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McNally Bharat Engineering: High on visibility…
Multiple sector exposure, strong sales visibility and impressive
expansion plans make McNally Bharat Engineering (MBE) an attractive
play in the domestic capital goods sector. Having successfully executed
several BOP and material handling equipment (MHE) projects, MBE is
gradually transitioning itself into a full-scale EPC contractor. We expect
the improved domestic economic outlook and continued emphasis on
infrastructure development by the government to drive order inflows
over the next few years. We are initiating coverage with an ADD rating.
Robust order inflows expected; led by power and mining sectors
The government’s aggressive targets to add power generation capacity in
the XI-XIIth plans will translate into substantial BOP opportunities (~40%
of total capex). With MBE enjoying a credible execution track record in the
BOP segment, repeat orders from existing clients and robust order
inflows in YTDFY11, we expect the power segment to be one of the key
drivers of revenues (30% share in FY12E vs. 10% in FY10). Further,
mining sector orders are likely to be robust with the recent acquisition of
KHD Humboldt Wedag’s CMT division and enhanced technological
capabilities especially in the EPC segment. Consequently, we estimate
MBE’s order book will grow at 10.3% CAGR in FY10-13E to | 5,728 crore.
Consolidated revenues are projected to grow to | 3,333 crore (24.8%
CAGR in FY10-13E).
Margin profile to get enhanced; BOP, EPC projects to drive profitability
MBE’s PAT growth (33% CAGR in FY10-13E) is likely to be faster than
revenues fuelled by improved operating profitability. With the successful
transition to executing high margin BOP orders and in-house
manufacturing capabilities, we expect EBITDA margins to expand to 8.9%
in FY13E (vs. 8.1% in FY10). In our view, further scope exists to expand
operating margins given the company’s recent foray into EPC segments.
Valuations
We expect MBE to deliver revenue and earnings CAGR of 25% and 33%,
respectively. This will be mainly driven by a healthy order backlog,
traction in performance of subsidiaries and a gradual improvement in
operating margins. Taking the above variables into account, the stock is
available at a reasonable P/E multiple of 11x/8x/6x on FY11E/12E/13E
EPS, respectively. Also, in our view, near term macro headwinds may
cap the expansion of P/E multiples in the near to medium term. We
expect our base case to fructify, going ahead. We derive our target price
of | 238 by assigning a P/E multiple of 8x to FY12E EPS.
Company Background
Established in 1961, McNally Bharat Engineering Co (MBE) is an
engineering company with ~45 years experience of providing lump sum
turnkey (LSTK) services. MBE operates as an LSTK contractor with
significant experience in material handling equipment (MHE) projects in
multiple sectors, including steel, civil infrastructure, power, port, cement
and mineral processing. In FY10, the company executed over 300 projects
on a turnkey basis. During the last two or three years, MBE has
undertaken higher-end projects and is considered as a strong balance of
plant (BOP) player. The company has successfully bid for several BOP
projects from companies in the power, steel, ports and mineral sectors in
recent years.
MBE’s standalone revenues were primarily contributed by four segments
– material and non-ferrous (62% share in FY10), followed by steel, mines
and ports (27%), power (10%) and infrastructure (1%). Further, the
company operates through three business verticals – product,
engineering services, and infrastructure and manufacturing services. MBE
manufactures a wide range of BOP and material handling equipment
through its Vadodara-based subsidiary, McNally Sayaji Engineering
(MSE), which it acquired in FY09. In FY10, MBE transferred its product
division to MSE through a demerger process that resulted in the transfer
of four manufacturing plants of the parent company to the latter. The four
manufacturing plants of the parent company (now operated by MSE) are
located at Jharkhand (2), West Bengal (1) and Karnataka (1).
MBE provides engineering services through its international subsidiaries
based in Singapore, Germany and South Africa while infrastructure
services are provided through two domestic subsidiaries – McNally Bharat
Infrastructure and McNally Bharat Equipments.
In FY06-10, standalone revenues witnessed robust growth of 44.4%
CAGR to | 1,448 crore fuelled by the strong order book growth (60.8%
CAGR). PAT grew faster at 59% CAGR to | 38 crore in FY06-10 driven by
strong topline growth and improved EBITDA margins (6.8% in FY10 vs.
5.5% in FY06). In FY10, the order book grew by 1.5x to | 4,550 crore
fuelled by the strong traction in power sector orders (8x to | 1,456 crore).
