McNally Bharat Engineering
Research
Reiterate Positive View
Result Update
Emkay June 17, 2008
BUY Price Rs149
Target Price Rs255
Sensex
15,396
Price Performance (%)
1M
3M
6M 12M
Absolute
(15) (17) (50) (19)
Rel. to Sensex
(4)
(16) (37) (25)
Source: Capitaline
McNally Bharat (MBEL) Q4FY08 results were mixed bag. Revenues grew 20% yoy to Rs2.1 bn, below our estimates. Operating profits doubled to Rs174 mn, in line with our estimates. Net profit grew by 539% yoy to Rs96 mn, in line with our estimates. Revenues for FY2008 grew by 9% to Rs5.5 bn, below our estimates. Net profit increased 61% to Rs249 mn, in line with our estimates. Continued growth momentum in order inflows resulted in order backlog doubling to Rs23.2 bn. We continue to maintain a positive view on MBE considering its presence in all industry verticals with varied product and solutions offerings. Our core argument of (1) changing order book mix in favor of steel and mineral vertical and (2) aggression in product business are playing out, thus reinforcing our positive stance. At CMP of Rs149, the
stock is trading at 17.1x FY2008, 11.0x FY2009E and 7.8xFY2010E earnings of Rs8.7, 13.5 and 19.1 per share respectively. We maintain our BUY rating.
Q4FY2008 Result – Mixed Bag
Stock Details Material Handling
Sector Reuters
MCNL.BO
Bloomberg
MCNA@IN
Equity Capital (Rs mn)
286
Revenues grew by 20%, below our estimates- Q4FY08 revenue growth at 20% yoy was below our expectations. Revenues for the quarter stood at Rs2.1 bn against our estimates of Rs2.6 bn. We attribute below expectation growth to lower order booking and delay in receipt of orders from steel majors like SAIL & Rashtriya Ispat Nigam (RINL). However, we believe that revenue booking is likely to gain momentum in Q1FY09- coinciding with execution of major orders namely - RINL (Rs5.6 bn) and SAIL (Rs2.6 bn and Rs6.2 bn).
Face Value(Rs)
10
Operating profits doubled to Rs174 mn, in line with estiamtes- Despite low
No of shares o/s (mn)
30
growth in revenues, operating profits doubled to Rs174 mn, in line with our estimates. The growth in operating profits was mainly on account of 500 bps yoy expansion in operating margins to 8.4%, above our expectations. The jump in margins was primarily due to combined effect of (1) an improvement in the performance of the low margin project division (2) rising conrtibution of high margin equipment division and (3) low base effect of Q4FY07 (OPM at 3.5%) consequent to completion of low margin orders during the period. However, in light of the current order backlog composition and rising cost pressures owing to escalating raw material prices, we believe that the current margins are not sustainable going forward.
52 Week H/L
317/135
Market Cap (Rs bn/USD bn)
4/93
Daily Avg Volume (No of sh)
45849
Daily Avg Turnover (US$mn)
0.2
Shareholding Pattern (%) M’08
D’07
S’07
Promoters
30.9
31.0
32.6
FII/NRI
22.2
19.9
18.9
Institutions
24.8
24.4
22.7
7.7
9.0
7.5
14.4
15.7
18.4
Private Corp Public
Net profit at Rs96 mn, in line with estimates- Despite low growth in revenues, net profits (before extraordinary items) for the quarter grew by 539% yoy to Rs96 mn, in line with our estimates. We attribute growth in net profits to better operating performance by project division. In the current quarter the company has written off Rs25 mn on account of its FCCB issue, whereas in the corresponding previous quarter it had reported an extraordinary net gain of Rs50 mn. Earnings for the quarter stood at Rs3.3 per share (before extra-ordinary) against Rs0.6 per share in corresponding quarter previous year.
Key Financials Pritesh Chheda
[email protected] +91 22 6612 1273 Prerna Jhavar
[email protected] +91 22 6612 1337
Emkay Research
Rs mn
YE-
Net
EBITDA
APAT
AEPS
Mar
Sales
(Core) (%)
FY07
5034
296
5.9
175
5.7
15.9
FY08P
5490
480
8.7
224
8.7
(Rs)
EV/
Div
EBITDA Yld
RoCE P/BV
(%)
P/E
4.1
0.7
14.7
25.9
9.2
3.0
0.7
20.7
17.1
FY09E
9635
736
7.6
417
13.5
6.4
2.4
1.3
29.1
11.0
FY10E
13489
1071
7.9
591
19.1
4.7
1.9
1.3
30.8
7.8
17 June 2008
1
M C N AL L Y B H AR AT
Result Update
FY2008 – Net profit in line with estimates Revenues grew by 9% to Rs5,490 mn in FY08, below our estimates. We attribute below expectation performace to delay in receipt of orders from SAIL and RINL and delayed project execution. However, favorable revenue mix was key highlight for FY2008 (1) contribution of high margin equipment division improved by 200 bps to 15% of total revenues and (2) rising share of high-margin verticals in project division- steel (up from 0% in FY2007 to 11% in FY2008) and ash handling (up from 10% in FY2007 to 14% in FY2008) and reduction in low margin material handling business (down from 63% in FY2007 to 45% in FY2008). Despite below expected performance at revenue front, operating profit growth at 57% to Rs449 mn was in line with estimates. This was due to 250 bps improvement in operating margins to 8.2%, above our expectations. The margin expansion was attributed to better revenue mix with higher contribution from steel & ash handling verticals and equipment division. Net profit (before extraordinary items) increased 62% to Rs249 mn, in line with our estimates. The company has accounted for FCCB issues expenses worth Rs25 mn in the current year, as against a net extraordinary gain of Rs20 mn in previous year. Earnings for the year stood at Rs8.7/Share (before extraordinary) against Rs5.7/Share in previous year.
