McNally Bharat Engineering-Management holds guidance, BUY:: Emkay

Visit http://indiaer.blogspot.com/ for complete details �� ��

McNally Bharat Engineering

Management holds guidance, Reiterate BUY

BUY

CMP: Rs 239                                       Target Price: Rs 418

---

n     Q2FY11 performance remains below estimates - revenue growth was healthy at 32% yoy to Rs4 bn, but APAT growth at 10% yoy to Rs97 mn was below expectations

n     CMT springs positive surprise on qoq basis – revenues up 46% qoq and PBT up 425% qoq. MSE failed to deliver – revenues down 10% yoy and APAT down 24% yoy

n     Despite lower Ebidta margins in H1FY11 - reiterates consolidated revenue guidance for FY11E of Rs25 bn and EBITDA margins at 10%, lending much needed comfort

n     Valuations attractive at 8.1X FY12E - Reiterate ‘BUY’ rating with target price of Rs418/Share

Q2FY11 performance below estimates- EBITDA margins drop 150 bps yoy

Post a subdued Q1FY11, McNally Bharat (MBE) posted strong revenue (standalone)

growth at 31.7% yoy to Rs4.0 bn. However, its operational performance was impacted

by 150 bps yoy drop in EBITDA margins, posting negative surprise. Sharp drop in

margins is attributed to (1) unfavorable project mix and (2) high operational costs - on

much lower revenue base (e.g. employee costs moved from 5.5% of revenues to 7.8%

of revenues). Consequently, EBITDA growth at 2.9% yoy to Rs219 mn and net profit

growth at 9.6% yoy to Rs97 mn – remain below estimates.

KHD Humboldt posts positive surprise, But MSE performance was

lackluster

KHD Humboldt (CMT) posted robust performance in Q2FY11 on sequential basis – (1)

revenues up 46% qoq to Rs1.1 bn, (2) EBITDA up 407% qoq to Rs152 mn and (3) PBT

up 425% qoq to Rs126 mn. However, McNally Sayaji (MSE) performance remained

lackluster for the second consecutive quarter – yielding negative surprise. MSE’s

revenues declined 10% yoy to Rs620 mn, EBITDA margins declined 110 bps yoy and

APAT dropped 24% yoy to Rs52 mn – led by slow ramp-up in Asansol unit and

unfavorable product mix.

Order book at Rs45 bn, L1 in orders worth Rs5 bn

After witnessing strong order inflows in past 5 quarters, MBE witnessed subdued order

inflows during Q2FY11 - down 69% yoy & qoq to Rs2.7 bn. Consequently, consolidated

order book declined marginally by 6% qoq to Rs45.2 bn (2.2X FY10 revenues). Order

book break-up is Standalone - Rs40.1 bn, MSE - Rs2.8 bn and CMT - Rs2.4 bn.

Company indicated robust bid-pipeline at Rs90 bn (including L1 orders worth Rs5 bn).

Retains consolidated revenue guidance of Rs25 bn for FY11E and

negates any one-offs or write-offs in project execution

Company reiterated its guidance for FY11E i.e. revenues of Rs25 bn and consolidated

EBITDA margins at 10%. It also negated occurrence of any write-offs or one-offs in

project execution.



¾ McNally Bharat (Standalone) – Led by a healthy order backlog, Company guided for
revenues of Rs19 bn in FY11E (implied revenue growth at 36% yoy in H2FY11E) with
margins of about 7% (Vs 5.5% in H1FY11). The management has also indicated no
plans equity dilution in parent company for fund raising.
¾ McNally Sayaji (MSE) – MSE would have stronger H2FY11E – expect revenues to
double to Rs2.3 bn in H2FY11, led by pick up in utilization at Asansol facility. MSE is
expected to report revenues of Rs3.4 bn in FY11E with EBITDA margins of 15-16% and
PBT margins of 11-12%. Benefits of Baroda plant expected from FY12E.
¾ KHD Humboldt (CMT)– Company has guided for revenues of Rs2.8 bn for FY11E (Vs
Rs1.9 bn in H1FY11) with EBITDA margins of 10% and PBT margins of 8-9%.




Reiterate ‘BUY’ rating
Led by robust order backlog of Rs40.1 bn and management confidence for timely and
profitable execution (negates occurrence of one-offs or write-offs in project execution), we
maintain a positive bias on the company. We maintain earnings estimates of Rs24.3/Share
and Rs30.3/Share. After price correction, MBE is trading at compelling valuations of 10.1X
FY11E and 8.1X FY12E. We retain our BUY recommendation with target price of
Rs418/Share.