PL Stock Report - BEML (BEML IN) - Ringside View - Opportunities aplenty; margins to expand - Not Rated

BEML (BEML IN) - Amit Anwani - Research Analyst, Prabhudas Lilladher Pvt Ltd

Rating: Not Rated | CMP: Rs1,576 | TP: NA

Ringside View - Opportunities aplenty; margins to expand

Quick Pointers:

§ Order book as on June 1st stood at Rs92.7bn with further ~Rs50bn Defence and Rail & Metro orders imminent; targeted FY24-end order book of Rs160bn+.

§ Better product mix and employee cost efficiency to drive margin expansion.

We hosted Mr. Amit Banerjee – outgoing CMD, Mr. Anil Jerath – Director (Finance), Mr. Sasi Kumar – CGM (Finance), and Mr. Shantanu Roy – Director (Mining & Construction) and incoming CMD, for a fireside chat on BEML’s strategy to harness the latest opportunities in India’s Railways and Defence sectors. BEML expects strong growth in revenue (implied CAGR of ~21.5% over FY23-26) and order inflow owing to an influx of opportunities in Vande Bharat, metros, and defence vehicles. Meanwhile, employee cost efficiency is being aided by manpower gradually falling YoY due to retirements, with the company only hiring more if required.

BEML’s growth outlook is positive given 1) Government’s push on Defence and Railway capex, 2) robust order pipeline, 3) margin expansion via operating leverage, and 4) debt-free balance sheet. Key monitorables include order win rate, execution, working capital, and the privatization deal. The stock trades at 26.3x FY25 consensus EPS. Not Rated.

Revenue expected to hit Rs45-50bn in FY24 and Rs70bn in FY26: Management is guiding for Rs45-50bn revenue in FY24, implying growth of 15-28% over FY23. This includes executable orders worth Rs32bn from the FY23 closing order book, and new Mining & Construction orders worth up to Rs20bn which will be executed in FY24 itself. Given the strong traction in Defence and Rail & Metro orders over the next 2-3 years along with good opportunities in Mining & Construction exports, BEML is targeting revenue of Rs70bn in FY26 (~21.5% CAGR over FY23-26).

Healthy pipeline coupled with robust order prospects: Order book as on June 1st stood at Rs92.3bn (Rail & Metro – Rs37.4bn; Defence – Rs40.3bn; Mining & Construction – Rs14.6bn). BEML also recently won a Rs4.2bn order for High Mobility Vehicles (HMV) for the Indian Army. Another ~Rs50bn worth of orders are imminent in Defence (~Rs10bn) and Bangalore Metro (~Rs40bn). Furthermore, the company has order potential worth over Rs300bn, including Rs53-55bn for HMVs and Armored Recovery Vehicles (ARV) in Defence, and Rs250-280bn for Metro projects. Management is targeting an FY24 closing order book of at least Rs160bn.

Better product mix and employee cost efficiency to drive margin expansion: Management sees scope for faster growth (10%+) in Defence and Rail & Metro, while Mining & Construction should see steady growth of 5-7% going forward. Rail & Metro and Defence projects are higher value and require less manpower, so margin should improve as the mix shifts towards them. Employee count has been falling 7-8% YoY, but employee costs as a % of revenue is high at 21.5% in FY23 despite trending down in recent years. Management aims to bring this down to <15%, starting with <20% in FY24. Guiding for 200bps+ EBITDA margin increment in FY24. Better profitability will also drive improvement in BEML’s return ratios.

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