Sadbhav Infrastructure: RTI to MSRDC provides clarity on MBCP; reiterate LONG |Sadbhav Infrastructure: Event Update |


In a reply to a RTI filed by us, the Maharashtra State Road Development Corporation (MSRDC
) has confirmed that the Transport Department will continue to operate at Sadbhav Infra’s (SIPL) flagship Maharashtra Border Check Post (MBCP) Project even post GST. We have also updated the SPV-wise Annual Reports for FY17 and the latest toll-collection data. With +2%/+12% EE/yoy toll collections and positive channel checks on resumption of activity across corridors, we expect a decent recovery in traffic post the dual blows of demonetisation and GST. Maintain LONG with a rolled over Sep’18 SoTP-based TP of Rs 161 (from a Jun’18 TP of Rs 137 earlier).

2QFY18 toll data indicates stabilization of traffic 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 three-year revenue CAGR of 14% over FY17A-FY20E, and see upside risks on certain corridors in case of a rise in construction activity.

MSRDC attributes MBCP delays to land acquisition: MSRDC clarified that land acquisition was one of the main reasons for MBCP project delays, and a favourable extension of time (EoT) is expected once the project attains COD. While we have not factored in EoT, two-thirds of the project is operational and we expect 20+ check posts to be operational by Mar’18. Given MBCP’s 41% share in gross project valuation, streamlining of this project is crucial for an overall re-rating.

On-track HAM execution to support standalone revenue growth: Work has commenced and is in full swing at five sites now, and should commence at all 7 sites by December. Given a high probability of HAM project awards over EPC/BOT in the coming 2-3 years, the likelihood of SIPL getting a multiple on this business is high if it manages to bag another 3-4 HAM projects in FY18E.

High financial flexibility in an operational portfolio:
While near-term net worth could turn negative, SIPL is currently trading at fair valuations of 12.1x/11.0x FY19E/FY20E EV/EBITDA. The investment phase is now over, and SIPL should see higher revenues with inflation/traffic growth as finance costs reduce due to repayments. We also derive comfort from the financial flexibility of SIPL’s 100% operational toll portfolio with a reasonable history. Major risks are premature termination of any state concessions and lower growth.

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