Graphic: Satish Kumar/Mint
Graphic: Satish Kumar/Mint

BEML: A sturdy order book, but timely execution is key to growth

  • Though it doesn’t disclose the order book break-up, analysts say rail and Metro-rail comprise a little over half the total
  • At 925, the BEML stock—pricing in the positives—quotes at 22 times its estimated FY21 earnings

Shares of government-owned BEML Ltd are on a roll. An outlier in the gloomy equity market, the stock rose 22% since 1 September, while the Nifty 100 increased a mere 5% in the same period. Besides, investors have netted a hefty 71% returns in a year.

The moot question is whether the rally is sustainable. While the company and analysts are confident of a 24% revenue growth in FY20, risks to profitability and earnings growth exist. These arise from the nature of the 8,900-crore order book, expected to touch 10,000 crore by the fiscal year-end.

Although BEML does not disclose its order book break-up, analysts say rail and Metro-rail orders comprise a little more than half the total. Also, the Q1 FY20 revenue break -up shows about 87% from rail and Metro-rail (43% in FY19 and 19% in FY17).

Indeed, this segment has short-term entry barriers. Only a couple of such manufacturers exist, and the government mandates that railway coaches be made in India. But stiff competition among incumbents is impacting pricing. A report by JM Financial Services Ltd says, “High competitive intensity has led to a decline in Metro-rail coach realisations ( 76 million each for Mumbai Metro-Rail Line-2/7 won by BEML versus 100 million a coach for Line-3 won by Alstom)."

Further, wafer-thin price difference between the lowest and second-lowest bidders hinders margin improvement, which is already low (FY19: 6.8%). Elara Securities Ltd highlighted that any sharp rise in raw material costs may pare the margin, given that the import content in the rail and Metro-rail segment is 40%.

Besides, the firm’s dependence on sectors sensitive to government policy, such as mining and construction, and defence, could delay orders and approvals. For instance, Q1 order flows were 25% lower year-on-year. This could impact timely execution and be a drag on revenue, which in turn, could dent margins.

Be that as it may, the robust order book provides about a two-year revenue assurance. Analysts forecast 18-20% earnings growth in the next two years, assuming steady execution and profitability.

At 925, the BEML stock—pricing in the positives—quotes at 22 times its estimated FY21 earnings. The next trigger would come from development, if any, from the government’s plan to divest 26% equity.