Sadbhav Engineering Ltd. (SEL)

Transcription

1 SADBHAV ENGG.BSE - 26/05/15 D F 19 M 24 A 29 M 30 J J 16 A 19 S 19 O 28 N D 16 J F 19 M 2 3 A 27 M Trend Daily May 28, 2015 RETAIL RESEARCH Sadbhav Engineering Ltd. (SEL) Management Interaction Note Scrip Code Industry CMP Recommendation Target Time Horizon SADENGEQNR Infrastructure Rs Buy at CMP and add on dips to Rs band Rs quarters Price Chart Led by strong order book of Rs bn, improvement in the order inflows expected over the next two years & robust outlook of the infrastructure industry (strong recovery expected in the road sector with huge orders from NHAI in 1-2 years in EPC & BOT space & opportunities available in mining & irrigation sector), we expect SEL s revenues (standalone) to grow by healthy 20.5% over FY14-17E. With experience & expertise, diversified presence across transportation, mining & irrigation, healthy order backlog & strong execution capability, SEL is well placed to capitalize on the available opportunities. We expect the operating margins to improve from FY16 onwards (though gradually) on the back of faster execution of in-house BOT projects resulting into higher fixed cost recovery and due to higher revenue share from the high margin mining segment. Stock Details BSE Code NSE Code Bloomberg SADBHAV SADE.IN Price (Rs) on May 27, Equity Capital (Rs. Mn) Face Value (Rs) 1 Eq. Shares O/s (mn) Market Cap (Rs Mn.) 49,117.6 Book Value (Rs) 60.9 Avg. Volume (52 Week) 44, wk H/L (Rs) 385/160.3 Shareholding Pattern (As on March 31, 2015) % Holding Promoters 47.1 FII 15.9 Institutions 24.3 Others (incl. body corporate) 12.7 Total Mehernosh K. Panthaki Fundamental Research Analyst - FMCG, IT, Midcaps mehernosh.panthaki@hdfcsec.com As regards the BOT portfolio, there has been a strong growth in traffic witnessed by the company s toll projects over the past 2-3 quarters. With the recovery in the economic growth, we expect the traffic growth (which is directly linked with GDP growth) to improve over the next two years. Players with stronger balance sheet and diversified business models like SEL could continue to bid for upcoming BOT projects which would be at better terms. Extension of concession period (if done) could further improve the cash flows and NPVs of the projects We expect the working capital cycle to improve further over the next three years as the company expects to receive the payments from some of its SPVs. This would result in healthy cash flow generations from its operational assets going forward. This would ensure that debt-equity remains at comfortable levels. With improved performance, we expect an increase in the institutional holding going forward. Also, we expect the dividend payouts to improve with better profits. Further, any progress on SIPL s IPO (which has been delayed) could bring SEL back under limelight. Valuing SEL on SOTP basis (EPC business - PE basis & SIPL s BOT portfolio - DCF basis), we arrive at a price target of Rs We feel investors could buy SEL at CMP and average it on dips to Rs for our price target over the next 1-2 quarters. Standalone Financial Estimates: Particulars (Rs. in Mn) FY12 FY13 FY14 FY15E FY16E FY17E Net Sales % Growth y-o-y Operating Profit % Growth y-o-y PAT (Adjusted) % Growth y-o-y EPS (Fully Diluted) PE RETAIL RESEARCH Page 1

2 Company Overview Incorporated in 1988, SEL is an infrastructure development and construction company focusing on roads and highways, irrigation and mining operations. SEL s expertise includes construction, rehabilitating, upgrading, widening and strengthening roads and highways, construction of earthen dams, etc. The company is reputed for completing projects ahead of schedule and excellent quality of projects. SEL is engaged in Engineering, Procurement and Construction (EPC) business for Transport, Mining and Irrigation sectors. In Transportation, SEL undertakes construction of roads, metro, etc. contracts awarded by NHAI/State or by other developers. The company also undertakes construction of roads and highways for its in house BOT contracts. The company has constructed over 4500 lane kms. In irrigation segment, SEL is into construction of dams, canals, syphon, remodeling & improvement of canals. SEL has till date constructed over 260 kms of canals. In EPC Mining, SEL undertakes excavation of overburden & mining of minerals, especially coal. It has excavated more than 250 mn cubic meters. SEL derives almost 68.5% of its revenues [EPC:BOT 30:70] from the transport segment (in 9MFY15, in FY14: 73%). Mining accounts for 19.3%, while irrigation contributes 12%. Contribution from the power generation is negligible by 0.2%. The company has a well diversified order book of Rs bn (with total of 57 projects Transport 24; Mining 14 and Irrigation 19) in its EPC business as on Dec 31, 2014 (~66% non-captive) with presence in 12 different states (with MP, Jharkhand, Rajasthan, Haryana & Gujarat being the major states in terms of order value). SEL s key clients include NHAI, MSRDC, Delhi Metro Rail Corporation Ltd., BSRDC, NVDA, UCIL, GHCL, Coal India, etc RETAIL RESEARCH Page 2

