Sadbhav Engineering's Q4FY18 results (Outperformer) - Strong order inflows to drive growth

Q4FY18 result highlights

• Sadbhav Engineering’s (SEL) earnings were below estimate led by higher interest and employee expenses. PAT grew 2.4%yoy to Rs699m (est: Rs815m).
• Revenue grew 6.9%yoy to Rs11bn (largely in line), EBITDA grew 13.2%yoy to Rs1.2bn but below estimate of Rs1.3bn due to increase in employee expense by 45.6%yoy and 46.7%qoq to Rs552m and EBITDA margin grew 60bp yoy to 11.2%, below estimate of 11.7%.  
• Interest expense (gross) grew 8.4%yoy and 16.2%qoq to Rs493m due to increase in finance charges led by higher utilization of non-fund based limits. Gross debt as on Mar 2018 stood at Rs14.9bn as against Rs14.5bn on Dec 2017. SEL expects gross debt to reduce by ~Rs2bn in FY19 led by repayment of loans by SIPL from proceeds of MBCPNL refinancing.
• SEL’s working capital levels are likely to reduce going forward led by improved debtor recoveries (~Rs4.3bn) and receipt of mobilization advances for new HAM and new EPC projects (~Rs5.9bn).
• Order inflow for FY19 stood at Rs85.9bn with current order backlog at Rs132.5bn (3.8x FY18 revenue). So far in Q1FY19 SEL is declared L1 in two projects worth Rs25.2bn (Likely EPC value). SEL has guided for order inflow of Rs80bn in FY19.
• Gross toll collection grew 10.7%yoy to Rs2.6bn led by strong traffic growth on key assets.
• FY19 guidance: Net revenue at ~Rs41bn, EBITDA margin at ~12%, capex of ~Rs1bn and nil effective tax rate due to MAT credit benefit. 

Key positives: Strong order inflows.

Key negatives: High receivables days.

Impact on financials: Upgrade in FY19E earnings by 3.2% led by lower effective tax rate and no material change in FY20E earnings. 

Valuations & view

We estimate 20% revenue CAGR over FY18-20E for SEL, led by a strong order backlog of Rs132.5bn (3.8x FY18 revenue) 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. Further, the current and future bid pipeline from NHAI, MORTH and state governments remains strong. We estimate 32.4% pre-tax earnings CAGR over FY18-20E. Adjusted for Rs137/sh (of SEL) value of SIPL, SEL trades at 13.4x FY20E standalone earnings. Maintain outperformer with a revised SoTP based TP of Rs445.