Metro rail, defence projects may help BEML tide over slowdown blues

The metro and rail segment, which grew 45% in FY19, accounts for half the firm's order book

Shares of BEML, which had corrected by about 30 per cent in the current fiscal till August due to macroeconomic concerns, have rebounded about 15 per cent recently and could see more gains.

Even as concerns on slowdown continue, the management recently affirmed analysts and maintained its FY20 revenue guidance of Rs 4,200 crore. Their confidence stems from expectations of robust execution of India’s metro rail projects to drive the year’s revenues by about 20 per cent over the last fiscal. The metro and rail segment (the company makes metro cars and rail coaches) had seen 45 per cent growth in FY19 and the business accounts for half of BEML’s order book. The rest comes from defence as well as mining & construction equipment segments.

The company’s order book, which stood at Rs 9,120 crore at June 2019, already implies revenue visibility of over two years. Additionally, new orders of Rs 3,600 crore are anticipated during FY20. Though order inflows will be led by railways, mining & construction and defence are also expected to contribute sizeably. BEML on Tuesday announced signing of a memorandum of understanding with Wipro Infrastructure Engineering in strategic partnership to collaborate on aerospace, industrial automation, 3D printing, artificial intelligence and hydraulic system engineering. Analysts feel the move will strengthen BEML’s defence and aerospace segment in the long run. This segment was already being looked at as holding promise, and analysts at Elara Capital had highlighted that they have a positive view on the defence and infrastructure industries, owing to high order book and huge opportunity in both (metro rail and defence equipment). The brokerage expects BEML’s earnings to grow 46 per cent annually over FY19-22.

Meanwhile, as growth is to be led by metro & rail segment and defence holds promises, the mining and construction equipment business too remains steady. With Coal India under pressure to raise coal production, fresh mining auctions for coal, iron ore and others, expect this segment’s order flow to improve too.

Not surprising that analysts at Antique Stock Broking say that while the broader macro-economic environment remains weak, BEML is expected to benefit from strong activity in the metro space coupled with steady mining and defence businesses. The target price of Elara Capital and Antique Stock Broking indicates up to 43 per cent upside from current levels of Rs 825.