For 4QFY2012, Sadbhav Engineering (SEL) reported a mixed set of numbers, with
revenue coming marginally higher than our estimates while earnings coming in
lower than our expectations. SEL had an order inflow of `2,844cr (majority
contribution by the two recent road BOT projects) during FY2012, taking its order
book to `7,554cr (2.8x FY2012 revenue), which provides good revenue visibility.
We maintain our Buy view on the stock.
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Mixed performance: On the top-line front, SEL reported a 13.6% yoy decline to
`905cr, marginally higher than our estimate of `856cr. It should be noted that
the decline was on account of high base in 4QFY2011. On a sequential basis,
revenue grew by 24.8%. On the margin front, the company posted EBITDAM of
9.5%, tad lower than our estimate of 10.0% owing to development cost incurred
in projects but revenue not booked. Interest cost stood at `15cr, registering a
decline of 10.4% yoy/5.6% qoq. On the earnings front, SEL reported a 13.0% yoy
decline to `47cr, lower than our expectation of `53cr. We were expecting higher
earnings on the back of bonus income as per the company’s guidance.
Outlook and valuation: For FY2013, SEL has given a flat guidance on the revenue
front primarily due to completion of Dhule Palesnar and Bijapur Hungund
projects. Further, the two recently won road BOT projects – Gomti ka Chauraha
and Solapur Bijapur – will start contributing to construction revenue post
September 2013. On the EBITDAM front, the company expects its margin to stay
at 10.5-11%. SEL’s management has reiterated that the company would continue
to focus on the sustainability of its margins. We continue to maintain our Buy view
on the stock with an SOTP target price of `182, owing to robust order backlog of
`7,554cr (2.8x FY2012 revenue), strong balance sheet (0.5x net debt/equity
FY2012) and as the company’s equity requirement for underconstruction/
Investment arguments
Sound balance sheet: SEL has a sound balance sheet with parent net debt/equity
of 0.5x as of FY2012. The company’s working capital position is also much better
than its peers. This has insulated the company’s earnings to a great extent in such
an exorbitant interest rate scenario, which has been the key concern for the decline
in the sector’s earnings, and has aided the company to outperform on the bourses.
Funds tied up for projects in hand: SEL had successfully raised `400cr through
stake dilution (22.2% in August 2010) in SIPL. This has made SEL fully tied up for
the projects in hand. This money raising was a timely development for SEL, given
its then huge equity commitment towards under-development projects. Also, this
helped the company to focus on project execution, which is SEL’s forte, leading to
early completion of projects – a rare phenomenon in the industry.
Key concerns
Interest rate: Road BOT projects are vulnerable to interest rate fluctuations and any
hike in interest rates would increase SEL’s interest costs.
Commodity risks: Road players are facing pressures from the recent price inflation
in commodities such as cement, steel, bitumen and diesel, which have a direct
impact on margins.
Awarding from NHAI: Slowdown in awarding activity by NHAI would hit order
inflow for road-focused players such as SEL.
Company background
SEL was incorporated in 1988. The company is a leading EPC and infrastructure
development company based in Ahmadabad. SEL is present in the roads and
highways (71.5% of order book), irrigation (13.2%) and mining (15.3%) sectors.
The company forayed into the road sector in 1995 and has since then executed
several projects for NHAI and state governments. Currently, SEL is one of the
largest BOT players in India with 11 projects in its portfolio through its 80.0%
owned subsidiary, SIPL.
Equity requirement for BOT projects
SEL’s subsidiary, Sadbhav Infrastructure Project Ltd. (SIPL) has a total equity
requirement of ~`919cr (excluding Solapur Bijapur and Gomti ka Chauraha
projects), of which the company has already invested `731cr. For the balance
`188cr, SIPL can utilize cash balance of `162cr, expected generation of `80cr-
90cr margin from Maharashtra Border Check Post project (unexecuted portion of
`210cr), expected savings (in terms of the debt service reserve account and
contingencies) on BOT projects (`250cr from four projects – Rohtak-Panipat,
Bijapur-Hungood, Hyderabad-Yadgiri and Maharashtra Border Check Post) and
sanctioned loan from ICICI Bank of `180cr. Hence, SIPL sits on a comfortable
position for the balance equity funding requirement for its BOT projects.
Outlook and valuation
For FY2013, SEL has given a flat guidance on the revenue front primarily due to
completion of Dhule Palesnar and Bijapur Hungund projects. Further, the two
recently won road BOT projects – Gomti ka Chauraha and Solapur Bijapur – will
start contributing to construction revenue post September 2013. On the EBITDAM
front, the company expects its margin to stay at 10.5-11%. SEL’s management has
reiterated that the company would continue to focus on the sustainability of its
margins. We continue to maintain our Buy view on the stock with an SOTP target
price of `182, owing to robust order backlog of `7,554cr (2.8x FY2012 revenue),
strong balance sheet (0.5x net debt/equity FY2012) and as the company’s equity
requirement for under-construction/development projects is expected to be met by
internal accruals.
development projects is expected to be met by internal accruals.
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