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1 Edelweiss Securities Limited
Executive Summary
Executive Summary
India’s road infrastructure woefully inadequate As per the Global Competitiveness Report 2008-09, inadequate infrastructure is the
biggest stumbling block in India’s economic growth. While India has the second largest
road network in the world, the report ranks it at a dismal 87th spot as far as quality
of roads is concerned, way below neighbours China, Pakistan, and Sri Lanka.
With the kind of multiplier effect that roads have on economic growth, a quantum
increase in investments in roads is paramount to achieve long-term growth targets.
Light at the end of the tunnel The National Highway Development Programme (NHDP) is India’s flagship and the
world’s largest PPP road development programme. It had hit speed bumps in 2006-
08, primarily due to frequent changes in the regulatory framework and economic slowdown.
However, 2009 has come as a breath of fresh air; since December 2008, the National
Highway Authority of India (NHAI) has awarded (or is evaluating bids for) 24
projects worth INR 228 bn. NHAI has an ambitious target of awarding 23,000 km
of roads during the next two years. It expects to receive bids for 49 projects
spread over 5,074 km, worth INR 511 bn by 2009 end. The government has set an
ambitious target of building 20 km of road per day. Amidst all this, encouraging signs on
credit availability, interest rates and capital markets mean that achieving financial closure
(FC) on projects has become considerably easier compared to last year. This infuses us
with the confidence that the travails of the past three years are behind us and the project
award process is likely to be on the fast track.
Size of opportunity at central and state level-humungous The chronic underinvestment in roads over the past 60 years has meant that huge
investment is required over the next couple of years to prop up the road infrastructure.
At the national level, of the total 54,454 km under the NHDP (including the
NHDP Phase IV), 36,926 km of roads are still to be awarded. Overall, the NHAI
expects to spend about INR 3,315 bn on completion of the balance part of NHDP. This is
in addition to the huge opportunity available for road development at the state level with
states like Karnataka (INR 1,770 bn opportunity in 2009-15), Andhra Pradesh, and
Gujarat taking steps to improve road infrastructure.
Outlook: Good long-term opportunity The government’s seriousness towards road development is evident from the steps taken
in the past couple of months to make projects more commercially viable. The major
stumbling block now is getting the funding required for the ambitious plans announced-
both debt and equity. In our view, cracking the funding code is the key to
unlocking the PPP opportunity in the medium term. The sheer scale of government
plans means that there are likely to be ample opportunities for every player in the road
segment. We initiate coverage on IRB Infrastructure, the leader in the Indian road
BOT space, with a ‘BUY’ recommendation. While past has been good, the future
promises to be better than ever for the company which has built up an impressive
portfolio of lucrative projects. With the focus of this report being on developers, we also
feature IVRCL (‘BUY’), Nagarjuna (‘BUY’), GMR (‘REDUCE’), Reliance Infra (‘BUY’),
Gammon (‘HOLD’), Sadbhav Engineering (‘NOT RATED’), Madhucon Projects (‘NOT
RATED’), and Gayatri Projects (‘NOT RATED’) in this report.
2 Edelweiss Securities Limited
Construction
Contents
At a glance ................................................................................................................. 3
Road infrastructure woefully inadequate ......................................................................... 4
Light at end of tunnel .................................................................................................. 6
Huge opportunity at centre and state levels .................................................................. 18
Time To Think About The Constraints ........................................................................... 26
Foreign Companies in NHDP: Changing Scenario ........................................................... 33
Annexure I: Frequent policy changes and their impact on project award .................... 35
Annexure II: Steps taken to attract more interest for NHDP projects ......................... 36
Annexure III: Work plan (for Aug-09 – Jul 10) for ministry of roads .......................... 37
Annexure IV: National highway opportunity (phase wise) ......................................... 38
BOT Projects Snapshot ............................................................................................... 39
Companies
IRB Infrastructure ............................................................................................... 41
Gammon India .................................................................................................... 63
Gayatri Projects .................................................................................................. 71
GMR Infrastructure .............................................................................................. 77
IVRCL Infrastructure ............................................................................................ 83
Madhucon Projects .............................................................................................. 89
Nagarjuna Construction ....................................................................................... 95
Reliance Infrastructure ...................................................................................... 101
Sadbhav Engineering ......................................................................................... 107
Edelweiss Securities Limited 3
Construction
At a Glance
Com
pan
yPr
ice
(IN
R)
Shar
es O
/S
(mn n
os)
Mkt
cap
(IN
R
mn)
Reco
Rev
enues
EBIT
DA
Net
pro
fit
Annual
ised
EPS
Rev
enues
EBIT
DA
Net
pro
fit
Annualis
ed
EPS
EV /
EBIT
DA
P/E
IRB I
nfr
a209
332.4
69,3
31
Buy
FY07 (
P)
5
,251
2,8
11
804
2.5
19.5
55.2
58.2
(4
.8)
26.0
83.2
FY08
7,3
27
4,1
19
1,2
66
3.4
39.5
46.5
57.5
36.7
20.5
60.9
FY09
9,9
19
4,3
74
1,7
72
5.3
35.4
6.2
40.0
54.4
20.6
39.4
FY10E
1
9,0
50
8,0
39
3,4
69
10.1
92.1
83.8
95.8
90.0
12.0
20.7
FY11E
3
0,4
42
1
1,1
39
4,1
65
12.3
59.8
38.6
20.0
22.2
10.1
17.0
Gam
mon I
ndia
196
107.0
20,9
77
Hold
FY07
1
8,6
47
1,8
52
444
11.3
57.0
19.8
(2
3.5
)(2
3.5
)10.7
17.3
FY08
2
3,2
96
2,0
92
861
10.9
24.9
13.0
(4
.2)
(4.2
)9.7
18.1
FY09
3
6,5
38
3,3
04
1,4
04
9.0
56.8
57.9
1.9
(1
7.4
)9.1
21.9
FY10E
4
0,9
10
3,8
88
944
8.8
12.0
17.7
(1
.6)
(1.6
)8.1
22.2
FY11E
4
6,7
70
4,4
81
1,0
75
8.7
14.3
15.3
13.9
(0
.9)
8.1
22.4
IVR
CL
Infr
a387
133.5
51,6
61
Buy
FY07
2
3,0
59
2,3
18
1,4
15
10.9
54.2
72.6
52.2
25.6
23.1
35.5
FY08
3
6,6
06
3,6
15
2,1
04
15.8
58.7
56.0
48.8
44.5
16.8
24.5
FY09
4
8,8
19
4,2
18
2,2
60
16.9
33.4
16.7
7.4
7.4
15.3
22.9
FY10E
6
2,9
57
5,7
77
2,5
36
18.8
29.0
37.0
12.2
11.0
11.7
20.6
FY11E
7
7,1
25
7,2
32
3,2
10
23.8
22.5
25.2
26.6
26.6
9.7
16.3
Nag
arju
na C
onst
.153
256.6
39,1
78
Buy
FY07
2
8,7
10
2,6
97
1,1
56
6.0
56.0
64.4
20.9
19.4
13.3
25.4
FY08
3
4,7
29
3,5
98
1,6
19
7.2
21.0
33.4
30.7
19.1
11.5
21.3
FY09
4
1,5
14
3,7
37
1,5
39
6.7
19.5
3.9
(6
.2)
(6.2
)12.3
22.7
FY10E
4
7,5
45
4,5
64
2,2
07
7.3
14.5
22.1
21.7
8.5
10.4
20.9
FY11E
5
6,2
34
5,5
11
2,4
55
9.6
18.3
20.7
31.2
31.2
8.7
16.0
Mad
huco
n P
roj.
262
37.0
9,6
98
Not
Rat
ed
FY07
5,1
00
765
415
11.2
49.1
22.0
24.7
24.
7
13.5
23.4
FY08
7,3
80
1,0
73
473
12.8
44.7
40.2
13.8
13.8
9.9
20.5
FY09
1
0,2
54
1,2
40
469
12.7
38.9
15.5
(0
.7)
(0.7
)9.7
20.7
FY10E *
1
3,1
11
1,6
58
614
16.6
27.9
33.8
31.0
31.3
7.4
15.7
FY11E *
1
6,2
33
1,8
89
777
21.0
23.8
13.9
26.5
26.2
6.6
12.5
Sadbhav
Engg.
850
12.5
10,6
25
Not
Rat
ed
FY07
4,9
01
590
264
24.2
68.2
68.6
90.3
90.3
16.5
35.1
FY08
8,7
21
964
524
37.1
77.9
63.3
98.7
53.6
12.5
22.9
FY09
1
0,6
25
1,0
83
633
50.6
21.8
12.4
20.8
36.4
11.7
16.8
FY10E *
1
3,2
15
1,5
37
669
53.5
24.4
41.9
5.7
5.7
8.2
15.9
FY11E *
1
6,0
69
1,9
60
821
65.1
21.6
27.5
22.7
21.7
6.7
13.1
Rel
iance
Infr
a.
1206
225.3
271,5
98
Buy
FY07
5
7,1
00
4,9
75
6,6
91
29.3
42.3
(31.5
)(4
.1)
(7.0
)57.7
41.2
FY08
6
3,6
42
5,4
71
7,6
91
32.6
11.5
10.0
14.9
14.9
46.9
36.9
FY09
9
6,9
65
5,0
65
13,4
32
59.4
52.4
(7.4
)74.6
82.7
43.8
20.3
FY10E
118,0
68
1
3,7
48
14,8
00
65.7
21.8
171.4
10.2
10.2
15.2
18.4
FY11E
146,4
93
1
5,4
95
15,0
63
66.9
24.1
12.7
1.8
1.8
13.0
18.0
GM
R143
1822.4
260,5
99
Reduce
FY07
1
6,9
67
5,4
37
2,4
18
1.1
59.8
21.4
158.2
108.2
46.2
128.7
FY08
2
2,9
48
5,9
85
2,6
27
1.2
35.2
10.1
8.6
10.9
46.2
116.1
FY09
4
0,1
92
1
0,6
70
2,7
71
1.5
75.1
78.3
5.5
24.6
33.2
93.2
FY10E
5
3,6
70
1
4,2
70
1,7
96
1.3
33.5
33.7
(3
5.2
)(1
7.1
)28.6
112.4
FY11E
5
8,5
82
2
0,1
93
1,1
98
1.1
9.2
41.5
66.7
(0
.2)
21.1
132.4
Gaya
tri Pro
j.306
11.1
3,3
98
Not
Rat
ed
FY07
5,0
21
754
235
23.5
35.3
15.1
29.7
16.8
7.5
13.0
FY08
7,5
24
1,0
58
393
38.9
49.8
40.3
67.3
65.6
5.1
7.9
FY09
1
0,0
46
1,1
36
413
40.9
33.5
7.3
5.2
5.2
5.4
7.5
* B
loom
berg
est
imate
s
Val
uations
(x)
Not
e:
All
num
ber
s are
sta
ndalo
ne e
xcep
t fo
r IR
B I
nfr
a an
d G
MR. G
am
mon's
num
bers
incl
ude A
TSL
wef FY
09
Finan
cial
s (I
NR m
n)
Gro
wth
(%
)
4 Edelweiss Securities Limited
Construction
Road Infrastructure Woefully Inadequate As per the Global Competitiveness Report 2008-09, inadequate infrastructure is the biggest stumbling block in India’s economic growth. While India has the second largest road system in the world at 3.3 mn km, the report ranks the country at a dismal 87th position as far as the quality of roads is concerned, way below neighbours China, Pakistan, and Sri Lanka.
Table 1: India ranks way below in quality of roads
Country Ranking for quality of roads
France 1
Switzerland 2
USA 8
Malaysia 17
Japan 19
UK 24
South Africa 40
China 51
Sri Lanka 63
Pakistan 69
India 87 Source: World Economic Forum, Global Competitiveness Report 2008-09, Edelweiss research
The inadequacy issue becomes evident from the fact that the average distance covered on roads by truck in India is less than 250 km per day compared to ~1,000 km per day in the US. While the high volume of vehicles on Indian highways, various tax regimes, and frequent check posts on state borders are also culprits, a major portion of the blame lies with the inferior quality of roads.
Table 2: China versus India–A case study in road quality and implementation success
China India
In 1988, China did not have an inch of expressway. The original plan, considered ambitious at that time, was to build upto 35,000 km of National Trunk Highway System (NTHS), of which 70% was to be expressways, before 2020. The NTHS was completed by the end of 2007, 13 years ahead of the original plan.
Expressways in India with a length of 200 km form a minuscule share of the overall road network; national highways (NHs) and state highways (SHs) at 2% and 4% respectively, do not fare much better. Also, while NHs carry 40% of the overall road traffic, only 14% of them are 4/6/8 laned. SHs, of which only 0.6% are 4-laned, are in a worse situation.
At the end of 2008, the Chinese national expressway network stood at 60,300 km (of which 6,433 km was built in 2008). This makes it the world's second longest expressway network, after the United States and roughly equal to that of Canada, Germany, and France combined.
The NHDP has repeatedly suffered cost and time overruns over its lifetime. NHDP Phase I and II, originally intended to be completed by 2003 and 2004, respectively, are still not completed and are likely to miss their revised timelines too. The same is likely to be true for Phase III and V.
The plan is to increase the total length of expressways to 65,000 km by 2010, 85,000 kilometers by 2020, 120,000 km by 2030, and 175,000 km by 2050. By 2010, the Chinese expressway network will connect all provincial capitals and cities with at least half-a-million population, as well as some with population ranging between 200,000 and 500,000. The annual investment between 2010 and 2020 is projected at USD 12 bn.
Between 1951 and 2006, the vehicle population grew at a CAGR of close to 11%; the freight and passenger traffic carried by roads grew at a CAGR of 10%. On the other hand, the total road length grew at a CAGR of 3.9% with the NH segment increasing by a mere 2.2 %. Also, it is estimated that 50% of state and district roads (forming 18% of the overall road network) are of poor quality, causing a loss of INR 60 bn per annum.
Source: Edelweiss research
Quality of Indian roads has been judged poorer compared to neighbours like China, Pakistan and Sri Lanka
China is much ahead of India, both in terms of quality as well as implementation success in road development
Edelweiss Securities Limited 5
Construction
While quality continues to be an issue, road transport has emerged as the dominant segment in India’s transportation sector. The entire increase in the transportation sector’s share in the GDP between 1999-2000 and 2004-05 came from the road segment. During the past few years, road transport has grown at a much higher rate compared to other competing modes like inland waterways, railways, and airways. All this makes it imperative for a quantum increase in road investments, which is also necessary to achieve the country’s long-term growth targets. An INR 1 mn investment in roads (at constant 1993 prices) helps 165 persons cross the poverty line. A World Bank study has assessed that every rupee invested in the highways sector yields 7x returns in economic value. With this kind of multiplier effect, it is high time for India to increase its investment in improving its road network, both in terms of length and quality.
6 Edelweiss Securities Limited
Construction
Light At End Of Tunnel The National Highway Development Programme (NHDP), India’s flagship highway programme, had hit speed bumps in 2006-08, first due to frequent changes in the regulatory framework (please refer Annexure I) and later due to an economic slowdown. The project award by NHAI, which had touched new highs during 2005-06, progressively slowed down in the past three years.
Chart 1: NHAI project award and implementation in various years
0
1,000
2,000
3,000
4,000
5,000
1999-0
0
2000-0
1
2001-0
2
2002-0
3
2003-0
4
2004-0
5
2005-0
6
2006-0
7
2007-0
8
2008-0
9
(km
)
Project awarded Completed Source: Government documents, Edelweiss research
The implementation of the new Model Concession Agreement (MCA) affected project awards in 2006 and 2007. As against the original target of awarding projects spanning 10,641 km in 2008-09, the revised plan had envisaged NHAI awarding 60 BOT projects spread across 6,412 km. These projects worth ~INR 700 bn were to be awarded before March 2009. However, the imbroglio over the new pre qualification guidelines derailed the plans in H1CY08 and the economic slump and the liquidity crunch scuppered the dream in H2CY08. The NHAI awarded eight projects spanning 643 km, worth INR 86 bn in FY09 under NHDP. Table 3: NHDP targets and achievements in past two years
Target (km)
Achievement (%)
Target (km)
Achievement (%)
Completion 437 49 220 60
Tolling 1,869 55 2,003 61
Phase II Completion 2,013 55 2,522 61
Phase III Award of project 3,278 9 6,047 10
Phase V Contract 2,995 29 3,754 0
2007-08 2008-09
Phase I
NHDP Phase Category
Source: Government documents, Edelweiss research
What has changed?
With the NHDP suffering setbacks, the government took a series of steps to improve the attractiveness of NHAI projects and address concerns of the road developer fraternity (please refer Annexure II). The positive effect of these measures is trickling in now.
Regulatory issues and economic slump affected project award adversely
Edelweiss Securities Limited 7
Construction
Also, the liquidity crunch which had plagued the corporate world in the last quarter of 2008 is now a thing of the past. Chart 2: Net reverse repo position
(1,200)
(600)
0
600
1,200
1,800
Apr-08 Jun-08 Aug-08 Oct-08 Dec-08 Feb-09 Apr-09 Jun-09 Aug-09
(IN
R b
n)
Net reverse repo Source: Bloomberg, Edelweiss research
The Reserve Bank of India (RBI) has taken various measures since September 2008, which have resulted in augmentation of actual/potential liquidity of over INR 4,220 bn. In addition, the permanent reduction in the SLR by 1.0% of NDTL (net demand and time liabilities) has made available liquid funds of INR 400 bn for credit expansion. Table 4: RBI measures to boost liquidity Sl. No. Measure Amount (INR bn)
1 CRR reduction 1,600
2 Unwinding/Buyback/De-sequestering of MSS securities 978
3 Term repo facility 600
4 Increase in export credit refinance 255
5 Special refinance facility for SCBs (Non-RRBs) 385
6 Refinance facility for SIDBI/NHB/EXIM Bank 160
7 Liquidity facility for NBFCs through SPV 250
Total 4,228 Source: RBI, Edelweiss research
Another helping hand was lent by the cooling down of soaring interest rates, which had adversely impacted project viability. RBI has cut the repo rate by 425bps and the reverse repo rate by 275bps since September 2008, thus sending a strong signal to banks to reduce interest rates. Reduction in the reverse repo rate was also a step towards discouraging banks from parking their surplus funds with the central bank. This resulted in banks cutting their lending rates with the prime lending rate of State Bank of India falling by 200bps since September 2008.
Liquidity situation has considerably improved as compared to last year
8 Edelweiss Securities Limited
Construction
Chart 3: Reduction in interest rates
3.0
5.3
7.6
9.9
12.2
14.5
Aug-0
8
Sep-0
8
Oct
-08
Nov-0
8
Dec-
08
Jan-0
9
Feb-0
9
Mar-
09
Apr-
09
May-0
9
Jun-0
9
Jul-
09
Aug-0
9
(%)
SBI prime lending rate Repo rate
Source: RBI, Edelweiss research
The risk aversion of lenders to BOT projects (which are typically long term in nature) has also decreased. Further, projects that are being awarded now will come up for financial closure (FC) only towards the latter part of H2FY10 after completing various formalities. We expect the situation on the FC front to improve by then. And, last, business confidence has also recovered, with signs of a turnaround, rally in equity markets across the globe, and a positive election outcome. The government’s stated objective of increased spending on infra projects (which was evident in the increased allocation for various infra schemes in Budget 2009-10) has also come like a shot in the arm for companies in the sector. The effect is visible
Amidst all this, FY10 came as a breath of fresh air. Project award has resumed; since December 2008, the NHAI has awarded (or is evaluating bids for) 24 projects worth INR 228 bn.
Interest rate reduction to help BOT developers
Edelweiss Securities Limited 9
Construction
Table 5: Projects awarded/bids under evaluation by NHAI
S. No. ProjectLength
(km)Total project
cost (INR bn)VGF/ revenue share Phase Developer
1 Vadakkancherry - Thrissur 30 6.2 VGF II KMC - CR18G Consortium
2 Pune Sholapur Pkg-I 110 11.1 VGF III Navinya Buildcon - Atlantia Spa (JV)
3 Gujarat/Mh border - Surat - Hazira Port Section
133 15.1 VGF III Soma - Isolux Corsan consortium
4 Pimpalgaon-Nashik –Gonde 60 9.4 Revenue share III L&T - Ashoka Buildcon consortium
5 MP/Mh Border-Dhule 97 8.4 Revenue share III HCC - John Laing - Sadbhav Engg consortium
6 Cuddapah-Mydukur-Kurnool 189 15.9 VGF III KMC - IVRCL consortium
7 Elevated road from Chennai Port-Maduravoyal
19 13.5 VGF VII Soma Enterprises
8 Kishangarh-Beawar 94 8.0 Revenue share III Soma - Isolux Corsan consortium
9 Hyderabad-Vijayawada 181 17.4 Revenue share III GMR-Punj Lloyd consortium
10 Armur-Adloor-Yellareddy 60 4.9 VGF II Navyuga-KPCL consortium
11 Goa-Karnataka border to Panaji 65 4.7 VGF III IRB Infra
12 Amritsar-Pathankot 102 7.1 VGF III IRB Infra
13 Jaipur-Deoli 146 11.8 VGF III IRB Infra
14 Talegaon-Amravati 67 5.7 VGF III IRB Infra
15 Ghaziabad-Aligarh 126 11.4 VGF III PNC Infratech - SREI - Galfar
16 Kannur-Kuttipuram Pkg - I 83 13.7 VGF III KMC - CR18G Consortium
17 Kannur-Kuttipuram Pkg - II 82 13.1 VGF III KMC - CR18G Consortium
18 Pune Sholapur Pkg-II 110 8.4 VGF III IL&FS - ITNL
19 Hazaribagh-Ranchi 71 6.3 Annuity project III IL&FS - Punj Lloyd
20 MP/Mh border-Nagpur section 95 11.7 NA II Oriental Structural Engineers
21 Jaipur-Reengus 52 3.8 NA III Reliance Infra Source: NHAI, News reports, Edelweiss research
What the future holds in store?
NHAI has an ambitious target of awarding 23,000 km of roads in the next two years. This involves inviting bids for projects spread over 13,000 km of roads in the next year with an investment of ~ INR 1 tn. Table 6: NHAI plan for next one year
NHDP phase No. of projects Length (km) Cost (INR bn)
Phase II 12 700 139
Phase III 96 8,825 602
Phase V 18 2,403 240
OMT projects 9 1,466 11
Total 135 13,394 993 Source: NHAI, Edelweiss research
Of the INR 982 bn required for the 126 projects under Phase II, III, and V, INR 546 bn is expected to come from the private sector and the balance from the government. Overall, a total investment of USD 70 bn is envisaged in the road sector in the next three years. The private sector is expected to contribute USD 40 bn, of which USD
NHAI has ambitious plans for project award in next couple of years
10 Edelweiss Securities Limited
Construction
10 bn is expected from foreign investors. Of this, USD 3-4 bn is expected in equity, while for the balance, the government is looking at creating new debt instruments like infrastructure bonds, securitising receivables, accessing the capital market, etc. NHAI plans to seek bids for 71 projects spread over 7,987 km in the next two quarters worth INR 616 bn. Table 7: NHAI plan for next two quarters NHDP phase No. of projects Length (km) Cost (INR bn)
Phase II 9 447 122
Phase III 43 4,261 339
Phase V 12 1,833 137
Phase VII 1 22 7
OMT projects 6 1,424 11
Total 71 7,987 616 Source: NHAI, Edelweiss research
NHAI expects to receive bids for 49 projects spread over 5,074 km worth INR 511 bn by 2009 end. News reports suggest that response to some of these projects has been enthusiastic with an average of 15 bidders expressing interest. These projects include an INR 95 bn plan to enhance road connectivity in Jammu & Kashmir by undertaking four laning of the Jammu-Srinagar national highway on BOT-annuity basis. Ministry of Roads also emerging as a big awardee
In addition to the NHAI, the road ministry also has a large list of projects that it expects to award on a PPP basis. It has chalked up a plan to award 58 projects worth INR 188 bn by July 2010 on BOT basis (please see Annexure III). These projects involve building 7,515 km roads in various states and largely relate to converting existing roads into two lanes in various states. The ministry will award these projects either by itself or through respective state governments. It has also received clearance for two laning of the trans-Arunachal highway from Nechipu to Hoj (311 km) and Potin to Pangin (407 km) estimated at INR 14.3 bn and INR 19.1 bn, respectively, both on BOT annuity basis. This is part of the ministry’s INR 134 bn plan of road development in J&K and North-East, as per its 100-day agenda submitted to the Prime Minister’s Office. News reports suggest that the World Bank has agreed to lend USD 3 bn to the government to develop 5,937 km of highways. The proposed loan will cover 70% of the project cost, while government will provide the balance. These roads have low traffic and are not viable on PPP basis; these roads are likely to be constructed with full government funding. These highways are not part of NHDP. The government has identified 6,376 km of roads to be developed over the next few years with government funding, of which 5,937 km will be developed using the World Bank fund. News reports suggest that the Ministry has also approved 63 projects that will connect the most populated cities in country to national highways. These projects — stretched over 8,982 km — will be taken up next year under NHDP phase IV.
Apart from NHAI, Ministry of Roads also has large number of projects to be awarded
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New government, new deal for road projects Keeping the sluggish progress on the road project award scenario in 2006-08 in mind, the new government post election responded by appointing Mr. Kamal Nath (earlier the Minister for Commerce and Industry) as the Minister for Road Transport & Highways Ministry. He has announced an ambitious target of building 20 km of roads per day. Many initiatives have been taken since then to speed up the progress in the roads space. A summary of the same is given below: • The erstwhile Ministry of Shipping, Road Transport and Highways has been
bifurcated into separate departments under different ministers–Ministry of Ports and Shipping and Ministry of Roads and Surface Transport to ensure focused efforts on development of both sectors.
• NHAI has been asked to finalise a framework for better execution of projects; this will include establishing a unity of command for proper delegation of power and better internal communication within NHAI.
• NHAI has decided to issue the letter of award (LoA) only after it has acquired 80% of the land required for a project and notification for acquiring the balance has been issued. The balance 20% will have to be handed before FC. Till now, NHAI used to award the project after acquiring 50% of land. This is likely to reduce delays due to land acquisition.
• Budget 2009-10 has increased the allocation for NHAI by 23% to INR 85.8 bn compared to last year’s allocation of ~ INR 70 bn. The government has also proposed an investment of INR 41.4 bn in 2009-10 for developing national highways, besides those built by NHAI.
• The 2009-10 budget has exempted highway developers from the 8% excise duty on goods manufactured at work sites.
• The budget has also allowed India Infrastructure Finance (IIFCL) to refinance 60% of commercial bank loans for PPP projects. Also, IIFCL has been mandated to evolve 'takeout financing’ schemes with banks through which it will pick up infrastructure loans from banks’ books.
• The Prime Minister had set up a committee to suggest fast-track mechanisms to improve inter-ministerial coordination for speeding up road projects. The committee’s mandate was to examine ways to expedite award of projects, financing road projects, restructuring of 4/6 laning projects based on traffic requirements and those in backward areas and to make suggestions for making projects attractive for banks and private investors. The committee has recently submitted its report to the Prime Minister.
News reports suggest that the committee has recommended that government should support NHAI in its borrowing programmes by offering sovereign guarantee. This is likely to make it easier for NHAI to raise loans from international organisations as well as lowering the rate of interest on its loans.
It has also recommended delegation of power to the road ministry on issues related to MCA, RFQ, and RFP.
• The government has approved the formation of an empowered group of ministers (EGoM) to fast-track road projects. The EGoM will remove various policy bottlenecks which do not require approval of the Cabinet or Cabinet Committee on Infrastructure (CCI). The EGoM has the power to fine-tune regulations and change the bidding norms for road projects if required.
Government’s commitment to road development shows in increased allocation for road projects and other regulatory reforms
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Proposed measures:
Along with the above mentioned initiatives, news reports suggest that several measures are in the pipeline to achieve greater progress on road development front:
• Proposal to amend the cross holding clause: The revised RFQ guidelines issued by the Ministry of Finance in May 2009 had raised the earlier limit of 1% related to “conflict of interest” to 5%. In essence, the new guidelines state that a bid will be disqualified if an investor or its associate holds more than 5% (directly or indirectly) in another company which is applying for the same project. The new RFQ guidelines also state that this clause is not applicable for ownership by banks, insurance companies, pension funds, and public financial companies.
Our interaction with ministry officials suggests that the government is considering a proposal by way of which the “conflict of interest” margin may be raised substantially from the current 5%. Government may also limit provisions of the clause to ‘direct holding’. News reports suggest that the limit has been raised to 25%.
Our take: More than equity stake, management control should be the determining factor. With most companies bidding in consortia, the 5% clause invariably crops up. News reports suggest that INR 100 bn of investment in roads sector has been blocked due to this rule. With the amount of investment that the government is targeting in road projects, a fast resolution of this concern is necessary.
• Proposal to amend the threshold technical capacity clause: The revised RFQ guidelines had also doubled the threshold technical capacity required to bid for a project. This means that to bid for a project of a certain total cost, the bidder should have the experience of implementing projects at least twice that cost in the preceding five years, i.e., to be eligible to bid for an INR 5 bn project, he should have implemented projects worth INR 10 bn in the previous five years. As per the old RFQ norms, the limit was set up at 100% of the project cost.
Many smaller developers opposed this saying that the revised norms will benefit bigger developers and foreign companies and thus will leave smaller companies in a disadvantageous position. This will also limit competition as only a few developers will be able to put in their bids.
Our interaction with ministry officials suggests that the government is considering a proposal to roll back the change in regulations so that the old RFQ norms come into place again.
Our take: Considering the large number of projects that the government is planning to award, it needs to use the services of every developer available. A larger number of developers will ensure better competition; more so considering the fact that most projects awarded in the past eight-nine months have seen bids from only 2/3 bidders.
• Proposal to amend the ‘termination clause’: This has been a major eyesore for many developers. This clause states that in case the traffic on any BOT project exceeds the ‘design capacity’ for four years at a stretch, NHAI may terminate the concession agreement unless the developer agrees to enhance the project’s capacity. For e.g., in case of a four-lane project, if the traffic exceeds the ‘design capacity’ for four consecutive years, NHAI may terminate the agreement unless the developer agrees to enhance the road’s capacity to six lanes.
Our interaction with ministry officials suggests that the government is considering a proposal to amend this clause and introduce a more developer-friendly mechanism.
Our take: This clause created uncertainties regarding the eventual duration of the concession period as well as cash flows from projects. With the upsides on traffic
Government looking to make regulatory framework more favourable for developers
Many steps being taken to generate more developer interest for roads
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capped (by linking it to concession period duration), developers were naturally not enamored with this clause.
• Proposal to provide an ‘exit clause’ for the lead member: Currently, the lead member in a consortium has to maintain 26% stake in the project SPV even after completion of the project. News reports suggest that government is considering a proposal to relax this clause so that developers can sell their stake and use the funds for developing new projects.
Our take: As the project goes through different stages, different type of investors would be interested in it. Once a project has been developed, the developer should not be constrained in a major way to remain attached to the project. Allowing him to sell stake and use the funds for new projects will be more beneficial. Once the project is complete, more risk averse investors and pension funds will be willing to come in. This will ease funding pains for the developer community.
• Proposal to vest ownership of roads with NHAI: The government is considering a proposal to vest the ownership of roads with NHAI; it will then be leased out to developers who will then raise loans against them. Currently, roads are not owned by NHAI; it only allows developers to collect toll on them. Thus, developers cannot use roads as collateral while borrowing from banks and other financial institutions.
Our take: While this will be a novel way to ease financing concerns, legal issues (such as stamp duties and taxes to be paid) will have to looked into first.
• Setting up of special land acquisition units: The NHAI has decided to set up 150 special land acquisition units across various states to deal with land acquisition problems. These units will be developed for each project in respective states; it is proposed that they will comprise state government officials, who will carry out the entire land acquisition process on behalf of NHAI. Currently, land acquisition typically takes 24 months; NHAI plans to pare this time to 11 months.
To push the land acquisition process, responsibility has been fixed on project directors, chief general managers (CGMs), and members of NHAI. Ten such units are coming up in Rajasthan, 13 in Bihar, 25 in Uttar Pradesh, seven in Gujarat, 11 in Orissa, 13 in West Bengal, four in Jharkhand, 11 in Maharashtra and five in Assam. Around 40 are already operational in Tamil Nadu and Karnataka and sanction has been received for Goa. The NHAI has also started the process of setting up 10 regional centers to be headed by CGMs in Lucknow, Patna, Jammu & Kashmir, Chennai, Guwahati, Delhi (Haryana & Punjab), Nagpur, Bangalore, and Kolkata.
Our take: Land acquisition is the biggest factor responsible for delays in project implementation. As per a recent survey of major infrastructure projects facing delays, land acquisition problems were responsible in 70% of cases. Also, news reports suggest that NHAI was unable to acquire land in eight states in Q1FY10. With NHAI now deciding to award LoA only after 80% of land acquisition is completed, efforts on this front need to be increased to speed up execution.
• Proposal to set up an expressway authority: The government intends to create a separate expressways authority, on the lines of NHAI, which will singularly concentrate on construction of expressways across the country. Such a move is likely to give an impetus to the construction of expressways in the country. The government intends to take up construction of about 1,000 km of expressways in four identified stretches under NHDP Phase VI. The proposed stretches are: Delhi-Meerut (66 km), Vadodara-Mumbai (400 km), Kolkata-Dhanbad (277 km), and Bangalore-Chennai (260 km).
