MOSL: SADBHAV ENGINEERING (Buy)-Well placed for upcoming opportunity-Focus on balance sheet improvement

​SADBHAV ENGINEERING: Well placed for upcoming opportunity; Focus on balance sheet improvement

(SADE IN, Mkt Cap USD1.0b, CMP INR380, TP INR435, 15% Upside, Buy)

We recently met management of Sadbhav Engineering (SADE) at our ‘Midcap Conference’.

• SADE sees robust business opportunity coming up in the road sector post the Bharatmala project announcement – the company expects annual awarding from the NHAI to be ~INR800b in FY18 versus INR600b in the previous year.
  
• The company has maintained its standalone revenue guidance of INR38b/INR45b for FY18/FY19, and expects the operating margin to be in the range of 11-12%. Order inflow is expected to be ~INR70b for FY18.
  
• Management has reiterated its commitment to reduce debt incrementally by ~INR2b to INR12.5b by end-FY18.
  
• Focus on strengthening balance sheet quality: SADE's balance sheet quality improved in 1HFY18, led by its focus on reducing debt and overall working capital requirement. The company was able to bring down debt by INR3.5b in 1HFY18, and expects a reduction of another INR2b in 2H. Debt reduction would be driven by the recovery of stuck debtors and the receipt of mobilization advance and also money from loans given to SIPL. A lean balance sheet would provide SADE with the necessary growth capital to take advantage of the massive capex planned by the government under the Bharatmala program.
  
• Expect NHAI ordering to pick up in 4Q, project pipeline provides confidence: SADE expects NHAI ordering to be ~INR800b this fiscal, as against INR600b in FY17. The company expects ordering to pick up hereon, especially in 4QFY18. The NHAI has already floated RFP of INR600b, which should be finalized by end-FY18. SADE expects order inflow of INR70b in FY18, of which it has already bagged orders worth INR35b in 1HFY18.