BEML Ltd’s shares have gained about 11% after the company forecast strong growth for the next fiscal year. At an analysts’ meeting on 21 December, the rail coaches, mining and defence equipment manufacturer indicated a strong double-digit rise in 2017-18 revenues. From an estimated Rs3,200 crore in the current fiscal year, revenue is forecast to rise to Rs5,000 crore in fiscal year 2018.
That would be a notable change for BEML, whose revenue on average grew just 2.4% per annum in the previous five fiscal years. As delivery of an order got delayed, revenue dropped by more than a third in the first half of the current fiscal year.
So, the growth estimate is aided by a favourable base. Even then, if one looks at the segment projections, the company is looking at a quantum jump in revenues. It aims to double revenue at its rail and Metro division from the current fiscal year, Emkay Global Financial Services Ltd said in a note after the analysts’ meeting. Revenue at the other businesses—mining, construction and defence—are projected to rise by a third.
The revenue growth projections are not entirely surprising, given the strong order backlog at the company, says an analyst at another broking firm. According to Antique Stock Broking Ltd, BEML received orders worth Rs1,200 crore in the first half of 2016-17. As of last month, the order backlog is Rs7,261 crore, 2.4 times the previous fiscal year’s revenue.
Perhaps the commentary on order inflows and business prospects may have enthused investors. According to Emkay, the management sounded confident about garnering more orders from railways and defence sectors. “In addition to the metros, BEML expects the Indian Railways (IR) to place increasing orders for Linke Hofmann Busch (LHB) passenger coaches—4,000 LHB coaches every year. Given that both ICF (Integral Coach Factory) and RCF (Rail Coach Factory) facilities of IR have the capacity to manufacture only 1,600 LHB coaches, there is a strong probability that BEML would likely be one of the major beneficiaries for the balance portion of LHB coaches,” Emkay wrote in the note.
But orders alone can’t drive the BEML stock up. The stock lost a fifth of its value in the last one year as delays in orders and high fixed costs dragged the company into an operating loss in the first half of the current fiscal year.
As execution and order deliveries pick up, the expectation is the performance will improve in the rest of the fiscal year. But that alone will not be sufficient.
As the analyst from the second broking firm points out, BEML should also match the growth with improvement in margins. That will give investors the confidence that the company is back on a profitable growth path and drive earnings upgrades for the stock, which at around 20 times one-year forward earnings estimate is not particularly cheap.