BEML – A Big Wealth Creation Opportunity

BEML may prove to be a big wealth generating opportunity post disinvestment, because of the nature of its business and a very low equity base.  BEML has outstanding equity shares of approx. 4.16 Crores of Rs 10 each (4,16,44,500 shares @ Rs 10)

Government is in the process of divesting its stake along with transfer of management control in BEML. Government holds 54.03% and had invited bid to sell its 26% stake along with transfer of control to potential acquiror.

Government will have to close the disinvestment transaction of BEML with in the suggested timelines, so that market gets a sense of direction and proof of validation, of Government commitment to reforms.

If India has to achieve a vision of $5Trillion economy, it becomes imperative that the PSU potential is unlocked by bringing in strategic partners for creating long term value. Further, Government is in the need of finances for meeting its developmental objectives. Finance Minister Smt. Nirmala Sitharaman has set the goal of Rs1.75 Lakhs Crore as disinvestment target. However, during current F.Y, 2021-22, only a total of Rs 8369 Crores Disinvestment proceeds have been realised through disinvestment of NMDC, HUDCO and SUTTI Axis Bank, through OFS route.

On the BEML disinvestment, Various media reports have cited that key Indian players have bid for the acquisition of state-owned enterprise. Tata Motors Ltd, Ashok Leyland Ltd, Bharat Forge etc are some of the key players selected in the first round.

During F.Y, 2020-21, BEML recorded highest ever revenue from operations of ₹3,557 crores (growth of 17% over previous year, with an order book of 11,363 crores as on 1 April, 2021). In the first quarter ending June 2021, BEML recorded a revenue of Rs 451 crores (in Q1 2020, Rs 392 Crores). Revenue mix included 41% in Rail & Metro Segment, 40% in Mining and Construction and 19% in Defence and Aerospace (Revenue mix in Q1 2020: 26% in Rail & Metro Segment, 55% in Mining and Construction and 19% in Defence and Aerospace)

Defence is one of the key priorities of Government. ‘Make in India’ policy of Government of India and ‘promulgation of negative list’ would boost Indigenous production. According to BEML’s Annual Report, BEML has capabilities for major weapon platforms / equipment, which Ministry of Defence (MoD) is embarking to procure.  During F.Y 2019-20, Defence & Aerospace Business bagged highest ever orders worth `2453 crores. Further, in Defence & Aerospace, BEML is working on new design & development programmes to meet the needs of the Indian Army e.g.  High Mobility Vehicle, Self-propelled mine burrier, Bar mine layer, Guided Pinaka Variants for Launcher, Replenishment vehicle (RV) etc. In Aerospace segment, Company also, planning for supply of aerospace components and parts for global requirements including possible tie-ups with renowned OEM’s

Under Rail & Metro segment, BEML is working on prospects of Chennai Metro, Bangalore Metro, Bhopal-Indore Metro. It is also working on development of Metro Neo MRTS system, along with other initiatives. Under Mining & Construction segment, Company is developing new products for striking new opportunities in the coal mining sector. For increasing export, BEML is working on business opportunities in SAARC and African countries in the area of Defence, Mining & Construction and Rail & Metro segments.

BEML may benefit from the upcoming capex program of government. Coal India has earmarked Capex of ₹17,000 crore during FY 2021-22. Capital expenditure in infrastructure sectors in India (fiscals 2020 to 2025) is projected over Rs 1oo Lakh crore ( e.g. Energy, Road, Railways, Urban Development, Port Airport etc). Capex earmarked by Indian Railways towards capacity augmentation and Maintenance ia approx. Rs 2.15 Lakhs crore. BEML will benefit from proposed Capex program.

In near term the stock may go up as the transaction cost of acquisition will be higher than the market price.  Valuation methodology of Department of Investment and Public Asset Management (DIPAM) suggest for control premium, to be paid by the buyer. suggested guidelines on valuation for strategic sale, provides that, in a strategic sale, the bidders have to consider, a premium along with the valuation arrived through DCF. In case of BEML, premium for management control will be subjective. Bidder will look for synergy with the existing business as well as the deep potential of the core business of BEML, and how those business can be scaled up in Indian as well as overseas markets, by gaining the management control.  

Given the potential of business, successful bidder will create long term value (e.g. by at least 15% CAGR), post-acquisition. This can be done, based on the business potential, export opportunities, development of new cutting-edge product and platforms needed by Defence, cost reduction, and synergies with acquirer’s existing business.  At 15% CAGR, sales will double in 6th year and efficiencies will bring at least similar proportion of post-tax profit. Given the low equity base of 4.16 Crores and higher EPS as well as re-rating of PE multiple, BEML may be a big wealth creating opportunity in times to come.

Bureau Galactik Views

(This is not an Investment advice)

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