24th October India s Road Sector Build ing Highway s to Gro wt h

Transcription

1 24th October 2017 India s Road Sector Build ing Highway s to Gro wt h

2 Infrastructure 24 October 2017 Table of Contents Contents Page No. India s Road Sector Building Highways to Growth Focus Charts 4 SOTP Valuation 5 What plagued the road sector and what has changed? 6 The road ahead Bharatmala and future market size 8 What we like and why 10 Annexures 11 Companies Dilip Buildcon Limited (Hold, TP INR 870) 13 Sadbhav Engineering Limited (Hold, TP INR 310) 19 JM Financial Institutional Securities Limited Page 2

3 24 October 2017 India Infrastructure Sector Report Infrastructure India s Road Sector Building Highways to Growth India s road engineering, procurement and construction (EPC) sector s fortunes have typically followed the ordering trends of the National Highways Authority of India (NHAI) and Ministry of Road Transport and Highways (MORTH), as reflected in its ballooning order inflows (OIs) in FY12, when NHAI + MORTH awards spiked to ~9,800km. After a lean period in FY13-FY16, prospects have improved, with FY17 awards totalling 16,271km (+ 66% from the previous peak in FY12 - Exhibit A). Keeping pace with orders, execution has also picked up, with record highs of 8,200km (23km/day) in FY17. Based on FY18 targets and the proposed Bharatmala project (details on Page 8), we expect ordering by the Central government to continue at 15000km-16,000km/year over the next 2-3 years. Increased road spending in FY17 is already reflecting in EPC players expanding order books (OBs) (Exhibit B) at 2x-3x sales and would further result in high revenue growth in FY18-FY20 (25%+ CAGR). On the other hand, most road companies also have maturing BOT portfolios, which are turning cash positive and hence ripe for deals/monetisation, eg. Dilip Buildcon (DBL). In the current scenario of elevated road spending, we find DBL to be the best play in road EPC given its leadership in Order Inflows/execution (Exhibit B) and lack of BOT debt drag. However, given restrictive valuations we initiate DBL with HOLD. We also re-initiate on Sadhbhav Engineering (SEL), with a HOLD rating where BOT debt remains a drag. Road capex levered towards HAM with larger spending per km: India s road sector spending/km has doubled since FY13 with the addition of flyovers, under passes and other structures that add to the overall investment for the same road development length (Exhibit 11). Another significant change has been an award-mix shift from 100% on build-operate-transfer (BOT) basis in FY12 to a mix of a Hybrid Annuity Model (HAM) and EPC in FY17 (Exhibit 10). Moreover, with NHAI and MORTH s orders expected to remain high for the next 3-4 years, future order inflows in EPC and HAM should remain strong (Exhibit A). While the long-term outlook remains encouraging, a lot depends on the Bharatmala fine print and the pace of land acquisition and ordering over FY19-FY21. Dilip Buildcon (DBL) - Initiate with HOLD - EPC market leader free of BOT drag: DBL is the largest EPC road developer with the highest early completion of projects and revenue CAGR of 34% since FY12. DBL has best-in-class EBIDTA margins of c.19% given the ownership of its entire construction fleet and negligible amount of sub-contracting. While this adds to a high fixed cost base (depreciation), we find that DBL is a key beneficiary of operating leverage in the current scenario of high road sector orders. With its current OB at 3x FY17 sales (INR 156bn), we find high visibility of earnings growth (34% PBT CAGR in FY18-FY20E). Additionally, DBL recently sold its entire BOT portfolio to investors, thus relieving its balance sheet of BOT debt and making room for future bidding capacity (D/E of 0.4x by FY20). In a scenario of elevated road sector ordering, we find DBL to be the best high growth EPC play, however valuations are restrictive. We value it at 10x FY20E EV/EBITDA (a 33% discount to L&T) vs. its peer group s historic peak multiple of c.11x. We arrive at a TP of INR 870 (implied 20x FY20 P/E), adding net debt and factoring BOT sale. We find limited upside, barring in a Bull case with aggressive assumptions. Sadhbhav Engineering (SEL) - Reinitiate with HOLD - strong EPC but BOT remains a drag: SEL s core earnings come from EPC contracting and it owns a 68.64% of its BOT subsidiary Sadbhav Infrastructure (SIPL). The EPC business has an OB of 2.8x FY17 sales, with order inflow of INR 70bn/year expected in FY18 FY19. This implies 18% CAGR in sales and 19% in net profit (standalone) for FY17-FY20E. However, its BOT subsidiary SIPL, though making cash profits in some SPVs, has significant debt (ex-project) as well as 2 projects recording large losses, resulting in negative value net of ex-project debt. Until SIPL s D/E improves either by a turnaround and/or monetisation of projects, SIPL debt remains a drag on SEL s overall SOTP valuation. We value SEL s EPC business at 9x FY20E EV/EBITDA, net of the negative value of SIPL to arrive at an SOTP-based target price of INR 310 (implied 17x FY20E P/E). We find limited upside given the BOT debt drag. Subhadip Mitra subhadip.mitra@jmfl.com Tel: (91 22) Koundinya Nimmagadda koundinya.nimmagadda@jmfl.com Tel: (91 22) Exhibit A: Road spending & Funding Source: JM Financial, NHAI, MORTH Exhibit B: Order inflows vs. road spending Source: JM Financial, Company, NHAI, MORTH JM Financial Research is also available on: Bloomberg - JMFR <GO>, Thomson Publisher & Reuters S&P Capital IQ and FactSet Please see Appendix I at the end of this report for Important Disclosures and Disclaimers and Research Analyst Certification. JM Financial Institutional Securities Limited

4 Infrastructure 24 October 2017 Focus Charts Exhibit 1. NHAI & MORTH awards (in km) have posted 41%/94% CAGR over FY13-FY17 In '000 km NHAI & Morth Awards in Km FY12 FY13 FY14 FY15 FY16 FY17 NHAI MoRTH Exhibit 2. Future ordering expected to remain high in km and INR trn terms (INR/km spends rising) In '000 km NHAI + MORTH Awards in km & INR trn FY16 FY17 FY18E FY19E FY20E FY21E Total INR bn TotalAward (Km) In INR trn Source: Industry, JM Financial Source: Industry, JM Financial MORTH ordering increased 4x during FY14-FY15, mainly due to higher two-laning of state highways, which were re-designated as National Highways. NHAI typically sanctions more 4- laning for national highways. Future ordering by NHAI and MORTH is expected to remain stable at 15,000-16,000km/year However, in INR terms, the investments will be higher than previous years due to increased spends per km. This is because it is expected that under the umbrella of the Bharatmala economic-industrial corridor s connectivity, each road will have several structures (flyovers, underpasses, etc.) in order to create future-ready roads in India. However, given rising spends we find the source of funding to come from higher NHAI borrowings, assuming stable budgetary allocations from plough back of road cess and toll collections. Exhibit 3. Spending on roads in INR trn (LHS) and % YoY (RHS) INR trn %YoY FY12 FY13 FY14 FY15 FY16 FY17RE FY18BE FY19E FY20E FY21E Central Govt spends on Roads NHAI Borrowings % YoY State Road spends (ex Central allocations) Sale of ToT projects 60% 50% 40% 30% 20% 10% 0% -10% Future ordering at km/year at higher spends/km Road spending to be funded by growing NHAI borrowings assuming stagnant budgetary allocations Source: JM Financial, Industry JM Financial Institutional Securities Limited Page 4

