Execution back in focus - Company Update - Sadbhav Engineering - HDFC Securities

Sadbhav Engineering Ltd (SEL) has announced a management rejig with Mr Vasistha Patel (VP) being appointed as CEO and Mr Shashin Patel stepping down as Chairman and MD to Vice Chairman in non executive capacity. We perceive this as a positive step with VP getting iron hand on execution and promoter SP dissociating himself from day to day run. SEL BS has deleveraged post the SIPL deal and now VP has immediate challenge of ramping up execution against the COVID-19 headwinds. We maintain BUY with SOTP of Rs 56/sh.

Management reorganization: A 4-member Business Advisory Committee (BAC) has been constituted (of which Mr. Shashin Patel will be a part), with the intent to enhance professionalism within the company. BAC will be responsible for establishing various SOPs, and charter a sustainable growth path for the company. Mr. Vasistha Patel, has resigned as Non-independent Whole-time Director (been with SEL since 1998) and has been appointed as CEO. He will be responsible to revive the execution of the company. Mr. Shashin V. Patel has moved from the role of CMD to VC/Non-Ex Director, and the company is on the lookout to fill the vacated post. Promoter family members, Mr. Vikram R. Patel and Mr. Vipul R. Patel, have also resigned as Whole-time Directors. Mr. Nitin R. Patel continues to be the whole time Director & CFO. No change in shareholding.

Update on SIPL-IndInfravit deal proceeds utilization: Till date, SIPL has received units representing 10% stake in Indinfravit worth Rs 7.24bn and cash of Rs 15.48bn. Balance proceeds of Rs 0.93bn to be received soon. The proceeds have utilized towards reducing debt and enhance WC. O&M contracts with the IndInfravit SPVs is independent of the trust units held by SEL. ROFO arrangement is applicable for all present and future operational assets. Churning of assets will remain the strategy going forward. 3-4 HAM projects are nearing completion in 1HFY21.Incremental focus will be on EPC contracts. Current OB stands at Rs 87.26bn (3.5x FY20E Rev).

Debt reduction post asset monetisation: As indicated earlier, SIPL & SEL combined standalone net debt has reduced from Rs 25.34bn as on Dec-19 to Rs 16bn. Adjusted for IndInfravit units, the debt stands even lower at Rs 8.77bn. Stake sale of 9th project i.e. ARRIL is expected to be completed in near future for Rs 2.67bn, which will lead to further reduction. Guidance on gearing levels stands at 0.2-0.3x vs 0.5x now.

Update on HAM funding and arbitration proceeds: Gross debt outstanding for the 10 HAM assets stands at Rs 20.18bn, with balance requirement being Rs 24bn. On the equity front Rs 2.2/1.67bn is expected to be infused over FY21/22E. Arbitration proceeds of Rs 4.2bn have been awarded (Rs 2.2bn with SEL, Rs 2bn with SIPL). On the Rohtak-Panipat project, SEL has been advised by NHAI to move the case to conciliation committee rather than arbitration. In company's view it is a clear case of an event of default (alternate traffic route is the issue here) as per the CA, and is confident of recovering its entire equity and debt.

Shares of SADBHAV ENGINEERING LTD. was last trading in BSE at Rs.44.7 as compared to the previous close of Rs. 42.6. The total number of shares traded during the day was 16267 in over 23 trades.

The stock hit an intraday high of Rs. 44.7 and intraday low of 44.7. The net turnover during the day was Rs. 727134.

Source : Equity Bulls

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