November 20, 2014 ICICI Securities Ltd | Retail Equity Research Result Update Geared up for robust growth… • The topline grew 58.4% YoY to | 594.6 crore on the back of strong execution and was above our expectation of | 469.3 crore • However, the EBITDA margin contracted 32 bps YoY to 10.0% and was lower than our expectation of 10.5%. This was mainly as additional resources and working capital need to be infused in three of the projects in irrigation sector. Sadbhav Engineering has to take over these projects from sub-contractor GKC that went to CDR • Net profit de-grew 28.1% YoY to | 10.2 crore as it reported a tax credit of | 18.7 crore in Q2FY14. On the PBT front, it grew 107% YoY to | 17.0 crore and was significantly ahead of our expectation of | 6.8 crore • The order book stands at | 8,346 crore, implying a book to bill ratio of 3.1x on a TTM basis, providing strong visibility for growth over the next few years. On the back of strong visibility, SEL has guided for 25% revenue growth guidance in FY15E Fund raising through QIP, warrants conversion to boost growth… SEL has raised | 248.4 crore via QIP by issuing ~1.2 crore shares at a fixed price of | 216/share. In addition to that, warrants conversion to 0.8 crore of equity share at the price of | 116 per share has led to infusion of | 92.8 crore by promoters, where | 23.2 crore was already received at the time of issue of share warrants. The proceeds from this would be used to meet future working capital and equipment capex. Hence, we have incorporated increase in equity in our financials and valuation. NHAI awarding to be key; equity requirement largely in place … NHAI has rolled out ~72 projects of which 38 projects worth ~| 34,000 crore are in the request for proposal (RFP) stage while 34 projects worth ~| 31,000 crore are in the request for quotation (RFQ) stage. We believe SEL is well placed to benefit from this huge opportunity. Currently, SEL has an equity commitment of | 250 crore (~| 85 crore already infused) over the next two years for the current BOT portfolio. To fund the same, it intends to use proceeds from securitisation of the Ahmedabad Ring Road, along with NCD proceeds of | 130 crore at SIPL. Consequently, we do not see any equity gap in the current SIPL BOT portfolio. As on date, SEL has done capex of | 98 crore and as per the management no further capex is required in any verticals. Hence, we believe SEL is well placed in terms of equity and capex requirement to beg road projects up to worth of | 5,000- 6,000 crore. Strong visibility in construction business… The current order book stands at | 8,346 crore, at 3.1x FY14 revenues providing strong revenue visibility. Based on this, we anticipate SEL’s growth should be back on track and anticipate that standalone revenues and net income will grow at a CAGR of 23.7% and 25.4%, respectively, during FY14-16E. Going ahead, we also anticipate that the EBITDA margin will improve 20 bps to 10.8% during FY14-16 due to higher proportion of revenues from the high margin mining segment. SEL remains our top pick in the sector; maintain BUY… SEL remains our top pick in the sector on the back of a strong order book providing revenue visibility, well funded equity for BOT projects portfolio, strong execution track record and better earning CAGR. We maintain our BUY recommendation with an SOTP based target price of | 290. We have valued SEL’s 80% stake in SIPL (BOT subsidiary) at | 150/share and construction business at | 140/share (at 8x FY16 EV/EBITDA). Rating matrix Rating : Buy Target : | 290 Target Period : 12 months Potential Upside : 16% What’s Changed? Target Changed from | 265 to | 290 EPS FY15E Unchanged EPS FY16E Changed from | 8.6 to | 9.8 Rating Unchanged Quarterly Performance Q2FY15 Q2FY14 YoY (%) Q1FY15 QoQ (%) Revenue 594.6 375.4 58.4 685.5 -13.3 EBITDA 59.6 38.8 53.5 71.5 -16.6 EBITDA (%) 10.0 10.3 -32 bps 10.4 -41 bps PAT 10.2 28.1 -64 27.0 -62 Key Financials (| Crore) FY13 FY14 FY15E FY16E Net Sales 1,811.0 2,358.1 2,933.1 3,608.7 EBITDA 155.7 249.4 314.5 390.5 Net Profit 74.1 106.2 115.2 166.9 EPS (|) 4.3 6.2 6.7 9.8 Valuation summary (x) FY13 FY14 FY15E FY16E P/E 58.0 40.5 37.3 25.7 Target P/E 67.0 46.8 43.1 29.7 EV / EBITDA 32.3 21.0 15.8 12.9 P/BV 5.2 4.5 3.1 2.8 RoNW (%) 9 11.1 8.4 10.9 RoCE (%) 7.8 10.2 9.5 11.4 Stock data Particular Amount Market Capitalization | 4296.2 Crore Total Debt | 1025.7 Crore Cash and Investments | 76.2 Crore EV (| Crore) | 5245.7 Crore 52 week H/L 270 / 71 Equity capital | 17.1 Crore Face value | 1 Price performance (%) Return % 1M 3M 6M 12M Sadbhav Engg 16.3 12.5 39.4 240.0 Ashoka Buildcon 14.3 (4.7) 13.8 172.1 IRB Infra 21.2 7.6 61.9 222.7 Analyst Deepak Purswani, CFA [email protected]Nikunj Gala [email protected]Sadbhav Engineering (SADENG) | 251
