BEML: Mining recovery the trigger

Company's revenue from the infrastructure equipment segment is also poised for a recovery

After a prolonged downturn in mining due to the ban in Karnataka and Goa, the prospects for BEML could improve. Revenue from the infrastructure equipment segment is poised for a recovery as demand for infrastructure equipment is seen improving from the fourth quarter of 2014.

"We are expecting some improvement in demand. However, it could take six or seven months to generate demand. The Street has started to look at that in advance as this could have a positive impact on BEML," said Misal Singh, who tracks the sector at Religare Capital Markets.

While the market has started sensing a recovery in profits and better earnings in FY15, the stock at Rs 267 is at half its book value.

Besides improving business fundamentals, the internal changes and cost control measures undertaken by BEML are equally important. Thanks to higher working capital needs, interest costs surged and eroded profits. On this, the company is making efforts to manage inventory and cut interest cost. Results are beginning to show. The firm made a profit in the December quarter against losses in the first and second quarters of FY14. Quarterly run-rate of interest cost has come down from a peak of Rs 40 crore in the March 2013 quarter to less than Rs 30 crore recently. This, to a large extent, helped BEML return to profits. BEML said because of these internal initiatives one can expect the March 2014 quarter to be better than the December 2013’s.

Since FY13, mining has been in a downward spiral in India as well as globally. In India, the construction sector was also under pressure. More, there has been acute pressure on margins, with global companies dumping their products and undercutting prices, said P Dwarakanath, chairman and managing director in BEML’s annual report for 2012-13.

BEML has taken steps to sustain revenues. The company has been focusing on the railways business, as well as international markets. Both have in the recent past reported good growth and helped maintain the desired sales.

With the current order book at Rs 6,000 crore, or two times its FY13 revenues, BEML is in a comfortable position for a year or two. However, a large part of the stock's re-rating will depend on the sustainability of domestic demand, specially from the mining and infrastructure space. In the long run, defence and rail and metro, should bear fruit.