News reports suggest that the government is also contemplating building a network of expressways spanning 17,661 km by 2022 (end of the Thirteenth Five Year Plan). A draft report has suggested that the expressways be
Government taking steps to ensure administrative issues like land acquisition are handled efficiently
Government undertaking measures to improve viability of road projects
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built as per the following two schedules: (a) 2,665 km by 2012, 3,690 km by 2017, and 6,031 km by 2022 on toll basis; or (b) 2,665 km by 2012 in the first phase and 9,721 km by 2017 in the second phase on toll basis. Along with either of the two options above, the report has suggested building 5,275 km of roads on an annuity basis till 2022.
• Proposal to classify toll receipts as tangible assets: Currently, many banks classify toll receipts as intangible assets which results in project loans to developers being classified as unsecured loans. This attracts higher provisioning charges and hence, the cost of loans for borrowers goes up. The government is studying a proposal to classify toll receipts as tangible assets which will help developers mobilise finance.
• Proposal to seek foreign funds for road projects: The government recently indicated that it is looking at sovereign wealth funds, private equity funds, and pension funds to fund road building in India. The roads minister has already undertaken road shows to meet investors to discuss which financing platforms would be most effective. The government has earmarked USD 20 bn per year for road building and expects foreign investors to fund half of this. The government aims to reform policy and ease investment rules for infrastructure projects in an effort to attract foreign capital.
• Setting up a forum to address developer concerns: The government has agreed to institutionalise a CII-Ministry of Roads-NHAI forum, as a mechanism to address industry concerns. This forum will meet every month under the leadership of secretary, Ministry of Roads, and report back to the minister on the progress made on various issues.
• Proposal to securitise cess and toll revenues: The government is considering a proposal to securitise the cess that it levies on petrol and diesel and the toll it collects from tolling bridges and bypasses on NHs (these two sources together contributed INR 87 bn in FY09). This will help the government augment its resources for road development.
• Proposal to exempt SPVs from dividend distribution tax (DDT): News reports suggest that the Roads Ministry is asking for an exemption from the dividend distribution tax (DDT) for SPVs which are developing highways. Under the existing income tax laws, both the SPVs and the holding company pay taxes when they declare dividends. This is a major disincentive for developers. The ministry’s proposal is aimed at reducing the cascading tax effect.
• Proposal to set up an independent regulator for highways to oversee all NHDP phases. The regulator will examine problems faced in implementing NHDP projects including land acquisition or disputes arising during the bidding process.
• Proposal to make the toll collection process automated in projects executed through the PPP mechanism. This is because it is felt that leakages under the manual system of toll collection undermine the viability of road projects for government and developers.
• Proposal to set up an arbitration body for roads that will be an institutional set up to deal with disputes between contractors and NHAI. As per Government estimates, as much as INR 100 bn worth funds are stuck because of disputes between developers and the NHAI.
Other measures that can be looked into:
• Mix of annuity and toll: While currently, there are two clear models under the PPP mechanism–toll and annuity–there is no model which encompasses the
Willingness on part of Government to listen to developer concerns
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characteristics of both. Such a model may well emerge as a win-win proposition for all stakeholders.
NHAI had some time ago proposed a new hybrid BOT model which combined the characteristics of both the toll as well as annuity payment models. A draft MCA was designed for this purpose and a communiqué was circulated among developers seeking their feedback on the same.
Currently, under the BOT (annuity) model, no viability gap funding (VGF) is made available to the developer and he has to bear the entire project cost. The project cost/investment is recouped by the developer through annuity payments made by NHAI after the construction is over, while the toll collected goes to the NHAI.
However, under the BOT (toll) model, the developer has to recover his investments through toll collection. Depending upon the viability of the project, he may ask for a viability gap funding (currently capped at 40% of the project cost) from the NHAI or may agree to share revenues with the NHAI.
The hybrid model had proposed that in case the amount of VGF quoted by the developer is more than 40% of the project cost, the funding requirement in excess of 40% of the cost would be paid to the developer in the form of annuity payments. Significantly, even while the incremental payment would have been made by the government, the developer would have been allowed to collect the toll through the concession period.
However, the government has rejected the hybrid model and has decided to go along with the current annuity and toll models.
Our take: Our interaction with developers suggests that they were in favour of the hybrid model. The new model would have reduced the financial risk for the developer in case toll collection was not as per expectations since he would have received an assured annuity payment from the government. Many projects in the past couple of months could not be awarded as the VGF quoted by developers exceeded the 40% cap. The new model would have made these projects viable and increased the pace of project awards.
The government would also have had to pay only the incremental amount as annuity under this model (against the earlier practice of paying the entire annuity amount under the BOT-annuity model). This would have had the advantage of reducing annuity payments significantly as well as transferring the commercial risk from NHAI to the developer.
Another method that can be tried is to allow a project to run on the annuity mode till the time the traffic on the project reaches such a level that it becomes viable under the toll mode. This will lessen the burden of annuity payment that the government has to bear.
• Relook at the waterfall mechanism: Under the current waterfall mechanism followed by NHAI, a project is first invited under the BOT-toll mode. In case of inadequate response, the BOT–annuity mode is used. In case even this fails, the project is given on cash contract basis.
Our take: While theoretically, letting market forces determine the viability of a project is the right way, the current method takes a long award time in case the project is not viable under the PPP mode. A faster way to award projects could be to assess the viability of awarding a contract on the BOT-toll model before the tender is invited. In case a project is not considered viable under the BOT-toll method, the annuity-based method could be used directly without going through the bidding process.
Flexible approach needed to spur road development
Measures to fast track road project award and remove irritants in current process need to be taken
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In a way, the government has already started working on this. It has decided that project development mode will be decided as per the vehicular traffic on the road as shown below: Table 8: Project development mode
Vehucular traffic (in PCUs) Project development mode
> 15,000 BOT-toll
10,000 - 15,000 BOT-annuity
< 10,000 EPC Source: Edelweiss research
News reports suggest that the Government is considering a new policy under which all road highway projects are to be earmarked from the beginning to one of three processes of bidding, on the basis of its financial viability. NHAI has, under the new policy, identified 6,831 km to be bid on toll, 1,143 km on annuity and 3,954 km on EPC in FY10.
• Updated cost estimates for projects: A major grouse that developers hold against NHAI is that project cost estimates are woefully outdated and totally out of sync with the current ground situation. A comparison of the estimated cost of some projects as per NHAI and developers is pertinent in this respect:
Table 9: Variation between NHAI and developer cost estimates
ProjectNHAI cost
estimate (INR bn) DeveloperDeveloper cost
estimate (INR bn)Variation
(%)
Talegaon-Amravati 5.7 IRB infra 8.5 50.6
Goa/KNT border - Panaji 4.7 IRB infra 8.4 77.4
MP/Maharashtra border - Dhule 8.4 HCC/John Laing/Sadbhav 14.2 69.5
Hyderabad-Vijaywada 17.4 GMR/Punj Lloyd 22.0 26.4
Source: Edelweiss research
While the government has taken measures to ensure that cost estimates are more in tune with ground realities, a lot more needs to be done to reduce the variation.
• Setting up a system of empanelled developers: The roads ministry has decided
to set up a system of empanelled developers by pre qualifying them for a period of one year. This will be done by establishing their qualification strengths. We believe such a step should be used for NHAI projects as well since it will streamline and simplify the process of qualification of bidders as well as save time taken to arrive at the bidding stage.
Our take: Government seriousness shows through even if target is daunting: The target that the government has set for itself–building 20 km of roads per day–is definitely daunting, considering the fact that the current execution rate is not even half of that. The NHAI chairman has said that achieving such a target will take atleast 18 months. Even then, it will require a massive capacity enhancement exercise at NHAI, developers, contractors, banks/financial institutions, and state governments (responsible for land acquisition) to achieve the target.
The government has taken a plethora of steps in the past three-four months to make the sector more commercially attractive. It recently said that all amendments to the MCA will be completed by September 2009 end to attract investments. With the government seriously showing its intent to address grievances of all stakeholders involved–NHAI, developers, banks/financial institutions, among others-and establishing a definite time frame to solve various issues, its commitment to achieving a substantial jump in the pace of road development is evident.
Government committed to a quantum improvement in country’s road infrastructure
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Outlook: Future looks bright The NHDP had run aground in the past three years, entangled in a maze of regulations and unfavourable economic scenario. With both these irritants out of the way, we expect a faster pace of project awards. With the government willing to look into the problems of developers and taking steps to remove the roadblocks, things definitely look better than a year ago. This makes us believe that the travails of the past three years are behind us and we are well on the road to seeing some heightened activity on the project awards scene. To conclude, it looks like there definitely is light at the end of the tunnel as far as the road development space is concerned.
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Huge Opportunity At Centre And State Levels Road projects have been at the forefront of the privatisation move in the Indian infra sector. BOT road projects account for 81% of total PPP projects awarded in India, as far as number of projects is concerned. This shows the rapid strides made as far as popularising the PPP route in the road sector. The heartening thing is that the past has been good and the future promises to be even better. If there is one word to describe the opportunity in the Indian roads space, it is humongous. While the expected investment in NHDP is INR 3,315 bn during 2006-17, it is not the only place where the action is happening. The NHDP accounts for only 47% of the total road sector investment in the Eleventh Five Year Plan. State roads, at 37% of the investment, also form an important segment for any developer/contractor in the road space. Also, as far as rural roads are concerned, the Eleventh Plan envisages spending over INR 400 bn on them (investment on rural roads is sourced from the Prime Minister’s Grameen Sadak Yojna, (PMGSY) under the Bharat Nirman Programme). With the public sector contributing a majority of funding for state roads and completely for rural roads, opportunities in these segments are available more for contractors than developers. We take a look at the upcoming road opportunity at the central level as well as the initiatives taken by various state governments to foster road development. Our focus is on the PPP opportunity at the central and state levels, since privatisation is the buzzword in the Indian road sector today.
NHDP: Developing the country’s arterial network NHDP, launched in 1998-99, has seen its scope getting enhanced from the two phases envisaged initially to seven phases covering more than 54,000 km (please refer annexure IV for details of various phases). Table 10: Various phases of NHDP
Phase Length (km) Date of approvalOriginal approved
cost (INR bn)
Phase - I 7498 * Dec-00 303
Phase - II 6647 ** Dec-03 343
Phase - III A 4,815 Mar-05 330
Phase - III B 7,294 Apr-07 476
Phase - IV 20,000 Jul-08 *** 278
Phase - V 6,500 Oct-06 412
Phase - VI 1,000 Nov-06 167
Phase - VII 700 Dec-07 167
Total 54,454 2,476 Source: NHAI, Edelweiss research
Note: * Includes 5,846 km of GQ, 981 km of NSEW, 356 km of port connectivity, and 315 km of other roads
** Includes 6,161 km of NSEW and 486 km of other NHs
*** 5,000 km were approved by CCEA in July 2008
While the NHDP started with awarding projects on cash contracting basis, the focus has progressively shifted towards the PPP approach. The government in 2005 decided to award all projects in NHDP Ph III-VII using the PPP approach. Since then, the BOT approach has been the predominant mode of award. The status of BOT projects in NHDP till date is summarised below:
Huge opportunity – both at central and state level
NHDP – World’s largest PPP road development programme
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Chart 4: BOT toll projects in NHDP
77
26
5,677
1,171
456
87
0 1,000 2,000 3,000 4,000 5,000 6,000
Awarded
Completed
Cost (INR bn) Total length (km) No. of concessions Source: NHAI, Edelweiss research
Chart 5: BOT annuity projects in NHDP
25
11
1,376
713
94
38
0 300 600 900 1,200 1,500
Awarded
Completed
Cost (INR bn) Total length (km) No. of concessions Source: NHAI, Edelweiss research
Over the years, delays in implementation and restructuring in certain cases has meant that the cost of NHDP has been revised upwards many times. The revised cost estimates for various phases are as follows: Table 11: Cost of NHDP phases (2006-17) (INR bn) NHDP phase Modified cost estimates
Phase – I and II (balance work) 684
Phase –III 1,143
Phase -IV 393
Phase -V 515
Phase -VI 229
Phase -VII 167
SARDP-NE, ICTT Cochin and others 184
Total 3,315 Source: NHAI, Edelweiss research
PPP approach gaining acceptance in NHDP
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As is evident, the NHDP involves an investment of INR 3,315 bn during 2006-17. The expected funding for the same is shown below: Chart 6: Funding sources of NHDP phases (2006-17) (INR bn)
243
723
274
444
136
104
46
441
420
119
71
93
63
138
0 200 400 600 800 1,000 1,200 1,400
I and II (Balance work)
III
IV
V
VI
VII
SARDP-NE, ICTT Cochin & others
(INR bn)
Private Sector Public Sector Source: NHAI, Edelweiss research
A significant portion of the opportunity still remains to be tapped. Substantial completion has been achieved only on the initial two phases. The main focus currently is on completing these two phases and to award project under Phases III and V.
Table 12: Status of various NHDP phases
PhaseTotal
length (km)Already
4-laned (km)Under implementation
(km)Balance for award (km)
Likely completion date
Phase I 7,498 7,227 265 6 Substantially completed
Phase II 6,647 3,451 2,444 752 Dec-10
Phase III 12,109 937 2,155 9,017 Dec-13
Phase IV 20,000 0 0 20,000 Dec-16
Phase V 6,500 131 899 5,470 Dec-13
Phase VI 1,000 0 0 1,000 Dec-16
Phase VII 700 0 19 681 Dec-15
Total 54,454 11,746 5,782 36,926
Source: NHAI, Edelweiss research
As can be seen above, of the total 54,454 km under the NHDP (including NHDP Phase IV which will be implemented by Ministry of Roads), 36,926 km of roads are still to be awarded. Of the seven phases, NHDP Phase IV and VI are yet to see any action on ground while awarding under Phase VII has just begun. This means that there is a huge opportunity waiting to be tapped by developers as far as NHDP is concerned.
PPP opportunity at state level: The undiscovered paradise
While NHDP hogs most of the spotlight, many states have been quietly and steadily drawing up the roadmap for PPP projects in the road sector. In fact, the phenomena of state PPP projects is old, with states like Rajasthan passing enabling resolution for inviting private participation in roads way back in 1994. Other states like Gujarat had started awarding PPP projects (like the Vadodara-Halol project which was completed in 2000) much before the turn of the century when NHDP projects picked pace.
NHDP entails huge funding requirements
PPP opportunity at state level is probably bigger than NHDP
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The reason why the state PPP scene attracts relatively less attention than the NHDP is because of the comparatively dispersed scene of action. Also, the level of activity differs from state to state. While states like Maharashtra, Gujarat, and Rajasthan are active as far as attracting private investments is concerned, there are many states which do not have a PPP policy and a PPP cell even today. Also, the regulatory frameworks vary with states having their own MCAs. The level of investment at the state level till now is also low. Part of it can be blamed on the slackness of states to take steps to set up the necessary regulatory framework. Also, there have been apprehensions regarding the credit worthiness of the involved state bodies (against NHAI, which is a ‘AAA (Ind)’ rated entity). However, things seem to be changing now. State governments seem to have realized the enormous potential of the private sector as far as developing the road network is concerned. Also, increasing awareness about the positive impact of a robust infrastructure network seems to be trickling in. All in all, we are set to see an enhanced level of activity as far as the state PPP scene is concerned. We present the future opportunity available in major states.
• Karnataka: INR 1,770 bn opportunity
Karnataka has decided to develop a Core Road Network (CRN) spanning 66,000 km at an estimated cost of INR 1,770 bn under the PPP mode (BOT- toll) over the next six years (2009-15). The CRN is to be developed in three phases: (i) first phase involving the development of 10,000 km of state highways (SHs) and major district roads (MDR) and 12,600 kms of village roads (VRs). The estimated cost of developing state highways and MDR is INR 314 bn; (ii) second phase with 40,000 km of roads to be developed at an estimated cost of INR 1,088 bn; and (iii) third phase comprising 16,000 km with an investment of INR 368 bn.
The CRN will connect the major IT centre of Bangalore with other IT hubs such as Mysore, Hassan, Davangere, Hubli, Dharwad, and Mangalore to promote industrial and urban development besides integrating economically backward and remote areas. It will be an all weather, smooth, speedy flowing road network with minimum two lane carriageway including feeder roads and four-six lanes near urban settlements. The concession agreement initially developed for these roads had innovative features like award of land pockets to developers to set up roadside amenities like restaurants, which was to be an additional source of revenue for companies. It proposed that developers would be eligible for one acre of wayside amenity land for every 5 km of project road (SHs//MDR plus VRs). Land acquisition and development was to be undertaken by developers. However, most of the developers that evinced interest in the programme were uncomfortable with land acquisition. Upon their requests, the government has now decided to acquire the land required for the development of these roads on its own. Also, the state government has drawn up a plan for the overall development of Bangalore with an outlay of INR 220 bn. The plan includes 12 major signal-free corridors, three elevated corridors, strengthening of arterial and sub-arterial roads, construction of 40 railway over and under bridges, etc. Meanwhile, the much delayed Peripheral Ring Road in Bangalore is also expected to see the light of the day. The state government has given the go-ahead for the first phase of the project. It will be implemented by the Bangalore Development
Karnataka plans to spend INR 1,770 bn on road development through PPP approach in 20009-15
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Authority (BDA) in partnership with private companies. The road, once it fully encircles the city, will be 116 km long and is expected to cost upwards of INR 30 bn.
Gujarat: The early mover
The Gujarat government has been active as far as PPP projects in the road sector are concerned. It was the first state in India to have a law governing BOT projects and such other arrangements along with private participation in infrastructure projects. The state witnessed the completion of the Vadodara-Halol and Ahmadabad-Mehsana toll projects in 2000 and 2003, respectively. The Gujarat State Road Development Corporation (GSRDC) had last year signed a concession agreement with Larsen and Toubro (L&T) for construction of three ‘road corridors’ in the state with a total length of 485 km and a project cost of INR 43 bn. The state government has now plans to undertake improvement of roads with private investment of about INR 90 bn. This involves developing 2,600 km of roads with an investment of INR 30 bn on annuity basis and of 1,000 km of roads with an investment of INR 60 bn on toll basis. The government has started with the projects on annuity basis which would ensure a fixed stream of revenues for companies. Also, the state government is assuring developers that 95% of the land will be made available to them at the beginning of the project. This compares favourably with 50-60% that most companies usually get in NHAI projects.
Also, the government has drawn up an ambitious plan for road development in the state. The proposed investment is ~ INR 300 bn in 2010-12 and ~ INR 200 bn in 2012-17. PPP will be the major source of funding, contributing ~ INR 110 bn in 2010-12 and ~ INR 120 bn in 2012-17.
Andhra Pradesh: The programme approach
The state government has to its credit successful highway development programmes such as the World Bank funded Andhra Pradesh State Highway Project (APSHP). The government has already awarded 38 road projects on BOT basis worth INR 77 bn. With the success of APSHP, the state government has now proposed a second project, i.e., AP Road Sector Project (APRSP) for improvement and better management of roads. The programme involves four laning of 1,252 km of roads under the PPP basis; it also includes upgradation and improvement of 600 km of roads and long-term performance based maintenance contract (LTPBMC) for 6,523 km of roads. Apart from this, there are 15 projects currently in the pipeline to be awarded under the BOT model.
Madhya Pradesh: The BOND-BOT approach
Madhya Pradesh (MP) has taken some innovative steps to foster the development of the road network through the PPP route. It initiated the Bond-BOT scheme to develop 2,000 km of state roads on BOT basis. The projects were aided by the state government through a subsidy of INR 5 bn, which was raised by a bond issue under the Madhya Pradesh Infrastructure Investment Fund Scheme. The projects developed during the scheme included the likes of the 203 km Indore-Edalabad project and the 247 km long Rewa-Amarkantak project. MP was also the first state to receive VGF from the central government. The state has also been able to award BOT projects on a negative grant/revenue sharing basis, indicating the attractiveness of the stretches. The state has completed projects spread over 1,532 km on BOT basis while projects spanning 965 km on BOT basis are under development.
Gujarat – ambitious road development plans
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The state government intends to award projects spread across 209 km in the near future on PPP basis. It has assigned the development of 794 km of NHs on DBFOT basis to MP Road Development Corporation (MPRDC). Apart from this, SHs worth INR 5.18 bn and MRDs worth INR 6 bn are to be developed on PPP basis. The government has also decided to award the project of developing and modernizing 21 check posts to MPRDC. The likely cost of the project is INR 7-8 bn.
Rajasthan: The mega highway opportunity
Rajasthan was the first state to pass an enabling resolution for inviting private participation in roads way back in 1994. One of the major PPP projects developed in the state was the Rajasthan Mega Highways Project (1,053 km, INR 15.3 bn). It is being undertaken by RIDCOR, a 50:50 JV between IL&FS and the state government. Apart from this, the state has awarded 35 BOT projects in the road sector, of which 33 projects have been completed and opened to traffic while two projects are under execution. The state is now contemplating a second Mega Highway project covering seven corridors with a total length of 1,267 km. The project involves widening and strengthening of seven major state highways. Apart from this, there are many other BOT projects scheduled to be awarded. This includes a 143 km ring road around Jaipur at a cost of INR 50 bn.
Uttar Pradesh: Road to expressway
The UP road PPP space has been in news due to the expressway projects being undertaken in the state. The government has awarded the 1,047 km Ganga Expressway (costing INR 300 bn) and the 165 km Taj Expressway linking Noida and Agra (costing INR 60 bn) on a PPP basis. The new ‘Economic Policy’ announced by the state government in December 2007 envisaged mega infrastructure projects on PPP basis going forward. Prominent amongst them are five expressways spread across 2,500 km. These expressways have been conceptualised along various rivers like Yamuna, Betwa, Ram Ganga, etc. The total cost of these expressways has been estimated to be ~ INR 470-500 bn. The state government has set up the UP State Highway Authority (UPSHA) for removal of connectivity bottlenecks. It has an ambitious programme to be carried out on PPP basis. About 1,256 km of state highways have been identified for strengthening, while 503 km of state highways have been identified for maintenance. Also, feasibility study has been conducted for 21 railway over bridges (ROBs) to be constructed on a PPP basis, of which 13 have been found completely viable while the balance have been found partially viable. Another 106 ROBs have been selected for which detailed project reports have to be prepared to gauge the suitability of construction on BOT/DBFO basis.
Tamil Nadu: Master plan
The state government had set up the Tamil Nadu Road Development Company (TNRDC) in May 1998 with the mandate to catalyse private sector resources and investments under the PPP framework for road sector initiatives. TNRDC is a 50:50 joint initiative between Tamil Nadu Industrial Development Corporation (TIDCO), the investment arm of Tamil Nadu government, and IL&FS. TNRDC has already undertaken the 113 km East Coast Road (ECR) project and the IT Corridor project. The government now plans to develop the 62.3 km Chennai Outer Ring Road project (ORR) for relieving congestion within the city. The ORR is to be constructed on a
Plenty of opportunities for developers in each state
More economically advanced states at the forefront with big plans
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DBFOT model on an annuity basis. Land acquisition for phase I of the ORR from Vandalur to Nemilichery has been completed. GMR Infrastructure recently won the bid to develop this 29.65 km stretch at a cost of ~ INR 11 bn. Apart from this, a road network development scheme for Chennai under the second master plan has also been conceptualised. This plan, called the Chennai Elevated Expressways, is to be developed at a cost of INR 130 bn. A total of nine elevated corridors have been proposed in the medium term while 12 corridors have been proposed in the long term. The overall project is to be completed by 2019-20. Also, recently the state government stated that it proposes to develop and upgrade 12,000 km of road at an outlay of ~ INR 40 bn. While 5,500 km roads will be widened, maintenance work will be carried out on 6,500 km roads. During the past three years, the government had upgraded 3,270 km of major district and other district roads into state highways.
Maharashtra: Leading the pack
Maharashtra is the leader as far as attracting private investment in road projects is concerned. It formulated a policy in 1996 to finance road development projects through private sector participation. A cabinet sub-committee has been formed to take fast decisions related to infrastructure projects. The state has already completed 16 major projects costing INR 54 bn. Further, 14 projects costing INR 108 bn are under development. The state has ambitious plans regarding future projects. Upcoming projects include the Worli-Nariman Point Sea Link, integrated road development programmes in many cities, widening of various state highways on BOT basis, among others.
Punjab: Expressway all the way
The Punjab Industrial Development Board (PIDB) is the nodal body for infra development in the state and is designated as the PPP cell for infrastructure development in Punjab. The state has already completed nine BOT projects in the road sector. The PIDB has an ambitious programme as far as future PPP projects are concerned. Future projects include five ambitious expressways, viz., Mohali-Phagwara Expressway (INR 25 bn), expressway around Mohali (INR 23 bn), expressway for Amritsar Airport, Pathankot-Ajmer Expressway (INR 86 bn), and expressway in Ropar along Sidhwan Canal up to Ludhiana. Other PPP projects included two ring roads (the Amritsar ring road at a cost of INR 20 bn and the Ludhiana ring road to be built at an estimated cost of INR 30 bn) apart from various other road projects.
Haryana: Venturing out
The state government has approved the improvement of the Gurgaon-Faridabad road, Ballabhgarh-Pali-Dhauj-Sohna road, Chandimandir-Jallah road, Bhuria-Khadri-Deodha Nainawali road, and Yamunanagar-Ladwa-Karnal road on PPP basis. Of this, the Gurgaon-Faridabad project has been already awarded to Reliance Infra. The government is also planning a North-South and East-West corridor at an estimated cost of INR 40 bn.
New entrants looking to catch up with early movers
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Orissa: Taking first steps
Orissa has a road network of around 2.38 lakh km (including 3,100 km of NHs). The state has embarked on an ambitious plan for improving road connectivity through the PPP route. Upcoming projects include the Capital Region Ring Road (INR 3 bn), Bhubaneswar-Paradeep Road (INR 5.6 bn), four Laning of Sambalpur-Rourkela Road (INR 12.7 bn), Koira-Tensa-Lahunipara Road (INR 4 bn), among others.
Summary The opportunity at the state level for the PPP route is abundant. The overall quantum rivals that of the NHDP and is perhaps even bigger than it. However, the opportunity is spread across a wide spectrum and the level of preparedness for PPP projects across various states is also different. While some like Gujarat and Rajasthan are old hands at the game, others like Orissa are in unchartered territory. The PPP framework and the associated regulations also differ across states; this, along with the myriad agencies with which companies will have to deal at the state level, is likely to ensure that there will be misses along with hits on the way. However, it can be safely said that the state road PPP scene is now ready for a quantum leap. Over the long term, it will ensure that there is no shortage of work for any participant in the infrastructure space.
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Time To Think About The Constraints While no one doubts the huge opportunity in store, it is also prudent to keep the constraints in mind. As far as the road development scene is concerned, the obvious constraints are:
1. Execution capability of contractors.
2. Amount of money the government (NHAI) can put in.
3. Debt funding from banks and other financial entities.
4. Capability of developers to provide the equity portion of funding.
We take a look at these factors involved: 1. Execution capability: A spending of INR 1 tn every year means that developers
alone will not be able to execute projects on their own; a significant chunk of the work will have to be outsourced to third part contractors as well. But even then, a look at the revenues earned by roads divisions of various contractors in FY09 reveals that it appears unlikely that this much quantum of work can be handled. Table 13: Order book/execution ratio of various contractors
Company Order book/execution ratio (FY09 end)
IVRCL Infra 2.8
Nagarjuna Construction 2.6
Patel Engg 2.9
Simplex Infra 2.1
Gammon India 3.5
Hindustan Construction 4.9
Sadbhav Engg 4.6
Madhucon Projects 5.2
Gayatri Projects 5.7
Punj Lloyd 1.7 Source: Company, Edelweiss research
With the spurt in order awards in the past six months, most contractors currently have a robust order book (>3x FY09 revenues). With the overall focus on infrastructure development, there are going to be opportunities in other infra segments as well. In this context, building 20 km of roads every day is a tough task to achieve. While the government has stated its intention to focus on capacity augmentation of contractors, it is going to be a gradual progress rather than a fast one. The government is also looking at getting the help of foreign players to achieve its objective. While foreign players may be able to help in funding aspects and project management skills, it yet remains to be seen how many of them will be willing to get their ‘hands dirty’ doing the actual contracting work. To conclude, even though projects awarded now will enter the execution stage after only a year or so, we believe that execution is going to be an issue, atleast in the medium term. The fact that many states are also becoming active as far as road development is concerned is going to further test the execution abilities of contractors.
Are there enough contractors to build 7000 km of roads every year?
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2. Does the government have the money?: The proposed funding plan for NHDP amounting to INR 1,735 bn in the Eleventh Five Year Plan is as follows:
Chart 7: Funding plan for NHDP in 11th plan
Cess21%
External assistance
2%
Borrowings by NHAI24%
Surplus from user fee
2%
Share of private sector51%
Source: Working Group report on roads for the Eleventh Five Year Plan, Edelweiss research
As is evident, the private sector is expected to provide more than half of the funds required. However, with the sluggish pace of project award in the first two years of the plan, achieving this target is going to be an uphill task. Currently, it looks like that the government may have to put more on the table than what was envisaged. We take a look at various funding sources being utilised by NHAI over the past few years:
Table 14: Funding sources utilised by NHAI (INR bn)
Borro- Budgetary Toll Total
Year Cess Grants Loans wings support collection
1999-00 10 5 0 7 0 0 22
2000-01 18 5 1 8 0 0 32
2001-02 21 9 1 56 0 0 87
2002-03 20 12 3 0 0 3 38
2003-04 20 12 3 0 0 4 38
2004-05 18 12 4 0 0 5 39
2005-06 33 24 5 13 7 8 90
2006-07 64 16 4 15 1 11 111
2007-08 65 18 4 20 3 14 125
2008-09 70 15 4 11 2 17 118
Total 340 127 29 129 12 61 699
External assistance
Source: Government documents, Edelweiss research
The amount collected from cess on diesel and petrol of INR 135 bn during the first two years of the plan is more or less as per estimates. It goes into a non lapsable fund to be used for highway development. On the other hand, external assistance has reached INR 41 bn in the first two years itself against projections of INR 45 bn over the plan period. This signifies the emphasis being put by the government on road development.
Does the government have enough money to back up its ambitious plans?
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As far as NHAI borrowings are concerned, there is still a lot of leeway left with the agency: As against the planned figure of more than INR 400 bn of borrowings, NHAI has borrowed only INR 31 bn in the past two years. There is expected to be a sharp uptick in borrowings going ahead with the NHAI planning to borrow INR 50 bn in FY10. News articles suggest, of this, INR 5 bn is proposed to be raised from a multilateral agency and negotiations are going on with ADB for a USD 100 mn loan. The balance is proposed to be raised through tax-free bonds, which are already available in the market. NHAI is also in talks with the World Bank to restructure an earlier loan of USD 400 mn. NHAI toll collection has also jumped to INR 17 bn this year. About 7,560 km of NHs have been completed and are under tolling. However, 3,476 km of NHs are only partially complete and hence are not under tolling. The toll collection could be expected to jump further on completion of these projects. Also, recent news reports suggest that the government is considering a move to transfer a part of the INR 100 bn tax-free bonds raised by IIFCL to NHAI for refinancing of road projects.
To summarise, the oft repeated statement from government that it will not allow
money to hinder road development is true to some extent. In the near term, it
seems that NHAI has adequate funds at its disposal to carry out its plans.
However, the picture over the medium term is muddled and will depend
upon several factors:
(i) How fast is the government able to remove bottlenecks and what will be the
success rate in awarding projects over the next two years.
(ii) How much will the government be able to support NHAI, constrained that it is
due to considerations about fiscal deficit.
(iii) How fast the economy recovers, for it will improve project viability by boosting
traffic and reduce dependence of developers on VGF (or conversely, how soon
will we see the return of developers willing to share revenues with Government).
3. Funding conundrum: Will the flood of liquidity translate into financial
closures: With no dearth of projects to choose from, liquidity situation improving,
and regulatory framework also turning favourable, the only stumbling block in
the way of a marked improvement in project awards, in our view, is funding.
Also, with increasing commoditization of the sector, the extent to which project
economics can be improved will increasingly depend upon innovative funding
structure along with design and execution capabilities.
In such a scenario, the extent of the companies’ participation in future BOT projects (and the success of the overall PPP plan in roads) will depend upon the confidence which companies have in achieving FC on projects. Thus, cracking the funding code is the key to unlocking the PPP opportunity, in our view. There are two major questions which will determine the success of the Indian PPP road projects in the medium term: (a) how much risk aversion from banks will the BOT projects face, keeping in mind the worries on asset quality (toll revenues being lower than estimates on some projects) and asset-liability mismatch (concession period being increased for many projects); and (b) where will the required equity for projects come from?
Can NHAI finances stand up to the increased demand for government funding?
Will funding emerge as the deal-breaker?
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In order to get answers to these questions, we have interacted with banks, financial institutions, private equity players as well as major developers in the road BOT space. We present our analysis of the situation: Banks turning sympathetic towards BOT projects….
