ValuePickr Forum

SREI Infrastructure Finance

A double bottom is a simple pattern to spot. Usually there are two bottoms at around the same levels (there might be variations of around 2-5% in price ) seperated by a time period of a few weeks or months depending upon the time frames involved.

Once first bottom is formed, there is an upmove which again is followed by a fall which gets support very close to or at the previous bottom. And from there again the uptrend begins with higher volumes and takes out the previous peak to go higher with even higher vols…

Ideal pattern is where once the earlier peak is taken out, the stock price comes down again to test the support level (which previously was the resistance and previous peak). Once this happens and support holds once can buy with a reasonable amount of comfort.

Since SREI is a dodgy stock to bet on , one needs to be careful not to be caught at higher levels and hence one needs patiently to wait for ideal entry point. I will keep an eye on daily charts and update accordingly.


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Putting up an update on srei chart.

attached chart shows the stock price pattern post the first post on srei weekly chart.

for better clarity this is a daily chart.


Excellent technical analysis. Hitesh at his best!

Srei infra is now in initial stages of the uptrend. The Bollinger bands on weekly charts are in expansion. If the market continues to be benign for the next two weeks then the uptrend in the stock will gather strength.

The first target is a close above 52 and the final resistance is at 64-65, above which there are no significant resistance levels. The stock is in a bull market of its own.

Fundamentally, there are enough triggers for the stock to go up. The current market choppiness is the only hinderance.

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SEZ news related to SREI in ET

just one more thing:
it has got 250 page AR

On monthly charts, Srei infra was under tremendous Bollinger band squeeze. Such a thing last happened in 2003 where after the stock rallied from 4 to around 140 rupees.

In January 2016, Srei appears to be coming out of a similar Bollinger band sqeeze. Can we expect a multi month / multi year rally in Srei?

Those bullish on Srei would take comfort from todays management conference, where the management has indicated that the stock is undervalued below 200 rupees and in the share swap agreement with BNP Paribas, Srei has been valuedat a market cap of around 16000 crores…whereas the present marketcap of Srei is just around 3300 crores.

Is Srei a multibagger in the making, with a price target of 300? Atleast the share swap agreement seems to suggest.

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I see tremendous value unlocking for srei infra in future. Infact if this latest digital move becomes a success then their stake sale of the tower segment will appear like peanuts. Also lets not forget they have further value unlocking through their road segment, rural e-kiosks etc

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Yes…but all this is 2 years away…atleast…

In the meanwhile, i will be more than happy if equipment finance business delivers good results.

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I have a strong feeling that the results will keep improving hereon. The asset pain is behind them and the equipment side of the business has definitely picked up. Results on the 5th will throw some light on it

I had wanted to write a detailed report on SREI infra…but the I came across this latest report on Srei…it is quite detailed and gives a price target of around 126…it is in the same range as is given by technical Analysis of monthly charts…make me wonder whether these research reports derive the target price technically of on the basis of fundamentals…

but still its an informative report

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SREI’s stock has underperformed BANKEX for the most of the past eight years, although over the past year the stock has narrowed the gap with the index . SREI has also been significantly outperformed by its NBFC peers over the past few years.

The relatively poor performance of SREI’s shares is attributable to concerns about the company’s capital allocation, which investors believe has stressed the balance sheet. The stock’s underperformance versus BANKEX started in FY3/11. During 2010–13, SREI made a series of equity investments in infrastructure assets including roads, telecom towers and SEZs. The largest of these investments was the merger with Quippo Infrastructure Equipment. This amalgamation caused Quippo’s subsidiaries to become SREI investments, and as a result SREI ended up with an 18.5% stake in Viom, the second-largest tower company in India (including Rs16bn in direct equity investment and Rs11bn in quasi equity). This pushed SREI’s total equity investment in infrastructure businesses outside of its core finance operation to 98% of its standalone net worth. In addition, as all of these projects were still in their investment phases, they were not generating any returns.

The situation worsened for SREI when the operating and investment climate in the infrastructure space started to deteriorate after 2012. This hampered SREI’s ability to liquidate these assets, so the firm had to hold them longer than it had initially anticipated.

As a result of the high leverage on its balance sheet, SREI’s credit profile deteriorated (see Figure 7). This caused its cost of borrowing to surge 290bps from 9.8% in FY3/11 to 12.7% in FY3/14. The interest yield rose by just 80bps during FY3/11–14 as this borrowing was used to make non-core investments that were not generating any interest income (in contrast, the HDFC Bank (HDFCB IN) base rate increased by 130bps over this period).

