BSE 100

BSE Capital Goods (Electronics)

Alka Securities Limited

CMP BSE Code 52 Week High/Low Average Daily Volume FV (Rs) Equity (Rs Crore) Market Cap. (Rs Crore)

1831 500049 2180/1213 28760 10 80 14648

Investment Rationale Phenomenal sales projection by BEL: The company has targeted a compounded growth of 19% over the next five years. Further, the company has projected operating income at Rs.5000Crs in 2008 and Rs.10000Crs by 2012. The projection was made on the basis of domestic and international requirement. To expand business operation in new area: The Company is in discussion with technology partners to expand business operations through joint ventures in various growth areas such as thermal imaging, avionics and solar systems. However, priority would be for the latest technology in radars and sonar s electro-optics, electronic warfare, microwave components and systems. Planning to enhance export: BEL has signed several Memorandum of understanding with aerospace majors like Lockheed Martin and Boeing and global defence companies like EADS and Northrop Grumman. Discussions are being held with many US and Europe based Companies. The Company aims to reach US $ 100 million export turnover within three years. BEL and HAL joined hands to work on new projects: BEL and fellow defence enterprise Hindustan Aeronautics Ltd will jointly pitch for satellite-related projects that the national space agency ISRO may offer. The two have also bid for the DRDO s proposal to develop UAVs (unmanned aerial vehicles) that are used for military reconnaissance. The aforementioned plans will help the company to further penetrate the business prospects in new areas.

Rating Book Value (Rs) P/BV (x) EPS FY07 (Rs) EPS FY08E (Rs) P/E (x) Target

Buy 333.7 5.5 91.4 116.3 15.7 2300

Bharat Electronics Ltd (BEL), moving to be a world-class enterprise in professional electronics, was incorporated in 1945. Originally It supplies products and turnkey systems to the Indian Defence Services. It also manufactures various civilian products and offers turnkey telecommunication solution to civilian market. In addition to this, the company exports various products and services, including television picture tubes and parts, radar and sub-systems, etc., to other countries worldwide. Further, it offers design and manufacturing services, semiconductor device packaging and quality assurance services including component testing, electromagnetic compatibility testing, among others, to customers in India and abroad. The company has two joint venture- (1) GEBE with General Electric Medical systems, USA for the manufacture of Xray tubes and other electronic components, (2) BEL-Multitone with Multitone, UK for marketing paging equipment. BEL also has a subsidiary, BEL Optronic Devices in Pune.

Bharat Electronics Ltd. 20th December 2007

Alka Research +91 022 22695609

Company vs. Sensex

One Year

Share Holding Pattern Shareholding Sep 07 Promoters Institutions Mutual Funds FIIs Non Institutions- Corporate Public

% 75.9 8.3 8.8 4.9 2.1

Alka Securities Limited, Hira Chambers, 2nd Floor, 17/19 Mint Road, Fort, Mumbai 400 001 Call us On +91 022 22695609 Fax: + 91 022 22610957 Website: www.alkasecurities.com All information provided in the report is true to our knowledge and sourced from publicly available information. To our knowledge, all the data and information are accurate and any interpretation derived is also on the same theme. Investment decisions are based on many factors and subject to market volatility and other factors. Based on publicly available information Alka Securities has come to a view, which has been expressed. Any investment decision or inferences derived from the report could not be construed as a substitution for independent judgment and all inferences and investment advices are subject to market variables and conditions and Alka Securities cannot be held responsible. Any substantial holding in any stock by key management personnel will be disclosed periodic or in specific reports.

20th December 2007

Bharat Electronics Ltd. Latest version X-Ray tubes by BEL: The Joint venture between BEL and GE pvt. Ltd now plans to develop latest version X-Ray Tubes for the first time in the country. This JV Company achieved a turnover of Rs.436.54Crs, during financial year ended 2007, as against Rs.415.76Crs in the financial year ended 2006, growth of around 5%. Expanding reach in civil market: BEL has taken up initiatives for development of high potential GSM antenna & Wi-Max antenna for the civil market. As large portion of company s product are not meant for civil market. BEL has consolidated its capabilities for providing turnkey system solutions based on various technologies including sitcom, CDMA, radio communication and networking and is actively pursuing projects in this area. New manufacturing initiatives: The company is setting up a state-of-the-art facility for Rapid Prototyping (RP), Rapid Tooling (RT) and Rapid Manufacturing (RM) for quick realization of mechanical parts for design verification. With this, the company will be able to cut down development cycle time by 30% and provide customers with better products in terms of aesthetics, ergonomics, lower cost and better manufacturability.