Strong traction in order book – up 106% to Rs23.2 bn MBE witnessed continued growth momentum in order book during FY08. MBE emerged big beneficiary of ongoing investment supercycle- MBE bagged order inflows worth Rs17.5 bn in FY08 against Rs10.3 bn in FY07, growth of 70%. Significant order accretion was recorded in Q4FY08 to the tune of Rs10.1 bn. Robust oder inflows resulted in 106% growth in order backlog to Rs23.2 bn. The order book composition has also improved with high margin equipment division comprising 5% of total order book or Rs 1.15 bn, up from 2.7% in FY2007. Orders bagged by MBE during Q4FY2008 include high value orders such as (1) Rs2 bn order from Uranium Corporation, (2) Rs6.2 bn order from SAIL for a raw material handling plant for its IISCO plant. We believe that MBE is expected to continue its momentum in order inflows, in view of the ongoing modernization / expansion programs within the steel, port and power sectors. Further MBE is also actively looking at orders in the civil construction to emerge as total solutions provider.
Expansion plans – on track MBE’s plans to treble its existing capacity through (1) brownfiled expansion of existing plant at Kumadhubi and (2) construction of greenfield plant at Asansol, West Bengal. MBE has commenced commercial production under the first phase of expansion of its Kumardhubi plant. The first phase of Asansol plant, which shall cater to the steel and power verticals, is expected to be commissioned in FY2009. We view that progress on expansion plans is in line with estimates.
Acquired 68.3% stake in Sayaji for Rs590 mn – strategic fit MBE has acquired a controlling 62.3% stake in Sayaji Iron & Engineering Co. Ltd. (Sayaji) in May 2008 for a consideration of Rs590 mn. Sayaji’s product offerings include Crushers, Grinders, Screens, Road Construction and material handling equipment, Concrete Batching Plants, Hammer Mills, Asphalt Paver finisher and Windmills (1 MW capacity). The acquisition shall aid MBE to enlarge its product offerings, especially in the crusher market, and increase share of revenues from the Product business. Also, acquired entity has stronghold in West India thus providing geographical diversification. Thus, we believe that above acquisition is strategic fit to MBE operations.
Emkay Research
17 June 2008
2
M C N AL L Y B H AR AT
Result Update
In FY2008, Sayaji reported revenues of Rs635 mn and operating profits of Rs128 mn. Operating margins stood at a healthy 20.2%. Net profit for the year was Rs83 mn resulting in earnings of Rs21.3 per share. The ROCE and ROE stood at 43.9% and 51.4% respectively, higher than MBE. We view that, Sayaji’s is earnings positive at the time of acquisition.
Outlook & Valuations We continue to maintain a positive view on MBE considering its presence in all industry verticals with varied product and solutions offerings. We believe that MBE with its all round capabilities will be a principal beneficiary of ongoing investment supercycle. Our core argument of (1) changing order book mix in favor of steel and mineral vertical and (2) aggression in product business are playing out, thus reinforcing our positive stance. At CMP of Rs149, the stock is trading at 17.1X FY2008, 11.0X FY2009E and 7.8X FY2010E earnings of Rs8.7, 13.5 and 19.1 per share respectively (standalone earnings). We maintain our BUY rating with a target price of Rs255.
Key Financials Y/E,Mar (Rs. mn) Net Sales Expenses Raw Materials % Of Sales Job Outsourcing Exp % Of Sales Employee Cost % Of Sales Other expenditure % Of Sales Ebidta Ebidta% Other Income Interest Depreciation PBT Tax PAT (Before EO Item) Net Margin% E/O Item Reported PAT Earnings
Q4FY08
Q4FY07
% YoY
Q3FY08
% QoQ
FY2008
FY2007
Gr (%)
2,058 1,884 1,102 54% 392 19% 119 6% 271 13% 174 8.4 2 17 7 152 56 96 4.7 (25) 71 3.3
1,710 1,651 860 50% 503 29% 68 4% 220 13% 59 3.5 (3) 30 3 24 9 15 0.9 50 65 0.6
20 14 28 -22 74 24 193 -159 -45 157 537 534 539 -150 9 496
1,181 1,080 666 56% 169 14% 91 8% 155 13% 101 8.6 1 24 6 72 23 50 4.2 50 1.7
74 74 66 132 31 75 72 167 -32 31 110 147 94 NA 43 94
5,490 5,010 3,025 55% 955 17% 349 6% 681 12% 480 8.7 11 89 23 348 99 249 4.5 (25) 224 8.7
5,034 4,738 3,090 61% 923 18% 236 5% 489 10% 296 5.9 25 94 17 179 26 154 3.1 21 175 5.7
9 6 -2 3 47 39 62 -58 -5 31 94 284 62 -217 28 51
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Emkay Research
17 June 2008
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