For BEL, consistent growth is a key ask now

Among key highlights, revenue and Ebitda rose 20% and 41% year-on-year, respectively, aided by robust execution. Lower raw material prices meant a substantial 340 basis points (bps) rise in operating margin at 22.3%. Even though the orders are awarded to BEL on nomination basis with a fixed margin, it has managed to generate higher margin because of operating efficiencies.

Q1 results have led to upgrades in earnings estimates. Analysts at Prabhudas Lilladher have raised their FY25 and FY26 earnings per share (EPS) estimates by 3.5% and 4.3%, factoring in healthy execution and better profitability.

For FY25, BEL management has maintained the full-year revenue growth guidance at 15% and Ebitda margin at 23-25%. Analysts at Nomura find the margin guidance conservative. They have raised its FY25-27 Ebitda margin estimates by 20-70 bps to a range of 24.8-25.7%. This is driven by factors including execution of base orders mainly received as part of import substitute in the past three years, cost savings via higher outsourcing from local vendors and better operating leverage.

Challenges and concerns

On the flipside, some dampeners cannot be ignored. In Q1FY25, order inflows slid 39% year-on-year to ₹4,970 crore, albeit on a high base. For FY25, the order inflow guidance stands at ₹25,000 crore. Some of the orders expected to come in FY25 include ADFCR Atulya, an electronic warfare suite for Mi-17 V-5 helicopters, a security and surveillance system for the Army and mountain radars, among others. However, this target is 30% lower than FY24, due to absence of large-ticket orders.

For now, a comforting factor is that BEL’s huge order backlog of ₹76,700 crore, which is about 3.7 times trailing 12 months revenue, aids revenue visibility. In FY26, order inflows are expected to be worth ₹50,000 crore, led by strong base orders, and quick reaction surface-to-air missile (QRSAM) order.

Further, there has been a spike of 144% in provisions for liquidated damages to ₹132 crore, 14% of Ebitda. This could impact future profitability if it remains at an elevated level. In the backdrop of BEL’s steep 70% rally in CY24 so far, these weak links suggest that investors should tread carefully. True, there has been a significant thrust of the Indian government on defence, which is likely to continue and BEL would be a potential beneficiary. That said, a meaningful upside from the current levels would require consistent earnings growth, which may be challenging.

“We await large ticket-size orders, better execution rate/margin visibility over the next few quarters for the stock to re-rate hereon," said a Nuvama Research report dated 29 July. The research firm believes that BEL has more positive catalysts/triggers than negative ones, and has further scope for a re-rating from current levels subject to aforementioned ask rates.

Meanwhile, BEL has planned an annual capex of around ₹800 crore for FY25. This will be utilized for projects including a land-based electronic warfare systems facility which would help expand its product portfolio. These should help it diversify into non-defence and exports business which account for about 15% of total revenue currently.

In the order backlog mix, defence has the highest share of 86%, followed by non-defence (11%) and exports (3%). Notably, a high dependence on defence projects adds to the company’s vulnerability in case there is a delay in order placement.

The stock trades at nearly 43 times estimated earnings for FY26, showed Bloomberg data. A consistent performance may offer support to valuations.