MBE is a part of the Kolkata-based Williamson Magor group, the world’s
largest private tea producer and third-largest dry cell battery
manufacturer. Headquartered in Kolkata, MBE has employee strength of
997 (as on March, 2010).
Investment Rationale
Power segment to drive revenue growth in FY10-13E
With a consolidated order book of | 4518 crore in Q2FY11 (2.5x FY10
revenues) and an average execution period of ~24 months, we estimate
MBE’s consolidated revenues will grow at 24.8% CAGR to | 3,333 crore
over FY10-13E. We expect robust order inflows during the next two or
three years primarily driven by the pick-up in industrial capex and the
sustained emphasis on infrastructure development by the government in
the XIIth Plan (investment of | 4,074,978 crore targeted; 2x XIth Plan
target).
In H1FY11, MBE’s standalone order backlog stood at | 4006 crore, up
37% YoY. It has bid for orders worth | 9,000 crore, which are at different
stages of decision (L1 status for | 500 crore orders). Consequently, we
estimate the company’s standalone and consolidated order book will
grow at a 7.6% and 10.8% CAGR, respectively, over FY10-13E.
We expect the power segment to dominate order inflows during the next
two or three years given the government’s thrust on power capacity
addition. In YTDFY11, MBE has enjoyed robust order inflows in the power
segment. Total ~75% of orders secured in YTDFY11 are from the power
sector. Consequently, we estimate the share of the power segment in
total order book will grow to 45% in FY13E (vs. 6% in FY09). With the
rapidly improving capabilities, recent foray into the EPC space and repeat
orders from large clients (e.g. NTPC), we expect the power segment to be
the key driver for MBE’s revenue growth (88% CAGR in FY10-13E). The
segment is projected to contribute ~30% of total revenues in FY13E (vs.
10% in FY10).
On the other hand, the contribution of the core material and non-ferrous
(MNF) segment in revenues is expected to decline to 42% in FY13E (vs.
62% in FY10) as a result of the faster growth of power segment revenues.
Significant BOP opportunities in XI-XII plans…
India continues to be plagued with significant power shortages (average
peak load deficit of 13.3% in FY00-10) due to the robust growth of power
demand (5% CAGR to 118 GW in FY00-10). Power demand has been
driven by India’s sustained economic expansion (GDP growth at 7.2%
CAGR in FY00-10) and development of the industrial sector.
Consequently, the government plans to add ~179 GW of new power
generation capacity in the XI-XII Plans (2007-17). Of this, only ~22 GW
has been added during the first three years of the XIth Plan.
With the government’s aggressive capacity expansion targets and MBE’s
growing presence in the BOP sector, we believe the power sector
presents attractive opportunities for the company during the next few
years.
According to the Central Electricity Authority (CEA), an investment of ~|
330,668 crore will be required for expanding the thermal power capacity
in the XII Plan. With the BOP component constituting ~40% of the total
capex and the ~77% share of thermal power sector (a key focus for MBE)
in the additional capacity, we estimate a BOP investment opportunity of
~| 132,267 crore in FY11E-17E.
…likely to benefit MBE due to its fast growing presence in the power sector
MBE’s credible track record of executing projects for government
agencies has helped the company to obtain large BOP orders in the
thermal power sector. At present, the company is executing orders worth
~| 2,034 crore that are at different stages of completion. In Q1FY11, MBE
secured a BOP project from NTPC for its 2x 250 MW thermal power plant
in Satpura (worth | 827 crore). This marked the company’s foray into the
EPC segment. We believe the entry into the EPC space will allow MBE to
secure orders from private sector clients as they prefer to deal with a
single entity (vs. multiple vendors). Private sector players are expected to
contribute ~30% of new power capacity addition in the XIIth Plan.
MBE well placed to capture mining sector orders…
MBE is a key player in the domestic mining and mineral processing sector
with a successful track record of executing orders for major mining
companies, including Vedanta Aluminium, Hindalco, Nalco, Hindustan
Zinc, Uranium Corporation of India and National Mineral Development
Corporation. The company undertakes communition, mineral
beneficiation and dewatering projects in the aluminium, copper, lead,
zinc, uranium and iron ore sectors. In FY10, MBE secured orders worth
~| 822 crore of which majority were from existing clients.
India is blessed with significant mineral deposits, with a leadership
position in bauxite (ranked fourth globally), iron ore (ranked fifth) and coal
(ranked fourth). With the pick-up in global economic activity and the
robust growth expected for domestic end-user industries (steel, power,
construction and automotives), we expect domestic mining companies to
aggressively invest in capacity enhancement.
