Sadbhav Engineering's Q3FY20 results (Outperformer) - A disappointing quarter; Asset monetisation to improve execution
Q3FY20 result highlights
- Revenue declined sharply by 58% yoy to Rs4.4bn (est. of Rs10.6bn) in Q3FY20 due to cancellation of two HAM projects. Overall, revenues have declined by 27% yoy in 9mFY20. Management attributed tight liquidity situation leading to slower disbursal of loan as the main cause for slow execution during Q3FY20 (Q4 is likely to be better)
- EBITDA declined by 51% yoy to Rs548m in Q3FY20 (vs. Rs1.1bn in Q3FY19 and below our estimate of Rs1.3bn). EBITDA margin improved to 12.5% (vs 12.0% in Q3FY19) led by increased execution on HAM projects. As a result, PAT in Q3FY20 declined by 79% yoy to Rs117m, sharply below our estimate of Rs590m.
- Order backlog stands at Rs87bn (2.8x book to bill ratio). Order book declined during the quarter as company terminated another HAM project – Tumkur Shivamogga Package III.
- SEL has revised its FY20E revenue guidance to Rs24b (Rs36bn earlier). Recently, it has received appointed date for Kim-Ankleshwar project and expects appointed date for Gadag Honali Projects in Q4.
- Stake sale to IND Infra INVIT: Six road projects have been sold to INVIT (equity value of Rs19bn), two projects have received regulatory approvals (Rs4.8bn) while regulatory approval is awaited for Ahmedabad ring road project. For sale of six road projects, Sadbhav has been issued Rs7.2bn worth of INDINFRAIVIT units and is expected to receive Rs12bn soon. Note that the management expects the entire transaction to be completed by March - 2020.
Key positives: Received appointed date for Kim-Ankleshwar project of worth Rs10bn.
Key negatives: Termination of Tumkur Shivamogga Package III project.
Impact on financials: Reduce our earnings estimates for FY20E/FY21E by 43%/28% yoy on account of slow execution; introduce our FY22E estimates
Valuations & view
Delay in appointed dates for new HAM projects, cancellation of orders and tight liquidity situation has impacted the revenues for last six quarters. However, he revenues in FY19ft Rslthy at Rs1trn reinted date for its portfolio of projects won in Fyposition than ahead of themSEL deal to sell 6 operational assets has been completed which will reduce the holding company debt and will aid company in meeting its equity requirements and working capital. As a result, execution is expected to improve from Q1FY21E onwards. The stock trades at 12x FY21E standalone EPS without adjusting for value of 68% stake in SIPL. Maintain Outperformer with a revised SoTP based price target of Rs174.
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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