Sadbhav Engineering Ltd. share price target

Sadbhav Engineering (SEL) continued to report disappointing numbers in H1FY21 with revenue falling 54.2% YoY to | 641.9 crore, largely marred by disruptions caused by Covid-19 pandemic. Operating margin fell 162 bps YoY to 10.8% for H1. At net level, the company reported loss of | 21.3 crore during H1FY21 on account of lower operational revenue and higher costs. SEL's standalone net debt (including loans) at the end of September 2020 was at | 1,095 crore. However, the company expects the potential realisation of arbitration awards, SPV debtors, GST refunds, and proceeds from transfer...

With all approvals in place, stake sale in Ahmedabad Ring Road (Rs3.4bn) expected to conclude and proceeds are likely to be received by Dec'20. Sadbhav Engineering posted a decent set of numbers with revenues in line with our estimates while margins remain healthy at 12.1%, beating our and...

Management expects to receive Rs3.4bn (Rs2.7bn for Ahmedabad Ring Road and Rs0.7bn balance from earlier 8 BOT assets) by 3QFY21E from Canadian pension fund for its assets stake sale. Further, the company is gradually ramping up execution across project sites with labour availability reaching ~80% pre-covid levels. With full labour force expected to be back post monsoon and commencement of three large EPC projects worth Rs36bn; company targets construction run-rate of Rs90-100mn/day from Oct'20. SADE is one of the most reputed and credible EPC companies in...

Sadbhav Engineering Limited (SEL) yet again disappointed on execution front during Q1FY2021 with standalone revenues declining by 73% y-o-y to Rs. 230 crore. However, OPM beat expectations (although falling 402 bps y-o-y to 8.5%) as gross margins improved. Lower revenue affected by COVID-19 led challenges and a dip in OPM led to a standalone net loss of Rs. 26.6 crore (higher than our expectation of a net loss of Rs. 22 crore). However, post Q1FY2021, SEL has seen labour availability and execution run-rate improving to 70-80% and 60-70%, respectively, from July 2020. It expects to achieve labour availability of 90100% and normalized execution run-rate from October 2020 onwards. Hence, the...

booked a profit of ~Rs170mn on its investment. Sadbhav Engineering (SADE) reported a mixed set of results with better operating performance, however higher effective tax rate dented profitability. sale of Ahmedabad Ring Road BOT project at a P/BV of ~2.5x (valuation as per agreement) is to be completed in FY21E. After a month's halt in construction activities due to nationwide lockdown, operations have now resumed in all project sites with labour force currently at 50-60% pre-covid levels. Company targets construction run-rate of Rs100mn/day with labour...

Update on HAM funding and arbitration proceeds: Gross debt outstanding for the 10 HAM assets stands at Rs 20.18bn, with balance requirement being Rs 24bn. On the equity front Rs 2.2/1.67bn is expected to be infused over FY21/22E. Arbitration proceeds of Rs 4.2bn have been awarded (Rs 2.2bn with SEL, Rs 2bn with SIPL). On the Rohtak-Panipat project, SEL has been advised by NHAI to move the case to conciliation committee rather than arbitration. In company's view it is a clear case of an event of default (alternate traffic route is the issue here) as per the CA, and is confident of recovering its entire equity and debt. Sadbhav Engineering Ltd (SEL) has announced a management rejig with Mr Vasistha Patel (VP) being appointed as CEO and Mr Shashin Patel stepping down as Chairman and MD to Vice Chairman in non executive capacity. We perceive this as a positive step with VP getting iron hand on execution and promoter SP dissociating himself from day to day run. SEL BS has deleveraged post the SIPL deal and now VP has immediate challenge of ramping up execution against the COVID-19 headwinds. We maintain BUY with SOTP of Rs 56/sh

SEL 3QFY20 performance was a disappointment as funding constraints limited execution of projects. With conclusion of InfInfravit deal funding issues will get resolved. Group standalone debt reduction by 50% will augur well for reinstating financial markets confidence in the group. Whilst it will take time for SEL to revert to historical levels of quarterly execution, we believe 3QFY21E onwards things should normalize. We maintain BUY. Key risks (1) Delay in new order inflows; and (2) Further delay in execution ramp-up. We maintain BUY on SEL with a reduced TP of Rs 175sh (vs. Rs 241/sh earlier). We value SELs EPC business at 15x FY21E EPS and assign a 20% hold co discount to SIPL stakes market cap. TP reduction is owing to FY20/21E EPS cut by 43/24%.

