sadbhav engineering august 19,...

ICIC

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Result

Update

August 19, 2019

CMP: | 127 Target: | 140 (10%) Target Period: 18-24 months

Sadbhav Engineering (SADENG)

HOLD

Considering merger with SIPL…

Sadbhav Engineering’s (SEL) topline declined 8.1% YoY to | 837.6 crore,

below our estimate of | 910.7 crore on account of weak execution in

Q1FY20. EBITDA margins expanded 74 bps YoY to 12.5%, slightly better

than our estimate of 12.1%. PAT declined sharply by 37.8% YoY to | 39.5

crore in Q1FY20 on account of de-growth in topline, higher tax expenses

and lower other income in Q1FY20.

Order book at | 10,809.7 crore as of Q1FY20

SEL’s order book (OB) was at | 10,809.7 crore as of Q1FY20, implying an

OB-to-bill ratio of 3.1x on TTM revenues.The management expects order

inflows to the tune of | 3,000-4,000 crore in FY20E. On the execution front,

the management expects to commence the Kim-Ankaleshwar project in

Q2FY20E while the other three HAM projects with total EPC value of | 2,347

crore are expected to commence execution post Q2FY20E. Overall, the

management has guided for revenue worth | 3,600 crore (including |350

crore from projects whose appointed date is yet to be received). We expect

revenues to grow at 6.6% CAGR to | 4,036.5 crore in FY19-21E.

Making shift towards asset-light model

On July 1, 2019, Sadbhav Infrastructure Project (SIPL), a subsidiary of SEL,

and IndInfravit Trust executed definitive agreements wherein the latter has

agreed to purchase SIPL’s nine (out of 12) operational road projects at an

enterprise value (EV) of | 6,611.2 crore. SEL expects all approvals in this

regard by Q2FY20E end and expects to complete this transaction & receive

payments by Q3FY20E. Post the completion of transaction, SEL would

receive | 550 crore for loans & advances given to SIPL. With this, SEL’s net

debt is expected to reduce significantly from | 1,530 crore to ~| 1000 crore.

With this SEL intends to make a shift towards an asset-light business model.

Appoints valuers for SEL, SIPL

The Board of Directors of SEL, in their meeting held on August 10, 2019,

have agreed to explore merger option with SIPL. They have also considered

appointment of valuers for both companies. The board, on receipt of the

valuation report, will study and discuss to set the future course of action.

Valuation & Outlook

While SIPL deal should deleverage SEL and SIPL’s balance sheet, the

management has lowered its guidance sharply resulting in earnings

downgrades. Secondly, we are unclear in terms of possible synergies from

the considered merger between SEL and SIPL. Besides this, the awaited

equity swap ratio would influence the price movement of each stock if the

merger goes through. Hence, we downgrade the stock to HOLD with a target

price of | 140/share.

Key Financial Summary

(| crore) FY17 FY18 FY19E FY20E FY21E CAGR FY19-21E

Net Sales 3320.3 3505.1 3549.2 3406.9 4036.5 6.6%

EBITDA 355.6 415.1 427.9 407.6 474.9 5.3%

EBITDA Margin (%) 10.7 11.8 12.1 12.0 11.8

PAT 187.8 220.7 186.9 167.7 198.3 3.0%

EPS (|) 10.9 12.9 10.9 9.8 11.6

P/E (x) 11.6 9.9 11.7 13.0 11.0

EV/EBITDA (x) 10.3 8.8 8.4 8.1 7.3

P/B (x) 1.3 1.2 1.1 1.0 0.9

RoE (%) 11.3 11.8 9.2 7.7 8.5

RoCE (%) 10.8 9.9 10.5 9.4 10.7

Source: Company, ICICI Direct Research

Particulars

Particular Amount

Market Capitalization | 2178 Crore

Total Debt | 1540 Crore

Cash and Investments | 65 Crore

EV | 3653 Crore

52 week H/L (|) 306 / 115

Equity capital | 17 Crore

Face value | 1

Key Highlights

Order book at | 10,809.7 crore, 3.1x

TTM revenues

Execution on ~| 2,347 crore projects

expected to commence post

Q2FY20E

Downgrade to HOLD with target price

of | 140/share

Research Analyst

Deepak Purswani, CFA

[email protected]

