Sadbhav Engineering’s stock has slipped 14 per cent in the last six months, as compared to a 10 per cent rise in the Sensex in the same period. Investors dumped the stock as financial performance was impacted due to slower project execution of under-construction projects, delay in clearance of some road build-operate-transfer (BOT) projects and lower-than-expected toll collection on some stretches.
Since the projects stuck for clearances were significant contributors to financial performance in FY13, March 2013 quarter, or Q4, will also remain subdued. Despite the near-term concerns, analysts expect the tide to turn for the better in FY14.
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The company expects pending clearances by May, which will help boost top-line growth led by construction business. Also, a pickup in economic activity should improve toll collection of seven operational projects. In short, worst is behind the stock, which is trading close to its 52-week low level of Rs 103.05. Even as profitability will continue to be subdued thanks to increasing debt level, key overhang of uncertainty over topline growth will be addressed.
TOPLINE TO GET A BOOST
Sadbhav’s construction revenues declined by 40 per cent year on year (y-o-y) in nine months ended FY13 (9MFY13). Says Nitin Patel, executive director of the company post December 2012 quarter (Q3) results, “The scheduled date for starting Shreenathji-Udaipur (Rajasthan) and Solapur- Bijapur (Maharashtra) was October 14 for and November 28 respectively. Thus in Q3, these two projects worth Rs 2,000 crore each were supposed to start generating revenues but that did not start.” Recently he said that Shreenathji Udaipur will get clearance by March-end and Solapur- Bijapur project by the end of April, which will boost top-line in FY14.
The company’s Rajsamand-Bhilwara project will also achieve financial closure by March-end and construction will start April-end. Clearance for Karnataka state government annuity project is also expected by April-end. Both projects cost around Rs 720 to Rs 730 crore each. Further, mining and irrigation orders (around 30 per cent of order book) won in FY13 will also contribute and support growth.
The company witnessed decline in toll collection for projects. Abhinav Bhandari, analyst, Elara Capital in post result note dated February 20 anticipates larger time (12-18 months) for traffic to pick up and stabilise on these stretches. Commissioning of projects namely Maharashtra Border Check Post (60 per cent complete) and Rohtak Panipat (74 per cent complete) should partly compensate for modest growth in toll collection.
OUTLOOK AND VALUATION
Order inflow, which was a concern, was up 10 per cent sequentially in Q3 and is a positive. This could be further boosted due to further project wins besides roads (slower awarding by NHAI). The company has submitted bids for two projects worth Rs 716 crore in irrigation and three projects worth Rs 1,100 crore in mining.
Given the company’s strong balance sheet (net debt to equity of 0.5 times), better working capital position than peers, funding in place for projects in hand and robust order backlog (Rs 8,747 crore, 3.3 times FY12 revenues), analysts like the stock.
At Rs 112, the stock trades at 1.4 times FY14 book value, which is cheap compared to average target multiple of 2 times and rightly reflects the concerns. Nitin Bhasin, analyst, Ambit Capital expects a re-rating on the stock as cash flow from operational toll projects rise from FY14 and execution pickup alleviates concerns. “57 per cent and 65 per cent of Sadbhav’s equity invested in roads will be operational by end-FY13 and end-FY14 respectively from 25 per -cent at end-FY12.
Incremental tolling will lead to 44 per cent CAGR in consolidated CFO over FY12-15E, which will be sufficient to fund equity needs and interest for the existing projects, ” he says in March 8 report. Agrees Parvez Akhtar Qazi, analyst, Edelweiss Securities, in his post result note on February 19, “Commencing execution on new projects remains the key driver.”