Mumbai: The big news of Sadbhav Infrastructure Projects Ltd’s (SIPL) asset divestiture has not brought investors jumping to their feet in cheer. The stock was down 2.5% on Wednesday and that of its parent Sadbhav Engineering Ltd (SEL) closed 2% lower. Perhaps, investors are awaiting the proceeds actually to flow in.
Also, government decisions such as allowing alternative routes that jeopardise 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 stock.
“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 in a note to clients. “Note that SADE has been facing execution challenges; it had scaled down its FY19 revenue guidance twice and has refrained from issuing guidance for FY20," they added
For perspective, monetising 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 to plough back funds into new assets.
On Tuesday, SIPL, which houses all the build-operate-transfer (BOT) projects of parent Sadbhav Engineering Ltd (SEL) struck a deal to sell nine of 12 operational road assets at an enterprise value of Rs.6,600 crore. The landmark deal, which is the largest consolidated asset sale in the roads sector will help de-leverage the parent’s balance sheet.
Just last week, shares of SEL and SIPL had fallen 3-4% when rating agency Care Ratings downgraded two SIPL road assets, stating a delay in interest payments to lenders.
The rating agency’s rationale was the firm’s weakness in toll collection and poor liquidity in the two assets to be able to service its borrowings. In one of the projects, Icra said, “toll collection for FY19 was Rs.64.95 crore while the debt obligations (interest + principal) was around Rs.110 crore."
This was no small worry, given SEL’s consolidated leverage, has been mounting. To that extent, the deleveraging is a welcome move.
That apart, the sale of BOT assets values the 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, de-leveraging will unlock tied-up funds for future project bids. After all, the National Highways Authority of India has plans for 4,500 km of road projects in FY20. But as Motilal’s analysts say, the focus now shifts to execution and improvement in the working capital cycle.