BEL’s order backlog of ₹51,800 crore remains robust, and it is more than four times FY20 revenue. Revenues of the two companies grew 6% and 7%, respectively, in FY20, according to provisional numbers released by them

If only order flows mattered, stocks of Bharat Electronics Ltd (BEL) and Hindustan Aeronautics Ltd (HAL) would have been hot favourites on the Street. But investors also need to contend with the niggling issue of payment delays from the government. This has taken the sheen off the BEL and HAL stocks.

Nevertheless, the current downturn brings the companies’ competitive advantages to the fore, which is a sturdy order book, resulting in steady revenues.

Revenues of the two companies grew 6% and 7%, respectively, in FY20, according to provisional numbers released by them. BEL’s growth pales in comparison to the 16% increase in revenue in FY19. HAL’s 7% growth is similar to the 7.8% revenue expansion the company had clocked in FY19.

Importantly, BEL’s order backlog of ₹51,800 crore remains robust. It is over four times FY20 revenue and provides good revenue visibility.

HAL did not reveal the order backlog figure. But several projects and products, such as helicopters for the Coast Guard and the Tejas light combat aircraft, are in the final leg of clearance.

Execution and delivery of the project backlog should also help BEL grow revenues. “We see limited impact of covid-19 on India’s defence sector spending, which has already been curtailed to the lowest level as a percentage of GDP," said analysts at Motilal Oswal Financial Services Ltd.

But payment delays from government and defence forces remain a challenge. Receivables have gone up significantly over the last two years. As a consequence HAL’s reliance on working capital borrowings have gone up in the past year, said ratings agency Icra Ltd.

BEL also faces similar pressures, though to a lesser extent. While government finances remain precarious as ever, this is one key parameter investors need to keep a tab on.

“Company’s (BEL) re-rating depends on its working capital management. Working capital has deteriorated from 9.8% in FY17 to ~34% currently, leading to negligible FCF (free cash flow) generation over the past four years. With the government’s fiscal deficit likely to come under pressure owing to the economic downturn and covid-19 related spending, there are risks of working capital worsening further," added the analysts at Motilal Oswal.