Obligated loss-making entity facilitates exit route for PE funds who hold the key.
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OFFER AT A GLANCE |
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Name |
Sadbhav Infrastructure Project Ltd |
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Public Offer |
Fresh Issue of 4.12 cr to 4.25 cr shares and Offer for Sale of 64.72 lakh shares of Rs 10 each |
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Offer % on Total Equity |
13.55% to 13.85% |
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Post-IPO Promoter Stake |
68.71% to 68.95% |
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Offer Price |
Between Rs 100 and Rs 103 |
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Offer Amount |
Rs 490 cr to Rs 492 cr |
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Application Quantity |
145 & Multiples of 145 |
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Bid/Offer Opens |
August 31, 2015 |
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Bid/Offer Closes |
September 2, 2015 |
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Listing |
BSE and NSE |
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IPO Rating |
Nil |
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Book Running Lead Managers |
Kotak Mahindra Capital, Inga Capital, Edelweiss Financial, ICICI Securities & Macquarie Capital |
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Registrars |
Link Intime India |
The IPO
Public issue of up to 4.9 cr equity shares at a price band of Rs 100-103 per share valued at Rs 490-492 cr. The IPO consists of a Fresh Issue of 4.12 cr to 4.25 cr shares aggregating to Rs 425 cr and an Offer for Sale of 64.72 lakh shares aggregating to Rs 65-67 cr, comprising of 32,35762 shares each by Xander Investment Holding XVII Ltd and Norwest Venture Partner VII-A-Mauritius.
The Issue will constitute 13.55% to 13.85% of the post-Issue paid up capital of Rs 352-353 cr. The promoter-company, Sadbhav Engineering Ltd, would hold between 68.71% and 68.95% of the post-issue capital. Investors should apply for a minimum of 145 shares and multiples of 145 thereafter. Kotak Mahindra Capital, Inga Capital, Edelweiss Financial, ICICI Securities and Macquarie Capital have been appointed as book running lead managers to the offer. Kotak Securities, Edelweiss Securities, Intime Equities and Antique Stock Broking are acting as syndicate members. The issue, scheduled to open on August 31, 2015, will close on September 2, 2015.
IPO Object
As per the amendment in the shareholders’ agreement between the issuer-company, promoter-company and the private equity funds (Xander and Norwest) there was an obligation on the part of the issuer company to list the share before September 30, 2015. Thus, while listing may be the main object of the IPO, the issuer company proposes to utilize the fresh issue proceeds for the following: Repayment of rupee loan facility from ICICI Bank Limited Rs 180 cr; Part repayment of unsecured loans to the company’s corporate promoter Rs 85 cr; Equity investment and advancing of sub-ordinate debt to subsidiary, Shreenathji-Udaipur Tollway Pvt Ltd, for part financing of its project of Rs 82 cr; and the balance is earmarked for General corporate purposes.
Lineage
The Ahmedabad-based Sadbhav Infrastrucure Project Ltd (SIPL) was promoted in 2007 as a wholly owned subsidiary by Sadbhav Engineering Ltd (SEL), a listed company that went public in 2006. SEL has an established track record of executing projects with over 25 years of experience in construction activities in the transport, mining and irrigation sectors since its incorporation in 1988. SEL transferred its BOT (Build-Operate-Transfer) operations to SIPL and invited funding to the tune of Rs 400 cr from private equity funds, Xander and Norwest in 2010.
Since going public in 2006, SEL has grown geometrically. From the pre-issue level of Rs 207 cr, the company’s top line has crossed Rs 3000 cr in FY 2015. From a net profit of Rs 7 cr in FY 2005, SEL’s bottom line has reached Rs 114 cr in FY 2015. Nevertheless post FY 2012, the company’s margins have been under pressure. Though SEL has posted profits on a standalone basis, it has incurred loss on a consolidated basis last year.
