MOSL: SADBHAV ENGG-Asset monetization plans to deleverage balance sheet; Expect execution CAGR of 26% over FY18-20

Sadbhav Engg: Asset monetization plans to deleverage balance sheet; Expect execution CAGR of 26% over FY18-20

(SADE IN, Mkt Cap USD0.7b, CMP INR276, TP INR385, 39% Upside, Buy)

• Balance sheet improvement via monetization of assets: Sadbhav Infrastructure Project (SIPL) intends to monetize its operational asset portfolio of 12 projects, proceeds of which will be utilized to (a) reduce debt at SIPL standalone level, (b) provide growth funding for the upcoming hybrid-annuity model (HAM) projects and (c) repay debt taken from Sadbhav Engineering (SADE). SIPL intends to offload a majority stake (51-100%) in its portfolio of 12 operational projects, due diligence for which is being carried out by international funds; the deal is expected to conclude by Dec’18. Total equity investment in this portfolio stands at INR23b, for which it expects valuation of 2x its invested capital. Successful completion of the transaction would help SADE to improve its balance sheet quality by significantly reducing outstanding debt (INR14.5b) and bring down the debt-equity ratio to 0.4:1 (debt below INR8b). Even after excluding the asset sale transaction, SADE expects to reduce debt by INR2.5b in FY19 by improving the receivable cycle.
• Working capital cycle to normalize to 120 days: SADE expects the working capital cycle to normalize to 120 days from 180 days now on account of (a) release of money stuck on account of variation jobs – SADE expects release of INR2.6b blocked in two projects (Eastern Peripheral Expressway: INR1.7b and Mysore Bellary: INR0.9b) and (b) repayment of loans taken by SIPL.
• Highway segment to be key focus area: SADE had diversified into the irrigation and mining segments as ordering activity in the core highway sector had come to a standstill. However, with the highway segment now providing multi-year strong ordering visibility, SADE intends to shift the focus back to its core area. In the current order backlog, 82% of the orders are from highway segment, 15% from mining segment and the balance from irrigation segment. SADE intends to (a) focus on the highway segment, where it has the requisite expertise to execute projects, (b) move out of the irrigation segment (avoid projects with last-mile connectivity) and (c) continue with mining segment projects to keep the machinery occupied.