Sadbhav Engineering's (SADE) Q3FY20 standalone revenue plunged 52% YoY as prolonged monsoons and tight liquidity slowed execution.

With the sale of majority of the assets in the SIPL platform to IndInfravit the SEL-SIPL Merger provides an opportunity to the company to recalibrate its business model to an asset light structure where it can further monetize its under construction portfolio through the ROFO agreement with IndInfravit, ensuring capital churning for securing new orders. Going forward, SEL is expected to prioritize securing new orders through EPC mode while selectively bidding for new HAM projects, once the NHAI activity gathers pace during 2HFY20. We maintain BUY. Key risks (1) Delay in new order inflows; and (2) Further delay in appointed dates for balance projects. We maintain BUY on SEL with a reduced TP of Rs 241/sh (vs. Rs 269/sh earlier). We value SELs EPC business at 15x FY21E EPS and assign a 20% hold co discount to SIPL stakes market value. Price cut is on account of revision in FY20/21E EPS by 4.9/(6.6)%.

22 October 2019 Infrastructure Directors of Sadbhav Engineering (SADE) has approved the merger of the company and its listed subsidiary Sadbhav Infrastructure Project Limited (SIPL). In consideration of the merger, SADE will issue one equity share for every three SADEs shareholders. As a result of the merger, the promoter stake in SADE will come down from 46.55% to 38.74%. recap, SADE had divested its stake in nine road assets at an EV of INR66.1b, resulting in a debt reduction of INR40.6b at the project level and realization of INR25.5b in lieu of equity invested. Anyway, the investor interest in the listed asset arm has been on a decline, as InvITs are better products compared to listed companies in the road assets business, given the removal of the dividend distribution tax on SPVs and the minimum construction risk. Prima facie, the merger appears value accretive to standalone SADE as the entire benefit of debt reduction in SIPL standalone gets captured in the new merged entity.

Contrary to investment wisdom SEL has corrected sharply when it is perceived to get significantly deleveraged over next 2-3months. Asset light model, selective focus on EPC projects bidding, ROFO on HAM assets, 10% stake in IndInfraVit (already SIPL is in the money) and potential resolution to bleeding Rohtak Panipat project are other key re-rating triggers. Merger may be another positive as combined entity curtails equity intensive projects and surplus cash is utilized towards pursuing growth, without equity dilution. SEL is in a sweet spot. CPPIB backing is literally a large bank support. We maintain BUY. Key risks (1) Delay in SIPL stake sale; (2) Slow order inflows; and (3) Further delay in appointed dates. We maintain BUY on SEL with a reduced TP of Rs 269/sh (vs. Rs 340 earlier). We value SELs EPC business at 15x FY21E EPS and assign a 20% hold co discount to SIPL stakes market value. Price cut is on account of FY20/21E EPS downgrade by 24.4/20.4%.

Order book at | 10,809.7 crore as of Q1FY20 SEL's order book (OB) was at | 10,809.7 crore as of Q1FY20, implying an OB-to-bill ratio of 3.1x on TTM revenues.The management expects order inflows to the tune of | 3,000-4,000 crore in FY20E. On the execution front, the management expects to commence the Kim-Ankaleshwar project in Q2FY20E while the other three HAM projects with total EPC value of | 2,347 crore are expected to commence execution post Q2FY20E. Overall, the management has guided for revenue worth | 3,600 crore (including |350...

Sadbhav Engineering Limited (SEL) reported weak standalone earnings for Q1FY2020 owing to a delay in receipt of appointed dates for hybrid annuity model (HAM) projects, which dragged down revenue and net profit by 8% and 38% y-o-y, respectively. The management maintained a revenue guidance of Rs. 3,600 crore for FY2020 on back of better execution in H2FY2020 along with receipt of appointed dates for couple of projects at the start of H2FY2020. Post the transfer of nine assets in recently signed deal with the IndInfravit trust, the management is...

