Incorporated in 2007, Sadbhav Infrastructure Project Limited (SIPL) is the asset holding arm of Sadbhav Engineering Limited (SEL). In the past few months, the company has established a strong foothold in the road sector by securing several hybrid annuity projects awarded by the National Highways Authority of India (NHAI). This is in line with SIPL’s strategy to tap the market at a time when most players have preferred to stay away.
Most of SIPL’s portfolio comprises operational assets ensuring a stable revenue stream for the company. Nonetheless, it has had to take steps to curtail its debt burden mostly to be able to take advantage of emerging opportunities in the market. Besides, the company also launched an initial public offering (IPO) in 2015-16 to raise funds.
Equity shares of SIPL were listed on the Bombay Stock Exchange and the National Stock Exchange on September 16, 2015, making it the only roads and highways build-operate-transfer (BOT) company to be listed in India. The IPO was oversubscribed by 2.327 times and the company raised Rs 4.92 billion, of which fresh issue was Rs 4.25 billion.
Of the total amount raised, SIPL planned to utilise Rs 2.6 billion for repaying loans and Rs 0.82 billion for equity investment and advancing subordinate debt to its subsidiary, Shreenathji-Udaipur Tollway Private Limited (SUTPL). Besides, Rs 0.85 billion was earmarked for the repayment of a loan from its parent company, SEL, and the rest for general corporate purposes. “Post the listing, the company has continuously strived to improve the cash flow position and attain high growth levels,” says Varun Mehta, chief financial officer, SIPL.
Expanding project base
SIPL is engaged in the development, operation and maintenance of roads as well as national and state highways across the country. The company is selective when it comes to adding assets to its portfolio. Its project portfolio increased from 10 projects in September 2015 to 16 projects at present with one other project under acquisition from SEL. Accordingly, SIPL’s total asset size under management increased from Rs 87.41 billion to Rs 140.06 billion during the same period. The company has a wide geographical spread and has projects in a number of states such as Maharashtra, Haryana, Rajasthan, Karnataka and Gujarat.
While SIPL continues to maintain its foothold in the competitive BOT space, it has not secured any project in recent times. After the first quarter of 2016-17, SIPL had bid for two BOT (toll) projects spanning a length of 239 km, where it emerged as the L3 (third lowest) bidder in one bid and the L5 bidder in the other.
However, the company has shown a strong appetite for hybrid annuity model (HAM)-based projects. As of October 2016, it had secured about 20 per cent (in terms of the number of projects) of the HAM-based projects awarded by NHAI. SIPL has a current outstanding order book of Rs 3.53 billion for five HAM projects that it had secured earlier. These projects are to be executed over a period of 24 to 30 months.
Besides, SIPL participated in 12 HAM projects worth Rs 11.27 billion and around 900 km in length after the first quarter of 2016-17. Of these, it emerged as the lowest bidder in the BRT Tiger Reserve Forest-Bangalore section project. SIPL was declared the L1 bidder for the Bhavnagar-Talaja, Una-Kodinar and Rampur-Kathgodam projects as well.
With respect to ongoing ventures, construction work on the Mysore-Bellary project is expected to be completed by January 2017. Meanwhile, provisional completion certificates have been received for 86 km of the Rajsamand-Bhilwara project in Rajasthan, 100 per cent length of the Rohtak-Hissar project and for the 11.35 km developed stretch of the Dhule-Palesner section.
While the total income of SIPL grew at a compound annual growth rate of 68 per cent between 2010-11 and 2014-15, threafter the company has been incurring losses.
This is despite the fact that toll revenues received from its 10 operational special purpose vehicles (SPVs) increased by 32.1 per cent from Rs 1.62 billion in the second quarter of 2015-16 to Rs 2.14 billion in the corresponding period of 2016-17. The cash profit of these SPVs is likely to increase further owing to a growth in traffic volumes as has been the trend in the past two years. Nonetheless, unforeseen economic events such as the demonetisation move are likely to impact revenue growth.