Alka Research

Export target set by the company: BEL has set up an export target of $22 million, for the current financial year 2008. At present, its export order is $12.33 million, and it had exported goods worth $11.60 million in previous financial year 2007. In order to achieve the export target, the company is looking for orders from Sri Lanka, Ghana, Suriname, Honduras and Malaysia. Further the company has set a turnover target of $1.14 billion, for the financial year 2008 and $2 billion, by 2011-12, from the later exports will contribute 10% that is $200 million. Thrust for indigenous development activities: Greater thrust for indigenous development activities in the potentially promising areas of future business like large system solutions, EW systems, Command control systems, Electro-Optical products & applications security business, etc., will be expedited. Cutting edge technologies & software modules developed by CRL s and other sources will be the hallmark of BEL designed products. Selective tie ups with reputed foreign firms will also be encouraged for the quick introduction of world class products to facilitate customers, through the route of ToT joint development.

Industry Outlook: Electrical goods industry has tremendous socio-economic importance. Therefore, the sector is dominated by large organized players especially public sector enterprises and are regulated by government. Seeing the growth prospective, there are ample opportunities arising for Indian companies due to global trend of outsourcing and offshoring manufacturing functions and services to cost effective producers. The sector has emerged as the favored destination for FDI and has shown impressive performance. Further, there is massive opportunity for private participants, producing electronic products for defence purpose. These companies have advantage of least cost production and time efficient as compared to government. We expect the industry to boost further in accordance with the development of nation as a whole, in an effective and efficient manner.

Peers Comparison: BEL Mar 07 (Rs) 1.8

Asian Electronics Mar 07 (Rs) 6.3

Hind Rectifiers Mar 07 (Rs) 2.7

333.7

251.8

175.9

5.5

1.9

1.1

P/E (x)*

20.0

10.2

2.5

DPS

21.0

5.5

11.7

EPS

91.4

46.8

74.6

EBITDA Margin (%)

27.0

25.5

22.0

NPM

17.0

16.4

12.8

Current Ratio Book Value Per Share P/BV (x)*

th

* Price as on Dec 20 2007.

20th December 2007

Bharat Electronics Ltd. Financials- quarterly (Standalone)

Financials- Yearly (Consolidated)

During Q2 FY08, the net sales of the company fell by 15.0% yoy to Rs708.9Crs as against Rs834.3Crs reported during Q2 FY07. The decline was mainly due to lowering in production. Other income slipped from Rs50.8Crs to Rs49.7Crs. The 45.9% yoy drop in raw material expenditure to Rs303.8Crs as against Rs561.8Crs has resulted the fall in operating expenses by 14.2% yoy from Rs647.7Crs to Rs555.6Crs. On account of higher fall in sales than operating expenses, the EBITDA shed by 14.5% yoy to Rs203.1Crs from Rs237.4Crs. Following the same trend, the net profit declined by 17.2% yoy to Rs122.8Crs. Finally, EBITDA margin (%) fell by 5 bps and stood at 26.8% while the net profit margin (NPM) witnessed yoy decline by 56 bps to reach 16.2%.

