beml - visit update - oct 14

8/10/2019 BEML - Visit Update - Oct 14

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Batlivala & KaraniVISIT UPDA TE BEML Maintain Outperformer

MIDCAPShare Data

Reuters code BEML.BO

Bloomberg code BEML IN

Market cap. (US$ mn) 415

6M avg. daily turnover (US$ mn) 7.2

Issued shares (mn) 42

Target price (Rs) 727

Performance (%) 1M 3M 12M

Absolute 8 (23) 339

Relative 8 (26) 219

Valuation Ratios

Yr to 31 Mar FY15E FY16E FY17E

EPS (Rs.) 16.3 43.4 52.0

+/- (%) 166.4 19.7

PER (x) 37.7 14.2 11.8

PBV (x) 1.2 1.1 1.0

Dividend/Yield (%) 0.4 0.8 0.8

EV/EBITDA (x) 20.9 11.4 9.6

Major shareholders (%)

Promoters 54

FIIs 4

MFs 10

BFSI's 13

Public & Others 19

Price: Rs 615 BSE Index: 26,631 01 October 2014

Mining growth to revive, Tatra resolution??? Key re-rating driver

We interacted with the management of BEML represented by Director-finance Mr. Pradeepswaminathan and Director mining Mr. Durugesh and following are the key takeaways:

Maintain revenue target due to mining recovery and stable rail & metro growth

Management is confident of mining segment recovery in 2HFY15E with orders from coal

India and spares & services growth is expected to continue. Rail & metro business to be stable

and will support the overall growth of the company. Tatra resolution will be the key trigger in

terms of defence segment and the company is optimistic regarding a favorable resolution of

the same. Given the confidence of management regarding revenue pick up in 2H, we maintain our revenue

estimates.

Operating margins to improve supported by spares & services and reduction

of loss under defence The Company is optimistic regarding growth of spares and

services (high margin) and mining equipment growth which will drive the margins of the earth

moving segment. Absence of low margin Bangalore metro is expected to increase the margins

of rail & metro business. Resolution of Tatra issue will be the key development to restore

margins in defence in addition to commencement of armored recovery vehicle (ARV) order

which is delayed due to price/forex negotiations. We factor in reduction of defence segment loss,

marginal improvement in rail & metro margins and stable earth moving segmental margins for FY15E.

Inventory liquidation to lower short term debt and improve net profitability

Expected recovery in the mining equipment will result in liquidation of inventory and releaseworking capital thereby reducing short term debt. With positive cash flow from operations

and limited capex requirement the short debt is expected to reduce resulting in higher net

profitability. We factor in 16% YoY and 22% YoY decrease in debt for FY15E/16E, respectively assuming

lower working capital requirement.

Healthy order book, order intake expected to improve with new orders from

Coal India and defence orders Current order book at Rs 60 bn (~2x TTM sales) lends

visibility. BEML is optimistic regarding more orders from Coal India and new defence related

projects like Pinaka launchers. These new defence orders (Pinaka launchers) carry higher

margins.

B&K view

Expected recovery of mining equipment segment will support operating profitability and

reduction on working capital due to liquidation of inventories. The EBIT margins of mining

equipment witnessed sharp turnaround (+ 1290 bps) to 12.1% in FY14 and this is expected

to continue with high demand for spare & sevices and growth in mining equipments. Defence

segment reported Rs 1 bn EBIT loss in FY14 impacting the overall profitability, we factor in

growth recovery in defence limiting the loss with favorable resolution of Tatra and

commencement of ARV order. Rail & metro segment margins are expected to improve with

absence of low margin Bangalore order and new orders from Indian railways. BEML is

Relative performance

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BEML (Actual)Sensex


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2BEML

B&K RESEARCH OCTOBER2014

expecting to book Pinaka launcher order which carry high margin and will result in revival of

the defence segment. Given the optimism in term of margin recovery and working capital

reduction we upward revise our earnings by 27% and 28% at Rs 16.3 and 43.4 for FY15E

and FY16E, respectively and introduce FY17E earnings at Rs 52 (+20% YoY). We maintain

our Outperformer rating with a revised target price of Rs 727 (10x FY17E EV/EBIT for

Earth moving, 10x EV/EBIT for rail & metro and 8x FY17E EV/EBIT for defence), implying

14x FY17E earnings. Resolution of Tatra and award of new orders will be re-rating catalyst

for the stock.

Two major Technical facors of Tatra truck that makes it indispensable:

Tatra truck has an unique all terrain independent axle design which makes it maneuverable

over any kind of terrain. This is a unique patented design and has not been successfully

replicated to similar performance by competitors.

