Our Call. Sadbhav Engineering: geared for the long run - BUY

The stock of infrastructure player Sadbhav Engineering, which operates in the roads, mining, and irrigation segments, has risen 254 per cent in one year. Its PE multiple has leapt from 16 times the trailing 12-month standalone earnings to 36 times now. The stock is a good buy still for investors with a three-year perspective for four reasons.

One, it has maintained both order flow and execution over the years, with only a brief blip in 2013, even as peers struggled.

Revenue growth has stayed at a healthy 15 per cent-plus for the past seven quarters, as project execution gathered pace.

Working capital cycle has also improved over the past year-and-a-half. Sadbhav has begun to consolidate its road portfolio, selling stake in projects where it has a minority share and upping in those where its share is already high.

It has also taken over the share of its joint-venture partner in projects where execution was held up due to the deteriorating financial position of the partner.

Two, Sadbhav’s diversity should see its order inflow swelling in the coming quarters, given that mining activity is likely to pick up post the coal auctions and the number of road projects could increase on higher allocations.

Sadbhav’s diversity gives it an edge over more focussed peers such as IRB Infra and Ashoka Buildcon in terms of order inflow.

From 60-70 per cent of the order book in earlier years, the share of roads is down to 40 per cent now with orders in irrigation and mining gaining ground.

In the roads sector, Sadbhav executes both PPP projects and pure contracts (EPC).

Two projects worth ₹776 crore have been won in the past two months, and NHAI will put up around ₹16,000 crore of orders for bidding in the coming months.

As for mid-size PPP projects, competition has tapered off, and bids can be more reasonably priced now.

The company’s order book of ₹9,020 crore covers trailing four-quarter revenues by 3.2 times and with an execution timeframe of around 24 months it provides good medium-term earnings visibility.

Three, Sadbhav has seen good growth in toll collections, clocking 17 per cent growth in the April-December period.

The company also saw one project turn operational in the 2014 calendar, joining seven others that are running.

Five projects on the BOT model are under construction, but will turn operational only in the 2016-17 fiscal.

Toll collections can improve on a pick up in economic activity over the medium term.

Four, a downward interest rate cycle coupled with other measures to address financing of infrastructure can lighten the debt burden for Sadbhav.

The company’s consolidated debt-equity ratio is high at 4.4 times as of March 2014, but it has not faced trouble in meeting interest payments or reaching financial closure for its projects so far.

For the nine months to December 2014, Sadbhav’s standalone revenues were up 28 per cent while the net profit grew 6.7 per cent over the year-ago period.

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