The Indian Air Force would be finalising large ticket acquisitions of $20-22 billion, and as the proportion of Electronics is higher in Air Force orders, these deals would be important from BHEL’s perspective.

We expect BHEL to report revenue CAGR of 14% and earnings CAGR of 18% over FY15-17. Our target price of INR2,600 implies 26% upside.

Large Electronic Warfare Systems such as Tactical Communication Systems, Battle Field Management Systems (BFMS), and Future Infantry Soldier System (FISS), among others, would be medium-term drivers. In the past, BHEL has said the potential pipeline from stands at R40,000-50,000 crore.

Increased exports to friendly countries and higher ‘offset’ contribution opens up additional interesting growth opportunities. Expect 14% revenue CAGR, 18% earnings CAGR over FY15-17: We expect BHE to report 14% revenue CAGR over FY15-17, largely supported by execution of the Akash Missile project. During FY11/12, BHE received orders of ~INR65b for Akash Missiles, and execution has been delayed. Improved execution will support EBITDA margin (expect 210bp expansion during FY14-17), aided by lower staff cost (expect 200bp decline), and lower provisions (expect 180bp decline), offsetting the expected 165bp reduction in gross margin during this period. Net working capital (NWC) is likely to deteriorate – being the lead integrator, BHE had received advances on the Akash Missile project in FY11/FY12, leading to a surge in cash balance and negative reported NWC.