3 SEL is also into construction of Roads & Highways on BOT through its subsidiary, Sadbhav Infrastructure Projects (SIPL). SEL holds 77.42% in SIPL, while 20.81% is held by Xander and Norwest Venture partners. SIPL has a portfolio of 13 BOT projects, of which 9 are operational and 4 are under various stages of construction (estimated to become operational in FY16 & FY17 respectively). The total project cost is Rs bn (Operational: Rs bn 2292 lane kms; Under construction: Rs bn 1448 lane kms). SEL has strong in-house integrated execution capabilities and state-of-the-art equipments. Note: i) Stake in ARRIL & DPTL have been increased to 100% (from September 2014 & April 2015 respectively) ; ii) 20% stake in MNEL has been sold to Gammon Infra for Rs. 720 mn in Jan 2015 RETAIL RESEARCH Page 3

4 Investment Rationale Well placed to leverage the opportunities available in the infrastructure sector Strong recovery expected in road sector; huge orders from NHAI likely in 1-2 years, both in EPC & BOT space After a subdued performance over the last 3-4 years, the construction sector is on the verge of significant recovery, thanks to the Modi led new NDA government for having taken decisive measures to resolve various policy issues / hurdles in infrastructure. There exists immense opportunity on the back of improvement in order inflows in roads, railways & urban infra (metro, water sewage plants). Main issues of environmental clearance, land acquisition and financing have been addressed effectively. The ministers handling the Roads, Railways and Power & Coal have strong track record. After a subdued phase in FY13 & FY14, EPC award activity from NHAI has started to pick up. NHAI has kick-started its much awaited yearly routine of EPC and BOT road project awards from January This time the process is going to be slightly different in the sense that i) government will build most of the roads on its own after a largely forgettable phase of PPP model of constructing roads; ii) government will spend the highest ever on roads in FY16E; iii) forest clearances will be faster with Stage II forest clearance from central government being scrapped; iv) Hybrid Annuity Model will be explored more to share project risks with the private sector; v) NHAI will likely achieve the target to complete awarding the remaining ~16k kms of NHDP in 2 years. Only 47% of NHAI road projects plan have been completed till date; with a major fillip to complete construction in the next 4 years we believe project awarding and construction activities to be at an all time high. With ~3000kms of projects terminated in the last 3 years fresh projects to be awarded by NHAI is likely to be ~16,000kms (13, ,000) in the next 2 years. NHAI likely to award ~4600km in FY15; funding not a concern; construction per day to increase to ~20km/ day before FY19E (from a subdued <5 km / day when NDA Gov tame in power). Further NHDP has a strong pipeline of 15,000 kms of road projects to be awarded. Road EPC contractors followed by road asset developers would benefit immensely from these opportunities. Further, we expect road traffic growth to pick up in the coming quarters on the back of uptick in the economic growth and sharp decline in the oil prices. This would benefit the BOT players significantly going forward. Quantum and quality of orders have improved significantly over the last few months with EPC players witnessing huge opportunity. Small and mid-sized contracting companies had witnessed order inflow decline of 15-20% p.a. in both FY13 and FY14. Now we expect substantial improvement with better quality of new orders as government will ensure land acquisition (80% for roads), and environment clearance through e-portals. Reduced competitive intensity and possible interest rate cuts could result in improved earnings growth for contracting companies. Reduced competition is due to many government tenders prohibiting companies in the CDR process from participating in new tenders and many PSU s making stringent payment terms resulting in increased working capital requirements. Hence we expect discipline to prevail over the next two to three years. We expect execution to improve going forward with stable margins and working capital cycle to improve by FY17. RETAIL RESEARCH Page 4

5 Funding doesn t seem to be a problem for NHAI. NHAI needs ~Rs. 1.1tn in the next 3 years. As per NHAI it will complete awarding of NHDP projects by FY17E. We assume ~70% of these projects to be on EPC mode and assume ~Rs. 80mn per km for EPC, we and arrive at total funding requirement of EPC projects ~Rs. 1.1tn for NHAI over the next 3-4 years. With a ~Rs. 200bn per year of funding from fuel cess and toll collections and with central outlay of Rs. 827bn for MoRTH for FY16E we expect comfortable funding from NHAI. Immense opportunities available in the mining & irrigation sector Apart from the transport sector, there are huge investment plans by GOI in Irrigation Sector. The new government has identified irrigation as one of its focus areas and announced various large schemes. Government plans to spend ~Rs 6,240 cr by 2017 to clean waters in 10,000 canals, lakes and rivers enabling irrigation on 1.2 million acres of land. Rs 1000 cr has been provided for Pradhan Mantri Krishi Sinchayee Yojna for assured irrigation in Union Budget Further there are upcoming opportunities in the mining sector as well. Coal India Limited plans to add its production capacity by over 40% to 615 MT by end of The demand for over burden removal is expected to grow driven by increased subcontracting by Coal India to increase production. Government of India is laying more focus on underground mining and is envisaged to increase its share from 15% of total production in India to 30% by Successful completion of Coal auctions and the new mining bill will result in a fillip to mining activities going forward. With experience, expertise and strong balance sheet, SEL is well placed to capitalize on available opportunities SEL has more than 25 years of experience in the infrastructure space. It has strong corporate governance. It is an integrated player with strong in-house execution capabilities for EPC and O&M. It has a proven track record of timely completion & excellent quality of projects. The company has received bonus for early completion of few projects (Rs. 90 cr in FY13). It has a strong order book of Rs. 82.4bn (40% transport; 33% mining & 27% irrigation sector) as of Dec 2014, which provides strong revenue visibility over the next three years. The company has so far executed >4,500 lane kms of road projects, excavated ~250mn cubic metres of overburden & minerals and constructed ~260kms of irrigation canals. SEL is one of the proven players in the construction space in the country and hence is well placed to leverage the opportunities available in the infrastructure sector (transport, mining & irrigation). With experience, expertise and strong balance sheet, we expect huge potential of order inflow for SEL over the next 2-3 years. Diversified presence across transportation, mining & irrigation with healthy order backlog & strong execution capability SEL has diversified presence across transportation, mining & irrigation segments. Transport Sector contributes 68.5% to the total EPC revenues and 40% to the total order book. Mining contributes 19.3% & 33% respectively, while Irrigation contributes 12% & 27% respectively. RETAIL RESEARCH Page 5

