INSTITUTIONAL EQUITY RESEARCH Infrastructurebackoffice.phillipcapital.in/Backoffice/Researchfiles/PC...In Dec‐14, we released a report on the EPC sector (read here). In that report,

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Infrastructure

EPC Sector – Reiterating conviction in the ‘Trinity’ INDIA | INFRASTRUCTURE | Sector Update

3 March 2015

In Dec‐14, we released a report on the EPC sector (read here). In that report, we had highlighted EPC sector to be the biggest beneficiary of the surge in infrastructure awards, over the next three years. We had predicted the EPC companies will benefit from a ‘trinity of forces’ — order awards, reduced competition, lower interest rates – leading to manifold growth in earnings. In the three months since then, our three BUY recommendations – NCC, J Kumar and KNR – have delivered 45%, 44% and 42% returns respectively. The Union Budget FY16 reinforces our conviction in the sector and its potential. In the budget, the government has significantly stepped up its outlay for the sectors that benefit the EPC sector the most – Roads, Railways and MRTS. The capital outlay for roads and railways for FY16, have been increased by 194% and 53% over FY15. To support the higher outlay, the budgetary support for the sectors – roads and railways – have been increased by 59% and 33% respectively. We would like to highlight that in our Dec‐14 report, we had marked these two sectors as the potential torchbearers for the EPC sector. Over and above the huge opportunity, expected on the back of huge capital outlay for infrastructure, we continue to maintain the belief in our ‘trinity of forces’ to benefit the EPC sector. Each of these three forces will influence a different line item in the companies’ P&Ls in a significantly positive manner, leading to manifold growth in earnings, and the beginning of a new virtuous cycle, over the next three years. Order awards to pick up: We see a huge investment opportunity in the EPC space, primarily driven by three segments – roads, railways, and MRTS. Our bottom‐up analysis indicates that over the next three years Rs‐8.5tn worth of projects may be awarded in these segments, which will translate into an EPC opportunity of roughly Rs 6tn. This will lead to robust topline growth, for the companies. Reduced competition: Most EPC companies suffered heavily due to the lack of order awards and high interest rates in the last four years. While many are currently under the CDR (Corporate Debt Restructuring) program, others have highly stretched balance sheets. These companies will be incapable of bidding and grabbing significant orders, implying lower competition and superior margins for the solvent and capable companies. Interest rates to fall: RBI is likely to lower the interest rates in the near to medium term this will lower the interest expenses and result in superior earnings growth for the highly leveraged sector. Lower interest expense will also improve cash flows leading to lower debt levels further reducing the interest expense a shift to a virtuous loop from the vicious loop that companies found themselves over the last four years. In this report, we have also attached the transcript of the pre‐budget conference call with NHAI, which we had organized on the eve of the Union Budget FY16. As evident from the comments from NHAI, it is looking to award a mammoth 20,000km of road projects over the next two years, and was seeking higher budgetary support from the government. The Union Budget FY16 delivered just that! Overall, we expect the EPC sector to be one of the most exciting turnaround stories of the economic revival of the next three years. We have upgraded our multiple for the entire sector, on the back of enhanced visibility in the order awards, from the announcements and allocation in the Union Budget for FY16. We now value NCC at 13x FY17 P/E (earlier 10x), J Kumar Infraprojects at 12x FY17 P/E (earlier 10x) and KNR Constructions at 12x FY17 P/E (earlier 10x). We maintain BUY rating on all three of them, and expect them to significantly outperform the sector peers, over the next three years.

Companies Nagarjuna Construction CMP, Rs Rs 93 Reco BUY Target Price, Rs Rs 116 Upside 25% KNR Construction CMP, Rs Rs 425 Reco BUY Target Price, Rs Rs 500 Upside 18% J Kumar Infraprojects CMP, Rs Rs 631 Reco BUY Target Price, Rs Rs 754 Upside 19% EPC companies – Relative Positioning

Source: Phillip Capital India Research Vibhor Singhal (+ 9122 6667 9949) [email protected]

NCC

J Kumar

KNR

8.0

9.0

10.0

11.0

12.0

13.0

14.0

15.0

0.0 0.3 0.5 0.8 1.0

P/E (FY17E)

Debt:Equity (FY17E)

http://backoffice.phillipcapital.in/Backoffice/Researchfiles/PC_-_Infrastructure_Sector_Update_-_Nov_2014_20141202151927.pdf�


INFRASTRUCTURE SECTOR UPDATE

Table of Contents

FY16 Union Budget – Providing the necessary fillip ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙ 3

Investment Thesis – Trinity at Work ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙ 4

Force # 1 – A mammoth opportunity beckons ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙ 5

Force # 2 – Reduced competitive intensity to aid margin expansion ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙ 9

Force # 3 – Lower interest rates to provide additional fillip to the earnings ∙∙∙∙∙∙∙∙∙∙∙∙∙ 10

Valuation – inexpensive vis‐à‐vis potential ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙ 11

Companies Section

Nagarjuna Construction ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙ 13

KNR Construction ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙ 16

J Kumar Infraprojects ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙ 19

Annexure

Transcript of conference call with NHAI ∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙∙ 22



FY16 Union Budget – Providing the necessary fillip The Union Budget FY16, though providing no big‐bang reforms, has done what was necessary for the infrastructure sector. The government plans to increase spending on infrastructure by Rs700bn in FY16 – with a step‐up in allocation for sectors like roads, railways and metros. The higher budgetary allocations and the mammoth capital outlays for the sectors (esp roads) are expected to provide the necessary impetus to the sector. Some of the key initiative announced in the Union Budget FY16, for the infrastructure sector: Increase in infrastructure spending by Rs 700bn

• National Investment & Infra Fund to be established with initial corpus of Rs200bn

• Tax free bonds to be allowed in roads, railways and irrigation sectors • Allocation to DMIC doubled to Rs12bn

Increased allocation for roads, railways and urban development

• 96% increase in budgetary allocation for NHAI • 37% increase in allocation for metro projects • 33% increase in allocation for railways

Infrastructure sectoral capital outlay – FY14‐FY16E

Rs bn FY14 FY15 FY16IncrementFY15 –FY16

% IncreaseFY15 –FY16

Roads 286.6 281.1 827.0 545.8 194%Shipping 41.8 26.0 45.5 19.4 75%Urban development 91.3 114.4 132.0 17.6 15%Railways 520.1 643.0 983.7 340.6 53%

Source: Budget Documents Infrastructure sectoral budgetary allocations – FY14‐FY16E

Rs bn FY14 FY15 FY16IncrementFY15 –FY16

% IncreaseFY15 –FY16

Roads 207.2 251.1 400.0 148.9 59% NHAI 116.3 150.1 294.2 144.1 96%Urban development 64.0 77.2 100.3 23.1 30% Metro projects 54.6 60.2 82.6 22.4 37%Railways 270.7 301.0 400.0 99.0 33%

Source: Budget Documents The above announcements and allocations are expected to lead to a surge in order awards, especially for the EPC sector. As we have been highlighting – roads, railways and MRTS segments are expected to be the torch‐bearers for the EPC sector over the next three years. We expect a strong deal pipeline and orderflow momentum, and the entire EPC sector to get re‐rated on the back of the enhanced visibility.



Investment Thesis – Trinity at Work Our investment thesis in the EPC sectors rests on a ‘trinity of forces’, which we expect to impact the P&L of the sector companies, and lead to manifold earnings growth over the next three years. The ‘trinity’ of forces are: 1) Increased order awards: With a huge opportunity in the infrastructure sector set

to be awarded over the next three years, most of the companies are expected to report robust topline growth.

2) Reduced competition: Over the last few years, many EPC companies were not able to bear the burden of high debt and interest rates and went under the CDR programme (reducing their ability to bid for new projects). This will significantly reduce the competition for the ‘survivors’ and aid margin expansion.

3) Lower Interest rates: With the economy turning around, we expect the RBI to lower interest rates in the near future – this will boost companies’ earnings.

