In addition, with this being high-margin work, SEL’s overall Ebitda margin will improve. Consequently, valuation of the EPC business will get enhanced,” stated a report by Edelweiss Securities.
The merger of Sadbhav Engineering (SEL) with its subsidiary Sadbhav Infrastructure Projects (SIPL) will result in operational synergy and improve cash flow management of the Ahmedabad-based infrastructure focused group, industry analysts said.
On October 19, the Sadbhav group had announced the merger between the two entities, subject to requisite approvals.
SIPL, which was listed on the exchanges only four years ago, is engaged in construction, operation and maintenance of infrastructure projects directly and through special purpose vehicles. Currently, the infrastructure company has 11 operational build-operate-transfer (BOT) assets, of which nine will be acquired by the Larsen & Toubro Group-sponsored infrastructure investment fund (InvIT), IndInfravit
Trust, for Rs 6,610 crore.
SIPL also has 10 projects under the hybrid-annuity-model (HAM), of which eight are under construction and the rest are yet to begin construction. On a standalone basis, SIPL generated cash profit of Rs 84.4 lakh in the financial year 2018-19.
“SIPL generates significant income by undertaking maintenance work on operational and under-construction projects… Currently, this income is not getting valued with most investors focusing only on SIPL’s BOT projects. Post merger, this maintenance work will be done by SEL, adding to its engineering, procurement and construction (EPC) revenue. In addition, with this being high-margin work, SEL’s overall Ebitda margin will improve. Consequently, valuation of the EPC business will get enhanced,” stated a report by Edelweiss Securities.
As on June 30, Sadbhav Engineering, the group’s EPC arm, has a order book for its transport business of over Rs 8,287 crore, while its order book for the mining business stood at over Rs 2,129 crore. The merger will lead to increased net worth due to consolidation of profits, enabling the company to bid for larger infrastructure projects, the company had said in an exchange filing. The group also expects to get access to a larger pool of funds post the merger.
“With significant deleveraging of the balance sheet, the company’s ability to win projects in future will improve significantly. The merger will also help streamline cash flow management,” Edelweiss Securities said in the report.
According to the exchange filing, shareholders of SIPL will get one share each in Sadbhav Engineering for every three shares held in the roads and highways construction subsidiary. The group has appointed BSR and Associates and Deloitte Haskin and Sells as independent valuers for the merger, while Cyril Amarchand Mangaldas has been appointed as the legal advisor. The management expects the merger transaction to be completed in the next six to nine months.