By Geetanjali Kedia
Sadbhav Infrastructure Project has entered the primary market on Monday 31st August 2015, to raise Rs. 425 crore, via fresh issue of equity shares, in addition to an offer for sale of 65 lakh equity shares by the PE investors Xander and Norwest, aggregating Rs. 65-67 crore, both priced in the band of Rs. 100 to Rs.103 per share. The total IPO size is between Rs. 490-492 crore, comprising fresh issue of 4.13 crore to 4.25 crore equity shares, at upper and lower end of the price band. The issue, representing 13.55% of the post-issue paid up capital at the upper end, closes on Wednesday 2nd September.
Sadbhav Infrastructure, 77.42% subsidiary of Sadbhav Engineering Limited, owns 10 road BOT projects, 6 of which are operational, 1 partially operational, while 3 are expected to be operational starting Oct 2015 to Jun 2016. 9 of the 10 projects are toll based, while 1 is annuity based. Company is acquiring 2 BOT projects, one under construction and another operational, although it is currently loss-making at the PBT level.
Promoter holding, currently at 78.10%, of which, nearly one-third is pledged, will reduce to 68.95% post IPO and company will continue to be a subsidiary of Sadbhav Engineering. 2 PE investors, Xander and Norwest, each holding 10.41% stake currently, having invested in the company since September 2010 at cost of Rs. 62 per share, are part exiting 1% stake each.
For FY15, company’s consolidated revenues grew 35% YoY to Rs. 500 crore and EBITDA increased 28% YoY to Rs. 337 crore, but depreciation and finance charges also soared 54% and 48% YoY respectively to Rs. 141 crore and Rs. 526 crore. Hence, there was consolidated loss before tax of Rs. 330 crore, having risen from Rs.184 crore in FY14. Net loss for FY15 stood at Rs. 302 crore, which lead to loss per share of Rs. 9.74 on equity of Rs. 311 crore.
Since its consolidated debt is enormously high, gross debt being at Rs. 6,200 crore, as of 31-3-15, company’s interest burden is humungous. Although objects of the fresh issue comprise repayment of ICICI Bank loan of Rs. 180 crore and parent Sadbhav Engineering’s unsecured loan worth Rs. 85 crore, given the total outstanding debt of Rs. 6,600 crore, as of 31-7-15 (having risen from Rs. 6,200 crore on 31-3-15), this repayment of Rs 265 crore looks like pocket change. On net worth of Rs. 788 crore, as of 31-3-15, debt equity ratio is steep at 7.7:1, which, post IPO, will also remain extremely high at 4.8:1. Another Rs. 82 crore from fresh issue proceeds will be invested in the subsidiary company to part finance a project under development.
While new projects coupled with organic growth will augment topline and EBITDA, bottomline picture looks very bleak. Given the huge interest outgo, which will continue in the future, despite softening interest rates and marginal repayment, as company expands operations to other projects, even till FY17, its bottomline is expected to be in the red. Depreciation burden is also high and rising.
Clearly the infrastructure sector grappling with massive debt, and in particular this company, is only for the brave-hearted - investors with ability to stay invested for the very long haul, with an appetite for high risk. It is probably good fortune of retail investors, that minimum 75% of the issue is reserved for institutional investors, while only maximum of 10% is for retail and 15% for HNI category, as per SEBI guidelines, since the company’s bottomline has been in the red.
Although valuation is not very material given the P&L stress, at Rs. 103 per share, company will have a market cap of Rs. 3,630 crore with enterprise value (EV) of Rs. 9,660 crore, on listing. This translates into EV/EBITDA multiple of 28x and 29x on historic basis, at the lower and upper end of the price band respectively. Even after accounting for 50% EBITDA growth in FY16, the EV/EBITDA multiple for FY16 stands very aggressive at 19 times. Peers such as Gammon, IRB Infra, IL&FS Transportation and Ashoka Buildcon are all ruling at single digit current year EV/EBITDA multiples, with debt equity ratios in the range of 1.5-3.5x.
Thus, on both counts, high debt coupled with expensive valuations, the issue scores poorly. Hence, remain away from the issue.
Disclosure: Not applying in the IPO.