Various steps taken by the government to improve the viability of BOT projects have found favour with banks. While a return of the 80:20 D/E structure for road BOT projects is still far, banks are comfortable funding a 70:30 project structure (which may go up to 75:25 in case the project is very lucrative). Also, most banks do not have preferences regarding whether the project is a NHAI/state project or the mode of project (toll/annuity). The paramount factor determining lending decisions is viability of the project. As far as sectoral lending caps are concerned, these can be changed internally in case a host of viable projects are available in any particular sector. Interest rates, on the other hand, present an interesting conundrum. The latter part of the last year saw interest rates shooting up, making many projects unviable. While rates have dropped significantly since then (currently at 11-12% level for project finance proposals), most banks are of the view that we are near the end of the interest rate cut cycle. In fact post the budget, there have been apprehensions that the sheer size of government borrowing will crowd out private players, driving interest rates higher by the start of next year. This may well coincide with the time when majority of the road BOT projects awarded this year are expected to come up for FC. How long will developers get to enjoy a favourable interest rate environment has emerged as an important point to ponder over. ….but, can they support long term funding requirement
The problem with BOT project funding is not limited to tying up initial funds. Their long tenure creates headache of asset-liability mismatch for banks. Recognising this, the government has been trying to take the help of IIFCL for this purpose. In Budget 2009-10, the government has proposed release of long-term funds by IIFCL for projects; IIFCL will also refinance 60% of bank loans for PPP in critical sectors over 15- 18 months. It will provide refinance at 7.85%, which banks can on-lend at 10.35%. The World Bank has recently sanctioned a USD 1.2 bn loan to IIFCL. This loan is designed to support IIFCL’s role to catalyse private financing for PPP projects in infrastructure and to stimulate the development of a long-term local currency debt financing market. The government has also mooted the idea of ‘take-out’ financing which basically involves securitising of infrastructure advances by primary financiers, especially banks, in favour of long-term financial institutions. IIFCL recently indicated that it has deployable funds of around INR 100 bn, a part of which has been raised for 10-25 years. Thus, it is in a position to offer take-out financing. However, it yet remains to be seen whether ‘take-out’ financing will work. It has been tried in the past too when SBI had tied up with IDFC, while IDBI had tied up with LIC for take-out financing. But these arrangements could not work.
Banks shedding their apprehension towards road projects
But do the banks have enough long term resources……
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Anyways, IIFCL’s overall exposure to the roads sector is low compared to the requirements. For the roads sector, the quantum of IIFCL’s disbursal in FY09 stood at INR 12.9 bn, which even though was more than double the INR 5.8 bn achieved in previous year, is still on the lower side. Also, while IIFCL had raised INR 100 bn earlier this year to refinance highways and port projects, it has not received a single proposal till date for funding. The pace of project awards in the time to come will determine whether IIFCL can achieve its target of lending INR 1 tn over the next five years. …and, how much can they support……
Even assuming that banks aided by IIFCL are willing to fund projects, the sheer quantum of funds required means that doubts will continue to linger.
Chart 8: Banking sector exposure to roads and ports sector
0.0
6.0
12.0
18.0
24.0
30.0
0
100
200
300
400
5001998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
(%)
(IN
R b
n)
Roads/ports sector exposure As % of overall infra portfolio
Source: RBI, Edelweiss research
As shown in chart 8, total banking sector exposure to the roads and port sector was ~INR 470 bn at FY09 end. The share of the roads/ports sector in the overall infra portfolio of banks has been hovering around 17% for the past four years.
We attempt a small exercise to ascertain the quantum of roads which can be funded in the current scheme of things. The banking sector exposure to infrastructure at the end of FY09 was ~ INR 2,700 bn.
Assumptions:
1. Banks’ credit to infra sector grows by 32% in FY10.
2. Roads/ports sector share in overall infra portfolio of banks is 17% in FY09; it rises to 20% in FY10 with increased thrust on the sector.
….and more importantly, how much can banks support road projects?
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Table 15: Incremental fund availability to roads sector
Particulars Funding
Banking sector exposure to infra at FY09 end (INR bn) A 2,700
Credit growth assumption for infra sector in FY10 (%) B 32
Banking sector exposure to infra at FY10 end (INR bn) C = A*(1+B) 3,564
Share of roads/ports sector in infra portfolio at FY09 end (%) D 17
Share of roads/ports sector assumed in infra portfolio at FY10 end (%) E 20
Incremental credit available for roads/ports sector in FY10 (INR bn) F = C*E-A*D 254
Assumed share of roads in incremental credit (%) G 75
Incremental credit available for roads in FY10 (INR bn) H = G*F 190
Assumed debt funding for a typical road project (%) I 70
Amount of road projects that can be funded (INR bn) J = H/I 272
Source: RBI, Edelweiss research
Table 15 shows that if the current scenario continues, only ~ INR 272 bn of road projects will be able to get funding. This needs to be juxtaposed with the ambitious plans of the central and state governments as far as the road development scene is concerned. The projects awarded on an EPC business will not face much problems; similarly, annuity based projects are also likely to face comparatively less problems due to absence of revenue risks. However, toll projects will pose a dilemma for banks due to associated toll risks. In any case, bank funding to the sector will have to take a quantum leap. In case the projects come up in a bunch, there is high probability that some of them will face funding delays.
4. Equity commitment still the biggest worry and may emerge as the party
pooper: The bigger worry for BOT projects, in our view, is the equity commitment required. With project sizes increasing and banks asking promoters to put in a higher share of equity, the equity required for projects has increased substantially when compared to projects awarded two-three years ago.
Coupled with this, the downtrend in equity markets (during the past one year) and drying up of private equity options had soured the pitch. PE funds were reluctant to invest as securitising toll fees and selling down to global pension funds as an option had disappeared for some time. Compounding the problem was the fact that the core contracting business (which anyways is a negative operating cash flow business) for most companies had taken a hit last year due to increase in commodity prices, interest rates, and slowdown in order intake, thus limiting the parent’s ability to pump in money. Many companies which had won projects in the 2005-07 period had hoped to sell stake in projects once they were complete and utilize the fund infusion to bid for future projects. Even as these projects became operational/achieved completion, the equity markets plunge poured cold water on such hopes. As per the Economic Survey 2008-09, infrastructure companies raised less money through public and rights issues in 2008-09 compared to the previous year. Public share sales and rights issues fell from INR 870 bn in 2007-08 to INR 147 bn in 2008-09.
Equity commitment from developers’ side may create roadblocks…
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A ray of hope is, however, the signs of recovery in equity markets. Many companies have announced fund raising plans. A summary of the fund raising plans of major infra companies is given below:
Table 16: Fund raising by companies
Company
Fund raising by companies (INR
bn) Status
HCC 4.8 QIP completed
GVK 7.2 QIP completed
Punj Lloyd 6.7 QIP completed
Lanco 7.3 QIP completed
Nagarjuna Construction 3.7 QIP completed
Era Infra 3.0 Warrants allotted
Reliance Infra 39.8 Warrants allotted
Gammon Infrastructure 10.0 Shareholders's approval received
Sadbhav Engg 1.3 Shareholders's approval received
Unity Infraprojects 2.5 Shareholders's approval received
Gammon India 9.6 Board approval received Source: Edelweiss research
However, the amount of equity required for road projects is large. Assuming an equity contribution of 30% for road projects, ~ INR 200-300 bn of funds will be required for the equity commitment in upcoming road projects. Amidst such a scenario, it surely is advantageous for companies with low leverage levels which are in a better position to fulfill their equity commitment.
Possible options to help solve the funding cononundrum
Some of the options that can be tapped to ease funding pangs are:
1. Long-term loans provided on reimbursable basis by the government.
2. Multilateral funding institutions like the Asian Development Bank (ADB), International Finance Corporation (IFC), and DEG, can lend a helping hand.
3. Currently, IIFCL can refinance only commercial banks. The facility can be extended to NBFCs and other institutions lending to the infrastructure sector. Also, IIFCL can finance only 20% of the project cost and 60% of debt has to be repaid in the first 10 years of the project. A removal of these restrictions will ensure that more projects will achieve FC.
4. Currently, ECBs can be used only for refinancing old ECBs at better terms or for undertaking capex. Allowing developers to access ECBs for repaying old rupee term loans on operational projects will help repay high-cost funds and save on interest costs. Also, this will enhance the ability of domestic banks to fund new projects by releasing old funds.
Recent fund raising exercise to make things a bit easy for developers
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Foreign Companies: Changing Scenario The presence of foreign companies in NHDP projects is not a new phenomenon. Companies from US, UK, Malaysia, Singapore, Spain, China, among others, have worked on NHDP projects. Most foreign companies started by doing contracting work on NHAI or ADB funded projects. The current involvement of foreign contractors in NHDP is summarised below:
Table 17: Foreign participation in NHDP
Category No. of contracts Length (Km) Project cost
(INR bn)
On GQ 1 77 4
On NS-EW 12 535 42
On NHDP Phase III 4 375 35
On NHDP Phase V 1 4 3
Total 18 991 84
Through joint ventures
On GQ 2 155 9
On NS-EW 8 324 25
On Others 2 111 10
On NHDP Phase III 3 248 11
On NHDP Phase V 2 530 40
Total 17 1,368 95
Grand Total 35 2,359 179 Source: NHAI, Edelweiss research
Over the years, their participation has been increasing, more so, as far as BOT projects are concerned.
Table 18: Foreign participation in NHDP PPP projects
NHDP Phase Overall no. of projectsNo. of projects awarded to
foreign players
Phase I 17 5
Phase II 33 2
Phase III 43 8
Phase V 8 4
Phase VII 1 0
Total 102 19 Source: NHAI, Edelweiss research
However, foreign participation had acquired a whole new dimension in the past one year. The RFQ norms unveiled in December 2007 restricted bidding to only top 5/6 players and placed greater emphasis on past work done in any infrastructure segment. Foreign companies with the experience of handling huge PPP projects abroad were naturally miles ahead of Indian companies as far as experience was concerned. This, along with the increased size of projects, ensured that tying up with foreign companies became a norm rather than an exception. Various Indian companies partnered foreign companies to bid. These foreign companies include both financial institutions as well as foreign infrastructure majors. Major foreign players involved were CR18G (which had partnered Maytas and NCC), Cintra (which partnered Shapoorji Pallonji & Co.), Isolux Corsan (which partnered Soma
Foreign participation in NHDP has increased over the years
Foreign companies had gained an upper hand as a result of stringent pre-qualification norms last year
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Enterprises), John Laing (which partnered HCC/Sadbhav Engg), Jiangsu Provincial Transportation Engineering Group Co. (which partnered Reliance Infra), Atlantia S.p.A. (which partnered Navinya Buildcon), Galfar (which partnered SREI), and Laing O’Rourke (which partnered DLF and Gayatri). However, the change in eligibility conditions (with NHAI scrapping the top 5/6 bidder rule for all future projects) means that the rules of the game have changed. The new rules imply that anyone meeting the technical qualifications is now eligible to bid and hence the dependence on foreign companies is now over. Most prominent Indian companies have sufficient pre-qualifications in the roads space and hence can bid alone in the future. This means that foreign companies have lost their high priest position and we are back to the pre-2008 days which regularly saw intense competition for projects facilitated by the large number of bidding companies. While foreign companies may see their bargaining power reduced, we do not foresee their absence from NHDP projects going forward. This is because they bring with them valuable experience of handling large PPP projects. The presence of foreign players will be further boosted by the news that the government is looking to come out with mega road projects (more than 500 km of length and costing ~ USD 1 bn) by the end of this year. Road projects of this quantum have not been developed by any private player in India before. Also, the biggest headache related to financing of PPP projects today is the problem related to garnering the requisite equity commitment. This is an area in which foreign partners come handy as their financial strength is larger than most Indian companies. Indian companies are also content since they get to do the EPC work on projects won which boosts their order book. Thus, in future as well, we are likely to see many Indian companies bidding with foreign partners for road projects. However, the reduced power of foreign companies may well have some interesting implications. Since Indian companies get to do the EPC work on projects, they are sometimes comfortable even with a slightly lower IRR on projects since they recoup the benefit through their construction division. However, for foreign companies which do not have any cushion of doing the EPC job, the only incentive is the dividend from the project and, hence, the metric important for them is the dividend IRR from the project. This implies that Indian companies which partnered foreign companies had to bid at a slightly higher IRR than standalone Indian companies. They were still able to win projects since the competition had been restricted to 5/6 players which invariably featured some foreign companies. Now with more standalone Indian companies likely to bid in future, we may well see the competition increasing and IRRs dipping slightly. Or conversely, the amount of grant which companies are asking from NHAI may dip in the future. Foreign players may well have to tone down their expectations a bit going forward.
However, recent regulatory changes have leveled the playing field
Foreign companies will remain an integral part of the roads scene going ahead, particularly with increase in scale and complexity of projects
Edelweiss Securities Limited 35
Construction
Annexure I: Frequent policy changes and their impact on project award Action Agency Time Reasoning Main points EffectNew MCA for National Highways comes into effect
Planning Commission
Sep-06 Finalising a regulatory framework for PPP
Revenue sharing model comes into being
Awarding activity declined in 2006 in anticipation of new MCA
Removal of traffic risk by linking traffic growth and concession period
Award activity also suffered in 2007 due to contentious issues raised in MCA like land acquisition and capping of project returns
Issuance of RFQ and RFP guidelines
Ministry of Finance
Dec-07 Adopting a uniform approach across various infrastructure sectors
Capping number of bidders to 5-6 per project (Clause 3.5.2)
Small companies adversely affected by new guidelines due to increased emphasis on quantum of past work done in any infrastucture sector and larger sizes of new projects
Encouraging only serious players and weeding out non-serious ones
Stringent technical and financial criteria for shortlisting
Companies forced to bid in consortiums to get short-listed
Ensuring better government control on the project award process
Calculation of experience score for each player
Foreign players gain edge with experience in implementing large projects
Court case against the RFQ/RFP norms
National Highway Builder Federation (NHBF)
Mar-08 New norms against small players; promote cartelisation
NHBF argued that the limit on number of bidders is arbitrary in nature and restricts competition.
Project award slows down further
Additional eligibility condition to be included in RFP for BOT projects under NHDP (Clause 2.1.18 of RFP)
MORTH Sep-08 To avoid cartelisation in the interest of efficient price discovery
A bidder shall not be eligible for bidding if the bidder, its member or associate, either by itself or as member of a consortium during the two months preceding the bid due date has been :
Many bidders withdrew from projects they perceived to be less attractive
Pre-qualified and shortlisted for eight or more projects
Some projects left with no bidders at all; many have only 1-2 bidders left
Declared as the selected bidder for four or more projects
Unable to achieve financial closure for two or more projects within the period specified in the respective concession agreements
Scrapping Clause 3.5.2 which restricted bidding to 5-6 players
Ministry of Finance
Sep-08 Speedier implementation of NHDP
Clause 3.5.2 deleted with prospective effect
All companies meeting the technical criteria allowed to bid
Old guidelined continue to be in effect for existing 60 projects
Smaller companies come into the fray again
New substitution procedure in order to comply with Clause 2.1.18 of RFP
NHAI Nov-08 To handle projects left with less than 6 bidders due to withdrawal of bidders while complying with Clause 2.1.18 of RFP
In case number of bidders falls below 6, NHAI will allow other pre-qualified players (in the order of their ranking based on experience score) to bid
Projects left with less than 6 bidders likely to see progress
In case number of pre-qualified players is still less than five, NHAI will make fresh offers to all pre-qualified applicants
Clause 2.1.18 will not be applicable for fresh offers and the project will not be counted in calculations for restricting the number of bids by a particular player
However, the bidders who had not withdrawn and continued to be in the list of shortlisted parties will still attract the restrictionsNHAI also reserves the right to invite bids even if the number of bidders, as per the final list of short-listed bidders, is less than 5
Source: NHAI, Edelweiss research
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Annexure II: Steps taken to attract more interest for NHDP projects
• Scrapping Clause 3.5.2 of RFQ guidelines: This clause which restricted bidding to the top 5-6 bidders was scrapped to ensure enhanced participation from developers. The September 2008 ruling meant that the clause was to be applicable only for the 60 projects originally intended to be awarded in FY09; all future projects were to be open to all players meeting the technical criteria.
However, the clause was later scrapped for those projects as well (out of the 60 projects) which could not be awarded in the initial round, either due to lack of response from bidders or due to regulatory guidelines (e.g., projects which received only single bid). This means that once these projects come up for re-bidding, the restriction will no longer apply to them.
• Revision of project costs: Project cost was increased by 20% where the Detailed Project Report (DPR) was completed in 2006 and by 10% where it was completed in 2007.
• Easing of viability grant funding (VGF) norms: Earlier, the VGF, which is capped at 40% of the project cost, was paid in two phases–first half during the construction period and the other half during the operation period. However, this restriction has been eased with the entire VGF now available during the construction period.
• Restructuring of projects: Projects which failed to receive any bids from developers were restructured by NHAI to reduce their costs. The restructuring involves reducing the number of lanes and/or doing away with the requirement of building structures such as flyovers, over bridges and service roads wherever they could be done away with.
• Increase in concession period: The concession period for many projects was increased to 25-30 years, much higher than the earlier norm of 15-20 years.
• Change in project mode: NHAI has switched over from the BOT-toll model to BOT-annuity/EPC model for certain projects which did not witness good investor interest. For e.g., seven road projects valued at around INR 90 bn in Bihar were converted to BOT-annuity mode from the earlier toll-model.
• Refinancing of projects: The government has allowed IIFCL to provide refinancing support of INR 400 bn to banks by raising tax-free bonds.
• Change in tolling policy: Revision in toll rates to be (3%+ 40%* WPI) against the earlier provision of 40% of WPI as defined in the new MCA. Also, toll charges for structures such as huge bridges, bypasses, or tunnels have now been linked to the cost of construction of these structures.
Also, now toll will be charged on two lane national highways, which were earlier exempt.
Plenty of steps taken by Government to improve project viability
Edelweiss Securities Limited 37
Construction
Annexure III: Work plan for (Aug 09’ – Jul 10’) for Ministry of Roads
Sl. No. State ProjectLength
(km)Project cost
(INR bn)Likely issue
of RFQLikely completion
of pre-qualificationLikely date of issue of RFP
Likely bid due date
1 Karnataka Hospet - Bellary 73 1.6 - - Aug-09 Oct-09
2 MP Rewa to Katni 103 2.6 Aug-09 Nov-09 Nov-09 Jan-10
3 Chattisgarh Bilaspur-Urdawal 197 4.9 Sep-09 Nov-09 Nov-09 Jan-10
4 UP Varanasi-Gorakhpur 209 5.2 Sep-09 Nov-09 Nov-09 Jan-10
5 Orissa Kanaktora-Jharsuguda Jn 68 1.7 Sep-09 Nov-09 Nov-09 Jan-10
6 Orissa Khurda-Nayagarh 60 1.5 Sep-09 Nov-09 Nov-09 Jan-10
7 MP Betul-Maharashtra/ MP border 115 2.9 Sep-09 Nov-09 Nov-09 Jan-10
8 UP Kanpur-Kabrai 123 3.1 Sep-09 Nov-09 Nov-09 Jan-10
9 Karnataka Chitradurga-Shimoga 111 2.8 Sep-09 Nov-09 Nov-09 Jan-10
10 Kerala Kollam - Kazhuthurty 82 2.1 Sep-09 Nov-09 Nov-09 Jan-10
11 Rajasthan Karauli-Dholpur 72 1.8 Sep-09 Nov-09 Nov-09 Jan-10
12 UP/ Uttaranchal Sitarganj-Bareilly 87 2.2 Sep-09 Nov-09 Dec-09 Jan-10
13 MP Bamitha-Bela 141 3.5 Sep-09 Nov-09 Dec-09 Jan-10
14 UP Aligarh-Kanpur 268 6.7 Sep-09 Nov-09 Dec-09 Feb-10
15 Kerala Kozhikode-Muthanga 118 3.0 Sep-09 Dec-09 Dec-09 Feb-10
16 Karnataka Gundlupet-Kollegal 114 2.9 Oct-09 Dec-09 Dec-09 Feb-10
17 UP Raibareilly -Allahabad 119 3.0 Oct-09 Dec-09 Dec-09 Feb-10
18 Kerala Kozikhode - Palakkad 126 3.2 Oct-09 Dec-09 Dec-09 Feb-10
19 Tamilnadu Thanjavur - Manamadurai 122 3.1 Oct-09 Dec-09 Dec-09 Feb-10
20 Tamilnadu Tiruchirapalli-Kootu Road 135 3.4 Oct-09 Dec-09 Dec-09 Feb-10
21 UP Agra-Aligarh 79 2.0 Oct-09 Dec-09 Dec-09 Feb-10
22 MP Gwalior to MP/UP Border 108 2.7 Oct-09 Dec-09 Dec-09 Feb-10
23 AP Kattipudi-Digmaru 140 3.5 Oct-09 Dec-09 Dec-09 Feb-10
24 Karnataka Shimoga-Mangalore 188 4.7 Oct-09 Dec-09 Dec-09 Feb-10
25 MP Jabalpur-Lakhnadon 74 1.9 Oct-09 Dec-09 Jan-10 Feb-10
26 AP Digmarru-Ongole 255 6.4 Oct-09 Dec-09 Jan-10 Mar-10
27 Kerala Bodimettu - Kundannur 168 4.2 Oct-09 Dec-09 Jan-10 Mar-10
28 Maharashtra Ahmednagar -Pathardi 51 1.3 Oct-09 Jan-10 Jan-10 Mar-10
29 Tamilnadu Dindigul-Karnataka Border 266 6.7 Nov-09 Jan-10 Jan-10 Mar-10
30 Kerala Kollam - Kumily 191 4.8 Nov-09 Jan-10 Jan-10 Mar-10
31 Tamilnadu Viluppuram- Nagapattinam 194 4.9 Nov-09 Jan-10 Jan-10 Mar-10
32 Bihar Ekangarsarai- Jehanabad - Arwal 54 1.4 Nov-09 Jan-10 Jan-10 Mar-10
33 Chattisgarh Raigarh-Sarangah-Saraipali 87 2.2 Nov-09 Jan-10 Jan-10 Mar-10
34 Chattisgarh MP Border-Simga 126 3.2 Nov-09 Jan-10 Jan-10 Mar-10
35 Jharkhand Ranchi - Birmitrapur 210 5.3 Nov-09 Jan-10 Jan-10 Mar-10
36 Jharkhand Ranchi- Nagar Untari 260 6.5 Nov-09 Jan-10 Jan-10 Mar-10
37 MP Mangawa-UP border 52 1.3 Nov-09 Jan-10 Feb-10 Mar-10
38 MP Jabalpur-Mandla-Chilpi 189 4.7 Nov-09 Jan-10 Feb-10 Mar-10
39 Bihar Biharsharif - Barbigha -Mokama 52 1.3 Nov-09 Jan-10 Feb-10 Apr-10
40 Tamilnadu Coimbatore - Karnataka Border 103 2.6 Nov-09 Feb-10 Feb-10 Apr-10
41 MP Sidhi-Sigrauli 115 2.9 Dec-09 Feb-10 Feb-10 Apr-10
42 AP Vijaywada-Badrachalam 170 4.3 Dec-09 Feb-10 Feb-10 Apr-10
43 Bihar Maheshkhut - Saharsa - Purnea 171 4.3 Dec-09 Feb-10 Feb-10 Apr-10
44 HP Kiratpur-Bilaspur 63 1.6 Dec-09 Feb-10 Feb-10 Apr-10
45 Maharashtra Pathri-Nanded 149 3.7 Dec-09 Feb-10 Feb-10 Apr-10
46 Uttaranchal Kashipur-Sitarganj 97 2.4 Dec-09 Feb-10 Feb-10 Apr-10
47 Rajasthan Cittorgarh-Neemach 38 1.0 Dec-09 Feb-10 Mar-10 Apr-10
48 Rajasthan Nimbahera-Pratapgarh 80 2.0 Dec-09 Feb-10 Mar-10 Apr-10
49 Rajasthan Suratgarh-SriGanganagar 75 1.9 Dec-09 Feb-10 Mar-10 Apr-10
50 Rajasthan Jodhpur-Pali 70 1.8 Dec-09 Mar-10 Mar-10 May-10
51 Rajasthan Nagaur-Jodhpur 133 3.3 Dec-09 Mar-10 Mar-10 May-10
52 Rajasthan Tonk-SawaiMadhopur 79 2.0 Jan-10 Mar-10 Mar-10 May-10
53 Rajasthan Sikar-Bikaner 200 5.0 Jan-10 Mar-10 Mar-10 May-10
54 Rajasthan Bikaner-Suratgarh 171 4.3 Jan-10 Mar-10 Mar-10 May-10
55 Rajasthan Fatehpur-Nagaur 171 4.3 Jan-10 Mar-10 Mar-10 May-10
56 Rajasthan Ajmer-Nagaur 161 4.0 Jan-10 Mar-10 Mar-10 May-10
57 Rajasthan Nagaur-Bikaner 117 2.9 Jan-10 Mar-10 Mar-10 May-10
58 Tamil Nadu Vikravandi-Kumbakonam-Thanjavur 165 4.1 Feb-10 Apr-10 Apr-10 Jun-10 Source: MoRTH, Edelweiss research
38 Edelweiss Securities Limited
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Annexure IV: National highway opportunity (phase wise)
• NHDP Phase I: It was approved by the Cabinet Committee on Economic Affairs (CCEA) in December 2000 at an estimated cost of INR 303 bn (1999 prices). It comprises 5,846 km of Golden Quadrilateral (GQ), 981 km of North South-East West (NS-EW) Corridor, 356 km of Port Connectivity, and 315 km of other national highways (NH).
• NHDP Phase II: It was approved by CCEA in December 2003 at an estimated cost of INR 343 bn (2002 prices). It comprises mostly NS-EW Corridor (6,240 km) and other NH of 496 km length. The total length of NSEW corridor is 7,274 km. The total length of other NH stands at 962 km and port connectivity at 380 km.
• NHDP Phase III: The government approved 4/6 laning of 12,109 km of NH on BOT basis at an estimated cost of INR 806 bn under NHDP III. The phase has been approved in two parts i.e., Phase III A of a total length of 4,815 km at an approved cost of INR 330 bn (approved in March 2005) and Phase III B, consisting total length of 7,294 km at an approved cost of INR 476 bn (approved in April 2007).
• NHDP Phase IV: This phase envisages upgradation of about 20,000 km of NH to two-lane paved shoulder (5,000 km under toll and the balance 15,000 km under the annuity mechanism). Around 5,000 km was approved by CCEA in July 2008. However, this phase will be implemented by Ministry of Road Transport.
• NHDP Phase V: This phase was approved by the CCEA in October 2006. It involves six laning of 6,500 km of existing four-lane highways on design-build-finance-operate (DBFO) basis. This includes six laning of 5,700 km of GQ and other stretches at an estimated cost of INR 412 bn (2006 prices).
• NHDP Phase VI: It envisages development of 1,000 km of fully access controlled expressways under the PPP model, following the DBFO approach. It was approved at an estimated cost of INR 167 bn in November 2006.
• NHDP Phase VII: The government has approved, in December 2007, the construction of 700 km of standalone ring roads, bypasses, grade separators, flyovers, elevated roads, tunnels, road over bridges, underpasses and service roads on BOT (toll) mode at an estimated cost of INR 167 bn.
NHDP has 7 phases spanning more than 50,000 kms
Edelweiss Securities Limited 39
Construction
BOT Projects Snapshot
Table 19: Road BOT projects snapshot (projects which have achieved financial closure)
Company IRB IVRCL NCC Gammon Madhucon Sadbhav Gayatri Rel. Infra# GMR
No of road projects 12 3 5 7 4 4 5 5 6
Total project cost (INR bn) 65.6 12.7 25.0 32.3 20.2 20.2 23.3 31.5 32.1
No. of toll projects 12 3 3 3 * 4 3 1 5 3
No. of annuity projects 0 0 2 4 0 1 4 0 3
No. of projects with positive govt grant
0 3 2 2 4 2 3 5 0
No. of projects with revenue share/negative grant
5 0 1 0 0 0 0 0 3
No. of NHAI projects 2 3 4 5 4 1 3 5 6
No. of state/other projects 10 0 1 2 0 3 2 0 0
No. of operational projects 10 0 1 3 1 2 0 1 6
No. of projects under development 2 3 4 4 3 2 5 4 0
Total equity commitment of company as per its stake (INR bn)
10.8 2.1 2.4 4.0 3.6 1.5 2.0 5.6 7.3
Effective equity stake of the company (%)
95.2 100.0 43.5 95.4 86.1 50.7 50.0 100.0 93.9
Source: Company, Edelweiss research
Note: * Mattancherry Bridge project of Gammon has a mix of annuity and toll. We have considered it as a toll project here.
# Excluding the INR 7.8 bn Gurgaon-Faridabad project which has achieved FC
Table 20: Road BOT projects snapshot (projects yet to achieve financial closure) Company IRB Sadbhav GMR IVRCL *No of road projects 4 2 2 1
Estimated project cost (INR bn) 46.7 29.2 33.0 4
No. of toll projects 4 2 1 1
No. of annuity projects 0 0 1 0
No. of projects with positive grant 4 0 1 1
No. of projects with revenue share/negative grant
0 1 1 0
No. of NHAI projects 4 1 1 0
No. of state/other projects 0 1 1 1
Likley equity commitment of company as per its stake (INR bn)
11.5 NA NA NA
Effective equity stake of the company 100% NA NA NA Source: Company, Edelweiss research
Note: * Excluding the Sion-Panvel project where the company is L1.
We have not included the INR 51 bn Western Freeway Sea link project and the INR 6 bn Jaipur-Reengus project in which
Reliance Infra is L1
40 Edelweiss Securities Limited
Construction
THIS PAGE IS INTENTIONALLY LEFT BLANK
Edelweiss Securities Limited 41
Construction
Pioneer in road BOT projects with control over strategic routes IRB Infrastructure (IRB) is a pioneer in the BOT road segment in India with
presence in the space since 1995. Till date, the company has won 18 projects
(spread across ~1,175 km and worth INR 113 bn) of which 10 are currently
operational. It controls strategic and lucrative stretches with 13 projects in
Maharashtra and Gujarat, two of the most economically developed states in India.
The company has a toll road project on all the approach routes to Mumbai and on
three of the four approach routes to Pune. It controls the entire stretch between
Bharuch-Surat-Mumbai-Pune.
Smart planning with an enterprising approach to decision making The company’s strategy revolves around sound planning and then following it up
with aggressive decision making. It has many firsts to its credit–early entry in the
BOT road space, first access controlled six-lane expressway, first project in NHDP-
Phase V, and amongst the first to win a project on revenue sharing basis. This
strategy has paid off; 8 of its 10 operational projects are debt free, while the
company has operating cash flow of ~ INR 5 bn every year.
Integrated approach enables value maximisation IRB’s operations span the entire value chain of BOT projects-construction,
operation, and maintenance–enabling value maximisation. Its EPC arm has
industry leading margins and return ratios and ~ INR 100 bn order book, which
will help EPC revenues grow four-fold between FY09 and FY11E.
Outlook and valuations: Bright prospects; initiating with ‘BUY’ With immense growth opportunities in the roads space, at national and state
levels, we expect IRB to be one of the biggest beneficiaries of the same. Aided by
its strong operating cash flows, the company is likely to be in a sweet spot as far
as winning future projects is concerned. Our sum-of-the-parts-based target price
for the stock is INR 263; BOT projects contribute INR 159/share, EPC arm
contributes INR 87/share, with the balance coming from real estate and cash. We
initiate coverage on the stock with a ‘BUY’ recommendation. On a relative return
basis, the stock is rated ‘Sector Outperformer’ (refer rating page for details).
October 1, 2009
Reuters : IRBI.BO Bloomberg : IRB IN
Absolute Rating BUY
Rating Relative to Sector Outperformer Risk Rating Relative to Sector Low
Sector Relative to Market Overweight Note: Please refer last page of the report for rating explanation MARKET DATA CMP : INR 209
52-week range (INR) : 477 / 79
Share in issue (mn) : 332.4
M cap (INR bn/USD mn) : 69.3 / 1,443.2
Avg. Daily Vol. BSE (‘000) : 642.4 SHARE HOLDING PATTERN (%)
Promoters* : 73.9
MFs, FIs & Banks : 8.2
FIIs : 10.9
Others : 7.0
* Promoters pledged shares : Nil (% of share in issue) RELATIVE PERFORMANCE (%)
Sensex Stock Stock over Sensex
1 month 9.3 (0.3) (10.4)
3 months 18.2 29.1 12.2
12 months 33.2 69.7 38.5
Edelweiss Research is also available on www.edelresearch.com,, Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. Edelweiss Securities Limited
India Equity Research | Construction Initiating Coverage
IRB INFRASTRUCTURE Best in class
EDELWEISS 4D RATINGS
Parvez Akhtar Qazi
+91-22-4063 5405
Financials
Year to March FY08 FY09 FY10E FY11E
Revenue (INR mn) 7,327 9,919 19,050 30,442
Rev. growth (%) 39.5 35.4 92.1 59.8
EBITDA (INR mn) 4,119 4,374 8,039 11,139
Net profit 1,139 1,758 3,341 4,082
Shares outstanding (mn) 332 332 332 332
EPS (INR) 3.4 5.3 10.1 12.3
EPS growth (%) 36.7 54.4 90.0 22.2
P/E (x) 60.9 39.4 20.7 17.0
EV/ EBITDA (x) 20.5 20.6 12.0 10.1
ROAE (%) 11.4 10.5 17.9 18.7
ROACE (%) 9.6 8.4 13.3 14.5
42 Edelweiss Securities Limited
Construction
Investment Rationale
Pioneer in road BOT projects; control of strategic routes displays foresight IRB is a pioneer in the BOT road space in India–the concession agreement of its first venture in the space (Thane–Bhiwandi bypass phase I) was signed as early as September 1995. Since then, it has emerged as one of the leading BOT road majors in the country, having won/been declared lowest bidder in 18 projects (spread across ~1,175 km) till date. The total cost of these 18 projects is estimated at INR 113 bn, with the company expected to put in INR 22.5 bn of equity. While the concession periods of two projects have already expired, 10 projects are currently operational and two are under development. The balance four projects are the ones which the company has recently won/been declared L1. IRB has tolling concessions on 7.56% of the Golden Quadrilateral (GQ), which connects the four metros of Delhi, Mumbai, Chennai, and Kolkata.
