Sadbhav Engineering Ltd. share price forecast

Sadbhav Engineering: Sadbhav Engineering (SEL) continued its weak operating performance in Q1 as revenue/EBITDA missed estimates by 34/52% and the company reported a loss of INR 169mn (vs estimate of INR 100mn profit). SEL is facing multiple challenges on ramping up execution towards normalcy as it requires investment in working capital. Asset monetisation (INR 14bn), along with arbitration inflows (INR 3.5bn), is expected to yield INR 17-18bn over the next 12 months, of which INR 8-9bn will be utilised towards working capital infusion and the balance towards deleveraging. We have cut our FY22/23E estimates by 58/25% to account for weak execution, which is expected to continue in Q2. We maintain BUY and roll forward SEL EPS to Jun-23E with a reduced TP of INR 73/sh (INR 105 earlier). SEL has embarked on a long road to recovery, which shall be driven by the pace of asset monetisation. JK Cement: We maintain ADD on JK Cement (JKCE) with a revised TP of INR 3,210 (11.5x Jun23E consolidated EBITDA). JKCE delivered a healthy show in Q1FY22. While consolidated sales volume fell ~22% QoQ (pandemic-led), robust grey cement pricing drove up blended NSR by 3% QoQ, which more than offset 2% opex inflation, moderating impact on profits. Thus, consolidated revenue/EBITDA/APAT fell 20/17/25% QoQ to INR 17.14/4.0/1.92bn respectively. The company is working at swift pace towards its Greenfield 4mn MT grey cement expansion in central region. Star Cement: We maintain BUY on Star Cement with an unchanged TP of INR 130/share (8x its Jun23E consolidated EBITDA). The company reported broadly...

We have cut our FY22/23E estimates by 37/9% to account for weak execution trajectory/COVID second wave impact. We maintain BUY with a reduced TP of INR 100/sh (INR 105 earlier). Sadbhav Engineering: Sadbhav Engineering (SEL) reported an operationally weak quarter as revenue missed estimate by 27% on weak execution. While labour availability has improved, guidance of 15-20% YoY topline growth was key negative from the call. Standalone order book stood at INR 93bn at the end of FY21. SEL standalone net debt stood at INR 12bn (net D/E 0.6). However, with debtors of ~INR 18bn, working capital still remains stretched. Improvement in balance sheet and pick-up in execution will lead to rerating. Necessary approvals for SEL-SIPL merger have been received and now hearing is pending at NCLT (expected in July-21).

Sadbhav Engineering (SEL) continued to report disappointing numbers in H1FY21 with revenue falling 54.2% YoY to | 641.9 crore, largely marred by disruptions caused by Covid-19 pandemic. Operating margin fell 162 bps YoY to 10.8% for H1. At net level, the company reported loss of | 21.3 crore during H1FY21 on account of lower operational revenue and higher costs. SEL's standalone net debt (including loans) at the end of September 2020 was at | 1,095 crore. However, the company expects the potential realisation of arbitration awards, SPV debtors, GST refunds, and proceeds from transfer...

With all approvals in place, stake sale in Ahmedabad Ring Road (Rs3.4bn) expected to conclude and proceeds are likely to be received by Dec'20. Sadbhav Engineering posted a decent set of numbers with revenues in line with our estimates while margins remain healthy at 12.1%, beating our and...

We maintain BUY on SEL, with an unchanged target price of Rs 62, given low valuation. Improvement in balance sheet and pick-up in execution will lead to re-rating. Sadbhav Engineering : Sadbhav Engineering (SEL) reported revenue at Rs 2.3bn, decline of 73%/44% YoY/QoQ. Consequently, losses came in at Rs 266mn, against our estimated loss of Rs 212mn. Labour availability has improved to 80%. Standalone order book stood at Rs 82bn. Although, SEL could not secure any order in 1QY21, it has already won orders of Rs 16bn 2QFY21. Net debt reduced marginally to Rs 10.6bn (vs 11.2bn at FY20-end). However, with receivables of ~Rs 18bn, working capital still remains stretched.

Management expects to receive Rs3.4bn (Rs2.7bn for Ahmedabad Ring Road and Rs0.7bn balance from earlier 8 BOT assets) by 3QFY21E from Canadian pension fund for its assets stake sale. Further, the company is gradually ramping up execution across project sites with labour availability reaching ~80% pre-covid levels. With full labour force expected to be back post monsoon and commencement of three large EPC projects worth Rs36bn; company targets construction run-rate of Rs90-100mn/day from Oct'20. SADE is one of the most reputed and credible EPC companies in...

