Bharat Electronics corrects for 9th consecutive session, hits new 52-week low on Axis Capital downgrade

State-owned defence company Bharat Electronics share price has been correcting for ninth consecutive session on Thursday amid government’s likely new pricing policy for defence orders which may limit margin.

The stock corrected 23.7 percent in nine straight days to hit fresh 52-week low of Rs 89.70 despite positive management commentary on new pricing policy and after large block deals on Wednesday.

The downgrade report by Axis Capital also caused selling pressure in the stock.

The research house has downgraded the stock to Sell and slashed target price by 44 percent to Rs 64 from Rs 115 per share earlier as valuations are expensive for a low-growth company with single customer.

Axis has maintained its FY19/20 EPS estimate, as existing order book is grand-fathered. “It is difficult to gauge impact on margin from new policy at this juncture,” it said.

UBS also maintained Sell call on Bharat Electronics and cut target price to Rs 95 from Rs 115. “New pricing policy reduced margins on nominated orders to 7.5 percent from 12.5 percent. We estimates a 150-225 bps margin impact due to the new policy.”

MV Gowtama, CMD, BEL on Wednesday assured that new pricing policy will not impact profitability or margins of the company. “The government is working to bring new pricing policy for PSU. We see no drastic change in our profitability due to revised guidelines.”

In an interview to CNBC-TV18, he said the company expects 15 percent revenue growth and maintained margin guidance of 17-18 percent for FY19.

He further said the government is looking to offload 5 percent stake via offer for sale in a months’ time.

As of June 2018, the Government of India held 66.01 percent equity stake in the company, which reduced from 66.79 percent at the end of March 2018.

He said the company is likely to sign contract w.r.t Akash Missiles in next few months and the government will rationalise pricing on Akash order.

He feels the new policy is applicable on nominated orders. 40 percent of its order inflows usually on nominated business. “New policy is only applicable to new contracts & not retrospective,”

As per new policy, he said Bharat Electronics would be able to garner 7.5 percent margins on manufactured equipment and for spare & services, 10 percent margin profitability is allowed.

Earlier BEL was making 10-12 percent margins on orders. Gowtama is confident that company will maintain margins of 10 percent plus.

BEL has entered into contracts worth about Rs 9,200 crore with Mazagon Dock (MDL) and Garden Reach Shipbuilders and Engineers (GRSE) to supply LRSAM systems to be fitted onboard seven ships to be built by these two shipbuilders. This is the highest-ever single value order bagged by BEL.

“A Rs 9,200 crore order for supply of seven Long Range Surface-to-Air Missile (LRSAM) systems has pushed the order book of navratna defence PSU Bharat Electronics beyond Rs 50,000 crore for the first time in its history,” the company said.

The company is confident that it is looking at maintaining a healthy order inflow with business segments such as radars & weapon systems, electronic warfare systems, fire control systems, communication systems and C4I systems driving its growth in the coming days.

Meanwhile, about 9.6 lakh shares traded in a block deal on the NSE at Rs 102.35 per share and about 11.4 lakh shares traded in other two block deals at Rs 92.35-93 per share in morning on Wednesday. These deals were worth around Rs 20 crore.

At 11:35 hours IST, the stock price was quoting at Rs 91.25, down Rs 3.25, or 3.44 percent on the BSE.


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