Founded in 1988 by Mr. Vishnubhai Patel, Sadbhav Engineering Limited (SEL) is an infrastructure development and construction company focusing on roads and highways, irrigation and mining operations. SEL’s expertise includes rehabilitating, upgrading, widening and strengthening roads and highways, construction of earthen dams, etc. The company is reputed for completing projects ahead of schedule and delivering excellent quality of projects.

The company has successfully constructed more than 4500 lane kms of roads and highways (both National and State Highways) while an additional 2200 lane kms are under various stages of construction. Its clients include NHAI, Sardar Sarovar Narmada Nigam, Coal India, GIPCL, GHCL, L&T, HCC, Punj Lloyd among others.

In the past five years, the top line of SEL revenue has grown at the fastest rates in the construction space. The revenues for the company surged 17 per cent year over year during the first quarter of fiscal 2018. The jump in revenue at Rs 940 crore was driven by commencement of work on hybrid annuity (HAM) projects and pick up in execution on engineering, procurement and construction (EPC) projects.

The increased revenue contribution from high-margin HAM projects at the expense of low-margin irrigation projects led to EBITDA margins improving 54bps to 11.3 per cent YoY. The interest cost catapulted 87 per cent YoY, yet MAT credit led to profit after tax jumping 14 per cent YoY to Rs 55.5 crore.

SEL has been able to achieve this feat on back of its focus on roads, which is one of the fastest growing segments in construction space, ownership of road projects via build–operate–transfer (BOT) route, which enables greater control, and consistently completing work ahead of schedule.

HAM projects

SEL has commenced work on its three HAM projects including Rampur Kathgodam Pkg 1, Una Kodinar and Bhavnagar Talaja projects. It expects to receive ‘appointed date’ for Rampur Kathgodam Pkg 2 in third quarter of 2018 and for BRT Tiger reserve boundary project in the second quarter of 2018. In addition, it expects to achieve financial closure and thereby in either of the last two quarters of 2018, the company will initiate work on the Udaipur bypass and Waranga-Mahagaon (Pkg-I) projects.

Subdued traffic on BOT projects

During the quarter, traffic on BOT projects grew two per cent YoY. The management has indicated that growth has picked up in August 2017; SEL witnessed growth of 5 to 5.5 per cent YoY. The company is in the process of refinancing four operational BOT projects, which will further improve the BOT arm’s cash flows.

Order intake boost

For the April-June’17 quarter, the bidding activity was muted due to GST impact. The company ended the first quarter of 2018 with an order book of Rs 8400 crore, 2.4 times its trailing twelve months revenue. However, it has now picked up. With National Highways Authority of India (NHAI) looking to award projects spanning 6,500km and worth Rs 75,000 crore, SEL expects to gain Rs 6000 to Rs 7000 crore of fresh orders in the road segment alone. In addition, the company is also targeting orders in mining, irrigation and metro rail.

The order book break-up for the quarter includes transport projects accounting for 69 per cent of order book, of which captive BOT projects constitute 55 per cent; irrigation and mining contribute 11 per cent and 20 per cent, respectively.

Debt

At the end of first quarter of 2018, SEL’s gross debt on standalone basis decreased and stood at Rs 1450 crore. The management expects the debt to further decrease to Rs 1200 crore at the end of 2018 driven by receipt of mobilisation advance on new HAM projects and reduction in joint venture work from GKC and Delhi Metro Rail Corp (DMRC), which requires higher funding support; and decrease in working capital requirement in HAM projects compared to EPC projects.

The loan given by Sadbhav Engineering Ltd to Sadbhav Infrastructure Project Ltd is Rs 440 crore as compared to Rs 430 crore at the end of fiscal 2017.

On the tax rate front, the management has guided for no tax in the financial year 2018 since it still has unclaimed MAT credit worth Rs 120 crore from previous years. SEL expects full tax rate in fiscal 2019 as the proportion of HAM projects, which does not avail 80 (IA) benefits, and hence will increase in the top line.

Way forward

The management has given its guidance for 2018. It expects revenue of Rs 3800 to 3900 crore for the year, of which HAM projects will contribute Rs 1400 to Rs 1500 crore followed with road EPC division contribution to be Rs 1700 crore, irrigation to provide Rs 425 to Rs 450 crore and mining segment to clock Rs 300 crore. The management has also alluded operating margin to be between 11.25 to 12.0 per cent.

The 2018 revenue guidance of more than Rs 3800 crore is not at risk, however fresh order inflows are required to achieve the target of 15 to 18 per cent top line growth in fiscal 2019.

With a strong bid pipeline, robust BOT portfolio and best-in-class execution skill, SEL is expected to perform well going forward. Higher revenue visibility is expected in the EPC arm and better cash flow generation in the BOT subsidiary to trigger re-rating going ahead. The company has raised Rs 400 crore by divesting 22.22 per cent stake in Sadbhav Infrastructure Projects, the holding company for its BOT assets to PE investors. This would take care of its equity requirements of the ongoing projects.

It is envisioned execution of HAM projects to boost the fiscal 2018 top line; order inflows will remain critical to improve revenue visibility given the book-to-bill ratio is at 2.4 times and will determine stock performance.

Key Risks

BOT space: The company has exposure to the road BOT space which entails upfront investments with returns generally being back-ended. Although the company is currently well funded, it needs large amount of BOT projects to maintain its current growth momentum. This will likely stretch balance sheet of Sadbhav Infrastructure Project Limited (SIPL) and may lead to equity dilution.

PPP projects: With the company focusing on public private partnership (PPP) projects, it is exposed to risks associated with gaining right-of-way on land stretches, execution risk, ‘force majeure’ risk, et al. Moreover, the focus on toll projects exposes it to the unpredictability of traffic growth.

neha.seth@outlookindia.com