Pick of the Week 17 Jul 2017

RETAIL RESEARCH
SREI Infrastructure Finance Ltd
Industry CMP Recommendation Add on Dips to band Sequential Targets Time Horizon
BFSI Rs. 114 Buy at CMP and add on dips Rs. 100-104 Rs. 131 & Rs. 146 2-3 quarters

SREI Infrastructure Finance Limited (SREI), a Kanoria Foundation entity, is one of India's largest holistic infrastructure
HDFC Scrip Code SREINFEQNR
institutions, delivering innovative solutions in the infrastructure space. It has been engaged in leasing and hire-
BSE Code 523756 purchase/hypothecation financing of heavy construction equipment and financing of infrastructure related projects. The
NSE Code SREINFRA company has been in the business for nearly three decades. With a customer base of over 77,000 and over US$ 5.5 bn of
consolidated AUM, it is one of the largest player in the infrastructure segment.
Bloomberg SREI IN
CMP as on 14 Jul 17 113.95 Investment Rationale
 Huge investments envisaged for infrastructure – providing visibility to AUM growth
Eq. Capital (Rs crs) 503.09
 Infra spending to spur demand for construction equipment
Face Value (Rs) 10  Asset quality set to further improve after peaking in FY15
Equity Sh. Outs (Cr) 50.31  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
Market Cap (Rs crs) 5732.7
Book Value (Rs) 97.94 Concerns
 Subdued domestic environment especially in the Infrastructure space
Avg. 52 Week Vol 19,20,000
 Continued high exposure in group Companies and strategic investments
52 Week High 123.40  GST initially may result in some practical issues and impact disbursals
52 Week Low 63.05  Infra space dependent on regulations and economic growth – NPA can again start growing
Financial Summary
Rs in Cr Q4FY17 Q4FY16 YoY (%) Q3FY16 QoQ (%) FY16 FY17 FY18E FY19E
Shareholding Pattern-% (Jun-2017)
Total Income 608 239 153.8 425 43.0 951 2038 1685 1881
Promoters 60.79 PPP 349 94 271.6 163 114.0 378 1117 697 842
Institutions 24.98 Reported PAT 63 17 273.3 67 -6.0 62 243 235 275
Adj. PAT 62 -110 235 275
Non Institutions 14.22
Reported EPS (Rs) 1.3 0.3 273.3 1.3 -6.0 1.2 4.8 4.7 5.5
Total 100.0 P/E (x) 93.0 23.6 24.4 20.8
P/ABV (x) 1.9 1.3 1.2 1.2
Research Analyst: Atul Karwa RoAA (%) 0.2 0.8 0.7 0.7
(Source: Company, HDFC sec)
[email protected]
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

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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.

Company Overview
Srei Infrastructure Finance Limited (SREI), a Kanoria Foundation entity, is one of India's largest holistic infrastructure
institutions, delivering innovative solutions in the infrastructure space. It has been engaged in leasing and hire-
purchase/hypothecation financing of heavy construction equipment and financing of infrastructure related projects. The
company has been in the business for nearly three decades. With a customer base of over 77,000 and over US$ 5.5 bn of
consolidated AUM, it is one of the largest player in the infrastructure segment.

Interest earning assets (Rs Cr)

(Source: Company, HDFC sec)

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Post divestment of equipment finance business into Srei Equipment Finance Ltd., Srei Infra is engaged in project financing,
infrastructure project advisory, equipment financing business (equipment of more than Rs.15 crore). Srei Infra is classified
as ‘NBFC-IFC’ by RBI and it has also received ‘Public Finance Institution’ status from the Ministry of Corporate Affairs, GoI. In
April, 2016, Srei Infra completed stake sale in Viom Networks Ltd to ATC Asia Pacific PTE Ltd. As per such transaction, ATC
Asia Pacific PTE Ltd acquired 51% shareholding in VNL from the Kanoria group (promoter of Srei Infra), Srei Infra, Tata
Teleservices Ltd. (TTL) and several other minority shareholders and the overall transaction amounted to Rs.7600 crore of
which Srei Infra’s share was Rs.2931 crore.

SREI, has launched a digital platform, iQuippo, which is an online forum to converge buyers and sellers of construction and
infrastructure equipment. Right from assisting original equipment manufacturers (OEMs) to market their products, enabling
and guiding potential buyers to identify the right assets, iQuippo will have a role in financing the asset, deploying it,
providing insurance, offering maintenance and operational services, making available spare parts, re-deploying the asset in
multiple project sites, identifying buyers for the used assets and providing all kinds of fee-based services till the asset is
finally disposed off.