…EPC capabilities enhanced by acquisition of KHD Humboldt’s CMT division
To strengthen its mining sector capabilities, MBE acquired the coal and
mineral technology (CMT) business of the Germany-based KHD Humboldt
Wedag Gmbh. The CMT division has been in operation for 155 years. The
acquisition was completed in August 2009 for a total consideration of ~|
80 crore (US$16 million).
With the CMT division owning several patented technologies, including
ROMJIG (for deshaling of coal), BATAC JIG (for separation of minerals),
PERMOS (medium intensity magnetic separator), we believe this
acquisition will strengthen MBE’s capabilities to execute EPC orders in the
coal, mineral processing, cement and petrochemical sectors in India and
abroad. Humboldt operates two manufacturing facilities globally, one unit
in Cologne (Germany) and the second in West Bengal (India). Also, the
company has a marketing presence in Europe, Canada, Australia, Russia,
China and South Africa.
In FY10, the CMT division had an order book of | 358 crore and clocked
revenues of | 262 crore. Although the CMT division’s margins were lower
than the standalone entity (3.2% in FY10 vs. 6.8% for the standalone
business), MBE’s management believes significant potential exists for
margin expansion (~10-12% in the next two or three years) once the
division’s order intake (primarily in EPC domain) gains traction.
Steel sector presents another key growth area for MBE
With the domestic economy gaining steam (GDP growth of 8.4% in FY11E
according to the RBI vs. 5.7% in FY09) and anticipated supply-side
constraints in the steel industry in the next few years, we expect
significant capex by steel companies in India. In FY10, domestic steel
consumption grew 8% YoY to 56.3 million tonnes (MT) while production
grew 4.9% YoY to 56.8 MT.
MBE plans to raise the domestic steel production capacity to 124 MT by
FY12E from 62 MT in FY10 (as per the Ministry of Steel). The capacity is
targeted to be further increased to ~276 MT over the next few years as
over 220 MoUs have been signed by several state governments with
major domestic and international steel companies. All this provides a
large market opportunity for MBE.
MBE has expanded its offering to steel companies by entering into
technological collaboration with major players in the steel manufacturing
technology space, including partnerships with TPE (Russia), DMT
(Germany), Siemens Vai (France) and MCC (China). With the support from
these partnerships, MBE is now capable of manufacturing critical steel
plant equipment, such as sinter plant, blast furnace, coke oven batteries,
etc. Consequently, MBE now boasts of large domestic steel makers as its
clientele, including Steel Authority of India (SAIL), Rashtriya Ispat Nigam
(RINL) and Tata Steel.
Entry into new business areas provides upside potential to earnings
With the acquisition of Humboldt’s CMT division, MBE has developed
capabilities to participate in EPC projects in the high-growth cement,
petrochemical and nuclear power sectors. We have not incorporated
revenues from orders from these sectors (due to the early stage of
operations). Hence, this provides an upside to our earnings estimates.
Recently, MBE hired a consultant for identifying a technology partner in
the petrochemical sector (for executing EPC projects). It is also open to
acquiring a company up to an overall valuation of nearly | 100 crore.
Strong capex plans in place
MBE is currently expanding the manufacturing capacity at its plants in
Asansol and Vadodara. The total capex is estimated at | 50 crore in
FY11E-12E. Besides this, the company will invest US$5 million in the plant
in Cologne, Germany, for upgradation of equipment.
Additionally, the company plans to set up a new manufacturing unit in
Vadodara (total capex of |100 crore), primarily to manufacture power
plant equipment. The investment on the same will be approximately |100
crore, which will be partly funded through the sale of land in Vadodara
(~|40 crore). Also, the management has recently passed a resolution for
a rights issue of |44 crore in Q2FY11. The proceeds from the issue will be
used to fund the capex requirements in addition to boosting the
company’s net worth (gaining pre-qualification for larger sized projects).
In February 2010, MBE’s board issued additional equity (worth ~|57
crore) on a preferential basis to the private equity firm EIG and the
promoters of the company. The proceeds from the issue are likely to be
utilised for the expansion of the Asansol plant.
