Emkay McNally Bharat Engineering

Update
Result
Research Reiterate Positive View
June 17, 2008
McNally Bharat (MBEL) Q4FY08 results were mixed bag. Revenues grew
20% yoy to Rs2.1 bn, below our estimates. Operating profits doubled to
BUY Rs174 mn, in line with our estimates. Net profit grew by 539% yoy to Rs96
mn, in line with our estimates. Revenues for FY2008 grew by 9% to Rs5.5
Price Target Price bn, below our estimates. Net profit increased 61% to Rs249 mn, in line
Rs149 Rs255 with our estimates. Continued growth momentum in order inflows
resulted in order backlog doubling to Rs23.2 bn. We continue to maintain a
Sensex 15,396
positive view on MBE considering its presence in all industry verticals with varied
product and solutions offerings. Our core argument of (1) changing order book
mix in favor of steel and mineral vertical and (2) aggression in product business
Price Performance
are playing out, thus reinforcing our positive stance. At CMP of Rs149, the
(%) 1M 3M 6M 12M
stock is trading at 17.1x FY2008, 11.0x FY2009E and 7.8xFY2010E
Absolute (15) (17) (50) (19) earnings of Rs8.7, 13.5 and 19.1 per share respectively. We maintain our
Rel. to Sensex BUY rating.
(4) (16) (37) (25)
Source: Capitaline Q4FY2008 Result – Mixed Bag
Revenues grew by 20%, below our estimates- Q4FY08 revenue growth at 20%
Stock Details yoy was below our expectations. Revenues for the quarter stood at Rs2.1 bn against
Sector Material our estimates of Rs2.6 bn. We attribute below expectation growth to lower order
Handling booking and delay in receipt of orders from steel majors like SAIL & Rashtriya Ispat
Reuters MCNL.BO Nigam (RINL). However, we believe that revenue booking is likely to gain momentum in
Bloomberg MCNA@IN Q1FY09- coinciding with execution of major orders namely - RINL (Rs5.6 bn) and SAIL
Equity Capital (Rs mn) 286
(Rs2.6 bn and Rs6.2 bn).
Face Value(Rs) 10 Operating profits doubled to Rs174 mn, in line with estiamtes- Despite low
No of shares o/s (mn) 30 growth in revenues, operating profits doubled to Rs174 mn, in line with our estimates.
52 Week H/L 317/135 The growth in operating profits was mainly on account of 500 bps yoy expansion in
Market Cap (Rs bn/USD bn) operating margins to 8.4%, above our expectations. The jump in margins was primarily
4/93
due to combined effect of (1) an improvement in the performance of the low margin
Daily Avg Volume (No of sh) 45849
project division (2) rising conrtibution of high margin equipment division and (3) low
Daily Avg Turnover (US$mn) 0.2 base effect of Q4FY07 (OPM at 3.5%) consequent to completion of low margin orders
during the period. However, in light of the current order backlog composition and rising
cost pressures owing to escalating raw material prices, we believe that the current
Shareholding Pattern (%)
margins are not sustainable going forward.

M’08 D’07 S’07

Net profit at Rs96 mn, in line with estimates- Despite low growth in revenues,
net profits (before extraordinary items) for the quarter grew by 539% yoy to Rs96 mn, in
Promoters 30.9 31.0 32.6 line with our estimates. We attribute growth in net profits to better operating
FII/NRI performance by project division. In the current quarter the company has written off Rs25
22.2 19.9 18.9
mn on account of its FCCB issue, whereas in the corresponding previous quarter it had
Institutions 24.8 24.4 22.7 reported an extraordinary net gain of Rs50 mn. Earnings for the quarter stood at Rs3.3
Private Corp 7.7 9.0 7.5 per share (before extra-ordinary) against Rs0.6 per share in corresponding quarter
previous year.
Public 14.4 15.7 18.4

Key Financials Rs mn
Pritesh Chheda YE- Net EBITDA APAT AEPS EV/ Div RoCE
pritesh.chheda@emkayshare.com
Mar Sales (Core) (%) (Rs) EBITDA Yld P/BV (%) P/E
+91 22 6612 1273
FY07 5034 296 5.9 175 5.7 15.9 4.1 0.7 14.7 25.9
Prerna Jhavar FY08P 5490 480 8.7 224 8.7 9.2 3.0 0.7 20.7 17.1
prerna.jhavar@emkayshare.com FY09E 9635 736 7.6 417 13.5 6.4 2.4 1.3 29.1 11.0
+91 22 6612 1337
FY10E 13489 1071 7.9 591 19.1 4.7 1.9 1.3 30.8 7.8

