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BEML IPO analysis


Bharat Earth Movers Limited (BEML) has an ongoing follow on public offer for:

Size: 49 lakh shares
Post issue equity: 4.164 cr. shares
EPS (Year ended March 2007): Rs. 55.77 per share
Price band: Rs. 1020 to 1090.

Current situation

At the current market price of 1121, the stock has a P/E of 20. The price band has a P/E band of 18-20. EPS has only grown about 10% from about 50 last year. This company builds earth moving and construction equipment, train coaches and lots of defence equipment. Nearly 18% of the company is held by financial institutions and this is a “midcap” – Reliance Growth Fund, DSPML Midcap fund etc. have invested in it.

What’s the money for?
214 cr. will be use for expansion of the Metro coaches unit in Bangalore. Bangalore is starting implementation of the metro system and the coach unit will supply coaches to it. But, having lived in Bangalore over the last 15 years and knowing how things work here, there are massive delays in both implementations and payments by the government. The Ring Road/Indiranagar Flyover was stalled for over a year because of some ridiculous issue or the other. This metro project itself has been in the offing since 1996 as far as I know and bangaloreans pay Rs. 1 per liter of fuel extra to fund this project (and have been paying since 96). So I don’t think the Bangalore metro should be construed to be a great thing – if anything, view any actually received revenues (not “receivables”) when they happen.

90 cr. for current facility upgrades. Part of this is IT upgrades (ERP software, workstations, laptops etc.) and most is for new equipment that they use. This is largely a capital requirement but does not necessarily have to be funded by equity – I think they should have taken a loan instead.

90 cr. is to fund VRS, their Voluntary retirement Scheme. The funda is to pay 50 days wages (calculated at an average of Rs. 16K per month) per year of service. The average term of service is 30 years (means they want to retrench their oldest employees). That’s a cost of 8 lakh per employee. Now, let’s think about this. 30 years of service. If anyone had joined when they were 18, they would be 48 now. About 10 years of service are left, as retirement age is 58. Not everyone would join when they are 18, so it’s likely the average joining age of such employees is more like 20, making them about 50 now, with 8 years of service remaining.

If they got the same salary (16k per month = 2 lakhs per year) for eight more years, they would get 16 lakhs from the company; so the saving is really about 8 lakhs. How good is that? That’s about 90 cr. saved for the next 8 years – about 11 cr. a year. Given their 204 cr. net profit, that’s a 5% increase in net profits per year. The EPS impact of the 90 cr. dilution is lesser than 5%, so net-net this element is positive.

The rest of the money will be used to build a windmill (5MW order to Suzlon), an R&D Center, and for other corporate purposes. This is not likely to impact EPS in any large manner.

Should you subscribe?
Tough call. I would rather buy in the open market because your money is not locked in for a month and the differential is only about 3% today. On the other hand, the IPO has been subscribed by institutions early, including FIIs.

This is a good long term buy. The metro coach, construction and defence units are great for business going forward, and with increased defense spending we are likely to see BEML revenues grow as fast as pure capital goods companies. Plus, they are planning to get into mining and construction in a bigger way. I would say this is a good 10 year stock – if you buy now, you’ll see it grow steadily over 10 years.

Listing gains are not likely to be enormous and yes, it’s possible you will get the share for less than the quoted price. But if you have that as a problem you can buy even today at a small premium to the offer price.

Overall, this is an industry that is going to see massive growth. L&T and BHEL are the biggies in this space, but players like BEML will see a good trickle down effect of India’s growth. Buy for the long term, IPO or in the open market.


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