Trinity at work for the EPC Sector

Potential triggers Income statement Impact of the trigger

Increased order awards Revenue

Robust topline growth

+ Operating Expenses

EBITDA +

Low competition EBITDA Margins Margin expansion

+ Depreciation +

Lower interest rates

Interest Expense Lower interest

expense

= Tax =

Cumulative impact

Net Profit Manifold earnings

growth

Source: PhillipCapital India Research However, even with the trinity at work, we do not expect all EPC companies to benefit. Only companies with a strong balance sheet and superior execution track record will be able to grab most of the orders that will be awarded over the next three years. We expect the beneficiaries in this round of orders to be completely different from the ones in the last 2007‐10 cycle. The EPC space has seen a lot of reshuffling since FY10. Many big players, the stars of the last cycle, have not been able to sustain themselves when faced with the lack of orders and high interest rates. Their balance sheets are highly stretched (many of them are formally under the CDR), their working capital has ballooned, and the visibility on their revenue and earnings remains extremely poor. At the same time, few companies, through financial discipline and prudent management, have actually emerged stronger from the downturn. NCC is one such survivor and will be THE biggest beneficiary of the next up‐cycle, in our opinion. Also, relatively smaller companies, like J Kumar Infraprojects (JKIL) and KNR Construction (KNR), are ready to fill the vacuum, created by the fall of the stalwarts of the last cycle. These companies will also be the beneficiaries of resurgence in order awards and provide the maximum delta for investors, over the next three years.



Force # 1 – A mammoth opportunity beckons As suggested by the budgetary allocations for the infrastructure sector, an opportunity of unprecedented magnitude is to be awarded over the next three years. Our bottom‐up analysis of the award pipeline for three sectors (roads, railways, and MRTS) suggests that Rs 8.5tn of the opportunity is already on the anvil and is all set to be awarded over the next three years. The EPC sector will be the biggest beneficiary of this huge opportunity. Whether it is in roads, railways, or metros, a large part of the capex for the infrastructure projects involves civil work, which will be executed by the local EPC players – irrespective of whether the project is awarded on EPC/BOT basis or to a domestic/foreign player. We estimate that the Rs 8.5tn infrastructure opportunity will translate into Rs 6tn of EPC opportunity over the next three years. Bottom‐up analysis of the opportunity on the anvil

Roads Length(km)

Total Opportunity(Rs bn)

EPC Opportunity (Rs bn)

Pipeline (excl Phase IV) 6,158 616 616 Phase IV pipeline 9,842 246 246 Backlog of FY12‐14 awards 10,000 1,000 1,000 Border & Coastal Roads 22,500 1,125 1,125 Total 48,500 2,987 2,987 Railways Railways PPP NA 1,069 534 High Speed Rail 4,215 674 337 DFCC 3,338 750 375 Total 7,553 2,493 1,247 MRTS Under construction Metros 489.9 1,362.4 681.2 Planned Metros 421.6 1,569.1 760.1 Planned Monorails 131.7 193.7 96.8 Total 1,043 3,125 1,538 Grand Total 57,096 8,605 5,772

Source: PhillipCapital India Research We see the potent combination of a strong government and a bursting‐at‐the‐seams award pipeline translating into huge opportunity in the EPC space – which constitutes the first leg of our trinity hypothesis. The order awards will lead to robust topline growth for the companies, which will trickle down the P&L, translating into strong earnings growth. Sectoral analysis of the opportunity and competition Sector Major Opportunities EPC Opp Size

(Rs bn)* Concerns Competitive intensity Domestic players Foreign players

Roads 13,000km of pending awards; Border & coastal roads; backlog of FY12‐14 awards

2,987 Backlog of stuck projects, clearances, declining traffic, high interest rates

High. Plethora of domestic players; foreign players too waiting in the wings

IRB Infra, L&T, Ashoka Buildcon, All EPC players

Vinci, Leighton Holdings, Balfour Beatty

Railways High speed rail network; Dedicated Freight Corridor

1,247 Low private investment, new to PPP model, regulatory uncertainty

Medium. Few large players have the technical capability

All EPC Players China Railway & Engg Group,

MRTS Ten MRTS projects on the anvil. Mega plans in Mumbai

1,538 Inexperienced players and authorities, politicization of projects

Low. Most domestic companies inexperienced, in JVs with foreign players

Reliance Infra, L&T, Gammon, J Kumar

Valio, Mitsubishi, Kyivmetrobud, Scomi

Source: PhillipCapital India Research (*PC estimates)



Roads – The low hanging fruit! Over the next three years, we see road sector as the low‐hanging fruit among infrastructure segments — the new government will try to capitalize on it to break the deadlock and revive the development process. While the NHAI started slowly in FY15, with the new government taking charge and resolution of bottlenecks taking time – they have managed to award ~4000km of road projects, till February‐2015. It expects to close FY15 at 6000‐7000km of awards – falling short of its target of 8500km – but still well ahead of its performance over last two years (1,116km and 1,436km in FY13 and FY14 respectively). On the eve of the Union Budget FY16, we had held a conference call with NHAI, to understand their expectations from the budget and details of the award pipeline (read the transcript in annexure). Key takeaways from the call were: • NHAI intends to award 20,000km of projects over the next two years. • This would translate into investment opportunity of Rs2.3tn – spread over next

three years. • 70% of this opportunity is expected to be awarded on EPC basis, and the

remaining 30% on BOT. • NHAI intends to borrow ~Rs400bn to fund the projects, apart from the budgetary

support and cess/toll collections. • It expects to close FY15 with 6000‐7000km of road awards and award another

11,000km of projects in FY16. We note that the Rs2.3tn pipeline, that NHAI intends to award over next two years, is bang in‐line with our estimate of Rs2.9tn opportunity (execution) spread over the next three years. NHDP current status — Jan 2015 (length in km) Phase

Description Total length

Already 4‐laned

Under Implementation

To be awarded

Phase I Golden Quadrilateral 5,846 5,846 ‐ ‐Phase II NS ‐ EW 7,142 6,360 365 417 Phase III 4‐laning of intercity connections 12,109 6,393 4,373 1,343 Phase IV 2‐laning of arterial road 14,799 942 5,904 7,953 Phase V 6‐laning of various highways 6,500 2,001 2,080 2,419 Phase VI Expressways 1,000 ‐ ‐ 1,000 Phase VII Ringroads, flyovers etc 700 22 19 659 Total 48,096 21,564 12,741 13,791 Others Port Connectivity 380 379 1 ‐Others Others 2,142 1,527 338 277 NHAI 50,618 23,470 13,080 14,068

Source: NHAI The pipeline for the sector appears HUGE with a plethora of projects on the anvil: • 15,000 km of new road projects are to be awarded from the current NHDP. • Close to 10,000 km of projects (awarded in FY11‐14), but which never saw the

light of day) will also be up for re‐bidding. • The NDA manifesto speaks of border and coastal road network. India has 15,000

kms of international border and 7,500 km of coastline. That can translate into a potential opportunity of 22,500 km.

• Lastly, there is a huge network of state roads and highways, which offers an even bigger opportunity.

• Over and above that, the roads that have been four‐laned under the current NHDP will need to be six‐laned as traffic increases. So we can expect ~20,000 km of six‐laning projects to come up in the next NHDP (not until 2017).