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November 20, 2014
ICICI Securities Ltd | Retail Equity Research
Result Update
Geared up for robust growth… • The topline grew 58.4% YoY to | 594.6 crore on the back of strong
execution and was above our expectation of | 469.3 crore • However, the EBITDA margin contracted 32 bps YoY to 10.0% and
was lower than our expectation of 10.5%. This was mainly as additional resources and working capital need to be infused in three of the projects in irrigation sector. Sadbhav Engineering has to take over these projects from sub-contractor GKC that went to CDR
• Net profit de-grew 28.1% YoY to | 10.2 crore as it reported a tax credit of | 18.7 crore in Q2FY14. On the PBT front, it grew 107% YoY to | 17.0 crore and was significantly ahead of our expectation of | 6.8 crore
• The order book stands at | 8,346 crore, implying a book to bill ratio of 3.1x on a TTM basis, providing strong visibility for growth over the next few years. On the back of strong visibility, SEL has guided for 25% revenue growth guidance in FY15E
Fund raising through QIP, warrants conversion to boost growth… SEL has raised | 248.4 crore via QIP by issuing ~1.2 crore shares at a fixed price of | 216/share. In addition to that, warrants conversion to 0.8 crore of equity share at the price of | 116 per share has led to infusion of | 92.8 crore by promoters, where | 23.2 crore was already received at the time of issue of share warrants. The proceeds from this would be used to meet future working capital and equipment capex. Hence, we have incorporated increase in equity in our financials and valuation. NHAI awarding to be key; equity requirement largely in place …
NHAI has rolled out ~72 projects of which 38 projects worth ~| 34,000 crore are in the request for proposal (RFP) stage while 34 projects worth ~| 31,000 crore are in the request for quotation (RFQ) stage. We believe SEL is well placed to benefit from this huge opportunity. Currently, SEL has an equity commitment of | 250 crore (~| 85 crore already infused) over the next two years for the current BOT portfolio. To fund the same, it intends to use proceeds from securitisation of the Ahmedabad Ring Road, along with NCD proceeds of | 130 crore at SIPL. Consequently, we do not see any equity gap in the current SIPL BOT portfolio. As on date, SEL has done capex of | 98 crore and as per the management no further capex is required in any verticals. Hence, we believe SEL is well placed in terms of equity and capex requirement to beg road projects up to worth of | 5,000-6,000 crore. Strong visibility in construction business… The current order book stands at | 8,346 crore, at 3.1x FY14 revenues providing strong revenue visibility. Based on this, we anticipate SEL’s growth should be back on track and anticipate that standalone revenues and net income will grow at a CAGR of 23.7% and 25.4%, respectively, during FY14-16E. Going ahead, we also anticipate that the EBITDA margin will improve 20 bps to 10.8% during FY14-16 due to higher proportion of revenues from the high margin mining segment. SEL remains our top pick in the sector; maintain BUY… SEL remains our top pick in the sector on the back of a strong order book providing revenue visibility, well funded equity for BOT projects portfolio, strong execution track record and better earning CAGR. We maintain our BUY recommendation with an SOTP based target price of | 290. We have valued SEL’s 80% stake in SIPL (BOT subsidiary) at | 150/share and construction business at | 140/share (at 8x FY16 EV/EBITDA).