Table 1: Project details
Project Project statusTotal cost (INR mn)
Debt (INR mn)
Equity (INR mn)
Internal accruals
(INR mn)
Positive / (Negative) grant
(INR mn)
IRB's stake
(%)IRB's equity
(INR mn)
Mumbai-Pune and NH-4 Operational 13,016 11,814 1,050 152 (9,180) 100.0 1,050
Surat-Bharuch Operational 14,091 12,110 1,981 0 (5,040) 100.0 1,981
Pune-Nashik Operational 737 727 10 0 0 100.0 10
Pune – Sholapur Operational 630 450 180 0 0 100.0 180
Thane Bhiwandi Bypass Operational 1,040 700 340 0 0 100.0 340
Thane Ghodbunder Road Operational 2,463 2,166 297 0 (1,404) 100.0 297
Kharpada Bridge Operational 320 220 100 0 0 100.0 100
Ahmednagar-Karmala-Temburni Operational 368 218 150 0 0 100.0 150
Mohol-Kurul-Kamti-Mandrup Operational 180 110 70 0 0 100.0 70
Kaman Paygaon (Bhiwandi Road) Operational 144 100 44 0 0 100.0 44
Surat-Dahisar Under Devp 28,350 19,560 5,440 3,350 0 90.0 4,896
IRDP Kolhapur Under Devp 4,305 2,580 1,725 0 (270) 100.0 1,725
Goa-Karnataka* Under Devp 8,357 4,546 1,948 0 1,863 100.0 1,948
Amritsar-Pathankot* Under Devp 13,172 8,332 3,571 0 1,269 100.0 3,571
Jaipur-Deoli* Under Devp 16,636 9,503 4,073 0 3,060 100.0 4,073
Talegaon-Amravati* Under Devp 8,549 4,472 1,917 0 2,160 100.0 1,917
Total 112,358 77,609 22,896 3,502 (7,542) 22,352
Bhiwandi-Wada Expired 95 70 25 0 0 100.0 25
Khambatki-Ghat Expired 450 300 150 0 0 100.0 150
Grant Total 112,903 77,979 23,070 3,502 (7,542) 22,526 Source: Company, Edelweiss research
Note: * These projects are yet to achieve FC; we have assumed a D/E ratio of 70:30 here
Edelweiss Securities Limited 43
Construction
Table 2: Concession period of operational/under development projects
Project Length
(km)Concession
period (years) Toll expiry date
Mumbai-Pune and NH-4 206.0 15.00 Aug-19
Surat-Bharuch 65.0 15.00 Jan-22
Pune-Nashik 29.8 18.00 Sep-21
Pune – Sholapur 26.0 16.00 Mar-19
Thane Bhiwandi Bypass 24.0 18.50 May-17
Thane Ghodbunder Road 14.9 15.00 Dec-20
Kharpada Bridge 1.4 17.75 Aug-15
Ahmednagar-Karmala-Temburni 60.0 15.00 Dec-16
Mohol-Kurul-Kamti-Mandrup 33.0 16.00 May-18
Kaman Paygaon (Bhiwandi Road) 22.0 15.00 Dec-13
Surat-Dahisar 239.0 12.00 Feb-21
IRDP Kolhapur 49.9 30.00 Jan-39
Goa-Karnataka 65.1 30.00 FC not achieved
Amritsar-Pathankot 102.0 20.00 FC not achieved
Jaipur-Deoli 148.8 25.00 FC not achieved
Talegaon-Amravati 66.7 22.00 FC not achieved
Source: Company, Edelweiss research More than the number of projects and length of stretches covered by IRB, what is more significant is the strategic importance of the routes for which the company has tolling rights. The choice of projects is a testimony to the management’s vision and excellent understanding of the socio-economic/geographical factors. Of the current 16 projects in the company’s kitty, 13 are in Gujarat and Maharashtra, two of the most economically developed states in India. According to the data compiled by economic research firm Indicus Analytics, these two states boast of four out of India's 10 fastest growing cities. IRB’s projects cover three cities in this list–Surat, Pune, and Mumbai. Of particular importance is Surat, Gujarat’s second largest city and the fastest growing city in India with a growth rate of 11.5% between FY02 and FY07. IRB controls the entire stretch between Bharuch (in Gujarat) and Pune (in Maharashtra), covering the Bharuch-Surat-Mumbai-Pune stretch in between through three projects–Bharuch-Surat, Surat-Dahisar, and Mumbai-Pune. The company has a toll road project on all approach routes to Mumbai. It also has tolling rights on three of the four approach routes to the industrial hub of Pune (it used to collect toll on the fourth route to Pune earlier; the concession period expired in May 2009). The exit points from Mumbai are covered by the Mumbai-Pune Expressway, Kharpada Bridge (Mumbai-Goa highway), Surat–Dahisar project (Mumbai–Surat highway on the Delhi–Mumbai corridor), and Thane Bhiwandi bypass (Mumbai–Nashik highway). Similarly, Pune-Nashik project (Pune-Nashik highway), Pune-Sholapur project (on Pune-Hyderabad highway), and Mumbai-Pune expressway cover three exit points from Pune. Also, the company’s various projects connect important cities/other important routes, thus ensuring that it benefits from the traffic growth due to economic activity in these regions. For e.g., the Thane Ghodbunder road is a major link connecting Mumbai-Ahmedabad NH 8 to Mumbai-Agra NH 3. The Surat-Bharuch project provides connectivity
IRB’s projects connect cities of economic importance like Mumbai, Pune, Surat, Bharuch, etc.
IRB has tolling concession on lucrative and strategic routes
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from Mumbai to Vadodara and further to Ahmadabad. Similarly, the Khambatki Ghat project (for which concession period has ended) was on the Pune-Bengaluru highway and the Pune–Sholapur project is on the Pune-Hyderabad highway.
Fig 1: Map showing IRB’s projects in and around Mumbai
MUMBAI
NASHIK
BHARUCH
SURAT
PUNE
SHOLAPURSATARA
GOA
To Vadodara and Ahmadabad
Pune - Nashik
Thane - Bhiwandi Bypass
To Bengaluru
Kha
rpad
a br idg
e
Surat -
Dahisa
r
Surat - Bharuch
Pune - SholapurKhambatki Ghat
To Hyderabad
Source: Company, Edelweiss research
A brief description of the company’s important projects is given below:
Mumbai-Pune Expressway (MPEW): MPEW is the crown jewel in IRB’s portfolio of projects. The project covers a cumulative 206 km of road-111 km on NH 4 and 95 km on the MPEW. Both these stretches run parallel to each other. The scope of the project involved four laning of a stretch of the existing NH 4 and making value additions to the MPEW. The MPEW was originally constructed by MSRDC on a BOT–toll basis. However, due to the existing toll free NH-4, the toll collection on MPEW was far lower than projected. In 2004, both the stretches were combined and bids invited for development of the entire stretch. IRB emerged the winner in March 2004 and received tolling rights on both the stretches. While tolling began on MPEW in August 2004, that on NH-4 started in September 2006 after completion of work.
Mumbai-Pune Expressway is the most lucrative project in IRB’s portfolio
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Since the project covers both the MPEW and the NH-4 corridors, the company does not face any competition from other competing roads or highways on this route. In FY09, the project contributed 67% of IRB’s overall toll revenues (excluding the Surat-Dahisar project). Surat-Dahisar: The project which involves six laning of the existing four lane stretch between Surat and Mumbai is the biggest project in IRB’s portfolio. This project on NH-8 was won along with Deutsche Bank (which has 10% stake in the project). Surat is the eight largest city in India and a major center for the diamond and textile industries. It is also known as the diamond capital of the world. This project belongs to NHDP Phase V which involves widening of the existing four lane stretches. The developer is allowed to collect toll on the project from the day financial closure is achieved; the construction work goes on simultaneously. This reduces the upfront debt required as the cash generated can be ploughed back during construction period. The company had initially hoped to achieve financial closure on the project in Q3FY09. However, adverse liquidity conditions resulted in a delay of a couple of months and eventually, FC was achieved in January 2009. The company started toll collection on the project on February 20, 2009, and expects to complete construction by August 2011. While the company initially expected to collect a toll of INR 11.5 mn per day, the slowdown has led to actual collections being lower at INR 8.5-9 mn per day. However, the decline in commodity prices has led to a reduction in the project’s EPC cost. IRB expects 20% saving in the construction cost and, hence, believes that the overall impact of lower toll collections is likely to be negligible. We believe the current traffic level on the project represents the worst case scenario with the recession affecting port-bound traffic. With signs of a turnaround, we expect future traffic growth on this stretch to be robust.
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Fig. 2: Dedicated freight corridor (DFC) to spur economic development in the region
PipavavArabianSea
Source: Edelweiss research
Surat-Bharuch: This project, also on NH-8, connects the port cities of Surat and Bharuch. Bharuch is one of the most heavily industrialised cities, not only in Gujarat, but in India as well, with many large chemical plants. The nearby town of Ankleshwar has one of the biggest industrial townships in Asia. The region boasts of manufacturing units of companies like China Light and Power, BASF, Reliance, Tata Group, Aditya Birla Group, Wockhardt, Rallis, Pfizer, Bayer, Glenmark, NTPC, ONGC, GAIL, among others. IRB achieved FC on the project in December 2006 and construction started in January 2007. The project has been completed and toll collection is likely to commence soon. Both the Surat-Dahisar and Surat-Bharuch projects will benefit from the proposed Dedicated Freight Corridor (DFC) between Delhi and Mumbai. IRDP Kolhapur: This is one-of-its-kind project in which IRB is responsible for maintaining the entire arterial road network of Kolhapur city. Kolhapur has one of the highest per-capita incomes for a city in India. Along with cultivation of cash crops like sugarcane, the economy is supported by trading activities in industries like metals and mining, textiles, etc. The company will construct or expand all city roads to four lanes. In lieu, it gets to collect toll for 30 years from all vehicles entering or leaving the city (traffic plying within the city is exempt). The company has also been allotted a 30,000 sq mt commercial plot on a 99 year lease (with an FSI of 2x). The company is
Edelweiss Securities Limited 47
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planning to develop a budget hotel on this plot and is in discussion with a leading hotel chain for this purpose. The company has already paid a negative grant of INR 270 mn for this project. Construction started in January 2009 and is expected to be completed in 24 months.
• Recent projects
IRB has recently won/been declared L1 in four NHAI BOT projects. A brief description of the same is given below: Pathankot-Amritsar: This NHDP Phase III project has a concession period of 20 years with an estimated cost of INR 13.2 bn. The company has sought a grant of INR 1.27 bn for the project from NHAI. It is on NH–15 which connects Kandla port in Gujarat with Pathankot in Punjab and passes through cities like Pathankot, Amritsar, Bathinda, Ganganagar, Bikaner, Jaisalmer, Barmer, etc. Goa/Karnataka border to Panaji: This NHDP Phase III project has a concession period of 30 years with an estimated cost of INR 8.35 bn. The company has sought a grant of INR 1.86 bn for this project from NHAI. It is on NH–4A which connects Belgaum in Karnataka to Panaji. The road passes through Ponda, the fastest growing city in Goa and the industrial centre of the state with many large factories and industrial estates. NH-4A is also used to access state highways which lead to Dharwad and Hubli, both big towns of Karnataka. Jaipur-Deoli: This NHDP Phase III project has a concession period of 25 years with an estimated cost of INR 16.6 bn. The company has sought a grant of INR 3.06 bn for this project from NHAI. It is on NH–12 which connects Jabalpur (in Madhya Pradesh) to Jaipur. The eastern terminal is in Jabalpur at the intersection of NH-7 and the western terminal is in Jaipur at the intersection of NH-8. The road passes through cities like Jabalpur, Bhopal, Kota, etc. Talegaon–Amravati: This NHDP Phase III project has a concession period of 22 years with an estimated cost of INR 8.5 bn. The company has sought a grant of INR 2.16 bn for this project from NHAI. It is on NH–6 which is a busy highway connecting Hazira in Gujarat to Kolkata. The road passes through important cities like Surat, Nagpur, Raipur, Kharagpur, etc. The route meets other important highways like NH-8 (Delhi-Mumbai), NH-3 (Agra-Mumbai), NH-2 (Delhi-Kolkata), etc.
Smart planning backed by an enterprising approach to decision making Over the years, IRB’s strategy has revolved around sound planning and then following it up with aggressive decision making. For e.g., it was one of the first companies to leave the relative safety of funded construction projects and venture into BOT projects. The upshot was the comparatively less competition in earlier BOT projects, which resulted in higher IRRs. Also, the wealth of experience gained by the company in BOT projects over the past 14 years is invaluable. The company also developed India’s first six lane access controlled expressway-the Mumbai-Pune Expressway (MPEW)-linking two major cities of the country. While it had to pay a staggering sum of INR 9.18 bn way back in 2004 as grant to the government, the gamble has paid off handsomely. Today, MPEW occupies a place of pride in IRB’s portfolio, contributing 67% of the company’s toll collection in FY09 (excluding the Surat-Dahisar project). The IRR of the project is 100% plus.
IRB has recently bagged 4 projects worth ~ INR 46 bn
IRB has been at the forefront of new initiatives in the road PPP scene
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Again, the company bagged the Surat-Bharuch project which was the first project in NHDP Phase V. To win this project, it paid the highest ever negative grant of INR 5.04 bn to NHAI. The project strengthened the company’s position on the dense NH-8 route which connects Delhi to Mumbai. Further, the company won the Surat-Dahisar project in January 2008. This was one of the first projects to be awarded under the new MCA where the revenue sharing concept was introduced. The company agreed to pay NHAI 38% of the toll collected in the first year of the project. NHAI’s share will increase by 1% every year. Finally, IRB won the project for upgrading and maintaining the entire road network of Kolhapur city for a period of 30 years. The company has the right to collect toll on all nine entry points to the city. This again is an innovative concept and the company is likely to gain a significant first mover advantage from this project. The company has won the maximum number of NHAI BOT projects in the past one year among developers. This is a testimony to the company’s ability to adjust to the dynamic environment amidst the fast changing regulatory framework and economic scenario. The achievement is magnified when viewed in the context of slow pace of project award over the past 18 months.
All this while, IRB’s enterprising approach has been backed by sound understanding and rational decision making with regards to project economics. This is evident in the relatively small difference between the company and its closest competitor for various projects.
Table 3: Difference between company’s bid and closest bid Project Bidding parameter IRB's bid Closest bid Difference
Mumbai - Pune Negative grant INR 9180 mn INR 9100 mn INR 80 mn
Bharuch – Surat Negative grant INR 5040 mn INR 4800 mn INR 240 mn
Thane – Ghodbunder Negative grant INR 1410 mn INR 1390 mn INR 20 mn
Surat – Dahisar Revenue share 38.0% 35.5% 2.5%
Goa-Karnataka VGF INR 1863 mn INR 1875 mn INR 12 mn
Amritsar-Pathankot VGF INR 1269 mn INR 1620 mn INR 351 mn
Jaipur-Deoli VGF INR 3060 mn INR 3150 mn INR 90 mn
Talegaon-Amravati VGF INR 2160 mn INR 2261 mn INR 101 mn Source: Company, Edelweiss research
In fact, the amount of VGF quoted by the company for the Goa-Karnataka project and the Jaipur-Deoli project is 39.6% and 38.6%, respectively. This is close to the maximum VGF of 40% that is permitted by NHAI. This is a clear indication that IRB has benefited from less competition for NHAI projects in the past six-eight months. Many developers had stayed away from bidding for these projects due to problems in equity commitment; however, this translated into a boon for cash rich companies like IRB. Also, the thought process is also evident in the timing and size of projects won by the company. IRB initially started with smaller projects in its home state of Maharashtra. As it went up the “learning curve”, it spread its wings to the neighboring state of Gujarat. Its projects were finely spread out, giving the company a chance to hone its execution skills as well as build up financial muscle. With the company achieving critical mass now, it has diversified in to other states as well with the recent project awards.
Sound economic sense to back enterprising approach
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Construction
Chart 1: BOT project wins over the years
Thane-B
hiw
andi
Kharp
ada B
ridge, B
hiw
andi
Wada
Kham
batk
i Ghat,
Kam
an
Payg
aon
NKT
MM
K, Pu
ne-S
hola
pur
Pune N
ash
ik
MPE
W
Thane G
hodbunder
Sura
t Bharu
ch
Sura
t D
ahis
ar
IRD
P Kolh
apur
4 N
ew
pro
ject
s
0
10,000
20,000
30,000
40,000
50,000
FY96 FY98 FY99 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10
Pro
ject
si
ze (
INR
mn)
Source: Company, Edelweiss research
The benefit of the gradual capacity build up as well as IRB’s ability to bag attractive projects is evident from the fact that of the 10 operational projects, the entire debt has been repaid in eight projects. This provides a significant benefit to the company in terms of free cash flows available from these projects every year. These eight projects contributed toll revenues of INR 1.25 bn in FY09. With no interest costs to be paid over the balance life of these projects and only O&M costs to be met, these projects give the company a big advantage over its peers (most of whom are predominantly contractors with negative operating cash flows from the contracting business). This is likely to enable the company to meet its equity commitment for newly won projects as well as to bid for more projects without resorting to equity dilution. This achievement needs to be viewed in the context of the fact that many of these projects were financed at a very high D/E structure, showing the company’s ability to find extremely viable projects which find favour with lenders too. Table 4: Funding structure of some projects Project Debt/Equity ratio
Mumbai - Pune 11.3
Thane – Ghodbunder 7.3
Pune-Nashik 72.7 Source: Company, Edelweiss research
With both the Thane-Ghodbunder and Pune-Nashik projects being debt free, the company is sure to make returns on the projects keeping in mind the relatively small equity that it had to contribute for the project.
Gradual capacity build-up ensures ample operating cash flows for future opportunities
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Integrated approach enables value maximisation IRB’s operations span the entire value chain of BOT projects-construction, operation, and maintenance. Having all the activities under one roof enables the company maximise the value from its operations. The group has been involved in the construction or operation and maintenance of approximately 1,200 km of highways and roads in India. It is the only Indian company with competencies for undertaking operation and maintenance activities of tunnels. The group’s construction activities are undertaken through a subsidiary, Modern Road Maker (MRM). Along with being responsible for construction of in-house projects, it bids and executes outside projects as well (on a cash contract basis). IRB’s expertise in road construction is evident from the fact that many of its projects have been completed ahead of schedule as is evident from the table below: Table 5: Early completion of projects
Project Stipulated construction period
Actual construction period
Pune - Sholapur 24 months 21 months
Kharpada Bridge 24 months 18 months
Ahmednagar-Karmala-Temburni 30 months 21 months
Khambhatki Ghat 24 months 21 months
Kaman Paygaon (Bhiwandi Road) 24 months 14 months
Bhiwandi Wada 24 months 12 months
Mohol-Kurul-Kamti-Mandrup 18 months 12 months Source: Company, Edelweiss research
This is a far cry from the usual delays associated with road projects which suffer from problems in land acquisition. Also, the company’s strategic thinking while running its various business segments is evident in the way it runs its construction business as well. It owns a fleet of sophisticated construction equipment which enables it to complete projects without any subcontracting. Also, it has a practice of acquiring mines for its construction division. This helps it save substantial cost as far as aggregates required in road construction are concerned (cost savings of ~ INR 100/tonne compared to open market prices). The upshot of the efforts put in by the company is evident in the high margins and return ratios of the EPC arm, MRM. MRM posted EBITDA margins of 17.9% in FY09, well above the industry average. This is all the more significant considering that contracting margins for most companies declined in FY09 due to high commodity prices (MRM’s margins declined 220bps compared to previous year). Similarly, the average ROE of MRM has been above 30% over the past couple of years which again is much higher compared to its peers. MRM had a substantial order book of INR 56.6 bn at Q1FY10 end. This does not include the EPC work on the four new projects. Break up of the order book is as follows:
Development, construction, operations & maintenance – all under one roof
IRB’s construction division has high profitability and superior return ratios
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Table 6: Order book of MRM Order book composition Amount (INR bn)
EPC work for under development BOT projects 29
O&M work on completed BOT projects 26
Funded projects 2
Total 57 Source: Company, Edelweiss research The EPC work on the under development BOT projects accrues primarily from two projects–Surat-Dahisar and IRDP Kolhapur. Both these projects will be completed in the next two years. On the other hand, O&M work on completed BOT projects is needed to be done over the remaining life of the projects (7-8 years on an average). The funded projects will be completed in the next 30 months.
Immense growth opportunities available Of the 18 projects won by the company till date, six have been NHAI projects while the balance were state projects. This shows that the company is equally adept at spotting the right opportunity, be at the state or national level. The company has possibly the biggest portfolio of state road PPP projects amongst developers. This puts it in a premium position as far as future growth opportunities are concerned. While the opportunity at the NHAI level has been discussed in detail, some upcoming projects at the state level are mentioned below:
Table 7: Upcoming state level opportunities for IRB Sl. No. Project Cost (INR mn)
Gujarat State Road Development Corporation (GSRDC)
1 Improvement and widening of Bhuj- Bhachau road on BOT basis 2,569
2 Improvement and widening of Nakhatrana ‐ Dayapar ‐ Panendro road on BOT basis 1,947
3 Four laning of Sarkhej- Vataman- Bhavnagar road on BOT basis 9,007
Government of Rajasthan
4 Modernisation and computerisation of border check posts at 13 locations in the state on BOT basis 5,000
Maharashtra State Road Development Corporation (MSRDC)
5 Construction of new network of roads and bridges in and around Baramati city on BOT basis 1,500
Maharashtra PWD
6 Four laning of Manor- Wada- Bhiwandi road on BOT basis 2,800
7 Four laning of Themburni- Kurduwadi-Barshi-Yedshi road on BOT basis 3,414
8 Four laning of Mohol- Mandrup- Kamathi road on BOT basis 1,895 Source: Company, Edelweiss research
Development of Sindhudurg greenfield airport: Venturing into a new arena
IRB has recently won a project for designing, building, financing, and operating a greenfield airport in Sindhudurg district, Maharashtra. The project was awarded by the Maharashtra Industrial Development Corporation (MIDC). It has a concession period of 95 years with a construction period of 18 months from the date of fulfillment of the precedent conditions. IRB won the project by paying an upfront premium of INR 207 mn. The total land required for the project is about 650 acres; the same has been already acquired by MIDC. Of this, only ~350 acres will be required for airport development; the balance will be available for commercial use by the company. The overall project cost (including the upfront premium) is expected to be INR 1.75 bn.
Robust order book to propel EPC revenues going ahead
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Fig. 3: Location of proposed airport
Source: Edelweiss research
Sindhudurg district lies on the Maharashtra-Goa border and is an emerging tourist hotspot. It has been declared a tourist district with tourism promotion activities qualifying for special incentives and benefits. It is famous for its beaches, backwaters, waterfalls, and pilgrimage centers. The district has good road and rail connectivity with both Goa and Mumbai. NH-17 passes through the area; with seven railway stations, a 103 km stretch of Konkan Railway line also passes through the district. The proposed airport is around 80 km from the existing Dabolim Airport in Goa (which is primarily a naval airport). The company expects to capture part of the existing traffic from the Dabolim Airport (which is reaching saturation point), particularly that catering to North Goa. With the Maharashtra government keen on promoting the picturesque Konkan coast, potential tourism development of the Sindhudurg district will also help the company in the long term.
Real estate plans will bear fruits only in long term The IRB Group ventured into the real estate development space through its subsidiary, Aryan Infrastructure (AIIPL). It proposes to develop an integrated township spread over 1,400 acres along the Mumbai-Pune Expressway. It has already completed land acquisition of ~ 1,250 acres in Mauje Taje and Mauje Pimploli taluka in Pune at an investment of INR 1.8 bn. The balance land is proposed to be acquired in the future. Considering the slowdown in the realty space, the company has reevaluated its plans. It expects the township to be developed only over a long period of time once the realty market picks up. Currently, the company is focusing on getting various regulatory approvals in place for the same.
Airport and real estate venture – long term game plan
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Valuation We have valued IRB using the sum–of-the-parts (SOTP) approach, applying the following methodology across its two main business segments:
• BOT segment: BOT projects have been valued by using the DCF methodology. We have used the ‘free cash flows to equity’ method by using a cost of equity of 13% (our risk free rate is 7%; we have assumed an equity risk premium of 6%). For projects under development, we have used a higher equity cost of 13.5% to take into account execution risks. IRB’s Beta is 0.8. However, considering the stock’s limited trading history, we have used a Beta of 1.0.
Table 8: BOT project valuation
ProjectTotal value
(INR mn)IRB's stake
(%) IRB's value
(INR mn)Value per
share (INR)Equity (INR
mn)IRB's equity
(INR mn)Implied
P/BV
Mumbai-Pune and NH-4 17,927 100 17,927 53.9 1,050 1,050 17.1
Surat-Bharuch 6,976 100 6,976 21.0 1,981 1,981 3.5
Pune-Nashik 2,243 100 2,243 6.7 10 10 224.3
Pune – Sholapur 1,284 100 1,284 3.9 180 180 7.1
Thane Bhiwandi Bypass 4,513 100 4,513 13.6 340 340 13.3
Thane Ghodbunder Road 3,141 100 3,141 9.5 297 297 10.6
Kharpada Bridge 509 100 509 1.5 100 100 5.1
Ahmednagar-Karmala-Temburni 820 100 820 2.5 150 150 5.5
Mohol-Kurul-Kamti-Mandrup 635 100 635 1.9 70 70 9.1
Kaman Paygaon (Bhiwandi Road) 562 100 562 1.7 44 44 12.8
Surat-Dahisar (2) 90 (2) (0.0) 5,440 4,896 (0.0)
IRDP Kolhapur 2,509 100 2,509 7.5 1,725 1,725 1.5
Goa-Karnataka 926 100 926 2.8 1,948 1,948 0.5
Amritsar-Pathankot 4,321 100 4,321 13.0 3,571 3,571 1.2
Jaipur-Deoli 3,429 100 3,429 10.3 4,073 4,073 0.8
Talegaon-Amravati 3,087 100 3,087 9.3 1,917 1,917 1.6
Total 52,880 52,880 159.1 22,896 22,352 2.4 Source: Edelweiss research
• EPC segment: The EPC business carried through MRM has been valued by using the P/E
approach (in line with our methodology for valuing the contracting business of other construction companies). We have valued MRM based on a P/E of 16x for its FY11E PAT, in line with its peers. We believe we have been conservative considering MRM’s margin profile and return ratios are superior to others.
• Real estate and cash: We have valued the real estate investments at book value. We have assumed that IRB will be able to deploy the cash available at parent company level in future BOT projects which will generate returns equivalent to a P/BV multiple of 1.5.
Our sum-of-the-parts-based target price for the stock is INR 263; we have not considered the Sindhudurg airport in our valuations since we believe it is at a preliminary stage and we will wait for more clarity on the same. We are positive about the company and initiate coverage on the stock with a ‘BUY’ recommendation. On a relative return basis, the stock is rated ‘Sector Outperformer’ (refer rating page for details).
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Table 9: Valuations
Construction business
Contracting PAT FY11E (INR mn) 1,817
Outstanding no of shares of IRB (mn) 332
Contracting EPS FY11E (INR/share) 5.5
P/E (Times) 16
Value per share (INR/share) 87
BOT projects
DCF value of projects (INR mn) 52,880
Outstanding no of shares of IRB (mn) 332
Value per share (INR/share) 159
Real estate
Book value of investments (INR mn) 1,800
Value per share (INR/share) 5
Cash
Cash and liquid investments at parent company level (INR mn) 2,399
P/BV multiple for cash (Times) 1.5
Value derived from investment of cash (INR mn) 3,598
Value per share (INR/share) 11
Total value per share (INR) 263
Current share price (INR) 209
Upside (%) 25.7
RECO BUY
IRB Infra
Source: Edelweiss research
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Key Risks
Geographical concentration with 13 projects in two states Of the 16 projects in IRB’s kitty, 13 are in the states of Maharashtra and Gujarat. This exposes the company to the risk of geographical concentration with revenues from toll projects dependent on economic activity in these states.
Inherent risk associated with BOT-toll projects With the company focusing on PPP projects, it is exposed to risks like those associated with gaining right-of-way on land stretches, execution risk, ‘force majeure’ risk, etc. Also, the focus on toll projects exposes it to the unpredictability of traffic growth, etc.
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Company Description IRB is an infrastructure development and construction company with wide experience in the roads and highways sector. Till date, it has won/been declared L1 in 18 road projects. It is primarily a holding company; various BOT projects as well as the construction activities of the IRB Group are handled by the company’s subsidiaries. The IRB Group started operations in 1977 when Ideal Road Builders (IRBPL) was incorporated to undertake the road contracting business. Between 1977 and 1995, it completed several projects in the roads and highways sector. In 1995, the group ventured into the BOT space through the Thane–Bhiwandi bypass project. The group entered the real estate development space through its subsidiary Aryan Infrastructure. It plans to develop a township along the Mumbai-Pune expressway. The current structure of the group is as follows:
Fig. 4: IRB group structure
Modern Road Makers (MRM)(Engineering & construction arm)
Ideal Road Builders (IRBPL)
Aryan Toll Road (ATRPL)(Pune-Solapur BOT) - 29.81 km-NH 9)
ATR Infrastructure (ATR Infra)(Pune-Nashik BOT) - 29.81 km-NH 50
Mhaiskar Infrastructure (MIPL)(Mumbai-Pune BOT) - 206 kms - MPEW & NH4
Thane Ghodbunder Toll Road (TGTRPL)(Thane Ghodbunder Toll Road BOT) - 14.90 kms
IDAA Infrastructure (IDAA)(Bharuch - Surat BOT) 65 kms - NH 8
NKT Road & Toll (NKT)(Ahmednagar - Karmala - Tembhumi Road) - 60 kms
IRB Infrastructure (IRB Infra)(Bridge over Patalaganga river-Kharpada BOT) 1.4 kms
MMK Toll Road (MMK)(Mohol-Kurul-Kamati-Mandrup Road) - 33 kms SH 149
IRB Surat Dahisar Tollway (IRBSDTPL)(Surat-Dahisar Road) - 239 kms NH-8
IRB Kolhapur Integrated Road Development Company(IRBKIRDCPL) Integrated road development in the city of Kolhapur
Aryan Infrastructure Investments (AIIPL)(Land bank adjoining the MPEW)
Aryan Hospitality(AHPL)
Real Estate
Roads
Thane Bhiwandi Bypass BOT - 25 kmsKaman Paygaon BOT - 22 kms - SH4
IRB Infrastructure Developers
Notes:1. The company’s 100% in MIPL is made up of the following: a) 74% held by IRB b) 26% held by IRBPL
2. The company’s 100% in TGTRPL is made up of the following: a) 74% held by IRB b) 26% held by IRBPL
3. The company’s 100% in IDAA is made up of the following: a) 53.29% held by IRB b) 10.81% held by ATRPL c) 23.75% held by ATR Infra d) 12.05% held by IRBPL
4. The company’s 100% in NKT is made up of the following: a) 53.33% held by IRB b) 46.67% held by IRBPL
5. The company’s 100% in IRB Infra is made up of the following: a) 80.15% held by IRB b) 19.85% held by IRBPL
6. The company’s 100% in MMK is made up of the following: a) 100% held by IRBPL
7. The company’s 100% in IRB Kolhapur integratedRoad Development Company is made up of the following: a) 80% by IRB b) 10% by MRMPL c) 10% by ATR Infra
100%
100%
100%
100%
100%1
100%2
100%3
100%4
100%5
100%6
90%
100%7
66%
100%
Source: Company, Edelweiss research
Edelweiss Securities Limited 57
Construction
Financial Outlook
Robust top line growth due to sharp uptick in construction and toll revenues
We expect IRB to be on a high growth trajectory in the next couple of years. This will be primarily due to the rapid growth in MRM’s revenues; also, completion of the Surat-Bharuch project will give a leg-up to toll collections going forward. With the company winning/being declared L1 in four projects, the EPC division is likely to see heightened activity over the next two-three years. Apart from the new projects, there is substantial amount of work left to be done on the Surat-Dahisar and IRDP Kolhapur project over the next two years. We expect MRM’s revenues to more than triple from INR 5.4 bn posted in FY09 over the next two years. The toll collection is also likely to post a sharp jump in FY10 due to completion of the Surat-Bharuch project as well as increase in contribution from the Surat-Dahisar project (which was operational for less than two months in FY09). After FY10, the toll collection is expected to post a steady growth till the four projects recently bagged are completed, which is some time away. Chart 2: Consolidated revenues and revenue growth–Impressive
0.0
20.0
40.0
60.0
80.0
100.0
0
7
14
21
28
35
FY07 (P) FY08 FY09 FY10E FY11E
(%)
(IN
R b
n)
Revenues Revenue growth
Source: Company, Edelweiss research
EBITDA margins expected to decline slightly; PAT margins to follow suit
The increase in contribution from the EPC division going forward is likely to exert a downward pressure on overall EBITDA margins due to lower profitability of the EPC division. We expect overall EBITDA margins to decline from 44.1% in FY09 to 36.6% in FY11E.