Railways – Changing tracks According to a National Transport Development Policy Committee (NTDPC) report submitted to the government in March‐14, the Indian Railways needs to increase its annual investment from Rs 300bn in FY12 to Rs 900bn in the 12th plan and further to Rs 4.6tn in the 15th plan period. Altogether, the report recommends a total investment of Rs 35tn (over FY15‐FY32) — majorly in capacity augmentation, rolling stock, and technology upgradation. That translates into an investment opportunity of Rs 4.5tn over the 12th five‐year plan period. Our bottom‐up analysis reveals that a large number of ‘new’ projects planned by Indian Railways are already on the anvil and can be awarded over the next two years. While Dedicated Freight Corridor (DFCC) would form a bulk of the investment need (Rs 750bn), high‐speed rails (Rs 500bn) and capacity augmentation would also require huge investments. Dedicated Freight Corridor – Action plan and status Section Phase Length

(Km) Funding Source

Funding Status Completion Date

EPC Wnner

Eastern Corridor Ludhiana‐Dadri‐Khurja III 447 World Bank

(APL‐3) Loan awaiting approval 5.5 yrs

Khurja‐Bhaupur I 343 World Bank (APL‐1)

Loan agreement signed on May 31, 2011; EPC Awarded

Mar‐17 Tata‐Aldesa (Rs32.67bn)

Bhaupur‐Mughalsarai II 393 World Bank (APL‐2)

Loan awaiting approval; EPC Bidders shortlisted

Mar‐18 GMR‐SEW*(Rs50.8bn)

Mughalsarai‐Sonnagar IA 118 MoR To be funded through budgetary support

Dec‐16

Sonnagar‐Dankuni IV 538 PPP To be funded via PPP ‐NA‐Total 1,839 Rs 370bn Western Corridor Dadri‐Rewari III 141 JICA Mar‐18Rewari‐Vadodara I 930 JICA Civil works have

commenced on May‐14Dec‐17 M/S Soitz‐

L&T (Rs98bn)

Vadodara‐JNPT II 428 JICA Loan agreement signed on Mar 31, 2013

Mar‐18

Total 1,499 Rs 380bn

Source: DFCCIL, PhillipCapital India Research (*declared L1) High‐Speed Rail Corridors on the anvil Corridor Length

(Km) Consultant for pre‐feasibility study Current status

Delhi‐Agra‐Lucknow‐Varanasi‐Patna

991 UK‐based Mott MacDonald Pre‐feasibility study completed

Chennai‐Bangalore‐Coimbatore‐Ernakulam‐Thiruvananthapuram

850 Consortium of Japan based Oriental Consultants Co Ltd and Japan Railway Technical Service

Pre‐feasibility study in progress

Hyderabad‐Dornakal‐Vijayawada‐Chennai

664 Japan External Trade Organisation, Japan based Oriental Consultants Co Ltd and US based Parsons Brinckerhoff

Pre‐feasibility study in progress

Mumbai‐Ahmedabad 534 Consortium of France‐based Systra, Italy based Italffer and India based rites

Pre‐feasibility study completed, final report accepted by MoR

Delhi‐Jaipur‐Ajmer‐Jodhpur 591 Yet to be appointed Tender to be finalizedDelhi‐Chandigarh‐Amritsar 450 Yet to be appointed Financial bids to be finalizedHowrah‐Haldia 135 Spain based Ingenieria y Economia

del Transporte S.A, Spain based Prointec and Ayesha

Pre‐feasibility study completed

Total 4,215 Rs 674bn (@ Rs 160mn per km)

Source: Ministry of Railways, PhillipCapital India Research



MRTS – Set to grow rapidly Currently Metro projects in 9 cities are at various stages of planning and development. Our bottom‐up analysis indicates that 415 kms of new metro network, entailing an investment of Rs 1.5tn, is on the anvil. Simultaneously, monorail networks spanning a length of 131kms and with an investment of Rs 192bn are also under consideration. Overall, projects entailing an investment of Rs 1.7tn could be awarded over the next three‐five years in this segment. Currently, only 5 cities in India (with a population of over one million) have an operational metro network – Kolkata, Delhi, Bengaluru, Gurgaon and Mumbai. Three other cities – Hyderabad, Chennai, and Kochi will soon be joining the bandwagon. Currently operational / under‐construction metros Operational Metro projects

Length (Km)

Operational Length (Km)

Operational stations (No)

Project Cost (Rs bn)

Implementing Agency

Current Status Commencement of service (expected)

Delhi Metro 329.7 189.9 143 748 DMRC Phases I (65.1km ‐ 2006); Phase II (124.8km ‐ 2011)

Phase III by 2016

Bengaluru Metro 114.4 6.7 6 380 BMRCL Reach 1 & Reach 3 operational Phase I by 2014, Phase II by 2017

Kolkata Metro 124.8 25.1 23 183 IR & KMRCL North‐South Corridor operational East‐West Corridor ‐2016Gurgaon Metro 7.0 5.1 6 12 HUDA, IL&FS Phase I operational Phase II by 2016Mumbai Metro 11.4 11.4 12 24 Reliance Infra Phase I operational in June‐2014 Multiple phases plannedHyderabad Metro 72.0 ‐ 65* 170 L&T Phase wise COD to start from Aug‐15 Chennai Metro 45.1 ‐ 34* 180 CMRL Line II to be operational by Oct‐14 Line I by July‐15Kochi Metro 25.6 ‐ 22* 52 KMRL Expected CoD by June‐16 Total 730.0 238.2 1,748

Source: PhillipCapital India Research Planned Metro Projects Planned Metro projects Phase Length (km) Cost (Rs bn)Chennai Metro Phase II 63.0 360.0Bengaluru Metro Phase II 72.1 264.0Gurgaon Metro Phase II 7.0 21.4Jaipur Metro Phase II 23.1 65.8Mumbai Metro Phase III 33.5 244.0Pune Metro Phase I 31.5 101.8Kochi Metro Phase II ‐ 15.0Ludhiana Metro ‐ 28.8 103.0Chandigarh Metro ‐ 37.6 109.0Lucknow Metro ‐ 22.9 70.0Nagpur Metro ‐ 42.0 80.0Bhopal Metro ‐ 28.0 60.0Indore Metro ‐ 32.2 75.0Total 414.6 1,547.6

Planned Monorail Projects Planned Monorail projects Phase Length (km) Cost (Rs bn)Mumbai Line 2 11.2 15.1Kozhikode Phase I 14.2 19.2Thiruvananthapuram Phase I 22.5 27.0Delhi ‐ 10.8 22.4Bengaluru Phase I 16.0 25.0Chennai ‐ 57.0 85.0Total 131.7 193.7

Source: PhillipCapital India Research

Proposed metro network for Mumbai Name of Corridor Length (km) Estimated

Cost (Rs bn)1 Versova‐Andheri‐Ghatkopar (commissioned in Aug‐14) 11.4 242 Dahisar‐Charkop‐Bandra‐Mankhurd (funding approved) 40.0 2653 Colaba‐Bandra‐SEEPZ (RFPs invited) 33.5 2444 Navi Mumbai Metro (under construction) 23.4 415 Wadala‐Ghatkopar‐Thane‐Kasarvadavali (funding approved) 30.7 1916 Wadala‐Carnac Bunder (deferred due to less ridership) 13.5 267 SEEPZ‐Kanjurmarg 10.5 428 Andheri (E) – Dahisar (E) 18.0 1089 Sewri‐Prabhadevi 3.5 21

Total 184.5 962

Source: MMRDA, PhillipCapital India Research



Force # 2 – Reduced competitive intensity to aid margin expansion The economic downturn of the last four years has permanently scarred many EPC companies. Their debt and working capital has ballooned to such high levels that it will take them at least 2‐3 years of excessive financial and operational discipline to bounce back. Many of them are formally under the CDR programme and will take anywhere between 5‐8 years to come out of it. Most EPC companies had to enter CDR over the last two years

Date of entry into CDR

Consolidated debt(Rs mn)

Current market cap (Rs mn)

HCC Q1FY13 78,220 19,600Gammon India Q4FY13 110,000 4,200IVRCL Q4FY14 55,000 5,090C&C Construction Q2FY13 19,730 887ARSS Infra Q3FY12 15,950 596Era Construction Q3FY14 NA 1,100Isolux‐Soma Q1FY15 20,700 NA

