BEML CMP Target Rating Good from far but far from good SELL...

BEML CMP

Rs. 1090

Target

Rs. 742

Rating

SELL Good from far but far from good

VIJAYARAGHAVAN SWAMINATHAN [email protected] +91 44 4344 0022

RAVI SWAMINATHAN [email protected] +91 44 4344 0058 Find Spark Research on Bloomberg (SPAK <go>),

Thomson First Call, Reuters Knowledge and Factset

Stock performance (%)

1m 3m 12m

BEML 15% -15% 8%

Sensex 10% -2% -10%

CG Index 12% -9% -24%

Financial summary

Year Revenues (Rs. mn) EBITDA (Rs. mn) PAT (Rs. mn) EPS (Rs.) P/E(x) RoE(%)

FY15 28,092 699 66 1.6 688.8 0.3

FY16E 33,111 1,151 727 17.4 62.6 3.4

FY17E 33,876 1,610 1,011 24.2 45.0 4.6

FY18E 34,416 2,506 1,549 37.1 29.4 6.7

Date March 28, 2016

Market Data

SENSEX 25338

Nifty 7717

Bloomberg BEML IN

Shares o/s 42mn

Market Cap Rs. 45.5bn

52-wk High-Low Rs. 1,612-806

3m Avg. Daily Vol Rs. 325mn

Index member BSE500

Latest shareholding (%)

Promoters 54.0

Institutions 23.9

Public 22.1

Company Report

There has been a considerable amount of optimism on the growth potential of the three segments which BEML caters to –

Mining equipment, Metro Rail and Defence segment. While we remain cognizant of the sizeable opportunities present across

these segments, a deeper inspection of the key drivers suggests that BEML is unlikely to materially benefit given – (1) Major

portion of Rs. 40bn worth of Coal India ordering is expected to happen over the next 12 months is for high end dumpers (>

190 Ton) and drag lines for which BEML does not have the product range to qualify (2) Komatsu has been aggressively

winning orders for 100 Ton dumpers, a stronghold of BEML so far (3) In metro rail, ~30% of the order consists of electronics

where Alstom and Bombardier scores on technology and higher indigenization over BEML (4) Majority of the ordering for

railway coaches would have preference for ICF and RCF (large fixed cost base) and BEML is unlikely to see large orders due

to cost disadvantages (5) In Defence, the Indian Army’s financial constrains should limit capex spend (6) execution of legacy

fixed price contracts - Tatra Trucks and Armoured recovery vehicles (ARVs) should have lower operating margins.

Mining Equipment: Lack of high-end product range and competition to limit BEML’s mining equipment growth – Coal India is

expected to tender/finalize Rs. 40bn worth of mining equipment orders over the next 12 months. Out of these, ~Rs. 30bn worth of

orders is for high end dumpers (>190 Tons) and drag lines in which BEML does not have product range. BEML had recently launched

205 Ton dumper while its trial test is expected to take two years to get approval. In 100 ton dumpers – in which BEML has been strong

so far – our channel check interactions suggest that Komatsu is aggressive and winning market share from BEML. Given BEML’s weak

positioning in the upcoming tenders, we expect order inflow to decline going forward (20% yoy decline in FY17E)

Metro Rail: MNC players have higher indigenization with technological edge over BEML – Our interaction with BEML’s

competition suggests that ~30% of the overall value of a metro rail coach is core electronics in which Alstom and Bombardier scores

due to their global presence. Given new technology keep emerging in metro rail and BEML is likely to bid for a project alone (as its

technology partner Rotem has been blacklisted in JICA based projects), we expect addressable opportunity for BEML in Metro rail

would be limited. In the recently won Kolkata order (Rs. 9bn), BEML emerged as the sole bidder as competitors stayed away from

bidding due to anticipated delays. We expect order inflow prospects for BEML to moderate from a high base in FY16E

Defence: Indian Army’s budget constraints, execution of legacy orders and new competition to keep prospects bleak - The

Indian Army’s capital expenditure has been steadily on a decline to accommodate the increase in revenue expenditure (primarily

salaries which constitute ~75% of revenue expenditure). With 7th pay commission coming up, it is expected to increase further. This

should limit the Indian Army’s ability to spend on new capex. For BEML, execution of legacy fixed price contracts Tatra Truck and ARV

orders (~90% of its defence order book) should keep margin improvement prospects limited. New players like Tata Motors and Ashok

Leyland have forayed into the defence equipment market over the past few years thereby increasing competition.

