Home / Markets / Mark To Market /  Metro rail orders put BEML on the growth track, but margins will be key

Shares of BEML Ltd continue to trend higher, gaining 12% in the last 10 days. The rally accompanies the reduction in corporate tax rate. Importantly, the company held an investors and analysts meet last week where it guided for a robust revenue growth in the current financial year.

BEML is targeting revenue of 4,200 crore in the current fiscal, implying growth of about 20%. That will be a notable acceleration from the previous fiscal when revenue growth was a sombre 5%.

The commentary comes amid reports that the government is firming up plans for sale of shares in the company along with several other public sector undertakings. However, the quantum and the price at which the government intends to sell shares is not known yet.

Meanwhile, the company is benefiting from the ongoing push to public transport, especially metro rail services across the country. Revenues in the current fiscal will be driven by execution of the metro-related orders, which constitutes more than half of the current order backlog of 8,917 crore.

BEML expects to receive substantial orders from metro networks in Delhi and Mumbai. Combine this with the defence, mining and construction sectors, the company expects to end the current fiscal with an order book of 10,000 crore, or 2.4 times the estimated revenues for the current fiscal.

“Several large orders are in finalization stage and management expects inflows of 4,000-4,500 crore in balance 9MFY20," JM Financial Institutional Securities Ltd said in a note.

While the commentary and prospects in metro business are encouraging, it should be noted that the company’s profit margins have been volatile for the last several years. As data compiled by JM Financial shows, BEML’s margins hovered in mid-single digits in recent years, weighing on earnings growth.

Realizations from metro coaches have dropped one-third over the years, indicating competitive intensity. The rail and metro businesses also has high import content of 40%, making it susceptible to cost pressures.

According to Antique Stock Broking Ltd, BEML has the capacity to manufacture 365 metro coaches in two shifts per annum vis-à-vis the order book of 580 units of metro coaches.

With volumes in the metro rail business seeing an uptick and the company rationalizing its employee base (and, thereby, costs), the expectation is that margins will improve from hereon, helping earnings. “The company expects to drive margin expansion through operating leverage along with specific cost cutting measures," analysts at Antique Stock Broking said in a note. The margin trajectory and the nature of government share sale (strategic or a mere stake sale) will play a determining role on the stock returns.

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