Buy Mcnally Bharat Engineering; target Rs 142: SPA Research

SPA Research is bullish on Mcnally Bharat Engineering and has recommended buy rating on the stock with a target price of Rs 142 in its November 20, 2012 research report.

"MBECL came out with disappointing set of numbers in the last quarter due to slower execution (resulting in tepid revenue growth of mere 3.0%) and deterioration in working capital cycle (leading to sharp surge in interest expenses). Resultantly bottomline declined by 20.2% to 86 mn despite 142 bps improvement in operating margins to 7.6%. The company witnessed sharp surge in order bookings (+2.7x to INR 17.7 bn in H1FY13) leading to total order backlog of INR 40.5 bn, which provides healthy revenue visibility for the company over the next couple of years. We change our estimates to factor in execution delays and increasing working capital requirement and retain our BUY rating on the stock with a revised target of INR 142."

"MBECL reported a muted topline growth of 3.0% YoY to INR 5130 mn (19.1% CQGR over past four quarters), which was lower than our estimates due to slow down in execution owing to tight liquidity conditions faced by some of its clients. Resultantly MBECL deferred execution and billing for such customers. The infrastructure sector dominated the revenue mix, contributing 55% to revenues in H1FY13. The steel, mining & port sector stood contributed 37%. Materials and Non Ferrous segments followed with balance contributions. EBIDTA margin improved by 142 bps to 7.6% in Q2FY13 aided by 195 bps decline in proportion of other expenses to 9.9%. This resulted in EBIDTA growing at a faster pace by 26.9% to INR 390 mn in Q2FY13. However sharp increase of 66.5% in interest cost to INR 239 mn coupled with 35.7% surge in depreciation expenses resulted in 20.4% decline in net profit to INR 86 mn."

"MBECL's order book grew from INR 34.3 bn in Q2FY12 to INR 40.5 bn (L1 INR 4.8 bn) in Q2FY13 (1.9x TTM revenue), registering a growth of 18.1%. Further order backlog is diverse with power accounting for 43% of backlog, followed steel, mining & port sector (26%), infrastructure/oil & gas (22%) and remaining 9% coming from process plants. The company witnessed sharp surge in order bookings resulting in total inflow of INR 17.7 bn in H1FY13 (increased by 2.7x YoY) led by power (42%) and infrastructure/oil & gas (33%)."

"The company has participated in further bids amounting to INR 126 bn and expects to bag a significant chunk of these orders in the current financial year. Overall MBECL is expecting an order inflow of INR 40 bn in FY13, which is almost in line with our estimates. MBECL’s standalone debt continued to surge, increasing by 27.3% from ~INR 5.1 bn in Q1FY13 to INR 6.5 bn in Q2FY13. This has largely been due to deterioration in working capital cycle. Consequently, its D:E Ratio has risen from 1.3x in FY12 to 1.8x in H1FY13."

"MSEL registered 5.5% growth in topline to INR 1287 mn in H1FY13. EBITDA improved by 3.7% to INR 157 mn with EBITDA margin contracting by 20 bps to 12.2%. PBT however declined by 21.8% to INR 15 mn. Going ahead we expect FY13 revenues to be ~INR 2810 mn. The overseas subsidiary performed well, with Global Coal & Mineral Business registering a revenue growth of 159.7% to INR 1457 mn in H1FY13 and EBIDTA growth of 216.9% to INR 69 mn aided by 86 bps improvement in margins to 4.8%."

"Infrastructure sector remains a long term play and MBECL with rich product portfolio and presence across the core sectors of economy is best placed to benefit from the improving economic scenario. Although MBECL is currently facing headwinds in terms of tight liquidity conditions and deteriorating working capital, its strong and good quality order backlog and considering the expected investments in its participating sectors of activity, provides comfort on long term growth. At the CMP of INR 98, the stock trades at a P/E and EV/EBIDTA of 4.8x and 4.5x respectively its FY14E earnings. We change our estimates to factor in execution delays and increasing working capital requirement and retain our BUY rating on the stock with a revised target of INR 142," says SPA Research report.

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