BEML's stock gains may disappear

Stake sale decision helps stock rise 16% on Monday, but there remains little hope for rerating

At the close of last week's trade, market got reassurance on government's plans to sell 26% stake in BEML, that could fetch Rs 1,000 crore and reduce state stake to 28%. Usually, divestments and news of divestments tend to pressure stock price as shares may get sold at a discount to their market rate. But, Monday turned out rather unusual, with BEML, previously known as Bharat Earth Movers Limited, gaining 16.5%. In fact, the day saw public sector undertakings MMTC, Balmer Lawrie, Rashtriya Chemicals and Fertilizers Limited, and Hindustan Copper, rally 4-11.5% on hopes the government would take similar decisions for them as well. 

However, most analysts feel BEML's stock spurt, due to expectations of a strategic partner being roped in through the 26% stake sale, is not justified. While they agree a partner could bring in much-needed tech push to BEML, it is too early to weigh the benefits of such a move for the company. "BEML has faced criticism on the technology front. So, a strategic technology partner is certainly welcome," an analyst from a foreign brokerage pointed out. However, he warned there haven't been too many success stories where the government was able to offload its stake entirely to a single strategic investor without stoking controversy. Therefore, most analysts see Monday's stock surge as a one-off and rule out fresh re-rating due to government's divestment plan.

"After underperforming for many years, there are tall earnings expectations for BEML in FY18. Unless the company meets its targets, room for re-rating is very thin," an analyst from a domestic brokerage cautions. 

In fact, BEML's management has estimated it is likely to see revenue of Rs 1,600 crore (growth of 15% year over year) in FY17, and Rs 2,200 crore in FY18. 

What's interesting to look at in growth estimates is the management placing priority on emerging segments such as railways and defence. BEML plans to scale up these businesses significantly (revenue expectation of Rs 1,500-1,600 crore from railways and Rs 1,200-1,300 crore from defence), to reduce dependency on the mining sector for meeting its revenue targets. The next 6-12 months, therefore, will be critical for BEML to win the Street.