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Apply for BEML FPO with medium term view: Keynote
Bharat Earth Movers is open for subscription with its follow on public offer of 49,00,000 equity shares of Rs 10 each. Keynote Capitals has advised to subscribe the issue with medium term view.
Bharat Earth Movers , BEML, multi-locational and multi-product manufacturer of mining and construction equipment, is open for subscription with its follow on public offer, FPO of 49,00,000 equity shares of Rs 10 each through a 100% book-building process, including a reservation for eligible employees of 4,90,000 equity shares. The issue closes for subscription on July 3, 2007.
The price band is between Rs 1020 and Rs 1090 per share.
Keynote Capitals report on BEML FPO:
Recommendation - Subscribe with a medium term view
Bharat Earth Movers (BEML) is a leading Government-owned, domestic manufacturer of mining and construction equipment. Market share is of around 50%. Has a strong presence in the defence and railway sectors too.
It is a Category 1 Mini-Ratna company under the Ministry of Defence. Ranked first among the fastest growing construction equipment companies in India by the Construction World - NICMAR Survey 2005.
An excellent play on the growth of the mining and other core sectors of the Indian economy.
The strategic tie-ups in the respective business segments will provide BEML with complete range of products, presence in emerging geographies, and also add margin-accretive products to its portfolio.
Setting up a joint venture with Companhia Comercio E Construcoes (CCC) of Brazil to manufacture and supply rail wagons, bogies, mining equipment and spare parts.
The BEML stock has not participated in the market rally. It has grossly underperformed both the BSE Capital Goods Index and the NSE Nifty, over the last 18 months. We believe that in view of the robust outlook for the mining sector, strong order book in the defence sector and strong pipeline of railway orders, the stock is due for a re-rating.
The FPO is priced is at a discount of 7.3% to the current market price. US-based Caterpillar, a low-growth company, trades at multiple of 13x 2008. With a valuation of 17.8x FY08 and 15.3x FY09, we feel investors can subscribe with a medium term view, as listing of the new shares typically may cause a dip in the market price.
Investment concerns
BEML's customers are mainly government-owned companies, whether in the coalmining, defence or railways sectors. Collection period of debtors may continue to be high, as a result.
The railways segment has not been profitable for BEML. It remains to be seen, whether it manages to make profits in this segment going forward, as the order size increases.
BEML may have to face increased competition due to imports and entry of more foreign players.
Erratic trend of operating cashflows would be a concern.