6 Under Transport segment, SEL undertakes construction, rehabilitation, upgradation, widening & strengthening of roads & highways. The company has constructed more than 4,500 lane kms of roads & highways. Some of the major projects completed include i) Widening & strengthening of NH 15 (ADB funded) kms; ii) Lalsot to Kota road project in Rajasthan 183 kms and iii) early completion of ARRIL (76 kms), BHTPL (97 kms) & DPTL (89 kms). Some of the key clients include MSRDC, Delhi Metro Rail Corporation Ltd., KSHIP, NHAI, BSRDC, Gujarat State Road Development Corporation Ltd., etc. Currently, the company is executing 24 EPC transport projects with a balance work order of Rs bn as on Dec 31, 2014 (40% of the total order book with majority of the orders from NHAI with 65% captive order book). The company has a good mix of EPC & inhouse BOT under transportation business, which changes depending upon the market situation. State-wise transport order book stood at 28% - Rajasthan, 23% - Haryana, 16% - Karnataka, 13% - Maharashtra, Balance 20% - Delhi, MP & Others. Major ongoing projects include i) Multai - Chindwara - Narsinghpur Saoner cash contract, Maharashtra; ii) Jodhpur-Barmer section of NH-112, Rajasthan; iii) Delhi Metro project, Delhi; iv) Gomati Chauraha - Udaipur section, Rajasthan; v) Rajsamand - Bhilwara, Rajasthan; vi) Rohtak to Hissar section, Haryana. SEL has shown strong execution ability in the roads sector over the past 21 years. The company has completed projects before time and has also earned performance bonus in the past for superior execution. The transport sector revenues declined by 1.9% on CAGR basis over FY11-14, largely on the back of sharp decline in revenues in FY13 (-42.9%) due to delays in environmental clearance for two large BOT projects. However, the revenue growth picked up sharply in FY14 (up 33.6%). Even in 9MFY15, the revenue growth has been robust at 20.4%. With a pick up expected in the NHAI road orders (~16000 kms over the next two years) and various policy reforms being initiated by the government like relaxation of environment clearance norms, easier exit norms to enable faster asset monetization, premium rescheduling, takeover of stalled projects by NHAI & setting up of Finance Corporations to fund projects, we expect strong order inflows in the roads segment over the next 2 years. Strong order book would improve the revenue visibility. This would result in healthy revenue growth in the transport segment over the next two years. Only few players like SEL with experience, expertise in the roads segment and balance sheet strength can bid for new projects. RETAIL RESEARCH Page 6

7 Under Mining segment, SEL undertakes excavation of overburden & mining of minerals. The company has excavated more than 250 mn cubic meters. Major projects completed include i) removal of overburden at Khadia OCP; ii) Removal of all types of material at Junad OCM of Wani area; iii) 7 year repeat contract from GIPCL for excavation of overburden at Mangrol mines. Some of the key clients include GHCL, UCIL, Coal India, Gujarat Industries Power Co. Ltd., etc. Currently, the company is executing 14 Mining projects with a balance work order of Rs bn as on Dec 31, 2014 (CAGR growth of 40% over FY11-14; 33% of the total order book). The state-wise order book stood at 62% - Jharkhand, 25% - MP, 10% - Gujarat, 2% - AP & Others. Major ongoing projects include i) excavation work at Mangrol lignite mines, Gujarat; ii) removal of over burden at Bharat Coking Coal, Dhanbad; iii) Maheshpur colliery of Govindpur area, Jharkhand; iv) Basantimata - Dahibari patch of Dahibari colliery of C.V. area, Jharkhand; v) Excavation of overburden at specified places of Amlohri OCP of NCL, M.P and vi) Overburden & extraction of Uranium Ore Banduhurang mine, Jharkhand. The mining segment revenues have grown by 8.7% over FY SEL witnessed a significant improvement in inflow in the mining segment in FY13 and FY14 on the back of increased focus by the company on mining to compensate subdued order flows in the road sector. This resulted in sharp jump of 50% in the segment s revenue growth in FY14. In 9MFY15, the growth accelerated further to 58.7%. With the new government s focus on improving mining activity, SEL expects the order inflows and revenue growth momentum in the segment to continue. SEL is also looking at entering into the Mining development operator business in JV with a partner and bid for larger projects worth Rs bn each, which should further improve inflows into the high margin mining EPC segment. Under Irrigation segment, SEL undertakes construction of earthen dams, canals, syphon, remodeling & improvement of canals. The company has constructed over 260 kms of canals. Major projects completed include i) construction of NMC from 108 to 127 km for SSNNL; ii) Canal syphon across river Watrak for SSNNL and iii) Construction canal earthwork, structures, RETAIL RESEARCH Page 7

