McNally Bharat Engineering Co. Ltd (MBEL) reported Q3FY11 standalone YoY revenue growth of 13.8% to Rs3.8bn. OPM declined by 40bps to 6.5%. Adjusted PAT grew by 19.7% to Rs83.4mn mainly on account of lower interest cost. The 9MFY11 performance of McNally Sayaji was subdued as sales grew by mere 7% and PAT de-grew by 35%. We remain positive on the long term prospects of the company but lower our PE multiple from 12x to 10xFY12E in line with broader correction in valuation of infra stocks. We maintain BUY with a revised target price of Rs275 (10xFY12E).

Project business report muted growth
MBEL reported subdued revenue growth of 13.8% to Rs3.8bn which was below our expectation of Rs4.05bn. Management sighted the concern of projects getting delayed and payments not coming on time. OPM declined by 40bps to 6.5%. Other income included Rs33mn as profit on sale of land. Resultantly adjusted net profit grew by 19.7% to Rs83.4mn led by lower interest cost.

Order backlog and inflows
As on date, MBEL has an order backlog of ~Rs39.2bn vs Rs35bn (SA basis) at the end of Q3FY10. Further the company has bidded for projects worth Rs133bn and is L1 in projects worth Rs4.7bn. The total order inflows in 9MFY11 amounted to Rs19bn and orders worth Rs10bn are expected in Q4FY11. Q3FY11 order inflow (SA) amounted to Rs. 2.9bn (down 68% YoY basis)

Subsidiaries also disappoint
In 9MFY11, McNally Sayaji witnessed sales growth of 7% to Rs1.88bn. OPM contracted by 466bps and resultantly PAT was down by 35% to Rs. 115mn. CMT and German business reported a sales of Rs2.24bn and OPM of 8.3% for 9MFY11.

VALUATIONS AND RECOMMENDATION
We expect revenue to witness a CAGR of 24% (FY10-12E). We continue to remain skeptical about margin improvement going forward given the fact that company is aiming for high growth by entering into newer segments (BoP, Cement, Oil & Gas etc) wherein it might have to compromise on the margins to bag its maiden order. At the CMP of Rs213 the stock is attractively valued at 8.7x and 7.7x FY11E and FY12E EPS respectively. We lower our multiple from 12x to 10xFY12E in line with broader correction in valuation of infra stocks and maintain our ‘BUY’ recommendation with a revised target price of Rs275(10x FY12E).