Graphic: Mint
Graphic: Mint

Sadbhav Engineering: Investors want more than a strong order book

Investors fear that the forthcoming elections and lower orders from the government, which form the core of Sadbhav's order book, would slacken order flows

Road construction and infrastructure firm Sadbhav Engineering Ltd’s strong order book did not seem to have helped it in the June quarter. On the contrary, weak execution in the EPC (engineering, procurement and construction) segment led to a 3.5% year-on-year drop in net revenue. This may worsen the already dull investor sentiment for the company’s stock, which has underperformed the Nifty Midcap 50 index in the recent past. Of course, this isn’t very different from other infrastructure firms too, especially those in the roads sector.

Investors fear that the forthcoming elections and lower orders from the government, which form the core of Sadbhav’s order book, would slacken order flows. The cautious approach of banks in lending to infrastructure firms has also made investors wary.

Intriguingly, despite these odds, the company’s order book is at an all-time high of 13,700 crore. This should supposedly assure a steady revenue stream for the next three-four years. About 80% of these are in the transport sector, and the rest in mining and irrigation.

The good thing is that future revenue accruals are largely from HAM (hybrid annuity model) projects. Work on seven of the 12 projects has already begun. And fortunately, toll revenue in the BOT (build-operate-transfer) segment rose by an appreciable 13% year-on-year in the quarter.

However, in spite of costs being reined in, operating profit fell short of analysts’ estimates mainly due to lower overall revenue growth. Investors fear that the trend seen in recent quarters may repeat going ahead, i.e. that a strong order book may not necessarily result in strong revenue growth.

The key factors to watch out for are execution and interest costs. According to HDFC Securities Ltd, Sadbhav’s gross debt came down during the quarter and is likely to recede further by September. A higher proportion of HAM projects, where land and other clearances are in place and working capital needs are lower, will ease the burden on borrowings.

Meanwhile, diversifying to accommodate a greater share of mining and irrigation orders will also help to derisk the company’s profile.

That said, a mere robust order book doesn’t seem to appease the Street. Sadbhav’s stock has been running downhill in the last few months. Perhaps a higher pace of execution and improving profitability will give a leg-up to the stock price.

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