ICICI Securities Ltd | Retail Equity Research Page 3
Company Analysis
BOT segment update…
In terms of equity requirement, SIPL requires further | 250 crore of equity infusion for BOT projects over the next two or three years. To fund the same, it intends to use the proceeds from NCD of | 130 crore raised at the SIPL level and securitisation of Ahmedabad Ring Road (~| 250 crore with | 190 crore expected to be received immediately once it is done and remaining over FY15 and FY16), along with internal accruals. In terms of securitisation of the Ahmedabad Ring Road, it expects the process to be completed soon.
Exhibit 1: Operational BOT projects status Particulars ARRIL AJTL BHTPL HYTPL NSEL RPTPL MBCPNL MNEL DPTLQ2FY15 Average Daily Toll Collection (| lakh)* 22 9 28 12 NA 22 24 NG 34
Stake 80% 100% 77% 60% 100% 100% 90% 20% 27%
Project Type Toll Toll Toll Toll Annuity Toll Service Fee Toll Toll
JV Partner Patel Infra NA Monte Carlo Ltd GKC Projects NA NA SREI Infra Gammon Infra HCC Group & JLL
Bank borrowing (| crore) 364.2 171.1 842.2 375.4 198.0 970.7 954.2 550.0 1004.0 Source: Company, ICICIdirect.com Research Note: refer to exhibit 11 for detailed project name and information
Source: Company, ICICIdirect.com Research * - Collection was stopped from 05th November to 13th December #- Including premium to be paid to NHAI
Fund raising through QIP, warrants to boost growth…
SEL has raised | 248.4 crore via QIP by issuing ~1.2 crore shares at a fixed price of | 216/share. In addition to that, warrants conversion to 0.8 crore of equity share at the price of | 116 per share has led to infusion of | 92.8 crore by promoters, where | 23.2 crore was already received at the time of issue of share warrants. The proceeds from this would be used to meet future working capital and equipment capex. Hence, we have incorporated an increase in shareholder’s equity in our financials and valuation.
ICICI Securities Ltd | Retail Equity Research Page 5
Robust construction order book to drive revenues, going ahead… Overall, SEL’s order book is currently healthy at | 8,346 crore, implying a book to bill ratio of 3.1x on a TTM basis providing visibility for the next couple of years. The strong order inflow in the irrigation and mining sector has reduced its dependence on the transportation segment. Over the past four years, SEL has improved its presence in the irrigation & mining segment from 26% of total order book as on FY11 to 56% as on Q2FY15. Similarly, the transportation segment now constitutes 44% of the order book vs. 74% in FY11. Given the strong order book, we expect construction revenues to grow at 23.7% CAGR in FY14-16E to | 3609 crore.
