Asset sale boost for Dilip Buildcon; stock gains more than 10%

The move is expected to strengthen its balance sheet and improve new project visibility

Dilip Buildcon’s stock gained more than 10 per cent on the bourses on Monday after the company announced the sale of some of its assets and the timeline to achieve the same. Cube Highways and Infrastructure is buying five of Dilip Buildcon’s 12 hybrid annuity model (HAM) projects.  

The move to offload assets was anticipated given the debt on the company’s balance sheet. While Dilip Buildcon has a good order book and a track record of strong execution, its debt has grown substantially. This led to higher outgo on interest costs, denting the bottom line. Analysts at HDFC Securities had indicated that asset monetisation would be the key for re-rating and the stock reaction on Monday reflects the same. 

The said HAM projects required a Rs 570-crore equity infusion and given Dilip Buildcon’s 51 per cent stake, it would have to contribute about Rs 290 crore. Subject to milestones, hereon, Dilip Buildcon would be receiving Rs 180 crore from Cube through optionally convertible debentures, and Rs 230 crore after the commercial operation date. Thus, total receipt of Rs 410 crore against investments of Rs 290 crore implies returns to the tune of 1.4 times.   

Also, once the deal is completed, it will ease balance sheet pressure by reducing the equity requirement in HAM projects. The total equity requirement for all 12 projects will reduce by 50 per cent to Rs 1,340 crore, and can reduce further, should the remaining seven projects also get monetised, believe analysts at SBI Capital. The move will also provide equity visibility for future HAM projects, says an analyst.

 There are additional triggers. The company is likely to monetise its remaining seven HAM projects in three-four months, according to analysts at BOB Securities, thereby, offloading the existing HAM portfolio of 12 road assets by FY20. This will help de-leverage the company’s balance sheet substantially, and give it access to capital for funding capex and new projects, they add.

 The move is in sync with the company’s strategy to focus on its strengths as an engineering, procurement and construction contractor, rather than as an asset holder, point out experts. Meanwhile, analysts at Anand Rathi Securities say that the stock (excluding investments) trades at price to earnings of 7.1 times FY20 and 6.6 times FY21 estimates. The target prices of analysts suggest up to 40 per cent upside from the current levels.