Toll collection as well as EPC revenues to show a sharp jump in future
Increase in EPC segment share in revenues to hurt margins
58 Edelweiss Securities Limited
Construction
Chart 3: Share of BOT and EPC segment in revenues
0
5
10
15
20
25
FY07 (P) FY08 FY09 FY10E FY11E
(IN
R b
n)
Toll revenues MRM's revenues
Source: Company, Edelweiss research
The company’s PAT margins are also likely to follow the same trend as increased share of MRM in overall top line will result in higher effective tax rate; BOT projects pay only a MAT rate (since they get Sec 80 (IA) benefits). This will push up the tax rate at the overall company level. We expect overall PAT margins to decline from 17.9% in FY09 to 13.7% in FY11E.
Chart 4: Margins to decline going ahead
0.0
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48.0
60.0
0
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6
9
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FY07 (P) FY08 FY09 FY10E FY11E(%
)
(IN
R b
n)
PAT EBITDA EBITDA margin PAT margin Source: Company, Edelweiss research
Phased development to keep leverage levels in control
The full benefit of the measured approach towards BOT projects is evident in the company’s leverage level. Despite being a developer, IRB’s net debt-equity stood at 1.2x at FY09 end. The company had >INR 5 bn in cash and liquid investments at FY09 end. Even though IRB is expected to be in intense project execution mode over the next couple of years, we do not expect the leverage levels to go beyond 2x over the next three years. The company will benefit from the eight debt-free BOT projects that it possesses; also, toll collection from Surat-Bharuch and Surat-Dahisar projects will ease the cash flow situation.
Leverage levels are low considering IRB is a developer
Edelweiss Securities Limited 59
Construction
Chart 5: Net worth (INR bn) and D/E ratio
0.0
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4.0
6.0
8.0
10.0
0
6
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18
24
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FY07 (P) FY08 FY09 FY10E FY11E
(x)
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R b
n)
Net worth Net debt/equity ratio Source: Company, Edelweiss research
Comfortably placed as far as funding needs are concerned
IRB’s pending equity commitment at FY09 end for under development projects was ~ INR 4.0 bn (consisting of INR 2.6 bn for Surat-Dahisar and the balance for IRDP Kolhapur). Apart from this, the company will need ~ INR 11.6 bn as equity for the four new projects. Against this, the company had ~ INR 5.2 bn of cash and liquid investments at FY09 end. It will also have strong operating cash flows at its disposal (cumulative cash flows > INR 17 bn over the next three years). This leads us to believe that IRB is in a comfortable position as far as meeting its equity commitment for new projects is concerned. Table 10: Funding summary (INR mn)
FY09 FY10E FY11E
Use of funds
Capex 8,069 11,681 23,541
Investment (877) 0 0
Non-cash working capital 1,200 (590) 512
Total 8,393 11,091 24,052
Funded through
Equity 0 0 0
Debt 4,646 7,757 12,933
Minority interest 318 128 83
Grant & Misc. expenses 6 0 2,025
Internal accruals 2,348 4,516 5,712
Decrease in cash 1,074 (1,310) 3,299
Total 8,393 11,091 24,052 Source: Company, Edelweiss research
In fact, the company has indicated that even after the recent win of four projects, it is still comfortably placed to bid for future projects. It indicated that it can take projects up to INR 65 bn with its current financial position; it still has space to bid for additional projects worth ~ INR 20 bn. The company has stated that equity dilution will be the last option that it will resort to if needed; it can sell stake in various SPVs if the need arises.
Enough funds at disposal to take care of all future obligations
60 Edelweiss Securities Limited
Construction
Financial Statements Income statement (INR mn)
Year to March FY07* FY08 FY09 FY10E FY11E
Income from operations 5,251 7,327 9,919 19,050 30,442
Direct costs 2,036 2,533 4,682 9,926 17,971
Employee costs 206 341 425 679 833
Other expenses 199 334 438 406 498
Total operating expenses 2,440 3,208 5,545 11,011 19,303
EBITDA 2,811 4,119 4,374 8,039 11,139
Depreciation and amortisation 862 1,016 1,144 1,758 2,214
EBIT 1,948 3,103 3,230 6,281 8,926
Interest expenses 1,387 2,006 1,483 2,395 3,829
Other income 228 569 402 540 481
Profit before tax 1,064 1,666 2,149 4,426 5,578
Provision for tax 261 400 378 957 1,413
Core profit 804 1,266 1,772 3,469 4,165
Profit after tax 804 1,266 1,772 3,469 4,165
PAT before minority interest 804 1,266 1,772 3,469 4,165
Less: Minority interest 184 126 13 128 83
Profit after minority interest 620 1,139 1,758 3,341 4,082
Equity shares outstanding (mn) 247 332 332 332 332
EPS (INR) basic 2.5 3.4 5.3 10.1 12.3
Diluted shares (mn) 247 332 332 332 332
EPS (INR) fully diluted 2.5 3.4 5.3 10.1 12.3
CEPS (INR) 5.9 6.9 6.8 14.0 17.4
Dividend per share 0.0 0.0 1.7 1.5 1.5
Dividend payout (%) 0.0 0.0 37.1 17.5 14.3
Common size metrics- as % of net revenues
Year to March FY07* FY08 FY09 FY10E FY11E
Operating expenses 46.5 43.8 55.9 57.8 63.4
EBITDA margins 53.5 56.2 44.1 42.2 36.6
Depreciation and Amortization 16.4 13.9 11.5 9.2 7.3
Interest expenditure 26.4 27.4 14.9 12.6 12.6
Other income 4.4 7.8 4.1 2.8 1.6
Tax 5.0 5.5 3.8 5.0 4.6
EBIT 37.1 42.3 32.6 33.0 29.3
Net profit margins 15.3 17.3 17.9 18.2 13.7
Annualised growth metrics (%)
Year to March FY07* FY08 FY09 FY10E FY11E
Revenues 19.5 39.5 35.4 92.1 59.8
EBITDA 55.2 46.5 6.2 83.8 38.6
Net profit 58.2 57.5 40.0 95.8 20.0
EPS (4.8) 36.7 54.4 90.0 22.2 * Proforma number
Edelweiss Securities Limited 61
Construction
Balance sheet (INR mn)
As on 31st March FY07* FY08 FY09 FY10E FY11E
Equity capital 2,473 3,324 3,324 3,324 3,324
Reserves & surplus 1,297 12,883 13,977 16,735 20,233
Shareholders funds 3,770 16,207 17,301 20,059 23,557
Minority interest 1,115 281 599 727 811
Secured loans 22,404 20,110 24,741 32,615 45,548
Unsecured loans 2,776 102 117 0 0
Borrowings 25,180 20,212 24,859 32,615 45,548
Net deferred tax (8) 26 182 182 182
Grant 0 0 0 0 2,025
Sources of funds 30,056 36,727 42,940 53,583 72,123
Gross block 24,754 22,189 24,601 50,827 74,368
Depreciation 381 3,340 4,440 6,198 8,411
Net block 24,372 18,848 20,161 44,629 65,956
Capital work in progress 46 8,889 14,545 0 0
Total fixed assets 24,418 27,737 34,707 44,629 65,956
Investments 413 1,985 1,108 1,108 1,108
Inventories 92 502 2,054 907 1,774
Sundry debtors 1,437 118 130 256 467
Cash and equivalents 3,703 5,222 4,147 5,457 2,158
Loans and advances 2,135 3,748 3,995 5,417 7,724
Total current assets 7,366 9,589 10,326 12,038 12,123
Sundry creditors and others 1,030 1,049 1,303 2,122 3,576
Provisions 1,296 1,551 1,908 2,080 3,499
Total CL & provisions 2,326 2,599 3,210 4,203 7,075
Net current assets 5,040 6,990 7,116 7,836 5,049
Miscellaneous expenses not written off 184 16 10 10 10
Uses of funds 30,056 36,727 42,940 53,583 72,123
Book value per share (INR) 15.2 48.8 52.1 60.4 70.9
Cash flow statement (INR mn)
Year to March FY07* FY08 FY09 FY10E FY11E
Net profit N.A. 1,139 1,758 3,341 4,082
Add: Depreciation N.A. 1,016 1,144 1,758 2,214
Add: Deferred tax N.A. 32 155 0 0
Add: Others N.A. 126 (638) (455) (500)
Gross cash flow N.A. 2,314 2,419 4,644 5,795
Less: Changes in W. C. N.A. 431 1,200 (590) 512
Operating cash flow N.A. 1,883 1,219 5,234 5,284
Less: Capex N.A. 6,278 8,069 11,681 23,541
Free cash flow N.A. (4,395) (6,850) (6,447) (18,257)
Cash flow metrices
Year to March FY07* FY08 FY09 FY10E FY11E
Operating cash flow N.A. 1,883 1,219 5,234 5,284
Financing cash flow N.A. 16,415 5,046 7,885 15,041
Investing cash flow N.A. (7,849) (7,193) (11,681) (23,541)
Net cash flow N.A. 10,449 (927) 1,438 (3,215)
Capex N.A. (6,278) (8,069) (11,681) (23,541)
Dividends paid N.A. 0 652 583 583
Share issuance / (buyback) N.A. 10,899 0 0 0* Proforma number
62 Edelweiss Securities Limited
Construction
Profitability and liquidity ratios
Year to March FY07* FY08 FY09 FY10E FY11E
ROAE (%) 16.5 11.4 10.5 17.9 18.7
ROACE (%) 6.6 9.6 8.4 13.3 14.5
Current ratio 3.2 3.7 3.2 2.9 1.7
Debtors (days) 100 39 5 4 4
Inventory days 16 49 119 92 36
Average working capital turnover (x) 1.0 1.2 1.4 2.5 4.7
Average capital turnover ratio (x) 0.2 0.2 0.2 0.4 0.5
Net debt/ Equity 5.7 0.9 1.2 1.4 1.8
Debt/Equity 6.7 1.2 1.4 1.6 1.9
Creditor days 185 150 92 63 58
Cash conversion cycle (68) (62) 32 33 (17)
Debt/EBITDA 9.0 4.9 5.7 4.1 4.1
Adjusted debt/Equity 6.7 1.2 1.4 1.6 1.9
Operating ratios
Year to March FY07* FY08 FY09 FY10E FY11E
Total asset turnover 0.2 0.2 0.2 0.4 0.5
Fixed assets t/o (x) 0.2 0.2 0.5 0.4 0.5
Equity turnover 1.4 0.7 0.6 0.9 1.3
Dupont analysis
Year to March FY07* FY08 FY09 FY10E FY11E
NP margin (%) 11.8 15.5 17.7 17.5 13.4
Total assets turnover 0.2 0.2 0.2 0.4 0.5
Leverage multiplier 8.0 3.3 2.4 2.6 2.9
ROAE (%) 16.5 11.4 10.5 17.9 18.7
Valuation parameters
Year to March FY07* FY08 FY09 FY10E FY11E
EPS (INR) 2.5 3.4 5.3 10.1 12.3
Y-o-Y growth (%) (4.8) 36.7 54.4 90.0 22.2
CEPS (INR) 5.9 6.9 6.8 14.0 17.4
P/E (x) 83.2 60.9 39.4 20.7 17.0
Price/BV(x) 13.7 4.3 4.0 3.5 2.9
EV/Sales (x) 13.9 11.5 9.1 5.1 3.7
EV/EBIDTA (x) 26.0 20.5 20.6 12.0 10.1
Dividend yield 0.0 0.0 0.8 0.7 0.7
Basic EPS (INR) 2.5 3.4 5.3 10.1 12.3
Basic P/E (x) 83.2 60.9 39.4 20.7 17.0* Proforma number
Edelweiss Securities Limited 63
Construction
Merger with ATSL likely to boost contracting business Gammon India’s (Gammon) merger with ATSL is likely to boost its contracting
business which otherwise had been hit by project suspensions and shrinking
margins in the past couple of years. The company’s order book, at ~ INR 130 bn,
is 3.5x its FY09 top line and provides revenue visibility in the medium term. ATSL
has relatively better margins than core contracting business and is also well
positioned for growth in the power transmission space.
Focus on asset ownership through Gammon Infra Projects Gammon’s asset development arm, Gammon Infrastructure Projects (GIPL), has
one of the most impressive portfolio as far as asset ownership is concerned. GIPL
currently has a portfolio of 18 projects spread across the roads, ports, and power
verticals. It was one of the earlier entrants in the road BOT space and has seven
road projects in its kitty. While three road projects are operational, three are
under development and one has recently achieved FC. With significant progress
on its projects, we believe GIPL is slowly but steadily moving towards creating
value for Gammon’s shareholders.
Outlook and valuations: Concerns persist; maintain ‘HOLD’ We believe execution is going to be a key factor going ahead which will determine
the company’s fortunes, particularly after the disappointments of FY09. Also,
achieving a sustainable turnaround in Italian subsidiaries still remains the key to
Gammon’s future performance. Also, while the company has low leverage levels,
it is contemplating raising up to USD 200 mn through the QIP route.
We value the company’s 76.2% stake in GIPL at INR 72/share (based on current
market capitalisation of GIPL and giving a holding company discount of 15%).
Adjusting for this, the stock is trading at P/E of 14.1x and 14.2x FY10E and
FY11E, respectively, based on our fully diluted EPS estimate of INR 8.8 and INR
8.7. We believe these valuations are fair and that concerns about the stock’s
performance are likely to persist until there are sustained signs of a turnaround in
acquired companies. We, thus maintain our ’HOLD’ recommendation on the
stock. On a relative return basis, the stock is rated as ‘Sector Underperformer’
October 1, 2009
Reuters : GAMM.BO Bloomberg : GMON IN
Absolute Rating HOLD
Rating Relative to Sector Underperformer Risk Rating Relative to Sector Medium
Sector Relative to Market Overweight Note: Please refer last page of the report for rating explanation MARKET DATA CMP : INR 196
52-week range (INR) : 202 / 46
Share in issue (mn) : 87.5
M cap (INR bn/USD mn) : 17.2 / 357.4
Avg. Daily Vol. BSE (‘000) : 439.6 SHARE HOLDING PATTERN (%)
Promoters* : 31.1
MFs, FIs & Banks : 15.1
FIIs : 26.2
Others : 27.6
* Promoters pledged shares : xxx (% of share in issue) RELATIVE PERFORMANCE (%)
Sensex Stock Stock over Sensex
1 month 9.3 2.8 (6.6)
3 months 18.2 4.6 (13.5)
12 months 33.2 29.2 (4.0)
Edelweiss Research is also available on www.edelresearch.com,, Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. Edelweiss Securities Limited
Parvez Akhtar Qazi
+91-22-4063 5405
India Equity Research | Construction Company Update
GAMMON INDIA Asset ownership subsidiary providing significant value
EDELWEISS 4D RATINGS
Financials
Year to March FY08 FY09 FY10E FY11E
Revenue (INR mn) 23,296 36,538 40,910 46,770
Rev. growth (%) 24.9 56.8 12.0 14.3
EBIDTA (INR mn) 2,092 3,304 3,888 4,481
Net Profit 861 1,404 944 1,075
Shares outstanding (mn) 87 107 107 123
EPS (INR) 10.9 9.0 8.8 8.7
EPS growth (%) (4.2) (17.4) (1.6) (0.9)
P/E (x) 18.1 21.9 22.3 22.5
EV/ EBITDA (x) 9.8 9.1 8.2 8.1
ROAE (%) 7.9 6.9 6.0 6.2
ROACE (%) 11.0 11.3 11.7 11.7
64 Edelweiss Securities Limited
Construction
Gammon Infra Projects Gammon holds 76.2% in its asset ownership arm, GIPL, which was incorporated in 2001 to undertake infrastructure projects on a PPP basis. GIPL currently has a portfolio of 18 projects encompassing roads and bridges, ports, and power. Of these, four are already operational while 10 projects are under development and four projects are in the pre-development phase. Of the 14 projects which are either operational or under development, seven are in the roads segment, three in the ports segment, and the balance in the power segment. GIPL was one of the earliest entrants in the asset ownership space.
Table 1: Road projects details
Project Project type Project statusTotal cost(INR mn)
Debt(INR mn)
Grant(INR mn)
Equity(INR mn)
GIPL stake (%)
GIPL equity (INR mn)
Rajamundhry Expressway Annuity Operational 2,564 2,274 0 290 94 271
Andhra Expressway Annuity Operational 2,481 2,191 0 290 94 271
Mattancherry Bridge Annuity + Toll Operational 258 194 0 64 98 63
Kosi Bridge Project Annuity Under development 4,396 3,913 0 483 100 483
Gorakhpur Bypass Annuity Under development 6,492 5,754 0 738 95 700
Mumbai Nasik Expressway Toll Under development 7,530 6,500 510 520 78 403
AP Rajamundry Bridge Toll Under development 8,610 5,568 1,186* 1,856 100 1,856
Total 32,331 26,394 1,696 4,241 4,047 Source: Company, Edelweiss research
Note: * In addition, a grant of INR 889.5 mn will be available in the operational period Brief description of various road projects:
Mattancherry bridge: This was the first BOT project in Kerala, providing a two-lane link across the Mattancherry channel. The company holds a 97.7% stake in this project, with the balance being held by the Cochin Port Trust. It started operating in October 2002 (10 months ahead of schedule). It has a revenue stream that comprises both toll and annuity. The concession period for this project is 19 years and 9 months and ends in April 2020. Rajamundhry Expressway: This NHAI annuity-based project involved up-gradation and widening of a 53 km stretch on the Chennai-Kolkata stretch of NH 5 in AP. The other partner in the project is Punj Lloyd. The project achieved FC in May 2002 and became operational in September 2004. It was commissioned 70 days ahead of schedule and the company earned a bonus of INR 115.19 mn for this. Subsequently, the project was refinanced in March 2006. The concession period for this project is 17.5 years, including 2.5 years for construction and runs until November 29, 2019. Andhra Expressway: This NHAI annuity-based project involved upgradation and widening of a 47 km stretch on the Chennai Kolkata stretch of NH5 in AP. The other partner in the project is Punj Lloyd. The project achieved FC in May 2002 and became operational in October 2004. It was commissioned 30 days ahead of schedule and the company earned a bonus of INR 46.52 mn for this. It was subsequently refinanced in March 2006. The concession period for the project is 17.5 years ending in November 2019, of which 15 years was for operations and 2.5 years was for construction. Mumbai–Nasik project: The company was awarded this NHAI toll-based project in FY06 in consortium with Sadbhav Engg and B.E.Billimoria. This NHDP Phase III project involves four laning and strengthening of the 99.5 km Vadape-Gonde section of the NH-3 including construction of 7.5 km long Kasara Ghat bypass segment. The concession period for this project is 20 years including a construction period of three years. The project achieved FC in October 2006. The toll collection can start during the construction period on completion of at least 50 km of a continuous stretch of the highway including the Kasara Ghat bypass.
Early entry into asset ownership space resulting into lucrative concessions
Edelweiss Securities Limited 65
Construction
Gorakhpur bypass: This NHAI annuity-based project involves construction and maintenance of the 32 km long Gorakhpur bypass on NH-28 in UP. The other partner in the SPV is ATSL. The project achieved FC in May 2007 and is under construction. The concession period is 20 years, ending in April 2027, of which 17.5 years is for operations and 2.5 years for construction. The company expects this project to become operational in FY10. Kosi bridge project: This NHAI annuity-based project involves construction and maintenance of a four lane bridge across the Kosi river in Bihar. The project with a length of 10.6 km is a vital link connecting North Indian states to North Eastern India. It achieved FC in April 2007 and is under construction. The concession period is 20 years, ending in April 2027, of which 17 years is for operations and three years for construction. The company expects this project to become operational in FY10. AP Rajamundhry bridge: The company entered into a concession agreement with the AP government for constructing and maintaining a bridge over the Godavari river. The company will get a total grant of INR 2,075.5 mn from central and state governments for the project. The concession period is 25 years (including a construction period of three years). The project has achieved FC recently.
66 Edelweiss Securities Limited
Construction
Company Description Gammon is a significant player in the construction industry with more than eight decades of experience. The company undertakes civil construction in roads, bridges, flyovers, energy (thermal, hydro, and biomass), water supply, irrigation, buildings, tunneling, ports, and pipelines. It is now looking to enter new areas such as airports, railways, hydrocarbons, and urban infrastructure. The company’s business model has undergone a change over the past few years—from a contracting player to being a large player in asset development and now into the power EPC space (with current acquisitions in Italy). Gammon was one of the earlier players to move into the asset ownership space by incorporating a subsidiary, GIPL, in 2001. It currently has a portfolio of 18 projects across various verticals including road, power, and ports. Also, the company recently acquired three companies in Italy to venture into the EPC power space which is likely to offer significant opportunities going forward.
Key Risks Lower-than-expected traffic on GIPL’s BOT projects can impact its valuations adversely; the same will be detrimental to Gammon’s valuations as well. In case the Italian subsidiaries take a longer time than expected to turnaround, it may increase the financial burden on the parent company.
Edelweiss Securities Limited 67
Construction
Financial Statements Income statement (INR mn)
Year to March FY07 FY08 FY09 FY10E FY11E
Income from operations 18,647 23,296 36,538 40,910 46,770
Direct costs 16,361 20,534 30,402 33,940 38,842
Employee costs 222 302 1,986 2,194 2,499
Other expenses 212 368 846 888 949
Total operating expenses 16,796 21,204 33,234 37,023 42,289
EBITDA 1,852 2,092 3,304 3,888 4,481
Depreciation and amortisation 352 462 640 797 927
EBIT 1,500 1,630 2,664 3,090 3,554
Interest expenses 422 535 1,053 1,712 1,989
Other income 353 357 30 52 64
Profit before tax 1,430 1,452 1,642 1,430 1,629
Provision for tax 447 510 682 486 554
Core profit 983 942 960 944 1,075
Extraordinary items - 58 (445) - -
Prior period items (539) (22) - - -
Profit after tax 444 861 1,404 944 1,075
Profit after minority interest 444 861 1,404 944 1,075
Equity shares outstanding (mn) 87 87 107 107 123
EPS (INR) basic 11.3 10.9 9.0 8.8 8.7
Diluted shares (mn) 87 87 107 107 123
EPS (INR) fully diluted 11.3 10.9 9.0 8.8 8.7
CEPS (INR) 15.8 16.1 14.9 16.3 16.3
Dividend per share 0.5 1.0 1.2 0.6 0.5
Dividend payout (%) 11.3 11.7 10.6 7.9 7.0
Common size metrics- as % of net revenues
Year to March FY07 FY08 FY09 FY10E FY11E
Operating expenses 90.1 91.0 91.0 90.5 90.4
EBITDA margins 9.9 9.0 9.0 9.5 9.6
Depreciation and amortization 1.9 2.0 1.8 1.9 2.0
Interest expenditure 2.3 2.3 2.9 4.2 4.3
Other income 1.9 1.5 0.1 0.1 0.1
Tax 2.4 2.2 1.9 1.2 1.2
EBIT 8.0 7.0 7.3 7.6 7.6
Net profit margins 5.3 4.0 2.6 2.3 2.3
Annualised growth metrics (%)
Year to March FY07 FY08 FY09 FY10E FY11E
Revenues 57.0 24.9 56.8 12.0 14.3
EBITDA 19.8 13.0 57.9 17.7 15.3
Net profit (23.5) (4.2) 1.9 (1.6) 13.9
EPS (23.5) (4.2) (17.4) (1.6) (0.9)
68 Edelweiss Securities Limited
Construction
Balance sheet (INR mn)
As on 31st March FY07 FY08 FY09 FY10E FY11E
Equity capital 177 177 217 217 249
Reserves & surplus 11,326 12,110 15,131 16,000 18,412
Shareholders funds 11,503 12,287 15,349 16,218 18,661
Secured loans 2,303 2,440 7,988 8,738 9,988
Unsecured loans 1,412 1,331 1,710 2,968 3,168
Borrowings 3,715 3,771 9,698 11,707 13,157
Net deferred tax 379 372 439 439 439
Sources of funds 15,597 16,429 25,486 28,364 32,257
Gross block 8,962 10,268 13,564 15,564 18,064
Depreciation 2,051 2,536 3,755 4,552 5,479
Net block 6,911 7,733 9,808 11,011 12,584
Capital work in progress 104 182 0 0 0
Total fixed assets 7,015 7,915 9,808 11,011 12,584
Investments 1,504 1,608 1,957 1,957 1,957
Inventories 5,290 7,050 11,004 12,484 14,164
Sundry debtors 3,033 5,172 10,142 11,176 12,734
Cash and equivalents 960 381 734 1,011 1,128
Loans and advances 5,521 5,073 7,319 7,880 8,750
Total current assets 14,804 17,675 29,199 32,550 36,777
Sundry creditors 3,163 4,554 9,439 9,975 11,379
Others 3,408 4,489 5,607 6,277 6,665
Provisions 1,156 1,725 433 903 1,017
Total CL & provisions 7,726 10,768 15,479 17,155 19,061
Net current assets 7,078 6,907 13,721 15,395 17,715
Uses of funds 15,597 16,429 25,486 28,364 32,257
Book value per share (BV) 133 142 143 152 152
Cash flow statement
Year to March FY07 FY08 FY09 FY10E FY11E
Net profit 444 861 1,404 944 1,075
Add: Depreciation 352 462 640 797 927
Add: E.O.Adjustments 0 7 68 0 0
Add: Deferred tax 34 (8) 0 0 0
Gross cash flow 831 1,323 2,112 1,741 2,002
Less: Changes in W. C. 1,083 408 6,461 1,397 2,203
Operating cash flow (253) 915 (4,349) 344 (201)
Less: Capex 3,915 1,488 3,463 2,000 2,500
Free cash flow (4,168) (572) (7,812) (1,656) (2,701)
Cash flow metrices
Year to March FY07 FY08 FY09 FY10E FY11E
Operating cash flow (253) 996 (4,214) 344 (201)
Financing cash flow 3809 (45) 5819 1933 2818
Investing cash flow 3,915 1,488 3,463 2,000 2,500
Net cash flow 7,471 2,439 5,068 4,277 5,117
Capex (3,915) (1,488) (3,463) (2,000) (2,500)
Dividends paid (50) (101) (149) (75) (75)
Share issuance / (buyback) 0 0 41 0 1,443
Edelweiss Securities Limited 69
Construction
Profiability and liquidity ratios
Year to March FY07 FY08 FY09 FY10E FY11E
ROAE (%) 9.5 7.9 6.9 6.0 6.2
ROACE (%) 10.6 11.0 11.3 11.7 11.7
Current ratio 1.9 1.6 1.9 1.9 1.9
Debtors (days) 53 64 76 100 99
Inventory days 164 157 151 185 184
Average working capital turnover (x) 2.8 3.3 3.5 2.7 2.6
Average capital turnover ratio (x) 1.3 1.6 1.6 1.5 1.5
Net debt/ Equity 0.2 0.3 0.6 0.7 0.6
Debt/Equity 0.3 0.3 0.6 0.7 0.7
Creditor days 64 69 84 104 100
Cash conversion cycle 153 152 143 181 183
Debt/EBITDA 2.0 1.8 2.9 3.0 2.9
Adjusted debt/Equity 0.3 0.3 0.6 0.7 0.7
Operating ratios
Year to March FY07 FY08 FY09 FY10E FY11E
Total asset turnover 1.4 1.5 1.7 1.5 1.5
Fixed assets t/o (x) 2.6 2.2 2.9 2.7 2.7
Equity turnover 1.8 2.0 2.6 2.6 2.7
Dupont analysis
Year to March FY07 FY08 FY09 FY10E FY11E
NP margin (%) 5.3 4.0 2.6 2.3 2.3
Total assets turnover 1.4 1.5 1.7 1.5 1.5
Leverage multiplier 1.3 1.3 1.5 1.7 1.7
ROAE (%) 9.5 7.9 6.9 6.0 6.2
Valuation parameters
Year to March FY07 FY08 FY09 FY10E FY11E
EPS (INR) 11.3 10.9 9.0 8.8 8.7
Y-o-Y growth (%) (4.4) (4.2) (17.4) (1.6) (0.9)
CEPS (INR) 15.8 16.1 14.9 16.3 16.3
P/E (x) 17.3 18.1 21.9 22.3 22.5
Price/BV(x) 1.5 1.4 1.4 1.3 1.3
EV/Sales (x) 1.1 0.9 0.8 0.8 0.8
EV/EBIDTA (x) 10.7 9.8 9.1 8.2 8.1
Dividend yield 0.3 0.5 0.6 0.3 0.3
70 Edelweiss Securities Limited
Construction
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Edelweiss Securities Limited 71
Construction
Company Description Gayatri Projects (GPL) is a prominent construction company specialising in road,
irrigation and industrial projects. Founded in 1963, it has a pan India presence and
employs more than 1,100 employees. It currently has an order book of ~ INR 60
bn. The company has a strong asset development portfolio comprising five road
projects and plans to develop a 1,320 MW power thermal power plant. Its revenues
have posted a CAGR of 39% between FY06 and FY09 to INR 10 bn in FY09; during
the same period, PAT has increased at a CAGR of 31% to INR 413 mn.
Key highlights GPL’s current order book, at INR 60 bn, is ~6x its FY09 revenues, providing
revenue visibility in the medium term. Irrigation projects form ~58% of the order
book with ~34% coming from roads and the balance from industrial projects.
The company currently has five BOT road projects in its portfolio consisting of one
toll based and four annuity based projects. All these projects have achieved
financial closure and will start contributing to revenues from FY11. The company
has transferred these BOT projects into a separate holding company, Gayatri
Infraventures (GIVL). In March 2008, AMP Capital infused INR 1 bn in GIVL for a
30% share, valuing the company at INR 3.4 bn.
GPL also has plans to develop a 1,320 MW (=2*660 MW) thermal power plant at
Krishnapatnam, Andhra Pradesh. It has been allotted 1,400 acres of land in
Krishnapatnam district for this purpose. The company has also secured water and
coal linkages for the plant. GPL has also signed a power purchase agreement (PPA)
with Power Trading Corporation (PTC) for selling 70% of the power generated; the
balance 30% will be sold on merchant basis. The company eventually plans to hold
a minority stake in the power plant; it will sell a majority stake to a strategic
partner/ financial institutions.
Key risks GPL’s current order book is ~6x its FY09 revenues and will test the company’s
execution strength. Its leverage is also on the higher side with the debt/equity
ratio standing at 1.7x at FY09 end.
October 1, 2009
Reuters : GAPR.BO Bloomberg : GAYP IN
MARKET DATA CMP : INR 306
52-week range (INR) : 318 / 42
Share in issue (mn) : 10.1
M cap (INR bn/USD mn) : 3.1 / 64.2
Avg. Daily Vol. BSE (‘000) : 51.5 SHARE HOLDING PATTERN (%)
Promoters* : 55.8
MFs, FIs & Banks : 12.9
FIIs : 6.5
Others : 24.8
* Promoters pledged shares : Nil (% of share in issue) RELATIVE PERFORMANCE (%)
Sensex Stock Stock over Sensex
1 month 9.3 3.9 (5.4)
3 months 18.2 65.3 47.2
12 months 33.2 58.3 25.2
India Equity Research | Construction Company Profile
GAYATRI PROJECTS Ready to break into the big league
Edelweiss Research is also available on www.edelresearch.com,, Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. Edelweiss Securities Limited
Parvez Akhtar Qazi
+91-22-4063 5405
Financials
Year to March FY06 FY07 FY08 FY09
Revenue (INR mn) 3,712 5,021 7,524 10,046
Rev. growth (%) 23.2 35.3 49.8 33.5
EBITDA (INR mn) 655 754 1,058 1,136
Net profit (INR mn) 181 235 393 413
Shares outstanding (mn) 9.0 10.0 10.1 10.1
Basic EPS (INR) 20.1 23.5 38.9 40.9
EPS growth (%) 7.6 16.8 65.6 5.2
P/E (x) 15.2 13.0 7.9 7.5
EV/ EBITDA (x) 7.4 7.5 5.1 5.4
ROAE (%) 21.4 20.1 24.5 20.9
ROACE (%) 16.0 16.4 21.1 20.7
72 Edelweiss Securities Limited
Construction
Road BOT project details GPL is currently developing five road projects–four annuity and one toll road projects. All the projects have achieved financial closure and will start contributing to revenues from FY11. The total cost is INR 23.3 bn. The total equity commitment from GPL is INR 2.0 bn. It has partnered with IDFC, Nagarjuna Construction, and Maytas Infra for these projects. A brief description of the various projects is given below.
