Maintain ‘buy’ on Sadbhav Engineering with TP at Rs 67

Revenue visibility (5x at Q1FY21 end largely due to weak revenue over the past year) has received a boost due to ~Rs 16 billion NHAI EPC orders won recently.

Sadbhav Engineering (SEL) posted a contraction of 73% y-o-y in topline and Rs 266 million loss in Q1FY21 as Covid-19 derailed execution. Operations are now at ~80% of pre-Covid level and expected to normalise by Q3FY21. The lockdown and the pandemic dragged toll collection significantly during the quarter, but it has now recovered to ~95% of pre-Covid level. Incremental order wins, ramp-up in execution and reduction in leverage are key to stock performance, in our view. We introduce FY22E numbers (as the stock comes out of restriction) and maintain ‘buy’ with SOTP-based TP of Rs 67.

Topline plunged 73% y-o-y with the health crisis playing spoilsport. With Ebitda margin declining ~400 bps y-o-y to 8.5%, the company reported a loss of Rs 266 million during the quarter. Labour/raw material availability, which was ~20-40% during Q1FY21, has now reached 80% level.

Management expects work to commence/gather pace on four projects starting Q3FY21; this will boost execution going ahead. Revenue visibility (5x at Q1FY21 end largely due to weak revenue over the past year) has received a boost due to ~Rs 16 billion NHAI EPC orders won recently.

Toll revenue declined during the quarter due to lockdown and lower economic activity; it has now reached ~95% of pre-Covid level. The company has already completed two HAM projects and expects to complete five more over the next year. It expects to receive Rs 3.4 billion through asset monetisation; this should help it meet the equity requirement of Rs 3.1 billion for the HAM projects.

The company’s operations have suffered over the past few years due to lower-than-expected order accretion and land availability issues. While there is improvement on both these parameters, a lot still remains to be done