Ashoka Buildcon Note: Purchase – Selling BOT Toll Assets Removes Key Overhang
A strong order book and a stronger balance sheet bode well for the company; ‘Buy’ withheld with TP of Rs 175
Ashoka Buildcon subsidiary Ashoka Concessions has entered into a share purchase agreement with Galaxy Investments II Pte, an entity of KKR, for the sale of its entire stake in five toll assets for 13.3 billion rupees. Of this amount, Rs 12 billion would be used to provide an exit to SBI Macquarie for its stake in Ashoka Concessions. After regulatory approvals, the deal is expected to be finalized by September 22. The release of SBI Macquarie is long overdue and has been an overhang on the stock.
In the five projects – Ashoka Highways (Bhandara), Ashoka Highways (Durg), Ashoka Belgaum Dharwad Tollway, Ashoka Sambalpur Baragarh Tollway and Ashoka Dhankuni Kharagpur Tollway, Ashoka Concessions invested 21 billion rupees (equity). There would be a net depreciation of 5.5 to 6 billion rupees for Ashoka Buildcon resulting from this transaction, which would be recorded in the third quarter of fiscal year 22. Its external debt in these five projects amounted to Rs 32 billion.
The company is in advanced talks to sell its stake in Jaora Nayagaon and the Chennai ORR project, and some developments could be expected on this front soon. Ashoka Buildcon is also looking to monetize its HAM assets through an outright sale or the InvIT route.
Going forward, mgmt would continue to bid on road projects and would also evaluate toll projects where it sees an increase in value. She recently participated in the tender process for the Ganga Expressway toll project. This toll asset deal was long overdue and erases a large surplus on the stock. The mgmt can now focus on other aspects like fulfilling its order book and monetizing other assets. With improved management bandwidth and a reduction in consolidated debt levels, it would be able to take on additional projects and capitalize on growth opportunities.
Assessment and view
While the deal may take 9 to 12 months to bear fruit, it is a step in the right direction. Any development on the sale of other assets, where discussions are at an advanced stage, could be progressively positive. A strong order book and improving balance sheet bodes well for Ashoka Buildcon. The share is trading at 8x EPS FY23E for the core construction business. We are holding Buy with a TP of Rs 175 / share, based on the SoTP valuation.
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