5 Infrastructure 24 October 2017 Exhibit 4. Order inflow - peer comparison 20% 18% 16% 14% 12% 10% 8% 6% 4% 2% 0% FY12 FY13 FY14 FY15 FY16 FY17 Historic FY18E FY19E FY20E FY21E Avg SEL, Industry DBL Exhibit 5. Peer order inflows (LHS) vs. Sector orders (RHS) OI INR bn, Industry DBL's Order inflow 2.5-3X its peers FY12 FY13 FY14 FY15 FY16 FY17 FY18E FY19E INR bn NHAI INR bn SEL INR bn DBL INR bn MoRTH INR bn ABL Sector Orders INR Bn 2,000 1,500 1, Order inflows (OI) for road EPC players have grown in line with road ordering and spending by NHAI/MORTH. However, DBL has the largest share of the pie, with OIs 2.5x- 3x those of its peers. DBL s historical average market share is estimated at 8%-9% of NHAI/MORTH orders in INR terms. However, we conservatively factor DBL s future market share at 4%-5% given a large base. While this leaves some scope for upgrades to future OIs and earnings, it is only under aggressive bull case assumptions. For SEL on the other hand we factor a market share higher than its historical average (2.5%-3%) and still find limited upside. For DBL s order inflows we factor < historical market share, given large backlog which awaits execution For SEL, despite factoring > historical market share in inflows we find limited upside Exhibit 6. DBL SOTP Valuation Particulars Basis Multiple INR /share Implied P/E FY20 Exhibit 7. SEL SOTP Valuation Particulars Basis Multiple INR /share Implied P/E FY20 EPC business FY20 EV/E (x) 10x 995 EPC Business FY20 EV/E (x) 9x 342 Less: Net Debt FY Less: Net Debt FY BOT Investments - Sale Net inflow 55 BOT NPV 68.64% stake 39 Total x Total x JM Financial Institutional Securities Limited Page 5

6 Infrastructure 24 October 2017 What plagued the road sector and what has changed? BOT model failed as traffic growth went awry: FY10-FY12 was the golden period of for India-wide traffic growth (17%-29%) that followed high IIP growth during FY08-FY12. However, traffic growth since plummeted, in line with the declining IIP, with recovery visible only in FY17 at 6% as the IIP stabilised at 4%-5%. While there is limited history and data currently available, the trend lines below indicate that traffic growth tends to follow IIP growth with disproportionate sensitivity. Given the steep decline in FY13-FY16 traffic growth and tepid recovery, several BOT projects faced challenges in cost recovery through toll revenues, leading to NHAI being forced to extend the tenure of the BOT contracts in some cases. However, many BoT projects that had aggressive bids remain troubled and in the NPA zone, leading to the failure of this model. Exhibit 8. Traffic growth vs. GDP & IIP 30 % YoY Growth FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 Traffic volume sensitive to IIP growth rate Traffic % YoY GDP % Spliced IIP % spliced Source: JM Financial, Infraline Policy action hastens sector revival - NHAI ordering a key indicator: During FY12-FY14, the sector faced major road blocks from a) delays in land acquisition and Ministry of Environment, Forest and Climate Change (MoEF) clearances, b) tendering low-traffic BoT projects and c) stressed financials of road players already stuck in older slow-growing projects. This is well reflected in the slowdown in ordering seen in FY13 awards by NHAI, which fell 83% YoY (Exhibit 1). However, a host of steps taken by the Central government (Exhibit 17) helped address these issues, including 1) relaxing MoEF clearance rules for faster land acquisition, 2) easier exit norms for faster asset monetisation, 3) classifying road sector lending under secured lending and 4) premium rescheduling to help revive unviable projects. This led to a 114% increase in NHAI ordering to 3,000km in FY15; NHAI orders grew an additional 42% in FY16. Policy action led to sector revival NHAI orders a key barometer More steps needed on easier a) Land acquisition and b) MoEF clearances for high capex rates to sustain However, to further increase NHAI s ordering rate to >6,000km (FY18 target), additional steps such as the following are required: 1) further easing of land acquisition, since 80% minimum land for BOT/HAM and 90% for EPC are pre-requisites for project awards; 2) stricter qualification norms to filter out unreliable players; and 3) sorting out troubled BOT projects to create additional space for banks to fund new projects under HAM. Exhibit 9. NHAI & MORTH ordering in km 14,000 Km 12,000 10,000 8,000 6,000 4,000 2, NHAI MORTH MORTH ordering increased 4x during FY13-FY15, on higher twolaning of state highways, which were re-designated as National Highways. NHAI typically sanctions more 4- laning for national highways JM Financial Institutional Securities Limited Page 6

7 Length(inThousands km) km of Road(in Thousands) Infrastructure 24 October 2017 Mix change - shift to EPC and HAM: The mix of awards by both NHAI and MORTH also changed with the shift to HAM/EPC from BOT. This was largely driven by the need to insulate road players from the volatility of traffic growth, which had rendered several older projects un-bankable, limiting debt funding from banks for future growth. Exhibit 10. NHAI + MORTH award mix 120% 100% 80% 60% 40% 20% 0% FY12 FY13 FY14 FY15 FY16 FY17 BOT Award (%) EPC Award (%) HAM Award (%) Award (km) Construction (km) Shift to EPC/HAM to insulate developers from risks related to traffic growth NHAI ordering growing faster in INR/km terms: The value of roads ordered posted a CAGR of 45% during FY13-FY17 vs. 35% CAGR in km terms. This due to doubling of investments in INR/km terms, as structures such as flyovers, underpasses, etc. have become standard features in new projects. We expect this trend to continue over the long term given India s focus on more future-ready road development. Exhibit 11. NHAI capex INR/Km FY13 FY14 FY15 FY16 FY17 NHAI Award Award(INR bn) Note:Projects in NHDP Phase-IV are largely awarded in FY17, hence the dip HAM vs. EPC pros and cons - A higher EPC allocation is most favourable for both a) faster project execution and b) ready EPC cash flows for road developers given 100% funding by the Indian government (NHAI/MORTH). Hence, this model also sees high competition with a high number of bidders, ensuring lower costs for the government. However, the EPC model requires 100% funding by MORTH/NHAI, which caps their ordering capabilities. - HAM on the other hand requires only 40% funding by NHAI/MORTH as a grant, while the rest is a mix of D/E by the road developers. This strikes a good balance with funding spilt three ways between banks, developers and NHAI/MORTH effectively doubling ordering capacity vs. EPC. However, given the historic woes of road developers stuck in older BoT projects, availing fresh bank debt for new HAM projects is challenging This has resulted in only a few established players having the balance sheet strength required to bid under HAM, thus limiting competition. Increase in value of projects as structural features such as flyovers, underpasses, service roads, etc. have become a norm HAM has few bidders due to the need for a strong balance sheet and debt funding While EP C has more competition due to ready cash JM Financial Institutional Securities Limited Page 7

