Analysts remain cautious on the Sadbhav Group despite Sadbhav Infrastructure Project’s (SIPL)agreement with IndInfravit Trust to sell its nine operational road projects for about ₹6,610 crore.
Shares of Sadbhav Engineering (SEL) closed 3.33 per cent lower at ₹248.2 on the BSE, while those of SIPL closed flat at ₹70.8 despite opening strongly at ₹77.
SEL holds a 69 per cent stake in SIPL, which holds its BOT-toll portfolio. SEL’s portfolio is spread across 14 States.
The Sadbhav Group has agreed to sell nine of its roads projects at a fair valuation of 1.7x equity invested. A large part of the sale proceeds would go towards reducing leverage to more reasonable levels and towards funding recent HAM (hybrid annuity model) wins.
On completion of the transaction, SIPL will receive cash and will be allotted units of IndInfravit. Post-completion, SIPL will hold not more than 10 per cent of the units in IndInfravit, the company said in a statement.
Mixed calls
Kotak Securities, which has advised ‘Reduce’ on Sadbhav Engineering, said: “The ability of Sadbhav Group to use the remaining growth capital would depend on the endgame in the remaining BoT portfolio (operates at 10x net debt/EBITDA) and pace of scale up in its construction business. We note uncertainty on the former (depends on the NHAI providing funding support) and share a cautious stance on the latter.” According to Motilal Oswal Financial Services, the deal seems positive for Sadbhav Engineering given that it will help reduce debt and improve quality of the balance sheet. “However, whether SEL will use its balance sheet to fund SIPL’s funding requirement for new projects that it bags in future will be an important point to watch, which can again lead to its balance sheet getting stretched.”
Motilal Oswal maintains a neutral rating on the stock with a target price of ₹275.
Asset downgrade
Recently, SEL’s BOT asset — RHTPL — had its credit rating downgraded to CARE D (link) from CARE BB+ owing to a 15-day delay in servicing debt. RHPL and another BOT asset — Rohtak Panipat Tollway Pvt Ltd (RPTPL) — have been performing poorly with muted traffic flows in the past few quarters.
JM Financial (JMFL) maintains its cautious stance on SEL given its over-leveraged balance sheet, even as the share pledge has increased to 49 per cent of the promoters’ holding.
“The high leverage is led by a heavy debt burden in its BoT subsidiary — SIPL — which has over-leveraged to invest equity into its BoT SPVs. This high leverage is now clearly impacting cash flows, which also inhibit the execution pace (flattish sales growth in FY19) as well as SEL’s ability to bid for more projects,” JMFL said.