Key Subsidiary
SREI Equipment Finance
SREI Equipment Finance (SEFL) was started as a 50:50 JV in 2008 between the company and BNP Paribas for equipment
financing business. It has emerged as one the major equipment financiers in India. The company enjoys a Pan-India
presence with offices in 89 locations. SEFL has an experienced management team having significant expertise in the
financial services. It provides finance for a range of construction and mining equipment like earth moving, material
handling, road construction, concrete and material processing equipment.

In Dec-2015 SREI entered into an agreement with BNP Paribas to purchase its share in the JV and post all the necessary
approvals SEFL became a wholly owned subsidiary of SREI in Jun-2016. SEFL reported a networth of Rs 2473 cr and interest
earning assets of Rs 20994 cr at the end of FY17.

Srei Infra had announced in December, 2015 that Srei Infra, BNP Paribas Leasing Group (BPLG), Srei Equipment Finance Ltd.
(SEFL -50% JV between BNP and SREI INFRA), along with the promoters of SREI group have entered into a Share Purchase
Agreement (SPA) wherein BPLG has agreed to acquire 2,51,54,317 equity shares of Srei Infra (representing 5% stake of Srei
Infra) against BNP’s existing shareholding of 2,98,30,000 equity shares in SEFL (representing 50% stake of SEFL). Post receipt
of RBI approval on May 17, 2016, the transaction was completed on June 17, 2016, wherein Srei Infra has consolidated
100% shareholding in SEFL and BNP has become a shareholder in Srei Infra.

Key Milestones
Year Milestone
1989 Srei started operations and identified infrastructure as its core business.

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1992 IPO and listing on all major exchanges

1997 IFC, DEG and FMO invested in Srei as strategic equity partners
2005 One of the first Indian NBFIs to be listed on the London Stock Exchange
2008 Formed a joint venture with BNP Paribas for equipment financing business.
2009 Formed a strategic partnership with Tata Group for passive telecom infrastructure business.
2010 Synergistic integration of Srei and Quippo to create an integrated infrastructure institution.
2011 Received 'Infrastructure Finance Company' and 'Public Financial Institution' status.
2012 Received certificate of registration for mutual fund (infrastructure debt fund) from SEBI.
2014 Received certificate of authorisation from RBI to set up, own and operate White Label ATMs
2016 Sells stake in Viom to ATC, consolidates 100% shareholding in its equipment financing business.

Investment Rationale
Huge investments envisaged for infrastructure – providing visibility to AUM growth
Infrastructure sector is a key driver for the Indian economy. India has a huge unmet need for investment in infrastructure,
estimated to the tune of Rs43 trillion or about $646 billion over the next five years, 70% of which will be required in the
power, roads and urban infrastructure sectors. Government has planned initiatives to fast track infrastructure development
with a target investment of Rs. 25 trillion (US$ 377 billion) in the sector over a period of three years. It has taken various
measures like:
 Total capital and development outlay for the railways of Rs 1.31 trillion for 2017-18
 Allocated Rs. 649 billion for roads & highways
 Allocated Rs. 138.81 billion for the power sector. Rs. 33.61 billion has been earmarked for renewable energy.
 Union Budget 2017-18 has allocated Rs. 6 billion for the port sector
 UDAN scheme has been launched to improve regional air connectivity
 Accorded infrastructure status to affordable housing

The table below gives a brief view of the proposed government investment in infrastructure over the next 4-5 years. All
these initiatives and targets augur well for the future of the infrastructure sector and would lead to higher demand in the
infrastructure financing space.
Investment Equipment Opportunity
Sector Comments
(in Rs. bn) Intensity (in Rs. bn)
Roads - National Highways 3900 ~15%-20% 780 Investment in National Highways (FY 18 – FY 22)
Roads - State Highways 4772 ~15%-20% 955 Investment in State Highways (FY 18 – FY 22)
Roads - Rural Roads 1630 ~15%-20% 326 Investment in Rural Roads (FY 18 – FY 22)
Coal Mining 626 ~37% 232 Coal India Limited Expected Capex (till FY2020)
Railways 6700 ~3% 201 Railways Expected Capex (2016-2020)

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Power 8500-9000 ~1% 85-90 Expected Investments Over FY17-FY21

Ports 325-375 ~16% 52-60 Expected Investments upto FY2021
(Source: Company Presentation, HDFC Sec)
While India has consistently experienced yoy GDP growth in the range of 6-8% over the last few years, infrastructure
spending has witnessed a slowdown due to various macro factors. Consequently the targets for the 12th five year plan were
tapered down from original estimates.

