The big news of Sadbhav Infrastructure Project Ltd’s asset divestiture has not brought investors jumping to their feet in cheer. The stock has fallen 6% in the past two trading sessions, and that of its parent Sadbhav Engineering Ltd has fallen 4%. Perhaps, investors are awaiting for the proceeds to actually to flow in.
Also, government decisions such as allowing alternative routes that jeopardize toll-collection forecasts and lack of a back-up mechanism to service loans in case of a liquidity crunch would be an overhang on the stocks.
“We would wait for execution to pick up meaningfully and working capital cycle to improve before we turn constructive on the rating of the company," said Motilal Oswal Financial Services Ltd in a note to clients. “Note that SADE (Sadbhav Engineering) has been facing execution challenges; it had scaled down its FY19 revenue guidance twice and has refrained from issuing guidance for FY20."
For perspective, monetizing or selling operational assets at the right time is important for the steady growth of infrastructure firms. This helps them to cash in on profits from completed projects and plough back funds into new assets.
On Tuesday, Sadbhav Infrastructure, which houses all the BOT (build-operate-transfer) projects of Sadbhav Engineering, struck a deal to sell nine of 12 operational road assets at an enterprise value of ₹6,600 crore. The landmark deal, which is the largest consolidated asset sale in the roads sector, will help deleverage the parent’s balance sheet.
Just last week, shares of Sadbhav Engineering and Sadbhav Infrastructure fell 3-4% when CARE Ratings downgraded two road assets of the latter, stating a delay in interest payments to lenders.
The rating agency cited weak toll collections and poor liquidity in the two assets for the downgrade. In one of the projects, another rating agency Icra Ltd said, “Toll collection for FY19 was ₹64.95 crore while the debt obligations (interest + principal) was around ₹110 crore."
This was no small worry, given Sadbhav Engineering’s consolidated leverage, has been mounting. To that extent, the deleveraging is a welcome move.
That apart, the sale of BOT assets values Sadbhav Infrastructure’s project portfolio at nearly 1.7 times the equity book. This signals an avid appetite for infrastructure assets, which is a morale boost for such developers.
Meanwhile, deleveraging will unlock Sadbhav Engineering’s tied-up funds for future project bids. After all, the National Highways Authority of India has plans for 4,500km of road projects in FY20. But as Motilal Oswal’s analysts say, the focus now shifts to execution and improvement in the working capital cycle.