BEL, HAL, BEML: Q3 sales, profit estimates for 3 defence firms, target prices

PL Capital in its Q3 defence preview note said defense companies under its coverage namely Bharat Electronics Ltd (BEL), Hindustan Aeronautics Ltd (HAL) and BEML Ltd are likely to report 12 per cent year-on-year (YoY) sales growth, driven by strong execution of robust order books. Ebitda margins are likely to remain flattish due to lower gross margin and higher other expenses, it said. The domestic brokerage believes that the recent Rs 79,000 crore AoN approvals by DAC would translate into incremental order inflows, with BEL and HAL being key beneficiaries. 

"Continued policy thrust on defense indigenisation should further support sustained order booking momentum across multiple platforms and programs," it said.

PL Capital has 'Hold' rating on BEL and BEML and 'Buy' on HAL. It suggested targets of Rs 407 for BEL, Rs 1,982 for BEML and Rs 5,507 for HAL.

Q3 defence preview
HAL is seen reporting a profit of Rs 1,603 crore, up 11.4 per cent. BEL's Q3 profit is pegged at Rs 1,432.40 crore, up 8.8 per cent and BEML's Rs 59 crore, up 141.8 per cent YoY. 

PL Capital said BEL may report 14 per cent YoY growth in revenue at Rs 6,552  crore, driven by healthy execution of a strong orderbook. Ebitda margin is likely to decline 100 basis points due to product mix. During the quarter, BEL announced an order inflow of Rs 5,000 crore across various products. Management’s commentary on execution pace, order pipeline, and majors developments across key upcoming programs such as QRSAM, AMCA and Kusha will be key monitorables, it said.

In the case of BEML, the brokerage expects the defence PSU to register a revenue growth of 21 per cent YoY (Rs 1,062 crore), driven by improvement in execution and gradual stabilisation of supply-chain challenges. Ebitda margin is seen improving 260 bps owing to better operating leverage. The management commentary on supply chain headwinds, execution pace across segments and order pipeline across Rail & Metro and Defence will be key monitorable, it said.

In the case of HAL, PL Capital sees revenue growth of 10 per cent YoY  (Rs 7,618 crore) in Q3, driven by healthy execution of a robust order book. Ebitda margin likely to contract 70 bps YoY, due to higher other operating expenses. The management’s commentary on execution pace, status of GE engines and deliveries of Tejas Mk1A will be keenly watched, it said. 

Among the three stocks, HAL is PL Capital's preferred pick.

It said HAL is a strong play on India’s growing strength and modernisation of air defense given it is the primary supplier of military aircraft, receipt of 5 GE-F404 engines, with two more anticipated by end January, likely to help ramp up the execution and delivery of LCA Tejas Mk1A over the next few years.

PL Capital cited HAL's robust order book of Rs 2.5 lakh crore (8 times trailing 12-month sales), leap in HAL’s technological capabilities due to development of advanced platforms (Mk2, AMCA, GE-414 & IMRH engines, etc), and improvement in profitability via scale & operating
leverage. 

"We expect the company to report revenue/adj PAT CAGR of 13 per cent/8 per cent over FY25-28E. We have a ‘Buy’ rating on the stock with a target price of Rs 5,507 valuing the stock at a PE of 38x Sep’27E," it said.