Stock To Buy: Debt Free Defence Company With Strong Order book & Healthy ROE

Geojit has come-up with its stock to buy for the month of April. The brokerage is bullish on the defence play and has recommended buying the stock of Bharat Dynamics. Here are some of the reasons the brokerage is bullish on the same.

Strong order book

According to Geojit, the company for the year ended March 2022 reported sales of Rs 2700 crore (unaudited) compared to March 2021 sales figures of Rs 1914 crore- a growth of 41%.

"But what is encouraging is that the company has an order book position of Rs 11400 crore as of 1st February 2022. In February this year, Bharat Dynamics signed a contract with the Indian army to manufacture and supply Konkurs-M anti-tank guided missiles with Rs 3132 crore. This order is expected to be executed in three years. In other words, the company, on average, should have annual sales of Rs 1000 crore only from this order, giving strong revenue growth visibility for the company," the brokerage has said.

Zero debt and Strong Financials

Bharat Dynamics revealed a good set of numbers for the first nine months of the current financial year. Sales in the first nine months were Rs 1356 crore compared to Rs 701 crore, same period last year. The company reported an operating profit of Rs 322 crore compared to a loss of Rs 27 crore in the same period the previous year. The company's net profit stood at Rs 235 crore compared to a loss of Rs 2.60 crore for the same period last year. The company is a zero-debt company that will help the company distribute more profits to shareholders. The company declared an interim dividend of Rs 7.50 per share for FY2022.

Mutual Fund Managers love the shares of Bharat Dynamics

According to Geojit, institutional investors owns a 19% stake in the company, of which 17% is with the mutual fund industry as of 31st December 2021.

"We have observed that Indian mutual fund managers have increased their stake in the company in January and February. They held 1.47 crore shares as of December 2021, which increased to 1.56 crore shares for January and further increased to 1.68 crore shares for February," the brokerage has said.

India’s Focus on Exporting Defence Products

Bharat Dynamics is in the defence business producing Surface to Air Missile (SAM) and Air to Air Missile. It also manufactures underwater weapons and anti-tank guided missiles for the Indian army.

"The Indian Government has set an ambitious target to export defence products to India-friendly countries. India's defence exports which were Rs 1941 crore in FY2015, increased to Rs 11606 crore for the FY2022. The Government has set a target of Rs 36500 crore by FY2025," Geojit has said in its report.

A few concerns

However, Geojit has also highlighted concerns in its report. "Bharat Dynamics gets its revenue mainly from the government. Any slowdown by the government on defence spending could impact the company's future growth. The company inventory levels are usually high, reducing cash flow from operating activities. We expect the company to improve its working capital cycle. Last but not least, there is a chip shortage in the world," the brokerage has said.