8 lining and service road to Kachchh Branch Canal. Some of the key clients include NVDA, Government of AP, etc. Currently, SEL is executing 19 irrigation projects with a balance work order of Rs mn as on Dec 31, 2014 (27% of the total order book; 27% CAGR over FY11-14). The state-wise order book stood at 43% - MP, 34% - Gujarat, 18% - AP & 5% - Orrisa & UP. Major ongoing projects include i) HNSS main canal Anantapur district, Andhra Pradesh; ii) Gouravelly right side canal, Andhra Pradesh; iii) Omkareshwar right bank lift canal, M.P; iv) Radhanpur sub branch canal, Gujarat; v) Kachchh branch canal Adipur, Gujarat & vi) Bhauti high level canal, M.P. The segment revenue has grown by 30.7% on CAGR basis over FY The new government s increased focus on Water/Irrigation projects and new projects like inter-linking of rivers is likely to improve outlook for the segment over the next few years. We expect decent amount of order inflows in this segment going forward. Healthy CAGR growth expected in revenues over FY14-17; margins to improve on the back of faster execution of BOT projects and higher proportion of revenues from mining segment SEL s revenues have grown by a marginal 2.2% on a CAGR basis over FY This was due to sharp decline in the revenue growth in the transport segment in FY13 due to delays in environmental clearance for two large BOT projects. However, we expect a turnaround over the next two to three years, led by increased uptick in the ordering activity from NHAI and increasing focus on the mining & irrigation segment. In 9MFY15, the standalone revenues have grown by 28.4%. Over the past 4 years, SEL has improved its presence in Irrigation & Mining segment from 27% of total order book as on FY11 to 60% as on 9MFY15. We expect strong order inflows across SEL s all business segments with well diversified order backlog. Led by strong order book of Rs bn (which provides strong revenue visibility over the next three years) & robust outlook of the infrastructure industry, we expect SEL s revenues to grow by a healthy 20.5% over FY14-17E. RETAIL RESEARCH Page 8

9 SEL s operating profit has grown marginally by 1.6% over FY11-14, while OPM has declined from 10.8% in FY12 to 10.6% in FY14. Poor fixed recovery in the fixed cost resulted in sharp decline in operating profit (down 46.3%) & OPM in FY13 (down 225 bps over FY12). However, things have started to turnaround at the operating level. In 9MFY15, operating profit has grown by 26.9%, while OPM has declined marginally by 12 bps to 10.2%. We expect the operating profit to grow by 23% over FY OPM is estimated to fall marginally from 10.6% in FY14 to 10.4% in FY15. However, we expect them to improve to 11.1% in FY16 and further to 11.3% in FY17 on the back of faster execution of in-house BOT projects resulting into higher fixed cost recovery and due to higher revenue share from the high margin mining segment. Also the prices of bitumen have declined, which would further support the margins. RETAIL RESEARCH Page 9

10 We expect SEL s PAT to grow by 9.1% on CAGR basis over FY The growth is slower than the operating profit growth due to lower growth expected in FY15E on the back of significant increase in the depreciation cost and higher tax expense (compared to tax credit in FY14). However, we expect the PAT growth to pick up over the next two years with 20.6% growth in FY16 & 24.4% growth in FY17. PAT margin is estimated to fall from 6.1% in FY14 to 4.3% in FY15, but is expected to improve to 4.5% by FY17. The improvement would be gradual as we expect the tax rate to rise significantly in FY16 & FY17 (assumed to be 21% in FY16 & 23% in FY17). Attractive portfolio of BOT assets; Traffic growth picking up across projects SEL is also into construction of Roads & Highways on BOT (Build Operate Transfer) through its subsidiary, Sadbhav Infrastructure Projects (SIPL). SEL holds 77.42% in SIPL, while 20.81% is held by Xander and Norwest Venture partners. SIPL has a portfolio of 13 BOT projects, of which 9 are operational and 4 are under various stages of construction (estimated to be operational in FY16 & FY17 respectively). The total project cost is Rs bn (Operational: Rs bn 2292 lane kms; Under construction: Rs bn 1448 lane kms). The details of the projects are given below: Operating Assets: Particulars AJTL ARRIL MNEL NSEL BHTPL RPTPL MBCPNL HYTPL DPTL Stake 100% 100% 20% 100% 77% 100% 78.2% 100% 100% Project Type Toll Toll Toll Annuity Toll Toll Service Fee Toll Toll State Maharashtra Gujarat Maharashtra Maharashtra /MP Karnataka Haryana Maharashtra A.P Maharashtra RETAIL RESEARCH Page 10

11 JV Partner N.A N.A Gammon Infra N.A Monte Carlo Construction Limited Client Govt. of Maharashtra N.A SREI Infra and SREI Sahaj e- village Limited AUDA NHAI NHAI NHAI NHAI Govt. of Maharashtra N.A NHAI N.A NHAI Length (km) Border CPs Concession Start 1-Feb-07 6-Dec Mar Nov-07 5-Sep Apr- Diff. for all CPs 30-Jul Dec Concession (yrs) PCOD/COD 28-Jul May- 23-Dec May-10 9-Apr-12 9-Jan-14 Diff. for all CPs 10-Dec- 20-Feb Revenue Sharing N.A. Grant Grant N.A. Grant Premium Upfront Premium Premium Premium Project Cost 2, , , , , , , , ,200.0 Total Equity , , , , , Debt outstanding ( ) 1, , , , , , , , EBIDTA (FY14) ADTCs (mn per day) N.A Under Construction Assets: Particulars SUTPL BRTPL RHTPL MBHPL Stake 100% 100% 100% 74% Project Type Toll Toll Toll Annuity State Rajasthan Rajasthan Haryana Karnataka Client NHAI NHAI NHAI Govt. of Karnataka Length (km) Concession Start 18-Apr-13 9-Oct Dec Oct-14 Concession (yrs) Expected COD 15-Oct-15 8-Apr Jun Apr-17 Revenue Sharing Premium Grant Grant Grant Project Cost 11,515 6, ,716 7,892.7 Total Equity Required 3, , , Total Equity infused (till date) , , Total Debt ( ) 5, , ,189.0 Nil RETAIL RESEARCH Page 11

