Disinvestment apart, BEML is anyway a good play on metro rail, defence

A growing executable order book and reasonable valuations make it a good investment

Public sector major BEML remains in the news on account of the government’s decision on strategic disinvestment of its stake in the company, which could mean some value unlocking for investors. 

Analysts say that while the divestment theme could be played out, the company’s business prospects themselves make BEML a good investment. 

This is despite the company — which makes heavy equipment for transportation, mining, construction and other sectors — having seen its stock rebound by about 50 per cent since its August lows of Rs 644.

BEML’s growing order book stands at close to Rs 9,600 crore, and provides revenue visibility for at least three years. The order inflow traction from the metro coach segment remains strong and analysts expect significant increase in the value of new contracts by FY20-end.

While the defence segment too will drive BEML’s prospects, mining and construction equipment hold promise as well. In defence, the company is executing a large order of Rs 1,400 crore for armoured recovery vehicles (ARVs) and Sarvatra Bridge Systems (Rs 500 crore), and is expected to garner new deals worth Rs 1,000-1,200 crore, say analysts. 

In mining and construction equipment, fresh allocation of mines and also pressure on Coal India to improve production can lead to a surge in the segment’s order flow.

After a muted first half, the firm’s second half performance is expected to be strong given that it has about Rs 2,560 crore worth of orders to be executed in this period. 

Investors should note, however, that the company's quarterly performance can be lumpy as seen historically, while execution picks up during the second half; a significant portion of its profit is reported in the last two quarters of the year. 

Therefore, as compared to a 6.7 per cent revenue growth in H1FY20, analysts estimate FY20 revenue growth at more than 17 per cent, with operating profit growing more than 47 per cent despite an operational loss during the first half.

Meanwhile, revenue from in-house developed products is improving and will boost profitability (up 1,200 bps year-on-year to 68 per cent in FY19), while the working capital cycle improving with better quality of receivables.

Himanshu Kapadia of Elara Capital expects earnings to grow 44 per cent a year over FY19-22 with improved return ratios. He says the stock (trading at Rs 983) commands an attractive valuations of close to 22x its FY21 estimated earnings.