Sadbhav Engineering's Q3FY18 results (Outperformer) - Growth pick-up to support valuation premium

Q3FY18 result highlights

• Sadbhav Engineering’s (SEL) earnings were ahead of estimate led by lower tax provision due to MAT credit benefit and higher other income. PAT grew 17.9%yoy to Rs618m (est: Rs566m).
• Revenue grew 8.1%yoy to Rs9.4bn (est: Rs9.5bn), EBITDA grew 12.6%yoy to Rs1.06bn (est: Rs1.1bn) and EBITDA margin grew 45bp yoy to 11.3% (est: 11.5%).
• Interest expense (gross) grew 22%yoy and 23.3%qoq to Rs424m due to payment of BG commission on utilization of additional limits and higher borrowing cost due to lower CP borrowings. SEL expects gross debt to reduce to ~Rs12.5bn by Mar 2018 from Rs14.5bn in Dec 2017.
• Other income grew 29.3%yoy (est: Rs130m) led by higher interest income form SIPL which grew 7.8%qoq to Rs139m (est: Rs119m).
• SEL expects working capital levels to come down going forward led by improved debtor recoveries (~Rs2.1bn) and receipt of mobilization advance for HAM & new EPC projects (~Rs2.2bn).
• Order inflow for 9mFY18 stood at Rs42.7bn with current order backlog at Rs96.4bn (2.7x TTM revenue). SEL is L1 in order worth Rs1.7bn.
• The provision for tax was lower due to benefit of MAT credit resulting in tax credit of Rs20m. The company has guided for effective tax rate of ~12% in FY19 and normalised corporate tax rate from FY20 onwards.
• Gross toll collection grew 13.1%yoy to Rs2.6bn led by strong traffic growth on key assets.
• FY18/FY19 guidance: Revenue at Rs37bn/Rs43bn, EBITDA margin at ~11.5%, order inflow of Rs70bn/80bn. 

Key positives: Strong order inflow.

Key negatives: Delay in receipt of appointed date for newer projects.

Impact on financials: Upgrade in FY18E/19E/20E earnings by 10.6%/17.2%/14.5% led by higher the expected other income and lower than expected tax provision. 

Valuations & view

We estimate 15  % revenue CAGR over FY17-20E for SEL, led by a strong order backlog of Rs96bn (2.7x 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 26% pre-tax earnings CAGR over FY17-20E. Adjusted for Rs168/sh (of SEL) value of SIPL, SEL trades at 14.6x FY20E standalone earnings. Maintain outperformer with a revised SoTP based TP of Rs450.