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Our Take:

BEML Ltd. is a public sector undertaking (PSU) established originally to manufacture rail coaches and spare parts and mining equipment. Today, it is a Miniratna Category-I PSU and operates under three major business verticals i.e. Mining & Construction, Defence and Rail & Metro. We believe BEML is well placed to capitalize on significant growth opportunities from the strong uptick in mining activities, capex driven demand in mining and construction equipment.

Mammoth capex of Rs 13 lakh cr in Rail and Rs 3 lakh cr in Metro Rail by GoI will drive growth in this sector. The “Make In India” and “Aatmanirbhar Bharat” programs provide robust opportunities across all business verticals of the company. In the defence segment, import embargo on 101 + 108 items will create growth opportunities for domestic players.

A strong capex in defence and railways augurs well for the Indian manufacturers. The Draft Defence Production & Export Promotion Policy (DPEPP) has set an ambitious revenue target of Rs 175,000 cr (US$ 2500 cr) by 2025, with the intent of becoming self-reliant and a clear focus on doubling the share of procurement from the domestic industry to Rs. 140,000cr by FY25E. Hence, we believe that BEML is wellpositioned to capture the growth opportunities across the business segment.

Valuation & Recommendation:

We believe BEML is well-placed to capitalize on the opportunities in mining, defence and Railways & Metro space. The mining sector, which is now open for private sector participation, is likely to get a boost. Further, initiatives i.e.“Atmanirbhar Bharat”, “Make in India”, import ban on 101 items and hike in FDI limit in defence to 74%, along with strong ordering activities in railways and metro rail, augur well for BEML.

Draft DPEPP policy, which has set ambitious revenue targets with intent to become self-reliant, provides good visibility of order book for BEML going forward. BEML is operating in three major verticals: (1) Mining & Construction; (2) Defence & Aerospace; and (3) Rail & Metro. The company has four manufacturing facilities located at Bengaluru, Kolar Gold Fields (KGF), Mysuru, and Palakkad, and a steel foundry (subsidiary) functioning in Tarikere Chikkamagaluru district. We believe BEML is in a good position to revert to the growth pathway.

The company’s segments are self-assured to grow, led by: (1) strong up-tick in mining activities in the wake of private sector participation, which is likely to boost domestic production and reduce imports; (2) huge opportunities in defence space with the initiatives of “Atmanirbhar Bharat”, “Make in India”, ban on import of 101 +108 items and hike in FDI in defence to 74%; and (3) capex for railway and metro in India. As BEML is a divestment candidate (Govt intends to divest 26% out of its 52% stake) , we believe its valuation is likely to sustain and improve with improving earning profile.

Ministry of Home Affairs has given security clearance to selected bidders and due diligence is expected to be completed in next few months. We are not separately valuing the land assets, but assume its value to subsume under the overall P/E, though given the small number of equity shares, we cannot rule out further upside in the combined stock price due to land value. We feel investors could buy the stock at Rs. 1433.1 (38.5xFY23E PE) and add on dips to Rs. 1268(34x FY23E PE) for a base case target of Rs. 1564 (42x FY23E PE) and bull case target of Rs.1675 (45x FY23E PE).

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