As regards SEL’s performance on the trading screen, the scrip has witnessed some erratic behavior. SEL’s P/E multiple has shot up many folds in three years even while earnings have failed to catch up. SEL offered its share at Rs 185 in February 2006 which saw a peak of about Rs 1600 in January 2008. Interestingly, towards the end of 2008, the price dropped to as low as Rs 220. In 2010, it scaled to over Rs 1300 which was followed by a rights issue at Rs 725 per share. Interestingly, post rights, the price surged to Rs 1600 which was followed by a 10:1 stock split. Thus, the investors in SEL’s IPO have got a reward of more than 1500% in less than 10 years.
Business Profile
All SIPL’s projects are implemented through special purpose vehicles, including joint venture entities. The company’s SPVs are involved in the development, operation and maintenance of national and state highways and roads in several states including Maharashtra, Gujarat, Rajasthan, Karnataka, Haryana, Madhya Pradesh and Telangana and border check posts in the state of Maharashtra.
The project portfolio consists of ten BOT projects of which six road projects are fully operational, one is the partially operational border check posts and the remaining three projects are in various stages of development. Nine of the ten BOT projects are toll projects (including user fee for the border check posts in Maharashtra), while the remaining one is an annuity project. The operational projects cover approximately 1,531 lane kms and the projects under development cover approximately 1,061 lane kms. In addition, as of May 31, 2015, SIPL’s subsidiary Maharashtra Border Check Post Network Ltd has completed 13 check posts and is developing 9 more check posts.
In addition to the above projects, SIPL has initiated the process to acquire from SEL 74% of the outstanding equity interest in Mysore Bellary Highway Pvt Ltd and 39% of the outstanding equity interest in Dhule Palesner Tollway Ltd. After these acquisitions, SIPL’s project portfolio is slated to increase to 12 BOT projects, with seven fully operational projects, one partially operational border check posts project and four projects in various stages of development. SIPL generates revenues primarily from toll collection, user fee and annuity receipts. The company also provides operation and maintenance and advisory and project management services to its projects.
Financial Track
As SIPL’s projects are under SPVs, the company has virtually become a holding company for the SPVs. On a consolidated basis, SIPL’s operating revenue has grown from Rs 69 cr in FY 2011 to over Rs 525 cr in FY 2015. The company’s operating profit has steadily increased from Rs 65 cr to Rs 337 cr during this period. Nevertheless, in last three years, the company’s bottom line has been in red. From a loss of Rs 52 cr in FY 2013, SIPL has gone deeper into red at Rs 330 cr in FY 2015. Currently, the accumulated losses amount to Rs 494 cr as against its equity base of Rs 311 cr.
Even though working results are depressing, the company’s assets (Net Block) have had impressive growth. From Rs 1680 cr in FY 2011, the company’s net block has steadily increased to Rs 9013 cr in FY 2015. In this period, the company’s borrowings have gone up from Rs 1314 cr to Rs 6204 cr.
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FINANCIALS |
CONSOLIDATED |
STANDALONE |
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(Amount in lakh) |
Mar-15 |
Mar-14 |
Mar-13 |
Mar-15 |
Mar-14 |
Mar-13 |
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Revenue |
52805 |
39266 |
31543 |
10731 |
11583 |
11668 |
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Operating Profit |
33658 |
26317 |
19779 |
4277 |
5612 |
3821 |
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Oper. Margin % |
61.7 |
65.1 |
59.0 |
7.9 |
34.5 |
12.7 |
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Interest |
52592 |
35524 |
19518 |
10375 |
5268 |
2142 |
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Depreciation |
14061 |
9150 |
4990 |
13 |
11 |
13 |
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Net Profit |
-32997 |
-19574 |
-5231 |
-6114 |
81 |
1163 |
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Net Oper. cash flow |
35642 |
32461 |
13386 |
2039 |
1929 |
-3732 |
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Equity Cap |
31096 |
2826 |
2826 |
31096 |
2826 |
2826 |
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Reserves |
97077 |
97319 |
96782 |
55002 |
80147 |
80066 |
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Accumulated Loss |
-49354 |
-18106 |
-2512 |
-1739 |
0 |
0 |
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Net Block |
901276 |
778081 |
474405 |
128 |
141 |
152 |
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Borrowings |
620389 |
490177 |
364325 |
122191 |
67131 |
34756 |
Valuation
Interestingly, when some BOT players are already listed, SIPL’s offer document claims that it did not have any listed peer for comparison. Perhaps, being a loss making company, SIPL may not find it worth to compare with its competitors. A comparable peer, IL&FS Transportation, a dominant player in BOT, is currently priced around Rs 92 discounting its earnings just 6 times. Noida Toll, a BOT operator with a single asset, is quoting at Rs 24 which is less than 6 times its earnings. In fact, Noida Toll currently offers a dividend yield of 12.5% per annum.
