Recommendation: Buy
CMP = Rs 1,701
Price target: Rs 1,850
Result highlights:
- Bharat Electronics Ltd (BEL) has reported another quarter of disappointing results. Its revenues declined by 23.3% to Rs 662.2 crore in Q3FY2008 as compared with Rs 863.8 crore in Q3FY2007. The management has indicated that the delay in obtaining the approval for some of its products and the bottlenecks in the supply chain have been the key reasons for the lower than expected revenues in the third quarter of FY2008.
- The operating profit margin (OPM) declined by 370 basis points to 19.2% largely due to an increase in the staff cost as a percentage of the sales (which jumped to 24.2% as compared with 12.8% in Q3FY2007). The staff cost jumped by 44.3% on the back of Rs 12 crore of provisions made (pertaining to FY2007 as per the guidance given by the Sixth Pay Commission).
- The net profit declined by 23.8% to Rs 113 crore. The company has disappointed for three quarters in a row.
- For the first nine months, the revenues and earnings of BEL declined by 18.6% and 26.4% respectively. The OPM plummeted by 540 basis points to 15.5% during the period. In addition to a possible negative growth in the earnings in FY2008, for the first time in ten years the management might not be able to achieve the revenue targets set as per the memorandum of understanding (MoU) signed with the defence ministry.
- At the current market price the stock trades at 20.9x FY2008 and 15.2x FY2009 earnings estimates.
- I still maintain Buy recommendation with a price target of Rs 1,850.
