UBS downgrades multibagger defence PSU stock Bharat Electronics despite strong Q1 results – here’s why

Despite a robust performance in the June quarter (Q1FY25), UBS has downgraded its rating on state-owned Navratna defence company Bharat Electronics (BEL) from Buy to Neutral. The brokerage house has, however, revised its price target upwards to ₹340 from ₹333 for the next 12 months, implying a modest upside potential of 6 percent.

Strong Financial Performance

BEL reported impressive financial results for Q1FY25, with a 46.1 percent increase in net profit, reaching ₹776 crore compared to ₹531 crore in the same period last year. The company's revenue rose by 19.6 percent, amounting to ₹4,199 crore, up from ₹3,511 crore in the year-ago quarter. Earnings before interest, taxes, depreciation, and amortization (EBITDA) grew by 41 percent, totaling ₹937 crore, compared to ₹665 crore in the previous year. Additionally, BEL's EBITDA margin improved to 22.3 percent from 19 percent a year earlier.

Stock Performance

The stock has delivered multibagger returns over the past year, rallying 147 percent and surging almost 75 percent in 2024 year-to-date. It advanced over 5 percent in July, extending gains for the fourth straight month. Currently, the stock is just 5.5 percent away from its record high of ₹340.35, hit on July 10, 2024. It has soared 160 percent from its 52-week low of ₹123.55, hit on August 3, 2023.

UBS's Rationale for Downgrade

While UBS remains optimistic about BEL's earnings and order book growth, it believes the stock's medium-term growth potential is already priced in. "We downgrade our rating to Neutral, while raising our price target from ₹333 to ₹340, based on an unchanged target PE of 40x on 12-month forward earnings as of July 2025," UBS stated. The brokerage has retained above-consensus earnings and new order assumptions.

UBS highlighted that BEL has experienced a significant stock rally over the past 12 months, largely driven by a 70 percent increase in order intake in FY24 compared to management guidance. Earnings upgrades during this period were 13 percent, reflecting a strong valuation re-rating. "BEL factors in a healthy ₹30,000-34,000 crore/year new order run rate, 19 percent top-line/EBITDA CAGRs (FY24-27E), and a 12-month forward PE of 48x, leaving little room for a positive surprise," UBS explained.

Future Outlook and Critical Stock Triggers

UBS remains positive on BEL's order book growth, with a higher new order estimate for FY25-27 than consensus, implying ₹7,600 crore higher orders over the next three years. The company’s order book position as of July 1, 2024, stood at ₹76,705 crore.

However, UBS emphasised the importance of timely closure of large-ticket orders to sustain a higher 19 percent top-line CAGR, compared to 11 percent/12 percent in the past 5/10 years. Surface-to-air missile platforms remain the most crucial growth lever for BEL, as the largest subset of its pipeline.

Management's guidance of a 15 percent top-line and a ₹25,000 crore order run rate seems achievable, but UBS sees limited upside beyond this and seeks greater clarity on timelines for larger platforms such as the Quick Reaction Surface-to-Air Missile (QRSAM) system and future Akash orders.

While Bharat Electronics Limited has shown strong financial performance and impressive stock returns, UBS's downgrade to Neutral reflects concerns about the stock's current valuation and the sustainability of its growth potential. Investors should watch for the timely execution of large orders and management’s guidance on future projects to assess BEL's continued growth trajectory.

Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of Mint. We advise investors to check with certified experts before taking any investment decisions.