12 Pending work on BOT projects (as on Q3FY15) include i) Shreenathji Udaipur (Rs. 250 cr), ii) Rajsamand Bhilwara (Rs. 360 cr), KSHIP II (Rs. 670 cr), Rohtak Hisar (Rs. 690 cr). SEL expects to complete the Shreenathji Udaipur and the Bhilwara Rajsamand BOT projects ahead of schedule. The company has received appointed date in the KSHIP II project w.e.f. Dec 12, The company has completed the acquisition of 40% in the Hyderabad Yadgiri BOT project from GKC Projects for a consideration of INR265mn. In September 2014, SIPL signed a definitive agreement for acquisition of 20% stake in Ahmedabad Ring Road project for Rs. 620 mn. With this, SIPL holds 100% of share capital in ARRIL. SEL has already paid half of the acquisition price and the balance will be paid post receipt of all approvals. Further, in April 2015, SIPL signed a definitive Share Purchase Agreement for acquisition of 60% equity stake from HCC Concessions (for a consideration of Rs cr), a group company of HCC in Dhule Palesnar Tollway (DPTL). Post completion of the acquisition from HCC Group and transfer of holding by SEL to SIPL, SIPL will become 100% owner of DPTL. The net cash outflow for SEL in this deal will be Rs bn only as they had certain receivables from HCC which would be netted off in transaction. The transaction is expected to be completed shortly. The current total equity requirement is Rs. 135 crs - Rs. 100 cr in Shreenathji Udaipur in FY16 & Rs. 35 cr in KSHIP II. Further, SIPL is expected to repay SEL s loans worth Rs. 240 cr. Raising funds to meet this requirement would not be an issue. In Jan 2015 Sadbhav agreed to sell 1,03,99,500 equity shares of Rs. 10 each held in Mumbai Nasik Expressway Limited (MNEL) constituting 19.99% of share capital of MNEL to GIPL (Gammon Infra) for an aggregate consideration of Rs. 720 mn. In terms of the Term Sheet, the Company is in the process of transferring its shares in MNEL to SIPL. SIPL is also looking to raise funds through stake sale in MBCPNL. The company entered into a share purchase agreement with D Thakkar Construction Pvt limited on 18 September 2013 to issue 10,903 equity shares of MBCP (representing 21.8% stake in MBCP) for a consideration of Rs mn equity and Rs. 622mn subordinate debt (Rs. 720mn overall consideration, representing 21.8% stake in the company). However, we have not factored that in our assumptions. SEL had plans to raise funds (for further expansion) through proceeds from SIPL s IPO (of ~Rs. 600 cr). Further, it was looking to raise ~Rs. 500 cr through OFS of 3.23 cr equity shares (1.61 cr equity shares by Xander Investment Holding XVII Ltd and up to 1.62 cr equity shares by Norwest Venture Partners VII-A-Mauritius). The IPO was proposed to hit the markets by mid-april, but has been delayed. SEL has withdrawn its DRHP due to some change in the issue structure and has filed revised draft offer document again. As per the revised DRHP, the Issue consists of a fresh issue of equity shares of Rs. 10 each aggregating up to Rs. 425 cr mn and an offer for sale of up to 0.81 cr equity shares by Xander Investment Holding XVII Limited and up to mn equity shares by Norwest Venture Partners VII-A-Mauritius. Traffic growth picking up; Toll collections to improve going forward There has been a strong growth in traffic witnessed by the company s toll projects over the past 2 quarters. Toll revenue in its BOT projects grew 7 18% Y-o-Y. Projects like ARRIL, AJTL, BHTPL, HYTPL & MBCPNL have witnessed double digit toll growth in the range of % in Q4FY15 (3nd straight quarter of double digit growth for most of these projects). Bijapur-Hungund (BHTPL) traffic growth has picked post removal of mining ban. The average daily toll collection on MBCP has increased to Rs. 4mn daily, which indicates double digit traffic growth Q-o-Q. We expect SEL s toll revenues to grow by a healthy rate over RETAIL RESEARCH Page 12