Harsh Pathak

[email protected]

ICICI Securities | Retail Research 2

ICICI Direct Research

Result Update | Sadbhav Engineering

Exhibit 1: Variance Analysis

Q1FY20 Q1FY20E Q1FY19 YoY (Chg

%)

Q4FY19 QoQ (Chg %) Comments

Income from Operation 837.6 910.7 911.4 -8.1 1,021.7 -18.0Topline de-growth was on account of weak execution

during Q1FY20

Other Income 4.1 9.6 10.8 -61.7 5.5 -24.0

Construction Expenses 673.9 727.7 743.4 -9.3 805.2 -16.3

Employee Cost 42.1 45.5 42.4 -0.8 46.0 -8.6

Other expenditure 17.1 27.3 18.6 -8.1 43.7 -60.8

Total Expenditure 733.1 800.5 804.4 -8.9 894.9 -18.1

EBITDA 104.6 110.2 107.0 -2.3 126.8 -17.5

EBITDA Margin (%) 12.5 12.1 11.7 74 bps 12.4 8 bps

Depreciation 28.0 23.1 24.1 16.3 23.1 21.1

Interest 27.3 28.2 25.7 6.2 28.2 -3.2

PBT 53.4 68.4 68.1 -21.5 81.7 -34.6

Taxes 13.9 19.2 4.6 200.4 52.7 -73.6

Reported PAT 39.5 49.3 63.4 -37.8 28.9 36.4PAT declined on account of de-growth in topline, higher

tax expenses and lower other income in Q1FY20


Exhibit 2: Change in estimates

FY19 FY20E FY21E Comments

(| Crore) Old New % Change Old New % Change

Revenue 3,505.1 3,549.2 3,717.3 3,406.9 -8.4 4,456.1 4,036.5 -9.4 We incorporate management guidance

EBITDA 415.1 427.9 448.5 407.6 -9.1 537.6 474.9 -11.7

EBITDA Margin (%) 11.8 12.1 12.1 12.0 -13 bps 12.1 11.8 -33 bps

PAT 220.7 186.9 196.2 167.7 -14.5 249.3 198.3 -20.5

EPS (|) 12.9 10.9 11.4 9.8 -14.5 14.5 11.6 -20.5

FY18


Exhibit 3: Assumptions

Current Earlier Earlier Comments

FY18 FY19E FY20E FY21E FY20E FY21E

Order inflow 9,064 1,519 4,000 7,000 8,000 7,000 We incorporate management guidance

Current





Conference call Highlights

Bidding pipeline: The management expects bidding for new road

projects to start from September, 2019. NHAI has called bids for 43 EPC

projects worth | 29,052 crore and for 28 HAM projects worth | 31,532

crore. All these bids are to be submitted before September 30, 2019. On

the irrigation orders front, the management sees river-interlinking

projects lining up, whereas tenders related to Jal Shakti Abhiyan are

expected to start coming up from Q3FY20E. This could be a big

opportunity for SEL on the EPC front

Order book update: SEL’s order book (OB) was at | 10,809.7 crore as of

Q1FY20. BOT/HAM and EPC divisions make up 76.7% of the OB,

followed by mining (19.7% and irrigation (3.6%) division. The

management now expects road EPC projects order inflows to the tune

of | 3,000-4,000 crore in FY20E v/s |6000-7000 crore guided earlier.

