We believe the merger is beneficial for SEL and will result in better cash flow management. Early receipt of cash flow from BOT asset sale (refer to, BOT stake sale to lighten debt burden significantly) and new project wins will be key triggers, in our view. We maintain ‘BUY’ with TP of INR185 (EPC: INR93 at 12x EPS; INR92 – DCF of BOT projects). At CMP, the EPC business is available at just ~6.1x P/E (adjusting for BOT asset valuation).
While SIPL deal should deleverage SEL and SIPL’s balance sheet, themanagement has lowered its guidance sharply resulting in earnings downgrades. Secondly, we are unclear in terms of possible synergies from the considered merger between SEL and SIPL. Besides this, the awaited equity swap ratio would influence the price movement of each stock if the merger goes through. Hence, we downgrade the stock to HOLD with a target price of Rs 140/share.
Maintain Buy with revised PT of Rs. 200: We have lowered our net earnings estimates for FY2020-FY2021 by more than 16%, factoring in a delay in receipt of appointed dates for HAM projects. The stock has remained under pressure on account of weakening macro environmentaffecting traffic growth at toll projects along with drying up of new projecttendering since H2FY2019. The reduction of net earnings and a reduced EPC multiple on account of near-term sectoral woes led us to cut our price target to Rs. 200. We believe that execution coming back on track in H2FY2020, clarity emerging out of the asset sale and reverse merger of SIPL and an overall improvement in business outlook, would lead to re- rating of valuation multiple for SEL. Hence, we maintain our Buy rating on the stock.
The company is facing delays in receipt of appointed dates for some of its projects which has impacted its performance. The company expects receipt of appointed dates in three of its projects worth ~Rs.23bn post Q2 FY20. The order inflow has been weak so far in FY20 and SEL is targeting order inflows of Rs.30-40 bn during FY20. With start of new projects and expected receipt of appointed dates in coming quarters, we expect execution to pickup only in FY21. Also, margin is likely to hover at ~12% given current mix of order book. Debt is likely to decline as loan is repaid by SIPL with the funds received from sale of BOT assets. At CMP, the EPC business trades at valuation of 8.3x FY21 EPS. We recommend a BUY on the stock for target price of Rs.209.
We value the construction business at an EV/EBITDA multiple of 5x FY21e, the company’s ~68% stake in the BOT holdco arm on a sum-of- parts basis (and assign a 20% holdco discount), and recoverable exposure to Sadbhav Infrastructure at 1x book value. Consequently, we arrive at a target price of Rs189.
We maintain BUY with a reduced SOTP of Rs 340/sh (vs Rs 353/sh earlier). We value SEL’s EPC business at 15x FY21E EPS and assign a 20% hold co discount to SIPL stake’s market value. We have downgraded FY20/21E EPS by 1/2%.
Maintain Buy with unchanged PT of Rs. 285: The deal provides much needed relief to SEL to recover loans outstanding from SIPL. Additionally, reduced leverage would help SEL in bidding for upcoming HAM & BOT projects. Hence, at this stage, we continue to maintain Buy with unchanged PT of Rs. 285.
The deal seems positive for SADE given that it will help reduce debt and improve quality of the balance sheet. Even improvement in the earnings quality, post elimination of other income, is a positive. Post the asset monetization deal, focus will now shift to improve execution of projects in hand and the working capital cycle of the company. 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. 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. We maintain Neutral with SoTP-based TP of INR275.
Maintain Buy with unchanged PT of Rs. 285: We expect the resolution of Rohtak-Hisar project as the issue is well covered inthe concession agreement. Management has time and again clarifiedon the delays in such matters due to procedural delays. Hence, at this stage, we maintain our Buy rating with unchanged price target (PT) of Rs. 285.
Retain Buy with revised price target of Rs. 285: We have cut our net earnings estimates for FY2020 and FY2021 factoring lower execution on want of appointed dates in its HAM projects along with an increasing effective tax rate. The road sector is expected tosee significant order tenders with the re-electionof the ruling government as its manifesto had talked about Rs. 100 lakh crore investment in infrastructure by 2024. The key positive triggers for SEL in the near term would be early receiptof appointed dates and fructification of dealto monetize assets. Hence, we maintain a Buy rating on the stock albeit with a downwards revision in price target of Rs. 285 (on account of lower revision in estimates).
Valuation – Retain Buy with a revised PT of Rs. 300: We have introduced FY2021 earnings estimate in this note. We expect SEL to post a 14% CAGR in net revenue over FY2019- FY2021E, as a large chunk of its order book comes into execution in early FY2020. Further, a key hangover of financing its subsidiary, SIPL, is likely to be eliminated with fructification of the deal to offload its operational assets road portfolio along with significant easing of consolidated balance sheet. We roll forward our valuation multiple to FY2021E and arrive at an SOTP-based price target (PT) of Rs. 300. We maintain our Buy rating on the stock.