IDFC Securities - Sadbhav Engineering (SADBHAV) Event update: Sadbhav Engineering (Outperformer) - Asset monetization to aid next phase of growth

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IDFC Securities

Shirish Rane

Event update: Sadbhav Engineering (Outperformer) - Asset monetization to aid next phase of growth

Event update

Sadbhav Infra Projects Ltd (SIPL), a listed subsidiary of Sadbhav Engineering (SEL), has entered into a deal with INDINFRA INVIT to sell 8 road assets along with one road asset held by SEL at an enterprise value (EV) of Rs66bn. INDINFRA INVIT has been promoted by L&T Infrastructure Development Projects Ltd (IDPL).

Details

SIPL operates 15 road assets and 12 under construction projects. Of the 15, the company has decided to sell 8 road assets (7 BOT and one Toll); additionally, one annuity road asset will be sold by SEL.
The deal has an EV of Rs66bn, with a net debt of Rs41bn. The remaining Rs25bn will come as net equity inflow (versus our estimate of Rs27bn) to SIPL, of which, Rs19bn will be realised in cash and Rs6.5bn in the form of INDINRA INVIT units. SIPL will realise all the cash, except for Rs1bn, which will flow to SEL.
Note that cash flow from all pending claims (~Rs4bn) will flow to SIPL. This includes Rs2bn claim as compensation for scrapping of toll for personal vehicles in the case of Ahmedabad Ring Road.
Of the Rs19bn cash, Rs9bn will be infused in under construction projects, Rs5.5bn of loan of SEL will be repaid and external corporate debtwill be repaid at SEL/SIPL.
Note that SIPL has 12 road projects under the hybrid annuity model (HAM), of which the company has received appointed dates for 8 projects, having infused equity of Rs4bn.
Other key highlights of the deal: a) Operation and maintenance contracts of Rs40bn from the INVIT for these 9 assets by SIPL b) SIPL has given right of first offer for all its projects c) SIPL holds the right to appoint one board member on the board of the INDINFRA INVIT

View and valuation

We believe SIPL will be able to meet equity commitments of under construction projects from the deal’s cash flows. Moreover, the leverage would reduce by Rs6-7bn (existing debt of Rs13bn) for the standalone company and by ~Rs48bn for the consolidated entity. Besides, the deal will provide further headroom to SIPL to bid for upcoming NHAI bids. The stock trades at 14x FY21E standalone EPS after adjusting for value of 68% stake in SIPL. Maintain Outperformer rating with an SoTP-based target price of Rs287.

15/07/2019 1 EN

Underlying

Sadbhav Engineering

Sadbhav Engineering Limited is a construction company. The Company is engaged in the construction and maintenance of roads and highway, and irrigation system (canal). The Company is also engaged in the site preparation for mining, including overburden removal and other development. The Company's segments include EPC Contracts and BOT (Toll & Annuity). The Company has projects in the roads and highways, bridges, rail metro projects, irrigation supporting infrastructure, and the mining sector. Its engineering, procurement, construction (EPC) projects in roads and highways are Rohtak-Hissar section, Malavalli-Pavagada section, Ambala-Kaithal section, and Yamunanagar-Saha Barwala-Panchkula section of Haryana. The Company's Mining sector deals with excavation of overburden and mining of minerals, such as coal, uranium and lignite. It has excavation work at Mangrol lignite mines, Gujarat. It is also engaged in the construction of earthen dams, syphon, remodeling and improvement of canals.

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INE226H01026 National Stock Exchange of India India

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IDFC Securities

IDFC Securities Ltd., a subsidiary of the Infrastructure Development Finance Company (IDFC) wherein the Government of India holds a 20% interest, is India's leading equities broker catering to most of the prominent financial institutions, both foreign and domestic investing in Indian equities. A research team of experienced and dedicated experts ensures the flow of critically investigated stock ideas and portfolio strategies for our clients. Our coverage spans across various growth sectors such as agriculture, automobiles, Consumer Goods, Technology, Healthcare, Infrastructure, Media, Power, Real Estate, Telecom, Capital Goods, Logistics, Cement amongst other sectors. Our clients value us for our strong research-led investment ideas, superior client servicing track record and exceptional execution skills.

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Analysts

Shirish Rane

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Event update: Sadbhav Engineering (Outperformer) - Asset monetization to aid next phase of growth

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Event update: Aurobindo Pharma (Outperformer) - Unit IV receives EIR; positive outcome

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