Target: ₹310

CMP: ₹283.10

Despite the reduced majority, we expect that the upcoming government’s policy focus on investment-led growth, capex, infrastructure, manufacturing, and defense will continue. Particularly for the defense sector, the government initiated several initiatives in last 3-4 years, such as indigenisation, higher private sector participation, and increasing defense exports, and we expect a similar focus to continue going forward too.

Given that the sector is closely linked to national security, we do not see possibility of any re-orientation in defense policy. While a slight tinkering might not be ruled out, we do not foresee any major policy shift that can potentially lead us to revisit our thesis, which remains unchanged.

Accordingly, we continue to like Bharat Electronics (BEL) in the defense space, given its presence across highly specialized defense electronics segment. The company’s order inflows for FY24 were far ahead of its guidance, thereby hedging it against any slowdown in order inflows in FY25. With a strong order book, stable gross margin and efficient control over working capital, we expect BEL to continue to benefit from defense spending.

Further, the company had a cash surplus of ₹11,000 crore (as of FY24), providing scope for further capacity expansion. 

We thus maintain our estimates and Buy rating on BEL with an unchanged TP of ₹310, based on 35x two-year forward earnings.

Key risks: A slowdown in order inflows from the defense and non-defense segments, increased competition, further delays in finalization of large tenders, a sharp rise in commodity prices and delays in payments from MoD can adversely impact our estimates on revenues, margins and cash flows.

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