BEL continues to outperform on policy support
The defence sector continued with its slow undertone in Q4FY17. The broad theme continues to be high dependence on imports or foreign technology – be it K9, which will be jointly developed by L&T-Samsung Techwin (LRSAM), where out of Rs 6,500 crore of radar orders around 50-60 per cent of the payment will go to Israel Aerospace Industries (IAI) or procurement of QRSAMs from Rafael of Israel.
However, there is one common thread that binds most news flow – the presence of BEL as a single largest beneficiary from all the contracts put together. Right from being the Indian partner in LRSAM, to providing the Ashwini LLTRs to SpyDer SAM, to possibly being the second largest Indian beneficiary after L&T out of the K9 contract – BEL scores high. The extent of tilt seen in the Indian defence sector order delivery towards BEL is evident from the fact that BEL’s order inflow has reached 14-16 per cent of next 4 years cumulative expected other equipment budget. This has been closer to 8-9 per cent historically. From a DPSU/defence indigenisation standpoint, the signs are heartening. Sustainability though is a different ballgame.
BEL continues to outperform. FY17 order inflows stand as Rs 16,000 crore. We are seeing two successive years of heady order inflows. With around Rs 8,800 crore of standalone provisional turnover reported, we are looking at FY17 net sales growth of 19 per cent YoY (17 per cent minus the other operating income). Ebitda grows at 19 per cent YoY with margins maintained at 20 per cent. PAT is expected to grow at 8 per cent, mainly on account of reduced cash balance on account of buyback and higher dividend expected.

We have tinkered around with FY18/19E earnings of BEL. With the order inflow of LRSAM, BEL order inflow for FY17 stands at Rs 16,000 crore with final order book at around Rs 40,000 crore. Given the peaked out topline growth trajectory and elevated margins, we reiterate our ‘reduce’ on BEL with an unchanged target price of Rs 139 per share.
Solar Industries (SOIL) have marginally disappointed in FY17 with a consolidated Ebitda of Rs 3,200 crore against expected Ebitda of Rs 3,310 crore.
Slackness has been observed in bulk explosive volumes for FY17. Overseas business has seen the impact of around 57 per cent depreciation of Nigerian currency against the US dollar in FY17, where the company has 10,000te of cartridge and 5,000te of bulk explosives capacity. Delay in the start and ramp up of South African facility has also contributed marginally to the miss.
Defence business continues to underperform driven by the slack order inflows with provisional topline performance of Rs 10 crore against expected Rs 20 crore for FY17.
Given the sharp runup in the stock price, we downgrade SOIL to ‘hold’ from ‘buy’.