Execution update: Top five projects contributed ~49% to overall

revenues in Q1FY20. On the other hand, transport division (EPC and

BOT/HAM) contributed ~87% to the overall execution during the

quarter. The Ahmedabad-Rajkot project is 34% completed, Lucknow

Ring Road is 27% project completed while Mumbai-Nagpur expressway

is 14% completed. The company expects to commence Kim-

Ankaleshwar project (EPC value: | 1,005 crore) in Q2FY20E. Other three

HAM projects (total EPC value: | 2,347 crore) viz. Bhimasar-Bhuj,

Gadag-Honnali and Tumkur-Shivamoga are expected to commence

execution post Q2FY20E

Management guidance: The management aims to clock revenues to the

tune of | 3,600 crore from execution of the current OB. Of this, | 350

crore revenue is expected to be booked from HAM projects on which

appointed date is yet to be received. Also, the management expects the

mining orders to get completed in FY20E. On the margins front, the

management expects 12.0-12.5% EBITDA margins in FY20E

Project de-scoping: SEL has proposed to de-scope ~| 48-50 crore (6

km) worth work at Una-Kodinar. It is awaiting official communication

from authorities on this front

Land acquisition status: Currently, land availability at various HAM

projects is: 50% at Tumkur-Shivamogga and 60% at Bhimasar-Bhuj. SEL

is awaiting availability of 80% land to take appointed date at these

projects. With regard to the Vizag Port project, as 80% land was

unavailable, the company has signed a supplementary agreement with

NHAI. Hence, the project has been mutually terminated

Equity requirement: The company has a total equity requirement of

| 750 crore for its HAM projects, out of which it is yet to infuse | 450

crore. Of this balance requirement, it will infuse | 225 crore in FY20E and

| 170 crore in FY21E

Debt & capex: SEL’s standalone debt increased marginally to | 1,530

crore in Q1FY20 from | 1,490 crore in Q4FY19. SEL has given loan worth

| 630 crore to SIPL, out of which the former will receive | 550 crore post

merger with SIPL. On the capex front, SEL incurred capex worth | 10-11

crore in Q1FY20. The management has guided for capex worth | 45-50

crore in FY20E

Tax rate: Effective tax rate for FY20E has been guided at 25-26%

Arbitration award: Dhule-Palesner Tollway Ltd, one of the subsidiaries

of SIPL, has also won the arbitration award to the tune of | 56.4 crore.

Out of this amount, SIPL would receive | 22.6 crore while the balance is

to be paid to JV partners




Company Analysis

Exhibit 4: Quarterly order book trend

13713

13743

12872

11228

10810

3.8 3.8

3.5

2.13.1

1.0

2.0

3.0

4.0

6000

9000

12000

15000

Q1FY19

Q2FY19

Q3FY19

Q4FY19

Q1FY20

(x)

(| crore)

Order book Order book to bill ratio (RHS)


Exhibit 5: Annual order book trend

7487 7683

13249

1122811831

14805

6000

9000

12000

15000

18000

21000

FY16 FY17 FY18 FY19E FY20E FY21E

(| crore)


Exhibit 6: Top five projects by execution in Q1FY20

Project Segment Execution during Q1FY20

Waranga Mahagaon Transport-HAM 94.9

Udaipur Bypass Transport-HAM 93.5

Joghpur Ring road Transport-HAM 86.7

Nagpur Mumbai Expressway Transport-EPC 72.4

Lucknow Ring road Transport-EPC 60.2

Total 407.8





Exhibit 7: Segmental break-up of order book

11005 1112410093

8605 8288

420 352

513

444 393

2288 22672267

21792129

0

4000

8000

12000

Q1FY19 Q2FY19 Q3FY19 Q4FY19 Q1FY20

(| crore)

Road Irrigation Mining


Exhibit 8: Quarterly segmental revenue trend

548.9459.4

744.2616.7

432.0

271.6

189.5

139.5

260.2

300.5

37.3

15.5

12.895.3

48.2

49.8

24.2

28.1

47.6

53.5

0.0

200.0

400.0

600.0

800.0

1000.0

1200.0

Q1FY19 Q2FY19 Q3FY19 Q4FY19 Q1FY20

(| crore)

BOT EPC Irrigation Sector Mining Sector


Exhibit 9: Annual revenue trend

3,320.3

3,505.1

3,549.2

3,406.9

4,036.5

-

1,000

2,000

3,000

4,000

5,000

6,000

FY17 FY18 FY19 FY20E FY21E

(| crore)

