March 19, 2012 Initiating Coverage ICICI Securities Ltd | Retail Equity Research Accelerating on fast lane… Sadbhav Engineering (SEL) is an infrastructure developer and EPC player with a reputation of timely completion of projects. SEL holds varying stakes in nine BOT projects aggregating | 7859 core (equity requirement - | 1011 crore through its subsidiary (SIPL) for which funding (both equity and debt) has largely been tied up. Once operational, we anticipate SEL’s consolidated toll revenues will grow exponentially to | 1.7 crore/day supporting SEL’s consolidated cash profit growing 2.3x to | 345 crore during FY11-14E. Additionally, post emerging L-1 bidder for | 1280 crore project from NHAI, we anticipate SEL’s order book will increase to | 6466 crore, 2.6x order book to bill ratio (on a TTM basis) lessening concerns over revenue visibility. SIPL’s toll revenue to grow exponentially SIPL (SEL’s stake-77.8% stake) has a BOT project portfolio of nine projects aggregating | 7859 core (equity & sub debt commitment - | 1011 crore). These projects have financially been closed and there has been equity & sub debt infusion of | 658 crore till Q3FY12 (largely deployed through PE deal worth | 400 crore). Once operational, we anticipate SIPL’s toll revenues to grow exponentially by 6.4x at | 555 crore or | 1.7 crore/day during FY11-14E. Consequently, we anticipate SEL’s consolidated cash profit to grow 2.0x at | 344.9 crore during FY11-14E. Construction business - Execution on track With a domain expertise of 22 years, SEL has a reputation of completing projects on time along with quality of work. As on Q3FY12, SEL has an order book of | 5940 crore, 2.1x order book to bill ratio (on TTM basis). However, with the recent L-1 bid of | 1280 crore from NHAI in BOT segment, we anticipate SEL will close the order book at | 6466 crore, 2.6x order book to bill ratio (on a TTM basis). Going ahead, while we see huge opportunities in roads & mining, we have built in conservative order inflow at a CAGR of 7.7% in FY11-14E. Consequently, we anticipate SEL’s construction revenues will grow at a CAGR of 13.2% during FY11-14E. Valuations At the CMP, the stock is trading at 18.4x FY13E EPS and 1.8x FY13E P/BV multiples. Given the reputation of timely completion of projects and with funding for its BOT project portfolio largely tied up, we like SEL. However, given the sharp run up in last one year, we see limited upside at the current levels. Hence, we are initiating coverage on the stock with a Hold recommendation and advise clients any dip on the stock should be used as opportunity to accumulate the position in the stock. We value SEL at |166 /share (BOT - |84.8/share & construction at | 80.7/share). Exhibit 1: Valuation Metrics (consolidated) (| Crore) FY10 FY11 FY12E FY13E FY14E Net Sales 1,334.4 2,336.2 2,625.2 3,058.5 3,798.9 EBITDA 221.9 344.0 387.6 511.8 713.1 PAT 36.3 92.8 115.3 124.2 112.1 Cash Profit 92.7 171.6 198.4 255.0 344.9 EPS (|) 2.4 6.2 7.7 8.3 7.5 P/E (x) 62.8 24.6 19.8 18.4 20.3 Price / Book (x) 6.4 2.6 2.1 1.8 1.7 RoCE (%) 8.9 8.6 6.4 6.3 8.0 RoE (%) 10.2 10.6 10.6 9.9 8.3 Source: Company, ICICIdirect.com Research Sadbhav Engineering Ltd (SADENG) | 152 Rating Matrix Rating : Hold Target : | 166 Target Period : 12-15 months Potential Upside : 9% YoY Growth (%) (YoY Growth) FY11 FY12E FY13E FY14E Net Sales 75.1 12.4 16.5 24.2 EBITDA 55.0 12.7 32.0 39.3 Net Profit 155.8 24.2 7.7 (9.7) EPS 155.8 24.2 7.7 (9.7) Current & target multiple FY11 FY12E FY13E FY14E P/E 24.6 19.8 18.4 20.3 Target P/E 26.7 21.5 20.0 22.1 EV / EBITDA 12.2 14.1 13.0 9.0 P/BV 2.6 2.1 1.8 1.7 RoNW 10.6 10.6 9.9 8.3 RoCE 8.6 6.4 6.3 8.0 Stock Data Bloomberg/Reuters Code SADE IN / SADE.NS Sensex 17,273.4 Average volumes 110,175.1 Market Cap (| crore) 2,321.7 52 week H/L 156/ 94 Equity Capital (Rs crore) 15.0 Promoter's Stake (%) 47.5 FII Holding (%) 20.5 DII Holding (%) 18.5 Comparative return matrix (%) Return % 1M 3M 6M 12M Sadbhav Engineering Ltd 3.2 43.0 13.1 46.4 IRB Infrastructure (1.9) 34.3 13.7 6.9 IL&FS Transportation (10.2) 16.2 (4.4) (7.0) Ashoka Buildcon (6.8) 4.7 (25.8) (28.4) Price movement 0 20 40 60 80 100 120 140 160 180 Mar-12 Dec-11 Sep-11 Jun-11 Mar-11 0 1,000 2,000 3,000 4,000 5,000 6,000 7,000 Price (R.H.S) Nifty (L.H.S) Analyst’s name Deepak Purswani, CFA [email protected]Bhupendra Tiwary [email protected]
Transcript
March 19, 2012
Initiating Coverage
ICICI Securities Ltd | Retail Equity Research
Accelerating on fast lane… Sadbhav Engineering (SEL) is an infrastructure developer and EPC player with a reputation of timely completion of projects. SEL holds varying stakes in nine BOT projects aggregating | 7859 core (equity requirement - | 1011 crore through its subsidiary (SIPL) for which funding (both equity and debt) has largely been tied up. Once operational, we anticipate SEL’s consolidated toll revenues will grow exponentially to | 1.7 crore/day supporting SEL’s consolidated cash profit growing 2.3x to | 345 crore during FY11-14E. Additionally, post emerging L-1 bidder for | 1280 crore project from NHAI, we anticipate SEL’s order book will increase to | 6466 crore, 2.6x order book to bill ratio (on a TTM basis) lessening concerns over revenue visibility.