Risks and concerns
Execution delays may inhibit revenue growth
With the higher domestic infrastructure sector investment and growth of
industrial capex, MBE’s standalone order book size has increased by
~3.9x in FY07-10 to |4,550 crore. Any delays in the execution of orders
by the company are likely to raise questions on the ability of MBE to
handle big-ticket projects (and adversely impact future order inflows).
As per our sensitivity analysis on changes in execution rate on MBE’s
revenues, we estimate that a 10% movement on the execution rate on
negative side will result in revenue volatility of ~11% and ~8.5% in
FY11E and FY12E, respectively, vis-à-vis our base case.
Slowdown in domestic economy a threat to order inflows
With the increased integration of the Indian economy with the global
markets, any external shocks in the global economy can result in lower
consumption demand in India (automotive, steel, power, construction,
etc). In such a scenario, the capex plans by Indian companies could be
adversely impacted, resulting in lower-than-anticipated order inflows (and
revenues) for MBE.
Further, the high share of government sector contracts in MBE’s order
book makes the company highly vulnerable to the public sector capex
cycle.
High working capital requirements
MBE’s debtor days are high at ~180 days in FY10, which is primarily
contributed by the dominance of government sector orders. Back
payments and high proportion of retention money are common
occurrences for government contracts. This results in high working capital
requirements for MBE (21.4% of net sales in FY10). Higher interest rates
can adversely impact MBE’s earnings due to the significant leverage of
the company (debt to equity ratio of 1.1 in FY10) and its high working
capital requirements.
Rise in commodity prices may lower margins
With the upturn of the global economy, commodity prices are rising. A
higher-than-expected rise in commodity prices (steel, copper pipes, etc)
could adversely impact the margins of the company.
As per our sensitivity analysis on changes in raw material/sales (RM/sales)
ratio on MBE’s EPS, we estimate that increase in 100 bps in RM/sales ratio
on either side would result in an EPS volatility of 17.9% and 20% in FY12E
and FY13E, respectively, vis-à-vis our base case.
Financials
Consolidated revenues to grow at 24.5% CAGR in FY10-13E
We expect consolidated revenues to grow at 24.5% CAGR in FY10-13E to
|3,333 crore driven by strong sales visibility (Q2FY11 order book 2.5x
FY10 revenues) and average order execution period of ~24 months.
Topline growth will be supported by robust growth of power segment
revenues (88% CAGR in FY10-13E) with the segment constituting 30%
share of total revenues in FY13E (vs. 10% in FY10). Order inflows are
expected to be robust fuelled by the continued emphasis on infrastructure
development and pick-up of industrial capex. Consequently, we project
that the consolidated order book will grow at 10.3% CAGR in FY10-13E to
|5,728 crore.
EBITDA margins to improve gradually over FY10-FY13E
With the increasing share of the high margin power sector BOP orders
being executed by MBE, we expect the company’s consolidated EBITDA
margins to expand to 8.9% in FY13E (vs. 8.1% in FY10). BOP projects
typically generate higher margins compared to MHE segment projects.
Although further scope exists for MBE to improve margins with the
company’s foray in the EPC segment, we have taken a conservative
stance given the significant competition in this space from larger and
more experienced players (L&T, BGR Energy, etc).
Consolidated EBITDA is estimated to grow at 28.2% CAGR in FY10-13E to
| 292 crore driven by the robust topline growth and improved operating
profitability.
Significant increase in return rations
With the robust topline expansion and improved operating profitability,
we estimate the PAT will grow at 33.4% CAGR in FY10-13E to | 117 crore
(PAT margin of 4% in FY13E vs. 3% in FY10). As MBE plans to fund its
capex through internal accruals, we estimate the company’s return ratios
will improve.
Valuations
We expect MBE to deliver revenue and earnings CAGR of 25% and 33%,
respectively. This will be mainly driven by a healthy order backlog,
traction in performance of subsidiaries and gradual improvement in
operating margins. Taking the above variables into account, the stock is
available at a reasonable P/E multiple of 11x/8x/6x on FY11E/12E/13E EPS,
respectively. During the last five years, MBE has traded in a wide one-year
forward P/E band of 2.5x and 29.7x.
Having said that, in our view, the near term macro headwinds like a delay
in pick-up in the capex cycle, rising commodity prices and cost of credit
may cap the expansion of P/E multiples in the near to medium term.
