BEML

BEML

BEML

BEML

BEML

BEML

BEML

BEML

BEML, Berger Paints, Bharat Bijlee, Bharat Electronics, BOSCH, Britannia Industries

BEML, Berger Paints, Bharat Bijlee, Bharat Electronics, BOSCH, Britannia Industries

BEML - Sell

We recommend a sell in BEML from a short-term trading perspective. It is clearly visible from the charts of BEML that it has been on a downtrend from its December 2007 high of Rs 1,849. Since then the stock has been forming lower bottoms and lower peaks.

However, during July the stock found support at Rs 600 and made a corrective up move to Rs 845 levels. After encountering resistance around Rs 845 in early September, the stock resumed its downtrend. On October 6, the stock tumbled 10 per cent with above-average volumes, breaking through the key support level of Rs 600. BEML is trading well below its 21- and 50-day moving averages.

The daily and weekly relative strength indices are featuring in the bearish zone. Moreover, the daily moving average convergence and divergence is declining in line with the price in the negative territory. Our short-term forecast for the stock is negative. We expect the stock’s downtrend to prolong further until it hits our price target of Rs 522 in the upcoming trading sessions. Traders with short-term perspective can sell the stock while maintaining a stop-loss at Rs 613.

Company Background - BEML

BEML was incorporated under the Government of India administrative control by the Ministry of defence in 1964. In 1992, Government dis-invested 25% of its shareholding over a period of two years. Presently 40% of its equity has been dis-invested to financial institutions and public.It is the largest manufacturer of earth moving equipment in India and the second-largest in Asia. The company commands 70% market shares in domestic earth mover industry.

The company's unit at Kolar Gold Field Mysore and Bangalore incorporate hi-tech manufacturing facilities with soptisticated CNC machines,Arc-welding robots and FMS.

BEML manufactures a wide variety of equipment like heavy earth movers, rail coaches, military tanks, heavy-duty trucks, trailers, and high-powered diesel engines. Its products find application in mining, construction, power, irrigation, fertilisers, steel, defence and the railways.

BEML made its maiden public offer of Rs 117 cr in Dec.'94 for 60 lac 12.50% PCDs of Rs 195 each. The main objective of the issue was to part-finance the backward integration of an engine project by installing a flexible manufacturing system required for the manufacture of engines; and for expanding the capacity for the manufacture of hydraulic cylinders, which are critical components in the manufacture of earthmoving equipment. The estimated cost of the project was Rs 50 cr. Vignyan Industries, a subsidiary of the company, manufactures casting to meet the requirements of BEML.

During 1999-2000, the company has entered into strategic alliances with multinational companies like M/s Steelfields, UK, Kawasaki, Japan, Europactor, Spain, Crossmobil, Germany and Hartl Crushtek, UK , which will improve growth opportunities.

In 2000-2001, BEML tied up with Technology Information Forecasting & Assessment Council (TIFAC) for manufacturing specialised equipment to be used in disaster management and is planning to productionise them for deployment in hazardous situations.

In 2003-2004, the company has entered the metro Railway business with the manufacture and supply of hi-tech stainless steel metro coaches to the Delhi Metro Rail Corporation. BEML has expanding production activities in the Defence and Railway sectors and acquired over 1,100 acres of land and two workshops on lease basis from now-defunct public sector undertaking Bharat Gold Mines Ltd (BGML) in Kolar Gold Fields in 2004. During the same year, the company has opened a new Railway Fabrication Unit at Kolar Gold Field Complex.

The company has undergone organizational restructuring to improve over competitiveness in the global market and boost the revenues and profitability. Consequent to this, the company's operations will now be run as three-business groups viz. Mining & Construction, Defence and Railway & Metro Business. The company has also diversified into new business areas by opening two new divisions, the Technology Division and Trading Division on 12th April 2006.

With effect from 29th August 2006, the company has conferred `Mini-Ratna (Category 1)' status by the ministry of Defence. The status has been given recognizing position in the industry, consistent performance, growing profitability and rapid absorption of changing technologies. With this status, the company has got enhanced powers from the Ministry of Defence.

BEML: Invest

Investors with a three/four-year investment horizon can subscribe to the follow-on public offer of Bharat Earth Movers (BEML), being made in the price band of Rs 1,020-1,090 per share. At the price band, the offer is priced at 21-22 times its FY-07 per share earnings on a post-issue equity base. The rise in industrial capex, increasing Defence outlay, and proposals to introduce metro rail projects in major cities, lend visibility to BEML’s future earnings. This apart, BEML’s well-diversified product portfolio, established presence in the domestic market, strategic tie-ups with global players and a planned approach towards marking a global presence, are positives. However, short-term investors, despite these positives, can stay away, given the possibility of better entry points to the stock in the short term after the issue closes.

Business

Operating in three segments — construction and mining equipment division, Defence products division and railway and metro division — BEML’s strength stems from its business straddling a variety of user industries. In the construction and mining equipment space, BEML enjoys market leadership, thanks to its well-diversified product portfolio. The division’s performance can also be attributed to BEML’s competitive pricing and on-time availability of spare components. While this trend is likely to continue given the ongoing industrial capex boom, the revenues are likely to get a boost from BEML’s upcoming contract mining operations.