Specifically the credit rating from CARE Ratings for SREI’s non-convertible debentures (NCDs) fell from ‘AA’ in FY3/11 to ‘AA-‘ in FY3/14. Its NCD rating then dropped further to ‘A+’ in FY3/16. As a result, the spread deteriorated from 4.7% in FY3/11 to 2.7% in FY3/14. Consequently, NIM fell from 3.3% in FY3/11 to 0.9% in FY3/14.

The balance sheet became inefficient as borrowing was used to fund the equity investments. This borrowing exceeded the balance sheet loans, which pushed NIM below the core business spread.

The situation was further exacerbated by the difficulties in the infrastructure sector. The downturn in the infrastructure operating environment was characterized by a variety of defaults including in the power sector and for road projects. This in turn resulted in a sharp increase in nonperforming assets for SREI. The firm has responded by writing-off loans over the past couple of years, particularly in its construction equipment operation.

Viom Stake Sale Has Freed Up Equity

The proceeds from the sale of its Viom stake totaled Rs29bn for SREI, including equity and quasi equity. As a result of the sale, SREI has reduced its borrowing and capital has been freed up for the core business.

Reduction in Borrowing to Improve Credit Rating and Lower Funding Costs

Currently the major source of funding for SREI is wholesale funding through banks. The consortium for the construction equipment business includes 37 banks while that for the standalone book (mainly project finance) includes 30 banks. The company is looking to reduce its funding costs by diversifying its loans through a wide spectrum of lenders. SREI also recently issued NCDs with a maximum annual coupon of 10% aggregating to Rs2.5bn. This should help improve its borrowing costs.

Operational Changes

Not only is the operating environment improving significantly in SREI’s core equipment financing business, but the company has also adopted a strategy of not exposing the balance sheet excessively to infrastructure assets, as was the case in the last cycle.

SREI enjoys competitive advantages in its construction equipment finance business stemming from its presence in all segments of the construction equipment life cycle (from the initial asset purchase to the exit from the investment or its resale). The company has tie-ups with all the leading construction equipment makers, which gives it an edge in purchasing the assets, and it understands the segment well due to its 25 years of experience in the business. These assets are used primarily by construction and mining companies and given its project financing exposure and its equity interest in road projects, SREI is able to deploy its construction equipment assets efficiently and quickly. SREI has 32 stock yards for maintaining and refurbishing its assets, which improves their residual value. At the end of the equipment lifecycle, SREI offers valuation and inspection services and related financing.

On-balance-sheet loans as percentage of capital available for lending reached 113% in FY3/16, which in our view indicates that balance sheet utilization in the construction equipment business is excellent. This ratio exceeded 100% each year during FY3/10–16, which signifies better efficiency for SREI than that at peer NBFCs (in FY3/16, the ratio at Sundaram Finance (SUF IN) was 96% and that at Mahindra & Mahindra Financial Services (MMFS IN) was 104%). Due to demand for securitization, off-balance-sheet loans as a percentage of SREI’s total construction equipment AUM has been high (16% in FY3/16). Thanks to the lofty on-balance-sheet utilization and its securitization of assets, NIM on total assets for the construction equipment business (i.e., its capital available for lending) is significantly above its spread (for FY3/16, the construction equipment business spread was 4.5% and the NIM on its balance sheet was 8.0%).

Demand for construction equipment is highly correlated to investment in the infrastructure sector. As investment gains momentum, we expect growth in SREI’s construction equipment business to improve substantially. In the difficult markets of the past three years, several banks and NBFCs exited the construction equipment financing business. However, SREI stayed the course standing by its dealers, its customers and the manufacturers, and as a result it has strengthened its overall market position.

Earthmoving equipment dominates construction equipment volumes. In Q1 FY3/17, it accounted for about 81% of the total. Backhoe loaders, a subset of earthmoving equipment, constituted 60% of earthmoving equipment, and crawler excavators constituted 32% in Q1. Construction equipment volume rose 58% YoY industrywide in Q1, with earthmoving equipment volumes up by 59% YoY during this period.

