Anand Rathi raises Sadbhav Eng rating, target price Rs 189

Brokerage Anand Rathi has raised its rating for Sadbhav Engineering to buy, with a price target of Rs 189, saying the negatives for the company seem to be priced in and valuation has become tempting. It said asset sale will now be key to de-levering.

Key Financials

Protracted delays in receipt of appointed dates for three NHAI hybrid annuity projects mean a large part of Sadbhav Engineering’s order backlog is not yet contributing. Thus, revenues are subdued. Besides changes in the revenue mix, this means mobilisation advances have not been realised as expected, and de-levering needs to wait.


Rather, against the targeted de-levering, debt continues to rise as the BOT holding company continues to seek support. With appointed dates likely to take some time, and with lower targeted inflows, growth is likely to be delayed. Thus, asset monetisation is the key to de-levering in the immediate future.

Guidance pruned. With muted awarding till now, and as the group intends to go slow on any fresh opportunities in hybrid annuities, inflow guidance has been reduced to Rs 3,000-4,000 crore (Rs 5,000-6,000 crore earlier). The changed inflow outlook and the not-yet-appointed hybrid annuities impelled management to reduce revenue guidance to Rs 3,600 crore (Rs 3,250 crore from under-execution OB).

Debt up, on support to BOT holding company. Lower revenues should have ideally led to lower debt (on lower working capital required), which rose ~`0.4bn q/q as Sadbhav again extended support to the BOT holding company (Rs 95 crore in Q1). With cash-flows from operations slightly more than enough, any de-levering appears contingent on asset-sale transactions (likely receipts Rs 800 crore).

OB down, on execution and termination. No new inflows, removal of the Rs 420 crore Vishakhapatnam order from the OB (mutually terminated on RoW issue) and work executed during Q1 took the OB down a considerable Rs 1,200 crore to Rs 10,800 crore. Prima facie, revenue assurance at three times looks good, but adjusted for the not-yet-appointed projects, BtB is just about two times TTM sales.

Valuation. Delayed appointed dates and the termination compel us to slash FY20e earnings a steep ~24 per cent, and ~29 per cent for FY21. On our revised estimates, the stock quotes at EV/BITDA (excl. the value of BOTs) of 3.8 times FY21e.

Risk: Significant delay in appointed dates for orders.