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You are here : IndiaNotes >> Research & Analysis >> Companies >> SREI Infrastructure Finance Ltd. >> Research

Pick of the Week: Buy SREI Infrastructure Finance at CMP and add on dips to Rs100-104 band

HDFC Sec | 17 Jul, 2017  | Follow Author | Add to my Favourites 
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Investment Rationale:


- Huge investments envisaged for infrastructure – providing visibility to AUM growth


- Infra spending to spur demand for construction equipment


- Asset quality set to further improve after peaking in FY15


- Value unlocking in BRNL (short term) and Sahaj E-village (medium term)


- NIM and PAT margins have bottomed out – now they can rise from here


Concerns:


- Subdued domestic environment especially in the Infrastructure space


- Continued high exposure in group Companies and strategic investments


- GST initially may result in some practical issues and impact disbursals


- Infra space dependent on regulations and economic growth – NPA can again start growing


View and Valuation:

 

The Government’s focus on improving the infrastructure of the country and clearing the backlog of infrastructure projects has given a boost to demand for infrastructure as well as construction equipment financing. After the sharp increase in NPA levels in FY14-FY15, SREI has become cautious and is lending only to safe projects. SREI has utilized the income from Viom stake sale to reduce its debt. Further the expected IPO from BRNL (Bharat Road Networks Ltd.) should result in value unlocking for SREI strengthening its balance sheet. The company has adequate capital for growth and improving asset quality with increasing lending opportunities should result in strong profitability for the company. Compared to other players in NBFC space, Infra & Equipment financing companies get lower valuation due to wholesale lending and higher impact of economic growth on their disbursals and NPAs. However we think SREI deserves to trade at higher than the current multiple of 1.17xFY19E P/ABV.


We feel investors could buy the stock at the CMP and add on declines to Rs. 100-104 band (~1.05x FY19E ABV for sequential targets of Rs. 131 (1.35x FY19E ABV) and Rs. 146 (1.5x FY19E ABV) in 2-3 quarters.


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Disclaimer: The author has taken due care and caution to compile and analyse the data. The opinions expressed above are only the views of the author, and not a recommendation to buy or sell. Neither the author nor IndiaNotes.com accept any liability whatsoever arising from the use of any of the above contents.




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