Muted outlook; sale of 9 SIPL assets only silver lining ― maintain LONG
Sadbhav Engineering (SADE) continued to be marred by delays in securing appointed dates (AD), and 1QFY20 was no exception. 1Q revenues were down 8% yoy to Rs 8.4bn (EE: Rs 9.8bn), while EBITDA decline was restricted at 2% to ~Rs 1.0bn due to below-expected RM costs (-9% yoy) and other expenses (-8%). Higher interest and tax as a percentage of PBT (26.1% vs 6.8% in 1QFY19) dented PAT (-38% yoy). Management focus is now on attaining stability by (a) ensuring early closure of the already-announced IndInfravit deal, (b) getting ADs for secured projects and (c) staying asset-light (EPC focus). Given a weak 1Q and muted outlook, we slash revenue/PAT estimates by 12%/20% for FY20 and 17%/26% for FY21. This leads to a revised Sep’20 SOTP-based of Rs 190 (Rs 273 earlier), with EPC business valued at 12x Sep TTM EPS and SIPL the balance (on 20% discount to mcap).
Execution challenges persist on delays in getting AD: SADE reported another weak quarter with revenues down 8% yoy at Rs 8.4bn (EE: Rs 9.8bn) due to delays in getting ADs. SADE terminated one project worth Rs 4.2bn (Vizag port) owing to non-availability of requisite land within the given time frame. EBITDA inched down 2% yoy to ~Rs 1.0bn with a 9%/8% yoy drop in RM costs/other expenses. PAT came in at Rs 395mn, down 38% yoy due to a 16%/6% increase in depreciation/interest costs; other income slid 62% yoy. Tax as a percentage of PBT was at 26.1% in 1QFY20 vs 6.8% in 1QFY19.
Stagnating OB; muted outlook: SADE’s order book stands at Rs 108.1bn (3x TTM revenues), but includes orders worth Rs 2.3bn where ADs are awaited; management expects the same to come by 3QFY20 given current land availability. The company has revised its revenue guidance downwards to Rs 36bn (from 40bn to 45bn earlier) and inflow guidance to Rs 30bn-40bn (from 50bn-60bn earlier). Management has laid down a roadmap to be asset-light and hence EPC projects would be the preferred mode for SADE, which could pose another challenge given the bidding intensity in this space.
View: SIPL’s weak performance continues to persist, while the current OB and outlook do not offer any comfort. Sale of nine SIPL assets is the only silver lining. Given a weak 1Q and muted outlook, we cut revenue/PAT estimates, leading to a revised Sep’20 SOTP-based TP of Rs 190 (Rs 273 earlier). Risks: Further delays in getting AD, lowerthan-expected order inflows.
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