McNally Bharat Engineering Result Updated

Result Update on McNally Bharat Engineering for 4QFY2011 with a Buy recommendation and a Target Price of  `255 (12 months).

McNally Bharat Engineering (MBE) reported disappointing set of numbers for 4QFY2011 on a standalone basis, as reduction in EBITDA margin along with higher interest and depreciation cost led to flat performance on the PAT front. On a consolidated basis, we estimate the company’s order book to stand at `4,278cr as of 4QFY2011 (2.4x FY2010 consolidated revenue), led by the power sector, which lends high revenue visibility. We maintain our Buy view on the stock.

Lower EBITDA margin, higher interest and depreciation outflow restricts profit growth: Although MBE posted strong top-line growth of 23% yoy to `694 for the quarter backed by stronger execution cycle, EBITDA margin declined by 130bp to 5.9% (7.3%) due to a 550bp decline in gross margin to 46.1% (40.5%). Depreciation and interest for the quarter increased by 60% and 24%, respectively. This coupled with lower EBITDA margin led to flat PAT for the quarter.

Outlook and valuation: We believe an improving economic scenario, continuous government focus on infrastructure spend and pick-up in private capex augur well for companies providing EPC solutions to the core sector of the economy. We have revised our sales and EBITDA margin estimates downwards to factor in poor performance of MBE and its subsidiaries in 4QFY2011. At `189, the stock is available at attractive valuations of 5.9x FY2013E earnings and 3.3x FY2013E EV/EBITDA. Hence, we maintain Buy with a revised target price of `255 (`307)