8 Infrastructure 24 October 2017 The road ahead Bharatmala and future market size Bharatmala: a comprehensive plan in the making MORTH has embarked on a new plan (currently being finalised), which subsumes all ongoing/future schemes into one comprehensive plan named Bharatmala from FY19. This scheme targets de-congestion/capacity addition in routes that carry ~70% of India s road freight traffic. The full plan details are yet to be unveiled as it awaits cabinet approval. The plan envisages end-to-end connectivity from factory to market, linking industrial and economic corridors via roads, railway-ports and coasts. It also envisages ring roads around key industrial/economic centres to further ease traffic congestion. Although the finer details are yet to be unveiled, we understand that Bharatmala envisages developing 55,000-60,000km of roads at a total cost of ~INR 7trn. Ordering of the first phase of 25,000km at a cost of INR 3trn is expected during FY19-FY21 once Cabinet approval has been received. The detailed project reports (DPRs) of all roads under this project would be tendered out by Dec 17. Completed DPRs of the 1 st phase will start coming in from 4QFY18, enabling ordering in FY19. Exhibit 12. Bharatmala (estimated mix - km & cost) BHARATMALA Others (incl. Remaining NHDP) Expressways Coastal & port connectivity roads Border & International connectivity roads National Corridors Efficiency Programme 100% 90% 80% 70% 60% 50% 40% 30% 31% 2% 6% 6% 14% 17% 22% 7% 20% 9% 17% High traffic corridors connecting ports, factories and economic corridors are slated to be linked under Bharatmala Inter-corridor & feeder Routes Economic Corridors 20% 10% 0% 25% Km 9% 16% INR Bn Source: JM Financial, Industry Future bidding/funding pattern and likely path ahead New projects under Bharatmala alone would ensure annual ordering of 8,000km, possibly with high cost/km given the complexity of roads and higher component of required structures (flyovers/bridges/underpasses). Additionally, from FY19, Bharatmala would subsume all un-awarded projects-in balance under the ongoing National Highways Development Project (NHDP). In addition to Bharatmala, the regular MORTH capex for converting state highways to national highways will continue. In Mar 17, ~ 57,500km of state highways have been approved In-Principle to be made national highways (subject to DPRs). These would require 2-laning work, typically taken up by MORTH. Thus, we estimate road ordering by NHAI + MORTH to be stable at c.15,000km/year, ensuring a strong order pipeline for road developers. We estimate annual ordering of 15,000km from Bharatmala + regular MORTH Capex Much of this would be at higher capex/km JM Financial Institutional Securities Limited Page 8

9 Infrastructure 24 October 2017 Funding: - Historically, funding to the road sector has been directly linked to cess collection from diesel/petrol sales and toll collection on NHAI roads. Amid rising crude prices and pressure on the government to cut taxes (including cess), post-demonetization traffic growth is also yet to bounce back. Hence, there is limited scope for an increase in the plough-back of budgetary funding for the road sector in the near future. - Thus, we believe much of Bharatmala s funding would depend on leveraging NHAI s balance sheet to 2x-2.5x by FY20 from 0.4x in FY16. There have also been indications of NHAI planning to raise equity through a potential IPO. Another source of revenues is the toll-operate-transfer (ToT) model, which envisages monetising mature NHAI projects with a strong history of tolling and traffic growth. It is expected that 75 such projects can be put on the market in the next 2-3 years for a total value of INR 400bn. Exhibit 13. Government spending on roads (LHS INR bn) and sources of funds 4,500 60% Exhibit 14. Past NHAI capex funded by cess & borrowings 1,000 NHAI Sources of Funds INR bn 1,000 4,000 50% ,500 3,000 40% ,500 30% 2,000 20% ,500 1,000 10% FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19E FY20E FY21E 0% -10% 0 FY12 FY13 FY14 FY15 FY16 FY17 0, Industry Sale of ToT projects NHAI Borrowings State Spends Central Govt spends on Roads % YoY Other Inflows Toll Remittance Cess funds, Industry Bonds (NHAI) Other Budgetary receipts Total JM Financial Institutional Securities Limited Page 9

10 Infrastructure 24 October 2017 What we like and why The high number of orders in FY17 is already reflecting in expanding OBs of EPC players (2x-3x sales) and will further result in high revenue growth in FY18-FY20 (25%-30% CAGR). Moreover, with ordering by NHAI and MORTH expected to remain high for the next 3 years, future order inflows in EPC and HAM should remain strong (see adjoining chart). On the other hand, most the road players also have maturing BOT portfolios that are turning cash positive and hence ripe for deals/monetisation (eg. Dilip Buildcon). We believe players with strong risk management, superior execution capabilities and healthy asset profiles are likely to emerge winners. We expect EPC players to deliver 25%-30% CAGR in revenues over FY18-FY20 We also expect strong OIs from NHAI and MORTH to continue Though we prefer DBL s business model and find high growth potential, valuations remain restrictive. We initiate coverage on Dilip Buildcon with a HOLD Rating. We also re-initiate on Sadbhav Engineering with a HOLD, where we find the BOT portfolio to be a key drag on finances. Exhibit 15. DBL vs. SEL Projected Sales CAGR (FY17-20) D/E Sadbhav Engineering 18% at SEL standalone level 17% at SEL consolidated level High D/E ratio of 11x at consolidated level in FY17 Dilip Buildcon 14% Favourable D/E of 0.4x by FY20 Business Structure SEL Parent/ EPC SIPL SPV BOTs + O&M DBL Parent/ EPC Divested all existing SPVs (full sale by FY20) Business Model EBITDA/EBIT margins Order-book Mix Asset-light (Mix of ownership/lease/sub-contracting) 11%/7% at standalone level 27%/20% at consolidated level EPC and BOT Electrical/Power T&D Asset-heavy (Owns entire fleet) Pros: Control on margins and quality; faster execution Cons: High fixed costs (Int.+Dep.) hence high operating leverage; large impact in a down-cycle. 19%/15% Higher compared with general industry owing to fleetownership and concomitant operational efficiencies. EPC (70%). BOT (17%). Mining (1%) Susceptibility to traffic and toll assumptions Order-book Moderate (since a mixed order-book) Moderately-sized Q1 FY18 OB: INR 83,774mn. Low (traditionally has been an EPC player) Industry-leading Q1 FY18 OB: INR 156,297mn. ROE Near-term triggers ROE at 12.0% in FY18-FY19. NHAI ordering to pick up in 2H18 since only 17% annual targets ordered till Sept 17 Valuation (TP /sh) INR 310/- INR 870/-. High ROE c.20% till FY19, falling to 16% by FY20 as tax rates normalise NHAI ordering to pick up in 2H18 since only 17% annual targets ordered till Sept 17 JM Financial Institutional Securities Limited Page 10

11 Infrastructure 24 October 2017 Annexure: Exhibit 16. Comparison between Models EPC BOT HAM ToT Description Concession Period Developer to lay roads with no role in ownership Toll collection, maintenance, etc. by the authority Developer to Design, Build, Finance, Operate and Transfer (DBFOT) the projects 100% initial capex by developer Fixed concession period for construction and operation Developer entitled to collect toll revenue (or) paid annuity by the authority (as per the terms and conditions of the project) during the concession period O&M by developer N/A Fixed (reduces the operations period if there is delay in achievement of provisional commercial operations date (PCOD)) Revenue Based on Project Value Based on traffic and toll rate in any given year-bot toll projects Debt/Equity Commitment Dependence on Toll & traffic Growth Potential Cash Flow Visibility Towards Working Capital which is dependent on Project timelines N/A Source: JM Financial, Industry Limited to Project Cost Highly Certain 100% initial capex (Debt+Equity) and investment towards O&M in operational phase Revenue is totally dependent on traffic flow and toll rates fixed by the authority Unlimited. Growth in traffic will translate to top line Highly uncertain in case of Bot-toll projects Hybrid annuity model mix of EPC and BOT 40% capex by authority + 60% by developer Provision for Mobilisation advances upto 10% of project cost at bank rate from NHAI Compensation to developer- 30 semi-annual annuity payments across 15 years Interest paid to developer on reducing balances of rate+3% Toll collection by authority in operational phase O&M by developer in operational phase Fixed operational period - 15 years from COD (therefore fixed number of annuity payments) Fixed annuity number 60% initial capex (Debt+Equity) and investment towards O&M in operational phase Dependence on traffic and toll rates is shielded as revenue is in the form of annuity payments by the authority Limited to annuity. Growth in traffic will not translate to top line Highly certain. Limited credit risk to the extent of the authority paying annuity Developers have the right to collect user fees or tolls on highway stretches that are already constructed for a fixed concession period Upfront payment to the authority O&M by developer 30 years (under consideration to reduce it to 20 years) Based on traffic and toll rate in any given year 100% (Debt+Equity) by developer Highly dependent Unlimited. Growth in traffic will translate to top line Highly uncertain JM Financial Institutional Securities Limited Page 11

