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Sadbhav Engineering (SADE)
Construction
Expect strong growth backed by execution of BOT projects. Highlights from the
results conference call were (1) low margins attributed to higher irrigation revenues,
subcontracting, change in revenue recognition policy; we build about 10.25% margins,
(2) we expect subcontracting to decline in FY2012E (3) several project significantly (3-6
months) ahead of schedule and (4) we build in revenue growth of 36% in FY2012E.
Low working capital likely to remain as BOT contributes to major share of revenues.
Retain BUY with a revised target price of Rs190 (Rs175 earlier).
Low margins on higher irrigation revenues, subcontracting, change in revenue recognition policy
The lower EBITDA margin in 4QFY11 (reported 8.7%) was attributed to (1) a higher proportion of
revenues from low-margin irrigation segment (operates at average margins of 6.5-8%), (2) change
in revenue booking methodology in which lower inflation factor is built in during the initial phase
of the project and higher later, and (3) higher proportion of revenues from sub-contracted works.
We believe the proportion of revenues from sub-contracted work is likely to decline in FY2012 as
Rohtak-Panipat and recent cash contract project would start contributing to revenues (in-house
construction). The management expects to maintain historical margins of 10-11%.
Ahead of schedule in several projects under execution
The management cited that they are well ahead of scheduled in most of the projects under
construction viz. (1) Hyderabad-Yadgiri, (2) Bijapur-Hungud and (3) Maharashtra Border- Dhule.
The management also expects to complete the Hyderabad-Yadgiri and Rohtak-Panipat project at
least six months ahead of schedule. The company has completed the financial closure and received
appointed date for all its projects in its portfolio. The financial closure of its projects allows the
company to start execution as well as facilitates the company to bid for further projects.
Low working capital expected to continue as BOT to contribute to significant share of revenues
Net working capital (excluding cash) improved to 66 days of sales at end-FY2011 versus about 125
days at end-FY2010, likely on higher revenue proportion from execution of in-house BOT projects.
The improvement was led by lower debtors (113 days of sales versus 128 at end-FY2010) and
lower loans and advances (97 days versus 136 a year ago). We expect working capital requirement
to remain at the low levels going forward as BOT projects would contribute bulk of the revenues.
Revise estimates and target price to Rs190/share; reiterate BUY
Revise estimates to Rs10 and Rs12.1 from Rs8.7 and Rs10 for FY2012E and FY2013E, respectively,
and revise our target price to Rs190(from Rs175). Retain BUY on (1) strong execution and order
book, (2) strong balance sheet, (3) funded BOT projects and (4) attractive valuations
Believes that pie has enough for all though near-term competition is intense
The management believes that the opportunities in the road sector is large enough and
there is no need for aggressive bids. However, they also cited stiff competition in the nearterm
projects, especially for the large ultra-mega road projects.
The intense competition was also highlighted during our recent meeting with NHAI
management with several projects going on a premium basis. Several smaller, local players
have also started bidding, especially for small-sized projects. For instance, in a recent bid for
the Kota-Jhalawar 2-laning project, Keti Constructions (a small local developer) has emerged
as the L1 bidder. The company won the project on a premium basis of Rs11 mn – this is
versus NHAI’s expectation of Rs20 bn VGF for the project. The management cited that NHAI
would aim to capitalize the present aggression in the market and would try and maximize
project awards while the market optimism remains.
Revise estimates and target price to Rs185/share; reiterate BUY
We reiterate our BUY recommendation on the stock based on (1) relatively attractive
valuations, (2) strong order book, which provides near-term earnings visibility and (3)
positive long-term outlook for infrastructural investments. Key risks include (1) sensitivity to
base-year traffic and traffic growth assumptions, (2) margin pressures due to volatility in
commodity prices, (3) higher-than-expected interest costs, and (4) deterioration in working
capital parameters. Our SOTP-derived target price of Rs190 (Rs175 earlier) is comprised of
(1) Rs101/share from the construction business based on EV/EBITDA multiple of 6X to
FY2012E estimate, and (2) Rs84/share from stake in SIPL.
4QFY11 results highlights
Strong revenue growth likely led by execution of BOT projects. Sadbhav reported
strong revenue growth of 129% yoy in 3QFY11 to Rs10.5 bn, significantly ahead of our
estimates of Rs6.4 bn. The strong growth was likely led by strong execution large BOT
projects in the backlog of the company. The company is likely to have started execution
of all the BOT projects in this quarter leading to the strong revenues – only Rohtak-
Panipat project was awaiting appointed date (management had expected to receive it in
Feb, 2011).
EBITDA margin contracts on higher construction expenses. Sadbhav reported
EBITDA margin of 8.7%, down 320 bps yoy and 140 bps on a sequential basis. The lower
EBITDA margin was primarily on account of higher construction expenses as a percentage
of sales which increased to 87.6% in 4QFY11 from 82.2% in 4QFY10.
Net PAT of Rs539 mn, almost trebles yoy .Sadbhav reported a net profit of Rs539 mn,
up 197% yoy primarily led by the strong revenue growth. Slightly lower effective tax rate
of 29% in 4Q was primarily on account of an adjustment for excess tax provision in
earlier year.
