SREI Infrastructure Finance

EPS Dilution Likely In Short Term, But Both Will Gain From Synergies In The Long Run

KOLKATTA-BASED SREI Infrastructure Finance, a non-banking finance company (NBFC) which is into financing of infrastructure-related segments, has announced an amalgamation with Quippo Infrastructure.

   The company's main lines of business are equipment finance, project finance & advisory. This is where the amalgamation part comes into play as Quippo Infrastructure is an equipment bank. For instance, Quippo has a partnership with Tata Teleservices, featuring the largest independent telecom infrastructure in India. Apart from it, Quippo has oil & gas drilling equipment and construction equipment as well.

   Now that Quippo will be a part of SREI, the company will have the advantage of synergies. For instance, if a contractor approaches the company, Srei has the option to rent, lease or sell the equipment, which no other finance company in India is in a position to do. There are bound to be synergies in the long run. However, in the short term, the amalgamation will result in dilution of earnings per share, one reason why the stock took a 25% hammering during the last one month, while the Nifty lost just 8%.

   Infrastructure equipment financing comprises two-thirds of the assets under management, with the remaining one-third under project financing. There are synergies between these lines of business as well. For instance, the contractors to whom Srei provides finance under equipment financing can get business from the project it finances. Therefore, the various business segments of the company such as project finance, advisory and equipment finance are inter-related.

   On the liability side, loans from domestic banks and financial institutions constituted more than 50% of the total funds during the previous fiscal. Close to 13% of its funds were raised from the bond market. On the assets side, the company has a good asset quality, which is evident from its low non-performing assets (NPAs) or bad loans.

   At a consolidated level, NPAs are minuscule. In equipment financing business, NPAs were less than 1% of net advances at the end of December 2009. The company reported an net interest margin or NIM of 5.1% in the quarter ended December 2009. At the current level, its NIM is one of the highest in the NBFC segment. However, its stock trades at a discount to other players in the NBFC industry. At current levels, it is trading at a price to book value (P/BV) ratio of 1.1, while IDFC, which is also an infrastructure finance company, is trading at a P/BV of 3.2. Clearly, SREI Infrastructure Finance is trading at a huge discount to its fundamentals.