SIPL’s toll revenue to grow exponentially
SIPL (SEL’s stake-77.8% stake) has a BOT project portfolio of nine projects aggregating | 7859 core (equity & sub debt commitment - | 1011 crore). These projects have financially been closed and there has been equity & sub debt infusion of | 658 crore till Q3FY12 (largely deployed through PE deal worth | 400 crore). Once operational, we anticipate SIPL’s toll revenues to grow exponentially by 6.4x at | 555 crore or | 1.7 crore/day during FY11-14E. Consequently, we anticipate SEL’s consolidated cash profit to grow 2.0x at | 344.9 crore during FY11-14E.
Construction business - Execution on track With a domain expertise of 22 years, SEL has a reputation of completing projects on time along with quality of work. As on Q3FY12, SEL has an order book of | 5940 crore, 2.1x order book to bill ratio (on TTM basis). However, with the recent L-1 bid of | 1280 crore from NHAI in BOT segment, we anticipate SEL will close the order book at | 6466 crore, 2.6x order book to bill ratio (on a TTM basis). Going ahead, while we see huge opportunities in roads & mining, we have built in conservative order inflow at a CAGR of 7.7% in FY11-14E. Consequently, we anticipate SEL’s construction revenues will grow at a CAGR of 13.2% during FY11-14E.
Valuations At the CMP, the stock is trading at 18.4x FY13E EPS and 1.8x FY13E P/BV multiples. Given the reputation of timely completion of projects and with funding for its BOT project portfolio largely tied up, we like SEL. However, given the sharp run up in last one year, we see limited upside at the current levels. Hence, we are initiating coverage on the stock with a Hold recommendation and advise clients any dip on the stock should be used as opportunity to accumulate the position in the stock. We value SEL at |166 /share (BOT - |84.8/share & construction at | 80.7/share). Exhibit 1: Valuation Metrics (consolidated)
Page 2ICICI Securities Ltd | Retail Equity Research
Company background Incorporated in 1988, Sadbhav Engineering Ltd (SEL) is an Ahmedabad based leading infrastructure development and construction company. On the infrastructure side, SEL through Sadbhav Infrastructure Project Ltd (SIPL-SEL’s stake - 78.8%, post dilution) holds a stake in various SPVs, which develop, operate and maintain road infrastructure assets. Currently, it has a BOT project portfolio of nine companies aggregating | 7859 crore. On the construction side, the company undertakes EPC work in roads, irrigation and mining operations. With a presence of over 20 years in the industry, the company has a reputation for completing projects ahead of schedule along with quality work. SEL has executed projects for clients such as Sardar Sarovar Narmada Nigam, NHAI, Coal India, GIPCL and GHCL and worked with industry majors like L&T, HCC, Punj Lloyd and Gammon. As on Q3FY12, the order book stands at | 5939.9 crore, 2.1x order book to bill ratio (on a TTM basis). With the recent L-1 bid of | 1280 crore from NHAI in the BOT segment, we anticipate SEL will close the order book at | 6466 crore, 2.6x order book to bill ratio (on a TTM basis).
Exhibit 2: Corporate history of SEL
Establishment
2005 - 06
Asset Build up
Creating Value
Entry1988 - 97
1989 - 90
1992 - 93
1993 - 97
1997 - 2004
2001 - 02
2003 - 04
2000 - 01 Growth Phase
2006 - 20102005 - 06
2008 - 09
2006 - 07
2010 - 2011
2009 - 10
2007 - 08Executed largestportion of the canal work of Sardar Sarovar
Executed first road project for L&T
Awarded first Mining project
Awarded first Irrigation project
13.82 km Kakrapar canal remodeled in 75days
Completed first canal Syphon across Wartak river
Bonus from NHAI for early completion of road project
Listing with an IPO of | 54.0 crore
Appreciation letterfrom the World Bank for quality of work
Order book crosses | 1000 cr
Awarded first BOT project- MNEL
Awarded Bijapur Hungund BOT Project(BHTPL)
Awarded Rohtak Panipat BOT Project (RPTPL)
Awarded Hyderabad Yadgiri BOT Project (HYTPL)
Awarded Sardar Patel Ring Road BOT (ARRIL)
Awarded Aurangabad Jalna BOT (AJTL)
Awarded Lakhanadon-Seoni BOT (NSEL)
ARRIL becomes the first operational BOT
Awarded Mah Border Check Post BOT (MBCPNL)
Awarded Dhule Palasner BOT (DPTL)
Awarded Multai-Chindwara-Seoni and Narsinghpur-Amarwara-Chindwara-Saoner - cash contract of | 14, 11.3 crore
PE of | 400 crore in SIPL by Norwest Venture Partners & Xander Group for 22.22%
Rights Issue of equity shares and warrants of | 125 cr
Page 3ICICI Securities Ltd | Retail Equity Research
Investment Rationale BOT assets at value enhancing stage
SIPL toll revenues to expand to 6.4x in FY14E
SIPL (SEL stake - 77.8%) has nine BOT asset project portfolios with varying stakes across projects. Out of this, currently three toll based projects (in MNEL, it has a lesser stake) are fully operational while one annuity based project is partially operational. In FY11, two toll based projects generated toll revenues of | 87 crore or | 24 lakh/day. Going ahead, with the completion of the remaining road project over one or two years, we anticipate SIPL’s toll revenues will grow exponentially by 6.4x at | 555 crore or | 1.7 crore/day during FY11-14E and 9.9x at | 864 crore or | 2.4 crore/day during FY11-17E. Given the significant expansion in SIPL’s toll collection, we anticipate SEL’s consolidated cash profit will expand by 2x at | 344.9 crore during FY11-14E.