Exhibit 5: Quarterly order book trend
9240
9326
8941
8336
8346
4.64.1
3.83.4
3.1
6000
7000
8000
9000
10000
11000
Q2FY
14
Q3FY
14
Q4FY
14
Q1FY
15
Q2FY
15
(| c
rore
)
1.6
2.4
3.2
4.0
4.8
5.6
(x)
Order book Order book to bill ratio (RHS)
Source: Company, ICICIdirect.com, Research
Exhibit 6: Annual order book trend
69657554
10143
8941 89029359
4500
5500
6500
7500
8500
9500
10500
FY11 FY12 FY13 FY14 FY15E FY16E
(| c
rore
)
Source: Company, ICICIdirect.com, Research
Exhibit 7: Segmental break-up of order book
5146 4755 4596 4196 3703
2027 2054 1940 1872 1919
2068 2517 2405 2269 2724
0
2000
4000
6000
8000
10000
Q2FY14 Q3FY14 Q4FY14 Q1FY15 Q2FY15
(| c
rore
)
Road Irrigation Mining
Source: Company, ICICIdirect.com Research
Exhibit 8: Quarterly segmental revenue trend
142.3 109.4 117.8 160.0280.2 299.6
271.4174.1
323.9370.0 199.1 146.7
90.5
20.1
61.6
113.967.8
35.056.9
70.2
116.8
153.8
136.4111.9
0.0
200.0
400.0
600.0
800.0
1000.0
Q1FY14 Q2FY14 Q3FY14 Q4FY14 Q1FY15 Q2FY15
(| c
rore
)
BOT EPC Irrigation Sector Mining Sector
Source: Company, ICICIdirect.com, Research
Exhibit 9: Revenue to grow at 23.7% CAGR led by strong order book…
2,67
5.5
1,81
1.0
3,60
8.7
2,35
8.1
2,93
3.1
-
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
FY12 FY13 FY14 FY15E FY16E
(| c
rore
)
23.7% CAGR
Source: Company, ICICIdirect.com, Research
The order book stood at | 8,346 crore, 3.1x book to bill on
a TTM basis
The road sector dominates the order book with 44% of the
total order backlog. In the road segment, ~69% accounts for
BOT work while the remaining 31% accounts for EPC contracts
ICICI Securities Ltd | Retail Equity Research Page 6
EBITDA to grow at 25.1% CAGR during FY14-16E with stable margins… SEL’s construction business has historically enjoyed 10.5-11% margins. The margins had dropped to 8.9% in FY13, given the unabsorbed fixed cost on account of slower execution. In FY14, it has regained its previous margins of 10.5% with a pick-up in execution, which we believe would be stable, going ahead, at ~10.7-10.8% in FY15E and FY16E. Exhibit 10: Margins to inch up…
290.3
155.7
249.4
314.5 390.5
10.8
8.6
10.6 10.7 10.8
-
50
100
150
200
250
300
350
400
450
FY12 FY13 FY14 FY15E FY16E
(| c
rore
)
-
2.0
4.0
6.0
8.0
10.0
12.0
(%)
EBITDA EBITDA Margin (RHS)
Source: Company, ICICIdirect.com Research
Bottomline to grow at 25.4% CAGR during FY14-16E… The execution delay had also impacted the bottomline, which had declined 47.3% to | 74.1 crore in FY13. The earnings, however, climbed back in FY14 to | 106.2 crore with a sharp execution across BOT projects. Going ahead, given that all projects of SEL are financially closed (except one annuity based), there is no internal risk on the execution implying a healthy topline growth and stable margins. We have incorporated higher depreciation due to a change in depreciation policy as per the new Companies Act and lower tax rate as guided by the management in our estimate of the earnings. Consequently, we expect SEL’s net income to grow at a CAGR of 25.4% in FY14-16E despite higher depreciation charges. On a cash profit basis, we expect 28.6% CAGR in FY14-16E. Exhibit 11: PAT trend
140.
6
74.1
106.
2
166.
9
115.
