Bharat Electronics Pips Other Defence Stocks in 2024. What to Expect from This Multibagger Stock?

Indian defence stocks have been on fire for the last few years.

After the standoff with China on the border, the government increased the defence budget and focused on indigenisation. Ever since, defence stocks have been among the biggest wealth creators in the Indian stock market.

The market has not discriminated among these stocks either. Most of them have delivered very good returns, comfortably beating the benchmark indices.

One of these stocks is the PSU, Bharat Electronics. It's up about 130% in the last one year. In 2024, it's up about 23%. This is better than other defence stocks.

Just check out this chart...

Let's look at the reasons behind the outperformance of the stock...

Bharat Electronics: The Company

Bharat Electronics (BEL) is a Navratna defence PSU.

Established in 1954 in association with CSF France, the company is now a government aerospace and defence company. The government of India holds a 51.1% stake in the company.

It's a frontrunner in the field of defence electronics. The company is the dominant supplier of radar, communication, and electronic warfare equipment to the Indian armed forces.

It has a diversified product line, including defence and non-defence products, software, as well as electronics manufacturing.

The company heavily relies on the Indian defence sector, constituting about 87% of its revenue. It has been actively diversifying its revenue sources by increasing non-defence earnings and exploring defence equipment exports to friendly nations.

For the armed forces, it makes critical components of missiles, radars, aircraft sensors, sonars, electronic warfare systems, and more.

It has increased its emphasis on cutting-edge technologies like electro-optics and photonics. Its portfolio of night vision devices, optronic systems, and laser-based equipment demonstrates excellent domain knowledge and expertise.

BEL's electronics are integrated into various Indian-made defence platforms like fighter jets, warships, submarines, and communication networks. When it comes to India's critical defence needs, there no replacing Bharat Electronics.

The global appeal of these platforms indirectly translates to increased demand for BEL's products as part of the export package.

Apart from catering to the domestic market, it exports its products to several countries, including Botswana, Indonesia, Sri Lanka, Russia, the US, and South Africa.

Financials

Bharat Electronics is one of the biggest beneficiaries of the government's decision to put defence items under import embargo as a part of Aatmanirbhar Bharat.

The company's fundamentals are rock solid. As per the company's annual report, in the financial year 2023, Bharat Electronics reported a 14.8% YoY increase in revenue. Its operating profit rose 19.1% YoY, largely due to the robust revenue growth.

It registered a growth of 27.7% YoY in net profit. The company's net profit has grown at a CAGR of 16% in the last five years. Its net profit margin during the year grew from 15.3% in FY22 to 17.0% in FY23.

This has translated into high return ratios. Its return on equity stands at 22.1% while its return on capital employed stands at 29.5%.

Export revenue for FY23 was US$ 48 m or Rs 3.9 bn. The company is working towards exporting the Akash air defence missile system to friendly countries.

Bharat Electronics is a debt free company. It plans to spend around Rs 7-8 bn in capex this year to upgrade existing facilities and build new ones.

The company generates strong cash flows and is a strong dividend payer. The 5-year average dividend payout ratio stands at 44.26%. The payout ratio has been very consistent over the years.

For the financial year 2023, the company has declared a dividend of Rs 0.6 or 60% on the face value of Rs 1 per share.

Bharat Electronics has remained a consistent dividend payer over the years. Since 2001, Bharat Electronics has declared 47 dividends.

With its industry leading position, proven track record and a huge tailwind in the form of the government's defence indigenisation push, Bharat Electronics has a very bright future ahead of it.

Going forward, the company plans to expand its reach in the international market by adding new countries. It also plans to upgrade its manufacturing facilities to meet the growing demand for defence products.

The management expects growth in revenue and net profit at a CAGR of 21% and 20% respectively over the period of FY24 to FY26.

For more details, see the Bharat Electronics company fact sheet and quarterly results.

Conclusion

As India prioritises self-reliance in defence technology, BEL's in-house capabilities position it strategically for growth. BEL's trajectory is closely linked to Indian defence spending and priorities.

Advancements driven by defence requirements also find future applications in civilian markets.

This has the potential for technology spillovers in areas like surveillance or industrial automation. This could become another revenue stream for the company in the future.

The Indian defence sector will continue its boom phase for at least a few years on the back of multiple sectoral tailwinds.

However, investors have to be careful while picking stocks. The sector as a whole is booming but investors should not pick up just any defence company for investment.

You need to look out for a fundamentally strong defence company to make the most of the current opportunity. Also, you should look at the valuations and demand a margin of safety before considering any stock.

Bharat Electronics is certainly among the top defence stocks in India. However, do keep in mind that at the time of writing, the stock trades at a high PE ratio of 47.5.

Get started by using Equitymaster's stock screener to filter the best defence stocks in India.

Happy investing.

Disclaimer: This article is for information purposes only. It is not a stock recommendation and should not be treated as such. Learn more about our recommendation services here...