Source: Company, ICICIdirect.com Research *does not reflect MNEL & DPTL revenues as the stake is lower than 50%
SIPL’s (SEL stake – 77.8%) toll revenues to swell 6.4x at
| 555 crore during FY11-14E. This, in turn would lead to 2x
jump in SEL’s consolidated cash profit at | 344.9 crore
during FY11-14E
Page 4ICICI Securities Ltd | Retail Equity Research
SIPL equity funding largely tied up… We do not see any funding risk to SIPL’s current BOT project portfolio. Currently, all projects under construction have been financially closed. In terms of equity and subordinate debt commitment by promoters, funds have largely been tied up. Out of a total commitment of | 1011 crore, it has already infused | 658.1 crore. The investment is funded through PE deals worth | 400 crore by diluting a 22.2% stake in SIPL to Norwest Venture Partners and Xander Investment Holding. The remaining ~| 260 crore has been invested by SEL through internal accruals and partly through right issue and warrant conversion aggregating | 125 crore at SEL level. For the remaining investment of | 353 crore, we do not see any major risk due to:-
i) SIPL currently sitting with cash & advance to subsidiary of | 105 crore
ii) receipt of bonus aggregating | 80-83 crore for early completion of projects and
iii) Reduction in equity requirement of Maharashtra Border Check Post Network (MBCPN) by | 90 crore to | 165 crore due to a change in project plans (SIPL is now looking to develop only 18 toll plazas vs. 22 toll plazas planned earlier)
In addition to the above, SIPL has got credit facility from banks to the extent of | 100 crore for equity support across SPVs. Furthermore, SEL also has strong internal accruals of | 150-200 crore/annum and a comfortable balance sheet (net debt to equity of 0.55x as on Q3FY12). Hence, we do not see major funding issues in the current BOT project portfolio.
Exhibit 6: SEL comfortably placed as far as funding is concerned
| crore Equity Total Equity Total SIPL Equity Total
Under Construction 684.1 76.7 760.8 289.3 46.6 335.8 NA NA 449.5Dhule Palasner Tollway Ltd. 19.2 76.7 95.9 8.9 46.6 55.4 NA NA 92.4Maharashtra Border Check Post Network 256.7 0.0 256.7 90.0 0.0 90.0 131.6 0 131.6Hyderabad Yadagiri Tollway Pvt. Ltd. 60.0 0.0 60.0 24.2 0.0 24.2 40.36 0 40.4Rohtak Panipat Tollway Private Ltd. 242.7 0.0 242.7 60.7 0.0 60.7 NA NA 79.6Bijapur Hungund Tollway Private Ltd. 105.5 0.0 105.5 105.5 0.0 105.5 105.5 0 105.5
Total value 857.1 154.1 1011.1 407.1 62.7 469.8 NA NA 658.1
Subordinate Debt by
promoters
Subordinate Debt by
promoters
Subordinate Debt by
promoters
Equity inufused till Q3FY12Total SIPL Commitment Equity inufused till FY11
Source: Company, ICICIdirect.com Research
Has not participated in aggressive bidding so far… We also derive comfort from its BOT projects as SEL has not participated in any aggressive bidding, which has happened in the last year (few of them discussed below). Additionally, the management has indicated that competition has subsided in the recent bids and a lot of opportunities in terms of awarding are yet to come. The management has indicated that currently NHAI has invited bids for 27-28 tenders aggregating 1500-1600 km. We believe SEL with a comfortable financial position coupled with a strong execution track record is well placed to benefit from this trend.
Scheduled COD Early CODDhule Palasner Jun-12 Feb-12Bijapur Hungund Mar-13 Mar-12
We believe SEL with a comfortable financial position
coupled with a strong execution track record is well placed
to benefit from this trend
Page 5ICICI Securities Ltd | Retail Equity Research
And finally...emerged L-1 bidder on 83 km stretch on NH8… SEL has announced that it has been declared L-1 bidder (L1) with respect to the bid invited by National Highways Authority of India for four laning of the Gomati ka Chauraha-Udaipur section of NH-8 in Rajasthan under NHDP Phase IV on a toll basis. The project cost for the same is estimated to be | 1280 crore and the concession period is 27 years. The company is likely to pay an annual premium of | 21.6 crore per annum with 5% escalation per annum. Our quick calculation indicates that this project would contribute ~| 3.5/share to SEL. In our working, we have considered toll escalation of 5% per annum, traffic growth of 8% per annum for the first 10 years, 7% for the next five years and 5% thereafter. We have also considered a discount rate of 14% per annum and debt to equity of 70:30. While this would lead to equity requirement of | 384 crore over the next three years, this would improve order book visibility significantly and lower concerns over the declining order book. With this order, we anticipate SEL will close the FY12 order book at | 6466 crore, 2.6x FY12E revenues. Construction business - Strong execution with timely completion history The company undertakes EPC work in the roads, irrigations and mining operations. Being present in the industry for over 20 years, the company has a reputation for completing projects ahead of schedule along with quality work. SEL has executed projects for clients such as Sardar Sarovar Narmada Nigam, NHAI, Coal India, GIPCL and GHCL and worked with industry majors like L&T, HCC, Punj Lloyd and Gammon. SEL to close FY12 order book at | 6466 crore SEL’s order book stood at | 5940 crore as on Q3FY12, 2.1x order book to bill ratio (on a TTM basis). Given the lower order inflow of | 740.9 crore (roads – 13.6%, mining 43.9% & irrigation – 43%) and strong execution compared to its peers, SEL’s order book to bill ratio has come down sharply compared to its peers. However, with the recent L-1 bid of | 1280 crore, we anticipate SEL will close the order book at | 6466 crore, 2.6x order book to bill ratio (on a TTM basis). Going ahead, while we see huge opportunities in roads & mining, we have built in conservative order inflow at a CAGR of 7.7% during FY11-14E. Consequently, we anticipate SEL’s construction revenues to grow at CAGR of 13.2% during FY11-14E.