12 Infrastructure 24 October 2017 Exhibit 17. Policy Changes Model Concession Agreement(MCA) Step taken: Premium Payments have been made back-ended Lenders are given first charge on receipts Implication: Premium payment schedule coincides with low interest payment period of BoT projects, thus reducing stress on cash flows Comfort to banks for lending to the sector PPP Projects classified as secured lending Step taken: RBI- has notified that debts to PPP Projects may be considered secured conditional on: Toll/tariff payments to be kept in an escrow account Senior lenders have priority over withdrawals by concessionaire Lenders have a right of substitution in case of concessionaire default Lenders have a right to trigger termination in case of default in debt service Upon termination, the Project Authority has an obligation of o Compulsory buy-out and o Repayment of debt due in a pre-determined manner. Implication: Reduction of credit risk for banks to help increase road sector lending by banks Equity Divestment Land Acquisition Clearances Source: JM Financial Step taken: CCEA has permitted 100% equity divestment in PPP Projects after two years of construction, subject to condition that the proceeds be invested in An incomplete NHAI projects Any other highway projects Any other power sector projects To retire their debt to financial institutions in any other infrastructure projects. Implication: Release of equity capital from operational projects to help fund new projects in the sector. Option for developers to transfer traffic risk to investors. Steps taken: MoEF has relaxed Land Acquisition norms allowing NHAI to execute highway projects without obtaining forest clearance where land is not under forest area NHAI is ensuring 80-90% of land is in possession at the time of awarding of projects Implication: Increased pace of land acquisition and hence award of road projects due to relaxed norms 80-90% land possession may cause temporary delays in awarding of projects. However, projects once awarded are executed faster without construction delays thereby increasing financial viability of project. JM Financial Institutional Securities Limited Page 12

13 24 October 2017 India Infrastructure Initiating Coverage Dilip Buildcon HOLD EPC market leader free of BOT drag DBL is India s largest EPC road developer, with the highest rate of early completion of projects. It has reported revenue CAGR of 34% since FY12. DBL has best-in-class EBIDTA margins of c.19% given its ownership of its entire construction fleet (over 8,700 vehicles) and negligible levels of sub-contracting. While this adds to a high fixed cost base (depreciation), we find DBL to be a key beneficiary of operating leverage in the current scenario of high road sector ordering. The company has planned marginal capex, to sweat its existing fleet for accelerated sales growth. With its current OB at 3x FY17 sales (INR 156bn), we find high earnings visibility (34% PBT CAGR over FY18-FY20E). Additionally DBL recently sold its entire BOT portfolio to investors, relieving its balance sheet of BOT debt and making room for future bidding capacity (FY20E D/E of 0.4x). In a scenario of elevated road sector ordering, we find DBL to be the best high growth EPC play, however valuations are restrictive. We value it at 10x FY20E EV/EBITDA (a 33% discount to L&T) vs. its peer group s historic peak multiple of c.11x. We arrive at a TP of INR 870 (implied 20x FY20 P/E), adding net debt post cash inflow from BOT sale and find limited upside. We initiate with a HOLD rating. Pan-India presence: DBL operates in 16 states though its forte lies in Maharashtra (28% of OB), UP (15% of OB) and MP (15% of OB). It focuses on EPC of roads and bridges (82% of OB) and mining (15% of OB), with some exposure to irrigation and urban development projects. However, going forward, roads will be its key focus area. Irrigation and urban development order backlogs are set to be executed by end-fy18. Asset-heavy business model with high EBITDA margins: DBL owns a construction fleet of +8,700 vehicles and strategically co-locates projects in close proximity to maximise assetutilisation, cut timelines and achieve economies of scale. This reflects in its industryleading EBITDA margins (18%-21%) and has led to record project execution, earning it early-completion bonuses every year. With lower capex, depreciation is expected to stabilise while DBL is also looking to reduce debt (BOT sale) and float NCDs to reduce interest costs, all of which will reflect in better PBT margins by FY20. Divestment from SPVs: DBL has divested 100% of its stake in 24 BOT SPVs for INR 16bn. This has led to net cash inflow of INR 9bn, while all BOT debt would be transferred to the new owners of the project by FY20. This will result in DBL having a D/E of 0.4x by FY20, and greatly increasing its bidding capacity under HAM. This transaction makes DBL the only pure play road EPC stock with zero drag from BOT debt/traffic woes. Subhadip Mitra subhadip.mitra@jmfl.com Tel: (91 22) Koundinya Nimmagadda Koundinya.Nimmagadda@jmfl.com (91 22) Recommendation and Price Target Current Reco. HOLD Previous Reco. Current Price Target (12M) 870 Upside/(Downside) 13.0% Previous Price Target Change NA Key Data DBL IN Current Market Price Market cap (bn) INR770 INR105.3/US$1.6 Free Float 20% Shares in issue (mn) Diluted share (mn) mon avg daily val (mn) INR289.9/US$ week range 817/178 Sensex/Nifty 32,507/10,185 INR/US$ 65.0 Price Performance % 1M 6M 12M Absolute Relative* * To the BSE Sensex Strong OB, high earnings visibility and RoEs: With an OB of INR 156bn (3x FY17 sales), we forecast FY17-FY20E PBT CAGR of 36%. Historically, DBL has enjoyed lower tax rates due to 80IA benefits on some projects, however tax rates are expected to normalise to 30% levels by FY20, leading to flattish FY20 EPS and lower RoEs (c.20% since FY12). Our Bull case assumes annual OIs of INR 125bn (vs INR 90bn base case), resulting in FY17-FY20 EBITDA CAGR of 13% (vs. 11% in the base case). Our bull case SOTP of INR 925 (10x FY20 EV/EVITDA) offers some upside though under aggressive assumptions. Financial Summary (INR mn) Y/E March FY16A FY17A FY18E FY19E FY20E Net Sales 40,853 50,976 60,889 70,708 75,640 Sales Growth (%) EBITDA 7,992 9,923 10,960 12,727 13,615 EBITDA Margin (%) Adjusted Net Profit 2,208 3,609 4,528 6,308 6,014 Diluted EPS (INR) Diluted EPS Growth (%) ROIC (%) ROE (%) P/E (x) P/B (x) EV/EBITDA (x) Source: Company data, JM Financial. Note: Valuations as of 23/Oct/2017 JM Financial Research is also available on: Bloomberg - JMFR <GO>, Thomson Publisher & Reuters S&P Capital IQ and FactSet Please see Appendix I at the end of this report for Important Disclosures and Disclaimers and Research Analyst Certification. JM Financial Institutional Securities Limited

14 in INR bn Revenue INR bn EBITDA (INR bn) INR bn Dilip Buildcon 24 October 2017 DBL story in charts DBL s OB/OI posted a 47%/28% CAGR over FY13-FY17. We conservatively factor future OI at INR 90bn-100bn/year vs. INR 113bn in FY17. Roads form the lion s share of DBL s OB and we expect this to grow in future as ordering for the road sector improves. Exhibit 1. OB & OI trends Exhibit 2. OB mix FY10 FY12 FY14 FY16 FY18E FY20E Urban Development 1% Irrigation 2% Mining 15% Roads 82% Order backlog (INR bn) Order inflow (INR bn) OB/Rev ratio (x) Source: JM Financial, Company Source: JM Financial, Company We expect FY17-FY19 revenues to post a CAGR of 18%. FY20 sales growth would slow down to 7% as we factor conservative inflows of INR 100bn/year. DBL s EBITDA margins have remained steady at 19%-20% historically; we factor c.18% in our estimates. Exhibit 3. Sales growth Exhibit 4. EBITDA trend % % % 50% 40% 30% 20% 10% % 20% 15% 10% 5% 0.0 FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY20E 0% 0.0 FY10 FY12 FY14 FY16 FY18E FY20E 0% Revenue (INR bn) YoY EBITDA (INR bn) EBITDA margin DBL has a stellar track record in earning early-completion commission bonuses, which can add to EBIDTA margins in future. Exhibit 5. Early completion bonus earnings FY15 FY16 FY17 FY18E Cumulative Early Completion Bonus (in Rs bn) JM Financial Institutional Securities Limited Page 14

