Buy Sadbhav Engineering with a 12-month target of Rs 375 per share. Sadbhav’s improving order book will support strong revenue growth, stable/improving margins and improvement in balance sheet strength. We build in 22% ebitda CAGR over FY15-18 and a 9% ebitda CAGR over FY18-26. Our DCF valuation of the construction business implies a reasonable 13.1x FY17e EPS.
Valuation of its build-operate-transfer (BOT) asset holding subsidiary – Sadbhav Infrastructure (SIPL) – should not be based on market cap but on fair value (NAV) of the individual assets. Moreover, price-to-book is not an effective valuation tool given that its book is depleted (high depreciation and interest charge) due to large asset additions in recent years. Our NAV based valuation for SIPL implies 1.4x restated equity invested. Using SOTP therefore, we value the firm at R375 (R185 for EPC + R190 for SIPL). Further valuation upgrades are highly likely given the possibility of higher-than-expected EPC inflows and ability to deploy cash for assets.
Sadbhav Engineering’s strong EPC execution (19%/17% revenue/ebitda CAGR over FY10-15) and a healthy standalone balance sheet (0.7x D/E) set it apart from its struggling overleveraged peers. Its asset holding subsidiary (SIPL), owns the fourth largest BOT portfolio in India, which is entirely funded.
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