View and valuation – We have a negative stance on BEML given its headwinds across all three segments. We expect order

inflows and the subsequent growth prospects to remain challenged in the foreseeable future. At CMP of Rs. 1090, the stock

trades at ~29x FY18E which we believe is rich considering RoEs of <10%. We assign 20x multiple to arrive at a TP of Rs. 742/-

BEML CMP

Rs. 1090

Target

Rs. 742

Rating

SELL Executive Summary

Corporate Factsheet

Company Background BEML is a Mini-Ratna Category-1 public sector undertaking (PSU) under the control of Ministry of Defence (MoD), operating

in three distinct business segments namely, Mining & Construction Equipment, Defence, and Rail & Metro. Having

commenced operations in 1964, with the transfer of Railway Coach Manufacturing facilities from Hindustan Aeronautics Ltd,

BEML has over the years diversified into manufacturing various types of mining and construction equipments, Metro coaches

and specialised defence vehicles/ products.

Presence The company derives ~87% of its revenue from the domestic market and balance from exports

Management depth Mr. P.Dwarakanath, Chairman and Managing Director

Mr. Dwarakanath graduated from National Institute of Technology, Warangal in Mechanical Engineering and joined BEML in

1978. He held various positions in the company in all its business verticals namely, Rail & Metro, Defence and Mining &

Construction. Prior to his elevation as CMD, he was the Director(Rail & Metro Business) of the company.

Mr. D.K.Hota, currently, Director- HR would be the new Managing Director from July 2016

Business BEML is involved in the manufacture of mining and construction equipments, metro rail coaches, coaches for the indian

railway and defence equipments.

Corporate Structure As on March’15 the company had three subsidiaries

Revenue Model As on FY15, BEML derives 59% of its revenue from the mining and construction segment, 6% from the defence segment and

35% from rail and metro segment

Capacity & Facilities BEML has manufacturing facilities in Kolar Gold Field (Bulldozers, Excavators, Rail Coaches and Armoured Recovery

Vehicle), Bangalore (Metro coaches, Military Coaches), Pallakad (Tatra Trucks, Heavy Recovery Vehicle and Rail coaches)

and Mysore (Dump Trucks, Motor Graders, Water Sprinklers)

Key Clientele Coal India, Indian Army, Indian Railways, Various State Governments (Metro Coaches)

Key Success Factors BEML’s presence for more than five decades, established manufacturing facility and near monopoly in products supplies till a

few year ago has led to BEML having sizeable market share across all three segments

Credit Rating A1+ (ICRA)

Corporate Bankers Standard Chartered Bank, State bank of Travancore

Auditors S.R.R.K Sharma Associates

BEML CMP

Rs. 1090

Target

Rs. 742

Rating

SELL Mining Equipment: Core market for BEML - High value, low volume industry

Caterpillar (CAT) and Komatsu has a sizeable market share in the

mining equipment space

Source: BEML, Industry , Spark Capital Research

Construction Equipment industry has higher volumes

Source: ICEMA, Spark Capital Research

Construction and mining equipment market is ~Rs. 150bn in size

Source: Industry, Spark Capital Research

Mining equipment market is relatively smaller in volumes

Source: ICEMA, Spark Capital Research

68,500

87,800 85,000

67,000

59,200

-

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

1,00,000

2010 2011 2012 2013 2014

Construction Equipment Industry (in units)

400 390 420

250 245380 400

160 140140

120 130

140 100

0

100

200

300

400

500

600

700

800

FY09 FY10 FY11 FY12 FY13 FY14 FY15

Mining Equipment Market (in units)

Dump Truck Bulldozer Excavator Wheel Loaders Motor graders

Construction Equipment

67%

Mining Equipment

33%

Construction, Mining Equipment Market Share - Rs. 150bn

Komatsu27%

CAT (Gmmco)38%

BEML35%

Mining Equipment - Market share (%) - Rs. 50bn

BEML CMP

Rs. 1090

Target

Rs. 742

Rating

SELL

High End -Dumpers

37%

Drag Line38%

Dozers, Excavators,etc

25%

Coal India - Next 12 Months tenders - Value (Rs. 40bn)

Mining Equipment: MNC players have a better product portfolio

CAT has a wider range of product portfolio

Source: Caterpillar India, Spark Capital Research

BEML range of products is relatively lesser than CAT, Komatsu

Source: BEML, Spark Capital Research

BEML does not have the product range/qualify for the upcoming Coal

India tenders


The construction and mining equipment market in India is ~Rs. 150bn in size

with the mining equipment market (relevant to BEML) is of ~Rs. 50bn in size.

Construction equipment industry has higher volumes (relatively lower per unit

value) at ~60,000 units, while the mining equipment industry volumes is ~600

units with a larger ticket size

Apart from BEML, Caterpillar (CAT) and Komatsu have sizeable market

share in the mining equipment market with established manufacturing

facilities. According to our interaction with CAT and other industry personnel,

these players have won market share from BEML over the past few years

Given that ~80% of the mining equipment demand is from coal sector in

India, tender awards by Coal India is critical for orders. Recent Coal India

tenders (worth Rs. 40bn) have seen a pick up in momentum after five years.

