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Sadbhav Engineering (SEL) reported impressive set of numbers for 3QFY2011,
which were above our estimates both on top-line and bottom-line front. We are
revising our estimates upwards for FY2011 and FY2012 given the higher-thanexpected
performance this quarter. We believe that SEL has performed
particularly well over the last few quarters in the roads and mining segment, as its
order book has increased to `7,280cr i.e. 4.1x FY2011E revenues, one of the
highest in industry. We maintain a Buy on the stock.
Strong quarterly performance: For 3QFY2011, SEL surpassed our expectations on
the top-line front with revenues surging 51.2% yoy to `476.2cr (`315cr) v/s our
estimate of `397cr on account of pick-up in execution of road BOT projects.
Operating margins improved by 200bp to 11.1% in line with our estimate of
11.2% mainly due to reduction in construction cost, as a percentage of sales.
Bottom-line posted a substantial 87.1% yoy growth to `26.4cr (`14.1cr) as
against our estimate of `22cr on account of better than expected top-line growth.
Outlook and Valuation: SEL’s subsidiary Sadbhav Infrastructure Project (SIPL) has
raised capital of `400cr - a dilution of 22% stake - which is expected to ease the
pressure on SEL’s balance sheet and fade funding concerns. We expect the
company to log a CAGR of 36.2% and 49.1% in top-line and bottom-line
respectively, over FY2010-12 on the back of execution gathering pace on account
of robust order book and equity funds raised leading to reduction in debt levels
and WC requirements. At current levels, the stock is trading at valuations of 11.5x
FY2012E EPS (standalone). Hence, we maintain a Buy on the stock, with a SOTPbased
Target Price of `173.
Good show on all fronts
For 3QFY2011, SEL surpassed our estimate on the top-line front, with revenues
increasing 51.2% yoy to `476.2cr (`315cr) v/s our estimate of `397cr. This growth
came on the back of a robust order book (`7,280cr i.e. 4.1x FY2011E revenues)
and pick-up in execution in the in-house road projects (all financially closed
projects). Dhule-Palesnar and Bijapur-Hungund projects were the major
contributors in road related EPC revenues (`394cr).
On toll collection front, Ahmedabad Ring Road reported a jump of 24% qoq to
`17cr (`13.7cr) for the quarter with 9MFY2011 toll collections at `45.4cr.
Similarly, Aurangabad-Jalna witnessed a healthy growth of 19% qoq to `6.32cr
(`5.3cr) for the quarter with 9MFY2011 toll collections stood at `17.4cr. This is
broadly in line with our numbers forecasted in our FCFE model.
Further, SIPL has been able to raise equity (`400cr) for its projects (via equity
dilution) and the requirement of equity from SEL (parent) is ~`145cr over the next
18 months which is manageable given its internal accruals and current credit lines.
Against this backdrop and considering the strong execution capabilities of SEL we
expect similar ramp up in captive orders going ahead as well and expect SEL to
post robust growth on the top-line front in ensuing quarters.
Revision in estimates
We are revising our estimates upwards for FY2011 and FY2012 given the
higher-than-expected performance this quarter. Our top-line numbers are revised
upwards. On the EBITDA margin front, management has guided for stable
margins for the next 6-7 quarters (hence we maintain the same). We have already
factored in higher working capital days and hence the marginal jump in the same
during the quarter has not impacted our yearly estimates of interest cost. As a
result our bottom-line stands upgraded by 5-7%.
Outlook and Valuation
The recent lull in the awarding activity has negatively impacted performance of the
infra sector on the bourses. However, we expect the awarding activity to pick-up in
ensuing quarters which would result in abundant opportunities for the road
developers and contractors like SEL. We are optimistic on the road segment given
the quantum of opportunities lined up in the sector, albeit overdue.
As per management, SIPL’s forthcoming equity requirement can also be funded by
its internal accruals hence reducing its dependence on parent. Thus, SEL is one of
the few companies in the sector with minimal dependence of equity for its captive
road projects and going ahead, we expect SEL to post good performance. Against
this backdrop and considering the strong execution capabilities of SEL we are
penciling a CAGR of 36.2% and 49.1% in top-line and bottom-line front over
FY2010-12, respectively.
At current levels, the stock is trading at valuations of 11.5x FY2012E EPS on
standalone basis (at par with our 12x PE multiple assigned for parent). Therefore,
markets are assigning hardly any value to its 78% subsidiary which we believe is
unwarranted given the equity in place for projects. Therefore, we believe that stock
is trading at huge discount and offers a great buying opportunity.
Based on a Target P/E multiple of 12x (15% discount to larger peers like IVRCL
Infra and NCC) and valuing the company’s BOT arm on DCF basis, our SOTPbased
Target Price works out to `173. We maintain a Buy on the stock.
Investment Arguments
Aggressive ramp up of road BOT portfolio, leveraging on EPC competence: SEL
has slowly and steadily moved up the value chain from being a cash contractor to
becoming an asset owner. The company is leveraging its core competence in the
EPC business to encash on the upcoming opportunities in the road BOT space.
This not only serves to shore up its EPC order book, but also ensures consistent
revenue stream for SEL in the long run.
Strong order book renders top-line visibility: As on 3QFY2011, SEL had a robust
order book of `7,280cr (4.1x FY2011E revenues) owing to healthy order booking
witnessed in the road segment. SEL has one of the strongest order books in the
industry, which is spread across segments including road (79%), mining (13%) and
irrigation (8%), with an average execution period of 24-30 months. Pertinently, the
robust order book continues to provide top-line visibility for the company.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Sadbhav Engineering– 3QFY2011 Result Update
Angel Broking maintains a Buy on Sadbhav Engineering with a Target Price of Rs. 173.