15 Dilip Buildcon 24 October 2017 Investment rationale High earnings visibility/ob: DBL enjoys an industry-leading OB with 1QFY18 OB of INR 156bn (3x FY17 sales), suggesting high growth visibility going forward. Despite assuming slower order inflows of INR 90bn-100bn/year over FY18-FY20, we estimate revenue CAGR of 14% and PBT CAGR of 36%. DBL s effective tax rate is expected to rise in FY20 as the company outgrows its minimum alternate tax (MAT) benefit. However, rising revenues and lower interest costs will more than offset this impact at the net profit level. High RoEs: Owing to its efficient operating model and high margins, DBL has earned ROEs close to 20% consistently over the past 4 years. A large OB, high EBITDA margins and falling debt costs should help it maintain its RoE in future. Divestment from SPVs: DBL has signed an agreement to divest 100% of its stake to Shrem Group, from 24 SPVs at INR 16bn. This includes 14 operational projects, 4 underconstruction SPVs and 6 HAM projects where the company has invested INR 6.8bn and c.inr 8.4bn remains to be invested. DBL expects to receive INR 5.5bn in FY18 and INR 37bn in FY19 since the deal is contingent upon DBL completing its under-construction projects. This deal transforms the company into a pure EPC player (its core competency) and eliminates exposure to traffic risks/bot debt burdens. We expect the divestment to strengthen DBL s balance sheet, enabling it to compete for a larger share of EPC/HAM contracts. The divestment would also help reduce its finance costs, improving its PBT margins. Key Risks Heavy dependence on road sector orders (NHAI/MORTH capex): DBL has traditionally competed in the EPC space, with 80%-90% of its orders coming from the road sector alone. In addition, its divestment in SPVs means implies of its revenue now depends on OIs from NHAI, MORTH and individual states. Therefore, any slowdown in NHAI/MORTH orders will adversely impact OIs and hence future earnings for every player in the road EPC Industry. Asset-heavy: DBL relatively has an asset-heavy business model as it owns the largest construction fleet in the industry (8,718 vehicles as of Mar 17). While this may allow DBL to enjoy economies of scale in a high capex growth phase, it could have an adverse impact in a down-cycle as DBL would then struggle to recover its high fixed costs. Thus, the company is more susceptible to macro-economic phenomena than its peers, who use a mix of ownership and sub-contracting and can potentially adjust more nimbly to downcycles. JM Financial Institutional Securities Limited Page 15

16 Dilip Buildcon 24 October 2017 Valuation: Base Case: We factor FY18 order inflow of INR90bn (in line with guidance) growing to INR100bn by FY20. This implies an estimated market share of 5% vs. a historic trend of 6%-9% in FY15-FY17. However given DBL s record high order book (3x sales), we expect the management focus to shift on OB execution and hence estimate slower future inflows. We value DBL at 10x FY20E EV/EBITDA (33% discount to L&T) vs. its peer group s historic peak multiple of 11x. We arrive at a TP of INR 870. Bull case analysis: Our Bull case assumes annual OIs of INR 125bn (vs INR 90bn base case), resulting in FY17-FY20 EBITDA CAGR of 13% (vs. 11% in the base case). The resultant bull case SOTP is INR 925 (10x FY20 EV/EVITDA) offers some upside though under aggressive assumptions. Bear case analysis: In case of a sector slow down, we factor annual OIs of INR 56bn (falling to FY15 levels), resulting in FY17-FY20 sales CAGR declining to 4% (vs. 14% in the base case). We expect FY20 revenue to fall due to FY18 OIs, on the construction cycle. Yet, given that NHAI ordering is set to pick up in 2HFY18 (only 17% of the 6,500km FY18 target ordered until Jun 17), we find limited risk of a slowdown in ordering activity in the near future. Exhibit 6. DBL SOTP (Base/Bull/Bear Case) Particulars Basis Multiple (x) Base Case (INR /share) Bull Case (INR /share) Bear Case (INR mn) EPC business FY20 EV /EBITDA , BOT Investments - Sale Net Inflow Less: Net Debt FY Total Base case assumes FY18-FY20 OI of INR90-100bn (4-5% market share) Bull case assumes INR 125bn OI at 6% market share Bear case factors OI of INR55bn assuming slow-down in the sector Company background and brief history Started in 1987 as a sub-contractor for bigger players, DBL grew exponentially by 2016, when it went Public and was subscribed at 20.95x. About 76% of the company s shares are held by its Promoters and 17% are held by Institutions. It operates across 16 states and owns c.8500 vehicles, the largest fleet in the construction space. It is also the largest employer in the construction industry. Management Details Mr. Dilip Suryavanshi is DBL s Chairman and Managing Director. He holds a Postgraduate degree in Civil Engineering from the University of Jabalpur. He has over 36 years experience in the construction business and has worked with the company since its inception; he was a sole proprietor prior to the company s formation. He was also the President of the Madhya Pradesh Builders Association. Mr. Devendra Jain is DBL s Executive Director and CEO. He holds a bachelor s degree in Civil Engineering from Vikram University, Ujjain. He has over 21 years experience in the construction business and has risen through DBL s ranks after joining as a fresh graduate in The board has five Independent Directors comprising former IAS officers, architects and engineers with experience from diverse backgrounds in public works departments and design consulting firms. JM Financial Institutional Securities Limited Page 16

