Sadbhav Engineering’s (SEL) management, during our recent interaction, reaffirmed focus on bidding for road projects, especially hybrid annuity (HAM), where competition is moderate. Management is confident of healthy revenue traction riding: robust execution pace in already won projects; and work on 2 more HAM projects to start over the next month. Moreover, improvement in the EPC arm’s working capital and refinancing of 4 projects in the BOT arm are envisaged to boost profitability. We expect execution to stay strong and believe order inflows remain key catalyst for earnings. Maintain ‘buy’ with SOTP-based target price of Rs388. With work on projects won in FY16 in full swing, SEL posted strong revenues in H2FY17. With work on 2 more projects expected to commence over the next month, management expects to sustain healthy execution pace and has guided for Rs38-bn plus top line in FY18. The company is targeting Rs70-80 bn order intake in FY18 (Rs40-50 billion from roads, balance from mining & irrigation) versus ~Rs50 billion in FY17, which will boost book-to-bill to ~3x and brighten revenue visibility. SEL is also eyeing the metro rail segment to enhance growth prospects.
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Sadbhav Infraprojects (SIPL), the company’s BOT arm, has already refinanced 5 projects and is in the process of refinancing 4 more. Ergo, it expects the interest rate on these projects to dip ~200bps. The refinancing of the 9 projects will add ~Rs600-650 million to the bottom line. Going ahead, management will be focusing on asset churning to improve cash flow generation.
Improving top line, healthy BOT portfolio and best-in-class execution skills render SEL an attractive bet. We expect: (a) higher order intake in the EPC arm; and (b) better cash flow generation in the BOT subsidiary, to trigger re-rating. We maintain ‘buy’ with SOTP-based target price of Rs388 (Rs161 from EPC business at 16x FY19E P/E and balance from DCF valuation of BOT projects).