Published on 12/07/2019 9:17:35 AM | Source: Motilal Oswal Services Ltd

Neutral Sadbhav Engineering Ltd For Target Rs.275 - Motilal Oswal

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Asset monetization to help deleverage balance sheet

Focus now shifts to improving execution


SIPL sells nine operational road projects to IndInfravit at an EV of INR66.1b

Sadbhav Infrastructure Project Limited (SIPL) has entered into a definitive agreement with Indinfravit for the sale of its entire equity holding in nine of its operational road projects at an enterprise value of INR66.1b. SIPL has an equity investment of INR15b in these nine projects against which it will receive equity value of INR25.5b, thus valuing the deal at 1.7x its investment. The consideration will be split into 10% of IndInfravit units and INR19b of cash. The deal will also help to deleverage the balance sheet by reducing debt to the tune of INR40.6b. Incrementally, SIPL will (a) handle routine and major maintenance of the nine assets (INR40b contract for remaining concession period) as well as other projects that InvIT will invest into, (b)receive project management fees (toll collection fees for nine projects), and (c) have the right to claims worth INR4b from its various projects. Further, there is also a ROFO option with IndInfravit with respect to all future operational assets of SIPL.


Proceeds to deleverage balance sheet and fund future projects

The cash inflow of INR19b (post tax inflow of INR18.8b) will help SIPL achieve the twin objectives of a lean balance sheet and funding of under construction/new projects. While SIPL will repay the INR6.5b debt taken from SADE, it also plans to partially repay external debt (INR9b debt outstanding). The balance will be utilized to fund SIPL’s 12 under construction HAM projects, whose total equity requirement stands at INR13.3b. Of this, SIPL has currently invested INR4.3b. Cash received by way of monetization of assets will also help it to fund the balance equity requirement of INR9b for the HAM projects.


Implication of the deal on SADE’s financials

SIPL’s asset monetization will lead to cash inflow of INR6.5b for SADE (INR5.5b towards loans and advances that it provided to SIPL and INR1b towards its stake in the Mysore Bellary project). SADE intends to utilize this amount to repay the debt on its book (current debt of INR14.9b; to be scaled down to INR8.5b), which in turn will potentially improve the quality of its balance sheet and bring down the Net Debt: Equity ratio to 0.4:1. Improved balance sheet quality and liquidity availability will also help the company scale up the execution of projects in hand. Incrementally, we believe that the deal will also help improve the earnings quality of the company, even as the other income component declines (INR750m income from SIPL in FY18) and core business earnings increase.


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