Since the composition of ordering is more towards high end dumpers

(190 Ton and 240 Ton) and drag line in which BEML doesn’t have the

product range or is not technically qualified in the medium term

Product Range

Dump Trucks

35 Ton, 40 Ton, 60 Ton, 100

Ton, 150Ton, 205 Ton (under

trial)

Excavator

7.5 Ton (0.3 cu.mn), 20 Ton

(0.96 cu. m), 30.8 Ton (2

cu.m), 60 Ton, (4 cu.m), 98

Ton (7 cu.m) , 170 ton (12

cu.mn)

Wheel Loader 126 HP (2.4 cu. M) to 300 HP

(5.9 cu.m)

BEML not qualified for

high end dumpers –

190 Ton & 240 Ton

BEML does not have

drag line technology

after Bucyrus was

acquired by CAT

BEML CMP

Rs. 1090

Target

Rs. 742

Rating

SELL Mining Equipment: Coal India increasingly moving towards larger equipment,

packaged ordering – Negative for BEML

Increasing spares/service package is getting considered giving MNC

players an advantage


Coal India has started to award tenders for larger tonnage dumpers

Source: Coal India, Spark Capital Research

Komatsu has a well-established manufacturing facility and distributes

its products through L&T

Source: Komatsu India Presentation, Spark Capital Research

Our industry interactions suggest that in the recent mining equipment global

tenders placed by Coal India (given the in table above), BEML has not

participated in the 190 Ton and 240 Ton contracts due to lack of pre-

qualification. The recently launched 205 Ton dumper is still under trial testing

process and would take 1-2 years for approval

Increasingly, Coal India has been placing equipment orders with spares and

service contracts as a package with an effort to improve the total cost of

ownership. MNC players, who have a higher initial equipment cost, is

benefitting from such a change as the spares and service are lower when

compared to BEML due to better quality offered. Coal India’s sub-contractors

(private players) rarely opt for BEML’s equipments

Also, our channel checks interaction suggest that Komatsu has been

aggressive in winning orders for 100 ton dumpers which has been a strong

hold of BEML.

We expect order inflow for BEML to trend downwards due to Coal India’s

requirement for larger equipments, its limited product range and competition

from CAT, Komatsu and other players

Date Item Description

Estimated

Equipment value

(Rs. Bn)

13.10.2014 Supply, installation and commissioning of 44 Nos. of 240Ton Rear

Dumpers with spares 6.1

11.12.2014 Supply, Installation and Commissioning of 03 Nos. of 42 Cubic Metre

Electric Rope Shovels 3.4

15.12.2014 Supply, installation and Commissioning of 18 Nos. of 190 Ton Rear

Dumpers and Spares 2.2

19.02.2015 Supply, installation and Commissioning of 18 Nos. of 190 Ton Rear

Dumpers and Spares 2.2

21.05.2015 Supply ,Installation and Commissioning of 22 nos. of without ripper

and 10 nos. of with ripper 850 HP Crawler Dozers with Spares

2.7

21.05.2015 Supply, Installation and Commissioning of 44 Nos. of Wheel Dozer

not less than 460 HP along with Consumable Spares 1.4

Total 17.9

Equipment 60%

Spares & Service

(contract for 3-8 years)

40%

Coal India Mining equipment pacakge share (%)

Komatsu India 100 Ton Dump Truck

Komatsu India’s assembly line for Hydraulic Excavator

BEML CMP

Rs. 1090

Target

Rs. 742

Rating

SELL Construction Equipment: BEML has negligible presence; JCB, Tata Hitachi dominates

JCB is a clear leader in Backhoe Loaders

Source: Industry, Spark Capital Research;

Tata Hitachi dominates the excavator market (non-mining)

Source: Tata Hitachi, Industry, Spark Capital Research

BEML has very limited presence in these two products


Tata Hitachi37%

Komatsu16%

Hyundai16%

Kobelco8%

Others23%

Excavators - 15,000 units - Market Share (%)

JCB68%

Case9%

CAT5%

Tata Hitachi4%

Terex4%

Mahindra3%

Others4%

Backhoe Loaders - 22,000 units - Market Share (%)

BEML 7.5 Ton excavator BEML 7.6 Ton Backhoe loaders

Takeaways from our interaction

Construction equipment industry uses relatively lower duty equipments (<20 ton) equipments for infrastructure, irrigation and urban development usage.

