Bharat Electronics Ltd Q3 FY2024 Concall Summary

Key Takeaways

• Subdued revenue, confident Q4 catch-up: Revenue grew only ~4% in 9M, but management reiterated the full-year target of ~INR20,000 crores (15% growth), pinning the shortfall on INR400–500 crores of Israel-linked dispatch spillovers each quarter.
• Order book is the standout metric: Order inflow hit INR26,761 crores by December against a INR20,000 crores guidance, with government procurements fast-tracked ahead of elections. The executable order book stands at INR76,000 crores.
• A INR50,000 crores order pipeline is telegraphed: Management expects around INR50,000 crores in total orders over FY24–25 and FY25–26, anchored by the QRSAM program and other EW and upgrade projects.
• Margins are tracking to the top of the guided range: Gross margin is guided to ~42% and EBITDA to 23% for the full year, with the mix shifting toward higher material content in Q4.
• What to watch next quarter: Whether the steep INR8,000 crores Q4 revenue ask is met, the pace of Israel-linked supply normalization, and any concrete progress on QRSAM and MRSAM order finalization.

Revenue Trajectory & the Israel Overhang

• 9M growth was muted: Revenue growth remained subdued through the first nine months, with management sticking to a full-year target of around 15% growth, or closer to INR20,000 crores.
• Israel conflict is the recurring drag: The Israel-Hamas conflict caused a spillover of INR400–500 crores last quarter and again INR400–500 crores this quarter, with dispatches landing only in the first week of January. Total dependency on Israel is INR4,000–5,000 crores in execution across this year and next.
• Supply chain is stressed but not broken: Israeli factories are working despite the war, and management sees no materialistic impact, though some delays may occur. Tank electronics dependency on Russia will be eliminated from next year due to aggressive indigenization.
• Red Sea disruption is manageable: Shipping lines remain open with Indian Navy and other countries patrolling; some cases take 20–25 extra days by sea, and air freight faces minor trans-shipment delays.
• Q4 ask is steep but distributed: 24 strategic business units are working on multiple projects (LRSAM, IEWR System, Akashteer, WLR, tank upgrades, shipyard systems, SDR-Tac), and dividing the INR8,000 crores target across them makes it achievable.
• LRSAM carries execution risk: LRSAM must be executed on time and items must come from Israel; management says there is always a Plan A and Plan B to ensure reaching the INR20,000 crores target.

Bhanu Srivastava: "Revenue we are bit short, but we are very confident the way we have done in Q4 for order inflow last year, this year we will do it for revenue guidance also."

Order Inflow & Pipeline

• Order booking has overshot guidance: Against a INR20,000 crores target by end of December, orders received were INR26,761 crores. Many government procurements were fast-tracked and contracts concluded well before elections started.
• A INR50,000 crores two-year pipeline is projected: Management expects around INR50,000 crores in total orders over FY24–25 and FY25–26, factoring in QRSAM requirements and other projects in the pipeline.
• QRSAM is the anchor program: QRSAM could account for INR20,000 crores of the pipeline, split across Army and Air Force regiments and squadrons, depending on how many instalments are ordered based on budgets.
• MRSAM is not yet in the pipeline: Discussions on MRSAM have started but need concrete progress before being factored into estimates.
• Other pipeline items are taking shape: The Shakti EW System, BMP 2 upgrade program, QRSAM, and airborne EW systems are all in the pipeline and likely to materialize.
• Akash orders are flowing: BEL received a INR2,750 crores order from BDL for ground equipment for 2 Akash regiments. BDL also secured an export order for Akash, with ground equipment and radars coming from BEL. Some Akash projections are included in the INR50,000 crores estimate, but not aggressively.
• Positive indigenization list is a tailwind: BEL expects to see more orders from the positive indigenization list in the next 2–3 years.

Bhanu Srivastava: "But if you see if you are asking me projection of next 2 years, '24, '25 and '25, '26, I am expecting around INR50,000 crores worth order in 2 years should come."