Slowdown in infrastructure spending in 12th Plan (% of GDP)

(Source: Company Presentation, HDFC sec)

Infra spending to spur demand for construction equipment

The expected investment in infrastructure would give a boost to demand for construction equipment. As per a report titled
‘Revival of Indian Construction Equipment Industry’ by Indian Construction Equipment Manufacturers’ Association, the
equipment industry in India is expected to more than double from the 2015-16 levels of around 57,000 equipment to
1,20,000 equipment by 2019-20, registering an average yearly growth of more than 20 per cent.

The Indian construction equipment market which was witnessing a steady decline since 2012 due to the economic
slowdown has turned around and is expected to post strong growth over the next 2-3 years driven mainly by the increasing
investment in building infrastructure.

In the construction and mining machinery financing market, SREI holds a 30% market share. It has expanded product
offerings in the leasing and financing business to non-CME including health care and technology equipment, rural
equipment, Port and electric power equipment and warehouse equipment.

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Sales value of construction equipment (US$ bn)

(Source: Company Presentation, HDFC sec)

Asset quality set to further improve after peaking in FY15
Asset quality of SREI deteriorated during FY11-FY15 with GNPAs increasing from 1% to 4.7%. Both the segments witnessed
deterioration with GNPA of the equipment finance business rising from 2.8% to 4.8% in FY14 followed by the infrastructure
finance business from 2.4% to 4.6% in FY15 due to the slowdown in the economy and a ban on mining activity. Overall NPAs
peaked in FY15 and asset quality has started to improve with the recovery in economic activity. GNPA/NNPA have improved
from 4.7%/3.8% in FY15 to 2.9/2% in FY17 and expected to improve further.

Sharp improvement in NPA levels

(Source: Company, HDFC sec)

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The recently introduced Insolvency & Bankruptcy Code (IBC) will surely enable the much awaited resolution for the over-
leveraged corporates and the bank burdened with bad loans. The timeframe for addressing issues under IBC is practical
and, as and when implemented, will effectively help in resuscitating the stressed companies. As IBC has become fully
operational, it will enable change in management of many stressed infrastructure assets. Infrastructure Finance Companies
(IFCs) like SREI, which have specialized skill sets in managing infrastructure assets, will be well equipped to take charge of
such assets and revive them.

Value unlocking possible in BRNL and Sahaj E-village

SREI holds 30.43% stake in Bharat Road Networks Ltd, a road BOT company in India, focused on development,
implementation, operation and maintenance of roads/highways projects. It is involved in the development, operation and
maintenance of national and state highways in several states in India with projects in states of Uttar Pradesh, Kerala,
Haryana, Madhya Pradesh, Maharashtra and Odisha through partnerships with experienced EPC players in the local space
where the project is located. BRNL has a project portfolio consisting of six (6) BOT Projects, of which two (2) are Projects
operational under Final COD, three (3) are Projects operational under Provisional COD and one (1) is a Project under
Construction. BRNL has filed DRHP with SEBI and is looking to issue 2.93 cr shares to raise ~Rs 1200 cr according to market
estimates. This is likely to enhance the value of SREI’s holding in the company.

To enable IT enabled financial inclusion, SREI launched Sahaj E-village in 2007 and opened IT equipped service centres (for
e-governance, e-commerce and e-learning) across the rural country. Sahaj is a long–gestation rural distribution & e–
governance initiative and SREI has opened 60,000 service centres throughout India in villages with populations below
10,000. Due to the accumulated losses, its net worth has eroded as at 31st March, 2017. However, it has taken a number of
steps as part of a revamped business plan viz. substantial cost rationalization, business expansion in new geographies and
introduction of newer services etc., and its performance is expected to improve significantly over the coming years. SREI
holds 49.47% stake in the company whose value may be unlocked going forward.

