Sadbhav Engineering: Seemingly a turn around story

Sadbhav Engineering: Another turn around story 
320 Target for short term, 355-420 target till Q4FY18

Company Overview (as on it's website)

Founded in 1988 by Mr. Vishnubhai Patel, Sadbhav Engineering Limited (SEL) today is considered among the few elite infrastructure companies in the country. In the last couple of decades, we have truly risen above and beyond.

We have implemented projects including Construction of Roads & Highways, Bridges, Mining and Irrigation supporting infrastructure. We have successfully constructed more than 4,500 lane kms of Roads and Highways (both National and State Highways) while an additional 2,200 lane kms are under various stages of construction. We are listed on both BSE and NSE and have had the privilege to work for and with highly reputed organizations from all over the country such as NHAI, Sardar Sarovar Narmada Nigam, Coal India, GIPCL, GHCL, L&T, HCC, Punj Lloyd among various others.

In the near future, we will be participating in the Government of India’s NHDP initiative of developing over 50,000 kms of National Highways in several phases and would also be taking a part in national building which envisions providing network of roads to around 23,000 villages all over India. Sadbhav is also looking forward to participate in SARDP-NE, which would establish road connectivity to the state capitals, district headquarters and remote areas of North-East region of India. Going forward, we hope to accomplish much more and build landmarks while setting benchmarks in the infrastructure industry for others to follow. For Sadbhav, future is just the beginning.

My Outlook

Clearly the order book is spiking, due to which the debt is also seems to growing. But the debt doesn't seem to be a major concern as of now, since the majority of the road contracts are signed under HAM scheme (hybrid annuity model scheme):

For the uninitiated one's let me give you a brief about HAM:

The government has decided to introduce Hybrid Annuity Model (HAM) to revive PPP (Public Private Partnership) in highway construction. At present, three different models –PPP Annuity, PPP Toll and EPC (Engineering, Procurement and Construction) were followed by the government while adopting private sector participation.

1. The Build Operate and Transfer (BOT) Annuity Model

Under BOT annuity, a developer builds the highway, operates it for a specified duration and transfers it back to the government. The government starts payment to the developer after the launch of commercial operation of the project. Payment will be made on a six month basis.

2. BOT Toll Model

In this toll based BOT model, a road developer constructs the road and he is allowed to recover his investment through toll collection. This toll collection will be over a period of nearly 30 years in most cases. There is no government payment to the developer as he earns his money invested from tolls.

3. Engineering, Procurement and Construction (EPC) Model

Under this model, the cost is completely borne by the government. Government invites bids for engineering knowledge from the private players.  Procurement of raw material and construction costs are met by the government. The private sector’s participation is minimum and is limited to the provision of engineering expertise. A difficulty of the model is that financial is the high financial burden for the government

So, coming back to the company report. Sadbhav Engineering being a gujurat based is essentially close to the BJP government at centre. And trust me, when I say, it matters- it does. The last time I mentioned some company (Kolte Patil) being close to the centre, it became a multibagger since then. Evidence for the same being: 1. Vishnu Patel, co-founder of Sadbhav was presented Gujarat Ratna by Anandiben herself. 2. Sadbhav Engineering has  openly donated around 21 Lakhs to Modi campaign before the LS elections. 3. The patel family is closely associated with some ministers.

Click above^

Most of the current projects executed projects by sadbhav are BOT annuity model and the payment will start by Q3FY18, the cash flow will subsequently spike up and the D/E  will become nominal. The company then might become highest grossing amongst institutional players (It aleady is). Also, the company has decent exposure in Himachal Pradesh, Gujarat, Nagaland, Tripura, Meghalaya, Mizoram, Madhya Pradesh, etc. Most of these being BJP stong hold.

Himachal Pradesh: A feather in it's cap.

Coming to Himachal Pradesh, I am quite certain of BJP victory there, as I visited HP recently and interacted with several locals. Plus, BJP has unleashed the CBI terror upon Virbhadra Singh and his family. BJP is currently negotiating with congress MLAs to crossover. The infrastructure there needs immediate attention given the recent accidents at Shimla and Manali. Several hundred bridges are required to connect the scattered himachali villages. 

Three city youths killed as car collides with bus on Manali highway

28 Dead As Bus Falls Into Gorge Near Rampur In Himachal Pradesh

10 Die In Himachal Pradesh Accident

Four-laning and bridge projects have already kicked off from chandigarh, they will reach Shimla, Manali and other Himachali cities after the elections. Sadbhav, having recently developed high terrain capabilities and being closer to the centre will hugely benefit from this. (P.S. I am just an analyst and don't have polarised political opinions).

Besides, the company will enormously benefit from projects like DMIC, Sagarmala Project, Look East, etc. 

The company is also venturing into several areas like 4 laning, port devoelopment, private contracts, metro infra, etc.

Executed Projects:

http://sadbhaveng.com/construction/

Clientele:

http://sadbhaveng.com/our-clients/

Optimism & Recent order wins:

1. Sadbhav Engineering secured two road projects in Gujarat
2. Sadbhav Engineering successfully bids for Project of Kandla Port Trust
3. Sadbhav Engineering standalone net profit rises 13.97% in the June 2017 quarter

4. Sadbhav Engineering signs EPC agreement with Sadbhav Bangalore Highway

5. Confident of bagging a lot more orders in FY18: Sadbhav Engg

6. See pickup in road projects execution; expect 15-18% revenue growth in FY18

7. Plan to invest around Rs 135 crore in 4-laning project in Maharashtra: Sadbhav Infra

8. Nagpur E-way
9. Interest costs have gone down by almost 100-150 bps year over year: Nitin Patel, ED, Sadbhav Engineering

Technical Support:

Sadbhav Engineering, is one of the key infra players in the western zone having road building capability and expertise in hilly terrain (HP and Tripura [election states]). Also, the price seems to be very lucrative as of now. There was a sudden surge in is volume ( 4.9xAvg. Qty. & 10.2xAvg. del. Qty.). This might be an indicator of insider buying stocks from the market. It is somehow still below it's 50 Days SMA.

Several indicators say that it is in oversold/ neutral range.
But, it's EPS and Book Value has been steadily rising and I clearly sense a turn around real soon.
Total assets spiked up to a total of 13,790.30 cr. Vs 12,737.63 in 2016.
It accounted a loss of 171 cr vs 220 cr loss in 2016 and 232 cr loss in 2015.
A significant rise in Profit and drop in tax can be noticed.
The promoter holding averages at around 46.76%. But this low holding is not of any concern since around 33.50% public holding is with huge names like Abu Dhabi Investment Authority, Government Pension Fund, Kuwait investment Authority fund, ICICI prudential, ICICI Life Insurance, Tata Balance fund, Nomura, SBI, etc. And clearly these firms are not like day to day traders and are at this counter for long term.
Also, a promoter bought 675,500 shares at ₹295 each on 4th October signalling future strength.
Also, it was awarded an order worth 167.4 cr for development of smart industrial port at Kandla port on 10th October.

Key Financials:

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