Table 1: Road projects details
Project Project statusProject type
Total cost(INR mn)
Debt(INR mn)
Grant(INR mn)
Equity(INR mn)
GPLstake (%)
GPL equity(INR mn)
Meerut-Muzaffarnagar Under development Toll 6,681 4,550 564 1,567 49.0 768
Gayatri-Jhansi Under development Annuity 4,210 3,410 0 800 51.0 408
Gayatri-Lalitpur Under development Annuity 3,126 2,526 0 600 51.0 306
Hyderabad Expressway Under development Annuity 4,310 2,909 719 682 50.0 341
Cyberabad Expressway Under development Annuity 5,018 3,763 807 447 50.0 224
Total 23,344 17,158 2,090 4,097 2,047 Source: Company, Edelweiss research
Meerut-Muzaffarnagar: The company is executing this project in association with NCC and Maytas Infra. As per the original structure, GPL was to hold 40% stake in the project, Maytas had a 30% share, with the balance belonging to NCC. However, recently, GPL has decided to increase its stake to 49% by purchasing 9% stake from Maytas. Gayatri-Lalitpur: The company is executing this project in association with IDFC. GPL holds 51% stake in the project with the balance being held by IDFC. NHAI will pay a semi-annual annuity of INR 239.5 mn during the annuity period. GPL is doing the entire EPC work on the project. Gayatri-Jhansi: GPL is executing this project in association with IDFC. The company holds 51% stake in the project with the balance being held by IDFC. NHAI will pay a semi-annual annuity of INR 299.5 mn during the annuity period. GPL is doing the entire EPC work on the project. Hyderabad Expressway: GPL won this project in association with Maytas for developing and maintaining an eight lane access controlled expressway under Phase II programme of the outer ring road (ORR) of Hyderabad Urban Development Authority (HUDA). Both the companies have a 50% stake in the project. HUDA will pay a semi-annual annuity of INR 304.9 mn during the annuity period. The company expects to complete the project ahead of schedule. Cyberabad Expressway: This project like the Hyderabad Expressway project also relates to development of an eight lane access controlled expressway on outer ring road (ORR). GPL won this project along with Maytas with both the companies having a 50% stake in the project. HUDA will pay a semi-annual annuity of INR 395 mn during the annuity period. The company expects to complete the project ahead of schedule.
Value unlocked in road asset holding company
Edelweiss Securities Limited 73
Construction
Financial Statements Income statement (INR mn)
Year to March FY05 FY06 FY07 FY08 FY09
Income from operations 3,013 3,712 5,021 7,524 10,046
Direct costs 2,422 2,922 4,076 6,126 8,533
Employee costs (incl. sub contracting) 53 62 90 155 207
Other expenses 68 73 100 184 171
Total operating expenses 2,543 3,057 4,267 6,465 8,910
EBITDA 469 655 754 1,058 1,136
Depreciation and amortisation 99 104 126 164 197
EBIT 371 551 628 894 939
Interest expense 259 304 304 337 369
Other income 21 29 33 54 64
Profit before tax 133 276 357 612 634
Provision for tax 39 95 123 219 221
Core profit 93 181 235 393 413
Profit after tax 93 181 235 393 413
Profit after minority interest 93 181 235 393 413
Equity shares outstanding (mn) 5 9 10 10 10
EPS (INR) basic 18.7 20.1 23.5 38.9 40.9
Diluted shares (mn) 5 9 10 10 10
EPS (INR) fully diluted 18.7 20.1 23.5 38.9 40.9
CEPS (INR) 66.7 52.0 53.8 73.6 78.8
DPS 2.5 1.5 2.0 2.5 4.0
Dividend payout (%) 15.3 8.5 10.0 7.5 11.4
Common size metrics- as % of net revenues
Year to March FY05 FY06 FY07 FY08 FY09
Operating expenses 84.4 82.4 85.0 85.9 88.7
EBIDTA margins 15.6 17.6 15.0 14.1 11.3
Depreciation and amortization 3.3 2.8 2.5 2.2 2.0
Interest expenditure 8.6 8.2 6.1 4.5 3.7
Other income 0.7 0.8 0.7 0.7 0.6
Tax 1.3 2.6 2.4 2.9 2.2
EBIT 12.3 14.8 12.5 11.9 9.3
Net profit margins 3.1 4.9 4.7 5.2 4.1
Growth metrics (%)
Year to March FY05 FY06 FY07 FY08 FY09
Revenues (3.9) 23.2 35.3 49.8 33.5
EBITDA 46.6 39.5 15.1 40.3 7.3
Net profit 60.7 93.7 29.7 67.3 5.2
EPS 60.7 7.6 16.8 65.6 5.2
74 Edelweiss Securities Limited
Construction
Balance sheet (INR mn)
As on 31st March FY05 FY06 FY07 FY08 FY09
Equity capital 50 90 100 101 101
Reserves & surplus 715 837 1,310 1,691 2,056
Shareholders funds 765 927 1,410 1,792 2,158
Secured loans 1,658 1,904 2,093 1,968 2,480
Unsecured loans 728 638 787 1,133 1,128
Borrowings 2,386 2,542 2,880 3,102 3,608
Net deferred tax 141 183 178 187 186
Sources of funds 3,293 3,652 4,468 5,080 5,951
Gross block 1,382 1,643 2,070 2,573 2,748
Depreciation 565 660 784 944 1,141
Net block 817 983 1,286 1,629 1,607
Total fixed assets 817 983 1,286 1,629 1,607
Investments 29 32 402 662 1,283
Inventories 203 218 218 386 604
Sundry debtors 969 1,046 1,302 1,680 2,239
Cash and equivalents 357 461 280 756 588
Loans and advances 1,348 1,430 1,560 2,371 2,765
Total current assets 2,877 3,156 3,360 5,192 6,196
Sundry creditors and others 416 504 532 2,299 3,015
Provisions 14 15 47 104 120
Total CL & provisions 430 520 580 2,403 3,135
Net current assets 2,447 2,636 2,780 2,789 3,061
Uses of funds 3,293 3,652 4,468 5,080 5,951
Book value per share (INR) 153 103 141 177 214
Cash flow statement (INR mn)
Year to March FY05 FY06 FY07 FY08 FY09
Net profit 93 181 235 393 413
Add: Depreciation 99 104 126 164 197
Add: Deferred tax (7) 0 0 0 0
Gross cash flow 185 285 360 557 610
Less: Changes in W. C. 308 85 325 (467) 440
Operating cash flow (123) 201 35 1,024 170
Less: Capex 163 262 427 503 175
Free cash flow (286) (61) (391) 521 (5)
Cash flow metrices
Year to March FY05 FY06 FY07 FY08 FY09
Operating cash flow (123) 199 35 1,024 170
Financing cash flow 514 196 609 240 506
Investing cash flow (163) (258) (58) (242) 446
Net cash flow 228 137 587 1,021 1,122
Capex (163) (262) (427) (503) (175)
Dividends paid (14) (15) (23) (30) (47)
Share issuance / (buyback) 137 40 271 18 0
Edelweiss Securities Limited 75
Construction
Profitability and liquidity ratios
Year to March FY05 FY06 FY07 FY08 FY09
ROAE (%) 12.8 21.4 20.1 24.5 20.9
ROACE (%) 12.2 16.0 16.4 21.1 20.7
Current ratio 6.7 6.1 5.8 2.2 2.0
Debtors (days) 107 99 85 72 71
Inventory days 31 31 24 20 25
Average working capital turnover (x) 1.3 1.5 1.9 2.7 3.4
Average capital turnover ratio (x) 1.0 1.1 1.2 1.6 1.8
Net debt/equity 2.7 2.2 1.8 1.3 1.4
Debt/Equity 3.1 2.7 2.0 1.7 1.7
Payable days 59 57 46 84 114
Cash conversion cycle 79 72 63 8 (17)
Debt/EBITDA 5.1 3.9 3.8 2.9 3.2
Adjusted debt/Equity 3.1 2.8 2.1 1.7 1.7
Operating ratios
Year to March FY05 FY06 FY07 FY08 FY09
Total asset turnover 1.0 1.1 1.2 1.6 1.8
Fixed assets t/o (x) 2.6 2.8 3.1 3.6 4.1
Equity turnover 4.1 4.4 4.3 4.7 5.1
Dupont analysis
Year to March FY05 FY06 FY07 FY08 FY09
NP margin (%) 3.1 4.9 4.7 5.2 4.1
Total assets turnover 1.0 1.1 1.2 1.6 1.8
Leverage multiplier 4.2 4.1 3.5 3.0 2.8
ROAE (%) 12.8 21.4 20.1 24.5 20.9
Valuations parameters
Year to March FY05 FY06 FY07 FY08 FY09
EPS (INR) (Adjusted) 18.7 20.1 23.5 38.9 40.9
Y-o-Y growth (%) 60.7 7.6 16.8 65.6 5.2
CEPS (INR) (Adjusted) 36.9 31.7 36.0 55.1 60.4
P/E (x) 16.4 15.2 13.0 7.9 7.5
Price/BV(x) 2.0 3.0 2.2 1.7 1.4
EV/Sales (x) 1.2 1.3 1.1 0.7 0.6
EV/EBITDA (x) 7.6 7.4 7.5 5.1 5.4
Dividend yield 0.8 0.5 0.7 0.8 1.3
76 Edelweiss Securities Limited
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Edelweiss Securities Limited 77
Construction
Building a diversified asset portfolio GMR Infrastructure (GMRI) holds 63% stake in Hyderabad International Airport,
54% stake in Delhi International Airport, and 40% stake in the Sabiha Gochen
International Airport, Istanbul (Turkey). It has 810 MW of operating power plants
and is developing 3,240 MW power plants. It is also developing a multi product
SEZ spread over 3,300 acres in Krishnagiri, Tamil Nadu.
GMRI also holds stakes in land near the Delhi and Hyderabad international
airports, where either hospitality or multi-product SEZs are being developed. It
has 50% stake in Intergen, a utility with 7,700 MW of operating assets across five
countries. The company also has stakes in two coal mines–one in Indonesia and
another in South Africa.
Strong road asset portfolio GMRI has a robust road asset portfolio of six operational roads (three toll-based
and three annuity-based) totaling 421 km and worth INR 32.1 bn. It has also won
two new road projects recently-Hyderabad-Vijaywada (181 km toll-based road, 25
year concession period and a project cost of INR 22 bn) and Chennai Outer Ring
Road project (30 kms annuity-based road, worth INR 11 bn). It has outlined
ambitious plans for expanding its road asset portfolio. It has been short-listed for
submitting its bid for eight projects totaling INR 100 bn.
Outlook and valuations: Rich; maintain ‘REDUCE’ Capitalisation of assets at airports has led to increase in interest and depreciation,
leading to losses at both HIAL and DIAL. Its power business has been stable but
curb on merchant sales from Mangalore plant has capped earnings. Our SOTP
stands at INR 102/share. We maintain our ‘REDUCE’ recommendation on the
stock. On a relative basis, we rate the stock ‘Sector Underperformer’ (refer
rating page for details).
October 1, 2009
Reuters : GMRI.BO Bloomberg : GMRI IN
Absolute Rating REDUCE
Rating Relative to Sector Underperformer Risk Rating Relative to Sector High
Sector Relative to Market Underweight Note: Please refer last page of the report for rating explanation MARKET DATA CMP : INR 143
52-week range (INR) : 183 / 45
Share in issue (mn) : 1,883.7
M cap (INR bn/USD mn) :262.2 / 5,458.3
Avg. Daily Vol. BSE (‘000) : 8,567.7 SHARE HOLDING PATTERN (%)
Promoters* : 74.4
MFs, FIs & Banks : 8.6
FIIs : 8.3
Others : 8.7
* Promoters pledged shares : Nil (% of share in issue) RELATIVE PERFORMANCE (%)
Sensex Stock Stock over Sensex
1 month 9.3 (2.1) (11.4)
3 months 18.2 (200.1) (218.2)
12 months 33.2 57.6 24.5
Edelweiss Research is also available on www.edelresearch.com,, Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. Edelweiss Securities Limited
India Equity Research | Power Company Update
GMR INFRASTRUCTURE Losing steam
EDELWEISS 4D RATINGS
Shankar.K
+91-22-4040 7412
Abhishek Bhandari
+91-22-4063 5496
Financials
Year to March FY08 FY09 FY10E FY11E
Revenue (INR mn) 22,948 40,192 53,670 58,582
Rev. growth (%) 35.2 75.1 33.5 9.2
EBITDA (INR mn) 5,985 10,670 14,270 20,193
Net profit (INR mn) 2,627 2,771 1,796 1,198
Shares outstanding (mn) 1,705 1,821 1,822 1,822
EPS (INR) 1.2 1.5 1.3 1.1
EPS growth (%) 10.9 24.6 (17.1) (15.1)
P/E (x) 116.1 93.2 112.4 132.4
EV/EBITDA (x) 46.2 33.2 28.6 21.1
ROAE (%) 5.2 4.5 3.6 2.9
ROACE (%) 3.9 4.0 4.2 5.1
78 Edelweiss Securities Limited
Construction
Road project details GMRI has six operational roads (three toll-based and three annuity-based) totaling to 421 km and worth INR 32.1 bn. The annuity-based projects total 255 km and toll-based projects total 166 km.
Table 1: Project details
Project NameProject type Project status
Total project cost (INR mn)
Debt (INR mn)
Grant (INR mn)
Equity (INR mn)
GMR's stake (%)
GMR's equity (INR mn)
Tuni- Anakapalli Annuity Operational 3,040 3,810 0 778 74 576
Tambaram -Tindivanam Annuity Operational 3,770 4,901 0 1,060 74 784
Adloor Yella Reddy Annuity Operational 7,038 5,520 0 1,418 100 1,418
Ambala-Chandigarh Toll Operational 4,755 3,824 (1,748) 931 100 931
Faruknagar - Jadcherla Toll Operational 5,207 3,854 (827) 1,353 100 1,353
Tindivanam-Ulunderpet Toll Operational 8,300 6,043 (2,505) 2,257 100 2,257
Total 32,110 27,952 (5,080) 7,797 7,319 Source: Company, Edelweiss research
The company has also won two road projects recently-Hyderabad-Vijaywada (181 km toll-based road, 25 year concession period and a project cost of INR 22 bn) and Chennai Outer Ring Road project (30 kms annuity-based road, worth INR 11 bn). Table 2: Recent project wins
Project Project typeEstimated cost
(INR mn)GMR stake
(%)
Outer ring road project, Chennai Annuity 11,000 90.0
Hyderabad-Vijaywada Toll 22,000 74.0
Total 33,000
Source: Company, Edelweiss research
The company has outlined ambitious plans for expanding its road asset portfolio. News reports state that it is looking at an investment of INR 20 bn in the next couple of years to develop various road projects in the country. It has been short-listed for submitting its bid for eight projects totaling INR 100 bn.
GMR has sizeable road portfolio of 6 operational projects
Edelweiss Securities Limited 79
Construction
Company Description GMRI is the flagship company of the GMR Group promoted by Mr. G. M. Rao. The promoter group was initially active in the agri business and banking sector and controlled the Vysya Bank, the largest private sector bank in India, before banking sector reforms and subsequent sale to ING. The company follows the developer model for infrastructure projects across different verticals—power, roads, airports, and urban infrastructure. The group is headed by Mr. G.M. Rao, who also heads the promoter group, which holds 74%. The promoter group is closely involved with the management with each of the different verticals in the company. Each business head is supported by a strong group of professionals.
Key Risks
• Further upsides from commercial development linked to airports: If GMRI manages to sell the remaining 233 acres of land at a price greater than the value at which it has sold 17 acres presently (NPV of INR 434 mn/acre), it could result in further upsides for the company. Similarly, monetisation of the Hyderabad airport and SEZ lands at higher-than-expected valuations could result in a positive surprise.
• Power project expansion pipeline at nascent stage: The company has about 3,290 MW of generation units in various stages of development, which include 2,100 MW of coal-fired generation units and 1,190 MW of hydro power units. The company plans to use a majority of the new generation capacity for merchant sale instead of PPAs. Timely financial closure and execution of projects could result in increased earnings for the company.
• Increase in passenger traffic in airports and toll-based roads: If the passenger traffic picks up in airports and toll-based road projects, it could positively impact the company’s earnings.
80 Edelweiss Securities Limited
Construction
Financial Statements Income statement (INR mn)
Year to March FY07 FY08 FY09 FY10E FY11E
Income from operations 16,967 22,948 40,192 53,670 58,582
Direct costs 6,988 12,297 16,862 25,430 27,837
Employee costs 1,382 2,092 3,405 2,741 3,019
Other expenses 3,161 2,574 9,255 11,230 7,533
Total operating expenses 11,531 16,963 29,522 39,400 38,389
EBITDA 5,437 5,985 10,670 14,270 20,193
Depreciation and amortisation 1,346 1,785 3,898 5,564 8,157
EBIT 4,091 4,200 6,772 8,705 12,036
Interest expenses 1,441 1,687 3,682 6,231 10,040
Other income 183 698 212 399 260
Profit before tax 2,833 3,210 3,301 2,873 2,257
Provision for tax 415 584 530 1,077 1,058
Core profit 2,418 2,627 2,771 1,796 1,198
Profit before minority interest 2,418 2,627 2,771 1,796 1,198
Minority interest 673 526 (23) (522) (770) Profit after minority interest 1,744 2,101 2,795 2,318 1,969 Shares outstanding 1,570 1,705 1,821 1,822 1,822
EPS (INR) basic 1.1 1.2 1.5 1.3 1.1
Diluted shares (mn) 1,570 1,705 1,821 1,822 1,822
EPS (INR) fully diluted 1.1 1.2 1.5 1.3 1.1
Dividend payout (%) 133.6 0 0 0 0
Common size metrics- as % of net revenues
Year to March FY07 FY08 FY09 FY10E FY11E
Operating expenses 68.0 73.9 73.5 73.4 65.5
Depreciation and amortization 7.9 7.8 9.7 10.4 13.9
Interest expenditure 8.5 7.4 9.2 11.6 17.1
EBITDA margins 32.0 26.1 26.5 26.6 34.5
Net profit margins 14.2 11.4 6.9 3.3 2.0
Growth metrics (%)
Year to March FY07 FY08 FY09 FY10E FY11E
Revenues 59.8 35.2 75.1 33.5 9.2
EBITDA 21.4 10.1 78.3 33.7 41.5
PBT 1.7 0.1 0.0 (0.1) (0.2)
Net profit 158.2 8.6 5.5 (35.2) 66.7
EPS 108.2 10.9 24.6 (17.1) (0.2)
Edelweiss Securities Limited 81
Construction
Balance sheet (INR mn)
As on 31st March FY07 FY08 FY09 FY10E FY11E
Equity capital 3,311 3,641 3,641 3,645 3,645
Reserves & surplus 16,612 57,531 60,372 62,690 64,659
Shareholders funds 19,923 61,172 64,013 66,335 68,303
Minority interest 5,261 11,126 11,624 11,101 10,331
Secured loans 30,220 68,438 0 0 0
Unsecured loans 6,837 11,331 0 0 0
Borrowings 37,057 79,769 112,432 155,400 166,344
Sources of funds 62,241 152,067 188,069 232,836 244,978
Gross block 41,406 66,917 100,777 131,169 145,330
Depreciation 12,407 14,218 18,018 23,582 31,739
Net block 29,000 52,699 82,759 107,586 113,591
Capital work in progress 19,060 45,227 79,087 109,479 123,640
Total fixed assets 48,059 97,927 161,847 217,065 237,231
Investments 579 707 707 707 707
Inventories 304 380 380 380 380
Sundry debtors 3,860 4,116 4,116 4,116 4,116
Cash and equivalents 15,046 57,234 29,316 18,864 10,840
Loans and advances 2,007 5,789 5,789 5,789 5,789
Total current assets 21,218 67,520 39,601 29,149 21,126
Sundry creditors and others 6,627 12,779 12,779 12,779 12,779
Provisions 845 882 882 882 882
Total CL & provisions 7,471 13,661 13,661 13,661 13,661
Net current assets 13,747 53,859 25,941 15,489 7,465
Net deferred tax (145) (425) (425) (425) (425)
Uses of funds 62,241 152,067 188,069 232,836 244,978
Book value per share (BV)(INR) 13 36 35 36 37
Free cash flow (INR mn)
Year to March FY07 FY08 FY09 FY10E FY11E
Net profit 1,744 2,101 2,795 2,318 1,969
Depreciation 1,346 1,785 3,898 5,564 8,157
Deferred tax (143) (281) 0 0 0
Others 715 4,615 446 (522) (770)
Gross cash flow 3,662 8,220 7,139 7,360 9,355
Less: Changes in W. C. (1,811) (2,076) 0 0 0
Operating cash flow 5,474 10,296 7,139 7,360 9,355
Less: Capex 19,588 51,679 67,720 60,783 28,322
Free cash flow (14,115) (41,383) (60,581) (53,423) (18,967)
Cash flow metrices
Year to March FY07 FY08 FY09 FY10E FY11E
Operating cash flow 5,474 10,296 7,139 7,360 9,355
Financing cash flow 20,172 81,163 31,894 42,569 10,683
Investing cash flow (19,402) (51,806) (66,951) (60,381) (28,062)
Net cash flow 6,243 39,653 (27,918) (10,452) (8,023)
Capex (19,588) (51,679) (67,720) (60,783) (28,322)
Dividends paid (23) 0 0 0 0
82 Edelweiss Securities Limited
Construction
Profitability & liquidity ratios
Year to March FY07 FY08 FY09 FY10E FY11E
ROAE (%) 13.6 5.2 4.5 3.6 2.9
ROACE (%) 8.3 3.9 4.0 4.2 5.1
Current ratio 2.8 4.9 2.9 2.1 1.5
Debtors (days) 67 63 37 28 26
Average fixed assets t/o (x) 0.8 0.6 0.6 0.6 0.5
Average working capital t/o (x) (43.1) (9.8) (11.9) (15.9) (17.4)
Average capital employed t/o (x) 0.3 0.2 0.2 0.3 0.2
Debt / Equity 1.9 1.3 1.8 2.3 2.4
Debt/EBITDA 6.8 13.3 10.5 10.9 8.2
Adjusted Debt/Equity 1.9 1.3 1.8 2.3 2.4
Operating ratios
Year to March FY07 FY08 FY09 FY10E FY11E
Total asset turnover 0.3 0.2 0.2 0.3 0.2
Average fixed assets t/o (x) 0.4 0.3 0.3 0.3 0.3
Equity turnover 1.3 0.6 0.6 0.8 0.9
Du pont analysis
Year to March FY07 FY08 FY09 FY10E FY11E
NP margin (%) 10.3 9.2 7.0 4.3 3.4
Total assets turnover 0.3 0.2 0.2 0.3 0.2
Leverage multiplier 4.0 2.6 2.7 3.2 3.5
ROAE (%) 13.6 5.2 4.5 3.6 2.9
Valuation parameters
Year to March FY07 FY08 FY09 FY10E FY11E
Diluted EPS (INR) 1.1 1.2 1.5 1.3 1.1
Y-o-Y growth (%) 112.9 10.9 24.6 (17.1) (15.1)
CEPS (INR) 2.1 2.4 3.7 4.3 5.6
Diluted P/E (x) 128.7 116.1 93.2 112 132
Price/BV(x) 11.3 4.0 4.1 3.9 3.8
EV/Sales (x) 14.8 12.1 8.8 7.6 7.3
EV/EBITDA (x) 46.2 46.2 33.2 28.6 21.1
Basic EPS (INR) 1.1 1.2 1.5 1.3 1.1
Basic P/E (x) 128.7 116.1 93.2 112.4 132.4
Edelweiss Securities Limited 83
Construction
Robust business model marked by leadership in water segment IVRCL Infrastructure’s (IVRCL) business strategy is marked by its dominance in
the water segment, which contributes the bulk of its order book. It ended Q1FY10
with an order book of INR 149 bn (including L1 orders of INR 10 bn), of which the
water segment contributed 66.5%, buildings 20%, and power 8.7%, with the
balance coming from roads. The company is the leader in the water segment and
has mastery over the entire spectrum, both in terms of project mix and
complexity.
BOT projects nearing completion IVRCL has four BOT projects–a water desalination plant and three road projects.
While the company has 100% stake in all the road projects, it owns 74.85% stake
in the Chennai water desalination plant. The total cost of these four projects is
INR 18.35 bn. Apart from this, it has recently won another road project worth INR
4 bn and is L1 in one more road project. While execution on one road project is
already complete (the company is awaiting completion certificate from NHAI), the
other two road projects will also be completed in the next couple of months. It
expects the Chennai desalination project to be operational by start of October.
Outlook and valuations: Attractive; maintain ‘BUY’ The company has a robust order book. This, together with government focus on
infrastructure spending, adds to revenue visibility. With the company bidding for
upcoming road BOT projects, any order win will boost valuations; also, any stake
sale in road projects holding company will provide a valuation benchmark and
improve liquidity.
Our sum-of-the-parts-based target price for the stock is INR 470, with BOT
projects contributing INR 39 to valuations. At CMP of INR 387, for fully diluted
EPS estimate of INR 18.8 and INR 23.8, IVRCL is trading at a P/E of 20.6x and
16.3x for FY10E and FY11E, respectively. We believe the company is likely to
benefit from future project wins as well as stake sale in the road projects holding
company. We maintain our ‘BUY’ recommendation on the stock. On a relative
return basis, the stock is rated ‘Sector Outperformer’ (refer rating page for
details).
October 1, 2009
Reuters : IVRC.BO Bloomberg :IVRC IN
Absolute Rating BUY
Rating Relative to Sector Outperformer Risk Rating Relative to Sector Low
Sector Relative to Market Overweight Note: Please refer last page of the report for rating explanation MARKET DATA CMP : INR 387
52-week range (INR) : 400 / 56
Share in issue (mn) : 133.5
M cap (INR bn/USD mn) : 51.7 / 1,076.2
Avg. Daily Vol. BSE (‘000) : 4,276.9 SHARE HOLDING PATTERN (%)
Promoters* : 9.7
MFs, FIs & Banks : 19.1
FIIs : 48.0
Others : 23.2
* Promoters pledged shares : Nil (% of share in issue) RELATIVE PERFORMANCE (%)
Sensex Stock Stock over Sensex
1 month 9.3 7.9 (1.4)
3 months 18.2 11.2 (7.0)
12 months 33.2 63.4 30.2
Edelweiss Research is also available on www.edelresearch.com,, Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. Edelweiss Securities Limited
India Equity Research | Construction Company Update
IVRCL INFRASTRUCTURE Going from strength to strength
EDELWEISS 4D RATINGS
Parvez Akhtar Qazi
+91-22-4063 5405
Financials
Year to March FY08 FY09 FY10E FY11E
Revenue (INR mn) 36,606 48,819 62,957 77,125
Rev. growth (%) 58.7 33.4 29.0 22.5
EBITDA (INR mn) 3,615 4,218 5,777 7,232
Net profit (INR mn) 2,104 2,260 2,536 3,210
Shares outstanding (mn) 133 134 135 135
Basic EPS (INR) 15.8 16.9 18.8 23.8
EPS growth (%) 44.5 7.4 11.0 26.6
P/E (x) 24.6 22.9 20.6 16.3
EV/ EBITDA (x) 16.8 15.3 11.8 9.7
ROAE (%) 14.4 13.2 13.5 15.4
ROACE (%) 16.7 14.5 17.1 18.9
84 Edelweiss Securities Limited
Construction
Road BOT project details
IVRCL has a portfolio of three BOT toll road projects, each awarded by the NHAI. All the projects were won in FY06. The total length of the three stretches is 149 km. The company has completed execution on one road project and is awaiting its completion certificate from NHAI. The company expects the other two BOT road projects to be completed in the next couple of months. The road projects have been housed in a 100% subsidiary, IVR Strategic Resources & Services, which acts as a holding company for IVRCL’s investments in transportation BOT projects. Details of the various road BOT projects are given below:
Table 1: Road BOT projects
Project Project type Project statusTotal cost (INR mn)
Debt(INR mn)
Grant(INR mn)
Equity(INR mn)
IVRCL stake
(%)
IVRCL equity
(INR mn)
Kumarapalayam - Chengapally Toll Completed 4,216 3,390 175 651 100 651
Jallandhar-Amritsar Toll Under development 3,430 2,365 395 671 100 671
Salem-Kumarapalayam Toll Under development 5,020 2,930 1,290 800 100 800
Total 12,666 8,685 1,860 2,121 2,121 Source: Company, Edelweiss research
IVRCL is looking to monetise these road assets. This will have twin benefits of providing a valuation benchmark for these projects as well as cash infusion in the company, which will improve the company’s liquidity situation. The company had stayed away from bidding for BOT road projects in the last year. However, with the government taking various steps to make road projects attractive, the company has decided to bid for the upcoming BOT road projects. It has recently won an INR 4 bn project for four laning of Baramati to Phaltan road and Phaltan-Lonand to Shirwal road in Pune and Satara on DBFOT basis. The company has ~75% share in this project which has been awarded by state government of Maharashtra on a positive grant basis. It has also been declared L1 in another road project-the Widening of Sion-Panvel highway project. It is also shortlisted among bidders for a couple of NHAI road BOT projects. Also, with its own BOT road projects coming to a close, the company will be free to look for contracting work on road projects won by other developers. Thus, we expect the company to benefit significantly from the upcoming road opportunities, both as a developer and a contractor.
Road BOT projects nearing completion; stake sale may lead to value unlocking
Edelweiss Securities Limited 85
Construction
Company Description IVRCL was originally incorporated in November 1987 as I. Venku Reddy Constructions. It commenced commercial operations in 1990 with building construction works. Over the years, it has steadily emerged as the leader in the water and environment sectors and has undertaken projects on EPC and lump sum turnkey (LSTK) basis with front-end engineering capabilities in this segment. It operates in the water and environment sectors, roads and bridges, buildings and industrial structures, and power and transmission sectors, and is a leading player in EPC contract implementation. It has also entered the real estate development space through its subsidiary IVR Prime.
Key Risks More than 60% of the company’s order book comes from the water sector, which raises concentration risk. The absence of private sector investments in this sector means that order inflow will continue to depend upon state government finances. The company has also extended loans to IVR Prime, its real estate subsidiary. With the slump in the real estate segment, IVR Prime may find it difficult to repay these loans in the near future.