Purchase of Construction Equipment Stake from BPLG

BPLG sold its 50% stake in SREI Equipment Finance to SREI in lieu of 5% equity in the parent company and SREI Equipment Finance became a 100% subsidiary of SREI from 17 June 2016. This allowed SREI to regain direct control of the fund-based segment of its infrastructure operation. We expect SREI’s 100% consolidation of the equipment finance business and profits to enhance shareholder value

Strategic Opportunities

Call Option 1: Sahaj Sahaj e-Village (unlisted), a venture initiative of SREI, aims to bridge the digital divide between urban and rural India. Sahaj has established 40,768 touch points in the Indian states of Assam, Bihar, Odisha, Tamil Nadu, Uttar Pradesh, Maharashtra, Rajasthan, Himachal, Jharkhand, Delhi, Tripura and West Bengal that support the information technology requirements of rural villages with a range of services for (1) e-governance (including government-to-consumer (G2C), unique identification number (UID)-related and, bill collection services), (2) e-commerce (including insurance, mutual funds, financial inclusion (business correspondent (BC) model), mobile and direct-to-home (DTH) recharges, product sales and distribution) and (3) e-learning.

All the Sahaj retail outlets operate as franchises (i.e., retail outlets at the gram panchayat (local government) and village levels in each state, known locally as Sahaj Mitr) or star franchises (i.e., retail outlets at the metro, district headquarters and tehsil (county government) levels and hubs that serve as logistics and distribution centers, known locally as Param Mitr). Franchisees manage the day-to-day operations of the stores. All capex and operating expenses are borne by the franchisees. In turn, Sahaj is responsible for project management, quality assurance, infrastructure setup, franchisee training, and access to new services and content at the retail outlets.

In working with the franchisee, Sahaj serves as a BC and in that capacity receives fixed monthly remuneration from the banks. It also receives a variable income stream in the form of transaction fees from banks, e-governance and e–commerce partners. One time transaction fees are derived from account opening and UID generation while steady fees are generated from BC transactions (such as when deposits, withdrawals, and remittances are made), G2C transactions (e.g., when utility bills are paid), and B2C transactions (e.g., mobile and DTH recharges and product sales).

In absolute terms, revenue for Sahaj did not increase significantly during FY3/11–16. However, the company did reduce the level of government support to its top line from Rs495mn in FY3/11 to zero in FY3/16.

Call Option 2: Road Asset Portfolio

SREI has a well-diversified portfolio of build operate and transfer (BOT) road assets in Madhya Pradesh, Maharashtra, Uttar Pradesh, Kerala, Arunachal Pradesh, Odisha and Haryana. Of the eight total projects in which SREI has a significant economic interest, five are already operational covering 1,690km, and an additional 760km is under construction. Total revenue from road assets exceeded Rs4bn in FY3/16

Shareholder Returns

We see consolidated ROE rising from 2% in FY3/16 to 11% in FY3/19, led by an improvement in ROE in the construction equipment business from 5% to 15% during this period accompanying a decline in credit costs. With NIM increasing on reduced borrowing following the sale of the Viom stake, we also see ROE increasing the project finance operation from 4% in FY3/16 to 7% in FY3/19

Investment Thesis – Target Price – Share Price Catalysts

We think SREI is a classic turnaround story. It seems as if everything went wrong for SREI over the last decade, including mistakes by management on capital allocation (i.e., the buyout of Viom) and the firm’s heavy funding exposure to the infrastructure sector which suffered as a result of deterioration in the operating environment.

However we believe these problems are unwinding with
(1) the sale of the stake in Viom in FY3/16 enhancing the bank’s capital position,
(2) an improvement in the operating environment for the core construction equipment business,
(3) reduced financing costs, which has strengthened the balance sheet, and
(4) the purchase of 50% stake in the construction equipment business from BPLG in lieu of 5% stake in the holding company. In addition, we see the potential stake sale in Sahaj and/or in the road asset portfolio as call options.

We have a BUY rating on SREI with a target price of Rs126.90, based on our SOTP analysis, through which we have derived a FY3/18 PBR value for the project finance business of 0.7x and for the construction equipment segment of 1.5x. We expect ROE to rise through FY3/19 on an improvement in NIM accompanying reduced borrowing levels. We see this as a key positive catalyst for the share price.

