Stock market Result Update on Sadbhav Engineering for 2QFY2012

Stock market Result Update on Sadbhav Engineering for 2QFY2012 with a Buy recommendation and a Target Price of `165 (12 months).

For 2QFY2012, Sadbhav Engineering’s (SEL) numbers came in ahead of our and street expectations. Order inflow for the quarter was at dismal `101cr as expected, but order book remains healthy at `6,259cr (2.8x FY2011 revenues). We believe SEL has performed better than its peers on the bourses and would continue to do so owing to 1) consistent quarterly growth on the earnings front unlike its peers which are marred by various headwinds; 2) better management of its finances with one of lowest leveraged balance sheet (standalone) despite a healthy portfolio of BOT assets; and 3) robust order book which lends revenue visibility. Hence, we maintain our Buy rating on the stock and as our top pick.

Strong quarterly performance: SEL reported strong 65.0% yoy growth on the top-line front to `430.4cr (`260.9cr) vs. our estimate of 48.0% growth. SEL has been able to maintain a sturdy execution pace for captive road BOT projects since the last few quarters, leading to robust revenue growth. On the margin front, the company posted EBITDAM of 10.5% (12.0%), below our estimate of 11.3% mainly due to commodity price pressures. Interest cost stood at `15.4cr (`9.0cr), registering a jump of 70.9% yoy/22.5% qoq on account of rising interest rates. On the earnings front, SEL reported 32.1% growth yoy to `18.1cr (`13.7cr), higher than our expectation of `16.9cr on account of higher top-line growth.

Outlook and valuation: SEL’s management expects the current intense competition to subside in couple of quarters, however denting the order inflow target for the fiscal. We believe that given SEL’s strong execution capabilities, healthy balance sheet, increasing opportunities on road front and expected rationality in bidding process would ensure consistent order inflows for company in FY2013 and hence investors should not be wary of slowdown on order inflow front on quarterly basis. Our SOTP-based target price works out to `165/share, implying a 25.7% upside from current levels, based on a target P/E multiple of 9x to its FY2013E earnings and valuing its BOT arm on DCF basis. Thus, we maintain our Buy view on the stock and as one of our top picks in the sector.