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Dilip Buildcon’s asset sale allays rising debt concerns

LiveMint logoLiveMint 01-09-2017 Vatsala Kamat

Just when mounting debt concerns were seeping into the minds of contented investors, Dilip Buildcon Ltd struck a landmark deal with Shrem Infraventure Pvt. Ltd. By selling 24 road projects (14 completed, four under construction and six under the hybrid annuity model) lock, stock, and barrel for Rs1,600 crore, the company’s debt burden will now ease.

Besides, Dilip Buildcon’s investors have reason to cheer as the deal is sizeable and went through when many peers in the infrastructure segment are struggling to monetize assets. Erratic and weak traffic growth, and expectation of a high internal rate of return has stymied stake sale in road assets in the recent past.

However, according to a report by HDFC Securities Ltd, the company’s success in monetizing its assets is because its BOT (build, operate and transfer) projects are on the annuity model where the returns are assured and fixed over a 15-year period. This compares favourably with road projects reliant on toll revenue that fluctuates as per the traffic and toll rates.

Meanwhile, Dilip Buildcon’s asset sale is at a valuation of 1.05 times the book value, a tad better than what analysts had expected, given the cash crunch in the sector and economy. The company’s gross stand-alone debt of about Rs2,400 crore will come down by a fourth over the next two years. This will release locked-up funds while bidding for new projects.

On the flip side, will the company have a revenue stream once these projects are sold? The management in an analysts’ call said that operations and maintenance jobs along with EPC (engineering, procurement and construction) projects will keep cash flows healthy and revenue growing. In fact, such jobs have a relatively lower risk of fluctuation in profitability and are akin to annuity projects, where the return is fixed over a long period like 15 years.

Dilip Buildcon’s strength is in its ability to maintain a stable operating margin of about 18% that is among the best in the industry, in spite of aggressive growth.

That said, there are risks to revenue growth in the near term. The company is almost fully dependent on the government tendering in roads. Irrigation and mining projects are hardly of any consequence in the order book. Industry experts say that the government outlay in infrastructure may be subdued in the medium term. Also, the sale of projects may see a temporary dip in revenue traction.

But Dilip Buildcon’s investors may be willing to wait it out. For those who wish to bet on infrastructure, the stock has been an outperformer in the infra pack, on the back of strong execution of projects. It has returned nearly three times the money invested at the time of the initial public offering about a year ago.

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