17 Dilip Buildcon 24 October 2017 Financial Tables (Standalone) Income Statement (INR mn) Y/E March FY16A FY17A FY18E FY19E FY20E Net Sales 40,853 50,976 60,889 70,708 75,640 Sales Growth 55.7% 24.8% 19.4% 16.1% 7.0% Other Operating Income Total Revenue 40,853 50,976 60,889 70,708 75,640 Cost of Goods Sold/Op. Exp 32,861 41,054 49,929 57,980 62,025 Personnel Cost Other Expenses EBITDA 7,992 9,923 10,960 12,727 13,615 EBITDA Margin 19.6% 19.5% 18.0% 18.0% 18.0% EBITDA Growth 41.3% 24.1% 10.5% 16.1% 7.0% Depn. & Amort. 1,835 2,274 2,430 2,586 2,741 EBIT 6,158 7,649 8,530 10,142 10,874 Other Income Finance Cost 3,814 4,162 3,621 2,399 2,049 PBT before Excep. & Forex 2,501 3,601 5,031 7,884 8,976 Excep. & Forex Inc./Loss(-) PBT 2,501 3,601 5,031 7,884 8,976 Taxes ,577 2,962 Extraordinary Inc./Loss(-) Assoc. Profit/Min. Int.(-) Reported Net Profit 2,208 3,609 4,528 6,308 6,014 Adjusted Net Profit 2,208 3,609 4,528 6,308 6,014 Net Margin 5.4% 7.1% 7.4% 8.9% 8.0% Diluted Share Cap. (mn) Diluted EPS (INR) Diluted EPS Growth 60.8% 40.0% 25.4% 39.3% -4.7% Total Dividend + Tax Dividend Per Share (INR) Cash Flow Statement (INR mn) Y/E March FY16A FY17A FY18E FY19E FY20E Profit before Tax 2,501 3,601 5,031 7,884 8,976 Depn. & Amort. 1,835 2,274 2,430 2,586 2,741 Net Interest Exp. / Inc. (-) 3,770 4,073 3,621 2,399 2,049 Inc (-) / Dec in WCap. -3,498-2,966-4,678-4,004-2,011 Others Taxes Paid ,577-2,962 Operating Cash Flow 4,268 6,537 5,901 7,288 8,793 Capex -4,265-6,681 4, ,765 Free Cash Flow ,901 7,345 2,028 Inc (-) / Dec in Investments Others Investing Cash Flow -4,221-6,592 4, ,765 Inc / Dec (-) in Capital 0 4, Dividend + Tax thereon Inc / Dec (-) in Loans 2, ,000-5,000 0 Others -3,807-4,159-3,621-2,399-2,049 Financing Cash Flow -1, ,633-7,410-2,060 Inc / Dec (-) in Cash -1, Opening Cash Balance 2,342 1,059 1,137 1,405 1,340 Closing Cash Balance 1,059 1,137 1,405 1,340 1,308 Balance Sheet (INR mn) Y/E March FY16A FY17A FY18E FY19E FY20E Shareholders Fund 10,621 18,529 23,850 31,704 37,707 Share Capital 1,171 1,368 1,368 1,368 1,368 Reserves & Surplus 9,450 17,161 22,482 30,336 36,339 Preference Share Capital Minority Interest Total Loans 25,114 25,634 19,634 14,634 14,634 Def. Tax Liab. / Assets (-) Total - Equity & Liab. 36,510 44,922 44,243 47,097 53,100 Net Fixed Assets 14,204 16,825 15,895 14,809 13,568 Gross Fixed Assets 19,445 24,340 25,840 27,340 28,840 Intangible Assets Less: Depn. & Amort. 5,241 7,515 9,945 12,531 15,272 Capital WIP Investments 2,898 4, ,265 Current Assets 35,735 44,973 54,114 62,208 66,274 Inventories 15,803 16,639 19,874 23,079 24,689 Sundry Debtors 9,119 10,165 12,901 14,982 16,027 Cash & Bank Balances 1,059 1,137 1,405 1,340 1,308 Loans & Advances 5,235 5,815 6,534 7,247 7,606 Other Current Assets 4,518 11,218 13,399 15,560 16,645 Current Liab. & Prov. 16,327 21,571 25,766 29,921 32,008 Current Liabilities 16,125 21,267 25,403 29,499 31,557 Provisions & Others Net Current Assets 19,408 23,402 28,348 32,287 34,266 Total Assets 36,510 44,922 44,243 47,097 53,100 Dupont Analysis Y/E March FY16A FY17A FY18E FY19E FY20E Net Margin 5.4% 7.1% 7.4% 8.9% 8.0% Asset Turnover (x) Leverage Factor (x) RoE 22.8% 24.8% 21.4% 22.7% 17.3% Key Ratios Y/E March FY16A FY17A FY18E FY19E FY20E BV/Share (INR) ROIC 19.0% 21.9% 19.1% 18.6% 16.1% ROE 22.8% 24.8% 21.4% 22.7% 17.3% Net Debt/Equity (x) P/E (x) P/B (x) EV/EBITDA (x) EV/Sales (x) Debtor days Inventory days Creditor days JM Financial Institutional Securities Limited Page 17

18 Dilip Buildcon 24 October 2017 This page is intentionally left blank JM Financial Institutional Securities Limited Page 18

19 24 October 2017 India Infrastructure Company Update Sadbhav Engineering HOLD Strong EPC but BOT debt remains a drag Sadbhav Engineering s (SEL) core earnings come from EPC contracting and it owns a 68.64% stake in its BOT subsidiary Sadbhav Infrastructure Project Limited (SIPL). SEL standalone (SA) has an estimated OB of INR 92bn (2.8x of FY17 sales) spread across roads 72%, mining 18% and irrigation 10%. About 45% of its OB is external (non-sipl), however, as NHAI s HAM project awards have taken the lion s share of new orders, SEL would see a rise in dependence on captive HAM EPC orders in future. SEL uses a mix of owned assets and subcontracting, implying a relatively asset-light model. With its OI trend improving significantly in FY17 (+174% YoY), inflows are currently at INR 44bn, near the historic highs of FY13 while the company guides for INR 70bn inflows in FY18. Given the historically high sales growth in the years following peak OIs, we find high growth visibility and estimate 18% profit CAGR in FY17-FY20 for the EPC business (SEL). Its subsidiary (SIPL) owns the following projects: 10 BOT, 1 annuity and 7 HAM. Although of these BOT projects report net losses, several have achieved cash break-even. However, SIPL has significant debt (ex-project) as well as 2 projects recording large losses, resulting in negative value net of ex-project debt. We value SEL s EPC business at 9x FY20E EV/EBITDA, net of the negative value of SIPL to arrive at an SOTP-based target price of INR 310 (implied 17x FY20E P/E). We re-initiate coverage with a Hold rating. Growth in EPC/ HAM projects improves free cash: As of Aug 17 c.45% of SEL s OB comprises external EPC contracts (roads, irrigation and mining), while the rest comprises SIPL s internal EPC projects. Yet, management guides for growing OIs under HAM (in line with industry trends). While this augurs well for revenue growth, it will increase dependence on captive annuity projects (under SIPL) for EPC orders to SEL. With the existing OB at 2.8x FY17 sales and our optimistic estimates of INR 70bn OI in FY18 (all time high), we forecast revenue and net profit CAGR of 18% in FY17-FY20E period. OI upside is capped by its ability to take on debt in BOT/HAM projects (SIPL). However SEL s DSCR is expected to improve after FY19 (Exhibit 5) as its BOT cash flows improve. We value SEL (EPC business) at 9x FY20E EV/EBITDA vs. peer group peak multiples of 11x. BOT remains a drag, despite cash profits, due to high leverage: Although most BOT projects report net losses, several have started delivering positive cash flows adjusted for non-cash MMR and depreciation. Additionally, a larger share of HAM in newer project wins has improved cash-flow visibility for SIPL as revenues get unlinked from traffic risks. However, SIPL s large debt (ex-project) along with significant losses in 2 BOT projects has led to negative value for SIPL (netting of debt with NPV). Nevertheless, valuations may improve upon the strong monetisation of some of its mature BOT projects. This will help reduce debt and risk for the business. Subhadip Mitra subhadip.mitra@jmfl.com Tel: (91 22) Koundinya Nimmagadda koundinya.nimmagadda@jmfl.com Tel: (91 22) Recommendation and Price Target Current Reco. HOLD Previous Reco. Current Price Target (12M) 310 Upside/(Downside) 11.9% Previous Price Target Change NA Key Data SADE IN Current Market Price Market cap (bn) INR277 INR47.5/US$0.7 Free Float 50% Shares in issue (mn) Diluted share (mn) mon avg daily val (mn) INR37.0/US$ week range 351/220 Sensex/Nifty 32,507/10,185 INR/US$ 65.0 Price Performance % 1M 6M 12M Absolute Relative* * To the BSE Sensex Sensitivity to Inflows (Base / Bear case): Our base case is optimistic with all time high inflow estimates of INR70bn. In our bear case we assume OIs at INR 35bn (50% of base case), resulting in sales CAGR declining to 7% (18% in base case) while profits fall to FY16 levels. Thus, sensitivity to OI is high, and hence in a scenario of falling road sector capex, a downside can be unprotected. Financial Summary (INR mn) Y/E March FY16A FY17A FY18E FY19E FY20E Net Sales 31,863 33,203 38,689 45,000 54,295 Sales Growth (%) EBITDA 3,348 3,556 4,517 5,265 6,526 EBITDA Margin (%) Adjusted Net Profit 1,515 1,878 2,130 2,487 3,119 Diluted EPS (INR) Diluted EPS Growth (%) ROIC (%) ROE (%) P/E (x) P/B (x) EV/EBITDA (x) Dividend Yield (%) Source: Company data, JM Financial. Note: Valuations as of 23/Oct/2017 JM Financial Research is also available on: Bloomberg - JMFR <GO>, Thomson Publisher & Reuters S&P Capital IQ and FactSet Please see Appendix I at the end of this report for Important Disclosures and Disclaimers and Research Analyst Certification. JM Financial Institutional Securities Limited

