“BUY” This Mid Cap Infrastructure Stock For 63% Upside: Nirmal Bang

Nirmal Bang, a brokerage company, has issued a buy call on Ashoka Buildcon Ltd's stock. The brokerage has set a target price for the stock of Rs. 167, implying a 63 percent growth from the market price of Rs. 102. The stock was trading at a market price of Rs. 102 at the time of the brokerage's buy call, but it is currently trading at a market price of Rs. 98.50 per share on the NSE.

The brokerage’s take on Ashoka Buildcon

Nirmal Bang Equities Private Ltd has said today in its research report that "Ashoka Buildcon (ASBL) has finally signed a share purchase agreement (SPA) with Galaxy Investments II Pte Ltd (an affiliate of funds, vehicles and entities managed and/or advised by Kohlberg Kravis Roberts & Co. LP) for the sale of entire share capital in five subsidiaries of Ashoka Concessions Ltd (ACL). The aggregate consideration to be received post this sale has been agreed at Rs13.37bn, including loans provided by the parent entity. ACL will continue to hold 3 remaining BOT projects and 7 HAM projects and ASBL will have a 100% stake in ACL. SBI Macquarie, which currently owns 39% in ACL, will get exit after receiving payment of Rs12bn. Total investments made by ASBL and SBI Macquarie in these assets work out to be Rs21bn. After adjusting for the inflows, there will be a sizeable impairment of investment on both ACL as well as ASBL books. The cashflow for ASBL from the sale of these assets is expected to be ~Rs1bn and it will have the rights for any claims on these assets from NHAI."

According to the brokerage "Consolidated debt on the ASBL books will reduce by ~Rs31bn from the current level of Rs64bn. The management indicated that it is in an advanced stage of signing SPA with another investor for the sale of two more assets, which are Jaora-Naigaon and Chennai ORR projects and the deal will be concluded before the end of FY22. After the sale of these two assets, ASBL's exposure to BOT will be negligible and cash outgo on account of loss funding will stop. While the cash inflow from the sale is lower than our expectations, overall, the conclusion of the deal reduces significant debt from the consolidated books and further cash burn will be avoided. The other income ASBL used to get on loans provided to the subsidiary will go away, leading to a reduction in PAT but cash flow will not be impacted as ASBL didn't receive those amounts in the first place."

The brokerage has highlighted in its research report that "The management stated that it is planning to sell 10 HAM projects through the InVIT route post completion of these projects, which will make ASBL more asset-light. Going forward, the company's plan is to bid for EPC projects and select BOT projects. We believe that higher capital commitment towards BOT assets (roads, CGD, or airports) in the future will be detrimental for investor sentiment, especially given the experience of this deal. We have currently not changed our estimates or ratings and maintain our positive stance on the company as we believe that asset sales will result in better execution in the EPC business, leading to rerating and value unlocking potential available through the sale of remaining assets."

Expectation of the brokerage

Nirmal Bang has clarified that "ACL has entered into share subscription and share purchase agreements with Galaxy Investments II Pte. Ltd., an affiliate of KKR for sale of the entire share capital (which will also include repayment of any shareholder loans) held in the following subsidiaries. (1) Ashoka Highways (Bhandara) Limited (2) Ashoka Highways (Durg) Limited (3) Ashoka Belgaum Dharwad Tollway Limited (4) Ashoka Sambalpur Baragarh Tollway Limited and (5) Ashoka Dhankuni Kharagpur Tollway Limited. Total consideration for the deal is Rs13.37bn and the company will provide an exit to SBI Macquarie for its 39% stake by paying Rs12bn."

The brokerage has claimed that "Post this deal, ACL will have 4 BOT assets and 7 HAM assets and will be owned 100% by ASBL. The deal is likely to be concluded by Sept. 2022 and the effective date is likely to be 31st March 2022. Additional loss funding during that period amounting to ~Rs1bn will result in lower cash inflow for the company. Total investment in these five projects, including initial construction financing, shortfall financing and interest accrued on loans (including equity investments) amounts to Rs21bn. The company will receive a consideration of Rs13.37bn on these investments and hence there will be a total write-off of ~Rs8bn. Out of this, ACL has already provided for Rs2.45bn and hence additional write-off of Rs5-5.5bn will be there in 3QFY22. Impact of a write-off on the standalone entity (ASBL) will be to the tune of Rs6bn."

Disclaimer

The stock has been picked from the brokerage report of Nirmal Bang Equities Private Ltd. Investing in equities poses a risk of financial losses. Investors must therefore exercise due caution. Greynium Information Technologies, the author, and the brokerage house are not liable for any losses caused as a result of decisions based on the article.