Source: Company, PhillipCapital India Research Due to this, the competitive intensity in the bidding process in the EPC sector has reduced significantly. The number of players bidding for projects in ALL sectors (except MRTS, which is a relatively new one) has come down from FY10 levels. Only companies with strong balance sheets and superior fundamentals are able to bid for the new projects and we expect them to grab a much bigger share of the huge impending opportunity. Competitive intensity – then and now Sector FY10 No of bidders Prominent bidders FY15No of bidders Prominent bidders Buildings 7‐10 L&T, NCC, Ahluwalia, CCCL 4‐5 L&T, NCC, Ahluwalia, Shapoorji PallonjiRoads 15‐20 L&T, NCC, IVRCL, Gammon, HCC, Patel Engg 7‐8 L&T, NCC, KNR, J Kumar, Ashoka, HCC, ITD CementationIrrigation 8‐10 L&T, NCC, IVRCL, Gammon, Pratiba 5‐6 L&T, NCC, IVRCL, ITD Cementation Water 7‐8 L&T, NCC, IVRCL, Patel Engg 4‐5 L&T, NCC, IVRCL, VA Tech Hydro 4‐5 L&T, HCC 2‐3 L&T, HCC, ITD Cementation Power 6‐7 L&T, NCC, IVRCL, Gammon 2‐3 L&T, NCCMRTS 2‐3 L&T, Gammon 5‐6 L&T, J Kumar, KNR, Gammon, HCC, ITD Cementation

Source: Company, PhillipCapital India Research This forms the second leg of our trinity hypothesis – reduced competitive intensity will enable the companies to make better returns on projects, leading to margin expansion over the next three years. Companies like NCC and J Kumar have repeatedly mentioned this over the last two quarters. In fact, we already have evidence of this hypothesis playing out: • NCC’s margins have expanded from 5.5% in 4QFY14 to 8.1% in 2QFY15 (8.4% in

3QFY15 adjusting for provision for doubtful debt). • On similar lines, margins for J Kumar have expanded from 16% in 4QFY14 to

19.7% in 3QFY15. • KNR’s margins have remained stable at 14% over the last four quarters. NCC has also guided that its margin will expand from 6.6% in FY14 to 8% in FY15 and will be >9% in FY16 because of the higher share of new orders (won at higher margins) being executed over the next two years.



Force # 3 – Lower interest rates to provide additional fillip to the earnings One of the primary reasons that EPC companies fared so poorly over the last four years was the high interest‐rate regime. Fundamentally, most EPC companies do not generate positive OCF because of their high working‐capital requirements, implying that most of them are heavily leveraged. Lack of new orders and delay in payments from government bodies over the last four years caused their working capital to balloon, leading to even higher debt levels. Most companies currently have highly leveraged balance sheets… Operating profit barely matches interest expenses

Source: Company, PhillipCapital India Research However, with an uptick in the economic cycle, we expect interest rates to be revised downwards in the near‐to medium future. While it may take a few months for this to materialise, the event is surely closer to realisation than four quarters ago. This reduction in interest rates forms the third leg of our trinity hypothesis — it will enhance earnings and cash flows leading to a further reduction in debt — this in turn will lead to a manifold jump in earnings. EPC companies’ earnings are highly sensitive to interest rates — a 100bps fall in interest rates will lead to 22% earnings growth for a relatively low leveraged company such as NCC and 92% earnings growth for the most leveraged company such as HCC. Earnings sensitivity to fall in interest rates

KNR J Kumar NCC IVRCL Gammon HCC

‐200bps 2% 6% 43% 23% 45% 183%‐100bps 1% 3% 22% 12% 23% 92%0bps 0% 0% 0% 0% 0% 0%+100bps ‐1% ‐3% ‐22% ‐12% ‐23% ‐92%

Source: Company, PhillipCapital India Research Reduced interest rates will help companies deleverage their balance sheets — this will help them improve their credit ratings, which will lead to an incremental fall in borrowing costs and hence interest expense. NCC, which has managed to bring its leverage down to 0.7x (from 1.0x in FY14) on the back of the recent rights issue, is already talking to its bankers about improvement in its rating.

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Valuation – inexpensive vis‐à‐vis potential Almost all EPC stocks have rallied significantly over the last six months, on the back of hope and optimism – of the surge in order awards and lowering of interest rates. While these augur well for the entire sector, we maintain that the beneficiaries will be the companies with strong balance sheet and superior execution track record. EPC companies have significantly outperformed infrastructure peers over the last 6 months

Source: PhillipCapital India Research Infrastructure Sector – Valuation Table Company Mkt Cap CMP _____P/E_____ ___EV/EBITDA___ _____ROE_____ _____D/E_____ _____P/BV_____ Rs bn Rs FY16E FY17E FY16E FY17E FY16E FY17E FY16E FY17E FY16E FY17EAsset Owners GMR Infra 70.1 18 (4.5) (47.3) 18.5 11.5 (23.4) (2.3) 6.8 6.7 1.0 1.1 GVK Power 15.8 10 (2.1) (4.9) 13.3 8.5 (46.5) (20.4) 14.8 15.4 1.0 1.0 IRB Infra 85.3 257 16.3 12.6 7.6 7.4 10.4 11.2 2.7 2.5 1.7 1.4 Ashoka Buildcon 28.7 182 22.6 13.7 10.1 7.4 9.2 13.4 3.6 3.5 2.1 1.8 Adani Ports 701.7 339 25.1 20.5 19.6 16.1 20.1 20.0 0.6 0.5 5.0 4.1 EPC NCC 51.7 93 17.6 12.0 9.5 7.7 8.4 11.0 0.6 0.5 1.5 1.3 J Kumar 20.3 631 13.6 10.0 7.1 5.8 15.9 18.2 0.6 0.5 2.2 1.8 KNR 12.0 425 14.5 11.3 7.5 6.1 12.6 14.0 0.1 0.0 1.8 1.6 HCC 25.2 39 (47.9) ‐ 12.8 ‐ (4.1) ‐ 3.9 ‐ 1.9 ‐IVRCL 6.1 20 (1.5) ‐ 25.2 ‐ (55.5) ‐ 6.1 ‐ 0.9 ‐Gammon India 3.1 23 (1.3) ‐ 41.1 ‐ (21.9) ‐ 4.7 ‐ 0.3 ‐

Source: Bloomberg, PhillipCapital India Research Based on relative positioning, we find that NCC, KNR, and J Kumar are much better placed than other infrastructure players. We expect their leaner balance sheets and huge opportunity to translate into robust earnings growth and hence superior returns for investors. Notwithstanding their recent surge in prices (~45% in last3 months), we find their valuations still quite inexpensive, particularly vis‐à‐vis their manifold earnings growth potential in mind.

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NCC JKIL KNR HCC IVRCL Gammon BSE

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GMR GVK IRB InfraAshoka Buildcon Adani Ports BSE



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Nagarjuna Construction (NJCC IN) Still lot of steam left … INDIA | INFRASTRUCTURE | Company Update

3 March 2015

We expect NCC to be the biggest beneficiary of the ‘trinity of forces’ working in the EPC sector, over the next three years. Its strong presence in the all EPC verticals across the country should help it garner large share of order awards, leading to strong topline growth. The company has already depicted margin expansion over the last four quarters, on the back of reduced competition. Lastly, reduction in interest rates (due to internal as well as external reasons) should help provide additional impetus to the earnings. NCC recently raised Rs6bn through rights issue, using the proceeds to repay the debt. Its debt has reduced from Rs28bn in 2QFY15 to Rs23bnin 3QFY15 – leading to reduction in interest expense and improvement in leverage (from 1.0x to 0.7x). Its credit rating has been upgraded from junk to BBB‐, and the company has applied for a reduction in its borrowing cost – which might materialize over the next two‐three months. Best placed to capitalise on the opportunity: Over the last four years, while many EPC companies filed for CDR, NCC has improved its working capital situation (debtor days have come down from 105 in FY11 to 80 in FY14) while maintaining steady debt levels. Over the same period, it has been able to maintain EBITDA margins in the 7‐8% range, while most of its peers have reported highly volatile margins because of reduced operating leverage and write offs. With reduced competition, we expect NCC’s margins to expand significantly (by 240bps over FY14‐17). Multiple triggers awaiting: NCC has multiple triggers that can lead to significant cash accrual, over the next twelve months. The Nelcast power project deal with Sembelcorp would lead to a potential cash accrual of Rs 5bn. That, along with potential divestment of its BOT road projects (equity invested Rs3.7bn) and real estate (about 200 acres), could lead to further deleveraging of its balance sheet. Clear management focus: In an effort to deleverage its balance sheet it has divested multiple land parcels over the last two years leading to cash accrual of Rs 3.5bn (FY15 target is Rs 2bn). It has also put ALL its BOT projects on the block of which it has already sold its stake in two power projects. The management’s clarity is evident from the fact that its board has resolved NOT to bid for any BOT projects, focusing on its core competency, EPC. Robust and diversified orderbook: Its orderbook (Rs 207bn, 2.6x book‐to‐sales) provides high revenue visibility and is well diversified (building, roads, power, water; 15% outside India). We expect robust growth in the order book over the next two years, esp on the back of EPC road projects to be awarded by NHAI. Outlook and valuation: We believe that NCC’s superior position vs. EPC peers will enable it to capitalise on the HUGE impending investment opportunity in infrastructure. While the stock price has risen sharply over the last few months (3m, +55%), we still see significant upside potential from current levels.

