McNally Bharat Engineering Co. - Parent on Track, subsidiaries continue to disappoint; Downgrade 'SELL' - TP Rs106 - PINC Research

Q3FY12 Result Review - McNally Bharat Engineering Co.

Parent on Track, subsidiaries continue to disappoint

McNally Bharat Engineering (MBEL) reported 30% growth in revenue to Rs4.9bn (PINCe Rs4.7bn). OPM was flat at 6.5% (PINCe 6.3%). RM & outsourcing expenditure increased to 78% of sales from 67% in Q3FY12. However, it was compensated by steep decline of 45% in other expenses. Interest cost was up by 30% to Rs137mn but declined 4% sequentially. Adjusted PAT was up by 50% to Rs125mn (PINCe Rs94mn). The performance of McNally Sayaji and CMT was very disappointing. Sayaji reported 28% decline in revenue and incurred loss at EBIDTA level.

Execution and profitability in project business intact

MBEL reported revenue growth of 30% to Rs4.9bn which was higher than our estimates of Rs4.7bn. OPM was flat at 6.5% (PINCe 6.3%). The order backlog stood at ~Rs30bn (Rs38.5bn including L1) on a SA basis down by 24% YoY. The company has bid for projects worth Rs118bn and is L1 in projects worth Rs8.6bn. Order inflows are down by 60% in 9MFY12 to Rs7.7bn (calculated).

Disappointing performance by McNally Sayaji and CMT...

The performance of McNally Sayaji deteriorated further in this quarter. It reported 28% drop in sales to Rs534mn and incurred a loss of Rs29mn at EBIDTA level and loss of Rs98mn at PBT level. Delayed off take of high margin orders and cancellation of orders by the customers affected the sales and margins. The order book witnessed a marginal improvement of 7% YoY (up by 17% QoQ) to Rs2.8bn. Order inflows are up by 57% to Rs934mn (calculated). CMT reported a steep rise of 161% in sales to Rs941mn (on a weak base). However, OPM was at 1.5% as against our estimate of 8%. PBT was up by 52% to Rs32mn lead by higher other income. During the quarter it bagged a major order worth Rs1bn for supply of eight magnetic separators.

VALUATIONS AND RECOMMENDATION

Considering the 9MFY12 performance and current L1 positions we expect 20% fall in order inflows in FY12. Considering the performance of subsidiaries, we reduce our consolidated sales estimates by 2% and 3.5% and PAT estimates by 23% each in FY12E and FY13E. We expect consolidated revenue to witness sales CAGR of 7% and adj. PAT CAGR of 21% (FY12E-14E). We believe margins would remain under pressure in Sayaji and CMT on account of higher competition and slowdown in order inflows. Accelerated pace of order inflows and margin improvement in subsidiaries remain key triggers for re-rating. We downgrade our recommendation on the stock from "BUY" to "SELL" with a reduced target price of Rs106 (6x FY13E).

Source : Equity Bulls

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