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McNally Bharat Engineering1QFY2010 performance highlights and result update

Contributed by Angel Broking

By Angel Broking

McNally Bharat Engineering (MBE) posted disappointing set of numbers for 1QFY2011, and well below our estimates. MBE has robust order book of Rs4,803cr (2.4x FY2010E consolidated revenues) led by the power sector, which lends high revenue visibility. We maintain our Buy recommendation on the stock.

Muted sales growth impacts PAT: For 1QFY2011, MBE posted muted yoy sales growth of 12%, while EBITDA margin came in lower at 5.5% (6.8%) due to which EBITDA de-grew by 9%. PAT registered 16% yoy growth to Rs6cr. MBE’s subsidiary, McNally Sayaji (MSE), also posted disappointing performance for the quarter clocking yoy sales growth of mere 17%, while EBITDA margin contracted by 700bp to 13.9%. PAT declined by a substantial 64% to Rs1cr

Outlook and Valuation: We have revised our estimates downwards to factor in the poor 1QFY2011performance posted by the company and its subsidiaries. We have pruned our EBITDA margin estimates. We believe that an improving economic scenario (indicated by revival in the IIP), the continuous government focus on infrastructure spend and a pick-up in private capex augurs well for the companies providing EPC solutions for the core sectors of the economy. Hence, over FY2010-12E, we estimate the company to register a CAGR of 28% and 24% in sales and profit, respectively. Moreover, at Rs283, the stock is available at attractive valuations of 10x FY2012E earnings and 5x FY2012E EV/EBITDA. Hence, we maintain a Buy on the stock, with a revised Target Price of Rs406 (Rs486).

Muted sales growth: MBE’s standalone revenues grew by a mere 12% for the quarter to Rs284cr. Subsidiary MSE (adj for transfer of MBE’s product division) posted yoy sales growth of mere 17% to Rs52cr. However, we expect its business prospects to recover during the rest of the year and the company’s order booking to pick up in 2QFY2011.

Strong order inflow continues

MBE's (standalone) order inflow has increased from Rs2,200cr in 4QFY2009 to Rs4,200cr in 1QFY2011(3x FY2010 standalone revenues), registering a yoy  growth of 69%. On a consolidated basis, we estimate the company’s order book to be Rs4,803 at the end of 1QFY2011 (2.4x FY2010E consolidated revenues). Currently, the company has also bid for orders worth Rs3,200cr.

On a yearly basis, the company’s order inflow has been on the rise having increased from Rs406cr in FY2005 to Rs3,835cr in FY2010, posting a CAGR of 57% over the mentioned period. The company ended FY2010 with an order book of Rs4,550cr; on a consolidated basis we peg the company’s order book at Rs5,150cr.

Subsidiaries post subdued performance

McNally Sayaji (MSE), which is a key contributor to the company’s overall profit, also posted lacklustre numbers for the quarter. Total sales grew by a mere 17% to Rs52cr due to lower volume growth, while EBITDA margin declined by 700bp to 14% on account of higher contribution from low-margin business. Lower EBITDA margin resulted in PAT falling 64% to Rs1cr. It has an order book of Rs248cr (0.8x FY2010E revenues), which grew 13% qoq over 4QFY2010 (Rs220cr).

The CMT unit posted total income of Rs76cr with EBITDA margin of 4% and PAT of Rs2cr for 1QFY2011. The unit had an order book of Rs355cr at the end of quarter, up 42% than the 4QFY2010 order book position of Rs250cr.

Investment Arguments

Opportunities abound: Total upcoming opportunity for MBE is expected to be in the region of Rs51,600cr over FY2010-15E. Over the long term, the port and steel sectors are likely to witness highest cumulative opportunity to the tune of Rs22,200cr. The power and mining sectors are expected to be the key growth drivers for the company in the near term. Pertinently, the government's focus on the power sector, "Power for all by 2012", indicates the substantial Rs8,800cr potential opportunity that the sector is likely to offer. The mining industry also has similar opportunities coming up in the near future.

Strong order book: MBE registered CAGR of 57% in order inflow during FY2005-10E, increasing from Rs406cr to Rs3,835cr. It may be noted here that even during the global meltdown in FY2009, the company registered substantial growth of 101% in sales on account of being present in diverse sectors. Overall, order inflow has been robust on improving economic environment, higher government investments and private capex in basic infrastructure and the power segment. MBE's current consolidated order book (end of 1QFY2011) stands at Rs4,803cr or 2.4x FY2010 consolidated revenues, which provides high revenue visibility.

Rich experience in both turnkey solutions and products: MBE has rich experience of over 49 years in EPC activities including designing and developing Balance of Plants (BoPs), and supplying and installing material handling equipment for the core sectors. MBE provides turnkey solutions in the areas of power, steel, aluminium, material handling and mineral beneficiation. Thus, MBE's strong skill-set developed over a period of time places it in an advantageous position to capitalise on the vast upcoming opportunities with industrial capex set to increase going ahead. Apart from having rich experience in executing different types of EPC contracts, MBE has a wide-ranging product and technology portfolio on the back of which it is able to offer complete solutions to its clients. For instance, subsidiary, McNally Sayaji Engineering (MSE) manufactures a wide range of products that MBE requires for its projects. MBE through its subsidiaries and strategic tie-ups has access to various technologies required for BoP, which strengthens its portfolio and helps in bagging orders. Subsidiaries, EMW (Hungary) and Humboldt Wedage (Germany), hold innovator technology in ash handling and mineral processing.

Outlook and Valuation

We believe that an improving economic scenario (indicated by a revival in the IIP), the continuous government focus on infrastructure spend and pick-up in private capex augurs well for the companies providing EPC solutions to the core sectors of the economy. The overall emerging opportunities for MBE are expected to be around Rs51,600cr over FY2010-15E. Over the longer term, the port and steel sectors are likely to offer the highest opportunity of Rs22,200cr, while the power and mining sectors are likely to be the key growth drivers in the near term. The government's strong focus on the power sector, through "Power for all by 2012", is expected to result in an expansion of generation capacity in the sector, leading to higher opportunities for the BoP players.

We believe that MBE is well placed to seize the upcoming opportunities in the above-mentioned sectors, due to the following reasons: 1) Vast experience in the different EPC segments across sectors, 2) Presence in the high-margin product segment through its subsidiary, McNally Sayaji, and 3) Access to key global technology for ash handling and mineral beneficiation.

We have revised our estimates downwards to factor in the poor 1QFY2011 performance posted by the company and its subsidiaries. We have reduced our EBITDA margin estimates.