Large write off taken in FY17 may not be repeated

SREI has been going slow in infrastructure lending and gradually cleaning its loan book by writing off highly stressed assets.
In FY17 SREI has written off bad debts worth Rs 510 cr as compared to just Rs 3 cr in FY16. Such large write offs are unlikely
to be repeated in the coming years. Any recovery from these assets will also add to the profits going forward.

NIM and PAT margins have bottomed out – now they can only rise from here.
SREI has become cautious in infrastructure segment and lending only to safe projects. Disbursements in the construction
equipment segment have also increased with the pickup in infrastructure building activity. Total advances of SREI increased
by 32% in FY17. After the large write off taken in FY17 the balance sheet has become healthier and we believe margins are
likely to increase going forward.

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Trend in Gross Interest spreads and PAT margins

(Source: Company, HDFC sec)

Creeping acquisition by promoters

The promoters have been increasing their stake in the company through market acquisitions post 2011. Over the last 5
years the promoter holding has increased from 47.1% to 60.8%. Increase in promoter stake indicates that they are
confident of strong performance by the company going ahead.
Increasing promoter share

(Source: Capitaline, HDFC sec)

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Adequate capital adequacy ratio

SREI has maintained adequate capital adequacy ratio and with the stress reducing and profitability improving we believe it
will not require to raise capital for the next couple of years. At the end of FY17 SREI had CAR of 18.9% against regulatory
requirement of 15% and Tier I capital of 13.8%.

Concerns
Subdued domestic environment especially in the Infrastructure space which has resulted in stressed asset quality of the
company
The slowdown in economy over the last few years had resulted in lower spending on infrastructure. Consequently a
significant number of borrowers turned into NPA. Although the environment has improved in recent times, we cannot rule
out further stress in the asset quality of the company.

Continued high exposure in group Companies and strategic investments

SREI has exposure to group companies majority of which are in the infrastructure space and are yet to be divested/diluted
to yield commensurate returns.

GST initially may result in some practical issues

The new tax reform will pose several challenges for the infrastructure sector such as treating of works contracts as service
contracts, the imposition of new tax rates on ongoing projects, and change in the costs of construction materials. However,
the advent of GST is also expected to boost the infrastructure sector with the elimination of ´tax on tax’ and the
introduction of input tax credit (ITC).

For the first time in five years, in 2016 the construction equipment industry grew after the much-required push from the
government in terms of budget allocation and resuming stalled projects especially in the road sector. This has pushed
capacity utilisation to 50-70 per cent from around 40 per cent in 2010-11. However, in December last year, the industry was
hit by demonetisation, though for a brief period. Then in April-May this year, sales were hit badly due to the confusion
about the court order on the ban on BS III automobiles. Now under GST, while the input tax is 28 per cent, output is taxed
at 12 per cent, and hence the balance needs to be borne by the industry. Due to this anticipated price hike, the current
surge of infrastructure-related activities would be adversely affected. However the effect of this will be overcome in a few
weeks and business could return to usual thereafter.

Infra space dependent on regulations and economic growth – NPA can again start growing
Infrastructure spending is highly dependent on regulations in terms of tendering, land acquisition, clearance from various
agencies, etc. as well as the economic growth of the country. Change in regulations or slowdown in the economic growth
could once again lead to worsening asset quality of the lenders in this space.

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Q4FY17 Result Review

Operating income increased by 39.5% yoy to Rs 1103 cr driven by 100% consolidation of equipment finance business.
Disbursements in equipment finance were up 9% to Rs 3538 cr while in the infra finance space it increased by 36% yoy to Rs
1964 cr. Interest expenses were up 21.3% yoy to Rs 703 cr. Other income increased from Rs 28 cr to Rs 207 cr as the
company booked Rs 191 cr of non-compete fees received from Viom in the quarter. PAT increased from Rs 17 cr to Rs 63 cr
yoy. Asset quality improved sequentially in equipment finance business with GNPA/NNPA contracting from 2.6%/1.8% to
2.4%/1.7% qoq respectively while in infra finance it was stable at 3.2%/2.0%.

