BEML – BUY

Company Overview

BEML Ltd., established in 1964, is a prominent company categorised as a Mini Ratna ‘Category 1’ under the Ministry of Defence, Government of India. The company operates in three key verticals:

Mining & Construction (50% of Sales): BEML serves various industries such as coal, mining, steel, cement, power, irrigation, construction, infrastructure, railways, and metro transportation. They manufacture a wide range of equipment, including bulldozers, dumpers, excavators, shovels, water sprinklers, motor graders, loaders, pipe layers, and underground mining equipment.

Rail & Metro (27% of Sales): In this segment, BEML provides metro cars, electric multiple units, maintenance vehicles, and passenger coaches primarily for Indian Railways.

Defense & Aerospace (23% of Sales): BEML offers high mobility vehicles (HMV), combat mobility vehicles, aircraft, and missile-related equipment for the defense and aerospace sectors.

BEML operates manufacturing complexes in Bengaluru, Mysuru, Kolar Gold Fields, and Palakkad, and it exports its products to over 70 countries worldwide.

Investment Rationale
BEML boasts a robust order book and a promising pipeline in the Railways and Defense segments. As of June 2023, the company’s order book stands at Rs. 9,800 crores and is expected to increase to Rs. 16,000 crores by the end of FY24. Furthermore, BEML anticipates securing orders exceeding Rs. 17,000 crores in the next 2-3 years, particularly in the Railways & Metro (R&M) segment. Recent orders include 318 units for Bangalore Metro (approximately Rs. 3,100 crores) and 10 train sets for Vande Bharat from ICF (about Rs. 675 crores). In the defence sector, the company has a pipeline of new HMV orders worth Rs. 443 crores and plans to expand further by overhauling armoured recovery vehicles, potentially increasing orders to Rs. 1,000-2,500 crores annually. With revenue in the Defense & Aerospace segment expected to reach Rs. 1,500 crores by FY24 and Rs. 5,000 crores annually by FY27, BEML demonstrates a strong growth trajectory.The Mining & Construction segment, BEML’s largest, is poised for 10-12% growth over the next 3-4 years and 5-7% growth thereafter.

Strong Growth in OTC Business for Profitability
BEML has strategically reduced its workforce, witnessing an 8% YoY decline in manpower (5,157 employees) in FY23 and a 7% YoY drop (5,573 employees) in FY22. The company expects approximately 400 annuities in FY24 and 500 annuities by FY25, which will contribute to a reduction in employee costs. However, despite this reduction, the employee cost as a percentage of value of production (VOP) remained high at around 22% in FY23. BEML aims to lower this ratio to 20% in the current fiscal year and below 15% in the next 2-3 years, aligning with its strategy to enhance operational leverage. The company also plans to shift from a fixed employee structure to a more variable one to further reduce costs. Additionally, BEML anticipates a 200 bps expansion in profitability driven by higher volumes in the near future.

Valuation and Outlook
BEML is positioned for substantial growth, supported by a robust order pipeline and favourable industry trends in its primary sectors: Mining & Construction, Rail & Metro, and Defense & Aerospace. Government emphasis on these sectors bodes well for BEML’s prospects. The company serves key clients, including PSUs like Coal India Ltd., the Ministry of Defence, and the railway sector, with a history of repeat orders. BEML is also optimistic about its export business, targeting Rs. 300 crore in physical exports in FY24, compared to Rs. 178 crore in FY23, contingent on the performance of the Mining & Construction segment. Consequently, we assign a “Buy” rating to BEML. In terms of valuation, we base our assessment on 37 times FY25E earnings, resulting in a target price of INR 2,325, offering a 15% upside from the current market price. This target is projected over a 12-month investment horizon.Overall, BEML demonstrates strong growth potential and appears well-positioned for future opportunities in the industry.