We expect a topline CAGR of 19% over FY14‐17 and EBITDA margin expansion of 240bps (from 6.6% in FY14 to 9.0% in FY17) on legacy orders getting completed and low competition resulting in higher margins for new orders. This should result in 120% earning CAGR over the same period.

We have upgraded our valuation for the stock, on the back of enhanced visibility in the order awards, from the announcements and allocation in the Union Budget for FY16. We now value NCC at 13x FY17 P/E (earlier 10x) – still 20% discount to its last ten year average multiple. Our price target of Rs116 (earlier Rs93), represents a 25% upside from current levels. We maintain BUY rating.

BUY (Maintain) CMP RS 93 TARGET RS 116 (+25%) COMPANY DATA O/S SHARES (MN) : 556MARKET CAP (RSBN) : 51MARKET CAP (USDBN) : 0.8652 ‐ WK HI/LO (RS) : 95 / 16LIQUIDITY 3M (USDMN) : 14.1PAR VALUE (RS) : 2 SHARE HOLDING PATTERN, % PROMOTERS : 21.3FII / NRI : 32.3FI / MF : 11.1NON PROMOTER CORP. HOLDINGS : 10.9PUBLIC & OTHERS : 24.4 PRICE PERFORMANCE, %

1MTH 3MTH 1YRABS 23.2 44.2 486.6REL TO BSE 22.0 40.7 447.1 PRICE VS. SENSEX

Source: Phillip Capital India Research KEY FINANCIALS Rs mn FY15E FY16E FY17ENet Sales 78,900 90,731 104,336EBIDTA 6,075 7,712 9,390Net Profit 746 2,943 4,314EPS, Rs 1.3 5.3 7.8PER, x 69.3 17.6 12.0EV/EBIDTA, x 12.1 9.5 7.7P/BV, x 1.6 1.5 1.3ROE, % 2.3 8.4 11.0Debt/Equity (x) 0.7 0.6 0.5

Source: PhillipCapital India Research Est.

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Apr‐11 Apr‐12 Apr‐13 Apr‐14NCC BSE Sensex


NCC LTD COMPANY UPDATE

Revenue growth has been robust for NCC.... .... with stable and improving margins

Orderbook has been steady.... .... and is well diversified across segments

Nelcast Power project – Sembcorp deal removes a big overhang Project Details Rs mn Sembcorp Deal Total project cost 70,470 Stake acquired 45%Debt 52,850 Consideration (Rs mn) 8,500 Equity required 17,620 Implied P/BV 1.07 NCC Share (55%) 9,690 Stake Left Equity already infused 4,548 NCC 30%Equity required 5,142 Gayathri 25% SoTP Valuation Business division FY17 EPS Equity Invested Multiple Valuation Per share Rs Rs mn Rs mn RsEPC 7.8 13.0x 56,079 100.9 BOT Road Projects 3,557 0.7x 2,490 4.5 Power Projects 6,120 1.0x 6,120 11.0 Total Valuation 64,689 116.0

Source: Company, PhillipCapital India Research

14 13 15

19

15

22 24

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1Q14 2Q14 3Q14 4Q14 1Q15 2Q15 3Q15

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Revenu

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Revenue YoY Growth

1,083 1,002 916 1,048 1,090

1,815 1,740

7.9%7.5%

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Backlog Book to TTM Sales

Buildings, Housing & Roads, 42%

Water and Environment,

22%

Electrical, 6%

Irrigation, 5%

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Mining, 1%

International, 15%


NCC LTD COMPANY UPDATE

Financials

Income Statement Y/E Mar, Rs mn FY14 FY15e FY16e FY17eNet sales 61,173 78,900 90,731 1,04,336Growth, % 7 29 15 15Total income 61,173 78,900 90,731 1,04,336Employee expenses ‐2,404 ‐3,101 ‐3,565 ‐4,100Other Operating expenses ‐28,631 ‐37,986 ‐43,682 ‐50,232EBITDA (Core) 4,049 6,075 7,712 9,390Growth, % (14.0) 50.1 26.9 21.8Margin, % 6.6 7.7 8.5 9.0Depreciation ‐895 ‐1,111 ‐1,158 ‐1,206EBIT 3,153 4,964 6,554 8,184Growth, % (16.8) 57.4 32.0 24.9Margin, % 5.2 6.3 7.2 7.8Interest paid ‐4,660 ‐5,764 ‐4,004 ‐3,697Other Non‐Operating Income 1,535 1,794 1,843 1,951Pre‐tax profit 29 994 4,392 6,438Tax provided 376 ‐249 ‐1,449 ‐2,125Profit after tax 405 746 2,943 4,314Net Profit 405 746 2,943 4,314Growth, % (35.3) 84.0 294.7 46.6Net Profit (adjusted) 405 746 2,943 4,314Unadj. shares (m) 257 556 556 556Wtd avg shares (m) 257 556 556 556 Balance Sheet Y/E Mar, Rs mn FY14 FY15e FY16e FY17eCash & bank 688 658 548 634Debtors 13,410 15,131 18,643 22,868Inventory 15,987 19,455 21,129 22,868Loans & advances 30,739 37,829 39,772 42,878Total current assets 72,612 84,860 91,879 1,01,035Investments 11,643 11,643 11,643 11,643Gross fixed assets 11,494 11,994 12,494 12,994Less: Depreciation ‐4,577 ‐5,688 ‐6,847 ‐8,053Add: Capital WIP 104 104 104 104Net fixed assets 7,020 6,409 5,751 5,045Total assets 91,275 102,912 109,273 117,723 Current liabilities 41,201 48,606 52,024 57,161Total current liabilities 41,201 48,606 52,024 57,161Non‐current liabilities 24,871 22,371 22,371 21,371Total liabilities 66,072 70,977 74,395 78,532Paid‐up capital 513 1,112 1,112 1,112Reserves & surplus 24,690 30,823 33,766 38,080Shareholders’ equity 25,203 31,935 34,878 39,192Total equity & liabilities 91,275 102,912 109,273 117,723 Source: Company, PhillipCapital India Research Estimates

Cash Flow FY14 FY15e FY16e FY17e

Pre‐tax profit 29 994 4,392 6,438Depreciation 895 1,111 1,158 1,206Chg in working capital ‐4,144 ‐4,873 ‐3,712 ‐3,933Total tax paid 270 ‐249 ‐1,449 ‐2,125Cash flow from operating activities ‐2,950 ‐3,016 389 1,587Capital expenditure ‐668 ‐500 ‐500 ‐500Chg in investments 893 0 0 0Cash flow from investing activities 225 ‐500 ‐500 ‐500Free cash flow ‐2,725 ‐3,516 ‐111 1,087Equity raised/(repaid) 327 5,987 0 0Debt raised/(repaid) 2,496 ‐2,500 0 ‐1,000Cash flow from financing activities 2,763 3,487 0 ‐1,000Net chg in cash 38 ‐30 ‐111 87 Valuation Ratios

