Monday, April 25, 2011

Sadbhav Engineering - RU4QFY2011 - Accumulate

Result Update on Sadbhav Engineering for 4QFY2011 with an Accumulate recommendation and a Target Price of `161



For 4QFY2011, Sadbhav Engineering (SEL) posted numbers much higher than our and street expectations both on the top-line and bottom-line fronts. We are revising our estimates for FY2012 and FY2013, given the higher-than-expected top-line performance and pressure on EBITDA margins. We believe SEL has posted consistent growth over the last few quarters and is appropriately rewarded on the bourses with great outperformance over its peers. Hence, we are recommending an Accumulate view on the stock, given the recent sharp run up in the stock price and lower growth expected going ahead.

Outstanding quarterly performance: For 4QFY2011, SEL reported staggering 128.9% yoy top-line growth to `1,047cr (`457.2cr) vs. our estimate of `603.6cr. Ramp-up in execution of captive road BOT projects led to this stupendous growth in revenue. On the EBITDA margin front, SEL posted a decline of 320bp to 8.7% (11.9%) below our estimates of 11.5%, owing to high subcontracting, increased contribution from the low-margin irrigation segment and change in cost escalation policy. Interest and depreciation cost came in line with our estimates. On the earnings front, SEL reported stunning 199.3% yoy growth to `53.9cr (`18.0cr), substantially higher than our expectations of `36.4cr, mainly due to higher revenue.

Outlook and valuation: With the pick-up in award activity from NHAI, we are optimistic on the road segment, given the quantum of opportunities lined up in the sector. We expect the company to log a CAGR of 13.9% and 10.3% in its top line and bottom line, respectively, over FY2011–13 on the back of high base created in FY2011. We believe SEL will take a breather to consolidate before the next leap. At current levels, the stock is trading at valuations of 7.1x FY2013E EPS (adjusted for BOT investments). Owing to the sharp run up in the stock price,
we recommend Accumulate on the stock with a revised SOTP-based target price of
`161(`171) to factor in EBITDA margin pressures.

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