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Some excerpts from the previous investors conference call…

First of all, this quarter (Q1) has been quite eventful for the company, two major events have happened, one is we were able to complete our divestment of Viom investment in the month of April and we got our entire money which we were supposed to receive approximately 2,931 crores. Secondly, in the middle of June what happened was BNP Paribas, who were our partners in SREI Equipment, swapped there shares from SREI Equipment to SREI thereby SREI acquired the 50% of the SREI Equipment from BNP and has now become 100% subsidiary from middle of June and they are now shareholders at the SREI level with 5% equity in SREI. That helped us to consolidate the earnings of SREI Equipment from 50-100% from middle of June and going forward we will get the benefit of the full consolidation.

Again basically we took advantage of the consolidation partly and also the divestments which happened and we utilized that to also make write-offs during this quarter. We also have seen the overall loan portfolio and the net NPA coming down to 1.88%. We have started to see a downward trend and as the growth starts to happening along with being able to better manage the past cost of risk, we believe we shall start seeing quarter-to-quarter improvement.

What we are basically seeing is in terms of the construction and mining equipment the demand for equipment has had a very strong growth over 40% growth over the previous year in terms of sales of new equipment and that has been driven primarily by strong activity happening in the road sector, in irrigation, in mining and now we start to see activity even in the railway sector. So these are bringing in good amount of EPC contracts to our customers and therefore the demand for equipment has started to build up. We expect the trend to be positive and overall this year we expect a strong growth in this space and SREI being a leader in that space we expect it to grow well and take advantage of this growth coming in.

what we have done in order to also plan better tax, making it a more tax efficient rather than just making provisions we have written off many of the provisions which are there. So one is basically out of the Viom divestment which happened, so partly whatever write off had to take place we took there, then various loans which we had in the past there instead of making provision we have written off during this quarter.

because in writing off we also save the tax, so we don’t want to unnecessarily pay the tax, it’s better to write off. When we recover then we will look at it.

I will give you the simple assessment that you see the construction mine equipment sale at a peak in the country in 2012 when the economy was doing well, had gone up to 34,000 crores, in March 2016 it closed at 21,000 crores. There has been a massive negative for four years continues down. Now this year we are starting to see an improvement. I expect that with the economic positive environment and the government’s drive on the infra and the government spending in infra on a year-on-year basis I won’t be surprised if in three years’ time this 21,000 goes to 40,000 to 50,000 crores.

ON SREI SAHAJ

The business has started to show positive signs. During the year we have added another 10,000 centers so we have about 40,000 centers now. On a month on month basis we are now EBITDA positive. In the last couple of months, we have turned EBITDA positive. We have pruned down the cost also substantially and we are seeing volumes of trade increasing. We are expecting during this year that the volume would continue because we are adding on services. Primarily at the moment it’s mostly services and slowly we are also adding some products. It’s an e-commerce platform to serve through a brick and click model, services and products, with the focus on services which is government services, e-commerce, financial services, and elearning. These are the some of the services which we are providing. In terms of the divestment and release of capital we are working on and then we intend to go in the market and examine what the appetite and interest would be. We would be open to look at in what form and manner we can get an investor, whether it is a strategic investor, whether it is a financial investor with the objective of releasing some of our capital invested into it.

ON ROAD PROJECTS DIVESTMENT

In one of them we have full majority and other we have roughly about 40% to 49%. However, most of our partners–many of them are open to exit. So we are exploring couple of opportunities to release capital out of these investments. One by the way of open for individual sales, open for consolidated sale and also to look at today’s capital at the holding company level in the road portfolio. So there are multiple ways which we are exploring at the moment with various bankers and investing communities. Our target is to achieve something during this year.

ON SEZ SALE

We have one in Tuticorin that we have already started selling. It’s fully boundered and partly developed. The sales have started to happen and we continuously focus to build on the sales there. In Mumbai basically the land is there, we are waiting for the final clearances. We have got the environment clearances, couple of small clearances are left. And then post that we will finally start to market that.

HEMANT KANORIA ON SREI SHARE PRICE

we do not think so that the market has been able to capture the price of Srei, we have been telling for the last seven, eight months, one year almost the price of Srei if you take the sum of part should be about 200 bucks whereas the market does not see that because the market thought that we will not be in a position to divest out of Viom, we will not be able to create value because all the other infrastructure players are not doing well so therefore how can Srei be doing well. And that was the reason why there is a huge discount and actually we have been saying that the sum of the parts if it is taken it should be about 200 bucks should be the price of Srei, and which we again repeat.