Exhibit 8: Trend in order book
2299 2500
4641
6769 6965 6466 6040 5840
0
2000
4000
6000
8000
FY07 FY08 FY09 FY10 FY11 FY12E FY13E FY14E
| cr
ore
0.01.02.03.04.05.06.0
OrderbookRevenuesOrderbook to bill ratio (RHS -TTM basis)
Source: Company, ICICIdirect.com Research
Exhibit 9: Break-up of order book
69 7048
69 75 68 62 62
120 11
19
1515
14 18 20
11 1933
16 10 18 20 18
0
25
50
75
100
FY07 FY08 FY09 FY10 FY11 FY12E FY13E FY14E
(%)
Road Irrigation Mining
Source: Company, ICICIdirect.com Research
With the recent L-1 bid of | 1280 crore, we anticipate SEL
will close the FY12E order book at | 6466 crore, 2.6x order
book to bill ratio (on TTM basis). Going ahead, while we
see huge opportunities in roads & mining, we have built in
conservative order inflow growth at a CAGR of 7.7% during
FY11-14E leading to 13.2% CAGR in construction revenues
Page 6ICICI Securities Ltd | Retail Equity Research
Exhibit 10: Order book to bill ratio ( on TTM basis) Order book to bill ratio (x) Q1FY11 Q2FY11 Q3FY11 Q4FY11 Q1FY12 Q2FY12 Q3FY12HCC 5.2 5.1 4.7 4.0 4.1 4.0 4.0IRB 9.3 8.3 6.6 7.3 5.9 4.6 4.3IVRCL 4.3 4.5 4.4 4.2 3.9 4.6 4.6NCC 3.3 3.2 3.4 3.2 3.2 3.3 4.4SEL 5.6 5.0 4.3 3.2 2.8 2.4 2.1*Simplex 2.7 2.9 3.0 3.1 3.0 2.9 2.8Unity 2.3 2.3 2.2 2.1 2.0 2.1 2.2Average 4.1 4.1 3.9 3.7 3.5 3.6 3.7
Source: Company, ICICIdirect.com Research * with the recent L1 bid announcement, we expect the SEL order book to bill ratio to improve to 2.6x in FY12E
Order inflow weak in FY12, plenty of opportunities Given the intensified competition in the BOT road segment and lack of opportunities in other verticals, SEL’s order inflow has been tepid in FY12. The company has won orders worth | 740.9 crore in 9MFY12. Also, with the recent L-1 bid of | 1280 crore, the order inflow for FY12E is expected to be | 1991 crore. Going ahead, we have modelled in an improvement in order inflow on account of subsiding of competition in the road segment (as indicated by the management recently) leading to some order wins in the BOT segment as well as cash contract opportunities from NHAI in FY13E. Additionally, the company expects a lot of opportunities in the mining division. Currently, SEL has bid for five projects aggregating | 1500 crore. The same is expected over the next three to six months. Exhibit 11: Trend in order inflow
1055
2758 2866
17581351 1500
2000
250
385506
222325
500
625
328487
60
427315
347
381
13761097
32033385
2408
19912347
3006
500
1500
2500
3500
FY07 FY08 FY09 FY10 FY11 FY12E FY13E FY14E
| cr
ore
-60
-10
40
90
140
190
240
(%)
Roads Mining Irrigation Order inflow (Y-o-Y%)
Source: Company, ICICIdirect.com Research
Road segment NHAI is looking to award projects aggregating 7000-8000 km over the next couple of years, which provides visibility for opportunities over the next few years. Given the lack of opportunities in other infrastructure verticals, the competition has intensified in the road segment. Nonetheless, the management has indicated that competition has subsided in the recent bids on account of the difficult funding environment and already bunching up of orders leading to higher equity requirement. Additionally, the company has indicated that NHAI has invited tenders for 27-28 bids aggregating 1500-1600 km. The company remains hopeful of winning a few bids in that. Additionally, NHAI is also looking to award cash contracts for 2000-3000 km in FY13E further supporting order inflows.
With the recent L-1 bid of | 1280 crore, we anticipate SEL
will close the FY12E order book at | 6466 crore, 2.6x order
book to bill ratio (on a TTM basis)
SEL expects a lot of opportunities in the mining division.
Currently, the company has bid for five projects
aggregating | 1500 crore. The same is expected over the
next three to six months
SEL has indicated that NHAI has invited tenders for 27-28
bids aggregating 1500-1600 km. The company remains
hopeful of winning a few bids in that
Page 7ICICI Securities Ltd | Retail Equity Research
Balance length for award - 420 2,572 3,023 1,000 659 276 12,250 19,924 - 20 20,220
%age left for awarding - 6 21 47 100 94 71 83 41 - 1 40
OthersPort
ConnectivityGQ Total by NHAINHDP
Phase VII
NHDP
SARDP -NE
NHDP Phase IV
NHDP Total
NS -EW Ph. I & II
NHDP Phase III
NHDP Phase V
NHDP Phase VI
Source: NHAI, ICICIdirect.com Research
Exhibit 13: Trend in road awarding activity
500
2200
3900
5600
7300
9000
FY07
FY08
FY09
FY10
FY11
FY12
YTD
FY12
E
FY13
E
(km
)
Source: NHAI, ICICIdirect.com Research
Mining segment
In the mining division, SEL’s projects range from excavation of overburden to removal of lignite and coal. Its client include Coal India and its subsidiaries, Gujarat Heavy Chemical Ltd, Gujarat Mineral Development Corporation Ltd, Gujarat Industries Power Ltd. Currently, it has an order book of | 1039 crore in this segment. Going ahead, the company expects a lot of opportunities in the division. Currently, the company has bid for five projects aggregating | 1500 crore. The same is expected over the next three to six months. Secondly, the mining order inflow enjoys better margins compared to other segments. Hence, the traction in this order inflow should also improve the EBITDA margin of its construction business.