Sadbhav Engineering Limited (SEL) yet again disappointed on execution front during Q1FY2021 with standalone revenues declining by 73% y-o-y to Rs. 230 crore. However, OPM beat expectations (although falling 402 bps y-o-y to 8.5%) as gross margins improved. Lower revenue affected by COVID-19 led challenges and a dip in OPM led to a standalone net loss of Rs. 26.6 crore (higher than our expectation of a net loss of Rs. 22 crore). However, post Q1FY2021, SEL has seen labour availability and execution run-rate improving to 70-80% and 60-70%, respectively, from July 2020. It expects to achieve labour availability of 90100% and normalized execution run-rate from October 2020 onwards. Hence, the...

We trim our FY21 estimate by 1.3% and maintain BUY. We maintain BUY with revised TP of Rs 62 (vs Rs 56 earlier). With proceeds from assets transferred to Indinfravit, SADE has improved net D/E to 0.53x vs 0.75x in FY19. Company has also planned for monetizing HAM assets under ROFO with Indinfravit. However, working capital still remains stretched. Further improvement in balance sheet and pick-up in execution will lead to re-rating.

booked a profit of ~Rs170mn on its investment. Sadbhav Engineering (SADE) reported a mixed set of results with better operating performance, however higher effective tax rate dented profitability. sale of Ahmedabad Ring Road BOT project at a P/BV of ~2.5x (valuation as per agreement) is to be completed in FY21E. After a month's halt in construction activities due to nationwide lockdown, operations have now resumed in all project sites with labour force currently at 50-60% pre-covid levels. Company targets construction run-rate of Rs100mn/day with labour...

Update on HAM funding and arbitration proceeds: Gross debt outstanding for the 10 HAM assets stands at Rs 20.18bn, with balance requirement being Rs 24bn. On the equity front Rs 2.2/1.67bn is expected to be infused over FY21/22E. Arbitration proceeds of Rs 4.2bn have been awarded (Rs 2.2bn with SEL, Rs 2bn with SIPL). On the Rohtak-Panipat project, SEL has been advised by NHAI to move the case to conciliation committee rather than arbitration. In company's view it is a clear case of an event of default (alternate traffic route is the issue here) as per the CA, and is confident of recovering its entire equity and debt. Sadbhav Engineering Ltd (SEL) has announced a management rejig with Mr Vasistha Patel (VP) being appointed as CEO and Mr Shashin Patel stepping down as Chairman and MD to Vice Chairman in non executive capacity. We perceive this as a positive step with VP getting iron hand on execution and promoter SP dissociating himself from day to day run. SEL BS has deleveraged post the SIPL deal and now VP has immediate challenge of ramping up execution against the COVID-19 headwinds. We maintain BUY with SOTP of Rs 56/sh

SEL 3QFY20 performance was a disappointment as funding constraints limited execution of projects. With conclusion of InfInfravit deal funding issues will get resolved. Group standalone debt reduction by 50% will augur well for reinstating financial markets confidence in the group. Whilst it will take time for SEL to revert to historical levels of quarterly execution, we believe 3QFY21E onwards things should normalize. We maintain BUY. Key risks (1) Delay in new order inflows; and (2) Further delay in execution ramp-up. We maintain BUY on SEL with a reduced TP of Rs 175sh (vs. Rs 241/sh earlier). We value SELs EPC business at 15x FY21E EPS and assign a 20% hold co discount to SIPL stakes market cap. TP reduction is owing to FY20/21E EPS cut by 43/24%.

Sadbhav Engineering's (SADE) Q3FY20 standalone revenue plunged 52% YoY as prolonged monsoons and tight liquidity slowed execution.

With the sale of majority of the assets in the SIPL platform to IndInfravit the SEL-SIPL Merger provides an opportunity to the company to recalibrate its business model to an asset light structure where it can further monetize its under construction portfolio through the ROFO agreement with IndInfravit, ensuring capital churning for securing new orders. Going forward, SEL is expected to prioritize securing new orders through EPC mode while selectively bidding for new HAM projects, once the NHAI activity gathers pace during 2HFY20. We maintain BUY. Key risks (1) Delay in new order inflows; and (2) Further delay in appointed dates for balance projects. We maintain BUY on SEL with a reduced TP of Rs 241/sh (vs. Rs 269/sh earlier). We value SELs EPC business at 15x FY21E EPS and assign a 20% hold co discount to SIPL stakes market value. Price cut is on account of revision in FY20/21E EPS by 4.9/(6.6)%.