20 Sales (in INR bn)/ Execution rate (%) PAT (in INR bn) EBITDA EBITDA Margin Sadbhav Engineering 24 October 2017 Exhibit 1. Structure of business Sadbhav Engineering Limited 68.64% EPC Business Sadbhav Infrastructure Project Limited (SIPL) BOT Project Portfolio SIPL SEL J.V 1 Ahmedabad Ring Road Infrastructure Limited (ARRIL) 100.0% 0.0% 0.0% 2 Aurangabad Jalna Tollway Limited (AJTL) 100.0% 0.0% 0.0% Transport Irrigation Mining 3 Nagpur Seoni Expressway Limited (NSEL) 100.0% 0.0% 0.0% 4 Hyderabad Yadgiri Tollway Private Limited (HYTPL) 100.0% 0.0% 0.0% 5 Bijapur-Hungund Tollway Private Limited (BHTPL) 77.0% 0.0% 23.0% 6 Rohtak Panipat Tollway Private Limited (RPTPL) (MBCPNL) 100.0% 0.0% 0.0% 7 Maharashtra Border Check Post Network Limited 77.5% 6.1% 16.4% 8 Dhule Palesner Tollway Limited (DPTL) 99.9% 0.1% 0.0% 9 Shreenathji-Udaipur Tollway Private Limited (SUTPL) 100.0% 0.0% 0.0% 1. Share purchase agreement (SPA) has been signed for stake transfer of 10.0% stake from Srei group to SIPL. SPA has been signed for stake sale of 2.6% stake to D.Thakkar Construction Private Ltd or its associates 2. SPA has been signed for stake transfer of 74% stake from SEL to SIPL and 26% stake from GKC Projects to SIPL. MBHPL has applied for PCoD in the month of May Bhilwara Rajsamanad Tollway Private Limited (BRTPL) 100.0% 0.0% 0.0% 11 Rohtak Hisar Tollway Private Limited (RHTPL) 100.0% 0.0% 0.0% 12 Sadbhav Rudrapur Highway Private Limited (SRHPL) 100.0% 0.0% 0.0% 13 Sadbhav Nainital Highway Private Limited (SNHPL) 100.0% 0.0% 0.0% 14 Sadbhav Bhavnagar Highway Private Limited (SBHPL) 100.0% 0.0% 0.0% 15 Sadbhav Una Highway Private Limited (SUHPL) 100.0% 0.0% 0.0% 16 Sadbhav Bangalore Highway Private Limited (SBGHPL) 100.0% 0.0% 0.0% 17 Sadbhav Vidarbha Highway Private Limited (SVHPL) 100.0% 0.0% 0.0% 18 Sadbhav Udaipur Highway Private Limited (SUDHPL) 100.0% 0.0% 0.0% Operational Under Development Under Construction 19 Mysore Bellary Highway Private Limited(MBHPL) 0.0% 74.0% 26.0% - Operates across 14 states/ Sectors: roads, highways, bridges, irrigation, mining km of roads/highways in 11 BOT toll-projects operational - SEL (parent) undertakes EPC / SIPL (Sub) into BOT-toll Exhibit 2. Execution rate-sales-pat Exhibit 3. EBITDA % 12% 10% 8% 6% 4% 2% 0 FY12 FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY20E FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18EFY19EFY20E 0% Sales Execution rate(%) PAT EBITDA EBITDA Margin - We expect FY17-FY20 revenues to post a CAGR of 18%. FY20 revenues are expected to grow due to a low order intake base in previous years. - We expect EBITDA margins to improve to 11.5%-12%, from 10.7% in FY17, in line with management guidance, as more HAM projects are added to the OB. JM Financial Institutional Securities Limited Page 20

21 Orderbook / Sales (INR bn) Execution Rate (%) D/E Interest Coverage PAT(SEL Standalone) / Cash PAT (INR bn) DSCR Sadbhav Engineering 24 October 2017 Exhibit 4. Low interest coverage with high D/E Exhibit 5. DSCR improvement with Cash PAT FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18EFY19EFY20E D/E Interest Coverage at EBITDA level FY15 FY16 FY17 FY18E FY19E FY20E Cash PAT (SIPL Consol) (INR bn) PAT(SEL Standalone) (INR bn) DSCR (SEL Consol-EBITDA Level) Note: Doesn't include two HAM Projects (SVHPL and SUDHPL where Concession Agreement is to be Signed At high D/E ratios, interest coverage at the EBITDA level is barely close to 1x signifying the high debt levels. Refinancing of existing special purpose vehicles (SPVs) or securitising the existing SPVs is a key monitorable. - We expect improvement to start in FY20 as HAM and annuity projects start operating, thereby generating cash profits with certainty. This can help improve SEL s DSCR. Exhibit 6. OB mix Exhibit 7. OB top line trajectory Mining, 18% Roads - Cash contracts, 22% Irrigation, 10% Roads - BOT, 1% HAM, 49% Roads - Cash contracts HAM Roads - BOT Irrigation Mining Note:Incl of 900Cr Order from R&B Gujarat 0 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18EFY19EFY20E Orderbook Sales Execution rate(%) 0 - HAM projects form a major part of SEL s OB. Therefore, we expect some breathing space for the company as the funding requirements are lower than those of BoT projects. - We expect the order execution rate to dip, given high OIs estimated in FY18; however, this would only contribute to future top line growth. JM Financial Institutional Securities Limited Page 21

22 Sadbhav Engineering 24 October 2017 Investment rationale Improving execution along with OIs: SEL targets FY18 OIs of INR 70bn from road projects alone. With the existing OB at 2.8x FY17 sales and our optimistic estimates of INR 70bn OI in FY18 (all time high), we forecast revenue and net profit CAGR of 18% in FY17-FY20E period. OI upside is capped by its ability to take on debt in BOT/HAM projects (SIPL). However SEL s DSCR is expected to improve after FY19 (Exhibit 5) as its BOT cash flows improve. Despite a high D/E, the company can break even at the cash level in its SPVs thus providing sufficient room in the balance sheet to bid for future project wins. We value SEL (EPC business) at 9x FY20E EV/EBITDA vs. peer group peak multiples of 11x BOT debt drag: Although most BOT projects report net losses, several have started delivering positive cash flows adjusted for non-cash MMR and depreciation. Additionally, a larger share of HAM in newer project wins has improved cash-flow visibility for SIPL as revenues get unlinked from traffic risks. However, SIPL s large debt (ex-project) along with significant losses in 2 BOT projects has led to negative value for SIPL (netting of debt with NPV). Nevertheless, valuations may improve upon the strong monetisation of some of its mature BOT projects. This will help reduce debt and risk for the business. Key risks High D/E ratio: SEL s consolidated D/E ratio in FY17 is high at >10x. However, going forward D/E is expected to fall, due to the following: a) structuring of loan repayments, b) rising EPC profits and c) fresh grant inflows (in HAM). However, any delay/variation in EPC profits or cash inflows from grants could lead to new risks. Back-ended cash flows may not offer BOT visibility: BOT toll revenues and the endto-end viability of the projects depends heavily on significant traffic growth as the project matures. If the traffic growth does not rise as anticipated, some BOT projects may turn unviable, leading to an excessive debt load. Valuation: Our base case factors optimistic assumptions with all time high OI of INR70bn. In our bear case we assume OIs at INR 35bn (50% of base case), resulting in sales CAGR declining to 7% (18% in base case) while profits fall to FY16 levels. Exhibit 8. SOTP Valuation Particulars Basis Multiple (x) Base Case (INR/share) Bear case (INR/share) EPC FY20 EV/E (x) 9x BOT NPV 68.64% stake Less: Net Debt Ex Project debt and ICD) SOTP Base case assumes an OI of 70bn at 3.5%-4% of market share vs. Historic market share of 2.5%-3%. Hence Base case is fairly optimistic Exhibit 9. Base case optimistic 20% 15% SEL DBL Bear Case assumes an OI of 35bn, 50% of Base case 10% 5% 0% FY12 FY13 FY14 FY15 FY16 FY17 Historic Avg FY18E FY19E FY20E FY21E JM Financial Institutional Securities Limited Page 22

