MOSL: SADBHAV ENGG. (Buy)-Performance hit by issues restricting in-hand project execution
Sadbhav Engg.: Performance hit by issues restricting in-hand project execution
(SADE IN, Mkt Cap USD0.4b, CMP INR163, TP INR225, 38% Upside, Buy)
- Operating performance below expectations: Revenue declined 1% YoY (LTL growth of 10.3%) to INR9.3b (our estimate: INR10.5b). EBIDTA increased 5% YoY to INR1.1b (our estimate: INR1.2b). Operating margin of 12% (-60bp YoY) was above our estimate of 11.5%. PAT declined 9% YoY to INR563m, below our estimate of INR656m. The miss on most fronts can be attributed to weaker-than-expected execution of projects in hand.
- In-house HAM projects execution supports Transport revenue: Transport segment (95% of revenue) grew by a healthy 23% YoY to INR8.8b, supported by strong growth of execution of in-house HAM projects. HAM EPC contributed 84% of Transport revenue (+228% YoY), while third-party EPC formed 16% (-72% YoY as third-party order book available for execution declined YoY). Irrigation segment (1.4% of revenue) de-grew by 73% YoY due to lower order backlog available for execution. Mining revenue declined by 61% YoY to INR281m. Management scaled down its FY19 revenue guidance to INR38b (prior: INR40b), given the hindrance of land availability in executing a few existing projects. Notably, 61% of the existing order book has not been contributing to revenue.
- Margin contracts due to lower contribution from EPC projects: Operating margin shrank 60bp YoY to 12.0% in 3QFY19. We note that margins in the year-ago period were supported by the execution of better-margin EPC projects (contributed 68% of revenue in 3QFY18 v/s only 16% in 3QFY19). SADE maintained its FY19 operating margin guidance of 12%.
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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