Angel Broking has recommended 'Buy' on BEML with target price at Rs 1,414 as against current market price of Rs 1,218 in its report.

Commenting on the investment rationale, the stock broker said, ''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.  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 Rs 40.06 billion. 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).

At the current market price of Rs 1,218 a 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 '64/share, we arrive at price target of Rs 1,414, estimating 19% top-line and 529% bottom-line CAGR during FY2015-17E. Alternatively, BEML's stock at '1,218 is trading at FY2017E EV/sales of 1.3x. At the implied price target of Rs 1,414  a 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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