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Sadbhav Engineering
Sadbhav’s stock price has risen 26% over the last two years whilst all other
infrastructure/construction company’s stock prices have fallen 25-80%.
This superlative performance can be attributed to Sadbhav’s: (a) superior
accounting quality; (b) continuing strength in cost competitiveness; and (c)
well funded infra BOT assets. Industry leading 44% CAGR in revenues and
steady net margins over FY09-11 signify the importance of well-managed
balance sheet for delivering profitable growth.
Company Background
Incorporated in 1988, Sadbhav Engineering (SEL) is an Engineering, Procurement
and Construction (EPC) company catering to the roads/highways, mining and
irrigation sectors. SEL also has an infrastructure asset portfolio of four operational
road projects and five under construction road projects under its subsidiary
Sadbhav Infrastructure Pvt Ltd (SIPL). Sadbhav Engineering holds 78% stake in its
BOT asset portfolio subsidiary.
Recent Financial Performance
SEL posted strong performance in 1HFY12, as stand-alone revenues grew by 52%
(YoY) and stand-alone PAT grew by 32% (YoY). However, due to decline in EBITDA
margin (114bps YoY decline) in 1HFY12, PAT growth was lower than the revenue
growth. We highlight that SEL has a strong balance sheet, as unlike other
construction companies which are suffering from high debt:equity, Sadbhav’s
stand-alone debt:equity is 0.6x at the end of Sept-11 (industry average ~1.0x) .
Outlook
Sadbhav’s superior cost competitiveness coupled with relatively low debt: equity
should enable it to bid competitively against peers who are capital starved and are
reeling under rising financial cost pressures as visible from their highly leveraged
balance sheets consuming large proportion of EBITDA for debt servicing. The stock
(including embedded value) is presently trading at 11.5X FY13 one year-forward
earnings which are a 36% premium to its construction peers. This premium is
clearly warranted given Sadbhav’s superior cash flow generation profile, no
immediate equity dilution risks and a strong balance sheet.
Conference Meeting Notes
Sadbhav Engineering represented by Mr Nitin Patel, Exec. Director
Analyst:
Nitin Bhasin, nitinbhasin@ambitcapital.com, Tel: +91 22 3043 3241
1. Consolidation likely in the roads segment: Management highlighted that
few road developers plan to dilute their stakes in the existing road projects for
either lowering their existing debt levels or for generating funds for new
projects. Sadbhav plans to utilise its strong balance sheet/surplus cash to
acquire road BOT assets either operational or under construction at distress
valuations. Management highlighted that whilst the road developers are
demanding a valuation multiple of ~1.5x (of the equity invested) for their
assets, the true valuation of these projects is ~0.6x-0.7x as these projects are
suffering from execution delays, cost overruns and poor traffic growth.
Management expects that in the next 6-8months, road developers (sellers) will
realise the true valuations of their projects and will be willing to sell their
projects at valuations lower than equity invested.
2. Debt servicing is becoming a challenge for most of players:
Management highlighted that at the current high interest rates and debt levels,
debt servicing is becoming a challenge for most road developers. Presently,
most of its peers are capital starved and the existing projects are not
generating any cash flow (as actual traffic is significantly lower than earlier
projected estimates). Therefore, interest payments and part principal payments
are becoming a difficult task for these companies. Whilst road developers have
not yet defaulted on their interest payments, management expects that some
of the companies have very poor financial position and start defaulting in the
next 6-8 months.
3. Prefer strong balance sheet over revenue growth: Sadbhav Engineering
will remain selective and will continue to bid for road BOT projects at 16%-
17% equity IRR. Management mentioned that unlike some of its peers,
Sadbhav will neither risk its balance sheet nor compromise its cash flow profile
by taking up unprofitable BOT projects (equity IRR < 15%). Sadbhav expects
competition to moderate post March 2012 and will bid for new BOT projects in
FY13. Sadbhav’s current order book is `63bn and considering revenues of
`26bn-`27bn in FY12 (as per company’s guidance), the order book in March
2012 will be ~`50bn, which provides revenue visibility for 20-22 months. Even
if the company was not going to book any new orders, the management
expects FY13 revenues in line with FY12.
4. Cash contracts can drive order flow in the near term: In the current
environment of intense competition in the roads BOT segment, Sadbhav is
targeting cash EPC contracts in the roads (centre/state) segment. Management
highlighted that along with the BOT projects, NHAI and state Governments
(such as Karnataka, Madhya Pradesh, West Bengal etc.) are planning to award
a large number of EPC contracts over the next two years. Moreover, due to
high demands from the power sector, opportunities are increasing in the
mining segment, which offers higher margins and has low competition.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Sadbhav Engineering
Sadbhav’s stock price has risen 26% over the last two years whilst all other
infrastructure/construction company’s stock prices have fallen 25-80%.
