Dilip Buildcon (DBL) has signed an agreement with Shrem Group for sale of its entire BOT portfolio, 14 operational, 4 under construction projects and 6 Hybrid Annuity Model (HAM) projects) at an equity value of Rs 16 billion and enterprise value of ~ Rs 105 billion. DBL has invested, equity and sub-debt Rs 6.8 billion in operational and under construction assets, while an amount of Rs 8.4 billion is yet to be invested. The transaction values BOT portfolio at ~1.05x book value. The transaction is expected to be completed in tranches, wherein DBL would receive ~Rs 5.5 billion in FY18 and remaining in FY19, which would be utilised in strengthening the balance sheet, reduction of debt. With the monetisation of BOT assets, DBL has delivered on its strategy of being a focused EPC player in infrastructure space.
DBL was constrained in its growth due to equity infusion required in HAM projects and we believe this sale of operational and under construction BOT assets would allow DBL to participate in new HAM projects worth Rs 150-200 billion in FY18. Strong order backlog of Rs 156 billion, at the end of Q1FY18 and participation in new HAM projects would ensure sustained topline growth of 20-25% over next 4-5 years. Note: NHAI is expected to award projects worth ~ Rs 750 billion during the balance of FY18 with higher share (~70%) of HAM projects.
Moreover, competition in HAM projects has eased with 4-5 bidders in recent projects vs. 8-9 bidders in H2FY17. Easing competition would ensure sustained or better margin for DBL going forward. Return of Capital employed in EPC business is superior to capital intensive BOT business. Consolidated RoCE of DBL would rise to ~28%, in FY19 after sale of BOT portfolio from ~18% in FY17. We increase our FY18/19 EPS to Rs 42/Rs51, vs. Rs 38/ Rs 45 earlier, given the strong revenue growth visibility. We also raise our target multiple to 15x, 12x earlier, to account for improved growth outlook and RoCE of the business. Our revised TP stands at Rs 765, 15x FY19E EPS vs. Rs 610 earlier.