BEML - Strong Growth

On solid ground

POUND WISE

Jitendra Kumar Gupta / Mumbai December 24, 2007



BEML is well positioned to gain from increased investments in mining,
railways and infrastructure.

BEML, the second largest earth moving equipment manufacturer in Asia
and enjoying 70 per cent of the domestic market, stands to gain from
the opening up of the mining sector.

Also, the company is expected to be a major beneficiary of the
investments planned towards railway infrastructure and increased
spending on defence. Its growing current order book of Rs 3,400 crore
or almost 1.4 times its FY07 net sales of Rs 2,424 crore only provides
comfort. That apart, the company is confident of achieving the
targeted revenues of Rs 5,000 crore by 2009-10 as against the earlier
plan of meeting it in 2013-14.

Mining
BEML generated over 67 per cent of its revenue in the year 2007 from
sale of mining and construction equipment. Its earthmoving equipment
such as bull-dozers, dump trucks, hydraulic excavators, wheel loaders,
dozers, rope shovels and underground mining equipment finds different
applications in the construction and mining sector.

Coal production in the country touched a record level of 430 million
tonne in the year 2006-07. This is further estimated to go up to 1,267
million tonne per annum by 2024-25. The demand will be primarily
driven by the ongoing investment in the power sector bulk of which
will go into the coal based thermal power plants.

Besides, the National Steel Policy has targeted a steel production of
110 Million tonnes per annum from under 50 million tonne currently.
This will further lead to requirement of about 180-190 million tonne
of iron ore. Overall, mining of these minerals (iron ore and coal)
will require a lot of investment towards purchase of equipment and
thus augur well for companies like BEML.

"There is dearth of coal in the country and to support the growing
energy needs, specially the requirements coming from the power
projects offers huge opportunity for the coal mines in India," says B
L Bajaj, director finance, BEML.

Competition
The growing opportunities in the mining sector has also meant
increased competition from global and domestic players. BEML has been
scaling up its business by way of technical tie-ups with global
players as well as expanding its products range.

BEML recently acquired Mining and Allied Machinery Corporation (MAMC)
along with the two other players Coal India and Damodar Valley
Corporation. BEML, which is lacking in underground mining equipment,
expects this acquisition to fill the gap.

Also, on the technology front, it has tied-up with US-based TEREX for
manufacture of high capacity electric mining trucks ranging between
120-360 tonne. BEML also has a technology tie-up for equipments like
rope shovels and walking dragline with world-renowned, Bucyrus
International, USA.

Mining extensions
BEML, not only stands to gain as being one of the supplier of the
mining equipment, it also aims to tap other opportunities in the
mining space. BEML has floated a joint-venture, BEML Midwest, where it
owns a 48 per cent stake.

The JV with Midwest Granite and Sumber Mitra Jaya of Indonesia will
have the advantage of technical know-how and expertise in the field of
exploration and contract mining for third parties. The joint venture
company plans to own and acquire coal mines in India as well as
markets like Indonesia, Australia and South Africa.

Although still early, these activities are expected to generate
revenues of about Rs 300 crore in 2008-09 for BEML.

Railways
Though the railway business contributed just 4 per cent to total
income in 2006-07, it is expected to grow rapidly on the back of
increased spending on the up-gradation of the existing railway
coaches, increase in number of bogies, introduction of new trains and
development of new corridors.

More importantly, the higher demand is expected to be for metro
coaches. BEML, a pioneer in the manufacture of metro coaches, has
recently raised Rs 223 crore for doubling its Bangalore plant's
capacity to 300 metro coaches a year.

Earlier, it had secured an order from Delhi Metro Rail Corporation
(DMRC) for supply of 156 metro coaches worth Rs 1,144 crores. BEML is
also looking forward for additional orders for metro coaches from DMRC
besides bidding for similar projects planned in Mumbai, Tamil Nadu,
Bangalore, Cochin and West Bengal.

Besides, the Railway Budget 2007-08 has also emphasised on an
additional investment of Rs 5,000 crore for the Mumbai local trains.
BEML, is already working for about 240 air-conditioned EMU coaches for
the Mumbai trains and expects more orders to come in its way.

Notably, the Karnataka government's five-year sales tax exemption to
BEML for manufacturing metro coaches gives the company a competitive
edge in bidding for all these projects.

Global plans
As a part of its growth strategy and diversification, BEML is
expanding its global reach. BEML recently formed a JV in Brazil,
wherein it holds a 60 per cent stake.

This JV will assemble mining and construction equipment to cater to
the growing needs of Latin American markets. The near term aim is to
achieve an export turnover of Rs 150 crore in 2007-08 and Rs 300 crore
by 2008-09
HIGH ON GROWTH
Rs crore FY07 FY08E FY09E
Net sales 2424.00 2920.00 3500.00
Net profit 205.00 263.00 315.00
EPS (Rs) 49.20 63.10 75.70
PE (x) 33.10 25.80 21.50
OB*/net sales 1.40 1.10 -

* Stands for order book


Valuations
The company is operating in growing businesses, where lot of
investments are either announced or yet to come. Its leadership in
these businesses are the positive attributes for the sustainable
future growth. The company is also a preferred supplier for the
defence sector, which contributes 29 per cent to its total revenues.

"BEML's valuations at a PE of 25 times and market capitalisation to
sales at 2 times, based on 2007-08 numbers, are not cheap, but
relative to growth and potential opportunities in its field are very
much scaleable," says Jigar Shah, head equities, KR Choksey. For FY09,
the PE works out to 21.

On its part, BEML too is further strengtheing its capabilities to tap
emerging opportunities in its businesses, which should reflect in its
financials and provide up side for the stock in the long term.