Traffic and BOT portfolio stake sale bode well; TP cut to Rs 370 from Rs 435 given uncertainty in NHAI awards.
Steady traffic growth and impending stake-sale of majority share of its build-operate-transfer portfolio bode well for 50% of SEL’s SoTP. The prospects of the remaining 50% of SoTP depend on the pace of incremental ordering from NHAI. This remains uncertain, with key factors at play being (i) NHAI considering lowering the 30% threshold for payment in the event of termination and (ii) finding an alternative to descoping of works in the event of land-acquisition issues. Such uncertainty is reflected in our revised 6.5X EV/Ebitda multiple for the construction business (down from 8X) and higher ~13.5-14% cost of equity for road assets; TP at Rs 370 (from `435).
Impending deal to establish value for stake in SIPL
SIPL’s BOT portfolio reported a steady 5% traffic growth on a relatively high y-o-y base. Revenue growth at 12% was aided by a ~7% tariff component, partly propped up by 18% increase in the MBCPNL project. In our recent interaction, SEL mentioned good progress made in the sale of majority 74% stake in its 11 operational BOT (toll) portfolio. SEL expects binding offers to come by January, 2019.
EPC: Lending concerns for real
Sadbhav’s assessment is that existing projects of most players would get financial closure. However, the same would limit the funding appetite for incremental projects. Even as NHAI is aiming to revive activity through award of EPC projects in two large corridors (~`280 bn), SEL expects NHAI to end the year with `600-800 bn of ordering, as against Rs 1.2 trn in FY18. The key upside risk is the leading public sector banks lowering threshold to lend much below its stated 30% completion of project; depends on NHAI lowering its own 30% threshold for compensating both equity and debt in the event of a termination.