Emkay Research 17 June 2008 1

 M C N AL L Y B H AR AT Result Update

FY2008 – Net profit in line with estimates

Revenues grew by 9% to Rs5,490 mn in FY08, below our estimates. We attribute below
expectation performace to delay in receipt of orders from SAIL and RINL and delayed
project execution. However, favorable revenue mix was key highlight for FY2008 (1)
contribution of high margin equipment division improved by 200 bps to 15% of total
revenues and (2) rising share of high-margin verticals in project division- steel (up from
0% in FY2007 to 11% in FY2008) and ash handling (up from 10% in FY2007 to 14% in
FY2008) and reduction in low margin material handling business (down from 63% in
FY2007 to 45% in FY2008).

Despite below expected performance at revenue front, operating profit growth at 57% to
Rs449 mn was in line with estimates. This was due to 250 bps improvement in
operating margins to 8.2%, above our expectations. The margin expansion was
attributed to better revenue mix with higher contribution from steel & ash handling
verticals and equipment division. Net profit (before extraordinary items) increased 62%
to Rs249 mn, in line with our estimates. The company has accounted for FCCB issues
expenses worth Rs25 mn in the current year, as against a net extraordinary gain of
Rs20 mn in previous year. Earnings for the year stood at Rs8.7/Share (before extra-
ordinary) against Rs5.7/Share in previous year.

Strong traction in order book – up 106% to Rs23.2 bn

MBE witnessed continued growth momentum in order book during FY08. MBE
emerged big beneficiary of ongoing investment supercycle- MBE bagged order inflows
worth Rs17.5 bn in FY08 against Rs10.3 bn in FY07, growth of 70%. Significant order
accretion was recorded in Q4FY08 to the tune of Rs10.1 bn. Robust oder inflows
resulted in 106% growth in order backlog to Rs23.2 bn. The order book composition
has also improved with high margin equipment division comprising 5% of total order
book or Rs 1.15 bn, up from 2.7% in FY2007. Orders bagged by MBE during
Q4FY2008 include high value orders such as (1) Rs2 bn order from Uranium
Corporation, (2) Rs6.2 bn order from SAIL for a raw material handling plant for its
IISCO plant.

We believe that MBE is expected to continue its momentum in order inflows, in view of
the ongoing modernization / expansion programs within the steel, port and power
sectors. Further MBE is also actively looking at orders in the civil construction to
emerge as total solutions provider.

Expansion plans – on track

MBE’s plans to treble its existing capacity through (1) brownfiled expansion of existing
plant at Kumadhubi and (2) construction of greenfield plant at Asansol, West Bengal.
MBE has commenced commercial production under the first phase of expansion of its
Kumardhubi plant. The first phase of Asansol plant, which shall cater to the steel and
power verticals, is expected to be commissioned in FY2009. We view that progress on
expansion plans is in line with estimates.

Acquired 68.3% stake in Sayaji for Rs590 mn – strategic fit

MBE has acquired a controlling 62.3% stake in Sayaji Iron & Engineering Co. Ltd.
(Sayaji) in May 2008 for a consideration of Rs590 mn. Sayaji’s product offerings include
Crushers, Grinders, Screens, Road Construction and material handling equipment,
Concrete Batching Plants, Hammer Mills, Asphalt Paver finisher and Windmills (1 MW
capacity). The acquisition shall aid MBE to enlarge its product offerings, especially in
the crusher market, and increase share of revenues from the Product business. Also,
acquired entity has stronghold in West India thus providing geographical diversification.
Thus, we believe that above acquisition is strategic fit to MBE operations.

Emkay Research 17 June 2008 2

 M C N AL L Y B H AR AT Result Update

In FY2008, Sayaji reported revenues of Rs635 mn and operating profits of Rs128 mn.
Operating margins stood at a healthy 20.2%. Net profit for the year was Rs83 mn
resulting in earnings of Rs21.3 per share. The ROCE and ROE stood at 43.9% and
51.4% respectively, higher than MBE. We view that, Sayaji’s is earnings positive at the
time of acquisition.