I am saying that the market price if you actually go in with sum of parts and do the valuation it should about 200 bucks, the market is not giving 200 bucks, the market was between Rs.45 to Rs.60, now it has moved up because gradually when they see and the similar thing had happened in 2007 and 2008 when BNP had come in the market price used to about Rs.15 and Rs.16 and so when BNP came in the market price went at Rs.250 because BNP gave a value of about Rs.140, Rs.150 at that particular time. So similarly you see that when an investor is coming in to the company they actually go through the mathematics, the market is not able to see it because they see whatever is the balance sheet of the company and they do not see the value which is getting created through various investments which has been made, and every time it takes time because infrastructure play is not something where you invest today and you will get the return tomorrow, it takes time, so therefore it takes time to create a value. So people who are coming in and making an investment they go through the mathematics, people who go into the market because they have to go by the market perception. So I cannot comment on the market, what does the market feel, the actual value is this, the market may perceive it lower, perceive it higher it is dependent upon the market and that would be the market dynamics for which it is very difficult for us to comment

basically as I said that it is all a perception, stock market the price of a share of the company is all on perception, the perception of some of the investors or most of the investors in the market is that the price should be Rs.50, Rs.60, Rs.40 whatever it is, so that is so. We believe from the perspective of the major shareholder in Srei we believe, that is the reason why if you look at the promoters continuously we have been buying share, the reason because we believe that the price, the intrinsic value of Srei should not be less than Rs.200 per share, that is what we believe and that is what is basically when any investor is coming to us and wanting to invest in Srei parent we are saying that this is our value. If you want to buy at a lower value smaller number of share you can go into the market and buy it, that is someone is wanting to come into the company then they will have to pay this price.

OBSERVATION BY AMITABH SONTHALIA ON THE VALUATION OF SREI INFRA MARKETCAP BY BNP PARIBAS.**

So 50% stake or another way to look at it is in terms of the adjusted basis is worth about half of that at one time book value which is 800 crores and therefore if we value that at one time book then Srei is actually being valued at 16,000 crores of market cap by BNP which actually is much higher than the number that Hemant mentioned of Rs.200 a share, it is almost a Rs.300-odd a share which is being valued at. So that sounds great for the minority shareholders.

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The brokerages are giving a price target of 130…technical target is around 150…the promoters say that based on SOTP valuation, the share price should be above 200…and BNP Paribas has valued SREI infra @ 320 rupees (16000 crores marketcap).

These are all projections for the future, the only thing that an investor can be assured of now is that the stock is quite undervalued and as the turnaround and improvement in performance comes into play…the stock price is bound to go up…

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Excellent analysis as always Mehnaz. Makes the investors more calm and composed to handle the volatilities that the markets throw up specially in times like what we are experiencing at present. Srei is definitely on a path of recovery and returns will be great but perhaps not at a speed that some of the micro/small caps deliver.

At present srei seems like a safe and sound investment with probability of a 100% reward in the next two years seems quite easy.

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srei has around 40000 e kiosks…the plan is to increase it to 65-70000 by end of present year. Now SREI gets 40 crore revenue from sahaj vertical…after expansion it may get around 60-70 crores. The sahaj vertical is valued @ around 2000 crores based on peer valuation.

Similarly, 5 of the 8 road projects are completed and yield a revenue of around 400 crores.

The proceeds from sale in SEZ…

All these developments are not being valued by the market.

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Very true Mehnaz. I think this fall in srei infra is a great opportunity to buy more for the medium to long term. Btw where do u now see support for srei as well as the markets in general. Your call for correction in the markets coming true

Hi Everyone, I am a newbie here and before i say something, let me tell you, it is an amazing platform for people like me to learn. In respect to SREI, amazing information compiled by senior members. I would like to understand from senior members as to how do they view the transaction between SREI and BNP as BNP bought/swapped shares at an amazingly high price in comparison to the market price of the shares at the time of transaction. Logically, it does not sound correct and hence wanted some understanding. Thanks in anticipation.

The srei mngt conducted a conference call on 5th January …just to explain the valuation of that agreement with BNP Paribas.

You can read the transcript…i have pasted thr relevant portions in the post above.

Basically, what the SREI mngt said is that…we value our company above 200…if you want to buy smaller quantity, then you can buy from the market at lower price…but if you want to buy big quantity from us, you will have to pay a higher price.

They also said that market is undervaluing srei because they do not think thst we can accomplish some of the things that we seek to do…but since we KNOW that we can do those things…we value SREI atva higher price than the market price.

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