2
5.3
4.14.5
3.9
4.6
-20406080
100120140160180
FY12 FY13 FY14 FY15E FY16E
(| c
rore
)
-
1
2
3
4
5
6(%
)
PAT PAT Margin (RHS)
Source: Company, ICICIdirect.com Research
In FY14, it has regained its previous margins of 10.6% with
a pick-up in execution, which we believe would be stable,
going ahead, at 10.7-10.8% in FY15E and FY16E
We have incorporated higher depreciation due to a change
in depreciation policy as per new Companies Act and lower
tax rate as guided by the management into our estimate of
the earnings. This would lead to 25.4% CAGR in bottomline
to | 166.9 crore in FY16
ICICI Securities Ltd | Retail Equity Research Page 7
Return ratios to improve… The return ratios for SEL’s standalone business were in the range of ~20-21% in FY11 and FY12 given the sharp execution. The same had slumped to ~8% in FY13. With an improvement in execution and stable margins supporting the healthy bottomline growth and increase in equity base through QIP & conversion of warrants, we expect the RoE and RoCE of SEL’s standalone business to improve to 10.9% and 11.4%, respectively, in FY16E. Exhibit 12: Return on equity and return on capital employed (%)
18.4
10.98.4
11.18.9
21.7
7.810.2 9.5
11.4
-
5
10
15
20
25
FY12 FY13 FY14 FY15E FY16E
(%)
RoNW RoCE
Source: Company, ICICIdirect.com Research
Conference call highlights: • The project wise equity requirement is SUTPL – | 200 crore, RPTL –
| 35 crore and MBCPNL – | 16 crore, which will be equally infused in FY15 and FY16
• The company has already done capex in equipment required for the transportation and mining segment (~| 98 crore till date). It will not be incurring any capex in FY15E for any segment. If the company bags road projects worth more than | 6,000 crore then it may need to do equipment capex
• Traffic improvement has been seen in road projects such as BHTPL, ARRIL and HYTPL. Also, a positive trend has been seen in MBCPNL
• The management has guided for revenue growth of 25% and tax rate of 33% (after completion of Chhindwara project where it enjoys 80I benefit) in FY15E
• Sadbhav Infrastructure Project (SIPL) is increasing its stake in SPVs as the management believes the worst is behind for BOT projects and higher benefits would be reaped by increasing its stake. SIPL is in the process of increasing its stake in the Mysore Bellary project by 24% (stake post acquisition: 74%) and Hyderabad Yadgiri project by 40% (stake post acquisition: 100%) from GKC. Also, 20% acquisition from the Patel Infra in the Ahmedabad Ring Road (stake post acquisition: 100%) is under progress
With an improvement in execution and stable margins
supporting healthy bottomline growth, we expect the RoE
and RoCE of SEL standalone business to improve to 10.9%
and 11.4%, respectively, in FY16E
ICICI Securities Ltd | Retail Equity Research Page 8
Outlook and valuation SEL remains our top pick in the sector on the back of a strong order book, well funded equity for BOT projects portfolio, strong execution track record and better earning CAGR. We maintain our BUY recommendation with an SOTP based target price of | 290. We have valued SEL’s 80% stake in SIPL (BOT subsidiary) at | 150/share and construction business at | 140/share (at 8x FY16 EV/E BITDA). BOT projects: We have valued SIPL at | 188/share using the FCFE methodology. To value each project, we have considered traffic growth of 6% per annum and toll growth rate as per the agreement (either 5% per annum or 18% after every three years). Furthermore, we have considered CoE of 12% for operational projects and 13% for under construction projects. Construction business: We have valued SEL’s construction business at | 140/share (8x FY16E EV/EBITDA).
