- 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
- 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.
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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.