McNally Bharat; IVRCL; CRISIL; RCom; Voltamp; Tulip Telecom; Garware Offshore; and Tamilnadu Newsprint;

McNally Bharat; IVRCL; CRISIL; RCom; Voltamp; Tulip Telecom; Garware Offshore; and Tamilnadu Newsprint;

McNally Bharat Engineering Ltd

Investors can consider accumulating the stock of turnkey engineering solutions provider McNally Bharat Engineering. The stock is among the mid-caps that have fallen steeply as a result of broad market volatility. The correction offers a good opportunity to add the stock. At the current market price of Rs 204, the stock trades at 10 times its expected consolidated per share earnings for FY-12. As the rights issue proposed last year has not shown any signs of taking off, shareholders can use the current weakness to accumulate the stock.

McNally Bharat Engineering Ltd

McNally Bharat Engineering Ltd

McNally Bharat Engineering Ltd

McNally Bharat Engineering Ltd

McNally Bharat Engineering Ltd

McNally Bharat Engineering Ltd

McNally Bharat Engineering

Turnkey engineering solutions provider, McNally Bharat Engineering, managed to sail through a difficult FY-09, maintaining robust revenue growth and order accretion. The company also utilised the dull period to put its house in order by undertaking corporate restructuring measures and resorted to acquisition to expand its portfolio of business offerings. The current order book, diversified business profile and strong demand expected from user industries buttress earnings growth in the medium term.

Investors with a two-year investment perspective can consider investing in the stock of McNally Bharat. At the current market price of Rs 272, the stock trades at 15 times its expected consolidated per share earnings for FY-11. The stock can be bought in small lots as the markets may provide opportunity to accumulate during dips. Besides, the company has announced plans for a rights issue at Rs 140 a share. Existing shareholders can wait for the offer.

Graduating to BoP

McNally Bharat renders project services to sectors such as power, mineral processing, steel and non-ferrous metals, ports and other infrastructure activities. Material handling, coal washing and bulk-handling cranes, are some of the turnkey projects undertaken by the company.

McNally has diversified its business from merely executing material handling systems for user industries to offering complete Balance of Plant (BoP) works. For instance, the company, in 2009, bagged a BoP work for a power project as well as a complete design, engineer and structural work for a green anode project in an alumina plant. This upward integration will help showcase itself as a all-rounder in engineering services and act as a reference point for future orders besides propping up profit margins.

Eventful year

McNally Bharat has had an eventful FY-10 so far, in terms of its restructuring exercise and acquisition. The company transferred its product business to an 86 per cent subsidiary and retained the project business under the parent company. This move, meant to differentiate its offerings, will ensure improved business focus and allow independent leveraging for each company. At the same time, McNally Bharat would be able to generate better margins as a consolidated entity as it would tap its subsidiary for equipment to be supplied for projects thus retaining backward integration benfits. The subsidiary, McNally Sayaji Engineering, has four manufacturing units for crushing, screening, milling, material handling and other heavy equipment used in core industries. On a standalone basis, McNally Bharat's revenues and margins may be marginally muted by this realignment, as the product business enjoys lucrative margins. McNally Sayaji accounted for a fifth of the consolidated revenues for the September quarter.

Besides the restructuring, McNally Bharat also acquired the coal and mineral processing business of German-based KHD Humboldt for a total cash outflow of Rs 80 crore. This acquisition is expected to augment McNally Bharat's skills in coal and mineral processing, cement as well as in the power sector. Besides, the acquired company's marketing presence in Europe, Australia, China and South America may help McNally bid for Engineering, Procurement and Construction contracts, especially in developing countries.

McNally Bharat was among the few capital goods companies to successfully combat the slowdown in 2009. While the company has been on a fast-track mode, clocking sales and earnings growth of 42 per cent and 85 per cent annually in the last three years, it managed an impressive 76 per cent revenue growth (to Rs 968 crore) in FY-09 as well.

Order flows

Its order accretion in the first half of FY-10 too remained unaffected with orders bagged in this period moving well past the inflows of FY-09. Its order book as of September stood at Rs 3100 crore, over thrice FY-09 revenues. Comfortable debt levels and funds from rights issue and private equity (for subsidiary) are likely to ensure smooth order execution.

McNally Bharat's operating profit margins of about 8 per cent have dipped to the 6-7 per cent range in recent quarters as a result of still-high raw material costs and outsourcing expenses. The higher raw material cost could be on account of booking revenues on older projects. However, going forward too, an increase in commodity price can threaten the company's margins, as a good proportion of orders, according to the management, are on a fixed-contract basis. The outsourcing expense may, however, see some moderation as the company has set up its own construction division.

Orders in the L1 bidding stage include BoP projects, with the company already securing its first order in this space. Winning these orders could help build a portfolio with superior profit margins.

via BL

Madhucon Projects, Marico Industries, Mahindra and Mahindra, McNally Bharat, Power Finance Corporation, REI Agro, Subros, Tata Motors

Madhucon Projects, Marico Industries, Mahindra and Mahindra, McNally Bharat, Power Finance Corporation, REI Agro, Subros, Tata Motors

Mcnally Bharat, Godawari Power, Steel Pipes

Mcnally Bharat, Godawari Power, Steel Pipes

McNally Bharat

McNally Bharat

TCS, ABG Shipyard, DCW Ltd, Syndicate Bank, McNally Bharat Engineering

TCS, ABG Shipyard, DCW Ltd, Syndicate Bank, McNally Bharat Engineering

McNally Bharat Engineering: Buy

Investments with a two/three-year horizon can be considered in the stock of McNally Bharat Engineering (MBE), a turnkey material handling company.

