SREI Infrastructure Finance (SREI IN, INR 237, maintain Buy)
Metamorphosis: From infrastructure finance to a comprehensive infrastructure company
To capitalise on the growing demand in the infrastructure space, SREI Infrastructure Finance (SREI) is transforming itself from an infrastructure finance player to a comprehensive infrastructure company. The company plans to utilize its long-standing strategic relationships with construction companies along with its financial resources to emerge as a major force in the infrastructure project development space. It has received approval for developing seven NHAI road projects worth INR 40 bn, Machilipatnam and Subarnarekha ports worth INR 18-20 bn each and setting up auto component SEZ at Guptamoni and Quipo Equipment World SEZ at Raigarh.
JV with BNP Paribas on track
SREI's 50:50 joint venture with BNP Paribas Lease Group (BPLG) for equipment financing and leasing business is on track. The JV will receive the necessary approvals from Registrar of Companies and the high court in the near term and is expected to be completed over the next two-three months. Funds from BNP are expected to flow in by the end of the current financial year. The business will gain scalability in CY08E and benefits to the topline and profitability are likely to start kicking in by FY09E.
Quipo to invest INR 90 bn over next four years
Quipo Infrastructure Equipment, wherein SREI holds 15%, is planning to invest INR 15 bn in construction equipment rentals and INR 5 bn in the energy rental business. It is also expected to start operations in the Gulf, especially in equipment rentals and the oil & gas space. It also plans to invest INR 70 bn over the next two-three years to set up 25,000 telecom towers (from present 1,800).
Outlook and valuations: SOTP fair value of INR 325 per share; maintain 'BUY'
We expect SREI's consolidated profits to grow by 37% CAGR over FY07-10E and the company is likely to report EPS of INR 9.6 in FY08E and INR 11.4 in FY09E, factoring in warrant issuance, demerger of equipment financing business, and better asset growth. By using the sum-of-the-parts (SOTP) methodology, we arrive at fair value of INR 43.6 bn or INR 325 per share, incremental value being added from its plans to set up various infrastructure projects. We maintain 'BUY' recommendation on the stock.
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