Sadbhav Engineering – 2QFY2011 Result Update Angel Broking

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Sadbhav Engineering – 2QFY2011 Result Update

Angel Broking maintains an Accumulate on Sadbhav Engineering with Target Price of Rs1,623.

Sadbhav Engineering (SEL) reported 2QFY2011 numbers, which were above our

estimates and surprised on the earnings front mainly on account of higher EBITDA

margins. The company has given guidance of >35% growth over the next 12

months. We believe that SEL has performed particularly well over the last few

quarters in the roads and mining segment, which reflects in order book has

increased to `7,800cr i.e. 4.8x FY2011E revenues, one of the highest in industry.

We maintain an Accumulate on the stock.

Strong quarterly performance: For 2QFY2011, SEL posted in-line performance on

the top-line front with revenues increasing 40.8% yoy to `260.9cr v/s our estimate

of `255.2cr. Operating margins improved by 100bp to 12.0%. Bottom-line posted

substantial growth of 269.1% aided by: 1) robust top-line growth, 2) improvement

in EBITDA margins, 3) higher for tax provision (57%), and 4) low base effect.

Outlook and Valuation: SEL’s subsidiary Sadbhav Infrastructure Project (SIPL) has

raised capital to the tune of `400cr - dilution of 20% stake - which is expected to

ease the pressure on SEL’s balance sheet and fade funding concerns. We have

factored in the dilution while valuing the company’s BOT assets. We expect the

company to log CAGR of 25.7% and 44.4% in top-line and bottom-line

respectively, over FY2010-12E, with execution gathering pace, funds tied up and

robust order book. At current levels, the stock is trading at attractive valuations of

9x FY2012E EPS (adjusting for BOT assets). Hence, we maintain an Accumulate on

the stock, with an SOTP Target Price of `1,623.

Outlook and Valuation

NHAI has targeted to award orders worth `1lakh cr over the next one year, in line

with its long-term target of achieving 20km/day. We believe that if NHAI is able to

achieve even 50% of its target, it would result in abundant opportunities for the

road developers and contractors like SEL. Further, the recent structural changes

have also lessened the vagaries in road development. Hence, we are optimistic on

the road segment.

SEL’s subsidiary Sadbhav Infrastructure Project (SIPL) has raised capital to the tune

of `400cr – dilution of 20% stake – which is expected to ease the pressure on SEL’s

balance sheet and fade funding concerns. We have factored in the dilution while

valuing the company’s BOT assets. We expect the company to log CAGR of 25.7%

and 44.4% in top-line and bottom-line respectively, over FY2010-12, with

execution gathering pace, funds tied up and robust order book.

At current levels, the stock is trading at attractive valuations of 9x FY2012E EPS

(adjusting for BOT assets). We have assigned a Target P/E multiple of 12x (15%

discount to its larger peers like IVRCL Infra and NCC) and valued its BOT arm at

25% discount post the recent private equity deal to arrive at our SOTP Target Price

of `1,623. We maintain an Accumulate on the stock.