IDFC Securities - Sadbhav Engineering (SADBHAV) Sadbhav Engineerings Q3FY19 results (Outperformer) - Execution improves but delayed clearances in new projects impacts outlook

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IDFC Securities

Sadbhav Engineering's Q3FY19 results (Outperformer) - Execution improves but delayed clearances in new projects impacts outlook

Q3FY19 result highlights

Sadbhav Engineering (SEL) Sadbhav Engineering (SEL) reported broadly in-line quarterly earnings. Execution improved but increased tax rate led to 9%yoy decline in PAT to Rs563m (est: Rs587m).
Revenue grew 10.3%yoy (+34%qoq) to Rs9.3bn (est: Rs9.8bn). EBITDA grew 4.9% yoy to Rs1.1bn (in-line). EBITDA margins were strong at 12% but declined 60bp yoy on a high base (est: 11.4%).
Other income (including interest income of Rs177m from SIPL) grew 43.1%yoy to Rs304m and was ahead of estimate of Rs210m.
Interest expense (gross) grew by 10.3%yoy to Rs468m (est: Rs435m). Gross debt grew ~Rs500m qoq to Rs14.6bn in Dec 2018. Loans to SIPL stand at ~Rs4.6bn as on Dec 2018.
Order inflow for 9MFY19 stood at Rs30.9bn with order backlog at Rs129bn (3.5x TTM revenue). Currently, projects worth Rs280bn are up for bidding from NHAI and additional projects worth Rs56bn are expected to come up for bidding from NHAI by Mar-19.
With delay in receipt of appointed dates for 4 new HAM projects, SEL has lowered its FY20 revenue guidance from Rs50bn to Rs45bn.
Gross toll collections grew 5.9%yoy to Rs2.2bn led by traffic decline on Rohtak Panipat, Bijapur Hungud, Maharashtra Border check post and Dhule Palesner. Other projects witnessed moderate/weak growth.

Key positives: Strong order backlog, strong bidding pipeline

Key negatives: Elevated debt levels and delay in financial closures and appointed dates for new HAM projects.

Impact on financials: Downgrade in FY20E earnings by 8.6% led by lower revenues and higher interest expenses.

Valuations & view

Given the delay in appointed dates for new HAM projects, we lower our FY20 revenue from Rs50bn earlier to Rs45bn now. Nevertheless, the company’s margins have improved and working capital levels albeit elevated have stabilised and should reduce going forward led by better revenue mix, improved recoveries and receipt of mobilization advances. Notwithstanding a prolonged period of disappointment and delays in monetisation of assets, the management remains committed to completing the same over the next few months while also being pragmatic on the valuation expectations. With the steep ~25% correction over the last 3 months, the stock trades at 12x standalone EPS without adjusting for value of 68% stake in SIPL. Maintain outperformer with a revised SoTP based price target of Rs287.

18/02/2019 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

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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 Q3FY19 results (Outperformer) - Execution improves but delayed clearances in new projects impacts outlook

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

Monthly LMI Update Independent Investment Research

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GMR Infrastructure's Q3FY20 results (Outperformer) - Air traffic growth improved at the airports; deleveraging process gains momentum

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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