Deadline for filing EoI extended; is BEML going BPCL’s way?
For some companies multiple themes are being played out at this juncture but it remains to see how well they can capitalize on them. Consider BEML for instance. The stock has done well in the recent past.
BEML: Getting back in action?
Themes that it’s been a part of are:
The government intends to divest 26% of its stake, out of the 54.03% it holds in BEML, in FY22. It has already invited the Expression of Interest (EoI) and March 01, 2021 was the last day for submission which got extended to March 22, 2021. Through the strategic disinvestment, the government is willing to cede the management control. If the change in management brings in any major improvement in profitability and governance, it could reward existing shareholders.
Potential beneficiary of a cyclical upturn
BEML is Asia’s second largest company in the earthmoving equipment industry and enjoys 70% market share domestically. It also commands 45% market share in metro car manufacturing, which may have a good revenue visibility, going forward. For its mining business, it works with other state owned companies such as Coal India, SAIL, NALCO, NMDC and NTPC, amongst others. It enjoys a leadership position in dozers and dumpers used in the mining sector. BEML also works with cement companies.
BEML’s revenue pie
Note: Based on FY20 earnings
(Source: Company records)
Metals are on fire and mining stocks are rallying unprecedentedly. The demand-supply mismatches and economic recovery have been the primary drivers of metal prices. But these are cyclical factors; there’s something more to the story this time.
EV (Electric Vehicle) adoption and renewable energy initiatives across various parts of the globe are expected to create a substantial demand for metals. And of course, the massive liquidity available in the global system is doing its bit as well.
EVs are expected to consume more copper and aluminium as compared to that used in conventional cars.
EVs are propelling the copper demand
Amongst institutional investors the consensus seems to be building that the upcycle for commodities has just started. Last month, Goldman Sachs published a note predicting a commodity supercycle. JP Morgan and Bank of America too proclaimed a multi-year bull run for commodities.
Pick up in the mining industry is a positive for companies such as BEML. Bloomberg’s consensus FY22 estimates suggest that BEML might witness a strong surge in its revenue and profit.
Revenue, EBITDA and net profit is in Rs crore
Note: Bloomberg’s consensus estimates are considered for FY21 and FY22
(Source: ACE equity, Bloomberg)
Compatibility of offerings with Atmanirbhar theme
The company has been working with a motto of zero import. It has already delivered 150T and 190T dump trucks, 180T hydraulic excavators and 850 HP Bulldozers. These products have been manufactured for the first time in India as a part of import substitution. The company has been trying to make headway in AI and robotics enabled systems, unmanned ground vehicles, unmanned aerial vehicles, and other AI-based products.
BEML has been developing driverless metro cars for Mumbai Metro— the first time ever in India by any company.
You might be surprised to know, the company spent Rs 107 crore or 3.5% of its revenue on Research and Development in FY20. It derived 68% of its revenue from products developed in-house. Out of the total of 155 Intellectual Property Rights filed by the company since its inception, 70 were filed in FY20.
Factors to watch out for
Divestment of BPCL has met with several hurdles until now. Hopefully, the government takes lessons from the BPCL episode. That said, BEML isn’t an exception to challenges typically faced by large PSUs in India—difficulties faced in raising productivity and resistance to disinvestment by employees being the prominent ones.
In a nutshell
BEML is entering a potential upcycle with the mindset of a private sector company. The moot question is can it sail through the tedious process of disinvestment without many hiccups? If a competent management takes over, BEML may remain in the limelight in the days to come.
Please Note (read as a disclaimer): None of the stocks discussed in the article are recommendations to buy, hold or sell. This could just be the starting point for deeper analysis that you might want to carry out on your own. You may also take professional help as you feel appropriate.
If you are investing in any family run company, besides governance, you may also want to take stock of significant developments in the lives of the promoters. Sometimes, their personal life can overshadow market sentiments. Also pay attention to issues such as pledging of shares by the promoter group and the working capital.
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We, Ventura Securities Ltd, (SEBI Registration Number INH000001634) its Analysts & Associates with regard to blog article hereby solemnly declare & disclose that:
We do not have any financial interest of any nature in the company. We do not individually or collectively hold 1% or more of the securities of the company. We do not have any other material conflict of interest in the company. We do not act as a market maker in securities of the company. We do not have any directorships or other material relationships with the company. We do not have any personal interests in the securities of the company. We do not have any past significant relationships with the company such as Investment Banking or other advisory assignments or intermediary relationships. We are not responsible for the risk associated with the investment/disinvestment decision made on the basis of this blog article.