6.6% CAGR


Exhibit 10: EBITDA and EBITDA margins trend

355.6

415.1

427.9

407.6

474.9

10.7

11.8

12.1 12.0

11.8

9.0

10.0

11.0

12.0

13.0

125

250

375

500

625

FY17 FY18 FY19E FY20E FY21E

(%

)

(| crore)

EBITDA EBITDA Margin (RHS)





Exhibit 11: PAT trend

187.8 220.7 186.9 167.7 198.3

5.7

6.3

5.3

4.9

4.9

3

4

5

6

7

8

-

60

120

180

240

300


(%

)

(| crore)

PAT PAT Margin (RHS)


Exhibit 12: Return ratios trend

11.3

11.8

9.2

7.7

8.5

10.8

9.9 10.5

9.4

10.7

4

8

12

16

20


(%

)

RoNW RoCE





Valuation & Outlook

While the SIPL deal should deleverage SEL and SIPL’s balance sheet, the

management has lowered its guidance sharply resulting in earnings

downgrades. Secondly, we are unclear in terms of possible synergies from

the considered merger between SEL and SIPL. Besides this, the awaited

equity swap ratio would influence the price movement of each stock if the

merger goes through. Hence, we downgrade the stock to HOLD with a target

price of | 140/share.

Exhibit 13: Valuation Summary

Valuation summary Stake (%) | crore Value per share (|)

SIPL BOT projects (A) 5176.5 302

Less Debt -1427 -83

SIPL Valuation 1831.0 107

SEL stake valuation 68.6 880 51

Construction Business (B)

FY21E EBITDA 474.9

EV/EBITDA (x) 6.0

Construction business valuation 2849.4

FY20E Net debt 1286.1

Equity Value (B) 100.0 1563.4 91

Total SoTP Value (A)+(B) 2443.1 142

Rounded off target price 140





Exhibit 14: Recommendation History vs. Consensus

0.0

25.0

50.0

75.0

100.0

125.0

0

100

200

300

400

500

Aug-19May-19Feb-19Nov-18Aug-18May-18Mar-18Dec-17Sep-17Jun-17Mar-17Dec-16Sep-16Jun-16

(%

)(|)

Price Idirect target Consensus Target Mean % Consensus with BUY

Source: Bloomberg, Company, ICICI Direct Research

Exhibit 15: Top 10 Shareholders

Rank Name Latest Filing Date % O/S Position (m) Change (m)

1 Patel (Shantaben V) 30-Jun-19 28.1% 48.2 0.0

2 Sadbhav Finstock Pvt. Ltd. 30-Jun-19 9.6% 16.5 0.0

3 HDFC Asset Management Co., Ltd. 30-Jun-19 9.2% 15.8 0.1

4 ICICI Prudential Life Insurance Company Ltd. 30-Jun-19 7.0% 12.0 -0.4

5 SBI Asset Management Co., Ltd. 30-Jun-19 4.1% 7.1 6.9

6 SBI Funds Management Pvt. Ltd. 31-Mar-19 4.1% 7.1 -0.4

7 Nomura Asset Management Co., Ltd. 31-Jul-18 3.8% 6.5 -0.8

8 Patel (Shashin V) 30-Jun-19 3.6% 6.2 0.0

9 Kotak Mahindra Asset Management Company Ltd. 30-Jun-19 3.6% 6.2 0.0

10 Reliance Nippon Life Asset Management Limited 30-Jun-19 2.7% 4.7 0.0

Source: Reuters, ICICI Direct Research

Exhibit 16: Recent Activity

Investor name Value (m) Shares (m) Investor name Value (m) Shares (m)

SBI Asset Management Co., Ltd. 24.8 6.9 Patel (Vishnubhai M) -92.4 -25.7

HDFC Asset Management Co., Ltd. 0.2 0.1 DSP Investment Managers Pvt. Ltd. -5.7 -1.6

