Buy Sadbhav Engineering; target of Rs 416: Edelweiss

Sadbhav Engineering’s (SEL) Q2FY17 revenues, at INR 6.2bn, declined 17% YoY due to heavy monsoons/project specific issues. Interest cost spurted 33% YoY as revenue recognition threshold on certain projects was not achieved. Thus, PAT fell 53% YoY to INR 185mn. Toll growth moderated, but lower finance cost is boosting cash flows in the BOT arm. SEL's current order book stands at INR 94bn (3.1x TTM revenue), lending healthy revenue visibility. We are conservatively building in lower pace of execution, leading to 4% earnings cut for FY17/18E each. However, start of work on hybrid annuity projects and improving cash flows will help SEL deliver better performance going ahead. Maintain ‘BUY’ with a revised SoTP-based target price of INR 416 (INR 433 earlier).

While SEL’s performance during the quarter was impacted by project specific issues, we believe recovery is not far. Strong order book, robust BOT portfolio and best-in-class execution skills render SEL an attractive bet. We believe pick up in execution in the EPC arm is imminent, which along with strong cash flow generation in BOT subsidiary will drive re-rating of the stock. We maintain ‘BUY’ with SoTP-based target price of INR 416 (INR 189 from EPC at 15x FY18E P/E and balance from DCF valuation of BOT projects).