Buy Sadbhav Engg; target of Rs 288: Emkay

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26 Aug, 2025 12:21

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Emkay Global Financial Services research report on Sadbhav Engineering >> Raising funds to fuel growth majority of which to be utilized towards working capital requirement, given large order backlog of Rs84 bn with improvement in EBITDA Margins we expect earnings CAGR of 15% over FY14-16E>> Given 60% of the equity investment is operational enhances visibility of raising further growth capital at the SIPL level (road projects holding company), stake adjusted toll revenue CAGR of 38% over FY14-16E>> Well placed to fund equity requirement of Rs3.5bn for BOTprojects over FY14-16E by: a) cash flows from the construction business, b) ARRIL securitization proceeds and c) dilution at the SIPL level>> Revised target price to Rs288/share (earlier Rs250/share) as we incorporate traffic shortfall mechanism in Rohtakpanipat, Bijapur hungund, Hyderabad yadgiri, increase construction multiple(EV EBITDA) to 7x from 6x (Implied P/E 12x)Approves raising of funds to garner growth: Sadbhav engineering approved raising funds up to Rs2.5 bn via QIP. The proceeds of the issue will be used for purchasing (Rs800 mn) mining equipment and remaining Rs1.7 bn will be used towards the working capital requirement. The QIP will lead to dilution of 7.2% (assumed issue price at Rs230/share) and promoter stake will come down to 44.75% from 47.96%. In the meanwhile the company is in progress with its convertible warrants issue to promoters- to issue 8mn preferential convertible warrants at an exercise price of Rs115.75 per share. SEL would be able to raise about Rs926mn through this issue so far the promoters have raised Rs231.5mn (25% of the size), and the rest 75% would be raised in the next 13-14months. Post the warrants issue promoter stake will go up to 47.3%. The company is in process to create capital of Rs3.5 bn to capture the upcoming opportunity in the mining, Roads (EPC /BOT), and the Irrigation segment. “SEL has been able to maintain its EBITDA margin in double-digits in the range of 12-10.8% over FY04-12, with the exception of FY13, when its margin contracted to 8.6% because of a decline in revenues (early execution of several key BOT projects such as Maharashtra Border-Dhule, Hyderabad-Yadgiri and Bijapur-Hungund projects) and as a result of negative operating leverage – higher employee costs and other SG&A expenses as a percentage of sales. SEL reported an EBITDA margin of 10.3% in the last 3 quarters of FY14 and in Q1FY15 . The margin expansion is attributed to its operating leverage (on the back of a strong pickup in revenue) and higher revenue in mining (a high-margin business), which has clocked an average EBITDA margin of 18-20%. Moreover, In terms of profitability mining has proved to be more profitable than irrigation contracts, as SEL sub-contracts 10-12% of its work orders in the irrigation segment, which garners an EBITDA margin of 5-5.5%. Given the ramp-up in revenues to be driven by: a) scale-up in construction of Gomati KaChauraha-Udaipur project, b) commencement of construction of recently won BOT projects (Rajsamand-Bhailwara, Rohtak-Hissar), c) strong execution from the Chindwara EPC project, d) a low base (revenue growth in FY13 edged lower by 32%) on early completion of several large projects and some delays in start of execution of BOT projects won and e) higher revenue contribution from mining, the EBITDA margin would expand by 200bps over FY13-16E. We build in an EBITDA CAGR of 20% from FY14-16E.” 

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