Sadbhav Engineering (SEL) reported an impressive Adj. PAT for 4QFY2016. On
the top-line front, it reported an 11.3% yoy decline to Rs858cr, which is lower than
our estimates. Lower contribution from the in-house BOT portfolio led to such
revenue decline. Further, higher employee expenses in addition to low
contribution from in-house BOT projects led SEL to report a 41bp yoy decline in
EBITDA margin to 9.5%, which is almost in-line with our expectations. PAT for the
quarter came in at Rs41cr. On adjusting for exceptional item of Rs9cr, SEL’s Adj.
PAT stood at Rs50cr, which is ahead of our expectation of Rs44cr. Adjusted PAT
margin stood at 5.8% for the quarter vs 4.0% in corresponding period a year
ago. 4QFY2016 Adj. PAT benefited from high other income and low tax rate. As
of 4QFY2016, SEL is sitting on an order book of Rs7,487cr (Order Book to LTM
ratio at 2.4x), which provides good revenue visibility.
Outlook and Valuation: Road order wins in FY2016, strong NHAI bid pipeline,
uptick in MDO awarding, strengthens our view that Sadbhav is poised to report
2.4x growth in its Order Inflows during FY2016-18E to Rs6,050cr. Considering
execution cycle and Order Book mix, we expect Sadbhav to report 1.6x growth in
its Order book during FY2016-18E to Rs11,949cr. On the back of their strong
Order Book, we expect Sadbhav to report 14.0% revenue CAGR during FY2016-
18E to Rs4,140cr. On assuming 36bps EBITDA margin expansion, conservative
other income and low tax rate for FY2017/2018E, we expect SEL’s PAT margin to
expand by 75bps during FY2016-18E to 4.9%.
We value SEL using Sum-Of-The-Parts methodology. We value standalone entity
on P/E multiple of 12.0x its FY2018E EPS of Rs11.9, resulting in value of Rs143 per
share. We value BOT projects individually using Free Cash flow to Equity holder’s
method. Our value for SIPL’s portfolio of BOT projects comes to Rs154/share,
which is 52% of overall SOTP value for the company. On combining the value of
EPC business and BOT projects, we arrive at a combined business value of
Rs298/share, reflecting 18% upside in stock price from current levels. Accordingly,
we upgrade our recommendation on the stock to BUY.

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