McNally Bharat Engineering – Angel Broking Research Report

McNally Bharat Engineering (MBE) posted disappointing set of numbers for 1QFY2011, and well below our estimates. McNally Bharat Engineering 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, McNally Bharat Engineering 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. McNally Bharat Engineering’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

McNally Bharat Engineering 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, McNally Bharat Engineering 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. McNally Bharat Engineering‘s current consolidated order book (end of 1QFY2011) stands at Rs4,803cr or 2.4x FY2010 consolidated revenues, which provides high revenue visibility.

Outlook and Valuation: We have revised our estimates downwards to factor in the poor 1QFY2011performance posted byMcNally Bharat Engineering 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: McNally Bharat Engineering’s standalone revenues grew by a mere 12% for the quarter to Rs284cr. Subsidiary MSE (adj for transfer of McNally Bharat Engineering’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 McNally Bharat Engineering’s order booking to pick up in 2QFY2011.

Strong order inflow continues McNally Bharat Engineering‘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 McNally Bharat Engineering’s order book to be Rs4,803 at the end of 1QFY2011 (2.4x FY2010E consolidated revenues). Currently,McNally Bharat Engineering has also bid for orders worth Rs3,200cr.