Bharat Electronics: Should you buy, hold, or sell this defence multibagger post elections?

Multibagger stock: Shares of Bharat Electronics Ltd (BEL) have recovered some ground after plunging 20 per cent on the election results day, even as there are fears that a reduced BJP seat wins would hurt defence sector growth prospects. Brokerage Motilal Oswal Securities said the BEL's order inflows for FY24 were far ahead of its guidance, thereby hedging it against any slowdown in order inflows in FY25.

Despite the reduced majority, it expects that the next government’s policy focus on investment-led growth, capex, infrastructure, manufacturing, and defence will continue.

Particularly for the defense sector, the government initiated several initiatives in last 3-4 years, such as indigenization, higher private sector participation, and increasing defense exports, it said adding that it expects a similar focus to continue going forward too.

"We expect BEL to remain a key beneficiary of continued government spending on defence. The stock re-rated in the last two years on improving share of BEL in the overall defence capex and the possibility of BEL improving this from current 12.6 per cent levels going forward as against historical share of 8-9 per cent during FY11-18, Motilal Oswal Securities said.

It noted that BEL has stable gross margins at current levels of 47.6 per cent versus 37-46 per cent seen during FY11-18. BEL is seen recording a long term CAGR of 16 per cent in revenues and 17 per cent in Ebidta over the next decade, driven by sectoral tailwinds. This is against 10 per cent growth in revenue and 12 per cent growth in Ebitda seen over FY11-21.

Motilal Oswal Securities sees BEL's control over working capital which is at 22 days over FY25-27 versus average NWC cycle of 80-110 days seen during FY19-21.

Finally, it sees improving return ratios. It sees RoE/RoCE moving towards 24 per cent/26 per cent by FY26 on improved profitability, control over working capital versus mid-teens RoE/RoCE during FY11-21. Positive tailwinds on order inflows from import embargo, large sized surface to air missiles, radars, avionics etc are likely, it said.

The brokerage has a target of Rs 310 on the counter. The BEL stock is up 48 per cent in 2024 so far. It has surged 132 per cent in the last one year.