Stock Recommendation :- Sadbhav Engineering

Sadbhav Engineering
CMP:- Rs 1330

Sadbhav Engineering, with a focus on the road segment, would be a key beneficiary of the ongoing investments in construction segment. Of the company's current order book of Rs 2,300 crore (Rs 23 billion), road projects account for over 70 per cent, including 32 per cent from BOT projects. Enhanced focus on BOT projects has seen the company win four BOT road projects in consortium with other players over the last six months; Sadhbav's equity contribution is pegged at Rs 92 crore (Rs 920 million).

Going forward, the BOT projects are expected to contribute significantly to revenues as the company has achieved financial closure of Aurangabad-Jalna and Nagpur-Shinoi project during Q3FY08. It expects the Mumbai-Nasik expressway project to achieve closure by December 2008.

From Q4FY08 onwards, its projects in the relatively higher margin mining segment (9 per cent net margin) would be a positive trigger, and will help in improving its bottom line. The revenue will accrue from its ongoing project with GHCL and the recent Rs 245.24 crore (Rs 2.45 billion) order from the Northern Coalfields.

Sadbhav Engineering currently has 15 per cent of its current order book from mining. However, the mix is expected to go up as domestic companies are allotted more mines and thus, reflects huge potential for excavation work.

Considering its current order book, which is over three times its FY08 estimated revenue, the company is expected to maintain revenue growth of over 50 per cent for the next two years.

Also, with the increasing share of mining and the captive resources, the operating margins are expected to improve from 11.9 per cent in the FY07 to 12.5 per cent in FY08 and 13 per cent in FY09. The expansion in margins will also lead to the higher earnings growth. While these positives are partly reflecting in the higher valuations, the stock has good potential.