Currently, the company has bid for five projects
aggregating | 1500 crore. The same is expected over the
next three to six months
Page 8ICICI Securities Ltd | Retail Equity Research
Financials Consolidated revenues to grow at 17.6% CAGR during FY11-14E…
We expect SEL’s consolidated topline to grow at 17.6% CAGR during FY11-14E driven mainly by strong toll revenue growth at ~135.5% CAGR during FY11-14E as all projects would get operational (except recent L1 bid) and 13.2% growth in construction revenues. Exhibit 14: Consolidated revenues to grow at 17.6 % CAGR during FY11-14E…
1,334.4
2,336.22,625.2
3,058.5
3,798.9
-
500
1,000
1,500
2,000
2,500
3,000
3,500
4,000
FY10 FY11 FY12E FY13E FY14E
(| c
rore
)
17.6 % CAGR
Source: Company, ICICIdirect.com Research
…primarily led by toll revenue growth at ~136% CAGR during FY11-14E… Toll revenues are expected to grow at ~135.5% CAGR during FY11-14E as under construction projects such as Maharashtra Border check post, Hyderabad Yadagiri, Bijapur Hungud and Rohtak Panipat would commence tolling. In terms of construction revenues, we expect growth at a CAGR of 13.2% driven mainly by the EPC of under construction and newly awarded road projects.
Exhibit 15: Strong BOT revenue growth as projects commence tolling
117.0 134.9
286.1
592.6
0
100
200
300
400
500
600
700
FY11 FY12E FY13E FY14E
(| c
rore
)
135.5 % CAGR
Source: Company, ICICIdirect.com Research *does not reflect projects such as Mumbai Nashik and Dhule Palasner where the equity stake is lesser than 50%
Exhibit 16: Growth at 13.2 % CAGR in standalone revenues in FY11-14E
1,256.9
2,209.22,491.1
2,772.4
3,206.4
-
500
1,000
1,500
2,000
2,500
3,000
3,500
FY10 FY11 FY12E FY13E FY14E
(| c
rore
)
13.2 % CAGR
Source: Company, ICICIdirect.com Research
Toll revenues are expected to grow at ~135.5% CAGR
during FY11-14E as under construction projects such as
Maharashtra Border check post, Hyderabad Yadagiri,
Bijapur Hungud and Rohtak Panipat would commence
tolling
Page 9ICICI Securities Ltd | Retail Equity Research
Consolidated margins to inch up to 18.8% in FY14E as revenue mix changes
We expect the consolidated EBITDA margin to inch up to 18.8% by FY14E with a change in revenue mix as tolling for under-construction projects commences. The increasing share of toll revenues would lead to higher consolidated margins as BOT projects have higher EBITDA margins of 70-80% compared to ~10-11% margins of the construction business leading to higher consolidated margins. Exhibit 17: Consolidated margins to inch up to 18.8% in FY14E as revenue mix changes
221.9
344.0387.6
511.8
713.1
-
100
200
300
400
500
600
700
800
FY10 FY11 FY12E FY13E FY14E
(| c
rore
)
10.011.012.013.014.015.016.017.018.019.020.0
(%)
EBITDA EBITDA Margin (RHS)
Source: Company, ICICIdirect.com Research
Exhibit 18: Increasing BOT share to lead to higher margins
5.0 5.1 9.4 15.6
94.6 94.9 90.6 84.4
0.4
0102030405060708090
100
FY11 FY12E FY13E FY14E
(%)
BOT Revenues Construction Revenues Others
Source: Company, ICICIdirect.com Research
Exhibit 19: Standalone margins to remain flattish
137.1
226.0263.1
290.7
336.2
-
50
100
150
200
250
300
350
400
FY10 FY11 FY12E FY13E FY14E
(| c
rore
)
9.8
10.0
10.2
10.4
10.6
10.8
11.0
(%)
EBITDA EBITDA Margin (RHS)
Source: Company, ICICIdirect.com Research
The increasing share of toll revenue would lead to higher
consolidated margins as BOT projects have higher EBITDA
margins of 70-80% compared to ~10-11% margins of the
construction business leading to higher consolidated
margins
We have been conservative and assumed flattish EBITDA
margins at the standalone level. However, we highlight that
SEL has bid for five projects aggregating
| 1500 crore in the mining segment and the same is
expected over the next three to six months. Mining order
inflows enjoys better margin compared to other segments.
Hence, traction in this order inflow should also improve its
overall EBITDA margin
Page 10ICICI Securities Ltd | Retail Equity Research
Consolidated PAT to grow at 6.5% CAGR during FY11-14E… The consolidated bottomline of SEL is expected to grow at 6.5% CAGR during FY11-14E mainly on the back of strong revenue growth and increased EBITDA margins. The PAT CAGR growth is lower than the revenue growth despite higher margins due to higher interest cost and depreciation as under construction BOT projects become operational. In terms of standalone bottomline, we expect SEL to grow at 14.5% CAGR during FY11-14E on account of 13.2% revenue growth during the same period. We also highlight that we have not incorporated bonus of | 80-83 crore (| 53-55 crore post tax) to be received from under construction projects such as Dhule Palasner, which would improve our FY13E PAT estimates significantly.