13 FY14-17 on the back of pick up in the traffic growth (most of the projects are in the zone with higher share of industrial traffic), increase in the toll rates across the projects and the commencement of operations in new projects. Only 9 out of 22 posts at MBCP are currently operational. COD for 4 more posts has been received already and are expected to start in a month or two; In addition, 90% work on 4 more posts has been completed. Thus, 14 posts should be operational by July 2015 and the management expects the daily toll collections to increase to ~Rs. 4.9 mn. The management expects 20 posts to be operational by end of FY16 and all 22 posts by FY17. This would improve the total toll collections to Rs mn. Further, in case of DPTL, currently 14-km stretch is under construction (2 lanes), which is expected to be completed by July 31, This would increase the daily toll collections further by mn. Traffic growth at DPTL, which has been weak over the past few months, is expected to improve in the coming quarters. The asset's IRR would improve if traffic growth improves. SEL has bought a stake in DPTL at 1x invested book. This reflects the current traffic and cost structure and funding constraints for the seller. Strong pick up in traffic growth (with higher share of CVs), completion of pending 14-km stretch & improvement in cost structure could improve the project financials. Of the assets under construction SUTPL & BRTPL are expected to commence in Oct 2015 & April 2016 respectively and RHTPL & MBHPL are expected to commence operations in June 2016 & April This would further boost the toll collections. Further, SEL is expected to generate strong EBITDA in BOT assets as more projects become operational. Extension of concession period could further improve the cash flows and NPVs of the projects The company incorporated extension for MBCPNL project due to delay in land acquisition. After winning the project in May 2009, the company faced delays with respect to land acquisition due to which construction got delayed. As per the concession agreement if the land is not handed over to the concessionaire by Govt. of Maharashtra in not later 90 days period for the construction of check post from the date of work order the concession period will be extended based on cash flows submitted by concessionaire and approved by MSRDC. According to the management, the concession period would get extended by 3 years for all the check post. However, we have not considered this extension for in NPV projection for this project. Further, for other projects, as per their respective concession agreement, if the traffic growth in particular project does not reach the targeted PCUs within certain period (specified in the agreement project-wise) then the concession period would be extended for that particular project (extent is dependent upon the shortfall, as specified in the agreement). The extension of the concession period would further improve the cash flows and NPVs of the projects. We have considered extensions in projects like RPTPL, BHTPL & HYTPL (20% extension to their respective concession period taken, as the shortfall is likely to be significant). In certain projects under operation, SEL is undergoing negotiations for refinancing of their respective borrowing cost from 11.5% to 10.25%. However, we have not considered this proposed refinancing of the projects in our NPV calculation. RETAIL RESEARCH Page 13

14 NPV Calculation of projects Project NPV Stake SEL's value Fair Value per share Under Operation AJTL (Aurangabad Jalna) 2, % ARRIL(Ahmedabad Ring Road) 3, % MNEL (Mumbai Nasik)* 3, % NSEL (Nagpur-Seoni) % BHTPL (Bijapur-Hungund) 5, % RPTPL (Rohtak-Panipat) % MBCPNL (Maharashtra Border Checkpost) 20, % HYTPL (Hyderabad-Yadgiri) 3, % DPTL (Dhule Panesar) 3, % Under Construction SUTPL (Shreenathji Udaipur) % BRTPL (Rajshamand Bhilwara) % RHTPL (Rohtak Hisar) % MBHPL (Karnatka State Highway) % Total 55, SEL Valuation (77.42% stake in SIPL) Less: SIPL s standalone debt (to the extent of 31.6 SEL s stake) Add: SEL's share in BV/net worth of SIPL 37.5 Less: outflow due to increase in stake in DPTL 11.8 NPV (Rs. Per share) Note: i) Assumptions while calculating NPV: Average traffic growth at 6-7%, Cost of Equity at 13.4%; ii) We have not considered O&M revenues from SIPL for valuation purpose *In case of MNEL actual sale value of 20% stake Rs. 720 mn has been considered as NPV Strong balance sheet & careful selection of BOT projects to help SEL benefit from the macroeconomic uptick SEL generally avoids bidding in periods of high competition. In FY11, SEL didn t add any new BOT project due to intense competition in the industry In FY12 also; it refrained from bidding for a major part of the year. However, it booked two big projects viz; Shreenathji Udaipur and Solapur Bijapur, towards the end of the year as these had a strategic fit in its existing portfolio. The company has focused on selecting projects with low execution hurdles including land acquisitions, RETAIL RESEARCH Page 14

15 environmental clearance and forest clearance etc. Smaller players who had bid for NHAI s BOT assets are facing financial troubles due to delays in execution of projects or lower traffic. These companies are working towards monetizing the assets and refraining from bidding for new assets. Some of the companies have entered debt restructuring initiated by financial institutions. Companies with high leverage are being forced to sell assets and meet debt covenants. However, players with stronger balance sheet and diversified business models like SEL could continue to bid for upcoming BOT projects which would be at better terms. With ~73% of lane kms present in 4 key states of Maharashtra, Gujarat, Rajasthan and Haryana, SEL s strategy to bid for projects in high growth states and along stretches where it has an edge in estimating traffic (NH8, NH3 and NH7) is likely to yield benefits in the macroeconomic uptick. Strong Balance Sheet sustained low leverage, positive cash from operations; strong working capital management SEL has a strong balance sheet with sustained low leverage & positive cash from the operations. The debt-equity has increased from 0.5x in FY12 to 1.1 till date, it is still manageable and much lower than the industry average. At a time when many road contractors/ developers have been impacted due to aggressive bidding, lower-than-expected traffic growth and cost overruns due to delays in clearances and few EPC companies have entered into CDR, SEL is one of the few companies to have generated positive cash flow from operations over FY The company has never faced difficulty in getting bank guarantees for new projects. We expect strong cash flow generation to continue going forward. This would ensure that debt-equity remains at comfortable levels. Working capital to sales had risen to 31% in FY13 due to significant decline in revenue. However, it improved in FY14 and we expect the working capital cycle to improve further over the next three years as the company expects to receive the payments from some of its SPVs. This would result in healthy cash flow generations from its operational assets going forward Strong institutional presence SEL has strong institutional presence over the years. Though there has not been an increase in the institutional holding over the last four years, it has been in the range of 40-42%, which is quite strong. The percentage holding reflects the faith that the institutional investors have in the company despite the entire infrastructure sector going through a challenging phase over FY However, now the things have started to improve and the construction industry is on the verge of a significant recovery. The company has managed to weather the storm during difficult times. Hence during phase of recovery, we expect a sharp improvement in the company s financial performance over the next two to three years. The company is well placed to capitalize on the available opportunities. With this, we expect an increase in the institutional holding going forward. RETAIL RESEARCH Page 15