(Rs Cr) Q4FY17 Q4FY16 YoY (%) Q3FY17 QoQ (%) FY17 FY16 YoY (%)
Operating Income 1103 791 39.5 1110 -0.7 4275 3180 34.4
Interest Expenses 703 579 21.3 710 -1.0 2628 2311 13.7
Net Income 400 212 89.1 401 -0.2 1647 869 89.5
Other income 207 28 647.7 24 760.9 406 82 394.7
Total Income 608 239 153.8 425 43.0 2053 951 115.9
Operating Expenses 258 145 77.7 262 -1.3 921 573 60.8
Pre Prov. Profit 349 94 271.6 163 114.0 1132 378 199.2
Prov. & Cont. 250 69 262.8 65 287.9 772 272 183.3
PBT 99 25 296.2 99 0.2 360 106 239.9
Tax 36 8 344.2 31 13.6 117 44 164.2
PAT 63 17 273.3 67 -6.0 243 62 294.5
EPS (Rs) 1.3 0.3 273.3 1.3 -6.0 4.8 1.2 294.5
(Source: Company, HDFC sec)

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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Income Statement Ratio Analysis (based on reported numbers)

(Rs Cr) FY15 FY16 FY17 FY18E FY19E Particulars FY15 FY16 FY17 FY18E FY19E
Interest Income 2794 2914 3511 4270 4841 Return Ratios
Interest Expenses 2274 2311 2628 3133 3590 Calc. Yield on adv 17.9% 14.9% 15.0% 14.8% 14.6%
Net Interest Income 520 604 883 1137 1251 Calc. Cost of borr 11.3% 11.3% 11.2% 11.0% 10.9%
Non interest income 566 348 1155 548 630 Calc. NIM 3.3% 3.1% 3.8% 3.9% 3.8%
Operating Income 1086 951 2038 1685 1881 RoAE 3.4% 1.7% 5.7% 4.7% 5.2%
Operating Expenses 588 573 921 988 1039 RoAA 0.5% 0.2% 0.8% 0.7% 0.7%
PPP 498 378 1117 697 842 Asset Quality Ratios
Prov & Cont 310 272 772 346 431 GNPA on advances 4.1% 4.0% 2.1% 2.0% 2.1%
Profit Before Tax 188 106 344 351 411 NNPA on advances 3.4% 3.2% 1.4% 1.4% 1.4%
Tax 67 44 117 116 136 Growth Ratios
PAT 121 62 243 235 275 Advances 53.3% 6.8% 32.1% 16.0% 14.0%
Extraordinary gains (net of tax) 0 0 -353 0 0 Borrowings 2.8% 1.7% 26.8% 17.4% 14.1%
Adj. PAT 121 62 -110 235 275 NII 38.7% 16.1% 46.3% 28.8% 10.1%
PPP 23.9% -24.0% 195.1% -37.6% 20.8%
Balance Sheet PAT -12.1% -49.1% 294.5% -3.2% 17.1%
(Rs Cr) FY15 FY16 FY17 FY18E FY19E Valuation Ratios
Share Capital 503 503 503 503 503 EPS 2.4 1.2 4.8 4.7 5.5
Reserves & Surplus 3081 3122 4416 4620 4865 P/E 47.3 93.0 23.6 24.4 20.8
Shareholder funds 3585 3625 4919 5124 5369 Adj. BVPS 58.4 59.4 90.6 93.5 97.1
Minority Interest 13 1 1 1 1 P/ABV 1.6 1.6 1.2 1.1 1.1
Borrowings 20326 20673 26204 30762 35105 Dividend per share 0.5 0.5 0.5 0.5 0.5
Other Liab & Prov. 971 1239 2268 2495 2721 Dividend Yield (%) 0.4 0.4 0.4 0.4 0.4
SOURCES OF FUNDS 24894 25538 33392 38380 43195 Other Ratios
Fixed Assets 1859 1740 3293 3457 3630 Cost-Income 54.1 60.2 45.2 58.6 55.3
Investment 2250 2170 1282 1549 1696
Cash & Bank Balance 575 664 932 1023 1060
Advances 18940 20220 26713 30988 35326
Other Assets 1270 744 1172 1363 1484
TOTAL ASSETS 24894 25538 33392 38380 43195

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One year Forward PABV One year Price chart

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Fundamental Research Analyst: Atul Karwa, [email protected]

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HDFC Securities Limited, SEBI Reg. No.: NSE-INB/F/E 231109431, BSE-INB/F 011109437, AMFI Reg. No. ARN: 13549, PFRDA Reg. No. POP: 04102015, IRDA Corporate Agent License No.: HDF 2806925/HDF C000222657, SEBI
Research Analyst Reg. No.: INH000002475, CIN - U67120MH2000PLC152193

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