22 October 2019 Infrastructure Directors of Sadbhav Engineering (SADE) has approved the merger of the company and its listed subsidiary Sadbhav Infrastructure Project Limited (SIPL). In consideration of the merger, SADE will issue one equity share for every three SADEs shareholders. As a result of the merger, the promoter stake in SADE will come down from 46.55% to 38.74%. recap, SADE had divested its stake in nine road assets at an EV of INR66.1b, resulting in a debt reduction of INR40.6b at the project level and realization of INR25.5b in lieu of equity invested. Anyway, the investor interest in the listed asset arm has been on a decline, as InvITs are better products compared to listed companies in the road assets business, given the removal of the dividend distribution tax on SPVs and the minimum construction risk. Prima facie, the merger appears value accretive to standalone SADE as the entire benefit of debt reduction in SIPL standalone gets captured in the new merged entity.

Contrary to investment wisdom SEL has corrected sharply when it is perceived to get significantly deleveraged over next 2-3months. Asset light model, selective focus on EPC projects bidding, ROFO on HAM assets, 10% stake in IndInfraVit (already SIPL is in the money) and potential resolution to bleeding Rohtak Panipat project are other key re-rating triggers. Merger may be another positive as combined entity curtails equity intensive projects and surplus cash is utilized towards pursuing growth, without equity dilution. SEL is in a sweet spot. CPPIB backing is literally a large bank support. We maintain BUY. Key risks (1) Delay in SIPL stake sale; (2) Slow order inflows; and (3) Further delay in appointed dates. We maintain BUY on SEL with a reduced TP of Rs 269/sh (vs. Rs 340 earlier). We value SELs EPC business at 15x FY21E EPS and assign a 20% hold co discount to SIPL stakes market value. Price cut is on account of FY20/21E EPS downgrade by 24.4/20.4%.

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...

Sadbhav Engineering Limited (SEL) reported weak standalone earnings for Q1FY2020 owing to a delay in receipt of appointed dates for hybrid annuity model (HAM) projects, which dragged down revenue and net profit by 8% and 38% y-o-y, respectively. The management maintained a revenue guidance of Rs. 3,600 crore for FY2020 on back of better execution in H2FY2020 along with receipt of appointed dates for couple of projects at the start of H2FY2020. Post the transfer of nine assets in recently signed deal with the IndInfravit trust, the management is...

Around 50% decline in stock price implies ~75% correction in EPC business valuation: Since the announcement of the asset sale a month back, SADE's stock price has corrected by ~50%. We note that the company draws ~45% of valuation (based on our SOTP methodology) on account of its stake in the listed subsidiary, Sadbhav Infrastructure Projects Limited. Thus, adjusted for...

Sadbhav Engineering Limited (SEL) entered into definitive agreement with IndInfravit Trust for a 100% stake sale in nine operational projects held under listed subsidiary Sadbhav Infrastructure Projects (SIPL). The assets sold at an EV of Rs. 6612 crore and equity value of Rs. 2550 crore valuing the assets at 1.7x book value and 8.4x EV/ EBITDA on FY2019 earnings. The equity value will be received as Rs. 1900 in cash and 10% stake in IndInfravit trust. The deal will aid in Rs. 4000 crore O&M; contract for SIPL, more than halving leverage...

SIPL's asset monetization brings in the much needed liquidity flush to the Sadbhav Group. The cash infusion will lead to SEL net D/E reducing from 0.7x to 0.2x (FY19/20E). Balance sheet strengthening makes a case of credit rating upgrade. With IndInfravit's backing, SIPL is well placed to bid for upcoming HAMs/BOTs and SEL in turn stands to benefit from captive ordering. We believe SEL is well placed to deliver 20.3/26.5% FY19-21E Rev/APAT CAGR. Maintain positive stance. We maintain BUY with a reduced SOTP of Rs 340/sh (vs Rs 353/sh earlier). We value SELs EPC business at 15x FY21E EPS and assign a 20% hold co discount to SIPL stakes market value. We have downgraded FY20/21E EPS by 1/2%.