Valecha Engineering Ltd.
BUY
CMP: Rs209
VEL’s order book position at Rs8bn is a healthy 5.5x its FY06 sales. The company is awarded a significant part of its orders during the last nine months with order inflow rising to 4.6x FY06 sales. The company ramped up its networth through a preferential issue and GDR. Any announcement of an award of a BOT project on account of its increased financial muscle would lead to a positive surprise.
We expect an order intake in the region of Rs4bn during FY07, translating into an order intake of 1.8x its execution. Based on the present order book and the expected ones, we estimate VEL’s turnover to rise by 49.6% and 65.6% during FY07 and FY08 respectively.
VEL holds equity shares of Jyoti Structures, which translate into Rs76.9 per share of VEL diluted equity capital, which is 37.1% of the CMP. Besides, the stock is currently trading at its book value with a market capitalization of 0.9x its FY06 sales. This checks any significant downside to the stock from current levels.
The stock is trading at a P/E of 10.6x and a Price/CEPS of 8.3x its FY08E earnings and an EV/EBIDTA of 5.7x for the same period, which makes it a compelling buy. These estimates leave scope for upside from the company’s real estate foray. VEL, which generates 70% of its revenues from roads, offers good value, limited downside and high visibility for the next 2-3 years. The company has been consistent with dividend payments and 36% of the present equity is on account of bonus. We recommend a BUY with a one year price target of Rs294, based on a target enterprise value of 8x its FY08E EBIDTA and 50% discount to the two stocks held in its investment portfolio.