While the volatility in the secondary market continues to be high, the euphoria around IPOs is vanishing gradually. Last week had this impact on IPOs of Pennar Engineered Buildings Systems and Shree Pushkar Chemicals & Fertilisers while the listing of Power Mech Projects was also disappointing, although it recovered later. Against this back drop, Sadbhav Infrastructure IPO opens tomorrow. The IPO of the Ahmedabad based Road developer and operator will include issue of fresh shares amounting to INR425 crore in addition to an offer for sale (OFS) by existing investors Norwest Venture Partners and Xander Investment Holding for 32.35 lakh shares each. At the lower end of the price band, the IPO will raise INR489.71 crore while the upper end of the pricing spectrum will increase the IPO size to INR491.65 crore. Sadbhav Infrastructure IPO will be managed by Kotak Mahindra Capital Company, Inga Capital, Edelweiss Financial Services, ICICI Securities and Macquarie Capital Securities (India).
Here is a quick snapshot of the IPO:
|IPO dates||31 August 2015 – 2 September 2015|
|Price band||INR100 – 103 per share|
|Issue size||INR489.71 crore – INR491.65 crore
(Fresh issue – INR425 crore, OFS – 64.71 lakh shares)
|Category allocation||QIB – 75%, NII – 15%, Retail – 10%|
|Lead managers||Kotak Mahindra Capital Company, Inga Capital, Edelweiss Financial Services, ICICI Securities and Macquarie Capital Securities (India)|
|Minimum lot||145 shares and in multiples thereafter|
|Minimum investment||INR14,280 – INR14,935|
The subsidiary of Sadbhav Engineering Limited plans to raise INR425 crore through fresh issue of equity shares. Apart from raising funds for Sadbhav Infrastructure, the IPO will allow an exit to existing investors Norwest Venture Partners and Xander Investment Holding which plan to sell 32.35 lakh shares. Both private equity players hold nearly 10.41% stake each. As a result, the shareholding of both PE firms will come down to nil following the IPO.
Familiar theme of debt repayment
Out of the INR425 crore it will get from the IPO, Sadbhav Infrastructure plans to use INR264.8 crore towards debt repayment while another INR82 crore are earmarked for investment in its SUTPL (Shreenathji – Udaipur Tollway Private Limited) subsidiary. The company has taken these loans from ICICI Bank Limited and parent Sadbhav Engineering. The strategy to raise public funds to pay back debt is unlikely to help the financial performance of Sadbhav Infrastructure in a big way as it had INR5,706.1 crore in long term borrowings as on 31 March 2015.
Red – lot of it in Sadbhav Infrastructure’s books
Sadbhav Infrastructure operates in a capital intensive industry and it shows in its financial performance. It builds and operates toll highways and roads in several states including Maharashtra, Gujarat, Rajasthan, Karnataka, Haryana, Madhya Pradesh and Telangana and border check posts in Maharashtra. While its revenues grew impressively from INR89.6 crore in FY 2011 to INR528 crore in FY 2015, profitability has taken a hit in the same timeframe. During the last five years, Sadbhav Infrastructure posted losses in three years and unfortunately, these instances are in the last three years. From a profit of INR9.9 crore in FY 2011, its losses swelled to INR301.6 crore in the financial year ended 31 March 2015. This is not good news for investors and the biggest factor eroding profitability of the company is finance costs. From just INR39.9 crore in FY 2011, finance costs jumped to INR525.9 crore in FY 2015. It marks a difference of just over INR2 crore between total revenues and finance costs.
Sadbhav Infrastructure’s consolidated financial performance (INR crore)
|FY 2011||FY 2012||FY 2013||FY 2014||FY 2015|
|Net profit (loss)||9.9||9.8||(45.7)||(155.9)||(301.6)|
|Net margin (%)||11.0||4.9||-14.5||-39.7||-57.1|
Source: Sadbhav Infrastructure’s Red Herring Prospectus
Valuations not consistent with margins
Road infrastructure development is evidently a tricky business due to government’s involvement and long delays in receiving payments. Cost overruns and delays due to land acquisitions etc are also not uncommon. Considering these downsides, valuations of Sadbhav Infrastructure appear to be expensive. However, it is not that this space is devoid of quality stocks. Investors can buy from a long list of toll road operators such as Ashoka Buildcon, KNR Construction, IRB Infra and IL&FS Transportation which are available at better valuations in terms of debt equity ratios.
Sadbhav Infrastructure has certain positives and execution capabilities and a diversified road portfolio are some of them. Meanwhile, parentage support from Sadbhav Engineering has worked well for the subsidiary in getting good projects. However, these positives are more than offset by uncomfortably high debt load. With the reduction in interest rates, this cost is likely to come down going forward which makes Sadbhav Infrastructure’s IPO a long term game. Investors with that sort of timeframe can apply in the IPO but for most risk-averse investors, Sadbhav Infrastructure’s IPO should simply be AVOID.
We also don’t like the fact that the size of the IPO was reduced twice since filing the first draft red herring prospectus (DRHP). In our view, the reduction in IPO size reflects the low confidence the market has got in the space. Going by the responses of the IPOs of PNC Infratech and MEP Infrastructure in the same space, the odds are stacked heavily against Sadbhav Infrastructure IPO.