Road project sales to give Sadbhav a capital boost

By Himanshi Lohchab

Mumbai: The Sadbhav group’s deal to sell a bunch of road projects will not just help de-lever its consolidated balance sheet, but also release growth capital to fund new projects, brokerage firm CLSA said.

Execution of the group's core engineering and construction (E&C) business is likely to pick up in the second half of fiscal 2020 after it signed India's biggest highway divestment deal, it said.


On Monday, Sadbhav Infrastructure Project said it signed a pact to sell nine operational road projects for Rs 6,611 crore to IndInfravit Trust, an infrastructure investment fund sponsored by Larsen & Toubro and backed by Canada’s CPP Investment Board.

On Tuesday, Sadbhav Infrastructure closed nearly flat at Rs 70.80 on the BSE. Shares of its parent, Sadbhav Engineering, ended 3.33 per cent lower at Rs 248.20.

Last week, ratings firm CARE had downgraded the rating of Rohtak-Hissar Tollway, a wholly-owned subsidiary of Sadbhav Infrastructure, to ‘D’, or the default status, from BB+.

The equity valuation of the deal with IndInfravit Trust is at 1.7 times the infrastructure company’s initial equity investment and at a premium of 30-35 per cent to its market capitalisation, CLSA said.

This will help the company fund new projects, thereby reducing funding calls on Sadbhav and avoiding debt-for-equity structures from NBFCs, the global brokerage firm said. The group's consolidated debt-to-equity ratio in fiscal 2018 was 7.6. According to CLSA, the deal will allow Sadbhav Infrastructure to transfer Rs 4,050 crore of its debt to nine of its divested national highways. It will also be able to secure growth capital and return loan of Rs 4,600 crore from its parent, Sadbhav Engineering.

This will create a virtuous cycle of low leverage and E&C growth versus the current vicious cycle of capital constrained growth, CLSA said.