Bharat Earth Movers (BEML), a public sector undertaking under the ministry of defence, is a leading player in the construction and mining equipment industry in the country. The government of India (GoI) holds a 61% stake. This is slated to come down to 54% after the present issue. The company’s heavy earthmoving equipment is deployed in core sectors such as mining, road, and construction. Further, it has a captive steel-foundry subsidiary at Tarikere. Moreover, BEML also manufactures and supplies heavy-duty trucks and aggregates for defence, and rail and metro rail coaches for the railways.
The mining & construction equipment business is BEML’s largest business with a 63% share of the total revenue of the company in fiscal ended March 2006. Defence supplies and railway products account for 32% and 5% of its revenue, respectively. About 65% of the business stems from the government and government agencies such as the Indian Army through the Department of Defence Production of GoI, Coal India, and Indian Railways.
With a lion’s share of about 70% market share for earthmoving equipment in the domestic market, BEML has start augmenting its product basket with strategic technical tie-ups and getting into business such as contract mining through joint ventures. The company is also eyeing a bigger pie in the emerging markets for supplies to mass urban transportation and rail logistics. To garner a share in the international markets, the company has formed a joint venture (JV) with Companhia Comercio E Construcoes, a Brazilian company, to manufacture and supply rail wagons and bogies and mining and construction equipment in Brazil.
BEML is coming out with a follow-on public issue to raise Rs 499.80 crore to Rs 534.10 crore to part finance expansion, modernise existing plants and fund voluntary retirement scheme (VRS) expenditure. The company is currently expanding the capacity of its metro coach manufacturing facility at Bangalore from 150 coaches per annum to 190 coaches per annum at a cost of Rs 214.51 crore and setting up a 5-MW wind mill for captive consumption at a cost of Rs 27 crore. Moreover, the company also envisages a capital expenditure of Rs 90 crore for upgradation of current facilities. The VRS scheme aims at pruning the staff strength by 1,125 at an estimated cost of about Rs 90 crore. The fund proceeds are also expected to meet BEML’s contribution of Rs 9 crore for setting up a R&D centre of excellence for metro coaches and general corporate purposes.
Strengths
BEML has near 100% market share in the dozers and heavy-duty dumper trucks of above 85 tonnes in the country. On an overall basis, the company caters to about 70% of the construction and mining equipment demand of the country. The domestic market for construction and mining equipment is expected to grow at a faster pace on increased spending on infrastructure and mining. BEML is better positioned to garner a greater share of this growing pie. To achieve this end, the company is expanding its product base through in-house R & D and also through appropriate technological tie-ups with global majors. Incidentally, it is the only metro-rail coach manufacturer in the country.
Having supplied most of the construction and mining equipment under use in the country, BEML continues to get strong spares and service income. As a result, the share of spares and services in the revenue has increased from 24% in the year ending March 2006 to 28% in the nine months ended December 2006 and FY 2006.
BEML has lined up new initiatives such as e-engineering services, captive mining and setting up of a plant in Brazil. These initiatives are expected to expand product and services range as also help geographical expansion.
India’s coal demand is set to accelerate on massive capacity additions planned in the power, steel and cement. To cater to this demand, three coal PSUs --- Coal India, Singanerei Colleries and Neyveli Lignite --- have come together to draw up mining augmentation plans at a capex of Rs 23590 crore in the Eleventh Five-Year Plan beginning current fiscal. Meanwhile, the government is also opening up coal mining for captive purposes for power and steel. These initiatives, as and when they blossom out, would turn out to be a major trigger for acceleration in the pace of growth in demand for mining equipment.
In JV with Midwest Granites, BEML has formed a company, BEML Midwest, to undertake captive mining. The JV has tied up with NTPC, a licencee for carrying out mining on the blocks. As a result, BEML will not only get assured demand for its mining equipment, but will gain expertise and its share of profit from the mining JV as well.
Being under the ministry of defence, BEML continues to get assured support of defence orders. The company is able to maintain a 1.5-2% share of the ever-growing defence-capex pie.
Weaknesses
As a result of the Indian Railways’ inconsistent track record of placing orders and arbitrary fixing of prices, BEML does not even recover costs, hampering growth. This business continues to be in red. The segment posted a loss of Rs 17.68 crore in the nine months ended December 2006 and Rs 15.78 crore in FY 2006. The segment loss in FY 2005 and FY 2004 was Rs 24.71 crore and Rs 61.39 crore, respectively.
The profit earned by supplying metro coaches moderated losses in a small way in FY 2005 and FY 2006. But this cushion is likely to go off in the short-term with BEML completing its current order book of 40 metro coaches by June 2007. Further orders from Delhi Metro and new orders from metros in Mumbai and Bangalore are expected to take some time as the tendering process is still on. However, being the only manufacturer of metro coaches in India and expected tax advantages from Karnataka government, the company is confident of good order flow from these projects, though the financial benefits will flow only after FY 2008.
Though the railway business is bleeding, about 40 to 43% of the issue proceeds are to be invested in this business.
Demand for heavy-earth moving equipment, BEML’s forte, is still skewed towards/ dependent on orders from PSU coal-mining companies such as Coal India and its subsidiaries, Singaneri Colleries and Neyveli Lignite. Notwithstanding the massive expansion plans of these PSUs, the delay in order placement by these PSUs or uneven delivery schedule can affect the performance of the company. Order flow from Indian Railways is also uneven. Order book stood at Rs 1617 crore end March 2007 compared with Rs 2243 crore end March 2006.
Valuation
BEML reported an 18% growth in net sales to Rs 2423.87 crore and a 10% growth in net profit to 204.93 crore in FY 2007.
In the last three months, high/low and average price of BEML was Rs 1225, Rs 938 and Rs 1031, respectively. Against this, the offer price band is Rs 1020 to Rs 1090, discounting the FY 2007 EPS (on the post-issue equity) of Rs 49.2 by 20.7 to 22.2 times. For a company whose profit has grown at CAGR of just 8% in the last two years, the P/E looks high. However, the growth potential in construction and earthmoving division will be realised in future as investment in mining and infrastructure picks up. Nevertheless, the turnaround in the railway products division is crucial for the upside of the construction and earthmoving division to get fully reflected in the bottomline growth. And the turnaround in railway products division will depend on consistency and increased flow of orders by the Indian Railways, better pricing (decided by an independent advisor), and pick-up in implementation of various planned metro rail projects. With Railways becoming financially capable as well as serious about investing directly as well as through public-private partnership, railway products division is likely to complement growth from the construction and earthmoving division in the long-run, though short-term hick-ups can not be ruled out.