Bharat Electronics Ltd Q4 FY2023 Concall Summary

Key Takeaways

• Solid FY23, guided growth intact: Revenue grew 15.2% YoY to ₹17,333 crores, with PAT up 28%. Management guided for 15–17% revenue growth in FY24, driven entirely by the existing order book.
• Order book provides multi-year visibility: The order book reached ₹60,690 crores, roughly 3.5x FY23 revenue, with a further ₹20,000+ crores in orders expected in FY24.
• Margins guided to hold steady: EBITDA margin was 23% in FY23, and management expects to maintain a 21–23% range in FY24, with product mix causing quarterly variations.
• Big-ticket pipeline is the real catalyst: QRSAM and MRSAM orders are in the pipeline and could materialize this year or next, which would significantly boost the order book beyond the guided ₹20,000 crores.
• What to watch next quarter: Closure of the Akash-NG and fuse orders in H1, progress on the QRSAM procurement process after the final trial, and any resolution on the unexplained dip in operating cash flow.

Financial Performance & Health

• Revenue growth: FY23 turnover grew 15.21% YoY to ₹17,333 crores, driven by execution against the order book and customer delivery timelines.
• Profitability leap: PBT grew 26.18% and PAT grew 28% YoY, supported by revenue growth and operating leverage.
• Gross margin recovery: Gross material consumption improved to ~57.5% of value of production in FY23 from ~60% in FY22, reflecting a margin recovery.
• Receivables stable, cash strong: Receivables stood at ₹7,000 crores (148 days), the same level as last year, while the cash balance improved to ₹8,000 crores, indicating no budget constraints from the government.
• Operating cash flow dip unexplained: Operating cash flow declined significantly, per an analyst's math from ~₹4,000 crores last year to ~₹1,000 crores this year. Management did not provide a specific reason on the call and stated they would get back later, while noting that overall cash balance, receivables, and inventory days remained similar.
• Liquidated damages provision: ₹360 crores was provisioned in FY23 due to delays in supply caused by delays in receipt of inputs or components, which also contributed to an increase in other expenses. Some penalties were waived during the year and provisions were written back accordingly.
• No pay revision headwind until 2027: The next pay revision is due in January 2027, so for the next three to four years, there are no pay revisions except normal increments and dearness allowance increases.

Damodar Bhattad: "So we have to make the provisions in accordance with the contract terms because these are continuing contracts, some of them will continue in the current year. But at the same time, we take up with the government on various contracts and we get some of the exemptions also or penalty waivers also."

Order Book & Pipeline

• Record order book: The order book reached ₹60,690 crores at the end of FY23, with order booking of ~₹20,690 crores during the year.
• FY24 order inflow guidance: Management guided for ₹20,000-plus crores in new orders for FY24, explicitly not factoring in big-ticket programs like QRSAM and MRSAM which may fructify this year or next year.
• Order book to revenue ratio: Management hopes to continue maintaining a three times order book on the revenue front in the coming years.
• Key orders in hand: Major orders include BEL's share of the Akash Missile System (₹4,000 crores-plus), long-term fuse requirements (₹4,500 crores), and ship-building programs from NGOPV, NGMV, and a credit training ship.
• Near-term order catalysts: BEL is the L1 bidder for the fuse order, with the PNC almost over except one point, and the order is expected in H1 FY24. The Akash-NG order is with BDL and at the last stage of deal closure, expected within 1–2 months, within H1.
• Big-ticket pipeline: QRSAM completed its confirmatory trial successfully, with one small remaining test to be carried out next month, after which the defence procurement process will follow. MRSAM is also in the pipeline. Both may materialize between this year and next year.
• LRSAM execution: Around ₹3,000 crores in LRSAM execution is expected this year for frontline ships.

Bhanu Srivastava: "See, I'm not very conservative, but when it goes to government processes, especially if it is a big ticket program, so you have to be conservative... So when we give the guidance, what we tell, definitely we are going to meet this. And there will be over and above that. If luck favors, we can get something over and above this also."

Margins & Cost Structure

• EBITDA margin guidance: FY23 EBITDA margin was 23%, and management expects to maintain a 21–23% range in FY24, with variations due to product mix across 25 operating units.
• Gross material consumption: Expected to remain in the range of 58% to 60% in FY24.
• Indigenization benefit is shared: More indigenization can help gross margins to some extent, but customers also put pressure on pricing, so the margin benefit is not fully passed through to financial performance; benefits must be shared with the end customer.
• R&D spend to rise: FY23 R&D expenditure was ₹1,088 crores (~6.25% of turnover), slightly lower than the normal ~7% run-rate. Management targets to increase it significantly to reach the 7% range in this financial year.
• No royalty on DRDO technology: For PSUs, if the end customer is Defence Services or the Government of India, no royalty payment is required, as the earlier royalty provision has been withdrawn.
• Segment margin disclosure declined: Management declined to disclose segment-wise or product-wise margins when asked specifically about VVPAT and EVM gross margins.

