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BEML was incorporated in May 1964, and commenced operations on 1 January, 1965. It was wholly owned and operated by India's Ministry of Defence until 1992, when the Government divested 25% of its holdings in the company. BEML is Asia's second-largest manufacturer of earth moving equipment, and it controls > 60% of India's market in that sector. BEML operates under three major business verticals - viz. mining & construction (Earthmoving) (dump trucks, dozers and excavators), Rail & Metro (RM) and Defence (Tatra trucks and ARVs) segments. Mining & Construction account for ~50% of its total revenue followed by 32% contributed by railways and the balance is contributed by defence and spare parts. BEML’s strong service network also supports its share of business in the earthmoving equipment segment where the company is the largest supplier of equipment to Coal India (CIL) & its subsidiaries. In the Railway segment, Delhi Metro Rail is one of the biggest contributors in the metro rail segment.
We expect BEML to be the largest beneficiary of burgeoning opportunity in Metro coaches. BEML received the largest order from Mumbai Metro worth Rs 3000cr during Q3FY19, taking its overall order book to ~Rs 9100cr, which provides ~30 months revenue visibility. Strong execution capability of BEML would ensure sales and PAT CAGR of 20% and 85% respectively over the next two yearsled by sharp improvement in operating margin.We believe Railway and defence would lead a way for the company in the coming years. We estimate revenue mix would change drastically over the next three years.
BEML has taken significant strides over the past 2 years as it sees strong traction across segments particularly the Railways business (revenue growth in excess of 100% in FY18) and Defence business which boasts of a strong order book and pipeline which is expected to materialize over the next 1-2 years. The company has buried the hatchet of TATRA issue with the ministry of defence and is looking to ramp up its aerospace portfolio with critical components such as missile aggregates for Akash and Quick Response Surface-to-Air-Missile (QRSAM) along with ISRO Motor, Bomb Pallets and Aviation Hoses under the armoury. We believe BEML is a strong play on (1) uptick in mining activity, (2) defence spending and (3) rail capex.
View and Valuation:
Over the past five years, company has not posted consistent growth trajectory with revenues largely remaining in the range of Rs 3000cr due to weak performance from Railway and Defence segment. With the tie ups with global players in the defence segment and plethora of opportunities in the Metro Rail, we expect robust growth momentum by the company in the coming two-three years. BEML is likely to post topline CAGR of ~20% over FY19-21E and bottom line to see robust 85% CAGR over the same period. With strong performance, return ratios would also improve drastically. We believe RoE/RocE to touch around ~10% in FY21E from 5-6% in FY18. The stock trades at 19x FY20E and 13x FY21E earnings. We value BEML on ~20x FY21E earnings and arrive to target price of Rs 1060. We recommend Buy on the stock at cmp of Rs 830 and add on dips to Rs 765 for sequential TP of Rs 938 and Rs 1060 over the next 4 quarters.
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HDFC Securities Limited (HSL) is a SEBI Registered Research Analyst having registration no. INH000002475
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