Growth in a metro

Bharat Earth Movers is set to witness a re-rating driven by the huge potential in the metro rail projects planned across the country. 
 
Engineering major Bharat Earth Movers Limited (BEML) may not have matched the splendid returns offered by other engineering and capital goods companies this year, but this is set to change. 
 
In order to take advantage of the robust macro scenario for its business, the company is coming out with a follow on public offer of 49 lakh shares thus raising roughly Rs 450 crore. 
 
Analysts predict a re-rating for the stock as the company is ready to capitalise on the tremendous potential offered by the metro rail project, the ongoing industrial capex boom and increased spending on defense. 
 
Also the company's contract mining initiative, especially for coal, is expected to give an additional boost to topline thanks to the numerous power projects coming up in the country. 
 
The company's capital raising plan is a part of its total capital outlay of Rs 900 crore towards expansion, modernisation and overseas investments. 
 
The company is expanding its metro coach facility at Bangalore from current 400 coaches per year to 550. This will commence production by the end of 2008. Besides, the company is also investing in an R&D centre for metro coaches and upgrading its existing facilities, apart from setting up a 5MW wind power plant. 
 
On the fast track

The pioneer in making metro coaches in the country, BEML manufactures a wide range of products broadly classified under three key segments – mining and construction, defense and railway equipment. 
 
All the three segments are on a high growth trajectory. According to industry sources, the Rs 8560 crore construction and mining equipment industry is expected to almost double by 2010, thanks to huge investments in core sectors like mining, steel, construction, irrigation and power. 
 
Also, the total defense budget for FY08 has increased 12 per cent year-on-year to Rs 96,000 crore. However, the next big growth engine for the company is going to be the railways, especially the metro rail project. 
 
After the successful implementation of Delhi Metro Rail Project, where more tracks are being laid-out in full swing, there are projects lined up for other cities like Mumbai, Bangalore, Hyderabad and Cochin. 
 
Also the government has allocated a huge sum of about Rs 50,000 crore to be invested in urban transport. Says Bhargav Buddadeb, analyst from Edelweiss, the share of public transport in the country at 30-35 per cent, is way behind the global average of 60-75 per cent especially for cities having a population of over 2-2.5 million. 
 
According to the company, India needs 1500 metro rail coaches for the projects coming up over the next three years, which translates into an opportunity of about Rs 9000 crore given that a coach costs around Rs 6 crore. 
 
Since BEML is a strong player in the segment, it should be able to grab a substantial market share ensuring a steady growth in topline. Since margins tend to be better in these projects compared to other railway products, profits could grow even faster. 
 
In FY07, the company recorded sales of Rs 2600 crore. Already the company has orders worth Rs 2100 crore from the Delhi Metro (Phase III) alone. This paints a bullish scenario except that any delay in executing these projects on part of the government could seriously impact the company's growth. 
 
BEML is the second largest manufacturer of earth moving equipment in Asia and commands a 70 per cent market share in the domestic industry. With presence in over 40 countries, it has recently started offering engineering design and software solutions, and also trading in engineering components. 
 
The company is tapping mainly the developing economies like Latin America, North and West Africa. It recently formed a joint venture with a Brazilian company to supply its products. 
 
Then again, to augment sales of its mining equipment, the company formed a three way joint venture for contract mining with a local coal mining and exploration company Midwest Granite and an Indonesian company called Sumber Mitra Jaya. 
 
The new entity would also look for coal blocks in Indonesia, Australia and South Africa. According to the company, contract mining could generate revenues of Rs 500 crore over the next four years or so.
 

Men, material and profits
The company aims to be a Rs 5000 crore company by FY12. Even after the robust growth in the past three years, the company hopes to maintain a compounded annual growth rate (CAGR) of 18 per cent in revenues in the coming few years. 
 

Further, profit margins are expected to improve. From the 12 per cent in FY07, the company is confident of increasing margins to at least 15 per cent in the current year, largely driven by better control over raw material costs and savings in employee costs coming from the ongoing voluntary retirement scheme (VRS).

According to B L Bajaj, director - finance, raw material costs as a percentage to net sales, which declined by 200 basis points last year, are expected to come down further with initiatives like close monitoring of expenditure, in-house manufacture of some components and long term contracts with a lot of suppliers.

Further, the company is expected to save about Rs 25 crore on employee cost over the next few years as the company has issued VRS to 1100 employees already and plans to retire another 700 people. The company plans to bring down its total number of employees to 11000. 
 

BEML also enjoys a five-year sales tax exemption which makes it competitive. Amit Bagaria, analyst, Angel Broking feels that the company could outperform its own guidance given the huge opportunity in railways and contract mining.

Market players estimate the price band for the issue to be in the range of Rs 950-1000, a 18-16 per cent discount to its current market price of Rs 1150.

At the estimated price band, the stock trades at 10.7-11.3 times and 9.1-9.6 times its FY08 and FY09 estimated earnings respectively. Says Sandeep Nanda, head of research, Sharekhan, "The company is good given its various skill sets in diverse areas."

Issue opens: June 27
Issue Closes: July 3