Exhibit 14: Valuation summary Valuation summary Stake (%) | cr Value per share (|)
BOT projects (A)
SIPL Valuation 3218.4 188
SEL stake valuation 80.0 2575 150
Construction Business (B)
FY16E EBITDA 390.5
EV/EBITDA (x) 8.0
Construction business valuation 3123.9
FY15E Net debt 734.1
Equity Value (B) 100.0 2389.8 140
Total SoTP Value (A)+(B) 4964.6 290 Source: Company, ICICIdirect.com Research
We assign a BUY rating to the stock with an SoTP based
target price of | 290/share
ICICI Securities Ltd | Retail Equity Research Page 9
Company snapshot
0
50
100
150
200
250
300
350
Jan-
09
Apr-0
9
Jul-0
9
Oct-0
9
Jan-
10
Apr-1
0
Jul-1
0
Oct-1
0
Jan-
11
Apr-1
1
Jul-1
1
Oct-1
1
Jan-
12
Apr-1
2
Jul-1
2
Oct-1
2
Jan-
13
Apr-1
3
Jul-1
3
Oct-1
3
Jan-
14
Apr-1
4
Jul-1
4
Oct-1
4
Jan-
15
Apr-1
5
Jul-1
5
Target Price | 290
Source: Bloomberg, Company, ICICIdirect.com Research Key events Date EventFeb-10 Consortium led by SEL awarded | 1225 crore order for Bijapur and Hungund section in Karnataka on BOT basisNov-12 SEL receives project of four laning of Rohtak to Panipat on BOT basis. The estimated project cost is | 1350 croreMar-12 SEL emerged L-1 bidder for four laning of Gomati Ka Chauraha project. The estimated project cost is | 1280 croreMar-12 SEL bags | 1220 crore order from NHAI for Solapur-Bijapur section on BOT basisJul-13 SEL eyes | 200 crore through prefential issue/right issue. In tranche 1, it had issued 80 lakh shares to promoters @| 115.57Nov-13 SEL terminates concession agreement with NHAI for Solapur Bijapur providing comfort there would be no equity funding gapFeb-14 Bags Karnataka state annuity project with government grant of | 240 croreJun-14 NHAI approves deferral of premium for SEL's two step-down subsidiaries (Rohtak Panipat & Hyderabad Yadgiri) which will commence from FY15Jul-14 Awarded the work by South West Mining at Kapurdi Lignite Mines Barmer, Rajasthan in the form of JV (Sadbhav - Vishnushiva) worth of | 150 croreJul-14 Bags another project worth | 550 crore from South West Mining for excavation work at Jalipa Lignite Mines, Barmer, RajasthanSep-14 Declared successful bidder (L1) for the project by Sardar Sarovar Narmada Niga Ltd for quoted price of | 79 crore for constructing remaining works of earthwork,
lining, stuctures and services road for Morbi branch canal industrial area reachSep-14 Sadbhav Infrastructure Project (subsidiary of Sadbhav Engineering) signs binding memorandum of agreement with the latter's JV partner Patel Infrastructure to
acquire 20% stake in Ahmedabad Ring Road InfrastructureOct-14 The QIP Committee decides to open the issue to be undertaken. The floor price in respect of the issue is decided at | 219.1 per equity share
Investor name Value Shares Investor name Value SharesPatel (Vishnubhai M) 20.30m 5.60m DSP BlackRock Investment Managers Pvt. Ltd. -3.35m -0.92m Nomura Asset Management Co., Ltd. 6.74m 1.86m Norges Bank Investment Management (NBIM) -3.33m -0.92m Patel (Vasistha C) 4.35m 1.20m TVF Fund, Ltd. -2.46m -0.75m Patel (Vikram R) 4.35m 1.20m Birla Sun Life Asset Management Company Ltd. -2.39m -0.66m BNP Paribas Investment Partners Asia Ltd. 0.86m 0.90m Emerging India Fund Management Ltd. -1.81m -0.50m
Buys Sells
Source: Reuters, ICICIdirect.com Research
ICICI Securities Ltd | Retail Equity Research Page 10
ICICI Securities Ltd | Retail Equity Research Page 12
RATING RATIONALE ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns ratings to its stocks according to their notional target price vs. current market price and then categorises them as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock. Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction; Buy: >10%/15% for large caps/midcaps, respectively; Hold: Up to +/-10%; Sell: -10% or more;
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