The government has lined up huge infrastructure development plans, which are set to drive corporate India’s growth story over the next 4-5 years. McNally Bharat Engineering Company (MBE), a leading engineering firm, is set to benefit from the huge spend in the infrastructure and industrial sectors.
Business: MBE provides turnkey solutions in the areas of power, steel, aluminium, material handling, mineral beneficiation, fly ash handling and high concentrate disposal.
The company is also into turnkey projects related to coal washing, port cranes, civic and industrial water supply, etc. Headquartered in Kolkata, MBE is part of the Williamson Magor Group and has recently demerged its business into two divisions - projects and products.
MBE’s subsidiary McNally Sayaji Engineering Ltd, manufactures a range of products required for its various projects, which includes crushing, screening & milling equipment, pressure vessels, material handling equipment, steel plant equipment and process equipment such as flotation cell and slurry pumps, etc.
To bring resource consolidation and synergy, MBE has regrouped its project business into four strategic units — material handling & non-ferrous metals, steel, mines & port solutions, power and infrastructure. It has technical collaborations with some of the world’s top firms for each of their activities.
Investment rationale: The company’s presence across different infrastructure verticals makes its business robust and de-risked. The government’s increasing focus on infrastructure in the power and highway segments augurs well for MBE.
MBE has a order-book of around Rs3,500 crore as on date, which provides strong revenue visibility for coming years. Of this order-book, 28% is contributed by power and 34% by the steel, mines and port segments.
Further bids worth Rs 4,910 crore are at different stages of completion, of which MBE is an L1 bidder for orders worth 860 crore. The company, which has secured orders worth Rs 1,450 crore in the first half of FY10, expects to bag orders worth Rs 1,600 crore in the second half. MBE is expected to continue its presence, in a big way, in the steel sector modernisation packages of SAIL, balance of plant in the power sector, port expansion programme of National Maritime Development Programme and potential capacity increase in non-ferrous metal sector.
The company’s management aims to clock Rs 5,000 crore revenues in FY13. The company expects to register a combined topline of around Rs 1,800 crore in FY10, with operating Ebitda of 8-9%. Though prices of commodities are showing signs of firming up, it would not have a significant impact on MBE’s margins, as contracts of the company are having a price variation clause.
MBE recently acquired the coal & minerals technology (CMT) division of German firm KHD Humboldt Wedag International. With this acquisition, MBE would increase its global presence considerably in the coal and mineral processing space, as well as in domestic power sector. The company expects to grow the CMT business to $100 million by 2011-12 and earn margins in excess of 12%.
MBE plans to continue capital expansion in its projects and product division by spending Rs 115 crore over next 1-1.5 years. The funds would be raised via a mix of debt and equity. MBE recently announced a rights issue in the ratio of 1:10 to raise Rs 43 crore.
Concerns: Being in the infrastrucuture segment, MBE has high exposure to the government sector industrial capex cycles. Any economic slowdown or any adverse macro environment leading to a decrease in government and industrial sector spending or delay in execution of projects would affect its revenues. Any delay in payments by customers would also severely affect its balance sheet.
On account of its recent acquisitions and aggressive growth plans over the coming years, debt levels will increase. This, in turn, would lead to higher interest payments and would affect the company’s net profits.
Valuations: MBE’s expansion and a strong order book provide good visibility for revenue growth over the next 3-4 years. Its recent acquisitions and de-merger of the products division to focus on high-margin segments in power, mineral processing, port handling and infrastructure will further add to revenues and better margins. MBE’s revenues are expected to grow at a compounded annual growth rate of (CAGR) 45% over FY09-FY11 and net profit at a CAGR 49% over the same period.
At a current market price of Rs 201.85, MBE trades at a P/E ratio of 11.43x & 8.30x its FY10E & FY11E earnings respectively. In view of its strong order pipeline and presence in diversified infrastructure segments, MBE is a good domestic play and can be looked at current levels to expect good returns from a 2-3 years perspective.
(Disclaimer: The writer does not hold any shares in the company)
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