Consistent performance results in strong FY2011 result. For the full-year ending
March 31, 2011, Sadbhav reported revenues of Rs22.1 bn, up 76% yoy and about 22%
ahead of our estimate. Margins contracted by about 80 bps yoy to 10.2% leading to a
net PAT of Rs1.2 bn in FY2011, up 122% yoy from Rs538 mn in FY2010.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Sadbhav Engineering (SADE)
Construction
Expect strong growth backed by execution of BOT projects. Highlights from the
results conference call were (1) low margins attributed to higher irrigation revenues,
subcontracting, change in revenue recognition policy; we build about 10.25% margins,
(2) we expect subcontracting to decline in FY2012E (3) several project significantly (3-6
months) ahead of schedule and (4) we build in revenue growth of 36% in FY2012E.
Low working capital likely to remain as BOT contributes to major share of revenues.
Retain BUY with a revised target price of Rs190 (Rs175 earlier).
Low margins on higher irrigation revenues, subcontracting, change in revenue recognition policy
The lower EBITDA margin in 4QFY11 (reported 8.7%) was attributed to (1) a higher proportion of
revenues from low-margin irrigation segment (operates at average margins of 6.5-8%), (2) change
in revenue booking methodology in which lower inflation factor is built in during the initial phase
of the project and higher later, and (3) higher proportion of revenues from sub-contracted works.
We believe the proportion of revenues from sub-contracted work is likely to decline in FY2012 as
Rohtak-Panipat and recent cash contract project would start contributing to revenues (in-house
construction). The management expects to maintain historical margins of 10-11%.
Ahead of schedule in several projects under execution
The management cited that they are well ahead of scheduled in most of the projects under
construction viz. (1) Hyderabad-Yadgiri, (2) Bijapur-Hungud and (3) Maharashtra Border- Dhule.
The management also expects to complete the Hyderabad-Yadgiri and Rohtak-Panipat project at
least six months ahead of schedule. The company has completed the financial closure and received
appointed date for all its projects in its portfolio. The financial closure of its projects allows the
company to start execution as well as facilitates the company to bid for further projects.
Low working capital expected to continue as BOT to contribute to significant share of revenues
Net working capital (excluding cash) improved to 66 days of sales at end-FY2011 versus about 125
days at end-FY2010, likely on higher revenue proportion from execution of in-house BOT projects.
The improvement was led by lower debtors (113 days of sales versus 128 at end-FY2010) and
lower loans and advances (97 days versus 136 a year ago). We expect working capital requirement
to remain at the low levels going forward as BOT projects would contribute bulk of the revenues.
Revise estimates and target price to Rs190/share; reiterate BUY
Revise estimates to Rs10 and Rs12.1 from Rs8.7 and Rs10 for FY2012E and FY2013E, respectively,
and revise our target price to Rs190(from Rs175). Retain BUY on (1) strong execution and order
book, (2) strong balance sheet, (3) funded BOT projects and (4) attractive valuations
Believes that pie has enough for all though near-term competition is intense
The management believes that the opportunities in the road sector is large enough and
there is no need for aggressive bids. However, they also cited stiff competition in the nearterm
projects, especially for the large ultra-mega road projects.
The intense competition was also highlighted during our recent meeting with NHAI
management with several projects going on a premium basis. Several smaller, local players
have also started bidding, especially for small-sized projects. For instance, in a recent bid for
the Kota-Jhalawar 2-laning project, Keti Constructions (a small local developer) has emerged
as the L1 bidder. The company won the project on a premium basis of Rs11 mn – this is
versus NHAI’s expectation of Rs20 bn VGF for the project. The management cited that NHAI
would aim to capitalize the present aggression in the market and would try and maximize
project awards while the market optimism remains.
Revise estimates and target price to Rs185/share; reiterate BUY
We reiterate our BUY recommendation on the stock based on (1) relatively attractive
valuations, (2) strong order book, which provides near-term earnings visibility and (3)
positive long-term outlook for infrastructural investments. Key risks include (1) sensitivity to
base-year traffic and traffic growth assumptions, (2) margin pressures due to volatility in
commodity prices, (3) higher-than-expected interest costs, and (4) deterioration in working
capital parameters. Our SOTP-derived target price of Rs190 (Rs175 earlier) is comprised of
(1) Rs101/share from the construction business based on EV/EBITDA multiple of 6X to
FY2012E estimate, and (2) Rs84/share from stake in SIPL.
4QFY11 results highlights
Strong revenue growth likely led by execution of BOT projects. Sadbhav reported
strong revenue growth of 129% yoy in 3QFY11 to Rs10.5 bn, significantly ahead of our
estimates of Rs6.4 bn. The strong growth was likely led by strong execution large BOT
projects in the backlog of the company. The company is likely to have started execution
of all the BOT projects in this quarter leading to the strong revenues – only Rohtak-
Panipat project was awaiting appointed date (management had expected to receive it in
Feb, 2011).
EBITDA margin contracts on higher construction expenses. Sadbhav reported
EBITDA margin of 8.7%, down 320 bps yoy and 140 bps on a sequential basis. The lower
EBITDA margin was primarily on account of higher construction expenses as a percentage
of sales which increased to 87.6% in 4QFY11 from 82.2% in 4QFY10.
Net PAT of Rs539 mn, almost trebles yoy .Sadbhav reported a net profit of Rs539 mn,
up 197% yoy primarily led by the strong revenue growth. Slightly lower effective tax rate
of 29% in 4Q was primarily on account of an adjustment for excess tax provision in
earlier year.
Consistent performance results in strong FY2011 result. For the full-year ending
March 31, 2011, Sadbhav reported revenues of Rs22.1 bn, up 76% yoy and about 22%
ahead of our estimate. Margins contracted by about 80 bps yoy to 10.2% leading to a
net PAT of Rs1.2 bn in FY2011, up 122% yoy from Rs538 mn in FY2010.
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