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Buy Ashoka Buildcon Ltd For Target Rs.200

Reduction in assured IRR to SBI-M lowers burden

Event

Ashoka Buildcon (ABL) has signed a revised agreement with SBI-Macquarie (SBI-M) in respect of SBI-M’s Rs8bn investment in ACL. The revised agreement caps the assured valuation at ~Rs12bn (till Dec-21) from Rs15.3bn earlier, thereby lowering the burden for ABL by Rs3.3bn (10% of market cap) – positive for ABL. Maintain BUY.

* SBI-M invested Rs8bn in ACL over Jan-13 to Dec-15 with a guaranteed IRR of 12% till June-19 post which there has been no IRR accretion. This implied an obligation to return a minimum of Rs15.3bn in valuation to SBI-M upon sale of the underlying assets or through transfer/swap of shareholding in the underlying assets so that SBIM ultimately gets at least its minimum valuation.

* ABL has now renegotiated this return obligation to a cap of Rs12bn till Dec-21. Beyond Dec-21, there will be further interest on Rs12bn as mutually decided, subject to the interest being paid out of ACL’s asset sale proceeds. The implied XIRR for SBI-M is 5.1% assuming full payout on 31st Dec-21.

* It has been once again emphasized that the consideration (including interest) as agreed is subject to the receipt of proceeds from ACL’s asset sale process or restructuring of the investments by swapping into identified assets/SPV of ACL. In case of no deal situation, the original rights of SBI-M will be reinstated.

Asset returns weaker than envisaged; renegotiation lowers burden on ABL - positive

ACL’s asset portfolio has not generated adequate returns and the guaranteed IRR obligation to SBI-M further diminishes ABL’s value of investments. This has also been a key overhang on the stock. Now, at the margin, the burden on ABL has been lowered by Rs3.3bn, which is a positive. More so, the indicated timeframe of the new arrangement till Dec-21 implies greater certainty of tangible progress in asset sale process. SBI-M’s willingness to negotiate a lower return could be driven by a practical consideration to ensure a deal is consummated and that it can finally exit this investment. Also, the IRR accretion for SBI-M has stopped with effect from June-19 and delaying its exit is unlikely to enhance the value of investment. GMR Infra had similarly renegotiated its committed IRRs to its private equity investors in the Energy and Airports vertical.

We have an equity value of Rs20.5bn for ACL (net of NCD of Rs2.5bn in ACL holding company; does not include valuation of Rs3.3bn for 36.3% stake in Jaora Nayagaon directly held by ABL and also does not include 26% stake in the asset directly held by SBIM). The total equity and loans (including accrued interest) invested in ACL is ~Rs31bn and we expect there could be a significant write-off of this investment based on the assets included in the sale process and the actual valuation of the transaction. However, valuations are attractive at 10x FY23E EPC earnings (prior to interest income) without any adjustment for value of investments in BOT assets. With valuations of peer sets moving up to 14-18x on EPC basis, the stock has room to rerate. Maintain BUY.

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