Buy Sadbhav Engineering; target of Rs 312: ICICI Direct

SEL witnessed muted execution in Q2FY17 mainly on the back of heavy rain and flood situation in MP impacting SEL’s irrigation work for almost two months (revenue impact of Rs 70 crore). Furthermore, in the road division, work was hampered on the Mysore-Bellary and Managuli Devpura projects in Karnataka on account of the Kaveri water dispute (revenue impact of Rs 35 crore). Despite subdued execution in H1FY17 (10% YoY decline in revenues), the management expects pick-up in H2FY17 and maintains 10% growth in revenues FY17. It has already witnessed a pick-up in execution with revenue booking of Rs 320 crore in October 2016. Furthermore, it also expects revenue booking worth Rs 300 crore from execution of hybrid annuity model (HAM projects). Overall, we expect SEL’s revenues to grow at a CAGR of 12.2% at Rs 4011 crore in FY16-18E.

Though SEL reported dismal execution in Q2FY17, we anticipate a pickup in execution in H2FY17. Furthermore, SEL is well placed to capture strong opportunities across sectors given its strong execution capabilities. We expect its topline, bottom line to grow at 12.2%, 18.2% CAGR, respectively, in FY16-18E. Hence, we maintain our BUY recommendation on the stock with an SOTP based revised target price of Rs 312. We have valued SEL’s 69% stake in SIPL at Rs 157/share and EPC business at Rs 155/share (8x FY18 EV/EBITDA implying 14.2x FY18 EPS).