Sadbhav Engineering: Better visibility may lead to re-rating

Clearance of key road projects will boost construction revenues in FY14

Sadbhav Engineering’s stock has underperformed the Sensex by a wide margin in the past six months but this trend is likely to reverse in FY14, believe analysts. The stock’s underperformance can be attributed to financial performance getting impacted due to slower project execution, delay in clearance of a few build-operate-transfer (BOT) road projects and lower-than-expected toll collection on some operational stretches. Since the projects stuck for clearances were significant contributors to financial performance in FY13, the March 2013 quarter or Q4 will also remain subdued.

Positively, the company expects pending clearances to be awarded by May, which will help boost revenue growth, led by the construction business. Also, the expected pick-up in economic activity in FY14 should improve toll collection of seven operational projects. Thus, one can say the worst is behind for the stock, which is not far from its 52-week low of Rs 103. Even as profitability could remain subdued in the near term, the key overhang of uncertainty over topline growth will be gone.

Boost in FY14
Construction revenue declined 40 per cent year-on-year in the nine months ended December 2012, due to delay in some projects. Says Nitin Patel, executive director, after the December quarter (Q3) results, “The scheduled date for starting Shreenathji-Udaipur (Rajasthan) and Solapur-Bijapur (Maharashtra-Karnataka) was October 14 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 Shreenathji-Udaipur would get clearance by March-end and Solapur-Bijapur by end-April, boosting the top line in FY14.

The company’s Rajsamand-Bhilwara project is expected to achieve financial closure by March-end and construction to start by April-end. Clearance for the Karnataka state government annuity project is also expected by April-end. Both cost Rs 720-730 crore each. Further, large mining and irrigation orders (around 30 per cent of the order book) won in FY13 will also support growth. It recently bagged two projects worth Rs 682 crore in the mining sector from Bharat Coking Coal. All these should compensate for the subdued toll collection of some operational projects.

The company witnessed decline in toll collection for projects like the Ahmedabad Ring Road (down 9.5 per cent year-on-year in the December quarter) and Aurangabad-Jalna (down three per cent). Even newly operational assets such as Dhule-Palasner and Bijapur-Hungund have been reporting lower-than-expected toll collection over the past two-three quarters.  

Abhinav Bhandari, analyst, Elara Capital, in a post-results note (February 20) anticipates larger time (12-18 months) for traffic to pick up and stabilise on these stretches. However, 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.

Stock should rebound
Due to weak performance in the first nine months of FY13 and high interest cost on account of rise in debt levels (Rs 610 crore against Rs 490 crore at FY12-end) following mobilisation on BOT projects, analysts have reduced their earnings estimates for FY13 and FY14.

However, order inflow, which was a concern, was up 10 per cent sequentially in the December quarter and is a positive. This could be boosted by project wins, besides roads (where project awarding by NHAI has been slow). The company has bid for two projects worth Rs 716 crore in irrigation and three projects worth Rs 1,100 crore in mining.

Overall, given Sadbhav Engineering’s strong balance sheet (net debt-equity ratio 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 are positive on the stock.

At Rs 114, the stock trades at 1.4 times FY14 estimated book value, lower compared to its average target multiple of two times and reflects the concerns. Nitin Bhasin, analyst, Ambit Capital, expects a re-rating on the stock as cash flow from operational toll projects is seen rising from FY14 and execution pick-up alleviates concerns.

“About 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 (cash flow from operations) over FY12-15, which will be sufficient to fund equity needs and interest for the existing projects, ” he says in a March 8 report.