A hefty order book would have normally brought cheers for investors in infrastructure firms. However, this is not the case for Sadbhav Engineering Ltd, which is sitting pretty on a ₹12,000-crore order book—a little over three times its annual revenue.
Unfortunately, the huge order book failed to boost revenue in the recently announced March quarter results. Instead, revenues fell 7.5% year-on-year to ₹1,021.7 crore. In FY19, they were flat.
What went wrong? Delay in land acquisition for some of the awarded HAM (hybrid annuity model) projects has slowed down the rate of execution at Sadbhav. These hurdles have delayed “appointed dates" for four HAM projects. According to analysts, the management has indicated that it was not keen on taking up these projects unless at least 80% of the land has been acquired. Revenues from build-operate-transfer (BOT) and HAM projects fell 26.5% in Q4 as a result.
The smaller EPC (engineering, procurement, construction) segment, which comprises a fourth of the stand-alone revenue, clocked 89% growth. But evidently, it wasn’t enough to shore up company-wide revenues.
Uncertainty on revenue traction in spite of a blockbuster order book has weighed on the Sadbhav stock. It has underperformed the Nifty Midcap 100 index for almost a year.
That’s not all. The other worry is that with weak execution and poor revenue growth, the firm’s cash flows have been adversely impacted, and working capital needs are getting stretched. Increase in net working capital days from 125 in FY18 to 138 in FY19 shows strained cash flows. According to JM Financial Services Ltd, “Consolidated net debt/equity is around 10.6 in FY19, while the stock pledge is at 49% of the promoter holding, clearly highlighting stressed cash flows that may also be impacting execution run rate."
The key, therefore, is a resolution of the jeopardized HAM projects.
The silver lining is that Sadbhav reported 120 basis point jump in operating profit margin to 12.4% in the March quarter. A basis point is 0.01%. Control on contracting expenses did the trick in spite of a revenue shortfall. Also, some of the HAM projects under execution aided profitability, as they bring in better margins compared to other project types.
Be that as it may, cash flows are the lifeline for infrastructure firms. Hence, investor interest in the Sadbhav stock will hinge upon a pickup in revenue growth from the existing order book. Note, that in a recent analysts’ call, the management refrained from giving the customary revenue growth guidance for FY20, due to delays in “appointed dates". Apart from this, positive triggers could come from stake sale in some of its BOT assets, which have been elusive for a while.