CAPITA TELE 5.10.07RECOMMENDATION
FRIDAY TELEFOLIO RECOMMENDATION
McNally Bharat Engineering Company
Set for exponential growth
Huge investments in steel, power and metals industries will set the company on an exponential growth path
Buy
McNally Bharat Engineering Company
BSE Code
532629
NSE Code
MBECL
Bloomberg
MCNA@IN
Reuter
MCNL.BO
52-week High/Low
Rs 221 / Rs 96
Current Price
Rs 197 (as on 5th October 2007)
McNally Bharat Engineering Company (MBE) is one of the leading Engineering Companies in India engaged in providing Turnkey solutions in the areas of Steel, Power, Alumina, Material Handling, Mineral Beneficiation, Coal washing, Ash handling and disposal, Port Cranes, Civic and Industrial water supply etc. Over 250 plants have been constructed on turnkey basis by MBE till date.
The company, headquartered at Kolkota, is owned jointly by the Williamson Magor group and the G. P. Birla group and was a pioneer in India in the field of coal washing, Mineral Beneficiation and Material Handling with several first to its name.
MBE’s business can be broadly classified into projects division, product division and highway division.
The projects division is the flagship that encompasses material handling and mineral processing businesses. This business also encompasses ash handling, water supply systems and port handling. This division has been the largest revenue driver for the company in the past years and accounts for 75-80% of total revenues.
The product division, located at Kumardhubi, Dhanbad in Jharkand has shown consistent performance over the past few years. The division involves manufacture of road construction machinery, water pumps and spare parts for steel and cement plants.
In the highway division, MBE has a tie up with ELSAMEX SA of Spain focusing on highway construction, rehabilitation, and operations and maintenance. MBE has entered into this business when its core business was not doing well. However in future this division will not be the area of focus as its core business is set for exponential growth.
MBE has technical collaborations with some of the world’s leading firms for each of their activities. Some of its associates include Outokumpu Technologies- Finland, Soleus- France, Poltegor- Poland, TPE- Russia, Aubema- Germany, Sieb Technik- Germany, Eriez- USA, Krebs Engineers- USA etc.
MBE also has two subsidiary companies – EWB Kornyezetvedelmi Kft., Hungary, a fully owned subsidiary which is a world leader in ash handling systems and Eriez-MBE India Ltd. (EMIL) in Bangalore, a joint venture with Eriez Magnetics, USA the world Authority in Magnetic, Vibratory and Metal Detection applications.
Huge capex by user industries
MBE is well positioned to take advantage of the capex boom which its client industries i.e. metals, minerals, mining, ports, power etc. are witnessing. According to estimates these client industries are set to invest around Rs 1.45 tn in India over the next 8-10 years. This can culminate into a Rs 2000 crore annual opportunity for MBE over the next few years. If such an investment is to take place, MBE will find itself in a sweet spot and benefit from the high growth in the industry.
Steel sector investments will be the key growth driver
The company has recently expanded its scope in the steel sector from just providing mineral beneficiation and material handling solutions to include the latest in steel manufacturing technologies including sintering plant of size 400 sq. m. and above, coke over batteries and continuous casting machines through various technological tie-ups.
In steel four projects have already been approved for modernization and expansion and total outlay will be about 42000 crore. One is Rashtriya Ispat Nigam Limited, where the company has bagged an order of 560 crore that is the first order in steel sector. And second is coming from IISCO, where there will be 10,000-crore investment, out of which the company have already committed bid of about 3,000 crore, and in 2008 it will be Bokaro Steel Plant, where its investment is approximately 10,000 crore, followed by Durgapur Steel Plant with investment of about 12,000 crore. All these steel plants are located very close to the company's factories. And one of the largest inputs of all these projects is steel itself. And steel is available also very close to its factory, which is Bokaro Steel Plant,. So the company has a definite logistic advantage in all these orders and one can expect the company to win a significant portion of this business.
Bulging order-book
The Order book position, as on 30th June 07, stands at Rs 1075 crore. The company's order book is thus 2 times FY07 sales. Apart from the above the company has also bid for projects worth Rs 6000 crore (Rs 3000 crore in steel sector) of which it expects to bag orders worth Rs 1000 – 1500 crore orders in the next few months.
The company expects new orders of Rs 3,000 crore in FY 2008 almost doubling its order book to at least about 2,000-crore plus at year-end.