Therefore, we have constructed three valuation scenarios that are
discussed in Exhibit 31. We expect our base case assumption to fructify,
going ahead. We have derived our target price of | 238 by assigning a P/E
multiple of 8x to FY12E EPS.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
McNally Bharat Engineering: High on visibility…
Multiple sector exposure, strong sales visibility and impressive
expansion plans make McNally Bharat Engineering (MBE) an attractive
play in the domestic capital goods sector. Having successfully executed
several BOP and material handling equipment (MHE) projects, MBE is
gradually transitioning itself into a full-scale EPC contractor. We expect
the improved domestic economic outlook and continued emphasis on
infrastructure development by the government to drive order inflows
over the next few years. We are initiating coverage with an ADD rating.
Robust order inflows expected; led by power and mining sectors
The government’s aggressive targets to add power generation capacity in
the XI-XIIth plans will translate into substantial BOP opportunities (~40%
of total capex). With MBE enjoying a credible execution track record in the
BOP segment, repeat orders from existing clients and robust order
inflows in YTDFY11, we expect the power segment to be one of the key
drivers of revenues (30% share in FY12E vs. 10% in FY10). Further,
mining sector orders are likely to be robust with the recent acquisition of
KHD Humboldt Wedag’s CMT division and enhanced technological
capabilities especially in the EPC segment. Consequently, we estimate
MBE’s order book will grow at 10.3% CAGR in FY10-13E to | 5,728 crore.
Consolidated revenues are projected to grow to | 3,333 crore (24.8%
CAGR in FY10-13E).
Margin profile to get enhanced; BOP, EPC projects to drive profitability
MBE’s PAT growth (33% CAGR in FY10-13E) is likely to be faster than
revenues fuelled by improved operating profitability. With the successful
transition to executing high margin BOP orders and in-house
manufacturing capabilities, we expect EBITDA margins to expand to 8.9%
in FY13E (vs. 8.1% in FY10). In our view, further scope exists to expand
operating margins given the company’s recent foray into EPC segments.
Valuations
We expect MBE to deliver revenue and earnings CAGR of 25% and 33%,
respectively. This will be mainly driven by a healthy order backlog,
traction in performance of subsidiaries and a gradual improvement in
operating margins. Taking the above variables into account, the stock is
available at a reasonable P/E multiple of 11x/8x/6x on FY11E/12E/13E
EPS, respectively. Also, in our view, near term macro headwinds may
cap the expansion of P/E multiples in the near to medium term. We
expect our base case to fructify, going ahead. We derive our target price
of | 238 by assigning a P/E multiple of 8x to FY12E EPS.
Company Background
Established in 1961, McNally Bharat Engineering Co (MBE) is an
engineering company with ~45 years experience of providing lump sum
turnkey (LSTK) services. MBE operates as an LSTK contractor with
significant experience in material handling equipment (MHE) projects in
multiple sectors, including steel, civil infrastructure, power, port, cement
and mineral processing. In FY10, the company executed over 300 projects
on a turnkey basis. During the last two or three years, MBE has
undertaken higher-end projects and is considered as a strong balance of
plant (BOP) player. The company has successfully bid for several BOP
projects from companies in the power, steel, ports and mineral sectors in
recent years.
MBE’s standalone revenues were primarily contributed by four segments
– material and non-ferrous (62% share in FY10), followed by steel, mines
and ports (27%), power (10%) and infrastructure (1%). Further, the
company operates through three business verticals – product,
engineering services, and infrastructure and manufacturing services. MBE
manufactures a wide range of BOP and material handling equipment
through its Vadodara-based subsidiary, McNally Sayaji Engineering
(MSE), which it acquired in FY09. In FY10, MBE transferred its product
division to MSE through a demerger process that resulted in the transfer
of four manufacturing plants of the parent company to the latter. The four
manufacturing plants of the parent company (now operated by MSE) are
located at Jharkhand (2), West Bengal (1) and Karnataka (1).
MBE provides engineering services through its international subsidiaries
based in Singapore, Germany and South Africa while infrastructure
services are provided through two domestic subsidiaries – McNally Bharat
Infrastructure and McNally Bharat Equipments.
In FY06-10, standalone revenues witnessed robust growth of 44.4%
CAGR to | 1,448 crore fuelled by the strong order book growth (60.8%
CAGR). PAT grew faster at 59% CAGR to | 38 crore in FY06-10 driven by
strong topline growth and improved EBITDA margins (6.8% in FY10 vs.
5.5% in FY06). In FY10, the order book grew by 1.5x to | 4,550 crore
fuelled by the strong traction in power sector orders (8x to | 1,456 crore).
