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Sowmya Sundar

Rail coaches division holds promise.

EXPOSURE can be considered in the BEML stock which trades at Rs 215, considering the bright business prospects ahead, the comfortable order book position and the improvement in operating parameters. Despite the three-fold rise in the stock price in the last six months, there is scope for further appreciation as the strong business prospects hold scope for earnings growth.

A number of developments such as technological tie-ups with international majors, capacity expansion for the railway coaches division, bagging contracts for railway coaches and the development of its Mysore unit into an outsourcing base for international markets infuse confidence in the company's growth story.

Strong growth story

BEML's growth prospects hinge on a number of infrastructure projects proposed to be executed over the next 10 years. A few of them are the Kashmir-to-Kanyakumari railway line, the metro rail projects in major cities, the river-linking projects and the ongoing road construction projects, which would sustain demand for its earth moving machinery and heavy road construction machinery.

BEML has a significant presence in the earth moving machinery market and would stand to gain from the opportunities.

The big potential would be in the railway segment. BEML has 25 per share in the rail coaches business. A number of railway projects such as the metro rail are in the pipeline. In light of the recent contracts bagged by BEML for the assembly of coaches for Rotem (South Korea) and the Goa Sky bus project, the company appears to be in a good position to grab opportunities in this sector.

Diversification

BEML is now primarily into three main businesses — construction machinery, Defence products, and assembly and construction of railway coaches. It plans to widen its product portfolio and enter into new product lines such as under-water mining equipment, port handling equipment, nuclear projects and also take up turnkey projects connected with river-linking.

Defence products contribute close to 40 per cent of BEML's turnover. With other businesses picking up, BEML would have a diversified portfolio aiding earnings growth.

Eyeing greener pastures

The next big growth driver would be exports, which contributes a mere 1.3 per cent of the total turnover.

The move to rope in an international partner for its manufacturing facility at Mysore is significant, as it is expected to become a low-cost outsourcing base for international markets. BEML is in talks with global players such as Komatsu of Japan and Caterpillar for a minority stake in the sale of the Mysore plant.

The technological tie-ups with Komatsu of Japan, FAM of Germany, and Bucyrus of the US would also aid in bridging the technological gap.

Performance

BEML's performance has been consistently improving over the last few quarters. Not only has sales grown at a faster pace, rationalisation of staff and better inventory management have pushed up operating margins significantly, reducing net loss.

For the half year-ended September 2003, BEML recorded a 79 per cent growth in sales and a profit of Rs 2.77 crore against a loss of Rs 9.79 crore in the corresponding previous period.

Improving operating margins, coupled with a good growth story, would aid earnings growth.

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