BEL OFS

The government is  selling 5% stake in Bharat Electronics (BEL) at a Floor Price of Rs 1498/- per Share through an Offer for Sale (OFS). BEL OFS is priced is at a 4% discount to the current Market Price. Retail investors will get a further discount of 5 per cent in the offer for sale (OFS). The government currently holds 74.41 per cent in Bharat Electronics Ltd.The BEL OFS is likely to fetch Rs. 1600 crore to the Government. The previous OFS by a PSU in this year was the 10 percent stake sale in MOIL which raised Rs 480 crore last month. BEL OFS is coming after a resounding success of CPSE ETF which raised 6000 core. CPSE ETF  also has BEL as one of its constituent companies with a weight of 4.36%. The huge return by CPSE ETF has helped to draw investors attention to listed PSUs which otherwise were thought as a spent force in the market.

OFS Closing on Day 2

BEL OFS: retail subscribed 3.67 . Aggressive bidding by retail even as share was down at Rs. 1501. Investors above Rs. 1558/- (discounted rate 1480.1) to get allotment.

OFS Day 1 Closing;
The response to BEL OFS has been just average with subscription of 2.34 times for Non retail portion and a indicative price of 1500.5 which is just a tad higher than Floor price of Rs. 1498/-. The F&O prices are hovering around  Rs. 1515.

Bharat Electronics Limited  : Day 1 ;Non Retail Portion
LTPFloor PriceIndicative Price Issue Size (Shares)Total Qty BidNumber of Times 
1,519.901,498.001,500.0589,34,5112,09,00,1882.34



About BEL OFS

Issue Period of BEL OFS22 Feb 2017 to 23 Feb 2017
 22 Feb 2017 for Non Retail Investors and 23 Feb 2017 for Retail Investors and Non Retail Investors who choose to carry forward their bids
StartTime09:15
EndTime15:30
Offer Size 1,11,68,139  Shares  ( Rs. 1672 cr. based on Floor Price)
Offer Size for Retail  20% ( approx 330 crore)
Face Value10
Floor PriceRs. 1498
Selling MemberEdelweiss Securities Ltd ,SBI Caps, ICICI Securities & Duetsche Equity 
Seller PromoterThe President of India,acting through and represented by the Ministry of Defence,Government of India

Retail investors, for whom 20 per cent of the BEL OFS would be reserved, will get a further discount of 5 per cent in the offer for sale (OFS). Retailers are those who put in bids for less than Rs 2 lakh. 

About The Company:

Bharat Electronics (BEL) is a Central PSU Set up in Bangalore in 1954 under the Ministry of Defence and today is a leader in the domestic defence electronics space. It has 9 manufacturing Units distributed across the country and a new green field project is planned in Andhra Pradesh. Bharat Electronics Limited (BEL) has grown into India’s foremost Defence electronics company. BEL is a multi-product, multi-technology, multi-Unit conglomerate with over 350 products in the areas of Military Communication, Radars, Naval Systems, C4I Systems, Weapon Systems, Homeland Security, Telecom & Broadcast Systems, Electronic Warfare, Tank Electronics, Electro Optics, Professional Electronic Components and Solar Photovoltaic Systems. BEL also provides turnkey system solutions like Coastal Surveillance System. BEL has a pan India presence with factories in Bangalore, Ghaziabad, Panchkula, Kotdwara, Navi Mumbai, Pune, Hyderabad, Machilipatnam and Chennai.

82% of BEL’s business comes from defence. In the year 2015-16  BEL has introduced several major products / systems like  3D Surveillance Radar, L-Band 2D Air Surveillance Radar for Navy, Coastal Surveillance Radar, Satcom Terminals, Software Defined Radio (Naval Version-NC), Tactical Access Switch, Advanced Composite Communication System (ACCS), Versatile Media Secrecy Device, Citizen Verification Devices, Integrated Sonar Suite for Submarines, IAC MOD O/C Ref System, Integrated EW System for Mountainous Terrain, Laser Warning System, Gunner Sight for T90, Driver Sight for MBT Arjun etc. BEL recently launched Remote Controlled Weapon Station for MBT Arjun Mk II tank. On Feb 21, 2017 the Coastal Surveillance System of 800 crores was  cleared by Defense Acquisition Council.  BEL is likely to be lead integrator for this project.

