Defense stocks gained attention on Friday thanks to reports that the Defense Acquisition Council is expected to give preliminary approval for three crucial projects at the end of this month. Bharat Dynamics Ltd shares closed 5% up. In any case, its prospects are on a better footing now. Concerns about delayed execution despite a strong order book seem to have been alleviated to an extent.
True, in the first half of FY24 (H1FY24), revenue declined by nearly 26%, hurt by supply chain challenges. But in the September quarter (Q2FY24), Bharat Dynamics’ revenue grew 15% year-on-year to Rs610 crore after three straight quarters of revenue decline. However, it needs to register 81.5% growth in the second half to meet the full-year revenue target of Rs3,200 crore.
The company doesn’t seem to be losing sleep over this. When Antique Stock Broking recently met the management of Bharat Dynamics, the company said it is confident of meeting its revenue guidance, helped by timely availability of components. Analysts are broadly optimistic. “Q4 is generally the strongest quarter for Bharat Dynamics, and it would see a significant increase in execution, thus helping the company achieve its revenue target,” said Harshit Kapadia, analyst at Elara Securities (India).
Further, it bodes well that Bharat Dynamics’ order book was robust at Rs20,766 crore at September-end, up 3.6% from six months ago. This provides earnings visibility of 9.6 times on a trailing 12-month basis. “We believe that Bharat Dynamics has the capacity to fulfill its current order book by FY27E, and considering that the company is the production agency of DRDO (Defence Research and Development Organization), it will maintain a steady inflow of orders and growth will be uninterrupted,” said Antique’s. analysts
As such, so far in 2023, Bharat Dynamics shares are up 23%. The fact that it didn’t cut its earnings guidance cheered investor sentiment, says Kapadia. Moreover, valuations are not too demanding, with the stock trading at nearly 23 times its estimated FY26 earnings. The ongoing Israeli war needs to be monitored as this could delay the supply of components for one of Bharat Dynamics’ key projects – a medium-range surface-to-air missile. Against this backdrop, poor execution by the company and failure to meet its revenue target can throw cold water on investor hopes.