Company Overview

Incorporated in 1964, BEML Ltd. is a Mini Ratna ‘Category 1’ company under the Ministry of Defence, Govt. of India. The company operates through its three main verticals (i) Mining & Construction (50% of sales) (ii) Rail & Metro (27% of sales) (iii) Defense & Aerospace (23% of sales) and offers services to defence & aerospace, coal, mining, steel, cement, power, irrigation, construction, infrastructure, railways and metro transportation system industries. The company caters to its three core verticals through its four manufacturing complexes set in Bengaluru, Mysuru, Kolar Gold Fields, and Palakkad. Major products manufactured in the Mining & Construction segment include bulldoz- ers, dumpers, excavators, shovels / walking draglines, water Sprinklers, motor graders, loaders, pipe layers, and underground mining equipment. In the Defense & Aerospace segment, the business provides high mobility vehicles (HMV) and combat mobility vehicles, aircraft, and missile-related equipment. Lastly, the Rail & Metro segment includes metro cars, electric multiple units, mainte- nance vehicles, and passenger coaches for Indian Railways. On the global front, the company has increased its presence in 70 countries by exporting 1,200+ pieces of equipment to date.

Investment Rationale

Robust order book and a healthy pipeline in the Railways and Defence segment

As on 31 st June 2023, the business reported an order book of Rs. 9,800 crores and expects this to scale upwards to Rs. 16,000 crores by FY24 end. Additionally, the company indicated an order book of Rs. 17,000+ crores in the next 2-3 years with the assumption of successful order conversion in the Railways & Metro (R&M) segment. Breaking up segment-wise new orders, in the R&M sector, the company received an order from Bangalore Metro for 318 units (~Rs. 3,100 crores), 10 train set orders of Vande Bharat from ICF (~Rs. 675 crores). Under the defence segment, new projects include new orders of HMV of Rs. 443 crores in the pipeline. Along with that, the business aims to expand in this space by taking up overhauling of armoured recovery vehicles which will increase its order to Rs. 1,000-2,500 crores/annum. In FY23, the company recorded Rs. 884 crores revenue within this segment and guided on increasing this number to Rs. 1,500 crores by FY24 end and to Rs.5,000 crores/annum in FY27. In the company’s largest segment Mining & Construction, the busi- ness expects 10-12% growth in the next 3-4 years, and 5-7% growth thereafter.

 Strong growth in OTC business to drive profitability
The company has recorded an 8% YoY decline (5,157 employees) in its manpower in FY23 and a 7% YoY drop (5,573 employees) in FY22. The company expects 400 annuations in FY24 and 500 annuations by FY25 which will effectively reduce its employee cost. However, the employee cost / VOP (value of production) remained high at around 22% in FY23, despite trending downwards in the previous fiscal. The management aims to bring this ratio down to 20% this year and below 15% in the next 2-3 years, in line with its strategy of improving its operational leverage. Going ahead, BEML Ltd. also aims to transition its fixed employee structure to a more variable employee structure to further reduce its costs going ahead. Further, the management guided on 200 bps expansion driven by higher volumes in the coming period.

Valuation and Outlook

BEML Ltd. is on a strong growth trajectory aided by its robust order pipeline execution in the coming years and favorable industry tailwinds. This includes an increased focus of the government in the company’s main three sectors i.e. Mining & Construction, Rail & Metro, and Defense & Aerospace. Also, increasing potential in the overhauling business in the defence segment is a growing business opportunity for the company. The company’s client base includes PSUs like Coal India Ltd., the Min- istry of Defence, and multiple repeat orders from the railway sector. Other than the core verticals, the company remains optimistic about its export business and expects to generate Rs. 300 crore physical exports in FY24 (highly dependent on Mining & Construction segment) compared to Rs. 178 crore physical exports in FY23. Thus, based on the above factors, we give the stock a “Buy” rating. On the valuation front, we value the company based on 37x of FY25E earnings and arrived at a target price of INR 2,325 (15% upside from CMP) with a 12 months investment horizon.