New Sebi Guidelines in OFS (from NBCC OFS onwards) : As per the new SEBI guidelines, only non-retail investors are allowed to place their bids on 22nd Feb 2017 (T Day)  and retail investors are allowed to bid on 23rd Feb 2017 (T+1 day). The retail investors have the option to place a price bid or opt for bidding at cut off price. The new arrangement provides retail investors the benefit of discovering the cut off price of T day and place their bids on T+1 day on a more informed basis than was the case earlier. As usual retail investors i.e. those investors who place bids for shares of total value of not more than Rs.2.00 lakh, will in addition be entitled to a 5% discount. 

Financials:

Quarterly Results:

(in Cr.)Dec-16Sep-16Jun-16Mar-16Dec-15FY 15-16
Income Statement      
Revenue2,191.301,794.62871.433,214.851,517.237,295.15
Other Income77.6171.39138.74133.65135.47532.15
Total Income2,268.901,966.011,010.173,348.501,652.707,827.31
Expenditure-1,708.53-1,456.20-918.12-2,216.03-1,224.64-5,833.72
Interest-10.64-0.25-4.1-0.14-4.5
PBDT549.73509.5692.051,128.38427.921,989.09
Depreciation-45.46-45.49-43.46-46.79-41.45-168.93
PBT504.27464.0748.591,081.59386.481,820.16
Tax-130.73-117.82-12.5-279.88-90.77-455.29
Net Profit373.54346.2536.09794.5295.711,357.67
Equity223.36240240240240240
Face Value101010101010
CEPS18.7616.323.3135.0514.0563.61
OPM %25.5728.4110.5635.2328.2127.33
NPM %17.0519.294.1424.7119.4918.61
EPS16.7214.431.533.112.3256.57
EPS (TTM)65.75     
Floor Price1498     
PE (TTM)22.78     

BEL reported strong Q3FY17 numbers with Revenue of 2191.3 crore, up 44.4% YoY. EBITDA of |482.8 crore in Q3FY17 vs. 292.6 crore in Q3FY16. EBITDA margins came in 22% vs. 19.3% YoY.  PAT came in at Rs. 373.5 crore, up 26.3%.

Annual Results

(in Cr.)20162015201420132012
Income Statement 
Revenue7,295.156,842.666,275.526,103.825,767.64
Other Income532.15477.95428.47609.98585.49
Total Income7,827.317,320.616,704.006,713.806,353.13
Expenditure-5,833.72-5,698.57-5,383.76-5,467.72-5,156.89
Interest-4.5-1.38-3.4-0.78-0.6
PBDT1,989.091,620.651,316.851,245.301,195.65
Depreciation-168.93-153.97-142.11-130.71-120.8
PBT1,820.161,466.691,174.741,114.591,074.85
Tax-455.29-299.45-243.12-224.76-244.95
Net Profit1,357.671,167.24931.62889.83829.9
Equity24080808080
EPS56.57145.91116.45111.23103.74
CEPS63.61165.15134.22127.57118.84
OPM %27.3323.721.0420.4120.74
NPM %18.6117.0614.8514.5814.39

The results reflect a strong growth & improvement in margins.

Assessment:

