Brokerages give thumbs-up to BEML issue

Brokerages Prabhudas Lilladher and Anagram Stock Broking have recommended ‘subscribe’ to the follow-on issue of Bharat Earth Movers Ltd. At the price band of Rs 1,020-1,090, the stock is available at a discount of 8.2%-15.7% against the closing price on Tuesday.

The issue is attractively priced trading at 19.6 times 2006-07 (Apr-Mar) earnings based on the upper band, Prabhudas Lilladher says in a report dated June 26.

“There is strong investment taking place in infrastructure building. Moreover, there is huge capacity addition coming up in mining industry in the country. We believe that the company has a significant opportunity to cater to and recommend ‘subscribe’ to the issue,” the report says.

Bharat Earth Movers is one of the major manufacturers of mining and construction equipment in the country. It deals in three segments, namely mining & construction equipment, defence products and railway & metro products.

It caters to various sectors such as mining, steel, cement, power, irrigation, construction, road building, defence, railway and metro transit system. The company recently crystallised its offshore plans by entering into a memorandum of understanding with Companhia Comercio E Construcoes of Brazil to manufacture and supply rail wagons and bogies, mining and construction equipment and spares for the Brazilian market.

Bharat Earth also has plans to enter the contract mining business and have tied up with a mining company for the same.

The company reported net sales of Rs 24.2 billion in FY07, an increase of 18% over the previous year. Operating profit margin was up 20 basis points to 11.5%. However, other income for the year has been lower by 17.6% leading to an 11.7% growth in profit after tax to Rs 2.04 billion, the report says.

Anagram Stock Broking expects Bharat Earth Movers to grow 18-20% CAGR for the next two years.

“Considering the huge capital expenditure in the next 3-4 years in railways, mining and defence sector, we recommend subscribe to the issue,” it says in a report dated June 28.

“At upper price band of Rs 1,090, the issue is priced at 22.2 times and on the lower band of Rs 1,020, it is trading at 20.8 times its trailing 2007-08 (Apr-Mar) earnings of Rs 49.2 on post-FPO equity base.”

According to industry estimates, total investment in mining will be worth Rs 14,500 crore in the next five years. The brokerage sees huge investment opportunities for BEML in the mining and construction industry, where the company currently commands 20% market share.

BEML has also tied up with two Indian tyre manufacturing companies to invest in production facilities to manufacture off-the-road tyres.

Railway Minister Lalu Prasad Yadav proposed the largest-ever annual capital expenditure of Rs 31,000 crore in the Rail Budget 2007-08. This will translate into an opportunity of about Rs 9,000 crore for BEML.

But the brokerage has certain investment concerns. Change in government policies and rising raw material prices could hamper revenue flow, it feels. The government accounts for 40% of its sales. Delay in payment and implementation could hurt the company’s financials.

ISSUE DETAILS

Through the FPO, Bharat Earth Movers is offering 4.9 million shares of which 2.2 million (45%) are reserved for qualified institutional buyers, 1.54 million (13.5%) for retail, 0.66 million (31.5%) for retail and rest for employees. At the upper end, the company would be raising Rs 5.3 billion and at the lower end would raise Rs 5 billion.