Bhanu Srivastava: “To some extent yes, but then more indigenization, then customer also will put pressure on your pricing also. So, it's not like, all that margin built is passed on in our financial performance. More indigenous content, then we have to pass it on the benefit to our end customer also.”

Diversification & New Initiatives

• Non-defence revenue: FY23 non-defence was 10.6% of revenue, with a slight increase expected in FY24 due to contributions from EVMs and VVPATs.
• Diversification areas are long-drawn: Opportunities in metro, railway, and AI are long-drawn processes; orders will materialize when new metro lines come or existing lines go for upgrade. A proof-of-concept has been done for DMRC.
• Railway TCAS: BEL and DMRC are jointly pursuing Indian Railways, with an initial presentation made to the Railway Board. The process involves concept, proof-of-concept, prototype, evaluation, multiple certifications, qualification, and commercials, and the safety-critical nature makes the timeline long.
• EV battery tie-up: One set of batteries has been supplied to Triton for evaluation, but no major revenue is factored in for FY24. Management stated it will take time for them to build up momentum.
• Hyperion tie-up for US market: Management noted there has been no significant progress.
• New facilities under construction: An advanced electro-optics factory at Nimmaluru, Andhra Pradesh, is likely to be commissioned by the end of calendar year 2023. Other facilities at Ibrahimpatnam (EW, ~₹300 Cr), Palasamudram (defence system integration complex), and Nagpur (explosive and fuse complex) are all to fructify in the next 2–3 years.
• Capex for FY24: Likely expenditure is around ₹700–800 crores.

Bhanu Srivastava: "Just initial presentation and then again any -- introducing any indigenous product in entity, which is very, what you say, the safety critical like railway or civil aviation where safety is paramount importance. It takes time."

Exports & Partnerships

• FY24 export target: Management is targeting around $90 million to $100 million in exports for this year.
• LORA Weapon System MOU: BEL has signed an MOU with Israeli Aerospace Industry (IAI/IEI) for LORA Weapon Systems. IEI has visited BEL’s facility and discussions are continuing.
• Thales partnership: BEL is a partner to Thales for supplying T/R modules to their export businesses, with a separate dedicated production line for this. Existing contracts are ongoing and new requirements are being worked on.
• Export challenges acknowledged: Management noted that the export of defence contracts is a very typical ecosystem with many factors playing a role, including the availability of lines of credit to foreign services, the geopolitical situation, and G2G-level contributions.

Bhanu Srivastava: “If you see per se, the export of defence contracts or defence products, it is very, very typical ecosystem for a defence, which is not like any other product. There are many, many factors that play a role in getting a defence contract, including availability of line of credit to foreign services, what is the geopolitical situation, what is the contribution at G2G level, which country has got, what influence.”

Competitive Landscape & Indigenization

• Positive indigenization lists as tailwind: The government has issued four positive indigenization lists for services and four for DPSUs, which mandate that certain items cannot be imported beyond a specific timeframe. BEL has given commitments to the government on items it will indigenize and source locally.
• Collaborative approach with private sector: Management stated that where tier-1 or tier-2 suppliers bid for system integrator roles, BEL will compete with them; where they are subsystem suppliers, BEL will collaborate with them as part of the supply chain.
• Radar opportunities: Upgrade programs driven by 5G introduction will create a need to upgrade existing S-Band radars to minimize interference. Other radar programs are in the pipeline, but services have not progressed yet, so exact numbers are difficult to state. BEL is not currently shortlisted for one of the biggest high-power radar programs, which was evaluated with L&T and ELTA as collaborators.
• Tactical Communication Systems (TCS): The program, started in 1994, is still ongoing with two consortiums, one led by BEL and another by major private sector players. Discussions are ongoing and the government is in the process.
• Helicopter electronics work share: BEL is working with HAL on missile warning, countermeasures, and avionics, and some work share is likely to come from HAL. The size cannot be quantified yet.

Bhanu Srivastava: “If they are bidding for system integrator, we will compete with them. If they are subsystem supplier, we will collaborate with them and get. So, it is all collaborative approach. Where they compete, we will compete. Where they are part of supply chain, we will collaborate and we get.”

Guidance & Commitments

Key Metrics