FY14 FY15e FY16e FY17ePer Share data EPS (INR) 1.6 1.3 5.3 7.8Growth, % (35.3) (15.1) 294.7 46.6Book NAV/share (INR) 98.2 57.4 62.7 70.5FDEPS (INR) 1.6 1.3 5.3 7.8CEPS (INR) 5.1 3.3 7.4 9.9CFPS (INR) (17.5) (8.7) (2.6) (0.7)Return ratios Return on assets (%) 3.9 4.6 5.2 5.9Return on equity (%) 1.6 2.3 8.4 11.0Return on capital employed (%) 7.0 8.5 9.9 11.3Turnover ratios Asset turnover (x) 1.7 2.0 2.1 2.2Sales/Total assets (x) 0.7 0.8 0.9 0.9Sales/Net FA (x) 8.6 11.8 14.9 19.3Working capital/Sales (x) 0.5 0.5 0.4 0.4Receivable days 80.0 70.0 75.0 80.0Inventory days 95.4 90.0 85.0 80.0Payable days 261.2 242.0 227.3 218.5Working capital days 183.3 164.7 158.1 151.3Liquidity ratios Current ratio (x) 1.8 1.7 1.8 1.8Quick ratio (x) 1.4 1.3 1.4 1.4Interest cover (x) 0.7 0.9 1.6 2.2Total debt/Equity (x) 1.0 0.7 0.6 0.5Net debt/Equity (x) 1.0 0.7 0.6 0.5Valuation PER (x) 58.9 69.3 17.6 12.0PEG (x) ‐ y‐o‐y growth (1.7) (4.6) 0.1 0.3Price/Book (x) 0.9 1.6 1.5 1.3EV/Net sales (x) 0.8 0.9 0.8 0.7EV/EBITDA (x) 11.8 12.1 9.5 7.7EV/EBIT (x) 15.2 14.8 11.2 8.8



KNR Construction (KNRC IN) Slow and steady wins the race… INDIA | INFRASTRUCTURE | Company Update

3 March 2015

KNR Construction personifies the idiom ‘slow and steady wins the race’. It has been on the sidelines for over a decade now, doing subcontracting work for companies like GMR and Sadbhav Engineering and relatively small projects for NHAI and state governments. Over the last five years, it has reported revenue CAGR of only 4% (from Rs7.1bn in FY10 to Rs 8.3bn in FY14). However, over the same time period, it has reported average EBITDA margins of 16.5% ‐ (lowest being 15.5% in FY14), its debt‐to‐equity ratio never exceeded 0.5x, and its debtor days were always <80 (average 65). Today, it possesses one of the strongest balance sheets in the infrastructure space and is all set to capitalise on the huge investment opportunity in EPC over the next three years. Early Completion: KNR has had a superior execution track record because of operational discipline, which has helped it claim early completion bonuses for many of its projects. It expects to complete its on‐going BOT project in Kerala (four‐laning the Walayar‐Vadakkancherry highway) six months ahead of schedule. Backward integration: KNR’s margins are superior to its contemporaries such as NCC, IVRCL, and Gammon, primarily due to backward integration. It owns a host of quarries and RMC plants across the country, giving it the benefit in term of raw material costs. Its own fleet of equipment (excavators, tippers, pavers, and cranes) ensures minimum lease rental. Its in‐house team of 700 qualified professionals ensures that most of its projects are completed ahead of schedule – this means zero time‐and‐cost overruns. Current orderbook a concern: KNR’s orderbook currently stands at Rs 12.1bn, 1.4x book‐to‐sales, inferior to its peers such as NCC (2.6x) and J Kumar (3x). However, the company stands L1 at Rs16bn of orders, including which the orderbook stands at handsome 3.2x book‐to‐sales. 95% of KNR’s orderbook is in the roads segment, which has been hit by lack of awards from NHAI and other state governments over the last six months. However, the management remains optimistic about the order award potential and expects steady flow of orders from NHAI in coming months, leading to accrual of order inflow of atleast Rs10bn in FY16, which should provide decent revenue visibility for the next two years. Outlook and valuation: We expect the potent combination of operational efficiency and financial discipline to help KNR grow at the cost of its peers in the EPC space. Few companies in this space can match KNR in terms of balance sheet strength and operating margins. We expect it to benefit from a surge of orders in the roads segment (from NHAI and state governments). Its diversification into irrigation and overhead MRTS projects should also help it grow its orderbook beyond roads. KNR’s stock has surged 72% in the last six months and is currently trading at 14.5x FY16 and 11.3x FY17 earnings, already at a significant premium to its historical average (6x). However, we believe it is set to enter the ‘big league’ of EPC players, leading to a significant rerating potential. We have upgraded our valuation for the stock, on the back of enhanced visibility in the order awards, from the announcements and allocation in the Union Budget for FY16. We now value KNR’s EPC business at 12x FY17 P/E (earlier 10x) – 10% discount to NCC. Our price target of Rs500 (earlier Rs424), represents 18% upside from current levels. We maintain BUY rating.

BUY CMP RS 425 TARGET RS 500 (+18%) COMPANY DATA O/S SHARES (MN) : 28MARKET CAP (RSBN) : 12MARKET CAP (USDBN) : 0.252 ‐ WK HI/LO (RS) : 444 / 81LIQUIDITY 3M (USDMN) : 0.2PAR VALUE (RS) : 10 SHARE HOLDING PATTERN, % PROMOTERS : 67.3FII / NRI : 1.3FI / MF : 17.2NON PROMOTER CORP. HOLDINGS : 3.7PUBLIC & OTHERS : 10.5 PRICE PERFORMANCE, %


Source: Phillip Capital India Research KEY FINANCIALS Rs mn FY15E FY16E FY17ENet Sales 8,765 10,080 11,592EBIDTA 1,332 1,542 1,797Net Profit 646 824 1,056EPS, Rs 23.0 29.3 37.6PER, x 18.5 14.5 11.3EV/EBIDTA, x 9.1 7.5 6.1P/BV, x 2.1 1.8 1.6ROE, % 11.9 13.4 15.0Debt/Equity (x) 0.1 0.1 0.0


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KNR ConstructionBSE Sensex


KNR CONSTRUCTION COMPANY UPDATE

KNR has stable revenue and margin profile ... ... but the current orderbook appears weak

Source: Company, PhillipCapital India Research The company has one of the strongest balance sheets in the EPC space

Source: Company, PhillipCapital India Research A relatively small BOT portfolio Project Length KNR Stake Type CoD Period TPC Equity Grant Debt Current Debt KNR Equity Annuity/ Toll km % Rs mn Rs mn Rs mn Rs mn Rs mn Invested Rs mn Rs mnKarnataka 60 40% Annuity Dec‐09 20 4,429 1,129 ‐ 3,300 3,527 452 329AP 48 40% Annuity Jun‐10 20 5,920 1,480 ‐ 4,440 4,954 592 444Kerala 54 100% Toll Nov‐15 20 9,005 1,365 2,640 5,000 2,823 NA 378Total 162 19,354 3,974 11,303 1,044 1,151

Source: Company, PhillipCapital India Research SoTP Valuation Business division FY17 EPS Book Value Multiple Valuation Per share Rs Rs mn Rs mn RsEPC 37.6 12.0x 12,677 450.8 Kerala BOT Project 1,365 1.0x 1,365 48.5 Total Valuation 14,042 500.0

Source: PhillipCapital India Research

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KNR CONSTRUCTION COMPANY UPDATE