Income Statement

Year (Rs crores)

FY06

FY07

FY08E

FY09E

Operating Income

3573.1

4118.6

4,777.6

5,589.8

Other Income

115.4

192.2

288.3

389.2

Total Income

3688.5

4310.8

5,065.9

5,979.0

Operating Expenses

2697.2

3144.7

3,583.2

4,248.2

EBITDA

991.3

1166.1

1,482.7

1,730.8

Interest

25.8

0.8

0.7

0.3

Deprecation

89.2

93.3

112.3

139.7

PBT

876.3

1071.9

1,369.8

1,590.7

Tax

275.9

339.8

438.3

524.9

0.4

0.6

0.8

1.1

599.9

731.6

930.6

1,064.7

FY06

FY07

FY08E

FY09E

80.0

80.0

80.0

80.0

Reserve & Surplus

2033.9

2589.8

3297.7

4023.1

Net Worth

2113.9

2669.8

3377.7

4103.1

1.6

2.2

3.0

3.2

14.3

20.7

34.6

60.6

9.3

2.3

2.4

2.7

Q2 FY08

Q2 FY07

% YOY

Q1 FY08

% QOQ

708.9

834.3

-15.0

404.4

75.3

Other Income

49.7

50.8

-2.2

65.6

-24.3

Total Income

758.6

885.1

-14.3

470.0

61.4

Net Profit

Operating Expenses

555.6

647.7

-14.2

409.0

35.8

Balance Sheet

EBITDA

203.1

237.4

-14.5

61.0

232.8

Year (Rs crores)

Interest

0.0

0.1

-42.9

0.1

-66.7

Share Capital

Depreciation

22.1

19.8

11.5

21.1

4.7

Tax

58.1

69.2

-16.1

13.5

330.2

122.8

148.3

-17.2

26.3

367.1

Minority Interest

EBITDA Margin (%)

26.8

26.8

-0.2

13.0

106.2

Total Debt

NPM (%)

16.2

16.8

-3.3

5.6

189.4

Deferred Tax Liab. Capital Employed

Sales

Alka Research

Year (Rs crores)

Net Profit

Minority Interest

2139.1

2695.1

3417.7

4169.6

Fixed Assets

425.6

449.1

479.4

525.3

Intangible Assets

124.6

150.1

188.3

227.0

1586.7

2094.9

2749.1

3415.3

2.2

1.0

1.0

2.0

2139.1

2695.1

3417.7

4169.6

Investments Net Current Assets Capital Deployed

20th December 2007

Bharat Electronics Ltd. Ratio Analysis Year EBITDA Margin (%)

FY06

FY07

FY08E

FY09E

26.9

27.0

29.3

28.9

EBIT Margin (%)

24.5

24.9

27.1

26.6

NPM (%)

16.3

17.0

18.4

17.8

RONW (%)

28.4

27.4

27.6

25.9

ROCE (%)

42.2

39.8

40.1

38.2

EPS (Rs)

75.0

91.4

116.3

133.1

DPS (Rs)

16.7

21.0

26.9

33.7

BV (Rs)

264.2

333.7

422.2

512.9

P/BV (x)

6.9

5.5

4.3

3.6

24.4

20.0

15.7

13.8

4.0

3.5

3.0

2.6

14.6

12.4

9.7

8.3

P/E (x) EV/Sales (x)

Alka Research

EV/EBITDA (x)

Risk & Concerns BEL depends heavily on foreign import for technology and equipments, which sucks the liquidity of the company. Further, prospective private participants, appears to be big threat to the company as they bring wide range of competition, eg low cost product, enormous fund, etc. In the same line, with government interference, the electronics products industry as a whole is subject to different kinds of litigations and regulatory issues.

Valuation With strong in house R&D base, good infrastructure & manufacturing facilities, well-established systems and procedures, sound financial backup and skilled, dedicated & motivated work force, BEL is fundamentally very strong. Further, the company has potential to grow in system solution business, upgrade programmes to enable sophisticated products and strategic alliances. Considering all these factors, it has massive opportunity to grow, and expand its business in near future. At the current market price of Rs.1831, the stock is trading at a P/E of 15.7x on FY08E earnings of Rs.116.3 and at a P/E of 13.8x on FY09E earnings of Rs.133.1. Considering the strong fundamentals and growth prospect of the company, we recommend, BUY on the stock with a medium term price target of Rs.2300, providing an upside of around 25%. Further, at our price target of Rs.2300, the stock is quoting at a P/E of 19.8x on FY08E and 17.3x on FY09E earnings.