Tata Hitachi is the market leader in the excavator market with > 37% market share (15000 units industry). Similarly, JCB is the market leader in backhoe loaders with 68% market share. BEML has limited presence in the non-mining/lower tonnage space given its lack of distribution reach. Tata Hitachi and JCB have 230 and 600 touch points on a pan-India basis.

Our interaction with Tata Hitachi suggests that demand for low tonnage excavator and back-hoe loaders have increased since September-15, clocking m-o-m growth for six months due to improved traction from road construction, ports and railways segments.

BEML CMP

Rs. 1090

Target

Rs. 742

Rating

SELL Rail & Metro: Technological capability limits BEML

~Rs. 115bn worth of Metro rail orders have been awarded over the past six years

of which BEML has had a market share of ~35%. BEML has a technological tie

up with Hyundai Rotem and have bid for projects together leveraging Rotem’s

technology.

~30% of a metro coach carry advanced electronics which is available with

Bombardier and Alstom given their global footprint. Our interaction with

Bombardier suggests that Alstom and Bombardier scores over BEML in

electronics and they additionally offer signaling and propulsion systems as

a package to customers.

Recently, Rotem had been blacklisted by JICA for irregularities in bid documents

which it has submitted. While BEML has absorbed older technology with Rotem,

latest technologies are likely to be unavailable for the company. BEML is likely to

bid/win only for orders with are based on older design and technology. Design

specifications vary between metro orders as per our interaction with the industry

ecosystem.

The recent Kolkata metro rail contract has been awarded to BEML, as it was a

sole bidder. Other players have stayed away from the tender due to expected

execution delays arising out of land acquisition. (regular players – Alstom and

Bombardier did not bid at all)

Upcoming Metro Car Orders

Year City No. of Cars

(Approximate)

Potential

Order size

(Rs. bn)

Comments

2016 Mumbai 200 2000

Could be

imported from

CSR like

earlier order

2016 Ahmedabad 90 900

2016 Nagpur 70 700

2017 Bangalore Metro 180 1800

2017 DMRC (Phase IV) NA NA

Alstom and Bombardier scores over BEML in core electronics

Source: Bombardier, Spark Capital Research

India Metro Rail Awards

Date City/Entity Winner No. of Cars Rs. Bn

Jan-16 Kolkata BEML 84 9.0

Sep-15 Lucknow Alstom 80 10.7

Jul-15 DMRC Bombardier 162 15.0

Jun-15 DMRC BEML 74 6.5

2014 Kochi Alstom 75 6.3

Sep-14 Mumbai CSR Nanjing, China 6.0

Sep-13 Jaipur BEML 40 3.2

Jul-13 DMRC BEML - Rotem 92 7.5

Sep-12 Hyderabad Rotem 171 18.0

Sep-11 DMRC Bombardier 76 6.0

2011 Chennai Alstom 168 14.3

Jul-10 DMRC Bombardier 40 3.0

Apr-10 Gurgaon CSR Nanjing, China 1.5

Feb-09 Bangalore BEML - Rotem 150 16.7

Total 1128 114.7

Heavy Engineering

70%

Electronics30%

Typical Metro Rail Coach - Value Break-up (%)

BEML CMP

Rs. 1090

Target

Rs. 742

Rating

SELL Rail & Metro: MNC players have higher indigenization levels; Railways coach

manufacturing opportunity to be elusive

Alstom and Bombardier have well established facilities in India

Source: Bombardier and News articles, Spark Capital Research

BEML is at a disadvantage to ICF and RCF in coach manufacturing

s

Source: Indian Railways, Spark Capital Research

Company Manufacturing

facility Location

Capacity (no. of

cars per annum) Comments

Bombardier Savli, Gujarat 300-350

Sizeable portion of capacity

(~50%) dedicated for Exports,

Offers Signalling and Propulsion

systems for Metro Cars

Alstom Sri City, Near

Chennai 250

Offers Signalling and Propulsion

systems for Metro Cars. Plans to

expand capacity to 300 cars per

annum in the near term

BEML Bangalore 200 No Exports. Does not have

signalling and propulsion system

Indigenization level for Alstom and Bombardier is higher

s

Source: Bombardier and News articles, Spark Capital Research

70-75% 70%

55-60%

0%

10%

20%

30%

40%

50%

60%

70%

80%

Bombardier Alstom BEML

Metro Rail - Indeginization level (%)

Bombardier and Alstom have setup manufacturing facilities catering to both

domestic market and exports. Given their global presence and better

technological capability, their indigenization levels have been higher than

BEML. This is likely to give a clear edge for these MNC players over BEML.