MBE is a part of the Kolkata-based Williamson Magor group, the world’s
largest private tea producer and third-largest dry cell battery
manufacturer. Headquartered in Kolkata, MBE has employee strength of
997 (as on March, 2010).
Investment Rationale
Power segment to drive revenue growth in FY10-13E
With a consolidated order book of | 4518 crore in Q2FY11 (2.5x FY10
revenues) and an average execution period of ~24 months, we estimate
MBE’s consolidated revenues will grow at 24.8% CAGR to | 3,333 crore
over FY10-13E. We expect robust order inflows during the next two or
three years primarily driven by the pick-up in industrial capex and the
sustained emphasis on infrastructure development by the government in
the XIIth Plan (investment of | 4,074,978 crore targeted; 2x XIth Plan
target).
In H1FY11, MBE’s standalone order backlog stood at | 4006 crore, up
37% YoY. It has bid for orders worth | 9,000 crore, which are at different
stages of decision (L1 status for | 500 crore orders). Consequently, we
estimate the company’s standalone and consolidated order book will
grow at a 7.6% and 10.8% CAGR, respectively, over FY10-13E.
We expect the power segment to dominate order inflows during the next
two or three years given the government’s thrust on power capacity
addition. In YTDFY11, MBE has enjoyed robust order inflows in the power
segment. Total ~75% of orders secured in YTDFY11 are from the power
sector. Consequently, we estimate the share of the power segment in
total order book will grow to 45% in FY13E (vs. 6% in FY09). With the
rapidly improving capabilities, recent foray into the EPC space and repeat
orders from large clients (e.g. NTPC), we expect the power segment to be
the key driver for MBE’s revenue growth (88% CAGR in FY10-13E). The
segment is projected to contribute ~30% of total revenues in FY13E (vs.
10% in FY10).
On the other hand, the contribution of the core material and non-ferrous
(MNF) segment in revenues is expected to decline to 42% in FY13E (vs.
62% in FY10) as a result of the faster growth of power segment revenues.
Significant BOP opportunities in XI-XII plans…
India continues to be plagued with significant power shortages (average
peak load deficit of 13.3% in FY00-10) due to the robust growth of power
demand (5% CAGR to 118 GW in FY00-10). Power demand has been
driven by India’s sustained economic expansion (GDP growth at 7.2%
CAGR in FY00-10) and development of the industrial sector.
Consequently, the government plans to add ~179 GW of new power
generation capacity in the XI-XII Plans (2007-17). Of this, only ~22 GW
has been added during the first three years of the XIth Plan.
With the government’s aggressive capacity expansion targets and MBE’s
growing presence in the BOP sector, we believe the power sector
presents attractive opportunities for the company during the next few
years.
According to the Central Electricity Authority (CEA), an investment of ~|
330,668 crore will be required for expanding the thermal power capacity
in the XII Plan. With the BOP component constituting ~40% of the total
capex and the ~77% share of thermal power sector (a key focus for MBE)
in the additional capacity, we estimate a BOP investment opportunity of
~| 132,267 crore in FY11E-17E.
…likely to benefit MBE due to its fast growing presence in the power sector
MBE’s credible track record of executing projects for government
agencies has helped the company to obtain large BOP orders in the
thermal power sector. At present, the company is executing orders worth
~| 2,034 crore that are at different stages of completion. In Q1FY11, MBE
secured a BOP project from NTPC for its 2x 250 MW thermal power plant
in Satpura (worth | 827 crore). This marked the company’s foray into the
EPC segment. We believe the entry into the EPC space will allow MBE to
secure orders from private sector clients as they prefer to deal with a
single entity (vs. multiple vendors). Private sector players are expected to
contribute ~30% of new power capacity addition in the XIIth Plan.
MBE well placed to capture mining sector orders…
MBE is a key player in the domestic mining and mineral processing sector
with a successful track record of executing orders for major mining
companies, including Vedanta Aluminium, Hindalco, Nalco, Hindustan
Zinc, Uranium Corporation of India and National Mineral Development
Corporation. The company undertakes communition, mineral
beneficiation and dewatering projects in the aluminium, copper, lead,
zinc, uranium and iron ore sectors. In FY10, MBE secured orders worth
~| 822 crore of which majority were from existing clients.
India is blessed with significant mineral deposits, with a leadership
position in bauxite (ranked fourth globally), iron ore (ranked fifth) and coal
(ranked fourth). With the pick-up in global economic activity and the
robust growth expected for domestic end-user industries (steel, power,
construction and automotives), we expect domestic mining companies to
aggressively invest in capacity enhancement.
