In the much-awaited asset monetization deal, Sadbhav Engineering (SADE), through its subsidiary Sadbhav Infra Projects (SIPL), will sell stake in 9 BOT assets (of its portfolio of 12 assets) to lndlnfravit Trust at EV of `66 bn – 7% above our valuation. Equity valuation at 1.7x P/B is thus far premium; on negative side, SIPL’s 10% stake in InVIT valued at `6.5 bn will lead to lower upfront cash flows vs. market expectation.
The deal is all-round positive for IndInfravit given expected IRR of 13-14% vs. likes of IRB InVIT at 9-10%; slight discount (3%) to previous deal by existing partners of InVIT by OMERS Infra (Feb-19) is positive for SIPL. Remain constructive on SADE and expect cash proceeds to aid deleverage (~`7 bn) and release growth capital for new projects (`19-20 bn).
RoFo agreement sets a stage for SIPL to divest more assets in future. Apart from being project manager, SIPL to also enjoy one board seat in InVIT (which was precedent of it holding at least 10% stake). InVIT portfolio to offer maintenance opportunity of `40 bn for SADE.
Post transaction, expect SIPL’s leverage to reduce from 6x to 1.7x as `37 bn debt on 9 assets to be moved to InVIT structure. Milestone led receipts of `4 bn and `2 bn against various arbitrations to garner additional cash flows for SIPL. SADE’s standalone D/E to reduce to 0.25x (from 0.75x) upon receipt of `6.5 bn outstanding from SIPL (incl. interest) and `1 bn on Mysore-Bellary project.
With 80% of order book with appointed dates (balance expected in H2), we expect SADE to deliver 15% revenue CAGR over FY19-21 (vs. 6% CAGR over past 3 years). Our recent interaction with NHAI officials too indicated positive prospects for road sector – expects to award 6.5-8k km of road projects in FY20; 70% of new ordering under PPP model. Hence, players with lean balance sheet and cash flows remain in sweet spot for the opportunity; maintain ‘buy’ on SADE with TP of `301.