Order Book Quality & Execution Timeline

• The INR76,000 crores book is fully executable: There are no very old, non-executable orders. Orders may be "slow moving" because execution time itself is around 3 to 4 years, based on customer requirements.
• Big-ticket projects span 18 months to 4 years: All large projects have execution periods starting from 18 months to anywhere between 3.5 to 4 years, with deliveries linked to the production plan of the platform.
• QRSAM will follow a phased revenue ramp: First Article of Production Model (FOPM) will start around 18 months; after FOPM is cleared, delivery will ramp up quickly. Less than 20% of revenue is booked in the first 18 months, with total execution around 4 years.
• Order book sustainability is structurally assured: At any point in the next 3–4 years, the order book will hold a minimum of more than 2 years of revenue.

Damodar Bhattad: "At any point of time as I was telling it will be minimum more than 2 years of revenue will be there in the order books at any point of time what we receive in the next 3, 4 years, foreseeable future."

Margins & Cost Structure

• Gross margin is tracking to 42% for the full year: Gross margin up to December was 45%, but items with lesser material content were executed earlier; those with higher material content will be sold in Q4, bringing the full-year figure to around 42%.
• EBITDA margin guidance has been tightened upward: Originally guided at 21–23%, management now says EBITDA will be 23% for the year, with the lower end of the range to be ignored.
• Other expenses have grown substantially: Despite sales growing at only 4%, other expenses rose on higher traveling and normal employee cost increases from dearness allowance and increments.
• Margin guidance will be maintained going forward: Management expects things to remain in the same margin range and will provide formal FY24–25 guidance after year-end financials are closed.
• Segment-level margins are not disclosed: Management declined to comment on defense versus non-defense segment margins.

Bhanu Srivastava: "When we started, we gave guidance to 21% to 23%. Now we are giving guidance that it will be 23% in the year. Lower, you can ignore that, lower guidance."

Non-Defense, Exports & New Business Initiatives

• Non-defense revenue mix is temporarily elevated: Non-defense revenues are 20% for the first 9 months, but this is elevated due to EVMA/VPAT execution; otherwise it would be less than 20%. Defense is increasing at a much faster rate than non-defense.
• Civil business is competitive and granular: Non-defense projects typically come in INR100–500 crores ranges, not in large single orders like defense. The projection remains 15–20% of civil business.
• Key non-defense wins were secured: A INR665 crores plus taxes contract was signed with the Central Board of Indirect Taxes and Customs for IT infrastructure upgrade, and a contract with the UP Government for UP 112 upgradation.
• Exports remain modest: April to December exports were INR400 crores. Management is working with government agencies and will share if something concrete of significant value materializes.
• Cybersecurity is a new SBU: A new strategic business unit for cybersecurity has been established, with work underway with AIMS and a lead from the Ministry of Health for MOD cybersecurity.
• Anti-drone systems are gaining traction: A robust anti-drone system developed with DRDO has been supplied to the Army, Air Force, and Navy, with demonstrations given to the Border Security Force who are now placing orders.
• Unmanned systems and high-payload drones are in development: BEL is developing low-weight EW Systems mountable on drones and has one SBU working on high-payload drones in collaboration with partners.
• Services and AMC share is stable: Services are around 10–11% of sales, spares another 5–10%. The 90-10 product-to-services ratio is expected to remain in the same range.

Bhanu Srivastava: "We have developed along with DRDO a very robust anti-drone system and we have supplied it to Army, Air Force and Navy. We have given demonstration to Border Security Force also."

Capital Expenditure & Capacity Build-Out

• Capex is stepping up materially: Capital expenditure will be in the range of INR700–800 crores each year for the next two years, with INR700 crores targeted by March 2024.
• Infrastructure is expanding across sites: Buildings are coming up at Palasamudram, Hyderabad, and Masulipatnam, alongside purchases of machinery and test setups.

Guidance & Commitments

Key Metrics