Sadbhav Engineering (SEL) reported a strong set of numbers for 2QFY2016. On
the top-line front, SEL reported a strong 25.4% yoy growth to Rs746cr in
2QFY2016. This was mainly on account of execution of in-house BOT projects
(mainly Rohtak-Hissar project, which contributed ~Rs190cr) and lower base of the
corresponding period of last year. The company posted an EBITDA margin of
10.8%, up 80bp yoy. Interest cost declined by 20.4% yoy to Rs18cr. On the
bottom-line front, the company’s reported PAT grew 158.4% yoy to Rs26cr. On
adjusting for an exceptional item, the Adj. PAT grew 274.7% yoy to Rs38cr.
SEL reported order inflow of Rs1,608cr during the quarter, taking the total inflows won
during 1HFY2016 to Rs2,684cr. SEL is sitting on an order book of Rs9,306cr (Order
Book to LTM ratio at 2.9x) as of 2QFY2016, which provides good revenue visibility.
Outlook and valuation: Considering recent order wins and strong 1HFY2016
execution, we model revenue estimates of Rs3,481cr/Rs4,219cr for FY2016E/
FY2017E, respectively. Given the low competitive intensity for recently won Road
EPC projects, cool-down in bitumen and aggregate prices (as captive BOT
projects have fixed price contracts), we expect EBITDA margins to expand by 53bp
during FY2015-17E to 10.8%. Further, we model conservative other income
numbers and low tax rate for FY2016/2017E at Rs13/14cr and 24%, respectively.
Accordingly, we expect SEL’s PAT margin to expand by 109bp during
FY2015-17E to 5.1%. We value SEL using Sum-Of-The-Parts methodology. We
value standalone entity on P/E multiple of 15.0x its FY2017E EPS of Rs12.4cr,
resulting in value of `187 per share. We value BOT projects individually using
Free Cash flow to Equity holder’s method. Our value for SIPL’s portfolio of BOT
projects comes to Rs141/share, which is 43% of the overall SOTP value for the
company. On combining the value of EPC business and BOT projects, we arrive
at a combined business value of Rs328/share, reflecting limited upside in the stock
price from current levels. Accordingly, we maintain Neutral rating on the stock.

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