https://www.irbinvit.co.in/wp-content/uploads/2022/08/FINALOUTCOME_Sd.pdf gives the breakup and valuation report of the new asset.
- They seem to have valued the SPV at 377 Cr using 6.86% WACC (10.3% return on equity) which seems on the lower side. They have used a beta of 0.43 which seems low although I’m not sure about the source.
- they have used a cost of debt of 7.2% which seems to be low. Their annual report indicates 7.25-8.15% and does not account for rising interest rates. Using 8% drops equity value by 8% and 8.5% by 12%. A few years ago they were paying 9%+
Using both a 12% return on equity and a 8.5% cost of debt, they are paying a ~20% premium on the assets and should have priced the asset at ~290 Cr
This is without the sensitivity to the income and delayed payments by the government. I’m not yet certain about HAM project revenue and inflation risks.
Historically, the valuation report for the other acquisition and half year reports seem to have over-estimated the cash flows and valuation. There is also the related party risk of buying from the parent. That said, the risk seems to be more return dilutive and not as much value destructive at current prices.
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