MOSL: SADBHAV ENGG. (Buy)-Asset monetization process on track-Execution to see pick-up as executable order book improves
(SADE IN, Mkt Cap USD0.6b, CMP INR224, TP INR265, 18% Upside, Buy)
We met the management of Sadbhav Engineering and discussed the company’s asset monetization plans and improvement in its order book. Also, the company’s working capital cycle has normalized. Key takeaways:
- Asset monetization process on track, expect completion by end-FY19: Sadbhav Infrastructure Project Limited (SIPL) is well on track to partially monetize its operational road portfolio. Out of 12 operational projects, it expects to monetize nine projects where its total investment stands at INR15b. SIPL has already entered into an exclusivity contract with potential buyers; due diligence with regards to traffic, financial and legal is nearing completion. SIPL will offload 85% stake in these nine projects, retaining 15% stake and the O&M contracts for the same. Cash flow received from monetization of these assets will be utilized to (a) fund equity requirement of under-construction HAM projects (INR10b equity infusion required), and (b) repay INR4.5b loans of Sadbhav Engineering (SADE). SIPL also intends to monetize 12 HAM projects on completion of construction; contractual agreement with the buyer will include right of first offer.
- Execution to pick up as executable order book improves: SADE expects road project execution to pick up as its executable order backlog is now robust. The company has an order book of INR100b in the road sector with executable order backlog at INR600b. The balance INR400b is expected to get execution-ready by end-1QFY20, when land becomes available for these projects. SADE expects revenue booking of INR50b in FY20E as the entire road EPC order book comes under execution.
- Incremental focus to bag EPC projects given stringent approach from lenders: Lending norms have tightened with regards to (a) upfront equity commitment of 50% from developers, and (b) lending to projects after 30% physical progress. In this backdrop, SADE intends to focus on EPC projects in the near- to medium-term to scale up the order book with minimum equity commitment. Given the strong order backlog, which provides visibility of 3.6x its FY18 revenue, the focus is now to selectively bid for projects with better margins.
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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