Buy McNally Bharat Engineering - Way2Wealth

Investment Rationale

Robust Order book: The consolidated order book stands at 51 bln with MBE (Project business) order book at 45.5 bln, Mcnally Sayaji order book at 2.9 bln, & recently acquired CMT order book at 4.7 bln. This gives a revenue visibility of 2.5 years. Of the MBE order book, material handling comprises 27%, power 32%, infrastructure 24% while the rest from other segments. These segments are expected to stay strong going ahead with huge investments in infrastructure of close to $500 bln in the 11th five year plan.

Strong Financial Performance: For FY10, MBE's revenues have grown by 50% with major share coming from Material handling & Non Ferrous at 62%, power contributing 10%, steel mines & ports contributing 27% while remaining from the infrastructure sector. We are expecting an average growth of 30% for FY10-12E owing to strong order inflows from the material handling & power sector and the gradual pick up in the demand for material handling equipments segment.

Aggressive Expansion Plans: MBE is gearing up for a major restructuring with an accent on consolidation, increasing its global presence and expanding into newer areas. It has transferred its product manufacturing division to McNally Sayaji which was acquired in 2008. It has further chalked out capex plans of around Rs 106 crore in the next couple of years for business expansion. MBE has recently acquired German engineering company KHD Humboldt Wedag worldwide coal and minerals business and its manufacturing facility in Cologne for a total consideration of $16 million or Rs 78 crore. This would give MBE immediate footprints into several key markets in Europe.

Valuation: MBE's expansion and a strong order book provide good visibility for revenue growth over the next few years. Its recent acquisitions and de-merger of the products division to focus on high-margin segments in power, mineral processing, port handling and infrastructure will further add to revenues and better margins. At the CMP of Rs 280, the stock quotes at PE of 10x and 8x its FY11E and FY12E cons. earnings of Rs 28 and 38 respectively. We initiate with a BUY Rating on the stock, with a target price of Rs. 336 based on an average PE of 12x consolidated FY11E EPS of Rs. 28 per share.

Source : Equity Bulls

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