16 Low, but steady dividend payer over the last 12 years Despite being in a highly capital intentive industry and passing through challenging times, SEL has rewarded the shareholders with consistent dividend payouts (though low but steady) over the last 12 years. The dividend payments have increased from Rs. 2 mn in FY02 to Rs mn in FY14. The average dividend payout over the past 5 years has been 11.5%. Under a challenging scenario we are encouraged with the company s strategy of consistent dividend payments. We expect the company to contnue with this strategy. With bright prospects over the next two to three years, we expect the dividend payouts to improve. Competitive Profile In the EPC & BOT business, SEL faces competition with a number of listed large cap, mid & small cap infrastructure players. Some of the comparable listed peers include Ashoka Buildcon, ILL&FS Transportation Networks, KNR Constructions & IRB Infra. Though Ashoka s road portfolio is on larger scale, SEL s key projects are present in western/ north western region which places it better than Ashoka s key projects being around Orissa where there is uncertainty related to temporary iron ore mining-ban Further SEL has better advantage in winning more NHAI projects, which would improve its road portfolio in the coming quarters. In case of BOT portfolio, SEL has more projects with high commercial traffic mix, which would enable it to leverage its potential during economic turnaround. SEL s key state projects are witnessing turnaround in FY15 with NHAI projects witnessing strong double digit growth. We expect SEL s order book to grow at a faster rate due to both road and mining opportunities. RETAIL RESEARCH Page 16

17 No problem in funding the equity requirement SEL has lower equity commitments compared to some of its peers, thus increasing its bidding capacity. 80% of SEL s equity has started generating cash. SEL has the capacity to meet the equity requirement and generate further capital for growth on the back of healthy generation of operational cash flows expected from its standalone construction business due to higher revenue flow, better margin profile and improvement in working capital efficiency, securitisation of cash flows of operational BOT projects and dilution of stake at SIPL level (SEL has already diluted its 20% stake in SIPL, in FY11, and can further dilute its stake if required to raise funds). With most of the operational projects generating positive cash flows, the dilution (if done) could take place at a material premium to the equity invested. Risks & Concerns EPC business accounts for around 64% of SEL s consolidated revenues. Policy issues like clearances and financial constraints could slow down the ordering by NHAI and impact the growth of roads EPC segment (like in the past). Increase in the competitive intensity in new orders could result in pricing pressure and impact SEL s margins. A project always has a timeline set for execution. SEL has 4 BOT projects, which are under various stages of construction. Hence, any delay in execution of these projects could escalate the cost and impact profitability. SEL has exposure to the road BOT space, which entails upfront investments with returns generally being back ended. Though SEL is well funded at present, it needs to win a large amount of BOT projects to maintain its current growth momentum. This could stretch its subsidiary SIPL s balance sheet and may lead to equity dilution. Traffic growth is crucial in determining the viability of road projects. It is linked to the GDP growth, shift in traffic to alternate route, etc. An NPV of the project is negatively impacted by 10-15% with every 1% dip in the traffic growth. Sharp slowdown in GDP growth could impact the traffic growth and result in significant decline in the cash flows of BOT assets, thus reducing their NPV s. Adverse policy changes in the mining sector could slow down the growth in the mining segment, which is a high margin business for SEL Delays in collections from projects like Maharashtra Border Check Post and Dhule could put a strain on the company s working capital cycle. Since most of road projects are highly leveraged, most road projects are sensitive to interest rate change. Significant increase in interest rate over the base assumption can impact profitability in a big way. Sensitivity analysis shows that a 1% increase/decrease in interest rate can change the NPV of project by 5-10%. Tax reversals due to section 80 (IA) benefits and higher depreciation charge due to change in depreciation policy as per the new Companies Act resulted in lower tax rate of 4.1% on PBT in 9MFY15. However, we expect the tax rate to rise going forward, which could impact the PAT growth being lower than PBT growth. Proposed DFC (Dedicated Freight corridor) from Mumbai to Delhi could impact the key highway route (NH-8 which traverses key stretches tolled/to be serviced by IRB, L&T & SEL). However, we expect the loss to SEL to be limited, as SEL has limited direct exposure to NH-8. RETAIL RESEARCH Page 17