Tatra has an air cooled engine, hence its ideal during combat environment as its not

dependant on water and the engine doesnt get overheated. The competitors have water

cooled engines which have limitations during combat environment.

Change in Estimates

Rs mn Earlier Revised Var (%)

FY15E FY16E FY15E FY16E FY15E FY16E

Revenue 33,111 37,715 32,586 37,371 (1.6) (0.9)

YoY (%) 13.7 13.9 11.9 14.7

EBIDTA 1,376 2,279 1,552 2,757 12.8 20.9

margin (%) 4.2 6.0 4.8 7.4

PAT 537 1,421 682 1,816 26.9 27.7

EPS 12.8 34.0 16.3 43.4 26.9 27.7

YoY (%) 164.6 166.4

Segmental Assumptions

Revised estimates Variation (%)

Rs mn FY10 FY11 FY12 FY13 FY14 FY15E FY16E FY15E FY16E

Revenue

Earth moving + spares 19,157 16,587 18,828 15,123 16,863 17,270 19,492 0.0 0.0

% YoY 12.5 (13.4) 13.5 (19.7) 11.5 2.4 12.9

Rail & metro 10,208 12,610 12,846 13,305 14,237 15,113 15,895 0.0 0.0

% YoY 120 24 2 4 7 6 5

Defence 6,120 6,435 3,928 3,245 1,127 3,150 5,150 0.0 0.0

% YoY 3 5 (39) (17) (65) 180 63

EBIT margin (%)

Earth moving + spares 20.2 15.1 7.2 -0.8 12.1 11.0 11.5 500 550

Rail & metro (5.2) (4.9) (1.2) 4.7 3.3 4.0 4.5 (300) (250)

Defence 17.6 13.9 11.1 (1.7) (92.0) (17.0) 5.0 (100)


3/5

3BEML


Valuation Summary

Rs mn Target (x) EBIT FY17E

EV/ EBIT FY17E FY17E EV Debt Cash M-cap Target

(a) (b) (a x b) price (Rs)

Earth moving 10.0 2,488 24,884

Railways 10.0 781 7,807

Defence 8.0 411 3,288

Total (implied) 9.8 3,680 35,979 5,943 346 30,382 727


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4BEML


Valuations

Period end (x) Mar 14 Mar 15E Mar 16E Mar 17E

PER (108.5) 37.7 14.2 11.8

PCE 28.8 22.1 11.0 9.4

Price/Book 0.6 1.2 1.1 1.0

Yield (%) 0.3 0.4 0.8 0.8

EV/EBITDA 18.6 20.9 11.4 9.6

Key Ratios

Period end (%) Mar 14 Mar 15E Mar 16E Mar 17E

Adjusted EPS (Rs) (2.7) 16.3 43.4 52.0

Growth (87.5) (705.7) 166.4 19.7

CEPS (Rs) 10.1 27.8 55.7 65.2

Book NAV/share (Rs) 497.9 510.9 548.5 594.7

Dividend/share (Rs) 1.0 2.5 5.0 5.0Dividend payout ratio 105.0 17.9 13.5 11.2

EBITDA margin 3.9 4.8 7.4 7.5

EBIT margin 4.2 5.1 7.8 7.9

Tax rate 35.2 22.0 22.0 22.0

RoCE 3.3 4.8 8.5 9.4

Total debt/Equity (x) 0.4 0.4 0.3 0.2

Net debt/Equity (x) 0.4 0.3 0.2 0.2

Du Pont Analysis - ROE

Net margin (0.4) 2.1 4.9 5.1

Asset turnover (x) 0.6 0.7 0.8 0.8

Leverage factor (x) 2.4 2.3 2.2 2.2

Return on equity (0.5) 3.2 8.2 9.1

Cash Flow Statement

Period end (Rs mn) Mar 14 Mar 15E Mar 16E Mar 17E

Profit before tax 284 874 2,328 2,787

Depreciation 536 479 515 552

Change in working capital 2,608 1,111 (1,229) (1,270)

Total tax paid 52 (44) (192) (512)

Others 899 549 314 241

Cash flow from oper. (a) 4,378 2,968 1,735 1,797

Capital expenditure (525) (354) (489) (595)

Change in investments 3 3 0 0

Others 205 250 285 310

Cash flow from inv. (b) (317) (101) (204) (285)

Free cash flow (a+b) 4,061 2,867 1,531 1,512

Debt raised/(repaid) (3,097) (1,432) (1,671) (406)