Aditya Birla Sun Life AMC Limited 0.1 0.0 SBI Funds Management Pvt. Ltd. -1.4 -0.4

BlackRock Institutional Trust Company, N.A. 0.0 0.0 ICICI Prudential Life Insurance Company Ltd. -1.3 -0.4

Florida State Board of Administration 0.0 0.0 Nomura Asset Management Singapore Ltd. -1.1 -0.3

Buys Sells

Source: Reuters, ICICI Direct Research

Exhibit 17: Shareholding Pattern

(in %) Sep-18 Dec-18 Mar-19 Jun-19

Promoter 46.5 46.5 46.5 46.5

Public 53.5 53.5 53.5 53.5

Others 0.0 0.0 0.0 0.0

Total 100.0 100.0 100.0 100.0





Financial summary

Exhibit 18: Profit and loss statement | crore

(| Crore) FY18 FY19E FY20E FY21E

Net Sales 3,505.1 3,549.2 3,406.9 4,036.5

Growth (%) 5.6 1.3 -4.0 18.5

Other Income 15.8 35.7 38.3 41.9

Total Revenue 3,520.8 3,584.9 3,445.1 4,078.4

Raw Material Expenses 863.4 0.0 844.9 1,009.1

Construction Expenses 1,950.0 2,852.1 1,892.0 2,241.6

Administrative Expenses 276.5 269.2 262.3 310.8

Total operating expenses 3,089.9 3,121.3 2,999.2 3,561.6

EBITDA 415.1 427.9 407.6 474.9

Growth (%) 16.7 3.1 -4.7 16.5

Interest 116.7 110.3 111.8 111.8

Depreciation 97.9 95.8 101.3 109.2

PBT 216.3 258.3 232.9 295.9

Total Tax -4.4 71.4 65.2 97.7

PAT 220.7 186.9 167.7 198.3

Growth (%) 17.5 -15.3 -10.3 18.2

EPS (Diluted) 12.9 10.9 9.8 11.6


Exhibit 19: Cash flow statement | crore


Profit after Tax 220.7 186.9 167.7 198.3

Depreciation 97.9 95.8 101.3 109.2

Cash Flow before WC changes 415.1 428.7 407.6 474.9

Net Increase in CA -360.9 -58.9 163.1 -524.0

Net Increase in CL 178.1 -40.4 -73.3 147.1

Cash Flow from Operating Act. 236.8 257.9 432.2 0.4

(Purchase)/Sale of FA -54.7 -70.0 -50.0 -50.0

Cash flow from Investing Act. -47.0 -66.9 -11.7 -8.1

Others -15.8 -35.7 -38.3 -41.9

Proceeds from LT Borrowings -150.4 -110.3 -106.4 -111.8

Cash flow from Financing Act. -178.5 -138.3 -134.5 -139.8

Net Cash flow 11.3 52.7 286.0 -147.5

Opening Cash/ Cash Equivalent 23.0 12.7 65.4 351.4

Closing Cash/ Cash Equivalent 12.7 65.4 351.4 203.9


Exhibit 20: Balance sheet | crore


Liabilities

Share capital 17.2 17.2 17.2 17.2

Stock Option Premium outstanding 0.0 0.0 0.0 0.0

Share warrant 0.0 0.0 0.0 0.0

Reserves & Surplus 1,849.6 2,008.4 2,148.1 2,318.3

Total Shareholders funds 1866.8 2,025.6 2,165.3 2,335.5

Secured Loans 1,096.9 1,484.7 1,490.0 1,490.0

Unsecured Loans 387.8 0.0 0.0 0.0

Deferred Tax Liability 0.0 0.0 0.0 0.0

Sources of funds 3351.5 3,510.3 3,655.3 3,825.5

Assets

Gross Block 728.2 798.2 848.2 898.2

Accumulated Depreciation 227.8 323.5 424.8 533.9

Net Block 500.4 474.7 423.4 364.3

Investments 577.5 610.0 610.0 610.0

Inventory 164.3 177.5 170.3 201.8