…EPC capabilities enhanced by acquisition of KHD Humboldt’s CMT division
To strengthen its mining sector capabilities, MBE acquired the coal and
mineral technology (CMT) business of the Germany-based KHD Humboldt
Wedag Gmbh. The CMT division has been in operation for 155 years. The
acquisition was completed in August 2009 for a total consideration of ~|
80 crore (US$16 million).
With the CMT division owning several patented technologies, including
ROMJIG (for deshaling of coal), BATAC JIG (for separation of minerals),
PERMOS (medium intensity magnetic separator), we believe this
acquisition will strengthen MBE’s capabilities to execute EPC orders in the
coal, mineral processing, cement and petrochemical sectors in India and
abroad. Humboldt operates two manufacturing facilities globally, one unit
in Cologne (Germany) and the second in West Bengal (India). Also, the
company has a marketing presence in Europe, Canada, Australia, Russia,
China and South Africa.
In FY10, the CMT division had an order book of | 358 crore and clocked
revenues of | 262 crore. Although the CMT division’s margins were lower
than the standalone entity (3.2% in FY10 vs. 6.8% for the standalone
business), MBE’s management believes significant potential exists for
margin expansion (~10-12% in the next two or three years) once the
division’s order intake (primarily in EPC domain) gains traction.
Steel sector presents another key growth area for MBE
With the domestic economy gaining steam (GDP growth of 8.4% in FY11E
according to the RBI vs. 5.7% in FY09) and anticipated supply-side
constraints in the steel industry in the next few years, we expect
significant capex by steel companies in India. In FY10, domestic steel
consumption grew 8% YoY to 56.3 million tonnes (MT) while production
grew 4.9% YoY to 56.8 MT.
MBE plans to raise the domestic steel production capacity to 124 MT by
FY12E from 62 MT in FY10 (as per the Ministry of Steel). The capacity is
targeted to be further increased to ~276 MT over the next few years as
over 220 MoUs have been signed by several state governments with
major domestic and international steel companies. All this provides a
large market opportunity for MBE.
MBE has expanded its offering to steel companies by entering into
technological collaboration with major players in the steel manufacturing
technology space, including partnerships with TPE (Russia), DMT
(Germany), Siemens Vai (France) and MCC (China). With the support from
these partnerships, MBE is now capable of manufacturing critical steel
plant equipment, such as sinter plant, blast furnace, coke oven batteries,
etc. Consequently, MBE now boasts of large domestic steel makers as its
clientele, including Steel Authority of India (SAIL), Rashtriya Ispat Nigam
(RINL) and Tata Steel.
Entry into new business areas provides upside potential to earnings
With the acquisition of Humboldt’s CMT division, MBE has developed
capabilities to participate in EPC projects in the high-growth cement,
petrochemical and nuclear power sectors. We have not incorporated
revenues from orders from these sectors (due to the early stage of
operations). Hence, this provides an upside to our earnings estimates.
Recently, MBE hired a consultant for identifying a technology partner in
the petrochemical sector (for executing EPC projects). It is also open to
acquiring a company up to an overall valuation of nearly | 100 crore.
Strong capex plans in place
MBE is currently expanding the manufacturing capacity at its plants in
Asansol and Vadodara. The total capex is estimated at | 50 crore in
FY11E-12E. Besides this, the company will invest US$5 million in the plant
in Cologne, Germany, for upgradation of equipment.
Additionally, the company plans to set up a new manufacturing unit in
Vadodara (total capex of |100 crore), primarily to manufacture power
plant equipment. The investment on the same will be approximately |100
crore, which will be partly funded through the sale of land in Vadodara
(~|40 crore). Also, the management has recently passed a resolution for
a rights issue of |44 crore in Q2FY11. The proceeds from the issue will be
used to fund the capex requirements in addition to boosting the
company’s net worth (gaining pre-qualification for larger sized projects).
In February 2010, MBE’s board issued additional equity (worth ~|57
crore) on a preferential basis to the private equity firm EIG and the
promoters of the company. The proceeds from the issue are likely to be
utilised for the expansion of the Asansol plant.
