Sadbhav Engineering: 2Q FY11 results: profit up 273% YoY:: Daiwa

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Sadbhav Engineering (SADE IN) Rating:1
2Q FY11 results: profit up 273% YoY, driven by strong execution and margin increase



What has changed?
• Revenue for 2Q FY11 rose by 41% YoY on the back of robust execution. This,
together with a 100-bp EBITDA-margin improvement and lower interest costs
year-on-year led PAT to rise 273% YoY to Rs137m (our forecast: Rs76m).



Impact
• Sadbhav Engineering’s (Sadbhav) 2Q FY11 net revenue increased by 41% YoY
to Rs2.6bn due mainly to the execution of road projects, and was in line with
our forecast. The EBITDA margin improved by 100 bps year-on-year to 12%
on the back of declines in raw-material prices and a 20% revenue contribution
from high-margin mining projects. Roads, mining and irrigation accounted for
73%, 20%, and 8%, respectively, of the company’s 2Q FY11 revenue.

• Adjusted PAT rose by 273% YoY to Rs137m, due mainly to the margin
improvement and lower interest costs. Net-interest costs declined by 51% YoY
to Rs42m as a result of Rs48.2m in interest received on loans given to
subsidiaries. Sadbhav’s net-working capital declined by 28% in 1H FY11.

• The company’s orderbook stood at Rs77.8bn at the end of September 2010, ie,
4.4x our FY11 revenue forecast, with an execution timeline of 30-36 months,
providing strong revenue visibility going forward.

Valuation
• We have revised up our earnings forecasts by 9% for FY11 and 6% for FY12,
mainly to account for the strong 1H FY11 performance. Excluding Sadbhav’s
build-operate-transfer (BOT) subsidiary, Sadbhav Infrastructure Projects Ltd
(SIPL), the stock is trading at a PER of 8x on our FY12 EPS forecast. We
maintain our 1 (Buy) rating and sum-of-the-parts based six-month target price
of Rs1,791.

Catalysts and action
• Sadbhav Engineering is our top pick in the sector as we see low execution risk,
as most of its BOT projects are fully funded. We forecast an EPS CAGR of
25% for FY10-13 (including rights and warrants dilution), and the stock is
trading at an attractive valuation, in our opinion.