  • BEL is rightly well positioned to cash in on  the rising defense expenditure.
  • Government’s greater emphasis on ‘Make in India’ initiative in Defence sector provides a great opportunity for the Company to enhance its indigenisation efforts, Revenues  and to address the opportunities in Indian Defence sector
  • BEL has a strong manufacturing base and execution track record. Further it is setting up a Rs. 5 billion Greenfield weapon systems facility in Andhra Pradesh which will focus on the design, development and production of weapon systems like fire control, missile systems and other weapon upgrade systems. BEL expects the facility to be ready over the next two years
  • BEL has strong relationship with defense and government agencies
  • BEl is the preferred choice of foreign players for  strategic collaboration with foreign technology partners for new products development. High-end technologies in the electronics segment, long gestation periods, heavy capital requirements, and secrecy related to defence projects act as key entry barriers in this segment. This gives companies like BEL a competitive advantage over foreign and private players.
  • Strong Order Flow: Order inflows for 9MFY17 stood at 6219 crore. The management has guided for guide order inflows at Rs. 10000-12000 crore for FY17.
  • BEL spends around 9.4% of its revenue on R&D and plans to increase it to 10-12%
  • BEL has also announced sub-division of its each equity share into 10 shares (new face value Rs. 1/share from existing Rs. 10/share).
  • BEL announced a interim dividend of Rs.  3/shar along with Q3Fy17 results.
  • The company reported superior topline growth due to higher execution of orders like Akash Weapon System for Indian Army , hand held thermal imagers, 3D tactical control radar, weapon locating radar, etc.
  • BEL issued bonus shares in ratio of 2:1 ( 2 bonus shares for every share held) and further bonus may take time to materialize. 
  • BEL exports have strong a good uptrend.& is likely to increase its focus on exports to friendly countries. Export turnover has risen from Rs. 190 crore in 2011-12  to  Rs.  558  crore in 2015-16 .  Export to friendly nations is on the rise with recent export of indigenous developed Naval Air Surveillance Radar to Myanmar. 
  • Management has issued revenue guidance of 10% YoY growth for FY17 and next five years as well. 
  • On the risk factors, BEL has seen a good run up in recent times and with this OFS Govt stake till would be tad higher than 69% leaving scope for further dilution which may cap its upward price move.
  •  During 1HFY17 orders worth INR51.3b got finalized for electronic warfare suite (Shakti and Nayan), Advanced composite communication system, ship data network, annual maintenance contract for Rohini radar, homeland security, navigational complex systems.
  • With many new product additions in last one year and many planned, BEL addressable defence electronic market seems to be picking up.
  • For FY17 Key orders like Akash missile system , mobile cellular communication system, commander TI Sights, Samyukta upgrade, Long range surface to air missile and L-band tropo upgrade are likely to drive order booking.
  • BEL is setting up Greenfield weapon systems facility in Andhra Pradesh which will focus on the design, development and production of weapon systems like fire control, missile systems and other weapon upgrade systems. This is expected to be ready in  next two years.
  • The last OFS of a Central PSU was that of MOIL and Retail neither gained much in or lst much in it. Earlier NBCC OFS which raised around Rs2,200 crore and had evoked good response and also more or less lived up to the expectations of investors subsequently. However others Like REC, PFC in the past faltered and gave heavy losses to investors.
  • BEL expects the order inflow to remain healthy at Rs100‐ 150bn for next few years given the healthy pipeline of orders. BEL expects the sales to grow at 8‐10% CAGR over the next 5 years. 
  • BEL is a key beneficiary of increasing focus in modernization of current fleet and procurement of new capital equipment by government. We continue to believe BEL offers good investment opportunities to investors who want to invest in the Indian Defence sector with a long‐term view,  Retail investors may take exposure in the scrip for medium to long term
  • The Floor price of MOIL OFS is considered reasonable and Retail discount of 5%, subject to price discovered in OFS is attractive. It is expected that MOIL OFS will see good demand.
  • BEL is a debt free and cash rich company . Its Dividend payout record is good. For the year ending March 2016, Bharat Electronics has declared an equity dividend of 170.00% amounting to Rs 17 per share. This year it has so far paid an interim dividend of 30% and a liberal final dividend can be expected. Further BEL has announced share split from present face value of Rs. 10/- to Rs.1/-.
  • The good return by CPSE ETF may  draw investors attention to OFS by this PSU as well. 
  • BEL share being in F&O may see heightened interest, good degree of subscription and volatility in price during the OFS period. Also being in  F&O reduces possibility of substantial fall in price on allotment due to possible build up of short positions & short covering.
  • At PE(TTM)  of 22.87, BEL is not exorbitantly priced looking at its good growth prospects and earning visibility.
  • I intend to apply in BEL OFS in to get a allocation but would not bid very aggressively (final discounted price beyond cut off price) and in quantities that can be held for medium term. The BEL OFS is a good opportunity to take exposure to one of the best defence sector stock in the country. However caution is warranted as stock has run up a bit in last few months.
  • Alert: Average response on Day 1 (see the Top of Post)
Standard disclaimer:  I am not a SEBI registered analyst. I may have vested interest in every stock I discuss. Please do your own due diligence as stock market investments have high degree of inherent risk.