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High debt, low interest coverage and expensive valuation make the initial public offering of Sadbhav Infrastructure Projects (SIPL) not enticing to investors. The company is a subsidiary of Sadbhav Engineering (SEL), which is a major player in engineering, procurements and construction (EPC) services. SIPL owns and operates toll roads on the build-operate-transfer (BOT) model.
Funds of about ₹425 crore proposed to be raised in the offer will be used primarily to pay off loans. Besides, there is also an offer-for-sale (about ₹66 crore) of the entire holdings of private equity funds, Xander and Norwest.
Road assets
SIPL partially or fully owns 10 national and State highway BOT projects in Gujarat, Maharashtra, Karnataka, Rajasthan, Haryana, Madhya Pradesh and Telangana. Of these, six are fully operational in which toll collection has started.
SIPL partially or fully owns 10 national and State highway BOT projects in Gujarat, Maharashtra, Karnataka, Rajasthan, Haryana, Madhya Pradesh and Telangana. Of these, six are fully operational in which toll collection has started.
One project is about 87 per cent complete while two others are 50-60 per cent complete. These cover over 1,500 lane km of operational projects and over 1,000 lane km under construction. The projects have a life of 20-30 years before they are transferred to the government. The company can collect toll for its projects over the next 18 years on an average.
Lastly, in the border check-post project of Maharashtra, 13 of the 22 units are operational.
The company also plans to acquire stake in two more road projects — one completed and the other under construction — totalling 742 lane km. SIPL is also qualified by the National Highway Authority of India to bid for new road projects for values up to ₹2,650 crore until December 31, 2015.
The company earns annuity revenue from one project and income from toll in the other operational projects.
Revenue increased 38 per cent annually on an average in the last three years to ₹528 crore in 2014-15. This was thanks to more projects becoming operational, traffic growth and higher toll rates.
Loss making
But the higher revenue has not translated into profits at the net level, due to increase in interest costs and depreciation. Operating profits (EBITDA) increased 42 per cent annually on an average in the last three-year period to ₹336 crore. Operating margin though remains below 65 per cent (against industry average of 80 per cent). In 2014-15, revenue grew 34 per cent, but operating expenses increased 48 per cent due to higher employee and maintenance contract costs.
But the higher revenue has not translated into profits at the net level, due to increase in interest costs and depreciation. Operating profits (EBITDA) increased 42 per cent annually on an average in the last three-year period to ₹336 crore. Operating margin though remains below 65 per cent (against industry average of 80 per cent). In 2014-15, revenue grew 34 per cent, but operating expenses increased 48 per cent due to higher employee and maintenance contract costs.
Depreciation cost increased 87 per cent annually in the last three years, dampening EBIT (earnings before interest and taxes) growth to 37 per cent. Financing costs zoomed 94 per cent — nearly equalling revenue in 2014-15 — leading to net losses in the last three years.
As traffic and toll revenue in operational projects increase in the future, the pressure on the bottom-line should ease. That said, high debt levels may impact profits in the near to medium term.
High debt
As of March 2015, the company’s total debt stood at ₹6,342 crore. After paying down loans from the IPO proceeds, SIPL’s total debt-to-equity ratio will still be about 7 times. This is uncomfortably high, even by the standards of the debt-heavy sector. Peers such as Ashoka Buildcon, IRB Infra and IL&FS Transportation have debt-to-equity ratio of 2-4.5 times.
As of March 2015, the company’s total debt stood at ₹6,342 crore. After paying down loans from the IPO proceeds, SIPL’s total debt-to-equity ratio will still be about 7 times. This is uncomfortably high, even by the standards of the debt-heavy sector. Peers such as Ashoka Buildcon, IRB Infra and IL&FS Transportation have debt-to-equity ratio of 2-4.5 times.
As a result, SIPL’s interest coverage ratio — EBIT to interest expenses — of 0.37 times is very low. While in the long term, finance charges are likely to decrease as debt is paid down and borrowing rates moderate, the low coverage is a risk in the near term.
Other concerns
There are also project delays and revenue risks in BOT projects. For instance, Maharashtra is starting to implement a toll-free regime. This will pose a risk on the company’s border check-post project. Also, in certain road sections, the State Government has exempted light motor vehicles and State-operated transport buses from toll payment. While the State Government will reimburse toll charges, there may be delays in receiving payments.
There are also project delays and revenue risks in BOT projects. For instance, Maharashtra is starting to implement a toll-free regime. This will pose a risk on the company’s border check-post project. Also, in certain road sections, the State Government has exempted light motor vehicles and State-operated transport buses from toll payment. While the State Government will reimburse toll charges, there may be delays in receiving payments.
Also, SIPL’s offer price of ₹100-103 seems expensive. The company’s enterprise value to operating income (EV/EBITDA) ratio of 28 times is twice that of other listed companies in the road infra segment that are profitable. Even its enterprise value to sales ratio of 18 times is four times that of other road infra developers.
In general, past concerns about road infrastructure development — completion delays, funding issues, low profitability due to aggressive bidding, muted traffic growth and lack of regulatory support — are easing.
Measures such as deferring premium payable to National Highways Authority of India, 5:25 refinancing scheme and equity divestment option are long-term positives for the sector. But these would take time to yield results and highly-leveraged companies would be risky bets at the present juncture.
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