Exhibit 20: Standalone PAT to grow at 14.5% CAGR during FY11-14E
53.8
119.6133.5
149.0
179.4
-
50
100
150
200
FY10 FY11 FY12E FY13E FY14E
(| c
rore
)
-
1
2
3
4
5
6
(%)
PAT PAT Margin (RHS)
Source: Company, ICICIdirect.com Research
Exhibit 21: Consol. PAT to grow at 6.5% CAGR during FY11-FY14E…
36.3
92.8
115.3124.2
112.1
-
20
40
60
80
100
120
140
FY10 FY11 FY12E FY13E FY14E
(| c
rore
)
-
1
2
3
4
5
(%)
PAT PAT Margin (RHS)
Source: Company, ICICIdirect.com Research
Returns ratios to remain subdued… While standalone return ratios would remain robust during FY11-14E, consolidated return ratios are expected to remain subdued as most projects are expected to be in the initial year of commencement of operations. Going forward, we expect return ratios to improve as projects reach the mature stage.
Exhibit 22: Standalone return ratios to remain robust
13.817.016.817.819.1
14.0
19.5 19.3 18.7 19.5
-
5
10
15
20
25
FY10 FY11 FY12E FY13E FY14E
(%)
RoNW RoCE
Source: Company, ICICIdirect.com Research
Exhibit 23: Consolidated return ratios
10.28.9 8.3
9.910.610.6
8.6
6.4 6.38.0
0.0
2.0
4.0
6.0
8.0
10.0
12.0
FY10 FY11 FY12E FY13E FY14E
(%)
RoNW RoCE
Source: Company, ICICIdirect.com Research
We also highlight that we have not incorporated bonus of
| 80-83 crore (| 53- 55 crore post tax) to be received from
under construction projects such as Dhule Palasner, which
would improve our FY13E PAT estimates significantly
Page 11ICICI Securities Ltd | Retail Equity Research
Risks & concerns Execution delay Although SEL has a strong track record of executing projects within time, any delay in execution by the company would lead to cost overrun and loss of toll revenues. Furthermore, if there is any issue such as environment clearances, land acquisition, etc. in any of the projects, execution delay could be seen. For example, at Nagpur Seoni Company has executed 36 km, which NHAI provided vs. the original plan of 56 km. We highlight that we have built in annuity for only 36 km, which the company receives currently. Similarly, for the Hyderabad project, land acquisition of ~1.4 km is still due out of 35.7 km.
Aggressive bidding in NHAI As mentioned above, we derive comfort from the fact that Sadbhav has remained away from recent aggressive bidding (see table below) seen for NHAI projects. The management has also indicated that it would not compromise on equity IRR. However, any aggressive bidding by the company in future could negatively impact our valuation.
Source: Media Reports, Company, ICICIdirect.com Research
Traffic risk Lower traffic growth can adversely impact the revenue growth for projects since all (except one) of Sadbhav projects are toll-based and revenue is directly dependent on traffic. We highlight that we have built in conservative traffic growth of 5% for road projects and as such traffic risk should not be a major concern affecting our valuation estimates.
Equity or SPV stake dilution Another concern that we have is on the equity dilution front if the company manages to win a couple of big ticket NHAI projects. We highlight that for the current portfolio, SEL is comfortably placed in terms of equity funding. However, with robust NHAI awarding expected in the next couple of years, SEL could see equity dilution if it manages to lap up a few big size projects. On the positive side, this would also improve revenue visibility for the construction business significantly, which should partially support equity commitment in those projects.
Deviations in MBCPN plan could affect our valuation There has been a change in toll plaza plans. SIPL is now looking to develop only 18 toll plazas vs. 22 toll plazas planned earlier). As per the company, this would lead to a reduction in the equity by | 90 crore to | 165 crore. Furthermore, it would be beneficial in terms of earnings as the four toll plazas, which have been dropped were not expected to contribute to earnings. We have built in the same in our estimates. However, any further change in plan could affect our valuation.
Although SEL has a strong track record of executing
projects within time, any delay in execution by the
company would lead to cost overrun and loss of toll
revenues
Page 12ICICI Securities Ltd | Retail Equity Research
Valuation At the CMP, the stock is trading at 18.4x FY13E EPS and 1.8x FY13E P/BV multiples. We value SEL at |166 /share (BOT - |84.8/share & construction at | 80.7/share). BOT projects: We have valued SIPL (SEL stake – 77.8% post PE deal), which has varying stake across the road BOT projects SPV using the FCFE methodology. To value each project, we have considered traffic growth of 5% per annum and toll growth rate as per the agreement (either 5% per annum or 17% after every three years). Furthermore, we have considered CoE of 13% for operational projects and 14% for the construction business. Based on this assumption, we have valued SIPL at | 1642.3 crore. We highlight that our target valuation implies P/BV of 1.6x, which is at ~10% discount to PE deal P/BV. Furthermore, SIPL’s valuation could get enhanced in future through the IPO route. Thereafter, we have valued SEL’s stake at | 1271 crore or | 84.8/share. Construction business: We have valued SEL’s construction business at | 80.7/share (5.4x EV/EBITDA, at 10% discount to other leading midcap construction companies).
Exhibit 26: SEL valuation summary Valuation summary Stakie (%) | cr Value per share (|)
BOT projects (A)
SIPL Valuation 1633.9 109.0
SEL stake valuation (A) 77.8* 1271 84.8
Construction Business (B)
FY13E EBITDA 290.7
EV/EBITDA (x) 5.4
Construction business valuation 1569.6
FY13 Net debt 360.0
Equity Value (B) 100.0 1209.6 80.7
Total SoTP Value (A)+ (B) 2480.8 165.5
Source: Company, ICICIdirect.com Research *SIPL is valued at post equity dilution of 22.2% to PE investors
Given the reputation of timely completion of projects and
with funding for its BOT project portfolio largely tied up,
we like SEL. However, given the sharp run up in last one
year significantly outperforming its peers, we see limited
upside at the current levels. Hence, we are initiating
coverage on the stock with a Hold recommendation and
advise clients any dip on the stock should be used as opportunity to accumulate the position in the stock.