Diversification to add further impetus
The company is at this stage looking at various options to diversify and extend its offerings. New businesses where the company is currently interested include coal washeries, industrial gear box manufacturing, contract mining, sponge iron and baggage handling.
Q1 results is just beginning of the good times
Sales for the quarter ended June 07 was higher by 3% to Rs 110.79 crore. As the sales of scrap were down 54% to Rs 0.06 crore, the total operating sales amounted Rs 110.85 crore, up 3% only. However, an improvement of 230 bps in the operating margins to 8.2% resulted in operating profit posting a growth of 42% at Rs 9.11 crore.
Other income stood at Rs 30 lakh against Rs 8 lakh. Interest cost was higher by 30% to Rs 2.55 crore. The depreciation was lower at Rs 0.50 crore as compared to Rs 0.52 crore in the corresponding previous period. This took PBT up 59% to Rs 6.36 crore. As effective tax rate spurred by 281% to Rs 1.98 crore, net profit grew 26% to Rs 4.38 crore.
Change in revenue mix – positive for margins
MBE has been increasing its revenues from higher margin businesses like mineral processing – and steel sector applications resulting in improved operating margins.
Mineral processing and steel business is relatively technology intensive and has lower competition, resulting in higher margins. Thus, MBE would not only have a strong top line growth (as its order book increases) but would also witness an improvement in operating profit margins as revenues from higher margin segments increase faster.
Reasonable valuation
In FY 2008, we expect the company to register sales and net profit of Rs 617.77 crore and Rs 47.19 crore respectively. On diluted equity of Rs 30.10 crore and face value of Rs 10 per share, EPS works out to Rs 10.7. The share price trades at Rs 197. P/E works out to a reasonable 18.4.
McNally Bharat Engineering Company: Financials
0503 (12)
0603 (12)
0703 (12)
0803 (12P)
Total sales
288.07
332.74
504.01
617.77
OPM (%)
3.9
5.3
5.6
6.7
OP
11.25
17.67
28.34
41.55
Other inc.
0.26
0.50
0.39
0.77
PBIDT
11.51
18.17
28.73
42.32
Interest
5.76
8.74
9.02
11.73
PBDT
5.75
9.43
19.71
48.95
Dep.
2.30
2.73
1.72
1.76
PBT
3.45
6.70
17.99
47.19
EO
0.00
-0.10
2.09
0.00
PBT after EO
3.45
6.60
20.08
47.19
Tax
0.83
1.35
2.58
15.04
PAT
2.62
5.25
17.50
32.14
EPS (Rs)*
0.9
1.8
5.2
10.7
* Annualised on diluted equity of Rs 30.10 crore; Face Value: Rs 10
(P): Projections
EO: Extraordinary items
EPS is calculated after excluding EO and relevant tax
Figures in Rs crore
Source: Capitaline Corporate Databases
McNally Bharat Engineering Company: Results
0706 (3)
0606 (3)
Var. (%)
0703 (12)
0603 (12)
Var. (%)
Sales
110.79
107.85
3
503.42
331.19
52
Sale of Scrap
0.06
0.13
-54
0.59
1.55
-62
Total Sales
110.85
107.98
3
504.01
332.74
51
OPM (%)
8.2
5.9
5.6
5.3
OP
9.11
6.41
42
28.34
17.67
60
Other income
0.30
0.08
275
0.39
0.50
-22
PBIDT
9.41
6.49
45
28.73
18.17
58
Interest
2.55
1.96
30
9.02
8.74
3
PBDT
6.86
4.53
51
19.71
9.43
109
Dep.
0.50
0.52
-4
1.72
2.73
-37
PBT
6.36
4.01
59
17.99
6.70
169
EO
0.00
0.00
0
2.09
-0.10
LP
PBT after EO
6.36
4.01
59
20.08
6.60
204
Tax
1.98
0.52
281
2.39
0.95
152
Deferred Tax
0.00
0.00
0
0.19
0.40
-53
PAT
4.38
3.49
26
17.50
5.25
233
EPS (Rs)*
#
#
5.2
1.8
* Annualised on diluted equity of Rs 30.10 crore; Face Value: Rs 10
# EPS cannot be annualised due to the seasonality in business
Var. (%) exceeding 999 has been truncated to 999
LP: Loss to Profit PL: Profit to Loss
EO: Extraordinary items
EPS is calculated after excluding EO and relevant tax
Figures in Rs crore
Source: Capitaline Corporate Databases
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