Despite a remarkable 134 percent surge in the past year, Elara Capital has maintained a 'sell' recommendation on the defense stock Bharat Dynamics Limited (BDL), albeit with an increased target price of ₹1,100, up from ₹750. This revised target still suggests a potential downside of over 16 percent.
The decision to reiterate the sell call is influenced by ongoing supply chain disruptions caused by geopolitical tensions in Ukraine and Israel, which have led to execution delays.
In the June quarter, the company posted disappointing earnings on the back of these execution delay, which the brokerage believes may impact the company's FY25E performance.
The state-run defence company’s net profit in the June quarter plunged 83 percent year-om-year (YoY) to ₹7.21 crore as compared to ₹41.81 crore in the same period last year. Its revenue from operations in Q1FY25 also saw a sharp decline of 35.8 percent YoY, falling to ₹191.16 crore in the quarter under review from ₹297.72 crore in the year-ago period.
At the operating level, the company faced an EBITDA loss of ₹52.3 crore in the quarter, worsening from a loss of ₹32.6 crore in the same period last year.
These results fell short of market expectations, largely due to persistent supply chain challenges affecting performance over the last seven quarters.
However, the management is optimistic that these issues will be resolved by the end of Q2FY25. The brokerage believes this could result in recovery in lost revenue in subsequent quarters given execution ramp-up of domestic and export orders of Akash and Astra missile systems.
Elara also pointed out that the company's Gross margin spiked 2,480 percent bps YoY to 83.1 percent based on higher product contribution. Meanwhile, employee cost rose 9 percent YoY while operating cost fell 9 percent YoY amid muted execution.
The brokerage has adjusted its EPS estimates, lowering them by approximately 14 percent for FY25E and 6 percent for FY26E, as ongoing supply chain issues continue to impact the top line and margins.
Nevertheless, Elara Capital projects an earnings CAGR of 48 percent during FY24-27E, with an expected ROE of 23 percent and ROCE of 11 percent for FY25-27E.
Key risks are lower spending in defence capital budget, less allocation toward procurement, increased competition from the private sector, and a sharp rise in commodity prices, it added.
BDL's stock price has seen significant fluctuations in 2024, rising 53.5 percent year-to-date despite experiencing negative returns in four out of eight months. The stock has declined by 10 percent in August, following an 8.5 percent drop in July. However, it recorded positive growth in the preceding three months, gaining 2.5 percent in June, 57.5 percent in May, and 13 percent in April. In March, the stock corrected over 3 percent after a 6 percent gain in February and a 0.3 percent fall in January.
After hitting a record high of ₹1,794.70 last month, the stock is currently trading at ₹1,311.90, about 27 percent below its peak. Although it has surged over 191 percent from its 52-week low of ₹450.50, recorded on October 25, 2023.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.
