Although Sunil Hi Tech Engineers (SHEL) has strong order book (Rs13.9 billion) which would take care of the revenues for next two years, we feel that the overall slowdown in the economy would hit SHEL as well. We expect certain project delays due to liquidity crunch faced by the private infrastructure players.
Several cost overruns are also expected that would impact the operating margins of the company. Also the majority of the new orders are with higher component of bought out components, which typically enjoy lower operating margins.
Thus we expect the company to report lower operating margin of 13.8% in FY09E as against our earlier estimate of 14.2%.
As on date the total order book of the company stands at Rs13.9 billion. This is 4.5x its FY08 revenues of Rs3.1 billion.
Out of this order book, Rs3.3 billion worth of order is for the EPC work of integrated cane processing plant (ICPP), 32 MW power plant, 60 KLPD distillery, 6000 TCD sugar factory. This order is by the company in which the promoters of SHEL are majority shareholders.
The company is also L1 in tenders worth Rs2.1 billion. A couple of large tenders are also expected to be finalized by March 2009.
SHEL is relatively smaller player in terms of revenues as compared to other players as SHEL is purely focused only on power sector while others do a whole lot of construction jobs.
Although SHEL trades at significant discount to the larger players, the discount is likely to remain going ahead due to its concentration to one sector, relatively smaller portfolio of orders and likely negative impact of credit crunch.
At the current market price of Rs67, the stock trades at 0.4x book value, 3.1x earnings and 2.0x cash earnings based on FY09E.
We believe that the current valuation is attractive considering the clear growth prospects of the company, going forward. This is due to strong order book of 4.5x FY08 revenues and superior execution capabilities.
The price target is revised to Rs125 (Rs150 earlier). This is based on DCF method of valuation with 13% WACC and 3% terminal growth rate.
We remain positive on the medium to long-term growth prospects of SHEL and recommend BUY with revised price target of Rs125.