Sadbhav Engineering

Small and mid-sized infrastructure companies could benefit from higher spending on roads and possible changes in norms that gives more room for smaller players to participate.

Sadbhav Engineering, with its primary business of road contracting, may be one of the key beneficiaries. A strong order-book, the ability to tide over a period of liquidity crunch with reasonable leveraging and strong earnings growth during a difficult year also augur well for the stock’s prospects.

Investors with a two-year perspective can consider buying the stock of Sadbhav Engineering.

At the current market price of Rs 683, the stock trades at 12 times its expected per share earnings for FY-10 on an expanded equity base (taking into account a possibly successful rights issue).

Risk-averse investors can consider buying the stock on declines linked to broad markets, what with signs of volatility once again creeping in.
Changes contemplated

The recent rally, together with heightened expectations of a renewed thrust on the infrastructure segment in the upcoming budget, has led to such stocks returning 100-300 per cent since March; with valuations, especially of large-sized companies, soaring to levels that have set challenges to the earnings growth of these companies. Smaller companies too witnessed strong rallies, albeit with valuations still at a big discount to their larger peers.

While stiff qualification/bidding norms and stringent rules under the model concession agreement was perceived to be less beneficial to smaller infrastructure players, the recent statements of the new Minister of Road Transport and Highways appears to suggest that the National Highways Authority of India (NHAI) could be drawing a more viable and inclusive plan for highway projects. Such a move in which BOT (Build Operate Transfer) models may be removed if found unviable in certain cases could prove beneficial for contractors such as Sadbhav, which have relatively less financial muscle and scale.

Superior growth

Apart from roads, Sadbhav has also increased its presence in irrigation and mining projects.

The last two segments account for 16 per cent each of the total order-book of Rs 4,500 crore (4.5 times FY-09 revenues), thus providing a diversified revenue-mix for the company. It is perhaps these segments that ensured that the company clocked reasonable growth rate in FY-09, a year fraught with delays, specifically for road projects.

Sadbhav Engineering closed FY-09 with a 19 per cent growth in sales to Rs 1,062 crore and 31 per cent growth in net profits to Rs 63 crore.

The earnings growth was superior to most peers which witnessed sluggish growth on the back of slower execution of projects (as a result of fund crunch or delay in land acquisition).

Operating profit margins too held on to the 10 per cent levels during the year. Interest costs appeared higher only on account of interest income not being netted with interest charges any more (and instead shown as other income).

With the latest numbers, Sadbhav’s sales growth over a three-year compounded annual basis was 53 per cent, while earnings grew 31 per cent annually over the above period.

Except for a BOT project that was delayed due to land acquisition issues, the rest of the projects under execution are stated to be on track. Given the company’s ability to tide over tough times, the growth on the back of an economic revival can be expected to be superior.

From bagging its first BOT project in FY-06, Sadbhav has come a long way in now holding a portfolio of six BOT road projects (of which one is operational, three have achieved financial closure). Interestingly, five of the six are toll projects with only one mandating revenue-sharing with the Government.

Going forward, with revenue-sharing clauses likely to be attached to most projects, the portfolio appears lucrative. Besides, if the Highways Ministry opts to be more discreet with awarding BOT toll projects (going by the hints given by the Minister) then the toll portfolio of Sadbhav may well look attractive in terms of profitability compared to players which bag similar projects hereon.

Delays in BOT projects remain a key risk if land acquisitions continue to spell trouble.

via BL