This superlative performance can be attributed to Sadbhav’s: (a) superior
accounting quality; (b) continuing strength in cost competitiveness; and (c)
well funded infra BOT assets. Industry leading 44% CAGR in revenues and
steady net margins over FY09-11 signify the importance of well-managed
balance sheet for delivering profitable growth.
Company Background
Incorporated in 1988, Sadbhav Engineering (SEL) is an Engineering, Procurement
and Construction (EPC) company catering to the roads/highways, mining and
irrigation sectors. SEL also has an infrastructure asset portfolio of four operational
road projects and five under construction road projects under its subsidiary
Sadbhav Infrastructure Pvt Ltd (SIPL). Sadbhav Engineering holds 78% stake in its
BOT asset portfolio subsidiary.
Recent Financial Performance
SEL posted strong performance in 1HFY12, as stand-alone revenues grew by 52%
(YoY) and stand-alone PAT grew by 32% (YoY). However, due to decline in EBITDA
margin (114bps YoY decline) in 1HFY12, PAT growth was lower than the revenue
growth. We highlight that SEL has a strong balance sheet, as unlike other
construction companies which are suffering from high debt:equity, Sadbhav’s
stand-alone debt:equity is 0.6x at the end of Sept-11 (industry average ~1.0x) .
Outlook
Sadbhav’s superior cost competitiveness coupled with relatively low debt: equity
should enable it to bid competitively against peers who are capital starved and are
reeling under rising financial cost pressures as visible from their highly leveraged
balance sheets consuming large proportion of EBITDA for debt servicing. The stock
(including embedded value) is presently trading at 11.5X FY13 one year-forward
earnings which are a 36% premium to its construction peers. This premium is
clearly warranted given Sadbhav’s superior cash flow generation profile, no
immediate equity dilution risks and a strong balance sheet.
Conference Meeting Notes
Sadbhav Engineering represented by Mr Nitin Patel, Exec. Director
Analyst:
Nitin Bhasin, nitinbhasin@ambitcapital.com, Tel: +91 22 3043 3241
1. Consolidation likely in the roads segment: Management highlighted that
few road developers plan to dilute their stakes in the existing road projects for
either lowering their existing debt levels or for generating funds for new
projects. Sadbhav plans to utilise its strong balance sheet/surplus cash to
acquire road BOT assets either operational or under construction at distress
valuations. Management highlighted that whilst the road developers are
demanding a valuation multiple of ~1.5x (of the equity invested) for their
assets, the true valuation of these projects is ~0.6x-0.7x as these projects are
suffering from execution delays, cost overruns and poor traffic growth.
Management expects that in the next 6-8months, road developers (sellers) will
realise the true valuations of their projects and will be willing to sell their
projects at valuations lower than equity invested.
2. Debt servicing is becoming a challenge for most of players:
Management highlighted that at the current high interest rates and debt levels,
debt servicing is becoming a challenge for most road developers. Presently,
most of its peers are capital starved and the existing projects are not
generating any cash flow (as actual traffic is significantly lower than earlier
projected estimates). Therefore, interest payments and part principal payments
are becoming a difficult task for these companies. Whilst road developers have
not yet defaulted on their interest payments, management expects that some
of the companies have very poor financial position and start defaulting in the
next 6-8 months.
3. Prefer strong balance sheet over revenue growth: Sadbhav Engineering
will remain selective and will continue to bid for road BOT projects at 16%-
17% equity IRR. Management mentioned that unlike some of its peers,
Sadbhav will neither risk its balance sheet nor compromise its cash flow profile
by taking up unprofitable BOT projects (equity IRR < 15%). Sadbhav expects
competition to moderate post March 2012 and will bid for new BOT projects in
FY13. Sadbhav’s current order book is `63bn and considering revenues of
`26bn-`27bn in FY12 (as per company’s guidance), the order book in March
2012 will be ~`50bn, which provides revenue visibility for 20-22 months. Even
if the company was not going to book any new orders, the management
expects FY13 revenues in line with FY12.
4. Cash contracts can drive order flow in the near term: In the current
environment of intense competition in the roads BOT segment, Sadbhav is
targeting cash EPC contracts in the roads (centre/state) segment. Management
highlighted that along with the BOT projects, NHAI and state Governments
(such as Karnataka, Madhya Pradesh, West Bengal etc.) are planning to award
a large number of EPC contracts over the next two years. Moreover, due to
high demands from the power sector, opportunities are increasing in the
mining segment, which offers higher margins and has low competition.
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