Powerful growth

PENNY WISE

Mcnally Bharat is one of the biggest beneficiaries of the huge capex happening in steel and power.

Like other engineering stocks, Mcnally Bharat has also seen a phenomenal rise in its stock price in the past one year thanks to the huge order inflows amid robust economic activity in the country.

Analysts feel that its stock may remain flattish after the sharp rise in the past three months "� the stock has gained a whopping 51 per cent compared to Sensex gain of 14 per cent "� and in the absence of immediate triggers to push the stock further.

Says Nishit Master, analyst, Anand Rathi, "Since the milestone payments for most of the new orders will start from FY09 onwards, there does not seem to be any major trigger in the short term, except news relating to some order inflows."

However, analysts are bullish on the stock over a longer time frame considering its strong material handling capabilities and the business opportunity therein.

Mcnally is engaged in providing turnkey solutions in the areas of material handling, steel sector application, ash handling and mineral processing.

It also manufactures some parts of material handling equipments at its two factories in Jharkhand and Bangalore. It has a technical collaborations with some of the world's leading firms for each of its business activities.

While its projects business constitutes over 90 per cent of the turnover and drives volumes and sales, the equipments business is more profitable and provides an upside to margins. Its projects business also generates demand for its equipments business.

Power and performance
The company's performance in the last quarter of FY07 was below analyst expectations both on revenue and operating profit front due to the legacy of low margin orders booked in 2004.

Net sales grew 25 per cent to Rs 170.7 crore while operating profit declined by 12 per cent to Rs 5.4 crore. Net profit jumped two fold to Rs 6.4 crore primarily due to a Rs 5 crore profit on sales of investments.

However for the full year, the company reported a robust topline growth of 52 per cent to Rs 504 crore and operating profit leaped 84 per cent to Rs 28.2 crore.

Further, net profit also got a boost, as it more than doubled to Rs 18 crore due to five fold jump in other income. 
 

TO HIGH MARGIN SEGMENTS
Contribution margin	%
Mineral processing	18
Steel sector application	16
Material handling	14
Port handling	12
Ash handling	12
Water/Road	8
Equipment	35
Source: Analysts

Among all its user industries, the company is increasingly focusing on the steel and power sectors which command high margins and also offer a huge potential thanks to the massive capex plans lined up for the next few years.

SAIL, which is the company's main customer, is incurring a capex of Rs 42,000 crore over the next five years in its RINL, IISCO, Bokaro and Durgapur divisions which are in the radius of approximately 45 kms from the company's Bokaro factory in Jharkhand.

Thus the addressable market for the company from this segment alone is Rs 20,000 crore.

Further, the huge investments to the tune of Rs 1.33-1.7 lakh crore in the entire metals sector over next five to seven years translates into an opportunity of Rs 6800 crore for the mineral processing segment of the company.

Even the power sector offers huge potential due to 50,000 MW of capacity addition expected over FY07-12, which means a total capital expenditure of Rs 11,250 crore for material handling equipments.

As a result of this, the steel and power segment formed over 60 per cent of its order book as on March 2007 as compared to just 10 per cent in the corresponding period last year.

According to the company, its future orders are going to be more from steel and power companies. Its current order book stands at Rs 1125 crore while another Rs 2000 crore worth of order for steel sector applications is expected to be finalised in a month's time. Its order book to sales ratio of 2.2x (excluding the orders in pipeline) provides crystal clear visibility to earnings.

Good guidance
Thanks to India's robust macroeconomic environment and the company's unique positioning in the two key core sectors (which also pose high entry barriers), the management is targeting much faster growth than in the past.

Says Prabir Ghosh, chief financial officer, Mcnally Bharat, "We target to achieve a topline of Rs 750 crore in FY08 and at least Rs 1000 crore in FY09."

It clocked a turnover of about Rs 500 crore in FY07. The company plans to achieve a CAGR growth of at least 30-40 per cent in the topline over the next three years. 
 

PROFIT MOVING FASTER
Financials (Rs crore)	FY06	FY07	% chg	FY08E	FY09E	CAGR
Net sales	331.20	504.00	52.18	750.00	1000.00	40.86
Operating profit	15.30	28.20	84.31	52.50	90.00	78.65
OPM (%)	4.60	5.60	97.55 bps	7.00	9.00	"�
Adj net profit	5.25	18.10	244.76	31.90	45.00	57.68
Adj NPM (%)	1.60	3.60	200.6 bps	4.25	4.50	"�
Source: Company

In order to support such high growth, it is setting up another plant in West Bengal at an investment of about Rs 20 crore mainly catering to the steel and power segments.

Currently, Mcnally's operating margin is about 6 per cent and is expected to improve to double digits in the next couple of years.

This seems achievable since the steel and power segments yield comparatively higher margins. Growth in the equipments business too will contribute to higher profitability. Edelweiss expects the operating margins to increase by 200 bps and 300 bps in FY08 and FY09 respectively over FY07.

Analysts expect the company's performance to be strong this year but next year would be even better as the billing of the new orders procured now will start in FY09.

Edelweiss expects revenue and net profit to grow at a CAGR of 43 per cent and 93 per cent respectively over FY07-09E, expecting an improvement in the EBITDA margin from 5.6 per cent in FY07 to 10.5 per cent in FY09E.

Mcnally trades at 20 times and 10.8 times its earnings for FY08 and FY09 respectively based on consensus EPS estimates.

Though its closest peer namely Elecon Engineering and TRF trade at a similar valuation for FY08 estimated earnings, they trade at relatively higher valuation of 14-15 times on FY09 basis.