BEML: On a firm ground

BEML valuations appear reasonable, despite follow-on offer

Bharat Earth Movers (BEML) has managed to report a substantial growth in its top line in the December 2005 quarter, after two stagnant quarters. In first half of FY06, top line growth was barely 2.37 per cent. In Q3, net sales has risen 23.44 per cent.

All its three business segments: earthmoving division, railway rolling stock and defence are doing well. BEML has reduced its dependence on the low-margin defence business, while its other two businesses have seen a strong order-book growth.

The company has gained orders from coal companies as well as NMDC for earthmoving equipment. In the railway division, it is building coaches for Delhi Metro and will be a supplier to other metro projects such as Bangalore, as and when they come up.

At the operational level, efficiencies have improved substantially. Raw material cost, as a percentage of sales, reduced by 179 basis points to 55.72 per cent in Q3 over previous corresponding quarter.

Staff cost as a percentage of sales, which was as high as 25.9 per cent of sales in December 2004, has fallen to 13.87 per cent of sales. As a result, there was an improvement of 556 basis points in pre-tax profit margin to 15.34 per cent.

BEML's net profit more than doubled to Rs 55.78 crore and the company had an order book of Rs 2,058 crore at the end of Q3. The stock gained 3 per cent after the results and over the last six months, it has gone up over 100 per cent.

Though the stock trades at 22 times trailing earnings, its 100 per cent net profit growth and the P/Es of other engineering companies makes BEML's valuations reasonable, despite an impending follow-on offer of Rs 400 crore.

Oil and gas: subsidy travails

Upstream company ONGC is expected to see its gross realisations jump 32 per cent y-o-y to $58.7 a barrel in Q3 of FY06. However, the company's subsidy burden, in the form of discounts on crude oil sales to PSUs, is expected to reach about $18 a barrel compared with $7.2 in Q2 of FY06.

Analysts expect the company to post an almost 10 per cent y-o-y growth in Q3 profits. According to analysts, Reliance Industries is expected to see a 9 per cent y-o-y fall in its Q3 profits owing to planned maintenance at some units at its Jamnagar refinery for 50 days.

As a result, its crude throughput is expected to fall, coupled with its gross refining margin expected to drop to $9 a barrel compared with $9.8 a barrel in Q3 FY05.

In addition, margins at Reliance's petrochemical business are expected to be under pressure, given the declining profitability of several polymers owing to higher costs of inputs such as naphtha.

Oil marketing companies are likely to see reasonable profit growth in Q3. BPCL's net profit is expected to grow 96 per cent y-o-y in Q3 because its crude throughput is expected to show a large improvement, thanks to stabilisation of its new capacity.

Also, the government scheme for sharing subsidy losses is expected to help minimise the impact of under-recoveries for kerosene and LPG for these companies.

TV 18: bright picture

TV 18 has turned in strong numbers for the December 2005 quarter with operating revenues up 55 per cent y-o-y at Rs 38.1 crore. With the company having managed to contain expenditure, the operating profit too has soared 55 per cent y-o-y and operating profit margins have dipped marginally.

Not surprisingly, the stock remained firm at Rs 419 in Monday's trading.

Revenues for Awaaz are Rs 5.5 crore for the quarter compared with Rs 4 crore in the September quarter. Despite higher spends on interest and depreciation, TV 18 has posted a smart increase in net profit of 45 per cent y-o-y.

In the absence of a break-up of revenues, one assumes that advertising revenues continue to grow smartly in a strong economy. Looking ahead, with increased regulation, subscription revenues too should see better growth.

Thus, given a buoyant economy, TV 18's business should do better. Its contract with Zee Turner bouquet comes up for revision in March, and given its strength in the genre, it should be able to negotiate at least a 30 per cent higher contract price from the current Rs 22 crore.

Investors may be upset at TV 18's restructuring proposal, which has valued CNN-IBN and Awaaz at Rs 500 crore, believed to be on the higher side.

Despite this dampener, the stock, trading at around 20 times estimated FY07 earnings, should continue to do well given the positive outlook for both advertising and subscription revenues.

With contributions from Amriteshwar Mathur and Shobhana Subramanian