18 There are fears that GST implementation could lead to closure of MBCPNL project. However, we feel this is unlikely to happen on the back of multiple use of border check-posts (including checks on overloading/insurance/nature of freight, apart from collection of sales tax and excise duty), its contribution in increasing state revenues, option for states to crosscheck proceeds from GST and other states like Gujarat, Punjab, Chhattisgarh & West Bengal considering similar projects. Post the listing of SIPL, SEL s valuations could be impacted due to holding company discount (ranging from 20-40%) in SIPL. SEL s stake in SIPL is likely to go down to 70% from current 77.4% post the listing of SIPL. Conclusion Led by strong order book of Rs bn as on Dec 2014 (which provides strong revenue visibility over the next three years), improvement in the order inflows expected over the next two years & robust outlook of the infrastructure industry (strong recovery expected in the transport sector with huge orders from NHAI in 1-2 years in EPC & BOT space and immense opportunities available in mining & irrigation sector), we expect SEL s revenues (standalone) to grow by a healthy 20.5% over FY14-17E. With experience & expertise, diversified presence across transportation, mining & irrigation, healthy order backlog & strong execution capability, SEL is well placed to capitalize on the available opportunities. Things have started to turnaround at the operating level. We expect the operating profit growth & margins to improve from FY16 onwards (though gradually) on the back of faster execution of in-house BOT projects resulting into higher fixed cost recovery and due to higher revenue share from the high margin mining segment. As regards the BOT portfolio, there has been a strong growth in traffic witnessed by the company s toll projects over the past 2-3 quarters. With the recovery in the economic growth, we expect the traffic growth (which is directly linked with GDP growth) to improve over the next two years. Players with stronger balance sheet and diversified business models like SEL could continue to bid for upcoming BOT projects which would be at better terms. With ~73% of lane kms present in 4 key states of Maharashtra, Gujarat, Rajasthan and Haryana, SEL s strategy to bid for projects in high growth states and along stretches where it has an edge in estimating traffic (NH8, NH3 and NH7) is likely to yield benefits in the macroeconomic uptick. Extension of concession period (if done) could further improve the cash flows and NPVs of the projects SEL has a strong balance sheet with sustained low leverage & positive cash from the operations. We expect the working capital cycle to improve further over the next three years as the company expects to receive the payments from some of its SPVs. This would result in healthy cash flow generations from its operational assets going forward. This would ensure that debt-equity remains at comfortable levels. SEL has lower equity commitments compared to some of its peers, thus increasing its bidding capacity. 80% of SEL s equity has started generating cash. SEL has the capacity to meet the equity requirement and generate further capital for growth on the back of healthy generation of operational cash flows expected from its standalone construction business. RETAIL RESEARCH Page 18

19 With improved performance, we expect an increase in the institutional holding going forward. Also, we expect the dividend payouts to improve with better profits. SIPL s IPO process has been delayed at present with the DRHP having been withdrawn due to some change in the issue structure. However, SEL has filed the revised DRHP immediately, thus indicating its intention to raise funds sometime this year. Any progress on this would bring SEL back under limelight. Post IPO, SIPL would be independently valued in the secondary market, thus resulting into value unlocking. We have valued SEL on SOTP basis. We have valued its Standalone EPC business at 12xFY17E EPS, which gives a fair value of Rs SIPL (BOT portfolio) has been valued based on FCFE valuation of projects (discounted cash flow). On this basis, total NPV of BOT projects comes to Rs. 214 (after reducing SIPL s standalone debt). Total Fair Value comes to Rs We feel investors could buy SEL at current levels and average it on dips to Rs for our price target over the next 1-2 quarters. Quarterly Financials (Standalone) Particulars Q3FY15 Q3FY14 VAR [%] Q2FY15 VAR [%] Q1FY15 Q4FY14 Net Sales Other Operating Income Other Income Total Income Total Expenditure Construction Expenses Stock Adjustment Employee Expenses Other Expenses PBIDT Interest PBDT Depreciation PBT Tax (incl. DT & FBT) Tax Reported Profit After Tax Extra-ordinary Items/ Minority Interest Adj. Profit After Extra-ord. item EPS (Rs.) RETAIL RESEARCH Page 19

20 Equity Face Value OPM (%) PATM (%) (Source: Company, HDFC Sec) Financial Estimates (Standalone) Profit & Loss A/c YE March (Rs. Mn.) FY12 FY13 FY14 FY15E FY16E FY17E Net Sales Other Operating Income Total Operating Income Construction Expenses Employee benefits expenses Conversion & Other Related charges Advertisement & Sales Promotion Other Expenditure Total Operating Expenses Operating Profit Other Income EBITDA Interest Depreciation PBT Tax (including FBT & DT) PAT (before minority interest Minority Interest Reported PAT Extra-ord. Items Adjusted PAT Balance Sheet (Source: Company, HDFC Sec Estimates) YE March (Rs. Mn.) FY12 FY13 FY14 FY15E FY16E FY17E Equity & Liabilities Shareholders Funds RETAIL RESEARCH Page 20

21 Share Capital Warrant Allotment Reserves & Surplus Share application money pending allotment Non-Current Liabilities Minority Interest Long Term borrowings Deferred Tax Liabilities (Net) Other Long Term Liabilities Long Term Provisions Current Liabilities Short Term Borrowings Trade Payables Other Current Liabilities Short Term Provisions Total Equity & Liabilities Assets Non-Current Assets Fixed Assets Gross Block Depreciation Net Block (Tangible Assets) Intangible Assets Capital Work-in-Progress Goodwill On Consolidation Non Current Investments Deferred Tax Asset Long -term Loans and Advances Other Non-Current Assets (including Deferred Tax Asset) Current Assets Current Investments Inventories Trade Receivables Cash & Cash Equivalents RETAIL RESEARCH Page 21