Maintain BUY on Sadbhav Engineering - Long road to recovery - HDFC Securities

Mr. Parikshit D Kandpal, CFA, HDFC Securities and Mr. Manoj Rawat, Institutional Research Analyst, HDFC Securities

Sadbhav Engineering (SEL) continued its weak operating performance in Q1 as revenue/EBITDA missed estimates by 34/52% and the company reported a loss of INR 169mn (vs estimate of INR 100mn profit). SEL is facing multiple challenges on ramping up execution towards normalcy as it requires investment in working capital. Asset monetisation (INR 14bn), along with arbitration inflows (INR 3.5bn), is expected to yield INR 17-18bn over the next 12 months, of which INR 8-9bn will be utilised towards working capital infusion and the balance towards deleveraging. We have cut our FY22/23E estimates by 58/25% to account for weak execution, which is expected to continue in Q2. We maintain BUY and roll forward SEL EPS to Jun-23E with a reduced TP of INR 73/sh (INR 105 earlier). SEL has embarked on a long road to recovery, which shall be driven by the pace of asset monetisation.

Financial performance highlights: SEL reported a revenue of INR 2.6bn (34% miss). EBITDA came in at INR 242mn (52% miss). With EBITDA margin at 9.2% (vs estimate of 12.4%), it expects to maintain 12% margin from Q3 onwards. Interest cost was at INR 421mn (+3.5%/-16% YoY/QoQ) and it is expected to reduce by INR 0.9-1.0bn within a year, post completion of upcoming assets monetisation. SEL expects to achieve an execution run rate of INR 70-80mn/day in Q3FY22 and INR 80-90mn/day in Q4FY22.

Order book at INR 91.1bn; SEL-SIPL merger conclusion in 3-4 months: The standalone OB stood at INR 91.1bn at the end of the Jun-21 with transport sector contributing 76% (+18.5%/-2.5% YoY/QoQ). The SEL-SIPL merger is expected to be finalised in 3-4 months. Of the ten HAM assets, three have received PCOD, two have been recommended for PCOD, two are expected to be received by Q3FY22, and the other three in FY23.

Monetisation to de-lever balance sheet and strengthen working capital: SEL standalone gross debt reduced to INR 11.4bn, down from INR 12.1bn at Mar- 21 end. Debt, at SEL-SIPL, is further expected to reduce by INR 8-9bn from sale proceeds of INR 5.5bn from Maharashtra border check-post, INR 5.5-6bn from Ahmedabad ring road and 3 HAM assets and INR 1.6-1.8bn from the sale of remaining 2.5% units in Indinfravit Trust. Also, an INR 3.5bn arbitration award has been awarded in Q1FY22, which will aid debt reduction. Half of these proceeds are earmarked for working capital requirements. The equity commitment of all HAM assets, except for one, are fully met (INR 12bn infusion in nine assets).

Shares of Sadbhav Engineering Ltd. was last trading in BSE at Rs. 61.05 as compared to the previous close of Rs. 62. The total number of shares traded during the day was 285884 in over 2652 trades.

The stock hit an intraday high of Rs. 66 and intraday low of 59.85. The net turnover during the day was Rs. 17702917.

Source : Equity Bulls

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