Sadbhav Infra Q2FY17: Maintain Long | Sadbhav Infra: 24% ATR in 17 months|

Sadbhav Infra’s (SIPL) consolidated operational performance was above estimates due to higher-than-expected standalone contribution. Non-cash finance costs led to a below-expected PAT of Rs 813mn, but overall quarterly generation was at Rs 625mn. With greater impact of refinancing and gradual growth in traffic, we expect cash profits to grow steadily over the next two quarters. We are positive on the company achieving Rs 1bn+ quarterly cash generation by 1HFY19E. SIPL will continue to focus on HAM projects. We maintain LONG with a SOTP-based Mar’19 TP of Rs 164 (vs. Sep’19 TP of Rs 161 earlier).

2QFY18 toll data indicates traffic stabilization post GST: A positive surprise on 2QFY18 toll collections despite a weak first month suggests rising transport demand across verticals. Several projects like Rohtak-Panipat, Hyderabad-Yadgiri, Bhilwara-Rajsamand, Rohtak-Hissar, Dhule-Palasner and Shrinathjji-Udaipur saw ~10%+ yoy growth. We are confident of a 12% CAGR over FY17A-FY20E, and see upside risks on certain corridors in case of a rise in construction activity.

Focus on project refinancing to lower interest costs: SIPL has refinanced seven of its operational projects and is in advanced stages of refinancing at least two more projects (MBCPNL, BRTPL) by Mar-end; only the Rohtak twins would be taken up later. This would result in lower interest costs (average cost of 9-9.25% vs. ~10% currently), reduced debt repayment in earlier years and improved cash flows, thereby directly boosting profitability.

Steady cash generation to enable more HAM project wins, aid standalone revenue growth:
Work has commenced in full swing at five sites, and should commence at all seven sites by December. SIPL’s project portfolio is well placed to achieve Rs 1bn+ quarterly cash generation by 1HFY19. Given high probability of HAM over EPC/BOT projects in the coming 2-3 years, SIPL will bag more HAM projects and stands every chance of getting a multiple on this business.

HAM projects to be key focus area amid low competitive intensity:
With 27 HAM projects of over Rs 300bn to be bid by Sep’17, SIPL is confident of bagging more projects, since the competitive intensity has reduced considerably. Major downside risks are premature terminations of any state concessions and loss of revenue due to traffic leakage/lower growth.

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