Alstom is increasing the manufacturing capacity from ~250 cars per annum

to ~300 in the near term given the strong order book position. Similarly,

Bombardier is likely to expand the manufacturing capacity in the future

anticipating the increase in opportunity - Alstom starts expanding Sri City

manufacturing facility

In Railways segment, Indian railways has been and is likely to utilize the

capacity of ICF and RCF for the manufacture of coaches and EMUs.

Recently BEML has not received any sizeable orders from Indian Railways

given higher internal manufacturing targets of ICF and RCF (ICF Perambur

has Big Plans After Record Output). Given the higher cost of manufacturing

of BEML vis-à-vis ICF and RCF, we believe Indian railways is unlikely to

award large orders to BEML.

Indian Railways Coach Manufacturing Schedule (in units)

Manufacturer FY13 FY14 FY15 FY16 FY17

ICF 1500 1500 1600 1700 1700

RCF 1600 1600 1600 1600 1700

BEML 824 961 1080 800 600

ICF vs. BEML Coach Manufacturing Cost (Rs. Mn per unit)

in Rs. Mn ICF - Total Cost per

Unit

BEML - Total Cost

per Unit % Cost Difference

AC EMU B Type 33 39 16%

AC EMU C Type 9 11 19%

AC EMU D Type 9 11 17%

http://www.thehindu.com/business/Industry/alstom-starts-expanding-sri-city-manufacturing-facility/article8140293.ece













http://www.newindianexpress.com/cities/chennai/ICF-Perambur-has-Big-Plans-After-Record-Output/2015/04/04/article2746399.ece















BEML CMP

Rs. 1090

Target

Rs. 742

Rating

SELL Defence: Tatra Trucks – BEML’s loss, Tata’ gain

Major portion of the defence order book is Tatra Truck and ARVs


Post the scam, procurement of Tatra trucks was banned and the ban

lifted only recently in 2015

s

Private Players like Tata Motors has gained lead meanwhile

Armoured Recovery

Vehicle49%

Tatra trucks42%

Others9%

BEML - Defence - Order book Break-up (%) - Rs. 28bn

Tatra Scam – What happened then

Source: Spark Capital Research

Tatra Trucks Venus Projects

(Hong Kong)

Tatra Sipox

(UK)

BEML

BEML

wins Rs.

6.3bn

order for

788 Tatra

vehicle

Part of Global

Vectra Group

Held by

Ravi

Rishi,

Promoter

of Global

Vectra

Irregularities

in Tatra deal

exposed;

Govt. imposes

ban on Buying

from Tatra

Indian

govt. lifts

ban on

supplies

from Tatra

Mar’10 Apr’12 Jan’15

After the Tatra scam in 2012, the

procurement of trucks was opened

up to private firms. Private players

like Tata Motors, Ashok Leyland

have secured sizeable orders for

defence heavy duty trucks while

supplies from Tatra (through BEML)

was banned by the government.

Recently Tata Motors has won ~Rs.

13bn worth of orders from the

Indian Army winning over

competitors including BEML-Tatra

combined.

Indian Army

A Czech

based Truck

manufacturer

In 2012, former army chief General Mr. V.K.Singh brought into about light irregularities in the

purchase of Tatra Trucks by BEML for the Indian Army. The trucks, which are only to be

procured from an OEM, were traded through a series on entities (highlighted above) owned by

private individuals. Several former BEML and government employees are being investigated

for getting involved in these transactions. The Indian government had banned procurement

from Tatra trucks post the scam and the ban has been only lifted recently

BEML CMP

Rs. 1090

Target

Rs. 742

Rating

SELL Defence: Funding constraint in Indian Army to keep equipment ordering muted

Burgeoning revenue expenses of the Indian Army is eating into its

equipment modernization/capital spend


BEML’s ARV contracts have turned legacy orders due to this. With a

large import content, these fixed price contracts would take a margin

hit

s


Budgetary allocation towards Army capital spend is low and only ~40-

45% of it is used towards actual capex

Source: Mininstry of Defence, Spark Capital Research

61%69% 69%

62%

78%

91%96% 93% 92%

39%31% 31%

38%

22%

9%4% 7% 8%

0%

20%

40%

60%

80%

100%

120%

FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16

Indian Army - Spend Pattern (%)

Committed Spend New Procurement Spend

The Indian army’s expenditure towards capital expenditure (procurement of

new equipments) has been consistently on a decline as revenue expenditure

has been on an increase due to increase in salary and other costs (impact of

7th pay commission expected). We believe this should impact the equipment

ordering for BEML.

Majority of BEML’s current order book constitute of Tatra Trucks and

Armored recovery vehicles (ARV) contracts to be supplied to Indian Army.

The Tatra Trucks order which had been secured upto 2010 has been allowed

by the government to be executed only a year ago (due to the Tatra scam).

