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Stock pick of the week: Why Sadbhav Engineering is analysts' favourite

Impressive revenue growth, increased revenue visibility, strong balance sheet and reduced debt has made Sadbhav Engineering analysts’ favourite.

, ET Bureau|
Sep 04, 2017, 06.30 AM IST
Sadbhav Engineering has been a major beneficiary of the government’s focus on road development.
While most companies reported lacklustre results in the first quarter of 2017-18, Sadbhav Engineering put up a decent performance. Revenue and net profit of this Ahmedabadbased civil engineering construction company went up 17% and 14% respectively year on year (y-o-y).

More importantly, analysts expect its revenue to accelerate further in the short term. This is because the company has started executing several new projects and revenue from these will be accounted in the coming quarters. Though Sadbhav Engineering has interests in site preparation for mining projects, canal construction for irrigation projects, metro projects, etc., its main focus now is on road construction. Its current roads portfolio consists of 10 operational build-operate-transfer (BOT) projects, one partially operational BOT project and seven Hybrid Annuity Model (HAM) projects under development.

The company has already started three of the seven existing HAM projects in the first quarter and the other four are expected to start in the coming quarters. Roads segment has reported a 47% y-o-y growth in the first quarter and, with the start of HAM projects, it will remain the key revenue driver for the company in the coming quarters as well. Increased contribution by HAM projects and other high value engineering-procurement-construction projects should also help Sadbhav improve its margins further.

A strong order book, which improved 23% y-o-y to Rs 8,377 crore, gives clear revenue visibility for the company. There is a marked improvement at the order pipeline as well. Despite muted bidding activity in the first quarter due to GST concerns, Sadbhav got new orders worth Rs 1,575 crore, most of them from the roads segment. With relentless government focus on the roads sector, order inflow from this segment is only expected to get bigger in the coming quarters. Activity is reasonably strong on the mining and irrigation side as well.

And, with increased momentum after the GST rollout, the company should be able to get orders worth more than Rs 7,000 crore in 2017-18. Strong balance sheet is another positive for Sadhbhav. Due to better cash flows in the first quarter, the company was able to reduce its net debt by Rs 180 crore to Rs 1,450 crore. And with this, its net debt-equity ratio also came down from 0.98 in March 2017 to 0.87 in June 2017. Due to increased growth and the fall in debt, analysts expect a further re-rating in the counter.

Selection Methodology
We pick the stock that has shown the maximum increase in ‘consensus analyst rating’ in the past one month. Consensus rating is arrived at by averaging all analyst recommendations after attributing weights to each of them (5 for strong buy, 4 for buy, 3 for hold, 2 for sell and 1 for strong sell) and any improvement in consensus analyst rating indicates that the analysts are getting more bullish on the stock. To make sure that we pick only companies with decent analyst coverage, this search is restricted to stocks that are covered by at least 10 analysts. You can see similar consensus analyst rating changes during the past week in the ETW 50 table.

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