Outlook & Valuations

We continue to maintain a positive view on MBE considering its presence in all industry
verticals with varied product and solutions offerings. We believe that MBE with its all
round capabilities will be a principal beneficiary of ongoing investment supercycle. Our
core argument of (1) changing order book mix in favor of steel and mineral vertical and
(2) aggression in product business are playing out, thus reinforcing our positive stance.
At CMP of Rs149, the stock is trading at 17.1X FY2008, 11.0X FY2009E and 7.8X
FY2010E earnings of Rs8.7, 13.5 and 19.1 per share respectively (standalone
earnings). We maintain our BUY rating with a target price of Rs255.

Key Financials
Y/E,Mar (Rs. mn) Q4FY08 Q4FY07 % YoY Q3FY08 % QoQ FY2008 FY2007 Gr (%)
Net Sales 2,058 1,710 20 1,181 74 5,490 5,034 9
Expenses 1,884 1,651 14 1,080 74 5,010 4,738 6
Raw Materials 1,102 860 28 666 66 3,025 3,090 -2
% Of Sales 54% 50% - 56% - 55% 61% -
Job Outsourcing Exp 392 503 -22 169 132 955 923 3
% Of Sales 19% 29% - 14% - 17% 18% -
Employee Cost 119 68 74 91 31 349 236 47
% Of Sales 6% 4% - 8% - 6% 5% -
Other expenditure 271 220 24 155 75 681 489 39
% Of Sales 13% 13% - 13% - 12% 10% -
Ebidta 174 59 193 101 72 480 296 62
Ebidta% 8.4 3.5 - 8.6 - 8.7 5.9 -
Other Income 2 (3) -159 1 167 11 25 -58
Interest 17 30 -45 24 -32 89 94 -5
Depreciation 7 3 157 6 31 23 17 31
PBT 152 24 537 72 110 348 179 94
Tax 56 9 534 23 147 99 26 284
PAT (Before EO Item) 96 15 539 50 94 249 154 62
Net Margin% 4.7 0.9 - 4.2 - 4.5 3.1 -
E/O Item (25) 50 -150 - NA (25) 21 -217
Reported PAT 71 65 9 50 43 224 175 28
Earnings 3.3 0.6 496 1.7 94 8.7 5.7 51

DISCLAIMER: This document is not for public distribution and has been furnished to you solely for your information and may not be reproduced or redistributed to any other person. The manner
of circulation and distribution of this document may be restricted by law or regulation in certain countries, including the United States. Persons into whose possession this document may come are
required to inform themselves of, and to observe, such restrictions. This material is for the personal information of the authorized recipient, and we are not soliciting any action based upon it. This
report is not to be construed as an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. No person associated with Emkay
Share & Stock Brokers Ltd is obligated to call or initiate contact with you for the purposes of elaborating or following up on the information contained in this document. The material is based upon
information that we consider reliable, but we do not represent that it is accurate or complete, and it should not be relied upon. Neither Emkay Share & Stock Brokers Ltd, nor any person connected with
it, accepts any liability arising from the use of this document. The recipient of this material should rely on their own investigations and take their own professional advice. Opinions expressed are our
current opinions as of the date appearing on this material only. While we endeavor to update on a reasonable basis the information discussed in this material, there may be regulatory, compliance, or
other reasons that prevent us from doing so. Prospective investors and others are cautioned that any forward-looking statements are not predictions and may be subject to change without notice. We
and our affiliates, officers, directors, and employees world wide, including persons involved in the preparation or issuance of this material may; (a) from time to time, have long or short positions in, and
buy or sell the securities thereof, of company (ies) mentioned herein or (b) be engaged in any other transaction involving such securities and earn brokerage or other compensation or act as a market
maker in the financial instruments of the company (ies) discussed herein or may perform or seek to perform investment banking services for such company(ies)or act as advisor or lender / borrower to
such company(ies) or have other potential conflict of interest with respect to any recommendation and related information and opinions. The same persons may have acted upon the information
contained here. No part of this material may be duplicated in any form and/or redistributed without Emkay Share & Stock Brokers Ltd'sprior written consent. No part of this document may be distributed
in Canada or used by private customers in the United Kingdom. In so far as this report includes current or historical information, it is believed to be reliable, although its accuracy and completeness
cannot be guaranteed.

Emkay Share and Stock Brokers Ltd.,

Paragon Center, Ground Floor, C-6
Pandurang Budhkar Marg, Worli, Mumbai – 400 013. , Tel no. 66121212. Fax: 66121299

Emkay Research 17 June 2008 3