Given these contracts are fixed price in nature, we believe it should take cost

escalation hits due to imported content (~30% of the order value inspite of

indigenization efforts) and time delays

BEML’s ARV order (~Rs. 15bn secured in 2012) has been delayed due to

delays from the Indian Army. Given the high import content (~60% of order

value) we believe margins are likely to be impacted in these orders also.

Indegenized40%

Imported60%

Armoured Recovery Vehicle Manufacturing -Indeginization/Imported Share (%)

Revenue Expenditure

82%

Capital Expenditure

18%

Army Budgetary Allocation - Revenue and Capital Expenditure (% share) - Rs. 989bn

BEML CMP

Rs. 1090

Target

Rs. 742

Rating

SELL Financial Analysis

Revenue growth to remain subdued in FY17E and FY18E

Source: Spark Capital Research

Expect orderbook trend to decline …


BEML Order book break-up


… driven by lower order inflows


Mining & Construction

24%

Rail & Metro31%

Defence45%

BEML Order book Break-up (Rs. 63.7bn)

16 13 10 9

2525

2521

16 1816

17

0

10

20

30

40

50

60

FY15 FY16E FY17E FY18E

BEML Order book Trend - Rs. bn

Mining & Construction Rail & Metro Defence

18 16 1512 12

12

24 5

816 19

1617

0

5

10

15

20

25

30

35

40

FY14 FY15 FY16E FY17E FY18E

BEML Order Inflow Trend - Rs. bn

Mining & Construction Rail & Metro Defence

EBIT

Margin FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E

Mining 20.9 16.4 8.1 -1.0 14.1 7.4 8.0 10.0 12.0

Rail &

Metro 15.9 12.7 9.7 -1.6 -72.3 -31.9 -10.0 -5.0 5.0

Defence -5.2 -4.6 -2.7 6.0 3.6 3.0 3.0 5.0 7.0

Revenu

e (Rs.

Bn)

FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E

Mining 18.4 15.3 16.6 13.8 14.5 16.5 17.1 14.8 13.3

Rail &

Metro 6.8 7.1 4.5 3.4 1.4 1.6 1.9 4.0 8.2

Defence 10.2 13.3 5.5 10.5 13.1 9.9 17.1 18.2 16.1

Total 35.4 35.7 26.6 27.7 29.0 28.1 36.2 37.0 37.6

BEML CMP

Rs. 1090

Target

Rs. 742

Rating


Du pont Analysis – Falling margin and poor asset turnover has

impacted RoEs


…should contribute to margin improvement. Margin to remain well

below historical level of >11% (FY06-FY08)


Significant fall in employee count…


Gross margin contraction & employee cost increase led to margin

contraction, some respite due to fall in employee count in FY17E & 18E


0

2000

4000

6000

8000

10000

12000

14000


BEML - Employee Headcount (in nos.)

Employee Headcount

-2.0

0.0

2.0

4.0

6.0

8.0

10.0


BEML - EBITDA Margin (%)

EBITDA Margin (%)

FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E

Net Revenue 100 100 100 100 100 100 100 100 100 100

Raw material

Consumed 52.4 54.7 57.0 52.0 58.9 58.9 56.3 60.0 60.0 58.0

Gross Margin 47.6 45.3 43.0 48.0 41.1 41.1 43.7 40.0 40.0 42.0

Employee

Costs 20.1 19.5 25.8 26.6 26.3 24.6 27.4 24.2 21.5 21.0

Other Costs 15.4 16.3 14.0 16.1 15.6 12.7 13.8 12.3 13.7 13.7

EBITDA 12.1 9.4 3.3 5.3 -0.9 3.8 2.5 3.5 4.8 7.3

Depreciation 1.0 1.1 1.3 1.6 1.8 1.8 1.9 1.4 1.4 1.4

Other Income 4.1 5.0 7.6 2.8 4.0 2.7 2.1 1.8 1.9 2.1

Interest 1.4 2.0 2.6 4.1 5.8 4.3 2.5 1.7 1.5 1.2

PBT 13.8 11.3 7.0 2.4 -4.4 0.3 0.2 2.2 3.7 6.7

PAT 9.6 7.9 5.6 2.1 -2.8 0.2 0.2 2.2 3.0 4.5

FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E

PAT margin (%) 9.6% 7.9% 5.6% 2.1% -2.8% 0.2% 0.2% 2.2% 3.0% 4.5%

Total Asset

turnover (x) 1.2 1.0 0.9 0.9 0.9 0.9 1.0 1.2 1.1 1.1

Operating

Leverage (x) 1.3 1.4 1.4 1.4 1.5 1.6 1.4 1.3 1.4 1.3

RoE (%) 14.8% 11.3% 7.2% 2.7% -3.8% 0.2% 0.3% 3.4% 4.6% 6.7%

BEML CMP

Rs. 1090

Target

Rs. 742

Rating


Dividends has reduced progressively


Debtors greater than six months continue to remain high


High inventory & debtor days keep working capital at elevated levels


OCF/EBITDA has improved due to working capital improvement from

FY13



Inventory days

213

260

324

319

270

250

235

235

230

Debtor Days

175

161

106

112

123

129

128

126

122

Loans and

Advances

59

47

85

98

67

52

53

52

51

Other Current

Assets

1

38

38

37

39

48

49

48

47

Creditors

58

71

67

64

55

71

64

63

61

Customer

Advances

41

30

97

86

103

101

98

96

95

Other Current

Liabilities

16

44

53

68

44

41

38

41

44

Working Capital

334

361

337

348

296

266

265

260

250

in Rs. mn FY10 FY11 FY12 FY13 FY14 FY15

Debtors 13,607 11,680 7,917 8,615 9,774 9,917

Debtors > 6 months 4,556 6,269 4,610 5,332 4,497 4,150

% of Total Debtors 33% 54% 58% 62% 46% 42%

Parameter (in Rs.

Mn) FY10 FY11 FY12 FY13 FY14 FY15

FY10-

FY15

OCF (Pre-Tax) 2,744 -1,025 3,088 -1,070 4,200 5,358 13,294

EBITDA 2,668 876 1,453 -242 1,099 699 6,553

OCF (Pre-

Tax)/EBITDA 103% -117% 212% - 382% 766% 203%

10 10

5

2

1 1

0

2

4

6

8

10

12

FY10 FY11 FY12 FY13 FY14 FY15

Dividend per share (Rs.)

Dividend per share (Rs.)

BEML CMP

Rs. 1090

Target

Rs. 742

Rating

SELL Environment, Social and Governance Analysis

Corporate Governance philosophy

• Senior Management initiates the Corporate Governance standards and

ensures that it is percolated throughout the organization. The Company

firmly believes in the importance of ethics among the employees and strives

for developing a work culture that fosters accountability, fairness, integrity

and transparency in its dealings, while adhering to the fundamental principle

of enhancing the trust and value of all stakeholders.

• BEML has a 'Code of Conduct and Business Ethics for Board Members and

Senior Management', i.e., Directors, Key Managerial Personnel, Executive

Directors and Chief General Managers. In addition, there is a 'BEML Code

of Conduct to regulate, monitor and report trading by Insiders' to avoid

unlawful enrichment by the connected persons based on unpublished price

sensitive information.

Source: Company, Spark Capital Research

Board of Directors


Name Position Name Position

Mr. P Dwarakanth Chairman and

Managing Director Mr. C Durgesh

Director – Mining and

Construction

Mr. Rajnish

Sharma Government Nominee

Director Mr. P R Naik Director - Defence

Ms. Kusum Singh Government Nominee

Director

Mr. Aniruddh

Kumar Director – Rail and

Metro

Mr. C Balakrishnan Independent Director Mr. D.K. Hota Director - HR

Mr. P Gupta Independent Director Mr. Pradeep

Swamianthan Director - Finance

Mr. Suhas Anand

Bhat Independent Director

Green Initiatives & Environmental impact measures

• BEML had setup a 5 MW Windmill during 2007 in Kappadagudda area of

Gadag district in Karnataka for captive consumption. The existing Windmill

generated 80.31 lakh kWh power during 2014-15 resulting in green house

gas reduction.

• Further, BEML is in the process of setting-up 18 MW Wind Mill power

generation to develop green energy and also being self sufficient on power

requirements

• The company had also taken various initiatives within its facilities

(replacement of compressors, installation of energy efficiency lights – LEDs)

