BEML - CLSA

[Rajesh Desai]

 

Capital goods (CLSA)

BEML analyst meet takeaway

 

Time to focus and leverage competencies

We attended the annual analyst meet of BEML (ex-Bharat Earth Movers,

market cap US$565m). Owned 54% by the government, BEML is a

conglomerate operating in defence, mining & construction machinery and

rail/metro coach domains. Its new CMD’s strategy focuses on technology

upgrade, cutting headcount (Fig 5) and outsourcing to boost profitability.

As of Nov 16, the company boasted a US$1.1bn order backlog, +15%

YTD, which is 2.1x its FY16 sales. It guided for a robust Rs50bn top-line in

FY18 - 35% ahead of consensus. It also guided for improved margins on

a shift towards defence. On consensus numbers, the stock trades at

21x/14x FY18/19 EPS for a 76% EPS Cagr over FY17-19.

 

Govt capex driving order pickup across the board: OB +15% YTD

q In defence, scale up in mobility vehicle demand including FICV, rise in missile

production vs. imports and bridge systems.

 

q Mining orders have begun to pick up (3Q) after being slow in 1H on shift to reverse

auction @ CIL. Focus on construction machinery has been the biggest OB driver.

 

q Metro & rail see huge growth - every city with 2m+ population to have a metro.

 

Diversified conglomerate across mining, defence & rail

q BEML is 54%-owned by Govt of India, followed by 18% by MFs and 5% by FIIs.

 

q In defence, apart from Tatra trucks (Fig 3), it expects a rise in missile production,

where it is involved in Akash and potentially QR-SAM. It expects bulk production

clearance of Sarvatra bridges, where partner L&T is helping execute a US$100m order.

 

q In mining & construction machinery, BEML faces twin challenges of a slow market

at Coal India on one side and rising competition from MNCs on the other.

 

q In metro & rail BEML claims a 60% share in the Delhi metro and is sole supplier of

coaches to the Bangalore & Jaipur metro. Freight corridors to drive sales of highvalue

(ASPs 3-4x normal rail cars) DETC/OH cars.

 

Strong guidance by the new management: Revenue +50% in FY18

q Management guided for FY18 revenue of Rs50bn or ~50% YoY, albeit on a low

base. This is led by a doubling of defence revenue on normalization of Tatra and

Sarvatra deliveries (Rs12bn), railways (Rs16bn) and mining (Rs22bn).

 

q OB built: BEML boats an order backlog of Rs72bn +15% YTD (Fig 4), led by

significant improvement in order momentum.

 

Lacklustre historical performance but strong balance sheet

q BEML had a troubled past decade, with a revenue Cagr of just 3% on a slowdown in

its defence business led by the Tatra corruption controversy.

 

q Margins also collapsed in the past decade (4.8% vs 12.9% in FY07) on a lower

share of defence, competition and globalisation in the mining business.

 

q However it has preserved its balance sheet with improved working capital.

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