Risks and concerns
Execution delays may inhibit revenue growth
With the higher domestic infrastructure sector investment and growth of
industrial capex, MBE’s standalone order book size has increased by
~3.9x in FY07-10 to |4,550 crore. Any delays in the execution of orders
by the company are likely to raise questions on the ability of MBE to
handle big-ticket projects (and adversely impact future order inflows).
As per our sensitivity analysis on changes in execution rate on MBE’s
revenues, we estimate that a 10% movement on the execution rate on
negative side will result in revenue volatility of ~11% and ~8.5% in
FY11E and FY12E, respectively, vis-à-vis our base case.
Slowdown in domestic economy a threat to order inflows
With the increased integration of the Indian economy with the global
markets, any external shocks in the global economy can result in lower
consumption demand in India (automotive, steel, power, construction,
etc). In such a scenario, the capex plans by Indian companies could be
adversely impacted, resulting in lower-than-anticipated order inflows (and
revenues) for MBE.
Further, the high share of government sector contracts in MBE’s order
book makes the company highly vulnerable to the public sector capex
cycle.
High working capital requirements
MBE’s debtor days are high at ~180 days in FY10, which is primarily
contributed by the dominance of government sector orders. Back
payments and high proportion of retention money are common
occurrences for government contracts. This results in high working capital
requirements for MBE (21.4% of net sales in FY10). Higher interest rates
can adversely impact MBE’s earnings due to the significant leverage of
the company (debt to equity ratio of 1.1 in FY10) and its high working
capital requirements.
Rise in commodity prices may lower margins
With the upturn of the global economy, commodity prices are rising. A
higher-than-expected rise in commodity prices (steel, copper pipes, etc)
could adversely impact the margins of the company.
As per our sensitivity analysis on changes in raw material/sales (RM/sales)
ratio on MBE’s EPS, we estimate that increase in 100 bps in RM/sales ratio
on either side would result in an EPS volatility of 17.9% and 20% in FY12E
and FY13E, respectively, vis-à-vis our base case.
Financials
Consolidated revenues to grow at 24.5% CAGR in FY10-13E
We expect consolidated revenues to grow at 24.5% CAGR in FY10-13E to
|3,333 crore driven by strong sales visibility (Q2FY11 order book 2.5x
FY10 revenues) and average order execution period of ~24 months.
Topline growth will be supported by robust growth of power segment
revenues (88% CAGR in FY10-13E) with the segment constituting 30%
share of total revenues in FY13E (vs. 10% in FY10). Order inflows are
expected to be robust fuelled by the continued emphasis on infrastructure
development and pick-up of industrial capex. Consequently, we project
that the consolidated order book will grow at 10.3% CAGR in FY10-13E to
|5,728 crore.
EBITDA margins to improve gradually over FY10-FY13E
With the increasing share of the high margin power sector BOP orders
being executed by MBE, we expect the company’s consolidated EBITDA
margins to expand to 8.9% in FY13E (vs. 8.1% in FY10). BOP projects
typically generate higher margins compared to MHE segment projects.
Although further scope exists for MBE to improve margins with the
company’s foray in the EPC segment, we have taken a conservative
stance given the significant competition in this space from larger and
more experienced players (L&T, BGR Energy, etc).
Consolidated EBITDA is estimated to grow at 28.2% CAGR in FY10-13E to
| 292 crore driven by the robust topline growth and improved operating
profitability.
Significant increase in return rations
With the robust topline expansion and improved operating profitability,
we estimate the PAT will grow at 33.4% CAGR in FY10-13E to | 117 crore
(PAT margin of 4% in FY13E vs. 3% in FY10). As MBE plans to fund its
capex through internal accruals, we estimate the company’s return ratios
will improve.
Valuations
We expect MBE to deliver revenue and earnings CAGR of 25% and 33%,
respectively. This will be mainly driven by a healthy order backlog,
traction in performance of subsidiaries and gradual improvement in
operating margins. Taking the above variables into account, the stock is
available at a reasonable P/E multiple of 11x/8x/6x on FY11E/12E/13E EPS,
respectively. During the last five years, MBE has traded in a wide one-year
forward P/E band of 2.5x and 29.7x.
Having said that, in our view, the near term macro headwinds like a delay
in pick-up in the capex cycle, rising commodity prices and cost of credit
may cap the expansion of P/E multiples in the near to medium term.
Therefore, we have constructed three valuation scenarios that are
discussed in Exhibit 31. We expect our base case assumption to fructify,
going ahead. We have derived our target price of | 238 by assigning a P/E
multiple of 8x to FY12E EPS.
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