Stock Review: Mcnally Bharat Engineering Company Ltd. (MBE)

 

 

 

Mcnally Bharat Engineering Company Ltd. (MBE) is a leading engineering company whose principal activity is to provide turnkey solutions. It provides solutions in areas such as power, steel, alumina, material handling, mineral beneficiation, coal washing, ash handling and disposal, port cranes, and civic and industrial water supply.

 

The company has aggressive expansion plans through joint ventures, strategic partnerships and collaborations across the globe, hence its revenue is expected to increase in future. This global diversification is expected to strengthen the firm's product business by adding new product offerings. The company also plans to focus on high-margin segments like power, mineral processing, port handling and infrastructure. This will further improve its margins.

 

Besides, being in the infrastructure segment, the company is likely to benefit from high government expenditure in the infrastructure space. Among its weaknesses, the company is highly exposed to the government's industrial capex cycles. This means that any decrease in government spending or capital expenditure by the industrial sector, or delays in execution of projects would affect the company's revenue.

 

The company's sales have grown at a compounded annual growth rate (CAGR) of 37.70 per cent and PAT at 86.80 per cent between FY04 and FY09. MBE has been able to reduce its debt:equity ratio over the past two years from 1.38 in FY07 to 0.77 in FY09. But if we keep in view its future expansion plans, the debt:equity ratio could increase once again in future. This will lead to higher interest payments which will, in turn, affect the company's net profits.

 

Although the company has increased its net profit margin (NPM) from 0.76 per cent in FY04 to 3.5 per cent in FY09, this is low relative to that of its peers.

 

The company's return on capital employed (ROCE) for FY09 (5.36 per cent) saw a significant decline of 9.16 percentage points compared to the previous year (14.52 per cent).

 

The stock is currently trading at a PE of 21.79 which is below its five-year median PE of 27.5. The company has an attractive PEG ratio, which is 0.36 currently.

 

Since the stock's valuation is attractive and the sector that it operates in has bright prospects, you may buy the stock. However, you must have an investment horizon of more than three years.