McNally Bharat Engineering

Turnkey engineering solutions provider, McNally Bharat Engineering, managed to sail through a difficult FY-09, maintaining robust revenue growth and order accretion. The company also utilised the dull period to put its house in order by undertaking corporate restructuring measures and resorted to acquisition to expand its portfolio of business offerings. The current order book, diversified business profile and strong demand expected from user industries buttress earnings growth in the medium term.

Investors with a two-year investment perspective can consider investing in the stock of McNally Bharat. At the current market price of Rs 272, the stock trades at 15 times its expected consolidated per share earnings for FY-11. The stock can be bought in small lots as the markets may provide opportunity to accumulate during dips. Besides, the company has announced plans for a rights issue at Rs 140 a share. Existing shareholders can wait for the offer.

Graduating to BoP

McNally Bharat renders project services to sectors such as power, mineral processing, steel and non-ferrous metals, ports and other infrastructure activities. Material handling, coal washing and bulk-handling cranes, are some of the turnkey projects undertaken by the company.

McNally has diversified its business from merely executing material handling systems for user industries to offering complete Balance of Plant (BoP) works. For instance, the company, in 2009, bagged a BoP work for a power project as well as a complete design, engineer and structural work for a green anode project in an alumina plant. This upward integration will help showcase itself as a all-rounder in engineering services and act as a reference point for future orders besides propping up profit margins.

Eventful year

McNally Bharat has had an eventful FY-10 so far, in terms of its restructuring exercise and acquisition. The company transferred its product business to an 86 per cent subsidiary and retained the project business under the parent company. This move, meant to differentiate its offerings, will ensure improved business focus and allow independent leveraging for each company. At the same time, McNally Bharat would be able to generate better margins as a consolidated entity as it would tap its subsidiary for equipment to be supplied for projects thus retaining backward integration benfits. The subsidiary, McNally Sayaji Engineering, has four manufacturing units for crushing, screening, milling, material handling and other heavy equipment used in core industries. On a standalone basis, McNally Bharat's revenues and margins may be marginally muted by this realignment, as the product business enjoys lucrative margins. McNally Sayaji accounted for a fifth of the consolidated revenues for the September quarter.

Besides the restructuring, McNally Bharat also acquired the coal and mineral processing business of German-based KHD Humboldt for a total cash outflow of Rs 80 crore. This acquisition is expected to augment McNally Bharat's skills in coal and mineral processing, cement as well as in the power sector. Besides, the acquired company's marketing presence in Europe, Australia, China and South America may help McNally bid for Engineering, Procurement and Construction contracts, especially in developing countries.

McNally Bharat was among the few capital goods companies to successfully combat the slowdown in 2009. While the company has been on a fast-track mode, clocking sales and earnings growth of 42 per cent and 85 per cent annually in the last three years, it managed an impressive 76 per cent revenue growth (to Rs 968 crore) in FY-09 as well.

Order flows

Its order accretion in the first half of FY-10 too remained unaffected with orders bagged in this period moving well past the inflows of FY-09. Its order book as of September stood at Rs 3100 crore, over thrice FY-09 revenues. Comfortable debt levels and funds from rights issue and private equity (for subsidiary) are likely to ensure smooth order execution.

McNally Bharat's operating profit margins of about 8 per cent have dipped to the 6-7 per cent range in recent quarters as a result of still-high raw material costs and outsourcing expenses. The higher raw material cost could be on account of booking revenues on older projects. However, going forward too, an increase in commodity price can threaten the company's margins, as a good proportion of orders, according to the management, are on a fixed-contract basis. The outsourcing expense may, however, see some moderation as the company has set up its own construction division.

Orders in the L1 bidding stage include BoP projects, with the company already securing its first order in this space. Winning these orders could help build a portfolio with superior profit margins.

via BL