Company background: Sadbhav Infrastructure Project Ltd (SIPL) is a subsidiary of
Ahmedabad-based Sadbhav Engineering Ltd (SEL). SIPL was incorporated in
2007 as a roads and highways operator. It has a portfolio of 10 BOT projects of
which 6 road projects are fully operational, 1 is partially operational (border
check posts) and 3 are under construction stage. 9 of the 10 BOT projects are toll
projects (including service fee for the border check posts in Maharashtra) and 1 is
an annuity project. In addition to the 10, SIPL is in later stages of acquiring stake
in 2 projects, of which 1 is operational and the other one is under development.
This restructuring process is in accordance with company’s strategy of
consolidating all BOT road projects developed by SEL under one company- SIPL.
Pros: (1) Strong revival trend seen across many of the company’s BOT road
projects which should lead to improvement in its cash flow cycle, (2) diversified
portfolio with minimal risk, as only 4 of the 12 projects are under construction
stage (3 of them being ahead of schedule), and (3) recent BOT re-financing
initiative, as well as, debt re-payment from the IPO proceeds should relieve nearterm
stress on the Balance Sheet.
Cons: (1) Highly levered Balance Sheet (FY2015 debt of Rs6,342cr; D/E ratio of
7.9x), (2) deteriorating interest coverage ratio (from 1.0x in FY2012 to 0.3x in
FY2015), (3) networth erosion from Rs971cr in FY2012 to Rs788cr in FY2015, with
there being more potential for erosion, (4) lack of clarity on the sources of funding
of new projects the company intends to build its portfolio upon.
Outlook & Valuation: Although we are impressed by the company’s past
execution track record, strong parentage support, and diversified road portfolio
(with minimal execution risk), what concerns us is the high debt on the books. The
commencement of 4 BOT projects during FY2016-17E will add to the revenues,
but high interest expense will delay the turnaround in profitability. In terms of
valuation, the company is trading at FY2015-EV/EBITDA multiple of 29.9x and
FY2015-P/BV of 4.1x which is significantly expensive than its peers. On using the
sum-of-the-parts based valuation methodology, we arrive at FY2017 based fair
price of Rs101/share, which suggests that the issue is fully priced. While positives
emanating from favorable near term prospects would be offset by the high debt
on the company’s books, we suggest a NEUTRAL rating on the issue.

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