To leverage on opportunities in contract mining, BEML has formed a joint venture with Midwest Granites and the Indonesia-based Sumber Mitra Jaya. This venture, apart from giving BEML a 45 per share in earnings, will also serve as an alternative source of revenue; BEML is expected to provide for about 40 per cent of the mining equipment needs. However, effective contributions from this venture are likely to be derived from FY-09 only. While the construction and mining equipment division is likely to enjoy a robust revenue growth, increase in outsourcing of components and rising competition in this space could curtail pricing power.

Having established itself as the country’s leading metro coach manufacturer, BEML is well-placed to benefit from the upcoming metro rail projects in major Indian cities. While concerns on the delay in the execution of such projects cannot be ignored, the inevitability of the roll-out of such projects, given the increasing congestion in major cities, points to sound long-term prospects for the business. Further, the Railways’ proposal to introduce enhanced passenger capacity coaches, increase the production of electric motor units (EMU) and introduce air-conditioned EMU coaches in suburban trains in Mumbai, Chennai and Kolkata, are also opportunities.

BEML has planned an investment of about Rs 210 crore from the offer proceeds towards expanding its capacity to 190 coaches per annum from the present 150 coaches. Given the cost-advantage BEML enjoys over international players (partly because of a five-year sales-tax exemption), it is likely to garner a chunk of the metro project business. Nevertheless, the possibility of BEML losing out a few orders to other players cannot be completely ruled out.

BEML’s Defence products division, which supplies Tatra Vehicles, armoured vehicles and ammunition loader vehicles to the Government, is likely to sustain its revenue growth. Given the 11.6 per cent increase in Defence budget for FY-08 over the previous year, the division is likely to sustain its growth levels. Also, the new Defence procurement procedure, which stipulates a 30 per cent offset for contracts exceeding Rs 300 crore, augurs well for domestic Defence contractors such as BEML.

Brazilian foray

BEML has proposed to form a joint venture with Companhia Comercio E Construcoes, a Brazil-based railroad equipment provider. It plans to utilise about Rs 100 crore from the offer proceeds towards this venture and has proposed to acquire a local manufacturing unit. Given the growing demand for coal mining in Brazil and other South American countries, the joint venture, when it takes off, is likely to help BEML consolidate its position in these new markets. While it is certain to face stiff competition from the already established international players in the region such as Caterpillar, Terex and Komatsu, there is enough room for growth for BEML. Nevertheless, the first couple of years could be crucial.

BEML’s tie-up with Apollo Tyres and MRF Tyres for the manufacture of Off The Road (OTR) tyres, apart from meeting the increasing demand for such tyres from earth moving equipment companies, is also likely to help it reduce the delay in orders and production cycles.

Financials

For the year-ended FY-07, the earnings grew 10 per cent on the back of an 18 per cent increase in revenues. Operating profits grew 17 per cent, while the margins remained flat. However, with the introduction of the voluntary retirement schemes and setting up of windmill for captive power consumption, the pressure on margins is likely to reduce. For the year, while the mining and construction equipment division and the Defence products division contributed to about 63 per cent and 32 per cent of the total turnover respectively, the Railways division made only a 5 per cent contribution. The metro coaches division is loss-making, but with the roll out of metro rail projects in the light of BEML’s increase in capacities, the division is likely to see better contributions.

Concerns

Given that the Government contributes to a major share of BEML’s revenues, any unfavourable changes in policy with regard to Defence or the Railways procurement and any constraints in their budget could affect its earnings negatively. This apart, any unprecedented changes in the price of steel could also dent its earnings.

Offer details

The offer is open from June 27-July 3. The company seeks to raise Rs 534 crore through this offer. ICICI Securities is the book running lead manager and Karvy is the registrar to the issue. The offer would constitute about 11.7 per cent of the fully diluted post-issue paid-up equity capital of the company.

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.

Anagram - BEML

Anagram - BEML

IndusInd Bank, BEML, Sical Logistics

IndusInd Bank, BEML, Sical Logistics

Bharat Earth Movers FPO Analysis

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.

BEML FPO Analysis - June 27 2007

BEML FPO Analysis - June 27 2007

BEML FPO Analysis

BEML FPO Analysis

KR Choksey - GAIL, BEML, Kalyani Steel

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Capita Telefolio Volume No 13, Issue No 3 dated Saturday, 9th December 2006.

The following recommendation is based on price as on Friday, 8th December 2006.

BUY: Bharat Earth Movers at Rs 976

Now full details:

BUY : Bharat Earth Movers at Rs 976
BSE Code : 500048
NSE Symbol: BEML
Market Lot: 1

Bharat Earth Movers will be a key beneficiary of expected pick-up in investment in mining sector and metro rails.

Actual EPS for March 2005 : Rs 47.7
Actual EPS for March 2006 : Rs 50.9
Projected EPS for March 2007 : Rs 61.2

End of Capita Telefolio Volume No 13, Issue No 3 dated Saturday, 9th December 2006.

Way2Wealth - BEML

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Thanks Akash