86 Edelweiss Securities Limited
Construction
Financial Statements Income statement (INR mn)
Year to March FY07 FY08 FY09 FY10E FY11E
Income from operations 23,059 36,606 48,819 62,957 77,125
Direct costs 19,108 30,331 40,594 52,731 64,444
Employee costs 750 1,285 1,797 2,085 2,554
Other expenses 883 1,374 2,210 2,364 2,896
Total operating expenses 20,741 32,991 44,601 57,180 69,894
EBITDA 2,318 3,615 4,218 5,777 7,232
Depreciation and amortisation 216 328 473 624 723
EBIT 2,102 3,287 3,745 5,153 6,509
Interest expense 577 1,165 1,980 2,000 2,397
Other income 326 731 973 688 751
Profit before tax 1,851 2,853 2,738 3,841 4,863
Provision for tax 436 749 478 1,306 1,653
Core profit 1,415 2,104 2,260 2,536 3,210
Profit after tax 1,415 2,104 2,260 2,536 3,210
Profit after minority interest 1,415 2,104 2,260 2,536 3,210
Equity shares outstanding (mn) 130 133 134 135 135
EPS (INR) basic 10.9 15.8 16.9 18.8 23.8
Diluted shares (mn) 130 133 134 135 135
EPS (INR) fully diluted 10.9 15.8 16.9 18.8 23.8
CEPS (INR) 12.7 18.6 20.6 23.4 29.1
Dividend per share (INR) 1.0 1.4 1.4 1.4 1.4
Dividend payout 10.7 10.4 9.7 8.6 6.8
Common size metrics- as % of net revenues
Year to March FY07 FY08 FY09 FY10E FY11E
Operating expenses 89.9 90.1 91.4 90.8 90.6
EBITDA margins 10.1 9.9 8.6 9.2 9.4
Depreciation 0.9 0.9 1.0 1.0 0.9
Interest expenditure 2.5 3.2 4.1 3.2 3.1
Other income 1.4 2.0 2.0 1.1 1.0
Tax 1.9 2.0 1.0 2.1 2.1
EBIT margins 9.1 9.0 7.7 8.2 8.4
Net profit margins 6.1 5.7 4.6 4.0 4.2
Growth metrics (%)
Year to March FY07 FY08 FY09 FY10E FY11E
Revenues 54.2 58.7 33.4 29.0 22.5
EBITDA 72.6 56.0 16.7 37.0 25.2
Net profit 52.2 48.8 7.4 12.2 26.6
EPS 25.6 44.5 7.4 11.0 26.6
Edelweiss Securities Limited 87
Construction
Balance sheet (INR mn)
As on 31st March FY07 FY08 FY09 FY10E FY11E
Equity capital 259 267 267 270 270
Reserves & surplus 12,918 15,789 17,839 19,113 22,106
Stock Options 40 4 0 0 0
Shareholders funds 13,217 16,060 18,106 19,383 22,376
Secured loans 3,895 5,788 10,185 13,185 15,185
Unsecured loans 1,666 4,890 3,795 3,841 4,488
Borrowings 5,561 10,678 13,980 17,026 19,673
Net deferred tax 56 103 117 117 117
Sources of funds 18,834 26,841 32,203 36,527 42,166
Gross block 2,593 4,176 6,624 7,624 8,874
Depreciation 664 984 1,417 2,041 2,763
Net block 1,929 3,192 5,207 5,583 6,110
Capital work in progress 506 541 196 196 196
Total fixed assets 2,435 3,733 5,402 5,778 6,306
Investments 2,829 3,409 3,892 4,592 5,092
Inventories 825 1,943 2,093 2,700 3,096
Sundry debtors 6,332 6,585 11,430 14,741 17,001
Cash and equivalents 2,238 1,771 1,009 1,402 1,716
Loans and advances 7,071 7,781 9,319 9,561 11,898
Other current assets 6,367 10,747 14,284 16,532 20,253
Total current assets 22,834 28,827 38,135 44,936 53,964
Sundry creditors and others 6,183 5,892 10,406 13,074 16,439
Others 2,909 2,888 4,381 5,257 6,309
Provisions 172 347 440 448 448
Total CL & provisions 9,264 9,127 15,226 18,779 23,196
Net current assets 13,570 19,700 22,909 26,157 30,768
Uses of funds 18,834 26,841 32,203 36,527 42,166
Book value per share (BV) 102 120 136 144 166
Free cash flow (INR mn)
Year to March FY07 FY08 FY09 FY10E FY11E
Net profit 1,415 2,104 2,260 2,536 3,210
Add: Depreciation 216 328 473 624 723
Add: Deferred tax 14 51 14 - -
Add: Others (216) (799) (702) (217) (217)
Gross cash flow 1,429 1,685 2,045 2,942 3,715
Less: Changes in W. C. 4,562 2,217 435 606 577
Operating cash flow (3,132) (532) 1,611 2,336 3,138
Less: Capex 1,253 1,618 2,102 1,000 1,250
Free cash flow (4,386) (2,150) (492) 1,336 1,888
Cash flow metrices
Year to March FY07 FY08 FY09 FY10E FY11E
Operating cash flow (3,132) (532) 1,611 2,336 3,138
Financing cash flow 6,936 6,880 4,357 2,005 2,646
Investing cash flow 1,189 1,037 1,619 300 750
Net cash flow 4,992 7,385 7,587 4,641 6,535
Capex (1,253) (1,618) (2,102) (1,000) (1,250)
Dividends paid (152) (219) (219) (217) (217)
Share issuance / (buyback) 7,188 1,000 (20) 368 -
88 Edelweiss Securities Limited
Construction
Profitability and liquidity ratios
Year to March FY07 FY08 FY09 FY10E FY11E
ROAE (%) 15.7 14.4 13.2 13.5 15.4
ROACE (%) 16.9 16.7 14.5 17.1 18.9
Current ratio 2.5 3.2 2.5 2.4 2.3
Debtors (days) 88 64 67 76 75
Inventory days 11 18 22 20 20
Average working capital turnover (x) 2.2 2.2 2.3 2.6 2.7
Average capital turnover ratio (x) 1.5 1.6 1.7 1.8 2.0
Net debt/equity 0.3 0.6 0.7 0.8 0.8
Debt/Equity 0.4 0.7 0.8 0.9 0.9
Payable days 100 73 73 81 84
Cash conversion cycle (1) 10 16 15 12
Debt/EBITDA 2.4 3.0 3.3 2.9 2.7
Adjusted Debt/Equity 0.5 0.8 0.8 0.9 0.9
Operating ratios
Year to March FY07 FY08 FY09 FY10E FY11E
Total asset turnover 1.5 1.6 1.7 1.8 2.0
Fixed assets t/o (x) 11.1 10.4 8.4 7.9 8.9
Equity turnover 2.6 2.5 2.9 3.4 3.7
Du pont analysis
Year to March FY07 FY08 FY09 FY10E FY11E
NP margin (%) 6.1 5.7 4.6 4.0 4.2
Total assets turnover 1.5 1.6 1.7 1.8 2.0
Leverage multiplier 1.7 1.6 1.7 1.8 1.9
ROAE (%) 15.7 14.4 13.2 13.5 15.4
Valuations parameters
Year to March FY07 FY08 FY09 FY10E FY11E
EPS (INR) 10.9 15.8 16.9 18.8 23.8
Y-o-Y growth (%) 25.6 44.5 7.4 11.0 26.6
CEPS (INR) 12.7 18.6 20.6 23.4 29.1
P/E (x) 35.5 24.6 22.9 20.6 16.3
Price/BV(x) 3.8 3.2 2.9 2.7 2.3
EV/Sales (x) 2.3 1.7 1.3 1.1 0.9
EV/EBITDA (x) 23.1 16.8 15.3 11.8 9.7
Dividend yield 0.3 0.4 0.4 0.4 0.4
Basic EPS (INR) 10.9 15.8 16.9 18.8 23.8
Basic P/E (x) 35.5 24.6 22.9 20.6 16.3
Edelweiss Securities Limited 89
Construction
Company description
Madhucon Projects (MPL) is the flagship company of Hyderabad-based Madhucon Group which has interests in construction, granite, coal, sugar, and power segments. MPL, which was incorporated in 1990, is primarily present in the roads and irrigation space. It has built significant execution capabilities over the years, clocking a turnover of INR 10.3 bn and a PAT of INR 493 mn in FY09. The company has built up a significant asset ownership portfolio over the years which includes four toll road projects, a real estate project, and two coal mines in Indonesia. It also has a 74% stake in Simhapuri Energy, which is setting up a 540 MW thermal power plant in Krishnapatnam in Andhra Pradesh.
Key highlights MPL’s current order book is at ~INR 48 bn spread across roads (27%), irrigation (44%), power (20%), mining (4%), with the balance coming from buildings. The robust order book provides revenue visibility over the medium term. MPL has won four BOT toll projects from NHAI, all of which have achieved financial closure. The total project cost of the four projects is estimated at INR 20.2 bn with the company’s equity contribution at INR 3.6 bn. On the real estate side, the company is constructing a 4 star hotel cum office space in Kukatpally, Hyderabad, spread across ~9.2 acres (2.06 mn sq ft). The company’s 95% subsidiary PT Madhucon Indonesia has licence for undertaking mining in two coal mines. The first mine is spread across 3,200 hectares in East Kalimantan, while the second is in South Sumatra spread over 19,000 hectares. MPL is setting up a 540 MW thermal power plant (in two phases of 270 MW each) at Krishnapatnam. The first phase has achieved financial closure and work has already started on the plant. The company expects to commission 135 MW of the first phase by FY11 end.
Key risks MPL’s order book, which is ~4.7x its FY09 revenues, is likely to test the company’s execution capabilities going forward. Apart from this, the sizeable asset ownership portfolio will require upfront equity investment which can lead to increase in leverage levels and associated risks of equity dilution.
October 1, 2009
Reuters : MAPR.BO Bloomberg : MDHP IN
MARKET DATA CMP : INR 262
52-week range (INR) : 275 / 42
Share in issue (mn) : 36.9
M cap (INR bn/USD mn) : 9.7 / 201.0
Avg. Daily Vol. BSE (‘000) : 45.3 SHARE HOLDING PATTERN (%)
Promoters* : 58.5
MFs, FIs & Banks : 11.9
FIIs : 13.0
Others : 16.6
* Promoters pledged shares : Nil (% of share in issue) RELATIVE PERFORMANCE (%)
Sensex Stock Stock over Sensex
1 month 9.3 14.0 4.7
3 months 18.2 56.1 37.9
12 months 33.2 54.6 21.4
Edelweiss Research is also available on www.edelresearch.com,, Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. Edelweiss Securities Limited
India Equity Research | Construction Company Profile
MADHUCON PROJECTS Increasing focus on asset ownership
Parvez Akhtar Qazi
+91-22-4063 5405
Financials
Year to March FY06 FY07 FY08 FY09
Revenue 3,421 5,100 7,380 10,254
Rev. growth (%) 11.7 49.1 44.7 38.9
EBIDTA (INR mn) 627 765 1,073 1,240
Net Profit 333 415 473 469
Shares outstanding (mn) 37 37 37 37
Basic EPS 9.0 11.2 12.8 12.7
EPS growth (%) 50.6 24.7 13.8 (0.7)
P/E (x) 29.1 23.3 20.5 20.7
EV/ EBITDA 12.5 13.5 9.9 9.7
ROAE (%) 13.0 9.7 10.0 9.1
ROACE (%) 13.1 10.9 17.7 18.0
90 Edelweiss Securities Limited
Construction
Road BOT project details
Table 1: Road project details
ProjectProject type Project status
Total cost (INR mn)
Debt(INR mn)
Grant (INR mn)
Equity (INR mn)
MPLstake (%)
MPL equity (INR mn)
Bharatpur-Mahua Toll Operational 3,380 * 1,410 960 1010 ** 85 859
Karur - Dindigul Toll Under development 3,733 2,126 860 747 90 672
Tanjavur - Trichy Toll Under development 3,900 2,483 770 647 100 647
Madurai - Tuticorin Toll Under development 9,200 5,980 1,440 1,780 80 1,424
Total 20,213 11,999 4,030 4,183 3,601 Source: Company, Edelweiss research
Note: * Project cost has increased by INR 410 mn and the same has been funded by the developer. The figures given here are final estimates
** Equity + Unsecured loans
While the Bharatpur-Mahua project is already operational, work on the Karur-Dindigul project is almost complete and it will become operational soon. The company expects the Tanjavur-Trichy project to be completed by January 2010 and the Madurai-Tuticorin project to be completed by March 2010. Thus, all the projects will be operational in FY10 itself. The company expects a toll collection of INR 5-5.5 mn once all the projects get commissioned. It is also bidding for upcoming NHAI projects. MPL has recently increased its stake in the power plant to 74% (it held a 48% stake earlier). It is now looking at increasing the capacity of the power plant to 1,000 MW. As far as the coal mines are concerned, the company expects to start commercial production this year. The company has formed a separate subsidiary, Madhucon Infrastructure, for its asset ownership ventures. The four road projects, the coal mines as well as the power plant will be under the aegis of Madhucon Infra. The company is looking at fund raising plans in this subsidiary to finance its ongoing asset ownership plans.
All 4 of MPL’s roads will be operational by FY10 end; looking to raise funds in asset ownership arm
Edelweiss Securities Limited 91
Construction
Financial Statements Income statement (INR mn)
Year to March FY05 FY06 FY07 FY08 FY09
Income from operations 3,063 3,421 5,100 7,380 10,254
Direct costs 2,298 2,490 4,020 5,770 8,238
Employee costs 98 93 129 301 463
Other expenses 263 210 186 236 313
Total operating expenses 2,659 2,794 4,335 6,307 9,015
EBITDA 405 627 765 1,073 1,240
Depreciation and amortisation 143 191 253 339 433
EBIT 261 436 512 734 806
Interest expenses 43 134 140 165 266
Other income 42 74 218 126 191
Profit before tax 261 376 589 695 731
Provision for tax 98 43 174 223 262
Core profit 163 333 415 473 469
Reported profit 163 333 415 473 469
Profit after minority interest 163 333 415 473 469
Equity Shares outstanding 27 37 37 37 37
EPS (INR) basic 6.0 9.0 11.2 12.8 12.7
Diluted share (mn) 27 37 37 37 37
EPS (INR) fully diluted 6.0 9.0 11.2 12.8 12.7
CEPS (INR) 12.5 14.2 19.1 23.2 24.4
DPS 2.0 0.5 0.6 0.6 0.8
Dividend payout (%) 33.3 5.1 5.3 4.7 6.3
Common size metrics- as % of net revenues
Year to March FY05 FY06 FY07 FY08 FY09
Operating expenses 86.8 81.7 85.0 85.5 87.9
EBITDA margins 13.2 18.3 15.0 14.5 12.1
Depreciation and amortization 4.7 5.6 5.0 4.6 4.2
Interest expenditure 1.4 3.9 2.7 2.2 2.6
Other income 1.4 2.2 4.3 1.7 1.9
Tax 3.2 1.3 3.4 3.0 2.6
EBIT 8.5 12.7 10.0 9.9 7.9
Net profit margins 5.3 9.7 8.1 6.4 4.6
Growth metrics (%)
Year to March FY05 FY06 FY07 FY08 FY09
Revenues 1.6 11.7 49.1 44.7 38.9
EBITDA 3.6 55.0 22.0 40.2 15.5
Net profit (17.5) 104.6 24.7 13.8 (0.7)
EPS (23.5) 50.6 24.7 13.8 (0.7)
PBT (2.3) 44.3 56.6 18.0 5.2
92 Edelweiss Securities Limited
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Balance sheet (INR mn)
As on 31st March FY05 FY06 FY07 FY08 FY09
Equity capital 55 74 74 74 74
Reserves & surplus 976 4,022 4,405 4,852 5,286
Shareholders funds 1,030 4,096 4,479 4,926 5,360
Secured loans 405 1,034 2,012 1,962 3,199
Borrowings 456 1,034 2,012 1,962 3,199
Net deferred tax 35 35 76 122 124
Sources of funds 1,521 5,165 6,567 7,010 8,683
Gross block 1,572 1,890 2,936 3,788 4,615
Depreciation 646 756 980 1,308 1,731
Net block 926 1,134 1,956 2,480 2,884
Capital work in progress 0 0 0 0 0
Total fixed assets 926 1,134 1,956 2,480 2,884
Investments 12 13 2,311 2,997 3,728
Inventories 446 520 719 1,135 517
Sundry debtors 297 1,022 1,476 918 875
Cash and equivalents 580 2,889 1,381 1,016 848
Loans and advances 981 1,859 2,240 4,012 4,908
other current assets 0 0 1 4 3
Total current assets 2,305 6,289 5,816 7,086 7,147
Sundry creditors and others 1,648 2,209 3,357 5,352 4,783
Provisions 74 62 160 201 295
Total CL & provisions 1,722 2,271 3,517 5,553 5,078
Net current assets 582 4,019 2,299 1,533 2,069
Uses of funds 1,521 5,165 6,567 7,010 8,680
Book value per share (BV) 38 111 121 133 145
Cash flow statement (INR mn)
Year to March FY05 FY06 FY07 FY08 FY09
Net profit 163 333 415 473 469
Add: Depreciation 143 191 253 339 433
Add: Deferred tax 35 0 40 46 2
Gross cash flow 341 525 709 858 905
Less: Changes in W. C. 254 1,128 (212) (405) 708
Operating cash flow 87 (603) 921 1,263 196
Less: Capex 27 318 1,046 852 827
Free cash flow 60 (920) (126) 411 (630)
Cash flow metrices
Year to March FY05 FY06 FY07 FY08 FY09
Operating cash flow 76 (623) (1,404) 552 (569)
Financing cash flow 219 3,330 914 (50) 1,237
Investing cash flow 27 318 1,046 852 827
Net cash flow 322 3,026 556 1,355 1,495
Capex (27) (318) (1,046) (852) (827)
Dividends paid 11 19 26 26 35
Share issuance / (buyback) 156 2,752 (64) 0 0
Edelweiss Securities Limited 93
Construction
Profitability and liquidity ratios
Year to March FY05 FY06 FY07 FY08 FY09
ROAE (%) 18.6 13.0 9.7 10.0 9.1
ROACE (%) 20.0 13.1 10.9 17.7 18.0
Current ratio 1.3 2.8 1.7 1.3 1.4
Debtors (days) 31 70 89 59 32
Inventory days 76 103 80 81 62
Average working capital turnover (x) 9.5 1.5 1.6 3.9 5.7
Average capital turnover ratio (x) 2.3 1.0 0.9 1.1 1.3
Net debt/equity 0.0 0.1 0.2 0.2 0.2
Debt/Equity 0.4 0.3 0.4 0.4 0.6
Payable days 236 283 253 275 225
Cash conversion cycle (129) (109) (83) (135) (131)
Debt/EBITDA 1.1 1.6 2.6 1.8 2.6
Adjusted debt/Equity 0.4 0.3 0.4 0.4 0.6
Operating ratios
Year to March FY05 FY06 FY07 FY08 FY09
Total asset turnover 2.3 1.0 0.9 1.1 1.3
Fixed assets t/o (x) 2.0 2.3 2.4 2.3 2.6
Equity turnover 3.5 1.3 1.2 1.6 2.0
Dupont analysis
Year to March FY05 FY06 FY07 FY08 FY09
NP margin (%) 5.3 9.7 8.1 6.4 4.6
Total assets turnover 2.3 1.0 0.9 1.1 1.3
Leverage multiplier 1.5 1.3 1.4 1.4 1.5
ROAE (%) 18.6 13.0 9.7 10.0 9.1
Valuation parameters
Year to March FY05 FY06 FY07 FY08 FY09
Basic EPS (INR) 6.0 9.0 11.2 12.8 12.7
Y-o-Y growth (%) (23.5) 50.6 24.7 13.8 (0.7)
Basic CEPS (INR) 11.2 14.2 18.1 21.9 24.4
P/E (x) 43.8 29.1 23.3 20.5 20.7
Price/BV(x) 6.9 2.4 2.2 2.0 1.8
EV/Sales (x) 2.3 2.3 2.0 1.4 1.2
EV/EBIDTA (x) 17.3 12.5 13.5 9.9 9.7
Dividend yield 0.8 0.2 0.2 0.2 0.3
94 Edelweiss Securities Limited
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Edelweiss Securities Limited 95
Construction
Well placed for long-term growth with a diversified business model Nagarjuna Construction (NCC) had an order book position of INR 139 bn at
Q1FY10 which is well diversified across segments like transportation, water and
irrigation, buildings, electrical, metals, etc. It has performed well on the order
intake front this year; order inflows have exceeded INR 40 bn YTD. The
company’s presence in the overseas market and strong execution capability imply
that NCC is well poised for long-term growth.
Impressive array of BOT projects NCC has an impressive bouquet of 11 BOT projects—five roads, two hydropower,
two airports, one port, and one convention center. This is apart from the Gautami
power plant where the company has decided to sell its stake. Of these 11
projects, one is operational, five are in the development phase, and five projects
have yet to achieve financial closure.
Real estate value unlikely to emerge in medium term The company has a significant amount of land (444 acres in NCC Urban Infra, 85
acres in NCC Vizag Urban Infra, and another 406 acres in two separate JVs).
However, its ability to monetise this land bank will depend on the real estate
market, which is currently turbulent. We do not expect much progress on the real
estate front for the next two years, and hence, do not see any value emerging
from its land bank in the medium term.
Outlook and valuations: Positive; maintain ‘BUY’ NCC is in a strong position for significant growth ahead due to its presence in
diverse segments and strong execution capabilities. Improvement in the pace of
road BOT project awards and easy availability of funds with the recent fund
raising exercise are likely to aid NCC, going forward. At CMP of INR 153, the stock
is trading at a P/E of 20.9x and 16.0x for FY10E and FY11E, respectively. Our
sum-of-the-parts-based target price for the stock is INR 198, with BOT projects
contributing INR 18 to valuations. We have valued real estate investments at
book value. We maintain our ‘BUY’ recommendation on the stock, and rate it
‘Sector Outperformer’ on a relative return basis (refer rating page for details).
October 1, 2009
Reuters : NGCN.BO Bloomberg : NJCC IN
Absolute Rating BUY
Rating Relative to Sector Outperformer Risk Rating Relative to Sector Low
Sector Relative to Market Overweight Note: Please refer last page of the report for rating explanation MARKET DATA CMP : INR 153
52-week range (INR) : 159 / 34
Share in issue (mn) : 228.9
M cap (INR bn/USD mn) : 34.9 / 727.4
Avg. Daily Vol. BSE (‘000) : 2,516.6 SHARE HOLDING PATTERN (%)
Promoters* : 24.4
MFs, FIs & Banks : 26.0
FIIs : 23.9
Others : 25.7
* Promoters pledged shares : Nil (% of share in issue) RELATIVE PERFORMANCE (%)
Sensex Stock Stock over Sensex
1 month 9.3 10.2 0.8
3 months 18.2 8.8 (9.4)
12 months 33.2 64.2 31.0
Edelweiss Research is also available on www.edelresearch.com,, Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. Edelweiss Securities Limited
Parvez Akhtar Qazi
+91-22-4063 5405
India Equity Research | Construction Company Update
NAGARJUNA CONSTRUCTION Poised for long-term growth
EDELWEISS 4D RATINGS
Financials
Year to March FY08 FY09 FY10E FY11E
Revenue (INR mn) 34,729 41,514 47,545 56,234
Rev. growth (%) 21.0 19.5 14.5 18.3
EBIDTA (INR mn) 3,598 3,737 4,564 5,511
Net profit (INR mn) 1,619 1,539 2,207 2,455
Shares outstanding (mn) 229 229 257 257
Diluted EPS (INR) 7.2 6.7 7.3 9.6
EPS growth (%) 19.1 (6.2) 8.5 31.2
Diluted P/E (x) 21.3 22.7 20.9 16.0
EV/ EBITDA (x) 11.5 12.3 10.4 8.7
ROAE (%) 12.6 9.4 9.5 10.5
ROACE (%) 23.5 18.1 19.5 22.3
96 Edelweiss Securities Limited
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Road project details NCC has a sizeable portfolio of five BOT road projects of which two are annuity based while three are toll based. All the projects have achieved financial closure. While one project is already operational, one is nearing completion and the balance are in various stages of completion. The company entered the road PPP space with the Bangalore–Maddur project, which was awarded by the Karnataka Road Development Corporation. This project became operational in June 2006. The company’s other four projects are NHAI projects. The company expects to complete work on the Pondicherry–Tindivanam project by June 2010. The Bangalore elevated corridor project is nearing completion; the balance two projects which are under development are expected to be completed by December 2009. Thus, all the projects will become operational by FY11.
Table 1: Road BOT project details
Project Project type Project statusTotal cost (INR mn)
Debt(INR mn)
Grant (INR mn)
Equity(INR mn)
NCCstake (%)
NCC equity (INR mn)
Bangalore - Maddur Annuity Operational 2,475 2,025 0 450 33.0 149
Bangalore Elevated Corridor Toll Under development 7,757 6,160 (160) 1,757 33.0 580
Meerut - Muzzafarnagar Toll Under development 5,350 3,140 1,270 940 30.0 282
Orai-Bhognipur Annuity Under development 5,848 4,386 0 1,462 64.0 936
Pondicherry - Tindivanam Toll Under development 3,600 2,250 450 900 50.0 450
Total 25,031 17,961 1,560 5,509 2,396 Source: Company, Edelweiss research
The company is also bidding for the upcoming NHAI BOT projects. It has been already shortlisted among the bidders for a couple of road BOT projects.
NCC boasts of a robust road portfolio; recent fund raising exercise to amplify future opportunities
Edelweiss Securities Limited 97
Construction
Company Description NCC has its origins in the partnership business Nagarjuna Construction Corporation. It was founded in 1978 by Mr. AVS Raju and is currently led by his son Mr. A Ranga Raju. It is one of the largest construction players in India and undertakes civil construction in segments such as transportation, water & irrigation, buildings, power, transmission and distribution. The company has ventured into railways, oil & gas, and metals. It has also entered the Middle East where it currently undertakes work in roads, buildings, and water segments. NCC is also one of the large players in the asset development space, with a portfolio of 11 BOT projects spread across roads, power, ports, and airports. The company also has a land bank of 529 acres spread across Hyderabad, Bangalore and Chennai.
Key Risks Decrease in government spending could affect order intake: Although we believe the thrust on infrastructure spending by the government will continue, given that public sector finances are getting stretched, any decrease in spending could affect order intake and growth assumptions. Even though NCC is a well-diversified player and is to that extent insulated by order intake risks to any particular vertical, overall decrease in spending could have a bearing on its growth. Threat of equity dilution: The company’s venture into BOT and real estate segments will demand upfront investments with returns being back-ended. Though the company has pruned its real estate plans considerably, its plans to set up BOT projects will need funding in the future, possibly leading to a rise in leverage.
98 Edelweiss Securities Limited
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Financial Statements Income statement (INR mn)
Year to March FY07 FY08 FY09 FY10E FY11E
Income from operations 28,710 34,729 41,514 47,545 56,234
Direct costs 24,112 28,952 34,972 39,902 47,082
Employee costs 844 1,402 1,886 2,014 2,382
Other expenses 1,058 777 920 1,064 1,259
Total operating expenses 26,013 31,131 37,777 42,981 50,723
EBITDA 2,697 3,598 3,737 4,564 5,511
Depreciation and amortisation 299 482 533 596 710
EBIT 2,398 3,116 3,204 3,968 4,801
Interest expenses 640 1,116 1,621 1,775 1,659
Other income 164 452 700 643 578
Profit before tax 1,923 2,452 2,282 2,836 3,720
Provision for tax 667 811 743 964 1,265
Core profit 1,255 1,641 1,539 1,872 2,455
Extraordinary items 263 0 0 335 0
Prior period Items (363) (22) 0 0 0
Profit after tax 1,156 1,619 1,539 2,207 2,455
Profit after minority interest 1,156 1,619 1,539 2,207 2,455
Equity shares outstanding (mn) 209 229 229 257 257
EPS (INR) basic 6.0 7.2 6.7 7.3 9.6
Diluted shares (mn) 209 229 229 257 257
EPS (INR) fully diluted 6.0 7.2 6.7 7.3 9.6
CEPS (INR) 7.8 9.4 9.1 9.6 12.3
Dividend per share 1.2 1.3 1.1 1.2 1.3
Dividend payout (%) 16.3 17.7 22.6 13.3 14.7
Common size metrics- as % of net revenues
Year to March FY07 FY08 FY09 FY10E FY11E
Operating expenses 90.6 89.6 91.0 90.4 90.2
EBITDA margins 9.4 10.4 9.0 9.6 9.8
Depreciation and amortization 1.0 1.4 1.3 1.3 1.3
Interest expenditure 2.2 3.2 3.9 3.7 3.0
Other income 0.6 1.3 1.7 1.4 1.0
Tax 2.3 2.3 1.8 2.0 2.2
EBIT 8.4 9.0 7.7 8.3 8.5
Net profit margins 4.4 4.7 3.7 3.9 4.4
Annualised growth metrics (%)
Year to March FY07 FY08 FY09 FY10E FY11E
Revenues 56.0 21.0 19.5 14.5 18.3
EBITDA 64.4 33.4 3.9 22.1 20.7
Net profit 20.9 30.7 (6.2) 21.7 31.2
EPS 19.4 19.1 (6.2) 8.5 31.2
Edelweiss Securities Limited 99
Construction
Balance sheet (INR mn)
As on 31st March FY07 FY08 FY09 FY10E FY11E
Equity capital 417 458 458 513 513
ESOP outstanding 5 3 0 0 0
Share application money 54 54 0 0 0
Reserves & surplus 9,914 15,209 16,398 21,862 23,928
Shareholders funds 10,390 15,724 16,856 22,376 24,441
Secured loans 3,820 7,188 8,864 6,364 7,364
Unsecured loans 2,550 1,750 3,575 3,081 2,827
Borrowings 6,370 8,938 12,439 9,444 10,191
Net deferred tax 115 167 188 188 188
Sources of funds 16,875 24,829 29,482 32,008 34,820
Gross block 5,007 6,620 6,233 7,483 9,233
Depreciation 964 1,423 1,641 2,237 2,947
Net block 4,043 5,197 4,592 5,246 6,286
Capital work in progress 186 143 281 281 281
Total fixed assets 4,229 5,339 4,873 5,527 6,567
Investments 4,767 5,648 7,402 8,902 10,402
Inventories 4,040 5,493 7,495 8,324 9,383
Sundry debtors 5,817 8,677 10,260 11,100 12,358
Cash and equivalents 2,434 2,330 1,345 1,368 1,539
Loans and advances 8,579 13,725 14,484 15,949 18,070
Other current assets 93 61 30 30 30
Total current assets 20,963 30,286 33,615 36,771 41,379
Sundry creditors and others 11,850 15,564 15,542 17,704 21,710
Provisions 1,244 880 867 1,488 1,819
Total CL & provisions 13,094 16,444 16,408 19,192 23,529
Net current assets 7,869 13,842 17,206 17,579 17,850
Uses of funds 16,875 24,829 29,482 32,008 34,820
Book value per share (BV) 50 69 74 87 95
Note: The company was showing mobilisation advances as unsecured loans till FY07, but reclassified it as current liablities from FY08.
We have taken it as Current Liablities across all the years.
Cash flow statement
Year to March FY07 FY08 FY09 FY10E FY11E
Net profit 1,156 1,619 1,539 2,207 2,455
Add: Depreciation 299 482 533 596 710
Add: Deferred tax 76 32 21 0 0
Gross cash flow 1,531 2,143 2,092 2,803 3,165
Less: Changes in W. C. (269) 6,108 4,381 349 101
Operating cash flow 1,800 (3,964) (2,288) 2,454 3,064
Less: Capex 2,536 1,570 (249) 1,250 1,750
Free cash flow (736) (5,535) (2,039) 1,204 1,314
Cash flow metrices
Year to March FY07 FY08 FY09 FY10E FY11E
Operating cash flow 1,249 (4,323) (2,583) 2,094 2,674
Financing cash flow 4,378 6,629 3,500 679 746
Investing cash flow (6,426) (2,451) (1,505) (2,750) (3,250)
Net cash flow (798) (145) (588) 23 171
Capex (2,536) (1,570) 249 (1,250) (1,750)
Dividends paid 287 348 295 360 390
Share issuance / (buyback) (6) 4,061 (0) 3,673 0
100 Edelweiss Securities Limited
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Profiability and liquidity ratios
Year to March FY07 FY08 FY09 FY10E FY11E
ROAE (%) 12.7 12.6 9.4 9.5 10.5
ROACE (%) 22.7 23.5 18.1 19.5 22.3
Current ratio 1.6 1.8 2.0 1.9 1.8
Debtors (days) 56 76 83 82 76
Inventory (days) 90 86 96 107 101
Average working capital turnover (x) 3.5 3.2 2.7 2.7 3.2
Average capital turnover ratio (x) 2.5 2.2 2.0 2.1 2.4
Net debt/ Equity 0.4 0.4 0.7 0.4 0.4
Debt/Equity 0.6 0.6 0.7 0.4 0.4
Creditor days 51 65 65 62 65
Cash conversion cycle 95 97 115 126 112
Debt/EBITDA 2.4 2.5 3.3 2.1 1.8
Adjusted debt/Equity 0.9 0.9 1.0 0.6 0.6
Operating ratios
Year to March FY07 FY08 FY09 FY10E FY11E
Total asset turnover 2.0 1.7 1.5 1.5 1.7
Fixed assets t/o (x) 7.4 5.2 9.0 9.1 8.9
Equity turnover 2.9 2.7 2.5 2.1 2.3
Dupont analysis
Income statement FY07 FY08 FY09 FY10E FY11E
NP margin (%) 4.4 4.7 3.7 3.9 4.4
Total assets turnover 2.0 1.7 1.5 1.5 1.7
Leverage multiplier 1.4 1.6 1.7 1.6 1.4
ROAE (%) 12.7 12.6 9.4 9.5 10.5
Valuation parameters
Year to March FY07 FY08 FY09E FY10E FY11E
Diluted EPS (INR) 6.0 7.2 6.7 7.3 9.6
Y-o-Y growth (%) 19.4 19.1 (6.2) 8.5 31.2
CEPS (INR) 7.8 9.4 9.1 9.6 12.3
Diluted P/E (x) 25.4 21.3 22.7 20.9 16.0
Price/BV(x) 3.1 2.2 2.1 1.8 1.6
EV/Sales (x) 1.2 1.2 1.1 1.0 0.9
EV/EBIDTA (x) 13.3 11.5 12.3 10.4 8.7
Dividend yield 0.8 0.9 0.7 0.8 0.9
Edelweiss Securities Limited 101
Construction
Emerging into a diversified EPC player Reliance Infrastructure (RELI) is present in EPC, power generation, transmission,
distribution & trading, roads, and metro projects. It has INR 200 bn worth of EPC
order book. It has 941 MW of generation capacity and holds 45% stake in
Reliance Power which is developing 32,000 MW power generation capacity.
RELI has three power transmission projects aggregating INR 43 bn. It distributes
power in the Mumbai licence area and owns 49% stake in two distributing
companies of Delhi. It is also developing metro rail in Delhi and Mumbai, covering
67 kilometers with a project cost of INR 162 bn. It holds 51% stake in Reliance
Cementation which intends setting up cement plants. It is also developing a 100-
storey central business district in Hyderabad.
Ambitious plans in roads space RELI is developing five toll road projects in Tamil Nadu spread across 401 km
worth INR 31.5 bn. It has also won the rights to develop the Gurgaon-Faridabad
toll road in the NCR with a project cost of INR 7.8 bn. The project has achieved
financial closure and is expected to become operational by May 31, 2011.
It has emerged as the lowest bidder in the Western Freeway Sea link project in
Mumbai (project cost INR 51 bn) and the Jaipur-Reengus corridor (four laning of
52 km, project cost INR 6 bn). Apart from this, the company has ambitious plans
in the roads space going ahead. It is aiming at a near five-fold increase in its
roads portfolio to INR 200 bn by 2013 from INR 45 bn currently.
Outlook and valuations: Improving macro environment; maintain ‘BUY’ RELI is in the process of transforming itself from a power utility into a diversified
EPC provider (~INR 200 bn order book) and infrastructure company (INR ~130 bn
BOT project investment). Net cash and cash equivalents of ~INR 53 bn (~INR
235/share) are likely to be sufficient to fund the company’s projects, going
forward. We expect RELI to benefit the most in the present easy liquidity situation
and huge potential opportunity in the infrastructure space. Our SOTP value stands
at INR 1,376. We maintain our ‘BUY’ recommendation on the stock. On a relative
return basis, we rate it ‘Sector Outperformer’.
