Metro: The Metro investment cycle in the country is to pick up with over Rs15,000cr worth of Rolling Stock to be awarded during FY2016-20E. BEML being a low cost player (vis-a-vis Bombardier and Alstom India), is well positioned to gain the most from this opportunity.
Mining Equipment: 70-80% of BEML’s mining equipment sales come from Coal India (CIL) and other PSUs. We envisage strong mining equipment award activity from CIL (as per CIL’s internal projections, it intends to procure 5,263 equipments during FY2016-20E) and other PSUs (SAIL, NMDC) which are on a capex spree. This augurs well for growth prospects of BEML’s Mining & Construction Equipment (MCE) segment.
Defense: BEML has a monopolistic position for supplying Tatra trucks to the Indian Army. Removal of ban on Tatra trucks coupled with higher budgetary allocations towards the Defense sector indicate strong growth prospects for BEML’s Defense segment.
Poised to report strong growth; some early signs already visible: Higher Budgetary allocations towards urban infrastructure (especially metros) and defense sector, coupled with recent mining sector announcements, strengthen our view that good times are ahead for BEML. We expect BEML to post a 19% top-line CAGR during FY2015-17E to Rs4,006cr. Demand recovery, strong market positioning (almost virtual monopoly), coupled with execution of cost cutting initiatives, strengthen our view that BEML would experience strong margin recovery. Accordingly, EBITDA margins are expected to expand from 2.5% in FY2015 to 8.9% in FY2017E. With Management highlighting that it does not foresee any major capex for FY2016-17E, we expect entire benefits of EBITDA margin expansion to flow down to PAT level (PAT margins would grow from 0.2% in FY2015 to 6.7% in FY2017E).
Valuations: At the current market price of Rs1,218/share, BEML is trading at FY2017E P/E multiple of 19.0x. Historically, since Feb-2001, BEML’s stock has traded at 1-year forward P/E multiple of 27x (excluding the time when BEML made losses). On assigning P/E multiple of 22.0x to our FY2017E EPS estimate of Rs64/share, we arrive at price target of Rs1,414, estimating 19% top-line and 529% bottom-line CAGR during FY2015-17E. Alternatively, BEML’s stock at Rs1,218 is trading at FY2017E EV/sales of 1.3x. At the implied price target of `1,414/share, BEML would trade at FY2017E EV/sales of 1.5x, which is at ~12% discount to its long-term average. Given the 16% upside from current levels, we initiate coverage on BEML with Buy rating.

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