Project revenues/margins continue to be hit in FY14, led by tepid execution and the inability to book profits in new projects bagged with higher margins as they are yet to achieve 25% margin recognition threshold. The Sidra project is 95% complete now, and management stated that margins on new projects are in excess of 5%. Also, ~65% of the MEP order book comprises of new projects, where the execution period is 15-18 months. The unitary cooling business reported robust performance in FY14 with 12% revenue growth in FY14, and margins at 12.3% (up 330bps yoy) and maintained market leadership with 20% share.
The margins were being supported by scale economies, improved product quality, better product mix (with split ACs contributing 73-74% of sales) and operational efficiency. Margins are expected in low double digit vs the earlier expectations of ~9%.
The focus continues to be on bagging orders with EBIT margin in excess of 5%. Overall sentiment across domestic operations (44% of order book) awaits macro push. The outlook for GCC nations is set to improve as first-stage tendering activity (finalisation of PMCs) for mega capex related to FIFA World Cup has started. Net working capital (NWC) at the end of 4QFY14 was at 53 days, down from the peak of 69 days reported in 2QFY13. The stock trades at 20x FY16E EPS of R10.3 and 16.2x FY17E EPS of R12.7. Maintain Buy.
Motilal Oswal Fin Services
