Page 1
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/-
Page 2
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
Page 3
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
Page 4
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
Source: Industry, Spark Capital Research
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
Page 5
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
Source: Industry, Spark Capital Research
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
Page 6
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
Source: BEML, Spark Capital Research
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.
Page 7
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 (%)
Page 8
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%
Page 9
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
Source: BEML, Spark Capital Research
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
Page 10
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
Source: Industry, Spark Capital Research
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
Source: BEML, Spark Capital Research
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
Page 11
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 …
Source: BEML, Spark Capital Research
BEML Order book break-up
Source: BEML, Spark Capital Research
… driven by lower order inflows
Source: BEML, Spark Capital Research
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
Page 12
BEML CMP
Rs. 1090
Target
Rs. 742
Rating
SELL Financial Analysis
Du pont Analysis – Falling margin and poor asset turnover has
impacted RoEs
Source: BEML, Spark Capital Research
…should contribute to margin improvement. Margin to remain well
below historical level of >11% (FY06-FY08)
Source: BEML, Spark Capital Research
Significant fall in employee count…
Source: BEML, Spark Capital Research
Gross margin contraction & employee cost increase led to margin
contraction, some respite due to fall in employee count in FY17E & 18E
Source: BEML, Spark Capital Research
0
2000
4000
6000
8000
10000
12000
14000
FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E
BEML - Employee Headcount (in nos.)
Employee Headcount
-2.0
0.0
2.0
4.0
6.0
8.0
10.0
FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E
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%
Page 13
BEML CMP
Rs. 1090
Target
Rs. 742
Rating
SELL Financial Analysis
Dividends has reduced progressively
Source: BEML, Spark Capital Research
Debtors greater than six months continue to remain high
Source: BEML, Spark Capital Research
High inventory & debtor days keep working capital at elevated levels
Source: BEML, Spark Capital Research
OCF/EBITDA has improved due to working capital improvement from
FY13
Source: BEML, Spark Capital Research
FY10 FY11 FY12 FY13 FY14 FY15 FY16E FY17E FY18E
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.)
Page 14
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
Source: Company, Spark Capital Research
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
Source: Company, Spark Capital Research
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
Source: Company, Spark Capital Research
Page 15
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
Page 16
Disclaimer
Spark Disclaimer
Spark Capital Advisors (India) Private Limited (Spark Capital) and its affiliates are engaged in investment banking, investment advisory and institutional equities and
infrastructure advisory services. Spark Capital is registered with SEBI as a Stock Broker and Category 1 Merchant Banker.
We hereby declare that our activities were neither suspended nor we have defaulted with any stock exchange authority with whom we are registered in the last five years. We
have not been debarred from doing business by any Stock Exchange/SEBI or any other authorities, nor has our certificate of registration been cancelled by SEBI at any point of
time.
Spark Capital has a subsidiary Spark Investment Advisors (India) Private Limited which is engaged in the services of providing investment advisory services and is registered
with SEBI as Investment Advisor. Spark Capital has also an associate company Spark Infra Advisors (India) Private Limited which is engaged in providing infrastructure
advisory services.
This document does not constitute or form part of any offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction.
This document is provided for assistance only and is not intended to be and must not alone be taken as the basis for an investment decision. Nothing in this document should
be construed as investment or financial advice, and nothing in this document should be construed as an advice to buy or sell or solicitation to buy or sell the securities of
companies referred to in this document.
Each recipient of this document should make such investigations as it deems necessary to arrive at an independent evaluation of an investment in the securities of companies
referred to in this document (including the merits and risks involved), and should consult its own advisors to determine the merits and risks of such an investment. This
document is being supplied to you solely for your information and may not be reproduced, redistributed or passed on, directly or indirectly, to any other person or published,
copied, in whole or in part, for any purpose. This report is not directed or intended for distribution to or use by any person or entity who is a citizen or resident of or located in
any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject Spark Capital
and/or its affiliates to any registration or licensing requirement within such jurisdiction. The securities described herein may or may not be eligible for sale in all jurisdictions or to
a certain category of investors. Persons in whose possession this document may come are required to inform themselves of and to observe such applicable restrictions. This
material should not be construed as an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal.
Spark Capital makes no representation or warranty, express or implied, as to the accuracy, completeness or fairness of the information and opinions contained in this
document. Spark Capital , its affiliates, and the employees of Spark Capital and its affiliates may, from time to time, effect or have effected an own account transaction in, or
deal as principal or agent in or for the securities mentioned in this document. They may perform or seek to perform investment banking or other services for, or solicit
investment banking or other business from, any company referred to in this report.
This report has been prepared on the basis of information, which is already available in publicly accessible media or developed through an independent analysis by Spark
Capital. While we would endeavour to update the information herein on a reasonable basis, Spark Capital and its affiliates are under no obligation to update the information.
Also, there may be regulatory, compliance or other reasons that prevent Spark Capital and its affiliates from doing so. Neither Spark Capital nor its affiliates or their respective
directors, employees, agents or representatives shall be responsible or liable in any manner, directly or indirectly, for views or opinions expressed in this report or the contents
or any errors or discrepancies herein or for any decisions or actions taken in reliance on the report or the inability to use or access our service in this report or for any loss or
damages whether direct or indirect, incidental, special or consequential including without limitation loss of revenue or profits that may arise from or in connection with the use of
or reliance on this report.
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
Page 17
Disclaimer (Cont’d)
Spark Capital and/or its affiliates and/or employees may have interests/positions, financial or otherwise in the securities mentioned in this report. To enhance transparency,
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
Analyst Certification of Independence
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.
Additional Disclaimer for US Institutional Investors
This research report prepared by Spark Capital Advisors (India) Private Limited is distributed in the United States to US Institutional Investors (as defined in Rule 15a-6 under
the Securities Exchange Act of 1934, as amended) only by Auerbach Grayson, LLC, a broker-dealer registered in the US (registered under Section 15 of Securities Exchange
Act of 1934, as amended). Auerbach Grayson accepts responsibility on the research reports and US Institutional Investors wishing to effect transaction in the securities
discussed in the research material may do so through Auerbach Grayson. All responsibility for the distribution of this report by Auerbach Grayson, LLC in the US shall be borne
by Auerbach Grayson, LLC. All resulting transactions by a US person or entity should be effected through a registered broker-dealer in the US. This report is not directed at you
if Spark Capital Advisors (India) Private Limited or Auerbach Grayson, LLC is prohibited or restricted by any legislation or regulation in any jurisdiction from making it available
to you. You should satisfy yourself before reading it that Auerbach Grayson, LLC and Spark Capital Advisors (India) Private Limited are permitted to provide research material
concerning investment to you under relevant legislation and regulations;
Top Related