The upcoming metro rail projects will drive growth

The state-owned engineering major, Bharat Earth Movers, has been a major outperformer over the past three years: its net profit went through a quantum leap from about Rs 25 crore in FY04 to Rs 175 crore the next year.

However, since FY05 its net profit has grown only at 8 per cent a year to Rs 205 crore in FY07, while its sales have gone up 18 per cent. So, it is no surprise that the stock has been an underperformer since two years.

Revenue growth does not seem to be much of a problem going forward. It is a market leader in the earth-moving business and demand for infrastructure is likely to be robust. This segment accounted for 63 per cent of its FY06 revenues.

But the defence products segment has not seen much top line growth over the past four years. Its railways segment, where it manufactures coaches, should see a major spurt owing to the expansion of Railways and the metro rail projects coming up in several cities.

This is also where it will be investing over 40 per cent of the follow-on public issue proceeds. It will also provide voluntary retirement to over 1,000 employees at a cost of Rs 90 crore.

Besides, the company has also ventured into new businesses such as an assembly venture in Brazil and a contract mining venture in India.

At the lower end of the price band of Rs 1,020, the FPO price is at a 13 per cent discount to the market price, while at the upper end of Rs 1,090 it is at a 7.5 per cent discount. The full benefits of the metro project will start only in FY10, so there are not going to be any immediate triggers.

The company is a market leader and all its businesses are likely to grow. The FPO at 19 and 20 times estimated FY08 earnings at the lower and upper end of the price band does not seem expensive.