BEML - Out in open with no defence! - Khambatta Securities

BEML Limited (BEML) is a partially divested Indian government owned 'Miniratna-Category-1' PSU. It primarily produces equipment and customised solutions for three segments - Construction& Mining(C&M), Defence and Railways.

C&M segment hurt by weak economy and mining scams

Being cyclical C&M Equipment industry is currently struggling with poor demand and intense competition. Issues such as mining scams are also aggravating the slowdown in demand for equipment. Based on our poor macro outlook, we do not anticipate any significant improvement in the segmental performance over the next two years and thus expect BEML to continue report poor revenue, margin and working capital performance.

No light at the end of the tunnel for Defence segment

BEML's involvement in Tatra truck scam will have a negative impact on this segment over the next few years. Current order book stands at significant risk of cancellations or unfavourable alterations given the anticipated changes in procurement policies. Poor technological background would also limit the company's ability to secure new defence orders requiring high indigenous capabilities.

Railway & Metro segment a face saver

We expect Railway & Metro segment to benefit from increased demand given a number of planned launches in tier II cities. We also expect it to benefit from Indian Railways' increased thrust on enhancing security measures and infrastructure improvement. BEML is fully booked for the next two years and is investing in expanding capabilities to address the increased demand.

Operating performance will continue to deteriorate in the near to medium term

Dwindling order-book in C&M Equipment and suspension of new off-take at Defence segment will keep revenues and margins under constant pressure in the near to medium term. Working capital cycle is also expected to increase significantly given the inventory build-up at both these segments. This along with negative cash flow from operations will result into external accruals and an increase in leverage.

Valuation

Through DCF valuation methodology, we derive a target price of Rs 179.57 per BEML common share, representing a downside of 36.2% from the current levels. Hence, we initiate coverage on BEML common stock with an 'Underperform' rating.

Source : Equity Bulls

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