Divestment: What’s best for BEML?

IN PERSPECTIVE

The strategic divestment of Bharat Earth Movers Limited seems inevitable, with the government lining up disinvestment targets in several blue-chip, State-run companies this fiscal year. BEML’s latest Annual Report, too, speaks of the communication from the Ministry of Defence and the Department of Investment and Public Asset Management (DIPAM) appointing asset valuers, and legal and transaction advisers for divestment of a further 26% equity out of the 54% the government currently holds.

The employees and workmen are naturally apprehensive of the government’s move to monetize PSUs. A major reason for apprehension flows from the manner of BEML’s business activity through three business verticals: Mining & Construction, Defence & Aerospace, and Rail & Metro. Commonly, offloading of stake should involve sale of the complete entity as a whole, with strategic advantage accruing from the potential investor having similar verticals in his portfolio. Now, how many organizations with similar business interests exist in India or overseas?

BEML’s defence vertical is a jewel in the Defence Ministry’s crown, tasked with keeping the Indian armed forces supplied with state-of-the-art military equipment. Known for its manufacture of Tatra trucks, this vertical also manufactures other military products, too, ranging from engineering mine ploughs to armoured recovery vehicles, from mounted gun systems to pontoon bridging equipment. Its aerospace unit has significant expertise in MIG and TIG welding of Aluminum, Titanium and Maraging Steel. Although comprising only about 15% of BEML’s total business, several Indian and international companies in defence and aerospace manufacturing would be interested in acquiring this high–margin business facility with a world-class test track, CEMILAC and NABL certifications, R&D experience and product design strengths. Equally valuable is the opportunity of leveraging BEML’s best practices in providing parts and service after sales, skillfully honed through several decades of partnership with India’s armed forces.

The second and totally dissimilar domain is the company’s metro and rail business, which comprises roughly 30% of the company’s turnover. With the advent of modern rail-based MRTS for cities in India, BEML’s Rail & Metro business, having supplied over 1,100 metro cars, is a star performer in the country’s eco-friendly, urban mobility landscape. The first to indigenously manufacture metro cars, in collaboration with Rotem of South Korea, BEML’s efforts in indigenizing rolling stock and its current market share are noteworthy. Several metro coach manufacturers in India and overseas would want to bid for this unit to benefit from a readily available market with assured profitability, its well laid out facilities and competency in providing world-class coaches. A bonus would be the access to BEML’s Rail Coach Factory, which has manufactured over 17,000 mainline passenger coaches for Indian Railways so far.

The third, totally different business is the Mining & Construction vertical. Although responsible for almost 55% of the company’s business, this vertical is habitually under tremendous competitive pressure to maintain its margins and profitability. The mining and construction equipment manufactured by this vertical include Hydraulic Excavators, Bulldozers, Wheel Loaders, Wheel Dozers, Dump Trucks, Motor Graders, Pipe Layers, Tyre Handlers, Water Sprinklers, Backhoe Loaders, Side Discharge Loaders, Under Ground Mine Cruisers, Load Haul Dumpers and Granby Cars, yet the Indian construction and mining equipment market has so many entities, with manufacturers and distributors of international players, leading to intense competitive pressures, causing a skewed supply-demand gap and putting BEML’s vertical under severe strain.

Of interest to potential buyers would be Walking Draglines and Electric Rope Shovels made by this vertical, albeit in small numbers, primarily because the country’s requirement is minuscule. Of significant value are two high-capacity large-sized Electric Dump Trucks in the 205 and 150 tons range that have emerged out of BEML’s R&D stable. Powered by Cummins diesel engines, with General Electric supplying AC drive systems, these trucks are sure to give leading international competitors -- Caterpillar and Komatsu -- a run for their money. Currently, underperformance trials with Coal India, these first indigenously developed new-generation trucks are generating enhanced productivity, increased production, optimizing costs and will significantly alter profitability in this segment.

Under these circumstances, what is the best possible outcome for the government’s disinvestment move? With three completely varied and diverse verticals, only a trifurcation, with distinct buyers bidding separately for each vertical, is a sustainable option. While the Defence-Aerospace and the Metro-Rail verticals would have a surfeit of individual suitors, the Mining-Construction vertical should be kept within the PSU ambit (BHEL, who already supply equipment to the mining industry, could bid?) ensuring its unique high-margin potential is exploited appropriately. Precedents exist – state-owned Oil and Natural Gas Corporation bought the government’s stake in oil refiner HPCL. If a strategic sale is inevitable, a three-way break-up, a PSU participant and separate individual bids would ensure a win-win for all stakeholders.

(The writer is a former director on the Board of BEML)