Around 50% decline in stock price implies ~75% correction in EPC business valuation: Since the announcement of the asset sale a month back, SADE's stock price has corrected by ~50%. We note that the company draws ~45% of valuation (based on our SOTP methodology) on account of its stake in the listed subsidiary, Sadbhav Infrastructure Projects Limited. Thus, adjusted for...

Sadbhav Engineering Limited (SEL) entered into definitive agreement with IndInfravit Trust for a 100% stake sale in nine operational projects held under listed subsidiary Sadbhav Infrastructure Projects (SIPL). The assets sold at an EV of Rs. 6612 crore and equity value of Rs. 2550 crore valuing the assets at 1.7x book value and 8.4x EV/ EBITDA on FY2019 earnings. The equity value will be received as Rs. 1900 in cash and 10% stake in IndInfravit trust. The deal will aid in Rs. 4000 crore O&M; contract for SIPL, more than halving leverage...

SIPL's asset monetization brings in the much needed liquidity flush to the Sadbhav Group. The cash infusion will lead to SEL net D/E reducing from 0.7x to 0.2x (FY19/20E). Balance sheet strengthening makes a case of credit rating upgrade. With IndInfravit's backing, SIPL is well placed to bid for upcoming HAMs/BOTs and SEL in turn stands to benefit from captive ordering. We believe SEL is well placed to deliver 20.3/26.5% FY19-21E Rev/APAT CAGR. Maintain positive stance. We maintain BUY with a reduced SOTP of Rs 340/sh (vs Rs 353/sh earlier). We value SELs EPC business at 15x FY21E EPS and assign a 20% hold co discount to SIPL stakes market value. We have downgraded FY20/21E EPS by 1/2%.

Sadbhav Infrastructure Projects (SIPL), a 69.6% subsidiary of Sadbhav Engineering (SADE), has concluded its 100% stake sale in nine operational road assets to IndInfravit Trust at an EV of Rs 66.1bn. The equity value of the deal stands at Rs 25.5bn (~1.7x invested capital) to be paid out in two parts: Rs 19bn in cash and the balance as 10% of units in IndInfravit Trust. Divestment will help deleverage SADE's consolidated balance sheet and give SIPL access to capital for funding existing and new projects....

Structure of the deal and proceeds from the transaction On July 1, 2019, Sadbhav Infrastructure Project Ltd. (SIPL), a subsidiary of Sadbhav Engineering Ltd. (SEL), and IndInfravit Trust executed definitive agreements wherein the latter has agreed to purchase SIPL's 9 (out of 12) operational road projects at an enterprise value (EV) of | 6,611.2 crore. Equity valuation of these nine assets is | 2,550 crore, implying 1.7x P/BV (SIPL's initial investment in these 9 assets: | 1,550 crore). SIPL will receive | 2,550 crore equity in form of | 1,900 crore cash & | 650 crore (10%)...

Sadbhav Infrastructure Projects Ltd (SIPL), a subsidiary of Sadbhav Engineering Ltd (SEL) has entered in to a definitive agreement with Indiainfravit Trust to sell its 100% stake in nine operational road assets. The transaction values its road portfolio at Rs66.1bn which includes Rs25.5bn of equity and Rs40.6bn of debt. The deal will result in massive reduction in debt at SIPL level and advances given to SIPL by SEL worth Rs5.5bn are likely to be repaid. Moreover, out of the nine projects, in one projects viz. Mysore-Bellary, SEL has invested equity to the tune of 74% which will yield close to Rs1bn to SEL. We view this development positive for both SIPL as well SEL as it will lead to leaner balance sheet paving the way for...

Stake sale complete focus shifts to execution Sadbhav Infrastructure Projects (SIPL), a 69.6% subsidiary of Sadbhav Engineering (SADE), has concluded its 100% stake sale in nine operational road assets to IndInfravit Trust at an EV of Rs 66.1bn. The equity value of the deal stands at Rs 25.5bn (~1.7x invested capital) to be paid out in two parts: Rs 19bn in cash and the balance as 10% of units in IndInfravit Trust. Divestment will help deleverage SADE's consolidated balance sheet and give...