BEML: Going global

Products of BEML's Brazilian JV are likely to see demand from mineral resources-rich S American firms.

Going abroad to expand business is no longer limited to the private sector. Engineering PSU Bharat Earth Movers (BEML) has forged a joint venture in Brazil, where it will set up an assembly plant.

BEML is expected to invest Rs 100 crore to own 60 per cent in the joint venture while its Brazilian partner Compagnie Comercio E Construcoes will own the rest (40 per cent).

This joint venture will acquire a manufacturing plant of 500 wagons and 200 earth-moving equipment capacity.

That the South American countries are rich in mineral resources should provide adequate demand for the JV's earth-moving equipment. Also, Bharat Earth Movers expects development in the region's logistics, which will assure offtake of its railway products.

The other contracts that Bharat Earth Movers has bagged recent include a Rs 1,500 crore order from Delhi Metro to build coaches and a defence order worth Rs 800 crore. At the end of June 2006, the engineering PSU had a strong Rs 2,487 crore order position.

But, Bharat Earth Movers' financials are not as strong. For the June 2006 quarter "� usually weak for the company, its sales declined 11 per cent, y-o-y.

The company, however, could control the fall in its operating profit at 4 per cent, mainly because its raw material cost as a percentage of sales was reduced by 750 basis points.

BEML's operating profit margin, on the other hand, improved by just 44 basis points to 5.73 per cent as other expenditure rose 39 per cent.

Even in FY06, the company's performance was mediocre, as its operating profit fell 3 per cent, y-o-y, though net sales saw a rise of 18.7 per cent.

A shift in its product mix towards the railway business, where margins are lower, has impacted BEML's margins in recent quarters. The Brazilian JV helped the BEML stock rise 1.8 per cent on Monday, though the stock has not been much of a part in the recent market rally.

While the Sensex has risen 22 per cent in the past three months, BEML has gained just 9 per cent. Even for the past year, the stock has barely moved, while most other engineering stocks have soared. The stock trades at about 15-16 times FY07 EPS, which appears expensive for an EPS growth of just 4.6 per cent in FY06.

Abbott India: Excise blues

Once again, Abbott India's quarterly results have been adversely affected by the rising cost of inputs. In the August 2006 quarter, its operating profit fell 15.2 per cent, y-o-y, to Rs 18.9 crore against 10.6 per cent growth in net sales to Rs 136.7 crore.

The improvement in the company's sales once again demonstrates the life force that exists in the domestic pharma market.

Abbott's operating profit margin too dipped by 420 basis points, y-o-y, to 13.8 per cent in the last quarter, and that was largely owing to rising cost of other expenditure.

If EPS was maintained at the same level as was in the August 2005 quarter, it was because the company's other income jumped almost 130 per cent.

Although, not strictly comparable given the seasonal nature of pharmaceutical sales, in the quarter ended May 2006, the company had seen its operating profit margins fall by 292 basis points, y-o-y, to 13.6 per cent.

For the August quarter, its cost of purchase of finished goods rose 5.6 per cent, y-o-y, to Rs 89.2 crore. Analysts said higher excise duty paid on formulations, bought from third-party manufacturers, was responsible for Abbott facing a rise in the cost of finished goods.

Also, the 'others' component in other expenditure was Rs 14.76 crore in the last quarter compared with Rs 12.93 crore a year earlier.

The Abbott India board had earlier decided to buy back shares worth Rs 52.47 crore, at a price not exceeding Rs 650 a share, subject to its shareholders' approval.

Clearly, Abbott's operating margins have been lower than other multinational pharma companies for the past several quarters and the buyback price is at a 15.6 per cent premium to the current market price.

Investors could take the buyback offer as an opportunity to exit from the Abbott stock. The scrip today closed almost flat at Rs 560 against the backdrop a bullish Dalal Street.