to conserve energy


Other Observations

• Five out of the eleven board of directors are independent directors

(including government nominees) indicating healthy levels of supervisory

positions

• Top management’s total remuneration at Rs. 19.3mn in FY15 is 0.3% of

overall employee cost (Rs. 7.7bn for ~9500 employees) which we believe

is reasonable and fairly linked to the company’s performance

• R&D Spend is Rs. 824mn (2.3% of FY15 turnover). It has decreased

from Rs. 862mn in FY14

• Contingent liabilities of Rs. 9.8bn related taxes and legal cases (~50% of

the net worth) is present. This includes Rs. 3.6bn related to claims by M/s

Midwest Granite Pvt. Ltd, the joint venture partner in BEML Midwest


BEML CMP

Rs. 1090

Target

Rs. 742

Rating

SELL Financial Summary

Rs. mn FY15 FY16E FY17E FY18E FY15 FY16E FY17E FY18E

Profit & Loss Growth ratios

Revenues 28,092 33,111 33,876 34,416 Sales -3.5% 17.9% 2.3% 1.6%

EBITDA 699 1,151 1,610 2,506 EBITDA -36.4% 64.6% 39.9% 55.6%

Other Income 595 595 655 720 PAT 41.8% 1000.6% 38.9% 53.2%

Depreciation 521 458 476 494 Margin ratios

EBIT 773 1,287 1,788 2,732 EBITDA 2.5% 3.5% 4.8% 7.3%

Interest 705 560 525 420 PAT 0.2% 2.2% 3.0% 4.5%

PBT 68 727 1,263 2,312 Performance ratios

PAT 66 727 1,011 1,549 RoE 0.3% 3.4% 4.6% 6.7%

Balance Sheet RoCE 2.6% 4.6% 4.8% 6.1%

Net Worth 20,768 21,444 22,349 23,717 RoA 0.1% 1.5% 2.0% 3.1%

Deferred Tax -1,048 -1,000 -1,000 -1,000 Fixed asset turnover (x) 2.3 2.6 2.6 2.5

Total debt 5,922 8,000 7,500 6,000 Total asset turnover (x) 1.0 1.2 1.1 1.2

Total Networth and liabilities 25,641 28,444 28,849 28,717 Financial stability ratios

Gross Fixed assets 12,228 12,728 13,228 13,728 Net Debt to Equity (x) 0.2 0.3 0.3 0.2

Net f ixed assets 4,687 4,729 4,753 4,758 Current ratio (x) 2.0 2.1 2.1 2.0

CWIP 1,917 1,500 1,500 1,500 Inventory and debtor days 478 465 460 450

Investments 0 0 0 0 Creditor days 212 200 200 200

Inventories 19,212 21,318 21,811 21,687 Working capital days 266 265 260 250

Sundry Debtors 9,917 11,647 11,665 11,526 Interest cover (x) 1.1 2.3 3.4 6.5

Cash and bank balances 1,447 1,079 1,368 1,789 Valuation metrics

Loans and advances 7,681 9,218 9,218 9,218 Fully Diluted Shares (mn) 41.8 41.8 41.8 41.8

Current liabilities 19,221 21,046 21,466 21,762 Market cap (Rs.mn) 45,529 45,529 45,529 45,529

Net current assets 19,037 22,215 22,596 22,458 EPS (Rs.) 1.6 17.4 24.2 37.1

Total assets 25,641 28,444 28,849 28,717 P/E (x) 688.8 62.6 45.0 29.4

Cash Flows EV (Rs.mn) 50,004 52,450 51,661 49,741

Cash flow s from Operations 5,482 -1,753 1,920 3,021 EV/ EBITDA (x) 71.5 45.6 32.1 19.8

Cash flow s from Investing -360 -83 -500 -500 BV/ share (Rs.) 497.2 513.4 535.0 567.8

Cash flow s from Financing -3,838 1,468 -1,131 -2,101 Price to BV (x) 2.2 2.1 2.0 1.9

Abridged Financial Statements Key metrics

Disclaimer

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Absolute

Rating

Interpretation

BUY Stock expected to provide positive returns of >15% over a 1-year horizon REDUCE Stock expected to provide returns of <5% – -10% over a 1-year

horizon

ADD Stock expected to provide positive returns of >5% – <15% over a 1-year

horizon SELL Stock expected to fall >10% over a 1-year horizon

Disclaimer (Cont’d)

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Spark Capital has incorporated a disclosure of interest statement in this document. This should however not be treated as endorsement of views expressed in this report:

Disclosure of interest statement Yes/No

Analyst financial interest in the company No

Group/directors ownership of the subject company covered No

Investment banking relationship with the company covered No

Spark Capital’s ownership/any other financial interest in the company covered No

Associates of Spark Capital’s ownership more than 1% in the company covered No

Any other material conflict of interest at the time of publishing the research report No

Receipt of compensation by Spark Capital or its Associate Companies from the subject company covered for in the last twelve months:

Managing/co-managing public offering of securities

Investment banking/merchant banking/brokerage services

products or services other than those above

in connection with research report

No

Whether Research Analyst has served as an officer, director or employee of the subject company covered No

Whether the Research Analyst or Research Entity has been engaged in market making activity of the Subject Company; No

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The views expressed in this research report accurately reflect the analyst’s personal views about any and all of the subject securities or issuers; and no part of the research

analyst’s compensations was, is or will be, directly or indirectly, related to the specific recommendation or views expressed in the report.

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BEML CMP Target Rating Good from far but far from good SELL...

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