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Divestment of BOT toll assets removes a big overhang

* Ashoka Buildcon’s subsidiary Ashoka Concessions has entered into a share purchase agreement with Galaxy Investments II Pte, a KKR entity, for the sale of its entire stake in five toll assets for INR13.3b.

* Of this, INR12b would be used to provide an exit to SBI Macquarie for its stake in Ashoka Concessions. Post regulatory approvals, the deal is expected to be closed by Sep’22. SBI Macquarie’s exit has been pending for long and has been an overhang on the stock.

* In the five projects – Ashoka Highways (Bhandara), Ashoka Highways (Durg), Ashoka Belgaum Dharwad Tollway, Ashoka Sambalpur Baragarh Tollway, and Ashoka Dhankuni Kharagpur Tollway, Ashoka Concessions has invested INR21b (equity). There would be a net impairment of INR5.5- 6b for Ashoka Buildcon from this transaction, which would be accounted for in 3QFY22. Its external debt in these five projects stood at INR32b.

* The company is in advanced discussions to sell stake in Jaora Nayagaon and the Chennai ORR project, and some developments could be expected on this front soon. The equity infusion in these two projects stands at INR3.5b (total infusion at INR6b).

* Ashoka Buildcon is also looking to monetize its HAM assets through outright sale or the InvIT route.

* Going forward, the management would continue to bid for Road projects and also evaluate toll projects where it sees value accretion. It recently participated in the Ganga Expressway toll project tendering process.

* This deal has been long overdue and clears a big overhang on the stock. The stock trades at 8x FY23E EPS for the core construction business. We retain our Buy rating with a TP of INR175/share, based on SoTP valuation.

Focus shifts to operations and monetization of other BOT assets

* After re-negotiating the valuation with SBI Macquarie to INR12b (from ~INR15.3b), Ashoka Buildcon has managed to finalize the deal in FY22.

* The management can now focus on other aspects like execution of its existing order backlog and monetize other assets.

* With an improvement in management bandwidth and reduction in consolidated debt levels, it would be able to take up additional projects and capitalize on growth opportunities.

Focusing on Roads, Railways, Building, and Power verticals; open to taking up new toll road assets

* Ashoka Buildcon is looking at several Infra verticals to keep its order flows elevated. Within Roads, it is bidding for big ticket toll Road projects.

* While there is no major toll project pipeline at this point, it would selectively assess the opportunities there as and when they come up.

* Over the long term, the management expects construction revenue to grow at 15-20% over the next few years, with a stable margin profile.

Valuation and view

*  The sale of the toll road assets was expected for a while as the management was looking to provide an exit to SBI Macquarie. It is now looking to accelerate the sale of its other assets, which includes Jaora Nayagaon and the Chennai ORR project, to free up further capital.

* With this sale, a big overhang has been removed. The management’s focus now shifts to business operations and new business opportunities.

* While the deal is subject to receiving regulatory clearances and could take 9-12 months to fructify, the step is in the right direction. Any developments on the sale of other assets, where discussions are in advanced stages, could be incrementally positive.

* A robust order book and improvement in the Balance Sheet augurs well for Ashoka Buildcon. The stock trades at 8x FY23E EPS for the core construction business. We retain our Buy rating with a TP of INR175/share, based on SoTP valuation.

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