Debtors 1,628.0 1,668.1 1,601.2 1,897.1

Loans and Advances 688.2 696.9 600.8 631.1

Other Current Assets 677.4 674.4 681.4 847.7

Cash 12.7 65.4 351.4 203.9

Total Current Assets 3,170.6 3,282.2 3,405.1 3,781.6

Current Liabilities 417.5 443.7 391.8 444.0

Provisions 2.7 2.7 2.6 3.1

Net current assets 2,750.4 2,835.8 3,010.7 3,334.6

Application of funds 3351.5 3,510.3 3,655.3 3,825.5


Exhibit 21: Key ratios

FY18 FY19E FY20E FY21E

Per share data (|)

Reported EPS 12.9 10.9 9.8 11.6

Cash EPS 18.6 16.5 15.7 17.9

BV per share 108.8 118.1 126.2 136.1

Dividend per share 1.6 1.6 1.6 1.6

Cash Per Share 13.3 18.9 24.8 31.1

Operating Ratios (%)

EBITDA Margin 11.8 12.1 12.0 11.8

PBT / Net Sales 6.2 7.3 6.8 7.3

PAT Margin 6.3 5.3 4.9 4.9

Inventory days 17 18 18 18

Debtor days 170 172 172 172

Creditor days 62 55 55 55

Return Ratios (%)

RoE 11.8 9.2 7.7 8.5

RoCE 9.9 10.5 9.4 10.7

RoIC 9.5 9.6 9.3 10.1

Valuation Ratios (x)

P/E 9.9 11.7 13.0 11.0

EV / EBITDA 8.8 8.4 8.1 7.3

EV / Net Sales 1.0 1.0 1.0 0.9

Market Cap / Sales 0.6 0.6 0.6 0.5

Price to Book Value 1.2 1.1 1.0 0.9

Solvency Ratios

Debt/EBITDA 3.6 3.5 3.7 3.1

Debt / Equity 0.8 0.7 0.7 0.6

Current Ratio 3.2 3.4 3.5 3.5

Quick Ratio 3.1 3.2 3.3 3.3





Exhibit 22: ICICI Direct coverage universe (Roads)

Sector / Company CMP M Cap

(|) TP(|) Rating (| Cr) FY19E FY20E FY21E FY19E FY20E FY21E FY19E FY20E FY21EFY19E FY20E FY21EFY19E FY20E FY21E

IRB Infra (IRBINF) 96 100 Hold 3,191 25.6 22.8 18.2 3.8 4.2 5.3 5.6 5.4 6.4 0.5 0.5 0.4 13.8 10.8 8.1

PNC Infratech (PNCINF) 204 255 Buy 5,233 11.9 12.4 13.6 17.2 16.4 15.0 11.6 9.4 8.4 2.5 2.2 1.9 14.4 13.3 12.8

Sadbhav Engg. (SADENG) 127 140 Hold 2,178 10.9 9.8 11.6 11.7 13.0 11.0 8.4 8.1 7.3 1.0 1.0 0.9 9.2 7.7 8.5

Ashoka Buildcon (ASHBUI) 118 150 Buy 3,312 -1.4 -1.7 0.4 NA NA 307.1 6.5 5.9 5.2 NA NA 13.9 NA NA 4.5

RoE (%)EPS (|) P/E (x) EV/EBITDA (x) P/B (x)





RATING RATIONALE

ICICI Direct endeavors to provide objective opinions and recommendations. ICICI Direct assigns ratings to its

stocks according to their notional target price vs. current market price and then categorizes them as Buy, Hold,

Reduce and Sell. The performance horizon is two years unless specified and the notional target price is defined

as the analysts' valuation for a stock

Buy: >15%

Hold: -5% to 15%;

Reduce: -15% to -5%;

Sell: <-15%

Pankaj Pandey Head – Research [email protected]

ICICI Direct Research Desk,

ICICI Securities Limited,

1st Floor, Akruti Trade Centre,

Road No 7, MIDC,

Andheri (East)

Mumbai – 400 093

[email protected]




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