Buy Sadbhav Engineering; target Rs 187: Dolat Capital

“Sadbhav Engineering (SEL) has reported 52% YoY growth in revenue mainly aided by couple of road projects – Dhule-Palasner and Bijaur-Hongud, which are ahead of schedule. EBIDTA margin contraction of 71bps YoY to 10.4% was attributed to inflation in raw material costs. Interest cost has gone down QoQ and positively surprised us. This was on account of better working capital management and reduced dependence on bank borrowings due to improved cash flows. The reported PAT grew by 58% YoY, in line with revenue growth, with improvement of 22 bps in the net margin which was on account of lower tax rate and interest expenses.”

“SEL witnessed lower order accretion of Rs 5.5 bn (SIL’s share) in FY12 till date and is a cause of concern. The order book has gone down to Rs 59.4 bn (2.7xFY11 revenue) at the end of quarter and was the lowest in the last 7 quarters. Road segment continues to dominate the order book with 62% share, followed by irrigation at 20% and mining sector at 18%. SEL has observed that the competitive intensity in the road projects is declining and hope that some sanity comes back in the bidding, going forward. NHAI is expected to award 75-80 projects in the next 18 months, providing a decent opportunity for SEL. The states like Maharashtra, Gujarat and MP are coming up with large infrastructure projects. The company has recently submitted bids worth Rs 44 bn across all three verticals – roads, irrigation and mining.”

“Maharashtra Border Check Post project COD is getting delayed and its scope also has reduced to certain extent. The land acquisition for 10 out of 22 check posts is still not completed and we fear delay in execution. We have factored in this contingency and reduced our NPV for the project. Annuity for Nagpur-Seoni is yet to be received by SEL. All other road projects are on schedule or ahead of schedule, mainly due to sub contracting. SEL has reiterated the entitlement to early completion bonus from couple of road projects which is estimated at Rs 100 mn for Q4FY12 and Rs 800 mn for FY13.”

“We expect SEL to clock a top line growth of 21% in FY12 to Rs 26.7 bn, however, meager order inflow in FY12 till date and lower order inflow in coming quarters will put serious challenge to current growth momentum. The estimated EBIDTA margin expansion of 30 bps in FY12 will be on account of more loading of unclaimed escalation in the road projects. We have valued SEL on an SOTP basis to arrive at a fair value of Rs 187 (SOTP: BOT – NPV - Rs 87 and construction — 9x FY13E EPS — Rs 100) and reiterate a Buy,” says Dolat Capital research report.

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