Financials

Income Statement Y/E Mar, Rs mn FY14 FY15e FY16e FY17eNet sales 8,348 8,765 10,080 11,592Growth, % 21 5 15 15Total income 8,348 8,765 10,080 11,592Employee expenses ‐349 ‐367 ‐422 ‐485Other Operating expenses ‐3,834 ‐4,014 ‐4,607 ‐5,274EBITDA (Core) 1,258 1,332 1,542 1,797Growth, % 8.0 5.9 15.8 16.5Margin, % 15.1 15.2 15.3 15.5Depreciation ‐572 ‐567 ‐599 ‐630EBIT 686 765 944 1,167Growth, % 12.8 11.6 23.3 23.6Margin, % 8.2 8.7 9.4 10.1Interest paid ‐172 ‐129 ‐97 ‐65Other Non‐Operating Income 155 124 158 187Pre‐tax profit 669 760 1,004 1,288Tax provided ‐59 ‐114 ‐181 ‐232Profit after tax 610 646 824 1,056Net Profit 610 646 824 1,056Growth, % 17.0 5.9 27.5 28.3Net Profit (adjusted) 610 646 824 1,056Unadj. shares (m) 28 28 28 28Wtd avg shares (m) 28 28 28 28 Balance Sheet Y/E Mar, Rs mn FY14 FY15e FY16e FY17eCash & bank 112 548 914 1,382Debtors 1,171 1,249 1,381 1,588Inventory 341 384 414 476Loans & advances 3,078 3,242 3,728 4,288Total current assets 6,387 7,109 8,123 9,419Investments 400 400 400 400Gross fixed assets 5,252 5,552 5,852 6,152Less: Depreciation ‐2,615 ‐3,182 ‐3,781 ‐4,412Add: Capital WIP 3 3 3 3Net fixed assets 2,640 2,373 2,074 1,744Total assets 9,546 10,001 10,715 11,682Current liabilities 3,505 3,547 3,671 3,814Total current liabilities 3,505 3,547 3,671 3,814Non‐current liabilities 908 708 508 308Total liabilities 4,412 4,254 4,178 4,121Paid‐up capital 281 281 281 281Reserves & surplus 4,852 5,465 6,256 7,279Shareholders’ equity 5,133 5,746 6,537 7,561Total equity & liabilities 9,546 10,001 10,715 11,682 Source: Company, PhillipCapital India Research Estimates


Pre‐tax profit 669 760 1,004 1,288Depreciation 572 567 599 630Chg in working capital ‐1,035 ‐244 ‐524 ‐686Total tax paid ‐141 ‐114 ‐181 ‐232Cash flow from operating activities 65 969 898 1,001Capital expenditure ‐273 ‐300 ‐300 ‐300Chg in investments 83 0 0 0Cash flow from investing activities ‐190 ‐300 ‐300 ‐300Free cash flow ‐124 669 598 701Equity raised/(repaid) 15 0 0 0Debt raised/(repaid) 197 ‐200 ‐200 ‐200Dividend (incl. tax) ‐33 ‐33 ‐33 ‐33Cash flow from financing activities 164 ‐233 ‐233 ‐233Net chg in cash 40 437 365 468 Valuation Ratios

FY14 FY15e FY16e FY17ePer Share data EPS (INR) 21.7 23.0 29.3 37.6Growth, % 17.0 5.9 27.5 28.3Book NAV/share (INR) 182.5 204.3 232.4 268.8FDEPS (INR) 21.7 23.0 29.3 37.6CEPS (INR) 42.0 43.1 50.6 60.0CFPS (INR) (3.2) 30.1 26.3 28.9Return ratios Return on assets (%) 7.5 7.5 8.6 9.8Return on equity (%) 12.6 11.9 13.4 15.0Return on capital employed (%) 12.7 11.7 13.1 14.7Turnover ratios Asset turnover (x) 1.7 1.6 1.8 2.0Sales/Total assets (x) 0.9 0.9 1.0 1.0Sales/Net FA (x) 3.0 3.5 4.5 6.1Working capital/Sales (x) 0.3 0.3 0.4 0.4Receivable days 51.2 52.0 50.0 50.0Inventory days 14.9 16.0 15.0 15.0Payable days 158.0 152.7 138.3 125.8Working capital days 121.1 125.5 128.1 133.0Liquidity ratios Current ratio (x) 1.8 2.0 2.2 2.5Quick ratio (x) 1.7 1.9 2.1 2.3Interest cover (x) 4.0 5.9 9.7 17.9Total debt/Equity (x) 0.2 0.1 0.1 0.0Net debt/Equity (x) 0.2 0.0 (0.1) (0.1)Valuation PER (x) 19.6 18.5 14.5 11.3PEG (x) ‐ y‐o‐y growth 1.2 3.1 0.5 0.4Price/Book (x) 2.3 2.1 1.8 1.6EV/Net sales (x) 1.5 1.4 1.1 0.9EV/EBITDA (x) 10.1 9.1 7.5 6.1EV/EBIT (x) 18.6 15.8 12.2 9.3



J Kumar Infraprojects (JKIP IN) All set for the big leap … INDIA | INFRASTRUCTURE | Company Update

3 March 2015

J Kumar Infraprojects Ltd (JKIL) has, for long, been known as a local Mumbai based EPC company, primarily working on urban infrastructure projects such as flyovers, over‐bridges, and skywalks. It has worked on some marquee projects such as the Sion‐Panvel highway, Andher—Burfiwala flyover, and projects for DMRC, and is known for its superior execution track record. Strong orderbook: The company is all set to expand its wings now. It possesses a strong orderbook of Rs 47bn (including L1), a handsome 3.4x book‐to‐sales, which provides high revenue visibility. We expect it to be one of the biggest beneficiaries of the slew of large projects to be awarded in Mumbai (read detailed report here). Apart from Maharashtra, it has also expanded its geographic presence to Gujarat, Rajasthan, and Delhi. Entry into MRTS segment: It has also entered into the highly lucrative MRTS segment. It is currently working on Rs 15.8bn orders from DMRC and is one of the nine consortiums shortlisted for the prestigious Rs 230bn Mumbai Metro Phase‐3 project. It has recently bought four tunnel‐boring machines in anticipation of a surge in orders as more cities are expected to join the MRTS bandwagon. We expect it to benefit from its early entry and preparedness for orders from this relatively new segment.

The company expects the orders for the Mumbai Metro phase III project (Rs230bn) to be awarded within the next three‐four months. It stands qualified to bid for all the seven packages that the project is divided into, amidst nine qualified consortiums. Each package is expected to be of the size of Rs20‐30bn – providing significant fillip to JKIL’s orderbook, should the company win one. Backward integration: JKIL’s margins are higher (around 17%) to its contemporaries such as NCC, IVRCL and Gammon, primarily due to backward integration. The fact that it owns a host of quarries and RMC plants (15) across the country leads to benefit in term of cost of raw materials. Its own fleet of equipment (excavators, tippers, pavers, and cranes) ensures minimum lease rental costs. Zero subcontracting and strong focus on timely execution ensures minimum time and cost overruns. Its revenues saw a robust CAGR of 12% over FY10‐14, inspite of slowdown in order awards. Its current strong orderbook is expected to translate into even stronger topline growth over FY14‐17 (revenue CAGR at 25%). JKIL possesses one of the leanest balance sheets in the infrastructure sector with D/E at 0.6x (after its recent rights issue). Its debtor days, at 38, are also one of the lowest in the industry. Outlook and valuation: We expect the surge of order awards in urban infrastructure (roads, flyovers, and MRTS) to catapult JKIL into being one of the leading EPC players in the next three years. Its strong balance sheet and superior margin profile should translate into robust earnings growth, and superior returns to its investors. JKIL’s stock has surged 103% in the last six months and it currently trades at 13.6x FY16 and 10x FY17 earnings, a significant premium to its historical average (6.3x). However, we see major rerating potential, even from current levels. We have upgraded our valuation for the stock, on the back of enhanced visibility in the order awards, from the announcements and allocation in the Union Budget for FY16. We now value JKIL at 12x FY17 P/E (earlier 10x) – 10% discount to NCC. Our price target of Rs754 (earlier Rs628), represents 19% upside from current levels. We maintain BUY rating.

