Sadbhav Engineering - IPO

Strong order book

Backlog of Rs 1081 crore

Sadhbhav Engineering (SEL), incorporated on 3 October 1988, took over the running business of Bhavana Construction Company in 1989. Bhavana Construction Company was in construction business since 1968.

The major focus areas of SEL are (a) irrigation (constructing earthern dams, canals, and syphons, and remodelling and improving canals); (b) rehabilitating, upgrading, widening and strengthening roads and highways; (c) mining operations including excavation of overburden and mining of minerals).

SEL has executed various canal and road projects of Sardar Sarovar Narmada Nigam (SSNNL) and the National Highway Authority of India (NHAI). It has also carried out the excavation of overburden and lignite for GIPCL, GMDC, and GHCL. In a span of 17 years, the company has independently and in a joint venture executed 32 irrigation, roads and mining projects.

SEL intends to deploy the proceeds from the current issue (i.) to invest in build-operate-transfer (BOT) project; (ii.) as margin money for purchase of equipment; (iii.) to augment working capital.

Strengths

1. The government’s thrust on infrastructure development including road, irrigation and mining holds a good opportunity.
2. As of 1 November 2005, SEL had an order backlog of Rs 1081.36 crore (comprising 79% for roads, 17% irrigation, and 4% mining operations) including a toll-based BOT project (SEL’s share: Rs 486 crore) for widening two-lane into four-lane roads in the Vadape–Gonde section undertaken by the special purpose vehicle (SPV), Mumbai Nasik Expressway, in consortium with Gammon India and BE Billimoria. The company has an equity stake of 20%, i.e., Rs 35 crore, in the SPV.

Weaknesses

1. SEL had a negative cash flow of Rs 2.99 crore at the operating level in FY 2005. Debtors’ dues pending for more than six months, as of September 2005, amounted to Rs 17.46 crore. Of this, Rs 14.46 crore is disputed by the client.
2. The projects under execution have low margin and face intense competition.
3. Increase in the prices of raw material will affect the bottom line as this is not covered by the escalation provisions.
4. The revenues have been hovering around Rs 200 crore since the past four years. The profit before tax before extraordinary (EO) items is around Rs 7 crore for the past three years. In FY 2005, revenue fell 17% and profit before EO fell 5%. Net profit rose due to the decline in tax.

Valuation

At a price band of Rs 165- Rs 185, SEL has a PE of 24.7 to 27.6 times FY 2005 earning of Rs 6.7 on a post-issue equity of Rs 10.90 crore. In the first half ended September 2005, the company posted a 58% rise in revenue to Rs 123.79 crore and a 277% rise in net profit to Rs 5.70 crore. OPM was down from14.5% to 12.9%. The sharp growth in net profit was due to the flat interest and depreciation and deferred tax credit.

Annualised EPS works out to Rs 10.5, which is discounted 15.7 to 17.6 times by the offer price band. Due to the mad frenzy for construction scrips, sector TTM P/E stands at 32.3. SEL order book, at almost five times its FY 2005 revenue, is enough for investors to get attracted.