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A new beginning
We maintain BUY with a reduced SOTP of Rs 340/sh (vs Rs 353/sh earlier). We value SEL’s EPC business at 15x FY21E EPS and assign a 20% hold co discount to SIPL stake’s market value. We have downgraded FY20/21E EPS by 1/2%.
* Deal highlights: SIPL finally announced divesture of 9 BOT assets to IndInfravit trust (~Rs 15/0.9bn invested equity/short term debt) at an EV of Rs 66.1bn (Rs 40.6/25.5bn D/E). The equity consideration is split between cash receipt (Rs 19.0bn) and 10% stake in the trust (Rs 6.5bn). Excl. minority interest (of Rs 0.7bn to Monte Carlo) this translates to an equity valuation of ~1.6x (incl. loss funding) and ~1.7x (excl. loss funding).
* Post-deal dynamics: SIPL has entered into a Right Of First Offer (ROFO) with IndInfravit for all SIPL assets (incl. under construction 12 HAM, remaining 3 BOT assets and future Toll/HAM assets). This a big positive as it provides a ready platform for future equity churning (~Rs 3-4bn expected annual inflow). Besides O&M revenue (Rs 40bn over 15yrs) for 9 divested assets, SIPL will be preferred for the EPC/ O&M works for future Trust projects (incl. TOT). O&M rev. will have 20% EBIDTA margin.
* De-leveraging in sight: Post the deal, management expects standalone debt at SEL/SIPL to reduce from Rs 14.9/14.3bn (Mar-19) to Rs 8.5-9/4.5-5bn. This will provide increased bandwidth for upcoming NHAI HAM/BOT projects’ bidding. With very few grade-A developers left with an appetite for PPP projects and smaller players facing funding challenges, this deal bodes well for the Sadbhav group in its quest for growth.
* Deal to lend liquidity for execution ramp up: Currently only Rs ~85bn of the order book is firing with 5 HAMs (incl. one KSHIP and four NHAI HAMs) worth ~Rs 41.8bn yet to start. Though financial closure for all 4 NHAI HAMs is in place, the appointed dates are likely to come by Sep19, due to delay in land acquisition. This will likely coincide with inflows from the deal which will provide sufficient headroom for execution ramp up. We expect substantial execution ramp up post 2HFY19.
* Indirect inflows from divested assets, additional sweeteners: SIPL will have Rs 3bn of additional inflows from Ahmedabad ring road project and Rs 750mn from Aurangabad Jalna project. The present value of inflows will be ~Rs 2.5bn. These are compensation from States for loss in car traffic and concession extension. Besides this, SIPL has full rights on Rs 2.5bn divested assets claims.
SIPL’s asset monetization brings in the much needed liquidity flush to the Sadbhav Group. The cash infusion will lead to SEL net D/E reducing from 0.7x to 0.2x (FY19/20E). Balance sheet strengthening makes a case of credit rating upgrade. With IndInfravit’s backing, SIPL is well placed to bid for upcoming HAMs/BOTs and SEL in turn stands to benefit from captive ordering. We believe SEL is well placed to deliver 20.3/26.5% FY19-21E Rev/APAT CAGR. Maintain positive stance
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HDFC Securities Limited (HSL) is a SEBI Registered Research Analyst having registration no. INH000002475
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