Finquest Sec positive on BEML’s future prospects

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Finquest Sec positive on BEML’s future prospects

Bharat Earth Movers is open for subscription with its follow on public offer of 49,00,000 equity shares of Rs 10 each. Finquest Securities positive on the company’s future prospects

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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.

Finquest Securities report on BEML FPO:

Investment rationale

An Established Player

BEML is a leading player in the domestic industry for construction and mining equipment with a significant market share. For FY2006 company's 63% of the sales were from this sector. The company has also established itself as the major metro coach manufacturer in the country and have delivered 188 Metro coaches to DMRC till date. Along with this BEML also caters to the Defence sector for defence equipments.

Diverse Portfolio

The company has a diverse portfolio and caters to different core segments of the economy such as mining, steel, cement, power, irrigation, construction, road building, defence equipment, railways and Metro transit systems. Thus the company is not dependent on any particular segment. The company is now intensely capitalizing on construction industry as the government has huge investments lined up for this sector. Off late the company has forayed in providing engineering design software solutions and trading of components. The company is also setting up a 5MW wind mill.

Making Global Footprints

BEML has tie ups with international players for the manufacture of walking draglines, rope shovels, dumpers, heavy-duty vehicles, armoured recovery vehicles and Metro coaches. These alliances have helped the company to get access to world-class technology and production processes. We have presence in the international markets with supplies to 38 countries in Asia, Africa, Europe and Latin America.

BEML has recently signed a MOU with a Brazilian firm for manufacturing of railway bogies, mining equipments and other spare parts. Thus the company has a two way international orientation one through exports and other by way of overseas manufacturing.

High-quality Product Offering

The company's quality systems of all its manufacturing divisions have been upgraded to ISO 9001-2000 certification. BEML value-added services include application engineering services encompassing pre- and post-sales, preparation of pre-feasibility reports, equipment selection studies, total fleet optimization solutions and customization of equipment. The company has an experienced senior management team that have decades of experience in the engineering and manufacturing industry.

Focus is on continuous innovation and design and development of new products and technologies to suit the customer requirement by using contemporaneous engineering practices. With this track record the company has been bestowed the title of a Mini Ratna.

Investment concerns

High dependence on infrastructure industry

The company's products are used by the infrastructure industry (metro rail, roads, mining). Any slowdown in the growth momentum will have repercussions on the prices of these equipments which may affect the sales and profitability of the company. BEML has to be abreast with the latest technology to combat international and national competition, the failure to which could hamper its product demand.

Rise in input cost

The company has not entered into any long term contracts for sourcing its raw materials like steel, tyres, batteries etc. Any fluctuations in the prices and the supplies will create a pressure on the operating costs and thus on profitability of the company.

Valuations

BEML is a very well establish player in the space of capital goods. The company has a de-risk product portfolio which will sustain the demand for its various products. Going forward the capital sector will see a huge demand as the infrastructure sector is promised to grow at a rate of 15% for next three to four years. The issue is priced at 22x the upper band of FY'07 diluted EPS of Rs 49. We are positive on the company's future prospects.