IDFC Securities - Sadbhav Engineering (SADBHAV) Sadbhav Engineerings Q2FY19 results (Outperformer) - Lower execution; to pick-up pace in H2

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IDFC Securities

Sadbhav Engineering's Q2FY19 results (Outperformer) - Lower execution; to pick-up pace in H2

Q2FY19 result highlights

Sadbhav Engineering’s (SEL) earnings were below our estimate led by lower revenues. PAT grew 20.2%yoy to Rs383m (est: Rs456m).
Revenue declined 0.4%yoy to Rs6.9bn (est: Rs8.7bn). EBITDA grew 5.8% yoy to Rs833m and was below estimate of Rs980m. EBITDA margin grew 70bp yoy to 12.3% (est: 11.3%) led by better revenue mix.
Other income (including interest income of Rs160m from SIPL) grew 68.7%yoy to Rs226m and was ahead of estimate of Rs195m.
Interest expense (gross) grew sharply by 25.8%yoy to Rs433m (est: Rs435m) due to increase in debt levels. Gross debt as on Sep 2018 stood at Rs15.1bn as against Rs14.3bn on Jun 2018. Loans to SIPL stand at ~Rs4.5bn as on Sep 2018.
SEL’s NWC levels have increased in Sep 2018 partly due to lower creditors (in lieu of upfront discounts in raw material costs). NWC is likely to reduce going forward led by improved debtor recoveries and receipt of mobilization advances of Rs6bn for new projects.
Order inflow for Q2FY19 stood at Rs16.2bn with current order backlog on net basis (excluding GST) at Rs137bn (3.9x TTM revenue). SEL has guided for fresh order inflow of ~Rs35-40bn in H2FY19. SEL is also L1 in metro orders worth Rs11.5bn and in an irrigation order worth Rs2bn.
Gross toll collection grew 11.8%yoy to Rs2.7bn led by strong traffic growth on key assets.

Key positives: Strong order backlog, strong bidding pipeline and recovery of L&As from SIPL from June-18 levels.

Key negatives: Lower than expected execution during the quarter.

Impact on financials: Downgrade in FY19E/FY20E earnings by 7.1%/2.7% led by lower revenues and higher interest expenses.

Valuations & view

We estimate 19.7% revenue CAGR over FY18-20E for SEL, led by a strong order backlog of Rs137bn (3.9x TTM revenues) and a high share of executable orders. Margins and working capital levels too should improve going forward, led by a better revenue mix, improved recoveries and receipt of yet to be drawn mobilization advances. We estimate 30.4% pre-tax earnings CAGR over FY18-20E. However, due to emerging challenges on availability of funding and higher interest rates in the country, we have lowered our EPC business multiple by 20% to 15x, thereby valuing EPC business at Rs36bn. Adjusted for Rs136/sh (of SEL) value of SIPL, SEL trades at 5.4x FY20E standalone earnings. Maintain outperformer with a revised SoTP based TP of Rs343

28/11/2018 8 EN

Underlying

Sadbhav Engineering

Sadbhav Engineering Limited is a construction company. The Company is engaged in the construction and maintenance of roads and highway, and irrigation system (canal). The Company is also engaged in the site preparation for mining, including overburden removal and other development. The Company's segments include EPC Contracts and BOT (Toll & Annuity). The Company has projects in the roads and highways, bridges, rail metro projects, irrigation supporting infrastructure, and the mining sector. Its engineering, procurement, construction (EPC) projects in roads and highways are Rohtak-Hissar section, Malavalli-Pavagada section, Ambala-Kaithal section, and Yamunanagar-Saha Barwala-Panchkula section of Haryana. The Company's Mining sector deals with excavation of overburden and mining of minerals, such as coal, uranium and lignite. It has excavation work at Mangrol lignite mines, Gujarat. It is also engaged in the construction of earthen dams, syphon, remodeling and improvement of canals.

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INE226H01026 National Stock Exchange of India India

Provider

IDFC Securities

IDFC Securities Ltd., a subsidiary of the Infrastructure Development Finance Company (IDFC) wherein the Government of India holds a 20% interest, is India's leading equities broker catering to most of the prominent financial institutions, both foreign and domestic investing in Indian equities. A research team of experienced and dedicated experts ensures the flow of critically investigated stock ideas and portfolio strategies for our clients. Our coverage spans across various growth sectors such as agriculture, automobiles, Consumer Goods, Technology, Healthcare, Infrastructure, Media, Power, Real Estate, Telecom, Capital Goods, Logistics, Cement amongst other sectors. Our clients value us for our strong research-led investment ideas, superior client servicing track record and exceptional execution skills.

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Sadbhav Engineering's Q2FY19 results (Outperformer) - Lower execution; to pick-up pace in H2

Increased risk weighs on SADBHAV ENGINEERING, penalising its rating down to Slightly Negative

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Ambuja Cement's Q4CY19 results (Outperformer) - In line; cost efficiencies at play

Event update: Aurobindo Pharma (Outperformer) - Unit IV receives EIR; positive outcome

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