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Rail execution may be on slow track in Q3

BEML (BEML IN) revenue fell in Q3, likely due to a significant drop in revenue from the rail & metro (R&M) segment due to postponement in execution of the Mumbai Metro order. We believe mining & construction (M&C) and defence & aerospace likely grew at a moderate pace in Q3FY25. Margin improved by 160bp YoY, owing to product mix. Order inflows witnessed a spike due to a large order received in rail & metro toward the Chennai Metro. We lower our TP to INR 3,885 from INR 4,190, on 35x December FY26E P/E. But we reiterate Accumulate on robust orderbook increase and huge growth potential in R&M and defence sectors in the upcoming years.

Revenue slumps on rail, mining slowdown:

Q3 revenue fell 16% YoY to INR 8.8bn, 18% lower than our estimates. We believe revenue from M&C (43% share in FY24) and D&A (19% share in FY24) may have likely risen, led by execution of robust orderbook. R&M (38% share in FY24) revenue may have declined significantly due to execution being hit by delay in the Mumbai Metro. We expect to see better performance in Q4, led by execution and supply of Vande Bharat & Mumbai Metro orders and supply of Tatra trucks in defence.

Inflows spike 761% on receipt of large CMRL order:

Orderbook as on December 2024 stood at INR 151.4bn, surging 32% QoQ, with a book-to-bill of 3.9x TTM FY25E revenue. Order inflows spiked 761% YoY to INR 45bn in Q3FY25, led by receipt of large Chennai Metro Rail (CMRL) order of INR 37bn for supply of standard gauge metro rolling stock (EMU) during Q3. We expect R&M to pick up momentum in FY26, given the pipeline for Mumbai Metro 4, 5 & 6 lines and Bhubaneshwar Metro projects.

Margin expands led by product mix:

Gross margin fell 210bp YoY to 46.8%, likely due to higher material cost and execution mix. Employee cost fell 2% YoY and operating cost by 42% YoY. EBITDA grew 8% YoY to INR 604mn, 35% lower than our estimates while margin expanded 160bp YoY to 6.9%. Interest cost rose 122% and depreciation was up 18%. Other income plunged 87% YoY. Net profit stood at INR 244mn, down 50% YoY.

Reiterate Accumulate with a lower TP of INR 3,885:

We lower our FY25E earnings by ~12%, and FY26E by ~5% and~ 8% by FY27E on delayed execution of rail & metro along with overall slowdown in government capex in railways dragging order inflows in the future. We lower our TP to INR 3,885 from INR 4,190 on 35x (unchanged) December FY26E P/E, due to an earnings decline during the quarter. We reiterate Accumulate due to the robust increase in orderbook and huge potential for growth in both rail & metro and defence sectors in the next 2-3 years. We expect an earnings CAGR of 20% during FY24-27E with an average ROE and ROCE of 13% each during FY25-27E. Slowdown in order inflows and persistent execution delay are key risks to our call.

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