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Tuesday, September 26, 2006

Bharat Electronics

Bharat Electronics
Cluster: Apple Green
Recommendation: Buy 
Price target: Rs1,525
Current market price: Rs1,108

Sound as a BEL(L) 

Key points  

  • Growing addressable market: The healthy increase in the capital outlay of the defence budget and the government's efforts to reduce dependence on imports for critical equipment and security systems has considerably increased the size of the addressable market for the defence equipment manufacturers. With its wide range of product portfolio, R&D capabilities and a proven track record, Bharat Electronics Ltd (BEL) is well poised to effectively tap the same. 
  • Civilian orders and export business to aid overall growth: BEL has taken steps to improve its market share in the civilian market, especially the fast-growing broadband access equipment and telecom segments. It has bagged some prestigious large civilian contracts recently including the Rs500-crore order from MTNL. In exports market also, it is expanding its reach and has set an aggressive revenue target of $24 million in FY2007 (up from $13.7 million in FY2006).
  • Scope for positive surprises: With the recent modernisation and expansion of its manufacturing facilities as well as its technical capabilities, BEL is actively looking at tapping the huge opportunity in the contract manufacturing service space. The additional capacities shall also make it the preferred contender for any foreign supplier looking at partnering with a domestic entity as per the offset clause for any contract worth over Rs300 crore from the defence sector. 
  • Attractive valuations: BEL's net revenue and earnings are estimated to grow at a CAGR of 16.4% and 14.1% respectively, over FY2006-08E. The current valuations do not capture the improved growth outlook and the free cash & cash equivalents of Rs385 per share expected by the end of FY2008. We recommend a Buy on BEL with the price target of Rs1,525.

Minar International IPO

Minar International (MIL) trades and exports made-ups, particularly bed linen, in the home textile segment. Almost 80% of its exports are to the US markets. Presently, the company outsources processed fabrics and processes them in its cutting, machining and trimming (CMT) unit at Vasai, Maharashtra, with a capacity of 10000 sheets per day.

MIL now proposes to backward integrate and set up an integrated and modern wider width fabric processing plant at Perunduria in the Erode district of Tamil Nadu. This unit would have a capacity of 60,000 metres per day. The company plans to spend around Rs 8.84 crore on land and building, Rs 46.77 on plant and machinery for fabric processing, Rs 11.06 crore on other fixed assets, and the balance to meet preliminary and pre-operative expenses. It plans to raise around Rs 74.76 to Rs 79.61 crore (depending on the price band) through the current IPO.


  • The abolition of the quota regime has opened new growth avenues for export-oriented companies like MIL, which was the largest merchant exporter in made-ups for five years of the quota period and held the largest quota in made-ups for the US till the quota era ended in December 2004.
  • The proposed project will make the company backward integrated, resulting in timely delivery of processing fabrics and improvement in margin.


  • MIL has been debarred up to 22 November 2007 from exporting to quota-regulated destinations such as Canada, the European Union and the US by an order passed by Texprocil (Textile Export Promotion Council) on grounds of circumvention of quota restrictions on exports and for alleged fabrication of documents. The Bombay High Court has confirmed the debarment but stayed the other punishments awarded by Texprocil. Currently, the company is exporting indirectly. It has provided a bank guarantee of Rs 5 crore, though the contingent liability on this account is Rs 10 crore. Texprocil has also informed Sebi about the complaints lodged against MIL with CBI, though the company claims to have not received any copy of the complaint.
  • Vibhgyor Texotech, another promoter group company, is in similar line of the business, which could lead to conflict of interest.
  • Compared to a net profit of Rs 14.44 crore, MIL had a negative cash flow of Rs 24.02 crore from operating activities in FY 2006, mainly due to increase in inventories and debtors.
  • In the pre-quota regime, MIL was awarded major quotas in segments that could be sold to other companies, which is also reflected in the huge other income. But after the abolition of the quota regime, this source of income no longer exists.


MIL reported a net profit of Rs 14.44 crore in FY 2006. EPS on post- issue equity works out to Rs 5.9. The shares are being offered in a band of Rs 108 to Rs 115 at a PE of 18 to 19 times. Alok Industries, which is a much larger and far more integrated player, trades at Rs 64 at a TTM PE of 9.5 times. The sector TTM P/E is around 12.