Sadbhav Engineering (SEL) reported impressive set of numbers for 3QFY2011,
which were above our estimates both on top-line and bottom-line front. We are
revising our estimates upwards for FY2011 and FY2012 given the higher-thanexpected
performance this quarter. We believe that SEL has performed
particularly well over the last few quarters in the roads and mining segment, as its
order book has increased to `7,280cr i.e. 4.1x FY2011E revenues, one of the
highest in industry. We maintain a Buy on the stock.
Strong quarterly performance: For 3QFY2011, SEL surpassed our expectations on
the top-line front with revenues surging 51.2% yoy to `476.2cr (`315cr) v/s our
estimate of `397cr on account of pick-up in execution of road BOT projects.
Operating margins improved by 200bp to 11.1% in line with our estimate of
11.2% mainly due to reduction in construction cost, as a percentage of sales.
Bottom-line posted a substantial 87.1% yoy growth to `26.4cr (`14.1cr) as
against our estimate of `22cr on account of better than expected top-line growth.
Outlook and Valuation: SEL’s subsidiary Sadbhav Infrastructure Project (SIPL) has
raised capital of `400cr - a dilution of 22% stake - which is expected to ease the
pressure on SEL’s balance sheet and fade funding concerns. We expect the
company to log a CAGR of 36.2% and 49.1% in top-line and bottom-line
respectively, over FY2010-12 on the back of execution gathering pace on account
of robust order book and equity funds raised leading to reduction in debt levels
and WC requirements. At current levels, the stock is trading at valuations of 11.5x
FY2012E EPS (standalone). Hence, we maintain a Buy on the stock, with a SOTPbased
Target Price of `173.
Good show on all fronts
For 3QFY2011, SEL surpassed our estimate on the top-line front, with revenues
increasing 51.2% yoy to `476.2cr (`315cr) v/s our estimate of `397cr. This growth
came on the back of a robust order book (`7,280cr i.e. 4.1x FY2011E revenues)
and pick-up in execution in the in-house road projects (all financially closed
projects). Dhule-Palesnar and Bijapur-Hungund projects were the major
contributors in road related EPC revenues (`394cr).
On toll collection front, Ahmedabad Ring Road reported a jump of 24% qoq to
`17cr (`13.7cr) for the quarter with 9MFY2011 toll collections at `45.4cr.
Similarly, Aurangabad-Jalna witnessed a healthy growth of 19% qoq to `6.32cr
(`5.3cr) for the quarter with 9MFY2011 toll collections stood at `17.4cr. This is
broadly in line with our numbers forecasted in our FCFE model.
Further, SIPL has been able to raise equity (`400cr) for its projects (via equity
dilution) and the requirement of equity from SEL (parent) is ~`145cr over the next
18 months which is manageable given its internal accruals and current credit lines.
Against this backdrop and considering the strong execution capabilities of SEL we
expect similar ramp up in captive orders going ahead as well and expect SEL to
post robust growth on the top-line front in ensuing quarters.
Revision in estimates
We are revising our estimates upwards for FY2011 and FY2012 given the
higher-than-expected performance this quarter. Our top-line numbers are revised
upwards. On the EBITDA margin front, management has guided for stable
margins for the next 6-7 quarters (hence we maintain the same). We have already
factored in higher working capital days and hence the marginal jump in the same
during the quarter has not impacted our yearly estimates of interest cost. As a
result our bottom-line stands upgraded by 5-7%.
Outlook and Valuation
The recent lull in the awarding activity has negatively impacted performance of the
infra sector on the bourses. However, we expect the awarding activity to pick-up in
ensuing quarters which would result in abundant opportunities for the road
developers and contractors like SEL. We are optimistic on the road segment given
the quantum of opportunities lined up in the sector, albeit overdue.
As per management, SIPL’s forthcoming equity requirement can also be funded by
its internal accruals hence reducing its dependence on parent. Thus, SEL is one of
the few companies in the sector with minimal dependence of equity for its captive
road projects and going ahead, we expect SEL to post good performance. Against
this backdrop and considering the strong execution capabilities of SEL we are
penciling a CAGR of 36.2% and 49.1% in top-line and bottom-line front over
FY2010-12, respectively.
At current levels, the stock is trading at valuations of 11.5x FY2012E EPS on
standalone basis (at par with our 12x PE multiple assigned for parent). Therefore,
markets are assigning hardly any value to its 78% subsidiary which we believe is
unwarranted given the equity in place for projects. Therefore, we believe that stock
is trading at huge discount and offers a great buying opportunity.
Based on a Target P/E multiple of 12x (15% discount to larger peers like IVRCL
Infra and NCC) and valuing the company’s BOT arm on DCF basis, our SOTPbased
Target Price works out to `173. We maintain a Buy on the stock.
Investment Arguments
Aggressive ramp up of road BOT portfolio, leveraging on EPC competence: SEL
has slowly and steadily moved up the value chain from being a cash contractor to
becoming an asset owner. The company is leveraging its core competence in the
EPC business to encash on the upcoming opportunities in the road BOT space.
This not only serves to shore up its EPC order book, but also ensures consistent
revenue stream for SEL in the long run.
Strong order book renders top-line visibility: As on 3QFY2011, SEL had a robust
order book of `7,280cr (4.1x FY2011E revenues) owing to healthy order booking
witnessed in the road segment. SEL has one of the strongest order books in the
industry, which is spread across segments including road (79%), mining (13%) and
irrigation (8%), with an average execution period of 24-30 months. Pertinently, the
robust order book continues to provide top-line visibility for the company.
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