October 1, 2009
Reuters : RLIN.BO Bloomberg : RELI IN
Absolute Rating BUY
Rating Relative to Sector Outperformer Risk Rating Relative to Sector Medium
Sector Relative to Market Underweight Note: Please refer last page of the report for rating explanation MARKET DATA CMP : INR 1,206
52-week range (INR) : 1,373 / 354
Share in issue (mn) : 225.3
M cap (INR bn/USD mn) :271.6 / 5,653.6
Avg. Daily Vol. BSE (‘000) : 6,116.3 SHARE HOLDING PATTERN (%)
Promoters* : 37.7
MFs, FIs & Banks : 26.2
FIIs : 18.9
Others : 17.2
* Promoters pledged shares : Nil (% of share in issue) RELATIVE PERFORMANCE (%)
Sensex Stock Stock over Sensex
1 month 9.3 6.6 (2.7)
3 months 18.2 (0.9) (19.1)
12 months 33.2 56.3 23.1
Edelweiss Research is also available on www.edelresearch.com,, Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. Edelweiss Securities Limited
Shankar.K
+91-22-4040 7412
Abhishek Bhandari
+91-22-4063 5496
India Equity Research | Power Company Update
RELIANCE INFRASTRUCTURE Gaining muscle
EDELWEISS 4D RATINGS
Financials
Year to March FY08 FY09 FY10E FY11E
Revenue (INR mn) 63,642 96,965 118,068 146,493
Rev. growth (%) 11.5 69.8 85.5 51.1
EBITDA (INR mn) 5,471 5,065 13,748 15,495
Net profit (INR mn) 7,691 13,432 14,800 15,063
Shares outstanding (mn) 236 226 225 225
EPS (INR) 32.6 59.6 65.7 66.9
EPS growth (%) 14.9 82.7 10.2 1.8
P/E (x) 36.8 20.1 18.3 17.9
P/B(x) 2.4 2.3 2.1 1.9
ROAE (%) 7.3 11.4 11.8 10.9
ROACE (%) 2.9 3.2 14.6 15.3
102 Edelweiss Securities Limited
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Road project details RELI is developing five toll road projects in Tamil Nadu spread across 401 km and worth INR 31.5 bn. Details of these projects are given below:
Table 1: Road BOT project details
Project NameProject type Project status
Total cost(INR mn)
Debt(INR mn)
Grant(INR mn)
Equity (INR mn)
Rel Infra's stake (%)
Rel Infra's equity (INR mn)
Namakkal Karur Toll Operational 3,450 2,760 240 450 100 450
Dindigul Samyanallore Toll Under development 4,150 3,320 310 520 100 520
Trichy Karur Toll Under development 7,500 4,560 1,480 1,460 100 1,460
Trichy Dindigul Toll Under development 5,600 2,270 2,260 1,070 100 1,070
Salem Ulenderpet Toll Under development 10,800 5,020 3,660 2,120 100 2,120
Total 31,500 17,930 7,950 5,620 100 5,620 Source: Company, Edelweiss research
Among these, Namakkal Karur is operational and Dindigul Samyanallore is likely to start commercial operations in the current quarter i.e., Q2FY10. Other three projects are scheduled to be completed in Q2FY11. Table 2: Recent BOT project details
Project Project typeEstimated total cost (INR mn)
Rel Infra's stake (%)
Gurgaon-Faridabad Toll 7,830 100
Jaipur-Reengus Toll 5,900 100
Total 13,730 Source: Company, Edelweiss research
The company has achieved financial closure on the Gurgaon-Faridabad project. It is L1 in
the Jaipur-Reengus project and the INR 51 bn Western Freeway Sea link project in
Mumbai. The company has ambitious plans in the roads space going ahead. It is aiming
at a near five-fold increase in its roads portfolio to INR 200 bn by 2013 from INR 45 bn
currently.
RELI looking at a 5-fold increase in road portfolio
Edelweiss Securities Limited 103
Construction
Company Description RELI (an Anil Dhirubhai Ambani Group company) is involved in infrastructure projects, power EPC projects, and generation, transmission and distribution of electricity. In the infrastructure space, it is developing five road projects on build-operate-transfer (BOT) basis in Tamil Nadu. This division is involved in the development of metro rail projects in Mumbai and Delhi. It is also developing a 100-storey trade tower and a business district in Hyderabad. The EPC division currently has an order book of over INR 200 bn, comprising EPC and balance of plant (BoP) power projects. In the utility space, it distributes more than 28 bn units of electricity to cover 25 mn consumers across different parts of the country, including Mumbai and Delhi, in an area that spans over 1,24,300 sq km. It generates 941 MW of electricity through its power stations located in Maharashtra, Andhra Pradesh, Kerala, Karnataka, and Goa. The company holds 45% in Reliance Power which plans to have a portfolio of 32 GW generating asset.
Key Risks
• There have been changes in margins from the EPC business in the past one year due to the volatility in commodity prices and high interest rates. While we understand that RELI has entered into back-to-back contracts to minimise margin erosion, the scale and timing of projects could expose the company to execution risks.
• The road traffic growth has been dented due to the depressed industrial growth and weak macro environment. This, in addition to any delay in execution of infrastructure projects, could impact valuations.
• The company has parked sizeable part of its investments in group entities and yield bearing instruments. Since other income contributes significantly to the company’s total earnings, any diminution in the value of the same could impact valuations.
104 Edelweiss Securities Limited
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Financial Statements Income statement (INR mn)
Year to March FY07 FY08 FY09 FY10E FY11E
Income from operations 57,100 63,642 96,965 118,068 146,493
Direct costs 25,783 36,342 77,703 94,677 120,515
Employee costs 2,176 3,972 5,366 3,616 3,931
Other expenses 24,166 17,857 8,831 6,027 6,552
Total operating expenses 52,125 58,172 91,900 104,320 130,998
EBITDA 4,975 5,471 5,065 13,748 15,495
Depreciation and amortisation 2,401 2,230 2,449 3,021 3,225
EBIT 2,574 3,241 2,617 10,727 12,271
Interest expenses 2,503 3,088 3,305 4,237 4,435
Other income 8,653 11,370 12,623 9,797 8,787
Income from provisions written back 1,455 2,400 (1,688) - -
Expenditure from provisions 131 (761) 355 - -
Profit before tax 7,400 8,362 13,978 16,287 16,623
Provision for tax 709 671 546 1,486 1,560
Core profit 6,691 7,691 13,432 14,800 15,063
Extraordinary items 1,323 3,161 (2,043) - -
Profit before minority interest 8,015 10,852 11,389 14,800 15,063
Profit after minority interest 8,015 10,852 11,389 14,800 15,063
Shares outstanding 229 236 226 225 225
EPS (INR) basic 29.3 32.6 59.4 65.7 66.9
Diluted shares (mn) 236 236 225 225 225
EPS (INR) fully diluted 28.4 32.6 59.6 65.7 66.9
Dividend per share 5.3 7.4 6.9 9.2 10.7
Dividend payout (%) 17.7 18.7 16.0 16.4 18.7
Common size metrics- as % of net revenues
Year to March FY07 FY08 FY09 FY10E FY11E
Operating expenses 91.3 91.4 94.8 88.4 89.4
Depreciation and amortization 4.2 3.5 2.5 2.6 2.2
Interest expenditure 4.4 4.9 3.4 3.6 3.0
EBITDA margins 8.7 8.6 5.2 11.6 10.6
Net profit margins 11.7 12.1 13.9 12.5 10.3
Growth metrics (%)
Year to March FY07 FY08 FY09 FY10E FY11E
Revenues 42.3 11.5 52.4 21.8 24.1
EBITDA (31.5) 10.0 (7.4) 171.4 12.7
PBT (10.7) 13.0 67.2 16.5 2.1
Net profit (4.1) 14.9 74.6 10.2 1.8
EPS (7.0) 14.9 82.7 10.2 1.8
Edelweiss Securities Limited 105
Construction
Balance sheet (INR mn)
As on 31st March FY07 FY08 FY09 FY10E FY11E
Equity capital 2,286 2,356 2,261 2,253 2,253
Reserves & surplus 91,107 114,513 116,814 129,189 141,433
Shareholders funds 93,392 116,870 119,075 131,442 143,686
Secured loans 14,350 11,250 18,483 17,850 17,850
Unsecured loans 44,233 38,639 54,839 54,839 59,839
Borrowings 58,583 49,889 73,322 72,689 77,689
Others 2,559 2,687 1,940 1,940 1,940
Sources of funds 154,535 169,445 194,336 206,070 223,314
Gross block 58,984 63,961 69,227 74,227 79,227
Depreciation 30,825 33,286 35,825 38,846 42,071
Net block 28,159 30,676 33,402 35,381 37,156
Capital work in progress 2,885 5,689 5,644 2,177 2,177
Total fixed assets 31,044 36,365 39,046 37,557 39,333
Investments 25,119 76,644 121,471 132,091 137,341
Inventories 2,927 3,003 4,407 4,766 5,318
Sundry debtors 10,564 13,514 15,233 18,438 23,014
Cash and equivalents 21,759 877 2,510 3,838 10,388
Loans and advances 92,894 72,821 65,886 65,886 65,886
Total current assets 128,144 90,215 88,036 92,928 104,606
Sundry creditors and others 22,466 25,994 46,555 48,843 50,304
Provisions 7,306 7,784 7,663 7,663 7,663
Total CL & provisions 29,772 33,778 54,218 56,506 57,966
Net current assets 98,373 56,437 33,819 36,422 46,640
Uses of funds 154,535 169,445 194,336 206,070 223,314
Book value per share (BV)(INR) 409 496 527 583 638
Free cash flow (INR mn)
Year to March FY07 FY08 FY09 FY10E FY11E
Net profit 8,015 10,852 11,389 14,800 15,063
Depreciation 2,401 2,230 2,449 3,021 3,225
Deferred tax 272 172 (546) - -
Others (785) 38 6,003 0 (410)
Gross cash flow 9,902 13,292 19,295 17,821 17,878
Less: Changes in W. C. (5,754) (27,263) (27,916) 1,276 3,667
Operating cash flow 15,656 40,555 47,211 16,546 14,210
Less: Capex 4,986 7,782 5,220 1,532 5,000
Free cash flow 10,670 32,773 41,990 15,013 9,210
Cash flow metrices (INR mn)
Year to March FY07 FY08 FY09 FY10E FY11E
Operating cash flow 15,656 40,555 47,211 16,546 14,210
Financing cash flow 17,188 14,809 (12,924) (9,532) (6,197)
Investing cash flow (68,500) (51,803) (41,717) (5,687) (1,463)
Net cash flow (35,655) 3,561 (7,430) 1,327 6,551
Capex (4,986) (7,782) (5,220) (1,532) (5,000)
Dividends paid (1,417) (2,031) (1,826) (2,424) (2,820)
106 Edelweiss Securities Limited
Construction
Profitability & liquidity ratios
Year to March FY07 FY08 FY09 FY10E FY11E
ROAE (%) 7.8 7.3 11.4 11.8 10.9
ROACE (%) 2.1 2.9 3.2 14.6 15.3
Current ratio 4.3 2.7 1.6 1.6 1.8
Debtors (days) 69 69 54 52 52
Average fixed assets t/o (x) 2.1 2.2 3.0 3.4 4.0
Average working capital t/o (x) 0.6 0.8 2.1 3.4 3.5
Average capital employed t/o (x) 0.4 0.4 0.5 0.6 0.7
Debt / Equity 0.6 0.4 0.6 0.6 0.5
Debt/EBITDA 11.8 9.1 14.5 5.3 5.0
Adjusted debt/Equity 0.6 0.4 0.6 0.6 0.5
Operating ratios
Year to March FY07 FY08 FY09 FY10E FY11E
Total asset turnover 0.4 0.4 0.5 0.6 0.7
Average fixed assets t/o (x) 2.1 2.2 3.0 3.4 4.0
Equity turnover 0.7 0.6 0.8 0.9 1.1
Du pont analysis
Year to March FY07 FY08 FY09 FY10E FY11E
NP margin (%) 11.7 12.1 13.9 12.5 10.3
Total assets turnover 0.4 0.4 0.5 0.6 0.7
Leverage multiplier 1.6 1.5 1.5 1.6 1.6
ROAE (%) 7.8 7.3 11.4 11.8 10.9
Valuation parameters
Year to March FY07 FY08 FY09 FY10E FY11E
Diluted EPS (INR) 28.4 32.6 59.6 65.7 66.9
Y-o-Y growth (%) (7.0) 14.9 82.7 10.2 1.8
CEPS (INR) 41.0 42.8 67.8 79.1 81.2
Diluted P/E (x) 42.3 36.8 20.1 18.3 17.9
Price/BV(x) 2.9 2.4 2.28 2.06 1.88
EV/Sales (x) 5.0 4.0 2.3 1.8 1.4
EV/EBITDA (x) 57.5 46.6 43.6 15.1 12.9
Edelweiss Securities Limited 107
Construction
Company description Sadbhav Engineering (SEL) is an Ahmadabad-based company with operations in three main segments-roads, irrigation, and mining. Since its incorporation in 1988, the company has grown rapidly, clocking a turnover of INR 10.6 bn and a PAT of INR 633 mn in FY09. It entered the road sector in 1995; it has built more than 1,160 km of roads and highways and a further 625 km is under construction. Of late, it has been increasing its focus in the high margin mining business. The company’s key clients include NHAI, GIPCL, GMDC, state governments of Gujarat, Andhra Pradesh, Karnataka, among others. Apart from the contracting business, the company has a sizeable presence in the asset ownership space with a portfolio of six BOT road projects.
Key highlights SEL’s order book has grown rapidly–from INR 25 bn in FY08 end to ~INR 43.4 bn at June 2009 end. The roads segment dominates the order book comprising ~69% of it with irrigation contributing 16% and mining segments providing the balance. SEL ventured into the BOT space in FY06. Since then, it has built a strong BOT portfolio of six projects of which two are operational and two are under development. The company is close to achieving FC on the balance two projects.
Key risks An associated risk with BOT projects is the issue of land acquisition and the related delays in it. Any delay in land acquisition could affect project viability. Also, BOT projects require upfront equity investment which coupled with the funding needs of the core contracting business can lead to increase in leverage and associated risks of equity dilution.
October 1, 2009
Reuters : SADE.BO Bloomberg : SADE IN
MARKET DATA CMP : INR 850
52-week range (INR) : 879 / 220
Share in issue (mn) : 12.5
M cap (INR bn/USD mn) : 10.6 / 221.2
Avg. Daily Vol. BSE (‘000) : 7.8 SHARE HOLDING PATTERN (%)
Promoters* : 47.6
MFs, FIs & Banks : 16.0
FIIs : 23.8
Others : 12.6
* Promoters pledged shares : Nil (% of share in issue) RELATIVE PERFORMANCE (%)
Sensex Stock Stock over Sensex
1 month 9.3 10.0 0.6
3 months 18.2 32.0 13.9
12 months 33.2 26.1 (7.1)
Edelweiss Research is also available on www.edelresearch.com,, Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. Edelweiss Securities Limited
Parvez Akhtar Qazi
+91-22-4063 5405
India Equity Research | Construction Company Profile
SADBHAV ENGINEERING Betting big on roads
Financials
Year to March FY06 FY07 FY08 FY09
Revenue 2,913 4,901 8,721 10,625
Rev. growth (%) 41.4 68.2 77.9 21.8
EBITDA (INR mn) 350 590 964 1,083
Net Profit (Adjusted) 138 264 524 633
Shares outstanding (mn) 11 11 13 13
EPS (INR) 12.7 24.2 37.1 50.6
EPS growth (%) 45.3 90.3 53.6 36.4
P/E (x) 66.9 35.2 22.9 16.8
EV/ EBITDA 26.7 16.5 12.5 11.7
ROAE (%) 14.9 19.4 21.5 20.1
ROACE (%) 13.3 24.5 32.4 24.2
108 Edelweiss Securities Limited
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Road BOT project details SEL ventured into the BOT space in FY06. Since then, it has built a strong BOT portfolio of six projects of which two are operational and two are under development. The total project cost of these four projects is INR 20.2 bn. The company is close to achieving FC on the INR 15 bn Maharashtra border check post project and the INR 14.1 bn MP/Mh border-Dhule project. The BOT projects are to be housed in a 100% owned subsidiary, Sadbhav Infrastructure Projects (SIPL) which will be the holding company for SEL’s BOT projects. The company has partnered with reputed companies like HCC, John Laing, Gammon, SREI Infra etc., for these projects. SEL’s entry into the asset ownership space started with the award of the Mumbai-Nasik project in FY06. It won three BOT projects in FY07, while the balance two projects were won in FY09.
Table 1: Current BOT project details
ProjectProject type Project status
Total cost(INR mn)
Debt(INR mn)
Grant (INR mn)
Internal accruals
(INR mn)Equity
(INR mn)Sadbhav
stake (%)
Sadbhav equity (INR
mn)
Aurangabad-Jalna Toll Operational 2,770 1,940 0 0 830 51.0 423
Ahmedabad Ring Road Toll Operational 5,008 4,050 360 77 * 521 80.0 417
Mumbai-Nasik Toll Under development 7,530 6,500 510 0 520 20.0 104
Nagpur - Seoni Annuity Under development 4,897 3,821 0 0 1,076 51.0 549
Total 20,205 16,311 870 77 2,947 1,493 Source: Company, Edelweiss research
Note: * The company was entitled to collect toll during the construction period; it collected toll of INR 380 mn which resulted in surplus funds of
INR 303 mn
Table 2: Future BOT projects details
Project Project typeEstimated total cost (INR mn)
Sadbhav stake (%)
Maharashtra border check post Toll 15,000 90
MP/MH border Dhule Toll 14,150 27
Total 29,150 Source: Company, Edelweiss research
Brief description of projects:
• Mumbai–Nasik project: The company was awarded the toll-based Mumbai–Nasik road project in FY06 in consortium with Gammon and B.E.Billimoria. The project involves four-laning and strengthening of the 99.5 km Vadape-Gonde (Mumbai-Nasik) section of the NH-3 including construction of 7.5 km long Kasara Ghat bypass segment. The concession period for this project is 20 years. The project achieved financial closure in July 2006. The toll collection on the project can start during the construction period on completion of at least 50 km of a continuous stretch of the project highway including the Kasara Ghat by pass. While part of the road is expected to become operational soon, the rest will come on-stream in December 2009.
• Ahmadabad ring road project: This project, which is already operational, was won in August 2006. This toll-based project is in an 80:20 JV with Patel Infrastructure. The concession period for the project is 20 years. The FC was achieved in December 2006 and the concession period started in January 2007. It involves widening of the existing two lane stretch of 76 km into four lanes around Ahmadabad city.
Focus on road development to translate into big opportunities for SEL going ahead
Edelweiss Securities Limited 109
Construction
The company, which has advertising rights on the road, achieved completion of the project in May 2008. The road is an important link around Ahmadabad city as it joins five NHs and 14 SHs sections.
• Aurangabad-Jalna project: SEL was awarded this toll-based project in November 2006. This project is in a 51:49 consortium with PBA Infrastructure wherein both companies are executing the project equally. The project involves widening of the existing two lane stretch of 65 km into four lanes. The company also has advertising rights on the stretch. The FC for the project was achieved in November 2007.
The project has already become operational and the SPV has been authorised by the government to collect toll from July 28, 2009. The concession period for the project is 23 years and 6 months. It expects significant traffic growth on the stretch due to proposed development of the industrial estate by MIDC. Also, the route provides the singular access point to Ajanta-Ellora, Aurangabad, and Jalna industrial estate.
• Nagpur-Seoni: The company won this annuity-based project in January 2007. This project is in a JV (51:49) with SREI Infrastructure where SEL is responsible for the entire EPC work. The project involves four laning of the existing two laned stretch of 56 km on NH 7. The project achieved FC in November 2007. The debt has been financed through an ECB of USD 93 mn with interest rate and currency exposure fully hedged.
• Maharashtra border check post: This toll-based project, which has been awarded by MSRDC, is in a JV (51:49) with SREI Infrastructure where SEL is responsible for the entire EPC work. It involves computerisation and integration of 22 inter state border check posts bordering Gujarat, MP, Chattisgarh, AP, Karnataka, and Goa. Of these, 11 are situated on NHs with the balance on SHs. The project is yet to achieve FC.
This project is a new initiative to curb revenue evasion. All the goods vehicles going in and out of the state will be checked at these points using scanners with gamma rays and radio frequency identification devices (RFID). The concession period for the project is 24 years and 6 months. The company expects to complete the project by November 2010. While toll collection from all commercial vehicles entering the state will form a major chunk of revenues (90%), additional revenues are likely to accrue from leasing of commercial space, advertising rights, parking and warehousing charges at each of the 22 locations.
• MP/MH border Dhule: This toll-based project involves construction and maintenance of the highway stretch from Maharashtra-Madhya Pradesh border to Dhule on NH–3 under NHDP Phase III A. The HCC-John Laing-Sadbhav consortium has an exposure in the ratio of 37:36:27. The concession period of the project is 18 years including 30 months for construction.
While 2 projects are operational, 2 are likely to achieve completion in next one year
110 Edelweiss Securities Limited
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Financial Statements Income statement (INR Mn)
Year to March FY05 FY06 FY07 FY08 FY09
Income from operations 2,061 2,913 4,901 8,721 10,625
Direct costs 1,622 2,334 4,040 7,347 9,017
Administrative expenses 183 229 271 410 525
Total operating expenses 1,805 2,563 4,311 7,757 9,542
EBITDA 256 350 590 964 1,083
Depreciation and amortisation 133 139 149 139 157
EBIT 123 211 441 825 926
Interest expenses 75 91 69 157 214
Other income 27 7 14 39 117
Profit before tax 75 128 386 706 829
Provision for tax 5 (11) 122 242 196
Core profit 70 138 264 464 633
Extraordinary items 0 0 0 60 0
Profit after tax 70 138 264 524 633
PAT before minority interest 70 138 264 524 633
Profit after minority interest 70 138 264 524 633
Equity shares outstanding (mn) 8.0 10.9 10.9 12.5 12.5
EPS (INR) basic 8.7 12.7 24.2 37.1 50.6
Diluted shares (mn) 8.0 10.9 10.9 12.5 12.5
EPS (INR) fully diluted 8.7 12.7 24.2 37.1 50.6
CEPS (INR) 24.5 25.5 37.1 48.6 63.2
Dividend per share 0.5 2.3 4.7 4.7 4.7
Dividend payout (%) 5.6 17.9 19.4 11.2 9.2
Common size metrics- as % of net revenues
Year to March FY05 FY06 FY07 FY08 FY09
Operating expenses 87.6 88.0 88.0 88.9 89.8
EBITDA margins 12.4 12.0 12.0 11.1 10.2
Depreciation and amortization 6.5 4.8 3.0 1.6 1.5
Interest expenditure 3.6 3.1 1.4 1.8 2.0
Other income 1.3 0.2 0.3 0.4 1.1
Tax 0.2 (0.4) 2.5 2.8 1.8
EBIT 5.9 7.3 9.0 9.5 8.7
Net profit margins (Adjusted) 3.4 4.8 5.4 5.3 6.0
Annualised growth metrics (%)
Year to March FY05 FY06 FY07 FY08 FY09
Revenues (16.6) 41.4 68.2 77.9 21.8
EBITDA (7.3) 36.7 68.6 63.3 12.4
Net profit 38.6 97.9 90.3 98.7 20.8
EPS (82.7) 45.3 90.3 53.6 36.4
Edelweiss Securities Limited 111
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Balance sheet (INR mn)
As on 31st March FY05 FY06 FY07 FY08 FY09
Equity capital 80 109 109 125 125
Reserves & surplus 523 1,145 1,357 2,736 3,310
Shareholders funds 603 1,254 1,466 2,861 3,435
Secured loans 610 462 716 1,502 2,111
Unsecured loans 71 60 14 1 0
Borrowings 681 522 730 1,503 2,111
Net deferred tax 108 108 93 97 110
Sources of funds 1,392 1,884 2,290 4,461 5,656
Gross block 1,418 1,799 2,020 2,414 2,606
Depreciation 642 761 901 984 1,061
Net block 776 1,038 1,119 1,430 1,545
Total fixed assets 776 1,038 1,119 1,430 1,545
Investments 0 104 461 1,205 1,246
Inventories 399 463 467 850 276
Sundry debtors 580 846 1,339 1,537 2,782
Cash and equivalents 133 432 251 103 100
Loans and advances 242 636 1,199 1,685 2,757
Other current assets 4 80 191 158 5
Total current assets 1,357 2,457 3,447 4,333 5,920
Sundry creditors 738 1,726 2,500 2,040 2,592
Provisions 5 25 264 484 472
Total CL & provisions 742 1,751 2,763 2,524 3,064
Net current assets 615 706 684 1,809 2,856
Others 0 34 26 17 8
Uses of funds 1,391 1,884 2,290 4,461 5,656
Book value per share (BV) 75 115 135 229 275
Cash flow statement
Year to March FY05 FY06 FY07 FY08 FY09
Net profit 70 138 264 524 633
Add: Depreciation 133 139 149 139 157
Add: E.O.Adjustments (0) (34) 9 9 9
Add: Deferred tax (7) 0 (8) 5 0
Gross cash flow 196 244 413 676 798
Less: Changes in W. C. 315 (208) 159 1,273 1,050
Operating cash flow (119) 451 254 (597) (251)
Less: Capex (28) 382 221 394 193
Free cash flow (91) 70 33 (991) (444)
Cash flow metrices
Year to March FY05 FY06 FY07 FY08 FY09
Operating cash flow (123) 322 (153) (1,340) (351)
Financing cash flow 266 376 206 1,668 606
Investing cash flow (28) 382 221 394 193
Net cash flow 171 317 (168) (66) 63
Capex 28 (382) (221) (394) (193)
Dividends paid 4 25 51 59 59
Share issuance / (buyback) 170 535 (2) 894 (2)
112 Edelweiss Securities Limited
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Profiability and liquidity ratios
Year to March FY05 FY06 FY07 FY08 FY09
ROAE (%) 13.8 14.9 19.4 21.5 20.1
ROACE (%) 9.8 13.3 24.5 32.4 24.2
Current ratio 1.8 1.4 1.2 1.7 1.9
Debtors (days) 88 89 81 60 74
Inventory days 132 99 63 44 40
Average working capital turnover (x) 4.6 4.4 7.1 7.0 4.6
Average capital turnover ratio (x) 1.6 1.8 2.7 3.4 2.8
Net debt/ Equity 0.9 0.1 0.3 0.5 0.6
Debt/Equity 1.1 0.4 0.5 0.5 0.6
Creditor days 173 193 191 113 94
Cash conversion cycle 47 (5) (47) (8) 20
Debt/EBITDA 2.7 1.5 1.2 1.6 1.9
Adjusted debt/Equity 1.1 0.4 0.5 0.5 0.6
Operating ratios
Year to March FY05 FY06 FY07 FY08 FY09
Total asset turnover 1.6 1.8 2.3 2.6 2.1
Fixed assets t/o (x) 1.7 2.2 3.1 4.8 4.8
Equity turnover 4.1 3.1 3.6 4.0 3.4
Dupont analysis
Year to March FY05 FY06 FY07 FY08 FY09
NP margin (%) 3.4 4.8 5.4 5.3 6.0
Total assets turnover 1.6 1.8 2.3 2.6 2.1
Leverage multiplier 2.5 1.8 1.5 1.6 1.6
ROAE (%) 13.8 14.9 19.4 21.5 20.1
Valuation parameters
Year to March FY05 FY06 FY07 FY08 FY09
EPS (INR) 8.7 12.7 24.2 37.1 50.6
Y-o-Y growth (%) (82.7) 45.3 90.3 53.6 36.4
CEPS (INR) 24.5 25.5 37.1 48.6 63.2
P/E (x) 97.2 66.9 35.2 22.9 16.8
Price/BV(x) 11.3 7.4 6.3 3.7 3.1
EV/Sales (x) 3.6 3.2 2.0 1.4 1.2
EV/EBIDTA (x) 28.7 26.7 16.5 12.5 11.7
Dividend yield 0.1 0.3 0.6 0.6 0.6
Edelweiss Securities Limited 113
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NOTES:
114 Edelweiss Securities Limited
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RATING & INTERPRETATION
ABSOLUTE RATING
Ratings Expected absolute returns over 12 months
Buy More than 15%
Hold Between 15% and - 5%
Reduce Less than -5%
RELATIVE RETURNS RATING
Ratings Criteria
Sector Outperformer (SO) Stock return > 1.25 x Sector return
Sector Performer (SP) Stock return > 0.75 x Sector return
Stock return < 1.25 x Sector return
Sector Underperformer (SU) Stock return < 0.75 x Sector return
Sector return is market cap weighted average return for the coverage universe within the sector
RELATIVE RISK RATING
Ratings Criteria
Low (L) Bottom 1/3rd percentile in the sector
Medium (M) Middle 1/3rd percentile in the sector
High (H) Top 1/3rd percentile in the sector
Risk ratings are based on Edelweiss risk model
SECTOR RATING
Ratings Criteria
Overweight (OW) Sector return > 1.25 x Nifty return
Equalweight (EW) Sector return > 0.75 x Nifty return
Sector return < 1.25 x Nifty return
Underweight (UW) Sector return < 0.75 x Nifty return
SECTOR RATINGS Company Absolute Relative Relative
reco reco risk
Simplex Infrastructure Buy SP M
BL Kashyap and Sons Buy SO H
C & C Constructions Buy SP H
Nagarjuna Construction Co. Buy SO L
Gammon India Hold SU M
IVRCL Infra Buy SO L
Patel Engineering Buy SP M
Jaiprakash Associates Hold SU H
IRB Infrastructure Buy SO L
Edelweiss Securities Limited 115
Construction
IRB Infra Gammon India
4080
120160200240
Oct
-08
Nov-
08
Dec
-08
Jan-0
9
Feb-0
9M
ar-
09
Apr
-09
May-
09
Jun-0
9Ju
l-09
Aug
-09
Sep
-09
Oct
-09
(IN
R)
Gayatri Projects GMR Infra
075
150225300375
Oct
-08
Nov-0
8D
ec-
08
Jan-0
9Fe
b-0
9M
ar-
09
Apr-
09
May-0
9Ju
n-0
9Ju
l-09
Aug-0
9S
ep-0
9O
ct-0
9
(IN
R)
IVRCL Infra Madhucon Projects
AccmAccm
Buy
50140230320410500
Oct
-08
Nov-0
8D
ec-
08
Jan-0
9Fe
b-0
9M
ar-
09
Apr-
09
May-0
9Ju
n-0
9Ju
l-09
Aug-0
9S
ep-0
9O
ct-0
9
(IN
R)
Nagarjuna Construction Reliance Infra
Hold
Hold
HoldBuy
204876
104132160
Oct
-08
Nov-0
8D
ec-
08
Jan-0
9Fe
b-0
9M
ar-
09
Apr-
09
May-0
9Ju
n-0
9Ju
l-09
Aug-0
9S
ep-0
9O
ct-0
9
(IN
R)
Sadbhav Engineering
200360520680840
1000
Oct
-08
Nov-
08
Dec
-08
Jan-0
9
Feb-0
9M
ar-
09
Apr
-09
May-
09
Jun-0
9Ju
l-09
Aug
-09
Sep
-09
Oct
-09
(IN
R)
Hold
Hold
Redc2075
130185240
Oct
-08
Nov-0
8D
ec-
08
Jan-0
9Fe
b-0
9M
ar-
09
Apr-
09
May-0
9Ju
n-0
9Ju
l-09
Aug-0
9S
ep-0
9O
ct-0
9
(IN
R)
2096
172248324400
Oct
-08
Nov-0
8D
ec-
08
Jan-0
9Fe
b-0
9M
ar-
09
Apr-
09
May-0
9Ju
n-0
9Ju
l-09
Aug-0
9S
ep-0
9O
ct-0
9
(IN
R)
HoldHold
HoldRedc
10 30 50 70 90
110 130 150
Oct
-08
Nov-0
8D
ec-
08
Jan-0
9Fe
b-0
9M
ar-
09
Apr-
09
May-0
9Ju
n-0
9Ju
l-09
Aug-0
9S
ep-0
9O
ct-0
9
(IN
R)
Buy
300 550 800
1,050 1,300 1,550
Oct
-08
Nov-0
8D
ec-
08
Jan-0
9Fe
b-0
9M
ar-
09
Apr-
09
May-0
9Ju
n-0
9Ju
l-09
Aug-0
9S
ep-0
9O
ct-0
9
(IN
R)
116 Edelweiss Securities Limited
Construction
Edelweiss Research is also available on www.edelresearch.com ,Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset. Edelweiss Securities Limited
Edelweiss Securities Limited, 14th Floor, Express Towers, Nariman Point, Mumbai – 400 021, Board: (91-22) 2286 4400, Email: [email protected]
Naresh Kothari Co-Head Institutional Equities [email protected] +91 22 2286 4246
Vikas Khemani Co-Head Institutional Equities [email protected] +91 22 2286 4206
Nischal Maheshwari Head Research [email protected] +91 22 6623 3411
Coverage group(s) of stocks by primary analyst(s): Construction: BL Kashyap & Sons, Gammon India, Hindustan Construction, IVRCL Infrastructures & Projects, Nagarjuna Construction, Patel Engineering
and Simplex Infrastructures.
Recent Research
02-Sep-09 Nagarjuna Fund raising to spur 134 Buy Construction future growth;
Event Update
04-Aug-09 Gammon Strong margins but 166 Hold India concerns persist; Result Update
01-Aug-09 B L Kashyap Soft quarter on 345 Buy and sons topline front; margins
improve; Result Update
31-Jul-09 Simplex Topline below 380 Buy Infrastructure expectations; margin Improvement positive; Result Update
Distribution of Ratings / Market Cap
Edelweiss Research Coverage Universe
Rating Distribution* 70 53 16 142
* 3 stocks under review
Market Cap (INR) 89 38 15
> 50bn Between 10bn and 50 bn < 10bn
Date Company Title Price (INR) Recos
Buy Hold Reduce Total
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