Sunil Hitech Engineers (SHEL), an established player in the Balance of Plant (BOP) space, is involved in fabrication, erection, testing, commissioning and maintenance of power plants.
The company is also equipped to perform civil work for thermal power stations up to 500MW as well as erect boilers and auxiliaries up to 660MW.
SHEL, which has been primarily focusing on constructing steel structures and fabrication, now plans to move up the value chain by undertaking small EPC contracts.
During 9MFY2009, the company received orders worth Rs887 crore. As of 31 December 2008, SHEL had a strong order book position of Rs1,298 crore or 4x its FY2008 revenue. This provides high revenue visibility for the company over the next two years.
The Indian power sector is still evolving and is expected to be the principal driver of the Indian economy. Notwithstanding the current economic slowdown, the economy is expected to be among the fast growing economies of the world.
India’s power deficit is increasing even though the country’s per capita power consumption is amongst the lowest globally with India’s demand for power set to almost double over the next 10 years.
This tremendous increase in demand entails substantial increase in the country’s power generation capacity from the current installed capacity of 1,47,402MW, thereby throwing up immense opportunities for players like SHEL in the BOP space.
Outlook and valuation
The company owing to its proven track record and superior execution skills is well poised to grow and make the most of this opportunity over FY2008-10E, we expect SHEL’s net revenue to clock a CAGR of 45% on a robust order book size of Rs1,298 crore.
We expect the company’s operating profits to post a CAGR of 37% to Rs92.4 crore during the mentioned period. The Return on Capital Employed (RoCE) is set to increase by 45bp over FY2008-10E to 16.1%, while Return on Equity (RoE) is expected to improve by 162bp to 15.8%.
Going ahead, we expect the company to post 23% CAGR in net profit on the back of better operational performance and decline in interest rates.
At Rs63, the stock is trading at attractive valuations of 4.8x FY2009E and 2.3x FY2010E. We initiate coverage on the stock, with a BUY recommendation and target price of Rs111, implying an upside of around 75% from current levels.