Motilal Oswal's research report on Bharat Electronics
As per the new pricing policy for nomination projects finalized by the Ministry of Defense (MoD) in May 2018, a 7.5% PBT margin would be allowed v/s the earlier 10-12% margin; however, this allows pass-through of all costs and risks in the project, which was not the case earlier. Note that the new policy does not affect existing INR500b order book and therefore no impact is expected for the next 2-3 years. However, management expects a 50-200 bps impact on margins for nomination orders starting FY22 from this policy change – currently 35% of the order book is from nominated orders and assuming a similar share of order book in FY21, the impact on FY22 margin is limited to 0.2-0.7%. As per management, legacy orders (24% of order book) would not be covered under this policy since these are repeat orders.
Outlook
We maintain our BUY rating and our target price at INR100 (14x FY20E EPS, discount to the 5-year average of 15x). The stock has seen a sharp correction over the past few weeks on news of a reduction in margins allowed on nomination-based orders.
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