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Of the Rs 425 crore SIPL will get, it plans to utilise Rs 260 crore for repaying loans, Rs 82 crore towards equity investment and advancing of subordinate debt to its subsidiary, Shreenathji-Udaipur Tollways, another Rs 84.8 crore for repayment of loan to its parent and the rest for general corporate purposes.
While the business prospects and past record are good, high debt is a concern. Also, the IPO valuations seem to leave little on the table for investors.
Yellapu Santosh at Angel Broking, using a sum-of-the-parts valuation methodology, arrives at a fair price of Rs 101 for the share and suggests the issue is fully priced. Thus, only for patient investors, willing to wait till earnings pick up. Analysts at Spark Capital feel the likely cyclical recovery in the roads sector, and Sadbhav’s strong and improving order book, will support strong revenue growth, margin expansion and improvement in the balance sheet.
Diverse portfolio
SIPL was formed in 2007 as a developer and operator for highways, roads and projects via BOT (build, operate and transfer). It has 10 projects in its portfolio and is in the process of acquiring two more.
Six of the existing 10 are fully operational, one partially (Maharashtra border check-post) and three are in various stages of development (two expected to start in six to eight months). This is a sizable and diverse portfolio of toll roads, in seven states (Haryana, Rajasthan, MP, Gujarat, Maharashtra, Karnataka, Telangana), all having strong growth and which can see better traffic and toll growth.
SIPL’s projects have an average residual life of 18 years and seven months, thereby ensuring stable revenue and cash flow. The company is poised to capitalise on the surge in infrastructure growth. National Highways Authority of India was expected to award 15,303 km of projects for bidding via BOT between 2014 and 2019, helping SIPL add more projects.
The company is also open to churning its portfolio as opportunities arise by transferring or selling some assets and acquiring more profitable ones.
Financials & debt
Revenues rose at a compounded annual rate (CAGR) of 56 per cent over FY11-15 and Ebitda (earnings before interest, taxes, depreciation and amortisation) by 53 per cent. However, expansion and financing of new projects has seen debt also grow five-fold, from Rs 1,324 crore in FY11 to Rs 6,342 crore in FY15. Thus, SIPL’s finance costs rose sharply from Rs 40 crore in FY11 to Rs 526 crore in FY15, equivalent to its revenue of Rs 528 crore in FY15. Hence, with the Ebitda to interest ratio at 0.6 at the end of FY15, the company reported losses at the net level. The trend started in FY13, with losses rising in FY14 and FY15.
The journey from here is expected to be one of transformation. Of the three projects under development, one will see completion by October and another two by January 2016. The Maharashtra check-post project will also see new posts being added and acquisition of the already operational Dhule-Palesner Tollway project should get completed by January.
The IPO proceeds for general corporate purposes can also be used for funding the acquisition. With revenue of Rs 175 crore in this financial year's first quarter and some additional revenue from completed/acquired projects, SIPL can generate close to Rs 800 crore in revenue during FY16 and an Ebitda above Rs 600 crore, estimate analysts.
On debt, while the company will reduce it from the IPO proceeds, it has also refinanced loans on four projects for which the interest rate stands reduced at 10.3 per cent from 11.5 per cent earlier. Thus, some relief on it can be expected and FY16 could see operating profits meeting the finance costs. With further growth in earnings from FY17 onwards, the pressure could ease. More important, for a meaningful turnaround, the interest coverage ratio needs to increase to 1.4-1.5 from 0.6 in FY15, say analysts.
