>McNally Bharat Engineering

MBE declared its 1st qtr results which were below expectations, with a growth in net sales on standalone basis at 12%, operating profits degrew by 9% whereas PAT has grown by 15.8%.

1st Quarter Highlights

■ Order Book growth
Order book for the Projects business stands at 42000 mlns. Infrastructure forms 23% of the total order book, power comprises 37%, material & non ferrous segment forms 29% whereas steel mines & port forms the remaining 11% of the total. Order book for McNally Sayaji stands at 2480 mlns whereas for CMT & German Manufacturing business it stands at 3550 mlns. In May’10, MBE has bagged its first overseas order in Zambia of Rs. 1140 mlns. MBE also bagged its single largest BOP order of Rs. 8140 mlns in Apr’10.

■ Revenue Growth
MBE’s net sales stand at 2834.8 mlns out of which material & non ferrous segment contributed 54%, steel, mines & port contributed 26% power contributed 19% whereas the rest comes from the infrastructure sector. Operating margins have been lower at 5.5% due to completion of low end jobs in the 1st qtr. Outsourcing expenditure as a % of net sales have increased from 19% to 24% which has led to incremental expenditure from 93% to 95%. Employee cost has increased drastically by 70% from 5.7% to 8.7% yoy as a % on net sales. Interest cost has reduced by 24% yoy which could be due to partial repayment of high interest loan. Consequently PAT has
remained flat at 2.2% reflecting its dull performance for the qtr.

■ Bad performance from Subsidiaries
McNally Sayaji has delivered very poor results with an incremental growth of 17% in its net sales while its operating profits have degrown by 23% and and PAT has degrown by 66% mainly on account of lower volume growth, low margins jobs, higher interest outgo and higher depreciation on additional capacity created. Similarly for CMT business, revenue stands at 760 mlns, with operating profit margins at 4% and PAT margins at 3%.

■ Valuations
MBE has indicated plans to participate in a big way in the Steel sector modernization packages of SAIL , Balance of Plant(BOP) packages in Power sector, Port expansion programme of NMDP and capacity increase in nonferrous metal sector, as and when it picks up again.

At its CMP of Rs 286, the stock quotes at PE of 14x and 11x its FY11E and FY12E cons. earnings of Rs 20.7 and 26.9 respectively. We have reduced our earnings estimates based on weak Q1 performance but we remain bullish over its long term performance and give an Accumulate Rating on the stock, with a target price of Rs. 323 based on a PE of 12x consolidated FY12E EPS of Rs. 26.9 per share.

To read the full report: MCNALLY BHARAT