Asset monetization plans to deleverage balance sheet
Expect execution CAGR of 26% over FY18-20
Balance sheet improvement via monetization of assets: Sadbhav Infrastructure Project (SIPL) intends to monetize its operational asset portfolio of 12 projects, proceeds of which will be utilized to (a) reduce debt at SIPL standalone level, (b) provide growth funding for the upcoming hybrid-annuity model (HAM) projects and (c) repay debt taken from Sadbhav Engineering (SADE). SIPL intends to offload a majority stake (51-100%) in its portfolio of 12 operational projects, due diligence for which is being carried out by international funds; the deal is expected to conclude by Dec’18. Total equity investment in this portfolio stands at INR23b, for which it expects valuation of 2x its invested capital. Successful completion of the transaction would help SADE to improve its balance sheet quality by significantly reducing outstanding debt (INR14.5b) and bring down the debt-equity ratio to 0.4:1 (debt below INR8b). Even after excluding the asset sale transaction, SADE expects to reduce debt by INR2.5b in FY19 by improving the receivable cycle.
Working capital cycle to normalize to 120 days:
SADE expects the working capital cycle to normalize to 120 days from 180 days now on account of (a) release of money stuck on account of variation jobs – SADE expects release of INR2.6b blocked in two projects (Eastern Peripheral Expressway: INR1.7b and Mysore Bellary: INR0.9b) and (b) repayment of loans taken by SIPL.
Highway segment to be key focus area:
SADE had diversified into the irrigation and mining segments as ordering activity in the core highway sector had come to a standstill. However, with the highway segment now providing multi-year strong ordering visibility, SADE intends to shift the focus back to its core area. In the current order backlog, 82% of the orders are from highway segment, 15% from mining segment and the balance from irrigation segment. SADE intends to (a) focus on the highway segment, where it has the requisite expertise to execute projects, (b) move out of the irrigation segment (avoid projects with last-mile connectivity) and (c) continue with mining segment projects to keep the machinery occupied.
Guides for revenue of INR41/INR55b for FY19/20, operating margin of 12%:
SADE’s revenue growth was muted over FY15-18 (6% CAGR) due to constrained execution in the newly ventured irrigation, mining and railway segments. However, SADE expects revenue of INR41b in FY19 and INR55b in FY20 (26 CAGR), driven by execution of the 12 HAM projects (76% of highway segment orders). As the revenue mix tilts in favor of in-house projects where it has all clearances in place, revenue growth is expected to strengthen. Of the 12 HAM projects, 7 are under construction, 1 has received financial closure, and financial closure and concession agreements for the remaining 4 projects are expected to be signed by Oct’18. Operating margins at the company level are estimated at 12% levels, given (a) completion of legacy projects in irrigation and mining, (b) execution of in-house HAM projects, where the margin is better than that in road EPC projects.
Order backlog provides strong medium-term revenue visibility:
Over the past year, SADE has witnessed healthy order inflow in the HAM category (which has helped it to generate order backlog of INR133b as on Mar’18), providing healthy revenue visibility until FY20. Even in 1QFY19, SADE has bagged incremental road projects worth INR30b (Mumbai-Nagpur and Karnataka order). Its order book stands at INR132b, of which 82% comes from transportation projects (76% from BoT/HAM and balance from EPC), 15% from mining projects, and balance from irrigation projects. SADE’s order book provides good medium-term revenue visibility – CAGR of 26% over FY18-20.
Arbitration claims to be settled over next year:
SADE has claims outstanding worth INR7.2b (INR4.1b for Mumbai-Nashik, INR0.7b for Dhule-Palesnar, INR1.6b for Nagpur-Seoni and INR1b for Rohtak-Panipat), which it expects to be settled over the next year.
Valuation and view:
A healthy order backlog, an established execution track record and a strong upcoming ordering pipeline from the NHAI put SADE in a sweet spot. This, coupled with the likely improvement in its balance sheet quality (through monetization of assets, improvement in the working capital cycle), further strengthens the investment case for SADE. Moreover, the recent stock price correction provides a decent opportunity to play the infrastructure story through one of the established players in the sector. We maintain our Buy rating on the stock with a revised SOTP-based target price of INR385 (prior: INR450).
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