Revenue visibility improving for McNally Bharat

After achieving its highest ever turnover and net profit (reported) in FY12, McNally reached another milestone this year with the highest ever order inflow of Rs 2,898 crore (till date), more than its annual target of Rs 2,600 crore

McNally Bharat Engineering’s stock has gained almost six per cent in the past three trading sessions after it announced the receipt of a Rs 733-crore order from ACC. This adds significantly to the orders it has bagged this year.

Although there are some concerns as well, like rising interest costs, which need to be monitored, the growth outlook is looking better while potential upside for the stock is about 30 per cent.

The latest order, which is a full cement contract involving onshore supply, civil construction and installation and erection of ACC's new cement plant, also opens a new business avenue as it is the first such job in India that the company has bagged.

McNally Bharat is a part of the Williamson Magor Group and engaged in providing turnkey solutions to many core industries and infrastructure sector. It has constructed over 300 plants on a turnkey basis till date.

Robust order inflow
After achieving its highest ever turnover and net profit (reported) in FY12, McNally has reached another milestone this year with the highest ever order inflow of Rs 2,898 crore (till date), more than its target of Rs 2,600 crore. There could be further order inflows of Rs 1,500 crore given back-of-the-envelope calculations and the fact that, typically, the last quarter is the busiest for companies in the infrastructure sector.

Says Deepak Khaitan, chairman of the company, “The current (consolidated) order book stands at Rs 4,000 crore. We hope to open with an order book of about Rs 4,500 crore for the next year. Further, the company is planning to execute Rs 900-1,000 crore worth of orders in the last quarter.”

Though the company does not see economic growth improving dramatically in the next six months, it expects a pick-up next financial year. For McNally though, the pipeline remains robust at an estimated Rs 12,600 crore. Hence, the pace of order inflows looks sustainable even from a medium- to long-term perspective.

Valuation
Notably, the stock looks undervalued given the market capitalisation of Rs 319 crore and FY12 consolidated revenues of Rs 2,643 crore. Valuation of 4.6 times FY14 estimated earnings is also below the average target multiple of six times.

However, the Street has been pessimistic, as the company’s balance sheet deteriorated in the past few years due to stretched working capital on account of payment delays. The company’s standalone gross debt to equity ratio of 1.1 times in FY12 jumped to 1.8 times as in the September quarter (same as the consolidated debt to equity ratio in FY12).

This also led to leap in interest costs and squeeze in profitability, both in FY12 and first half of FY13.

Despite performing extremely well on the operational front (amid tough market conditions, competition and a mere 9.4 per cent rise in revenues) with operating profit margin jumping 133 basis points year-on-year to 7.7 per cent in the first half of FY13, net profit margin (NPM) slipped 30 basis points to only 1.8 per cent, as interest costs jumped 74.5 per cent and ate away 61.3 per cent of the operating profit earned.

Though the stock is a good long-term pick, concerns on profitability of incremental order inflows (from newly ventured low-margin business like infrastructure and construction that formed 24 per cent of order inflows in the six months ended September), profitable execution of the current order backlog and rising debt are key overhangs and need to be monitored.