Page 13ICICI Securities Ltd | Retail Equity Research
Sensitivity analysis
In our valuation of | 165.5/share, we have assumed traffic growth rate of 5% per annum across projects. We present below the sensitivity to this assumption. Our calculation suggests that every 100 bps change in traffic growth rate assumption would have an impact of | 26-37 per share on our target price.
In our valuation of | 165.5/share, we have assumed cost of equity of 13% for operational projects and 14% for under construction projects. Our sensitivity analysis indicates that every 100 bps change in CoE would have an impact of | 14-19/share. Exhibit 28: Sensitivity to change in CoE (%)
Every 1% change in our traffic growth rate assumption
would change our valuation by | 26-37/share
Every 100 bps change in CoE would have impact of | 14-
19/share
On a one year forward price to book basis, SEL has
historically traded at an average of 2.6x. Currently, at 1.8x,
the stock is trading at ~30% discount to its historical
average.
Page 14ICICI Securities Ltd | Retail Equity Research
Peer group comparison While SEL is trading at a premium to it peers, it seems justified as the company is comfortably placed in terms of equity funding and has displayed superior execution and timely completion across projects vis-à-vis its peers. On a one year forward price to book basis, SEL has historically traded at ~23% discount to IRB. However, over the last one year, the discount has narrowed down to ~9.5% given that the market has identified the execution consistency that SEL has delivered so far.
Inventory 54.0 69.2 87.2 97.0 112.3 Debtors 440.8 686.9 622.8 693.1 801.6 Loans and Advances 523.5 586.1 510.9 568.0 657.7 Other Current Assets 2.8 7.3 14.9 16.6 19.2 Cash 44.8 84.6 32.2 140.0 204.4 Total Current Assets 1,065.9 1,434.1 1,268.0 1,514.7 1,795.2 Creditors 527.7 826.9 448.4 499.0 577.1
Provisions 63.0 125.5 149.5 166.3 192.4 Net Current Assets 475.2 481.7 670.2 849.3 1,025.6
Miscellaneous Expenses - - - - -
Assets side total 829.5 1,037.9 1,229.8 1,403.3 1,572.2
Page 16ICICI Securities Ltd | Retail Equity Research
Cash Flow Statement
(| Crore) FY10 FY11 FY12E FY13E FY14EProfit after Tax 53.8 119.6 133.5 149.0 179.4 Depreciation 23.3 26.9 28.6 30.6 32.5 Cash Flow before working capital cha 77.1 146.4 162.1 179.6 211.9
Net Increase in Current Assets (478.9) (328.4) 113.7 (138.8) (216.1) Net Increase in Current Liabilities 324.1 361.7 (354.5) 67.5 104.1 Net cash flow from operating activitie (77.7) 179.7 (78.7) 108.3 99.9
- - - - - (Purchase)/Sale of Fixed Assets (78.8) (46.5) (30.0) (25.0) (25.0) (Purchase)/Sale of Investments (19.5) (182.3) (2.1) - - Net Cash flow from Investing Activiti (94.4) (226.8) (32.1) (25.0) (25.0)
Inc / (Dec) in Equity Capital - 2.5 - - - Inc / (Dec) in Secured Loan 62.6 42.2 49.1 35.0 - Inc / (Dec) in Unsecured Loan 150.2 (70.0) 19.8 - - Change in Securities Premium - 120.5 - - - Others (5.8) (10.5) (10.5) (10.5) (10.5) Net Cash flow from Financing Activit 206.9 86.8 58.4 24.5 (10.5)
Net Cash flow 34.8 39.7 (52.4) 107.8 64.3 Cash and Cash Equivalent at the beg 10.0 44.8 84.6 32.2 140.0 Closing Cash/ Cash Equivalent 44.8 84.6 32.2 140.0 204.4
Inventory 58.4 73.6 78.8 91.8 114.0 Debtors 440.8 587.1 656.3 734.0 873.8 Loans and Advances 369.5 372.8 393.8 458.8 569.8 Other Current Assets 46.4 60.3 78.8 91.8 114.0
Cash 50.7 136.5 223.7 191.5 184.7
Total Current Assets 965.8 1,230.3 1,431.3 1,567.8 1,856.2 Creditors 457.9 474.6 525.0 642.3 797.8 Provisions 6.7 126.9 131.3 152.9 189.9 Net Current Assets 501.2 628.9 775.0 772.6 868.5
Miscellaneous Expenses 0.4 - - - -
Assets side total 1,882.1 3,092.9 4,765.3 6,106.0 5,994.1
Page 18ICICI Securities Ltd | Retail Equity Research
Cash Flow Statement
(| Crore) FY10 FY11 FY12E FY13E FY14EProfit after Tax 36.3 92.8 115.3 124.2 112.1 Depreciation 56.4 78.9 83.1 130.8 232.8 Cash Flow before working capital changes 92.7 171.6 198.4 255.0 344.9
Net Increase in Current Assets (330.1) (178.8) (113.7) (168.7) (295.2) Net Increase in Current Liabilities 177.9 136.8 54.9 138.9 192.5 Net cash flow from operating activities (59.5) 129.7 139.6 225.2 242.2
(Purchase)/Sale of Fixed Assets (344.7) (1,097.0) (1,609.5) (1,473.8) (25.0) Other Investments (55.0) 55.0 - - - Net Cash flow from Investing Activities (405.2) (1,016.5) (1,521.5) (1,447.9) (31.6) Net Cash flow from Investing Activities (405.2) (1,016.5) (1,521.5) (1,447.9) (31.6)
Solvency RatiosDebt / Equity 4.1 2.3 3.1 3.6 3.2 Current Ratio 2.1 2.0 2.2 2.0 1.9 Quick Ratio 2.0 1.8 1.8 1.7 1.7
Page 19ICICI Securities Ltd | Retail Equity Research
Annexure – Key BOT projects Maharashtra Border Check post Network Ltd In this project, SIPL holds 90% stake while Srei Infra Finance holds the remaining 10% stake. The project cost is |1426.3 crore (EPC cost - | 1133 crore). The project is to be funded through equity of | 285.2 crore and debt of | 1141 crore. This project involves modernisation and computerisation of integrated border check posts at 22 locations in Maharashtra on a BOT basis. The concession period is for 24.5 years (inclusive of construction period of 18 months). The salient features of the project include prompt verification of all commercial vehicles including private buses coming from the adjoining states of Gujarat, Madhya Pradesh, Chhattisgarh, Andhra Pradesh, Karnataka and Goa at entry points. Apart from toll charges, the consortium will also enjoy advertisement, weighment, commercial rights and parking rights for the entire concessionaire period. Currently, the company has been handed over the 12 check posts and is looking to commence eight check posts by June, 2012. Additionally, the company has indicated that the scope of work for the project is likely to be changed now. SIPL is now looking to develop only 18 toll plazas vs. 22 toll plazas planned earlier. This should reduce its equity requirement by | 90 crore to | 165 crore.