23 Sadbhav Engineering 24 October 2017 Company Background and brief history SEL was established in 1988 and today has an OB of c.90bn EPC contracts spread across transport (roads), irrigation and mining industries. About 46% of the company s shares are held by its Promoters, 25% by Mutual Funds and 16% by FPIs. The company also holds a 69% stake in SIPL, which holds its BOT-toll portfolio. SEL s portfolio is spread across 14 states. Management Details SEL is promoted by Mr. Vishnubhai Patel and Mr. Shashin V Patel is the Chairman and Managing Director. Mr Shashin Patel holds a Master s Degree in Business Administration and has worked at the company since May The Board consists of four Executive Directors and five Independent Directors, who have vast experience in project execution, consulting and related fields. JM Financial Institutional Securities Limited Page 23

24 Sadbhav Engineering 24 October 2017 Financial Tables (Standalone) Income Statement (INR mn) Y/E March FY16A FY17A FY18E FY19E FY20E Net Sales 31,863 33,203 38,689 45,000 54,295 Sales Growth 7.3% 4.2% 16.5% 16.3% 20.7% Other Operating Income Total Revenue 31,863 33,203 38,689 45,000 54,295 Cost of Goods Sold/Op. Exp 28,515 29,647 34,172 39,735 47,769 Personnel Cost Other Expenses EBITDA 3,348 3,556 4,517 5,265 6,526 EBITDA Margin 10.5% 10.7% 11.7% 11.7% 12.0% EBITDA Growth 11.5% 6.2% 27.0% 16.5% 23.9% Depn. & Amort ,000 1,094 1,147 1,200 EBIT 2,377 2,556 3,424 4,118 5,326 Other Income Finance Cost 1,507 1,534 1,427 1, PBT before Excep. & Forex 1,840 1,897 2,266 3,316 4,656 Excep. & Forex Inc./Loss(-) PBT 1,840 1,897 2,266 3,316 4,656 Taxes ,536 Extraordinary Inc./Loss(-) Assoc. Profit/Min. Int.(-) Reported Net Profit 1,320 1,878 2,130 2,487 3,119 Adjusted Net Profit 1,515 1,878 2,130 2,487 3,119 Net Margin 4.8% 5.7% 5.5% 5.5% 5.7% Diluted Share Cap. (mn) Diluted EPS (INR) Diluted EPS Growth 33.2% 24.0% 13.4% 16.8% 25.4% Total Dividend + Tax Dividend Per Share (INR) Cash Flow Statement (INR mn) Y/E March FY16A FY17A FY18E FY19E FY20E Profit before Tax 1,840 1,897 2,266 3,316 4,656 Depn. & Amort ,000 1,094 1,147 1,200 Net Interest Exp. / Inc. (-) 1,507 1,534 1,427 1, Inc (-) / Dec in WCap. -1,319-4,417 4,452-2,012-2,963 Others Taxes Paid ,536 Operating Cash Flow 1, ,833 2,424 2,026 Capex Free Cash Flow ,333 1,924 1,526 Inc (-) / Dec in Investments Others Investing Cash Flow -1, Inc / Dec (-) in Capital Dividend + Tax thereon Inc / Dec (-) in Loans 1,059 1,324-7,000-1, Others -1,507-1,534-1,427-1, Financing Cash Flow ,567-2,167-1,782 Inc / Dec (-) in Cash Opening Cash Balance Closing Cash Balance Balance Sheet (INR mn) Y/E March FY16A FY17A FY18E FY19E FY20E Shareholders Fund 14,892 16,609 18,599 20,946 23,926 Share Capital Reserves & Surplus 14,721 16,437 18,427 20,775 23,754 Preference Share Capital Minority Interest Total Loans 12,207 17,771 10,771 9,771 9,071 Def. Tax Liab. / Assets (-) Total - Equity & Liab. 27,100 34,380 29,370 30,717 32,997 Net Fixed Assets 5,550 5,229 4,635 3,989 3,289 Gross Fixed Assets 9,388 10,067 10,567 11,067 11,567 Intangible Assets Less: Depn. & Amort. 3,838 4,838 5,932 7,078 8,278 Capital WIP Investments 5,629 5,694 5,694 5,694 5,694 Current Assets 23,771 29,280 25,822 28,919 33,523 Inventories 1,406 1,234 1,437 1,672 2,017 Sundry Debtors 10,372 17,010 12,595 14,649 17,675 Cash & Bank Balances Loans & Advances 10,494 9,728 10,446 11,272 12,489 Other Current Assets 1,424 1,284 1,284 1,284 1,284 Current Liab. & Prov. 7,851 5,823 6,782 7,885 9,509 Current Liabilities 7,813 5,803 6,762 7,865 9,489 Provisions & Others Net Current Assets 15,920 23,457 19,041 21,035 24,014 Total Assets 27,100 34,380 29,370 30,717 32,997 Dupont Analysis Y/E March FY16A FY17A FY18E FY19E FY20E Net Margin 4.8% 5.7% 5.5% 5.5% 5.7% Asset Turnover (x) Leverage Factor (x) RoE 10.7% 11.9% 12.1% 12.6% 13.9% Key Ratios Y/E March FY16A FY17A FY18E FY19E FY20E BV/Share (INR) ROIC 9.7% 10.1% 12.3% 12.7% 13.7% ROE 10.7% 11.9% 12.1% 12.6% 13.9% Net Debt/Equity (x) P/E (x) P/B (x) EV/EBITDA (x) EV/Sales (x) Debtor days Inventory days Creditor days JM Financial Institutional Securities Limited Page 24

25 Sadbhav Engineering 24 October 2017 Notes JM Financial Institutional Securities Limited Page 25

26 Sadbhav Engineering 24 October 2017 Notes JM Financial Institutional Securities Limited Page 26

27 Sadbhav Engineering 24 October 2017 APPENDIX I JM Financial Institutional Securities Limited Corporate Identity Number: U65192MH1995PLC Member of BSE Ltd. and National Stock Exchange of India Ltd. and Metropolitan Stock Exchange of India Ltd. SEBI Registration Nos.: BSE - INZ , NSE - INZ and MSEI - INZ , Research Analyst INH Registered Office: 7th Floor, Cnergy, Appasaheb Marathe Marg, Prabhadevi, Mumbai , India. Board: Fax: jmfinancial.research@jmfl.com Compliance Officer: Mr. Sunny Shah Tel: sunny.shah@jmfl.com Definition of ratings Rating Meaning Buy Total expected returns of more than 15%. Total expected return includes dividend yields. Hold Price expected to move in the range of 10% downside to 15% upside from the current market price. 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JM Financial Institutional Securities may not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. This report is provided for information only and is not an investment advice and must not alone be taken as the basis for an investment decision. The investment discussed or views expressed or recommendations/opinions given herein may not be suitable for all investors. The user assumes the entire risk of any use made of this information. The information contained herein may be changed without notice and JM Financial Institutional Securities reserves the right to make modifications and alterations to this statement as they may deem fit from time to time. JM Financial Institutional Securities Limited Page 27