Among the integrated players, that is EPC activity combined with BOT operation, Gammon Infra which went public in 2008 and priced at the lowest band of Rs 167 (Rs 10 paid-up) is currently quoting at Rs 11 (Rs 2 paid-up) inflicting a capital loss of more than 66% on the IPO investors. Incidentally, SIPL’s two lead managers, Inga and Macquarie, had been associated with Gammon’s IPO.
One of the leading integrated Road-BOT players, IRB Infra has a P/E multiple of around 16x. Another established integrated player, Ashoka Buildcon commands a P/E of more than 32x. SIPL’s promoter SEL currently enjoys a higher P/E multiple of 47x which has more to do with its subsidiary’s IPO valuation than its own earnings. In the absence of a positive bottom line, SIPL cannot be compared with peers on P/E multiple. Here Price to Revenue generation and Price to Assets owned become relevant.
SIPL is asking for a market cap of Rs 3500 cr to Rs 3600 cr which discounts the company’s top line (Rs 528 cr) more than 6 times which is far higher than other players. SIPL’s market cap discounts its net block 0.4 times which is in fact lower than Noida Toll (0.8x). However as compared to IRB, Ashoka, IL&FS and Gammon, SIPL’s P/NB is higher.
Looking at the promoter-company’s (SEL) track record, investors may not lose much on the SIPL’s offer. Nevertheless, the scenario may change once the lock-in lapses. It’s worth noting that the two private equity funds, who acquired more than 6.47 cr shares at an average price of Rs 61.64 five years back, would be still holding in excess of 5.82 cr shares at an average cost of about Rs 57 after the issue. Hence after the lock-in period, unless there is a significant improvement in the working of the company, the counter may witness significant selling pressure from the private equity funds.
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How Sadbhav Infra compares with players engaged in Road-BOT |
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COMPANY NAME |
MCAP |
EQ |
NB |
REV |
P/E |
P/R |
P/NB |
OPM |
Price |
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(Rs CR) |
(x) |
(%) |
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IRB Infrastructure |
8357 |
351 |
36599 |
3847 |
15.9 |
2.2 |
0.2 |
57.5 |
238 |
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Ashoka Buildcon |
2808 |
79 |
12722 |
2320 |
32.5 |
1.2 |
0.2 |
23.9 |
178 |
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IL&FS Transportation |
2253 |
247 |
17166 |
6503 |
6.0 |
0.4 |
0.1 |
32.9 |
92 |
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Gammon Infrastruct |
1068 |
189 |
8927 |
798 |
75.5 |
1.3 |
0.1 |
58.2 |
11 |
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Noida Toll Bridge Co |
452 |
186 |
573 |
123 |
5.8 |
3.7 |
0.8 |
70.4 |
24 |
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Sadbhav Infra – Hi Band |
3628 |
353 |
9013 |
528 |
Loss |
6.9 |
0.4 |
61.7 |
103 |
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– Lo Band |
3535 |
352 |
9013 |
528 |
Loss |
6.7 |
0.4 |
61.7 |
100 |
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Sadbhav Engg-Standalone |
5324 |
17 |
536 |
2970 |
46.7 |
1.8 |
9.9 |
12.3 |
310 |
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-Consolid |
5324 |
17 |
9731 |
3448 |
Loss |
1.5 |
0.5 |
18.1 |
310 |