An expanding order book, possible expansion in operating margins, shift in product mix in favour of high-margin businesses such as steel sector applications and equipment point to strong earnings growth in future.

This apart, given MBE’s established market presence, it may be one of the leading beneficiaries of the increased focus on infrastructure and the ongoing capex boom across industries.

At the current market price, the stock trades at about 23 times its expected FY-08 earnings per share on a fully diluted basis.
Investment argument

Buoyant trends in infrastructure and capacity expansions across MBE’s user industries such as power, steel, minerals and coal, to name a few, are likely to translate into improved business prospects for the company. Apart from providing turnkey solutions, MBE also manufactures equipment used in construction, mines and metal production.

Anticipating a rise in demand for such equipment, McNally has embarked on an expansion and modernisation drive for its plants in Kumardhubi and Bangalore.

This apart, it plans to set up a greenfield plant in West Bengal for heavy fabrications at a cost of Rs 22-25 crore. While it could take about a year or two for contributions from these expansions to kick in, they could deliver a potential boost to earnings.

Another significant pointer towards McNally improving prospects is its bulging order book. Pegged at Rs 1,125 crore (as on May 2007), its order book is about 2.2 times its FY-07 revenues.

In addition, McNally has bid for orders worth Rs 7,500 crore. Notably, it has emerged the L1 bidder in Rs 2,000 crore worth orders. The order book, which comprises mainly orders from steel sector applications (about 50 per cent), also points at a shift in revenue-mix towards segments that enjoy higher margins.

While this shift will help better its margins, it will also help MBE tap a considerable portion of the capex boom across such sectors.

In this context, the capex plans of SAIL (MBE’s main customer) of about Rs 42,000 crore for its various steel plants over the next five years offer MBE a potential market to scale operations.

Markedly, all these steel plants are located near MBE’s factories, giving it a logistic advantage over its peers. This apart, the strict pre-qualification norms in the steel sector, which are currently met by only MBE and L&T, are also likely to give MBE an edge.
Financials

For the year ended March 2007, MBE’s revenues grew 51 per cent while its earnings more than doubled on a sustainable basis; both the product and project businesses grew by more than 60 per cent each.

On an operational front, margins declined marginally to about 5.0 per cent. This could be attributed to the losses incurred after MBE withdrew from the highway construction business on facing disputes relating to land acquisition.

This apart, margins also were dented as the company had executed earlier orders at low margins.

Given that the loss from the road construction business was a one-time affair and with the change in the composition of the order book in favour of higher contribution segments, one can expect the pressure on margins to eventually ease.

In this regard, the management’s guidance for a double-digit margin for FY-09E also provides confidence.
Concerns

The long gestation period of McNally’s projects tend to reduce flexibility on pricing; as contracts may be locked in for a period of the contract.

Moreover, since its projects are completely dependent on the capex cycles of its user industries, any delay in execution from the user industries’ side could also affect earnings

Edelweiss - McNally Bharat

Edelweiss Research report on McNally Bharat Engineering:

McNally Bharat Engineering’s (McNally’s) Q4FY07 results were below our expectations both on the revenue and the operating margin front on account of higher share of low margin orders being booked in the current quarter. Sales increased by 25% Y-o-Y to Rs 1.71 billion while profits increased by 216% to Rs 64 million. However if we adjust for the other income which was on account of sale of investments then the profits de grew 30% to Rs 14 million. We do not expect this trend to continue going forward as most of its low price orders have already been executed last quarter. In fact we expect the operating margins to increase by 200 bps and 300 bps respectively over FY07 on the back of higher contribution margins in the Steel and the mineral processing sector.

McNally’s order book as on 31.5.2007 was at Rs 10.5 billion. Interestingly, the share of mineral processing and steel (which has the highest margins among its various segments) has increased to 63% compared with 10% in the same quarter last year. The company is L1 bidder in Rs 20 billion worth of orders (steel sector application) which it expects to get allotted in a months time. Including this, the order book would increase to Rs 30 billion which is a growth of 200% order book as on 31.3.2007. This gives a serious visibility over the coming three years and hence we recommend investors to invest from a long term horizon.

We are down grading our revenues, operating profits and PAT for FY08E by 1.5%, 25% and 30% respectively on account of change in our assumptions of EBITDA margin from earlier estimate of 10.2% to 7.8% in FY08E. We expect our earlier EBITDA margin estimates to be now met in FY09E as the revenues from the steel and the mineral processing sector starts contributing in a substantial way. Management has also been guiding for a double digit margin in two years time frame. SAIL; which is the main customer for Mc nally is incurring a capex of Rs 420 billion over the next five years in its RINL, IISCO, Bokaro and Durgapur division which are in the radius of approximately 45 Kms from Mc nally Bokaro factory. The addressable market from this segment alone is Rs 200 billion for the company. Thus, we feel very confident of EBITDA margins improving from hereon.

We are also introducing our FY09 estimates. We expect revenues and PAT CAGR of 43%, and 93% respectively over FY07-09E on the back of improvement in EBITDA margins from 5.6% in FY07 to 10.5% in FY09E. We expect a lack luster price performance in the near term; on the back of below than expected results. But we expect the company to exhibit robust performance in FY09 and hence continue to maintain our positive stance on the company with a long term perspective. At Rs 180, the stock trades at a PE of 16.5x and 8.7x on our EPS estimates of Rs 10.9 and 20.8 respectively. We continue to maintain our ‘BUY’ recommendation.

SKP Research - McNally Bharat

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