Hold Mcnally Bharat Engineering; target of Rs 110: Emkay

Emkay Global Financial Services has recommended hold rating on Mcnally Bharat Engineering with a target of Rs 110, in its August 10, 2012 research report.

“Mcnally Bharat Engineering (MBECL) delivered strong standalone performance – ahead estimates. Led by strong order backlog, revenue growth was healthy at 18% yoy to Rs4.3 bn – marginally ahead estimates. Gross margins remained stable at 25.3% while EBITDA margins improved sharply 120 bps yoy to 7.9%. EBITDA margins were highest in past 16 quarters and in 8% margin band, as guided by the company. Improvement in EBITDA margins was due to drop in other expenses as % of revenues (down from 10.5% in Q1FY12 to 8.9%). High interest costs (+84% yoy to Rs0.2 bn) partially offset strong operational performance. Hence net profit growth was lower at 14% yoy to Rs87 mn – but above estimates.”

“McNally Sayaji performance improved sequentially – but remained below estimates. (1) Led by declining order backlog, revenues declined marginally by 2% yoy to Rs653 mn. (2) EBITDA margins declined sharply by 330 bps yoy to 8.0% (below estimates), but represents an improvement over operational loss of Rs0.3 bn reported in Q4FY12. (3) Led by decline in EBITDA margins, EBITDA declined sharply by 31% yoy to Rs52 mn. (3) Net profit grew by 6% yoy to RS11 mn– below estimates.”

“MBECL secured robust order inflows at Rs10.2 bn (up 75% yoy, -44% qoq) - equivalent to 36% of FY13E target order inflows of Rs28.7 bn. Further, MBECL expects sustained momentum in order inflow – on the back of L1 orders worth Rs4.0 bn and healthy order bid pipeline at Rs210 bn. Led by strong order inflows, MBECL’s consolidated order book increased 18% yoy to Rs46.5 bn – equivalent to 1.8X FY12 revenues. As with the rest of the engineering and capital goods universe, McNally Bharat also witnessed increase in debt – increased by 18% qoq to Rs5.1 bn. Rise in debt attributed to lengthening of working capital cycle. Consequently, DER also increased from 1.4X as on Mar’12 to 1.6X as on Jun’12 – increasing risks to earnings estimates."

"This is the first quarter of strong standalone operational performance (EBITDA margins in 8% band), performance of subsidiaries continues to disappoint and remains sub-par. Further, risks to earnings remain from (1) concerns on profitability of incremental order inflows (2) profitable execution of current order backlog and (3) rising debt. Earnings growth and profitability remains low in its peer set - excluding one-offs. ROE have largely remained stable between 14-15%. We foresee no re-rating catalysts in near term. Maintain our HOLD rating with price target of Rs110 per share,” says Emkay Global Financial Services research report.

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