For the most part, arranging funds for new ventures has been smooth sailing for SIPL. “The company has achieved financial closure for four of the five HAM-based projects secured in the past nine months. Financing for the remaining project is expected to be tied up in the next two-three months,” says Mehta. In December 2016, wholly owned subsidiaries of SIPL, Sadbhav Bhavnagar Highway Private Limited and Sadbhav Una Highway Private Limited achieved financial closure for the Bhavnagar-Talaja and Una-Kodinar projects, within the timelines stipulated in the concession agreement of July 2016. Besides, in November 2016, the company achieved timely financial closure for both packages of the Rampur-Kathgodam project.
Efforts to pare debt
Despite many positives in terms of project award and completion, the company’s high debt is a cause for concern. SIPL’s long-term liabilities stood at Rs 108.25 billion in 2015-16, a 34.66 per cent increase from the previous year. Delayed payments for some new road projects are being cited as some of the reasons for the losses being incurred by the company. Work on two projects – Managuli-Devpura and Mysore-Bellary – in Karnataka was affected due to the Cauvery river issue for around 20 days. Besides, the new milestone-based payment mechanism adopted by NHAI has blocked SIPL’s working capital in road projects.
In September 2016, SIPL raised Rs 2 billion by issuing the first tranche of non-convertible debentures on private placement basis. SIPL has already completed the first round of refinancing of debt worth Rs 23 billion in five SPVs for the Aurangabad-Jalna, Nagpur-Seoni, Bijapur-Hungund, Dhule-Palesner and Hyderabad-Yadgiri projects. This has resulted in an improvement in the credit ratings of these SPVs and annual savings of about Rs 800 million on interest payments. Besides, plans to refinance the debt of three other SPVs, namely, Ahmedabad Ring Road Infrastructure Limited (ARRIL), Maharashtra Border Check Post Network Limited and SUTPL, are also on the anvil. The interest cost after refinancing the total debt of Rs 23 billion for the three SPVs is expected to decrease to 9.75 per cent, enabling annual savings of Rs 400 million on interest payments.
Highlighting the company’s future plans, Mehta says, “SIPL would prefer to add greenfield projects to its portfolio where returns are better due to less competition and where it can utilise the niche construction expertise of its parent company.”
SIPL is pre-qualified by NHAI to bid either directly or through joint ventures (JVs) for design-build-finance-operate-transfer projects of up to Rs 32.34 billion and for HAM-based projects of up to Rs 49.35 billion. This gives the company huge scope for expanding operations in the coming years. Besides, the average residual life of its projects is around 18 years, ensuring a stable revenue and cash flow for the company in the future.
Consolidation of stakes in all SPVs by way of acquiring the JV partner’s stake (as in the case of Hyderabad Yadgiri Tollway Private Limited, ARRIL and Dhule Palesner Tollway Limited) or selling a minority stake (as in Mumbai Nasik Expressway Limited) in the past two years has been a key growth strategy for the company. “We will continue to explore similar opportunities so as to unlock the value of our portfolio,” says Mehta.
Going forward, the company plans to foray into toll operations of its SPVs and undertake their routine and/or major maintenance services to ensure cash profits. In this regard, SIPL has recently signed engineering, procurement and construction (EPC) agreements worth
Rs 2.83 billion with four of its subsidiaries for maintenance and repair works during the development period of the Rampur-Kathgodam project, Packages I and II, and the Bhavnagar-Talaja and Una-Kodinar sections on national highways. Meanwhile, major maintenance works for three projects – Bijapur-Hungund, Hyderabad-Yadgiri and Dhule-Palesner– is also scheduled to be undertaken in 2016-17. The revenue from these, amounting to about Rs 2.4 billion, is likely to be booked in 2017-18 and 2018-19. Besides, the capacity augmentation clauses in some of its SPVs have enabled SIPL to retain the right to widen the existing road, which could be a potential source of EPC income for the company in the future.
In a nutshell, with the surge in infrastructure growth and development and the growing order book of the company, SIPL is poised for strong revenue growth and improvement in its balance sheet.