Sadbhav Engineering - 'The Twilight Saga' - ElaraCapital

Key takeaways from the management call

- Fresh order inflows for Q4FY13 stood at INR22.2bn, including an EPC contract worth INR10.8bn emanating from the 4-laning of NH-10 between Rohtak - Hissar section in Haryana bagged on a BOT basis. Cumulative inflows for FY13 were at INR44.8bn, +40.8% YoY, forming ~44% of current backlog at INR101.4bn.

- Average execution period of backlog stands at 3 years, imparting fair execution visibility. While the construction works on Gomati ka Chauraha Udaipur project have already commenced, SEL seems confident of receiving all approvals, requisite land and FC for Solapur Bijapur and Rajsamand Bhilwara projects latest by end-H1FY14. The management thus, has guided for INR25bn+ (~40% YoY growth) in standalone revenues for FY14.

- Receivables at INR7.4bn remain an area of concern, elongating the net working capital cycle from 70 days in FY12 to 106 currently. Apart from the persisting INR1.5bn still recoverable from the Dhule Palasner SPV, delayed payments from Maharashtra border check post and Rohtak Panipat projects stand at INR860mn and INR940mn respectively, and are likely to be settled only in H2FY14.

- SIPL requires INR10.2bn to be funded across the five new assets over next 3 years, of which INR3bn is to be infused in FY14. The management maintained guidance on near term securitization of Nagpur Seoni and Ahmedabad Ring road projects (expected to yield INR3.5bn over 12-15months) & internal cost savings primarily on IDC and DSCRA across operational projects (INR3bn over 18 months). Further, obligation on SIPL to get listed/demerged from SEL before Sep'14 presents another plausible funding source.

- Post witnessing a considerable traffic decline over past couple of quarters, both Ahmedabad Ring Road and Aurangabad Jalna have shown signs of an uptick in toll collections in Q4, reposing our belief that the traffic deceleration was a short term aberration led by the overall economic situation. We however, continue to remain concerned with sub-par performances of Dhule Palasner (INR22.8lacs/day) and Bijapur Hungund (INR26.4lacs/day) and anticipate a larger time (10-12 months) for traffic to pick up and stabilize on these stretches.

We incorporate the newly won INR12.1bn Rohtak Hissar section in Haryana in our SOTP based valuation; estimate the five new wins to wipe off ~INR4/share (Average post tax EIRRs of 9.9%) from SIPL's Mar'14 based NPV. Maintain 'Accumulate' on seemingly fair valuations though concerns on the long term value creation potential of the newly bagged 'average' assets in the portfolio persists.

Source : Equity Bulls

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