Dhule Palesner Tollway Limited SIPL holds a 27% stake in this project along with HCC and John Liang Investments Mauritius Ltd, which holds 37% and 36%, respectively. The total project cost is | 1420 crore (| 1221 crore) funded through equity of | 71 crore, and debt and subordinate debt by promoters of | 1065 crore and | 284 crore, respectively. SIPL has so far invested | 92.4 crore (equity and subordinate debt) out of its total commitment of | 95.9 crore. The concession period is for 18 years, inclusive of construction period of 30 months. The tolling for a part of the stretch commenced from February 2012 vs. initial scheduled tolling commencement from June 2012. The project involves design, engineering, finance, procurement, construction, operation and maintenance of four and six laning of MP/Maharashtra Border-Dhule section of NH – 3 from km 168.50 to km 265.00 in Maharashtra under NHDP Phase III A. From the eighth year of operation, the project encompasses payment of 2% of toll revenues as premium to NHAI, which shall increase by 1% every year thereafter.
Hyderabad – Yadagiri Tollway Private Limited SIPL holds a 60% stake while GKC Projects Ltd holds the remaining 40% stake in this project. The total project cost is | 480.2 crore (EPC cost - | 398.8 crore). The project is to be funded through equity of | 100 crore and debt of | 380.2 crore. SIPL has so far invested | 40.4 crore out of its total commitment of | 60 crore. The concession period is for 23 years (inclusive of construction period of 650 days). The expected COD of the project is from May 2012. The project involves work of design, engineering, construction, development, finance, operation and maintenance of four laning of the Hyderabad-Yadagiri section from km 18.600 to km 54.000 of NH-202 in Andhra Pradesh under NHDP Phase – III on DBFOT (toll basis) as well as to construct toll plazas and other works or conveniences of public and private utility for the purpose of smooth traffic on the roads. The company
Page 20ICICI Securities Ltd | Retail Equity Research
has to pay a premium of | 11.7 crore to NHAI, which shall increase by 5% per annum.
Bijapur Hungund Tollway Private Ltd. In this project, SIPL holds a 77% stake while Monte Carlo Construction Ltd holds the remaining 23% stake. The total project cost is | 1257.1 crore (EPC cost - | 1025 crore). The project is to be funded through equity of | 137 crore and grant from NHAI of | 273.6 crore debt of | 846.5 crore. The concession period is for 20 years (inclusive of construction period of 30 months). SIPL has completely invested it equity commitment of | 105.5 crore. The tolling for this project is expected to commence from March end, 2012 vs. initial scheduled tolling commencement from March 2013. The work involves design, engineering, construction and development of four laning of Bijapur–Hungund Section of NH-13 from km 102.000 to km 202.000 in Karnataka on a DBFOR Toll Basis under NHDP Phase – III as well as to construct toll plazas and other works or conveniences of public and private utility for the purpose of smooth traffic on the roads. The company expects a bonus of | 80-83 crore for early completion of the project from NHAI.
Ahmedabad Ring Road Infrastructure Limited In this project which is operational, SIPL holds an 80% stake while Patel Infra holds the remaining 20% stake. The total project cost is | 500.8 crore (EPC cost - | 216 crore). The project is funded through equity of | 52 crore, grant from NHAI of | 36 crore and debt of | 405 crore. The concession period is for 20 years (inclusive of construction period of 18 months). This project involved improvement and widening to four lanes of 76 km two lane ring road around Ahmedabad city.
Aurangabad Jalna Tollway Limited This is also an operational project where Sadbhav has 100% stake. The total project cost is | 277 crore (EPC cost - | 190.7 crore). The project is funded through equity of | 54.8 crore debt and subordinate debt by promoters of | 194 crore and | 28.2 crore, respectively. The concession period is for 23.5 years (inclusive of construction period of 30 months). The work involved four laning of the Aurangabad – Jalna Road (MHS-6) from km 10/400 to 60/200, Beed Bypass km 292/500 to305/650 and Zalta Bypass with km 0/00 to 2/850 on a BOT basis.
Page 21ICICI Securities Ltd | Retail Equity Research
RATING RATIONALE ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns ratings to its stocks according to their notional target price vs. current market price and then categorises them as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock. Strong Buy: >15%/20% for large caps / midcaps, respectively, with high conviction; Buy: > 10%/ 15% for large caps / midcaps, respectively; Hold: Up to +/-10%; Sell: -10% or more;
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