Dividend (incl. tax) (7) (60) (140) (245)

Others (1,564) (693) (299) (451)Cash flow from fin. (c) (4,668) (2,184) (2,110) (1,101)

Net chg in cash (a+b+c) (607) 683 (579) 411

Balance Sheet


Share capital 418 418 418 418

Reserves & surplus 20,380 20,940 22,511 24,440

Shareholders' funds 20,798 21,357 22,928 24,858

Non-current liabilities 9,805 9,514 9,343 9,337

Long-term borrowings 4,652 4,014 3,543 3,337

Other non-current liabilities 5,153 5,500 5,800 6,000

Current liabilities 17,005 17,507 18,409 19,478

ST borrowings, Curr maturity 4,394 3,600 2,400 2,200

Other current liabilities 12,611 13,907 16,009 17,278

Total (Equity and Liab.) 47,608 48,379 50,680 53,673

Non-current assets 10,731 10,627 10,701 10,844

Fixed assets (Net block) 6,716 6,591 6,565 6,608

Non-current Investments 39 36 36 36

Long-term loans and advances2,976 3,000 3,100 3,200

Other non-current assets 1,001 1,001 1,001 1,001

Current assets 36,877 37,752 39,979 42,828

Cash & current investment 162 844 266 677

Other current assets 36,715 36,908 39,713 42,151

Total (Assets) 47,608 48,379 50,680 53,673

Total debt 9,046 7,614 5,943 5,537

Capital employed 34,997 34,471 34,671 36,395

Income Statement


Net sales 29,115 32,586 37,371 42,432

Growth (%) 3.7 11.9 14.7 13.5

Operating expenses (27,984) (31,034) (34,614) (39,252)

Operating profit 1,131 1,552 2,757 3,180EBITDA 1,131 1,552 2,757 3,180

Growth (%) (343.1) 37.1 77.7

Depreciation (536) (479) (515) (552)

Other income 634 600 685 710

EBIT 1,230 1,672 2,927 3,338

Finance cost (1,105) (799) (599) (551)

Exceptional & extraordinary 159 0 0 0

Profit before tax 284 874 2,328 2,787

Tax (current + deferred) (44) (192) (512) (613)

Profit/(Loss) for the period 240 682 1,816 2,174

P/L of Associates, (193) 0 0 0

Min Int, Pref Div

Reported Profit / (Loss) 47 682 1,816 2,174

Adjusted net profit (112) 682 1,816 2,174

Growth (%) (87.5) (706.1) 166.4 19.7


5/5

B & K SECURITIES INDIA PRIVATE LTD.

Equity Research Division: City Ice Bldg., 298, Ground/1st Floor, Perin Nariman Street, Behind RBI, Fort, Mumbai - 400 001, India. Tel.: 91-22-4031 7000, Fax: 91-22-2263 5020/30.Registered Office:Room No. 3/4, 7 Lyons Range, Kolkata - 700 001. Tel.: 91-33-2243 7902.

B&K Research is also available on Bloomberg , Thomson First Call & Investext.

Disclaimer: This report was prepared, approved, published and distributed by Batlivala & Karani Securities India Private Limited ("B&K") located outsideof the United States (a "non-US Group Company"), which accepts responsibility for its contents. It is distributed in the U.S. by Enclave Capital, a U.S.registered broker dealer, on behalf of B&K, only to major U.S. institutional investors (as defined in Rule 15a-6 under the U.S. Securities Exchange Act of 1934(the "Exchange Act")) pursuant to the exemption in Rule 15a-6. Neither the report nor any analyst who prepared or approved the report is subject to U.S. legalrequirements or the Financial Industry Regulatory Authority, Inc. ("FINRA") or other regulatory requirements pertaining to research reports or researchanalysts. No non-US Group Company is registered as a broker-dealer under the Exchange Act or is a member of the Financial Industry Regulatory Authority,Inc. or any other U.S. self-regulatory organization. Outside the United States, this report is distributed by B&K or an authorized affil iate of B&K.

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B&K Investment Ratings

1. BUY: Potential upside of > +25% (absolute returns) 3. UNDERPERFORMER: 0 to -25%

2. OUTPERFORMER: 0 to +25% 4. SELL: Potential downside of < -25% (absolute returns)

B&K Universe Profile

By Market Cap (US$ mn) By Recommendation

B&K RESEARCH

Renjith Sivaram Renu Baid

[email protected] [email protected]

+91-22-4031 7166 +91-22-4031 7263

OCTOBER2014

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beml - visit update - oct 14

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