BUY on Sadbhav Engineering - Execution rampup awaited - HDFC Securities

Mr. Parikshit D Kandpal, Institutional Research Analyst, HDFC Securities

Sadbhav Engineering (SEL) reported revenue at Rs 4.1bn (-27/+80% YoY/QoQ, in-line). PAT too was in line at Rs 52mn, as EBIDTA margins normalized to 12.1%. Labour availability has improved to pre-COVID level. Standalone order book stood at Rs 94bn as it won orders of Rs 16bn in 2QFY21. Net debt increased marginally to Rs 10.9bn (vs 10.6bn QoQ). However, with receivables of ~Rs 17bn, working capital still remains stretched. Improvement in balance sheet and pick-up in execution will lead to re-rating.

In-line 2QFY21: SEL saw significant QoQ ramp-up in execution with revenue reported at Rs 4.1bn during the quarter (-27/+80% YoY/QoQ), in-line with our estimates. EBITDA at Rs 0.5bn (-28/+156% YoY/QoQ) came in-line with our estimates. EBIDTA margins normalized to 12.1% (-23/+362bps YoY/QoQ). Lower interest cost was offset by lower other income as well. Consequently, SEL reported PAT of Rs 52mn, also in-line with our estimate.

Execution to stabilize to Rs 90mn daily run-rate by Dec'20: Labor availability reached pre-COVID level by Oct-end, and 3QFY21 will see return to normalized execution pre-COVID levels. Toll collections for the 4 operational assets increased 17% YoY. The company expects PCOD on 6 HAM projects (of total 9 HAMs) in FY21, of which 3 have been received. With commencement of work on 3 large EPC project (combined value of Rs 37bn), management expect to close in on target of Rs 90mn/day execution by Dec-20, from Rs 70mn/day currently, with margins at current levels. This will be supported by additional Rs ~40bn EPC O&M order book of SIPL for the assets transferred to IndInfravit trust, and the dividends from the trust units, post SIPL merger, translating into additional Rs ~3.5bn inflows yearly.

Order book at Rs 94bn; Rs 45-50bn inflow guidance for FY21: Standalone order book stood at Rs 94bn at the end of the 2QFY21. SEL won two EPC contract in 2QFY21 with combined value of Rs 16bn. Cumulatively, SEL is targeting Rs 45-50bn of orders in FY21, implying Rs 30-35bn incremental inflows. In that direction, the company has submitted bids for various road projects, valued at Rs 31bn, and a metro project of Rs 8.5bn in Surat.

Stretched working capital weighing on the balance sheet: Including the loans (Rs 3.7bn) given to SIPL, standalone net debt stood at Rs 10.95bn (vs Rs 10.6/11.2bn at 1QFY21/FY20-end). Cash on hand stood at Rs 1.3bn. Although receivables reduced by Rs 1.1bn (Rs 2.5bn in 1HFY21), it still remains elevated at Rs 16.9bn. Potential realization of arbitration awards (~Rs 2.1bn over next 18 months), GST refunds (~Rs 0.4bn), SPV debtors (~Rs 3.1bn) pending disbursals by bank, HAM escalation charges (~Rs 2.2bn); and proceeds (Rs 3.4bn) from transfer of Ahmedabad Ring Road project to Indinfravit in 3QFY21 could help reduce stress on balance sheet over the next 2 years. Balance equity commitment is moderate at Rs 2.8bn.

Shares of SADBHAV ENGINEERING LTD. was last trading in BSE at Rs.49.2 as compared to the previous close of Rs. 49.8. The total number of shares traded during the day was 76333 in over 546 trades.

The stock hit an intraday high of Rs. 50.8 and intraday low of 48.75. The net turnover during the day was Rs. 3776752.

Source : Equity Bulls

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