Bharat Electronics is riding the defence boom. But is it a long-term bet?

Over the past year, BEL has delivered a remarkable 59% return, cementing its position as a top-performing public sector undertaking (PSU) stock. While the stock has seen some short-term volatility, including a 0.52% decline over the last six months, its long-term prospects remain robust, fuelled by strong government support for defence modernization and indigenization.

The recent rally in BEL’s stock price is a reflection of growing investor confidence in its execution capabilities and future growth prospects. On February 4, 2025, BEL’s share price rose 3.36% in a single session, outpacing the Sensex and indicating strong market sentiment.

Performance that beat expectations

BEL’s Q3FY25 results were nothing short of spectacular. The company recorded a 47.3% year-on-year (YoY) growth in net profit, reaching ₹1,316 crore, significantly exceeding analyst expectations. Its revenue surged by 39% YoY to ₹5,756 crore, demonstrating the company’s ability to efficiently execute large defence contracts.

Furthermore, Ebitda jumped an impressive 57.5% YoY to ₹1,653 crore, with profit margins expanding by 330 basis points to 28.7%. This margin expansion was a key highlight, as it comfortably surpassed BEL’s own guidance of 23-25%.

The company’s ability to maintain its guidance despite sectoral challenges signals operational efficiency and prudent cost management. However, order inflows for FY25 stood at ₹10,800 crore as of Q3, significantly lower than BEL’s projected ₹25,000 crore target. The management remains confident of bridging this gap in Q4, with several major contracts in the pipeline.

“Many projects are in the pipeline, and we are hopeful of securing several in the next two months,” said Manoj Jain, CMD of BEL, during the announcement of the company’s third-quarter financial results.

The strong Q3 performance underscores BEL’s execution prowess, pricing power, and strategic positioning in India’s defence sector.

A mammoth order book

BEL’s robust order book of ₹71,100 crore ensures high revenue visibility for the coming years. The company is well-positioned to capitalize on large defence projects, with several significant orders expected to materialize in the near term. Among the key upcoming contracts are the quick reaction surface-to-air missile (QRSAM) system, expected to be worth ₹25,000-30,000 crore, the medium range surface-to-air missile (MRSAM) project for next-generation corvettes, valued at ₹15,000 crore, and radar and electronic warfare systems, estimated at ₹8,000-10,000 crore. These orders, expected between FY25 and FY27, will play a crucial role in sustaining BEL’s growth momentum.

Additionally, the company is eyeing ₹25,000-50,000 crore worth of large-value contracts in FY26, further solidifying its position as a defence electronics leader. The government’s push for indigenous defence manufacturing has significantly boosted BEL’s prospects, making it the preferred supplier for critical defence electronics systems. The increasing emphasis on self-reliance in defence aligns well with BEL’s strong product portfolio and strategic partnerships with the Indian Armed Forces.

Also Read: The calm before the storm: Three defence stocks on radar

Beyond defence

While BEL’s primary focus remains on defence, the company is actively diversifying into non-defence verticals, aiming to reduce dependence on government contracts and tap into high-growth sectors. Currently, 8% of BEL’s revenue comes from non-defense segments, including railway infrastructure, homeland security, semiconductor manufacturing, and automation projects. The management has outlined a strategic roadmap to increase this contribution to 15-20% in the coming years.

A significant development in this regard is BEL’s involvement in the Kavach railway safety system, an indigenous train collision avoidance system. If successfully executed, this project could unlock a massive pipeline of contracts from Indian Railways and other transportation sectors. Additionally, BEL is exploring opportunities in cybersecurity, artificial intelligence-driven defense solutions, and border security technologies, further strengthening its diversified revenue base. This diversification strategy provides a hedge against defense budget fluctuations and enhances long-term financial sustainability.

Also Read: 10 defence stocks poised for explosive growth in India’s year of reforms

Financial strength and valuation

BEL’s financial stability is one of its standout strengths. The company boasts zero debt, which provides flexibility in funding expansion plans and pursuing new business opportunities. Its return on capital employed (ROCE) stands at an impressive 37.91%, highlighting efficient capital utilization. Despite trading at a one-year forward P/E of 29.9x, above its five-year average of 19.3x, investor confidence remains high due to its consistent performance and growth outlook.

“We believe that BEL will exceed its FY25 guidance, led by a better product mix without supply chain issues. The stock is trading at a one-year forward P/E of 29.9 times, above the five-year average P/E of 19.3 times. The stock has corrected from its 52-week high. We have upgraded the stock to ‘buy’ from ‘hold’ with a target price of ₹326,” said brokerage firm Nirmal Bang in its research note.

According to projections by Motilal Oswal, BEL’s revenue is expected to grow at a compound annual growth rate (CAGR) of 19% over FY24-27, driven by market share gains, higher localization, and strong execution capabilities.

Analysts have taken note of BEL’s financial strength, with brokerage firm Macquarie assigning a buy rating and a price target of ₹350, while JM Financial and Jefferies have set even higher targets of ₹360 and ₹370, respectively. These projections highlight the company’s resilience in a sector that is poised for long-term expansion.

Also Read: Execution hiccups curb order flow excitement for defence stocks

Potential risks and challenges

Despite BEL’s strong fundamentals and bright growth outlook, certain risks need to be considered. One of the key risks is lower-than-expected defence budget allocations, which could impact future order inflows. Additionally, delays in large contracts like QRSAM and MRSAM could create temporary revenue uncertainties. The company is also vulnerable to global supply chain disruptions, particularly concerning semiconductor shortages and geopolitical tensions affecting defence equipment procurement.

However, BEL’s diversified portfolio, increasing exports, and strategic expansion into high-tech defence and non-defencce solutions mitigate these risks. The company’s ability to secure large orders, leverage its cost advantages, and maintain high margins places it in a strong position to navigate challenges and sustain long-term growth.

A defence stock with unmatched potential?

Bharat Electronics continues to prove why it is one of India’s most formidable players in the defence and technology sector. With an unmatched order book, superior execution capabilities, and strong financials, BEL’s growth trajectory remains intact and highly compelling.

For investors seeking a high-growth, long-term defence play, BEL presents an unparalleled opportunity. As India accelerates its Atmanirbhar Bharat initiative and scales up defence spending, BEL stands to gain immensely. The stock remains a must-have in portfolios, promising sustained earnings growth, strong cash flows, and significant upside potential.

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Note: The objective of this article is to share insightful charts, data points, and thought-provoking opinions. It is NOT a recommendation to buy or sell any stocks. If you are considering an investment, please consult a professional financial advisor. This article is intended solely for educational purposes.

About the author: Suchitra Mandal is a financial writer with expertise in delivering well-researched insights and detailed analyses of companies’ performance and market trends.

Views are personal and do not represent the stand of this publication.