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McNally Bharat - Fallen From Cliff, Attractive Valuations
(Mkt Cap – Rs 7.04 bn, CMP – Rs 226, TP – Rs 418, Reco - BUY)
n McNally Bharat (MBE) is a market underperformer for the past 2 quarters (underperformed the Sensex by 20% & 31% in the past 3 months and 6 months respectively). This is mainly attributed to subdued performance in H1FY11 (Revenues increased 23% yoy to Rs6.9 bn while PAT grew merely 12% yoy to Rs158 mn) and concerns on execution and margins, thereby contemplating earnings downgrades.
n We expect MBE to meet our FY11E earnings estimates with improved traction beginning Q3FY11E. This is based on:
1. No aggressive estimates built for H2FY11E à standalone estimates have (1) Revenue growth at 30% yoy to Rs11.6 bn, (2) Operating Profit growth at 27% yoy to Rs808 mn with margins of 6.9% and (3) Net Profit of Rs268 mn (-6% yoy).
2. Robust consolidated order backlog – equivalent to 2.4X FY10 revenues – further cushioning our H2FY11E earning estimates
3. Most importantly – adequate comfort from our recent interaction with Mr. Prabir Ghosh, CFO – who reiterated FY11E guidance and indicated no pressure on margins. Additionally, Mr. Deepak Khaitan, Chairman also gave robust outlook for MBE in a recent television interview (Please see highlights below)
n Post the recent correction, MBE is trading at attractive valuations of 9.3X FY11E and 7.4X FY12E consolidated earnings of Rs24.3 and Rs30.6 per share respectively – amongst the cheapest in our ECI universe. Considering improved performance beginning Q3FY11E and attractive valuations, we believe that the stock can yield significant upsides (20-25%) in the short term. We have a BUY rating on the stock with a target price of Rs418/-.
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