BUY CMP RS 631 TARGET RS 754 (+19%) COMPANY DATA O/S SHARES (MN) : 32MARKET CAP (RSBN) : 20MARKET CAP (USDBN) : 0.352 ‐ WK HI/LO (RS) : 636 / 156LIQUIDITY 3M (USDMN) : 0.5PAR VALUE (RS) : 10 SHARE HOLDING PATTERN, % PROMOTERS : 51.0FII / NRI : 18.1FI / MF : 10.4NON PROMOTER CORP. HOLDINGS : 13.8PUBLIC & OTHERS : 6.8 PRICE PERFORMANCE, %


Source: Phillip Capital India Research KEY FINANCIALS Rs mn FY15E FY16E FY17ENet Sales 14,716 18,395 22,994EBIDTA 2,796 3,403 4,254Net Profit 1,149 1,495 2,024EPS, Rs 35.7 46.4 62.8PER, x 17.7 13.6 10.0EV/EBIDTA, x 8.4 7.1 5.8P/BV, x 2.5 2.2 1.8ROE, % 16.6 17.1 19.8Debt/Equity (x) 0.6 0.6 0.5


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J KUMAR INFRAPROJECTS COMPANY UPDATE

JKIL has reported a robust revenue growth and margin profile ... ... and has a strong orderbok to take it forward

Source: Company, PhillipCapital India Research Planned Metro projects – huge opportunity for JKIL

Phase Planned length (2014‐19) (km)

Cost (Rs bn)

Chennai Metro Phase II 63.0 360.0Bengaluru Metro Phase II 72.1 264.0Jaipur Metro Phase II 23.1 65.8Mumbai Metro Phase III 33.5 244.0Pune Metro Phase I 31.5 101.8Kochi Metro Phase II ‐ 15.0Ludhiana Metro ‐ 28.8 103.0Chandigarh Metro ‐ 37.6 109.0Lucknow Metro ‐ 22.9 70.0Nagpur Metro ‐ 42.0 80.0Bhopal Metro ‐ 28.0 60.0Indore Metro ‐ 32.2 75.0Total 414.6 1,547.6

Shortlisted bidders for Mumbai Metro phase III Domestic Company Foreign Partner AFCONS Infrastructure Ltd Kyivmetrobud ITD Cementation ‐Tata Projects Continental Engineering CorporationSOMA DOGUS IL&FS Engineering and Construction China Railway 25th Bureau Group J Kumar Infraprojects China Railway & Engineering Group Larsen & Toubro Shanghai Tunnel Engineering Hindustan Construction Company OSJC Moscow Metrostroy Pratibha Industries Guandong Tuantian Engineering Unity Infraprojects‐IVRCL China Railway Tunnel Group

Source: PhillipCapital India Research Key projects executed by the company Project City/State Sector Order Size (Rs

mn)Public Water transport platforms for 1) Nariman Point to Bandra 2) Dadar to Nerul Mumbai Transport 6,780Phase II BRTS Corridor Ahmedabad Transport 1,160Design & Construction of Amar Mahal flyover Mumbai Transport 729Design & Construction of viaducts, tunnels and elevated stations for Delhi Metro Rail Corporation Delhi Transport 15,862Widening & Improvement to Sion‐Panvel Highway Mumbai Transport 6,000Construction of barrage ‐ Lower Wardha Mail Canal Maharashtra Irrigation 926Building for UP Rajkiya Nirman Nigam Ltd Rajasthan Buildings 5,773

Source: Company, PhillipCapital India Research

8 9 9 10 12 15 18 23

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JKumar Infra COMPANY UPDATE

Financials

Income Statement Y/E Mar, Rs mn FY14 FY15e FY16e FY17eNet sales 11,868 14,716 18,395 22,994Growth, % 19 24 25 25Total income 11,868 14,716 18,395 22,994Employee expenses ‐773 ‐959 ‐1,198 ‐1,498Other Operating expenses ‐2,216 ‐1,031 ‐1,380 ‐1,725EBITDA (Core) 2,058 2,796 3,403 4,254Growth, % 23.0 35.8 21.7 25.0Margin, % 17.3 19.0 18.5 18.5Depreciation ‐348 ‐475 ‐576 ‐643EBIT 1,711 2,321 2,827 3,611Growth, % 19.7 35.7 21.8 27.7Margin, % 14.4 15.8 15.4 15.7Interest paid ‐576 ‐718 ‐718 ‐724Other Non‐Operating Income 108 112 123 135Pre‐tax profit 1,242 1,715 2,232 3,021Tax provided ‐402 ‐566 ‐737 ‐997Profit after tax 841 1,149 1,495 2,024Net Profit 841 1,149 1,495 2,024Growth, % 11.0 36.7 30.1 35.4Net Profit (adjusted) 841 1,149 1,495 2,024Unadj. shares (m) 28 32 32 32Wtd avg shares (m) 28 32 32 32 Balance Sheet Y/E Mar, Rs mn FY14 FY15e FY16e FY17eCash & bank 1,212 1,919 1,597 1,441Debtors 1,320 1,613 2,016 2,520Inventory 5,658 6,451 8,064 9,450Loans & advances 1,420 1,814 2,268 2,835Total current assets 11,500 13,687 15,834 18,135Investments 23 23 23 23Gross fixed assets 4,523 6,023 6,773 7,523Less: Depreciation ‐1,268 ‐1,742 ‐2,318 ‐2,961Add: Capital WIP 1,752 752 752 752Net fixed assets 5,007 5,033 5,207 5,314Total assets 16,531 18,743 21,064 23,472Current liabilities 5,136 5,495 6,039 6,719Total current liabilities 5,136 5,495 6,039 6,719Non‐current liabilities 5,642 5,142 5,642 5,642Total liabilities 10,778 10,637 11,681 12,361Paid‐up capital 278 322 322 322Reserves & surplus 5,475 7,783 9,060 10,788Shareholders’ equity 5,753 8,106 9,382 11,111Total equity & liabilities 16,531 18,743 21,064 23,472 Source: Company, PhillipCapital India Research Estimates


Pre‐tax profit 1,242 1,715 2,232 3,021Depreciation 348 475 576 643Chg in working capital ‐1,924 ‐1,120 ‐1,925 ‐1,777Total tax paid ‐383 ‐566 ‐737 ‐997Cash flow from operating activities ‐717 503 146 891Capital expenditure ‐2,254 ‐500 ‐750 ‐750Chg in investments ‐22 0 0 0Cash flow from investing activities ‐2,276 ‐500 ‐750 ‐750Free cash flow ‐2,992 3 ‐604 141Equity raised/(repaid) 84 1,372 0 0Debt raised/(repaid) 3,208 ‐500 500 0Dividend (incl. tax) ‐122 ‐168 ‐219 ‐296Cash flow from financing activities 3,086 704 281 ‐296Net chg in cash 94 707 ‐323 ‐155 Valuation Ratios

FY14 FY15e FY16e FY17ePer Share data EPS (INR) 30.2 35.7 46.4 62.8Growth, % 11.0 17.9 30.1 35.4Book NAV/share (INR) 206.9 251.5 291.1 344.8FDEPS (INR) 30.2 35.7 46.4 62.8CEPS (INR) 42.7 50.4 64.3 82.8CFPS (INR) (29.7) 12.1 0.7 23.5Return ratios Return on assets (%) 8.6 9.1 9.8 11.1Return on equity (%) 15.6 16.6 17.1 19.8Return on capital employed (%) 12.8 13.1 13.8 15.6Turnover ratios Asset turnover (x) 1.4 1.4 1.5 1.6Sales/Total assets (x) 0.8 0.8 0.9 1.0Sales/Net FA (x) 2.9 2.9 3.6 4.4Working capital/Sales (x) 0.4 0.4 0.4 0.4Receivable days 40.6 40.0 40.0 40.0Inventory days 174.0 160.0 160.0 150.0Payable days 184.7 163.0 142.8 127.5Working capital days 158.5 155.6 162.7 158.3Liquidity ratios Current ratio (x) 2.2 2.5 2.6 2.7Quick ratio (x) 1.1 1.3 1.3 1.3Interest cover (x) 3.0 3.2 3.9 5.0Total debt/Equity (x) 1.0 0.6 0.6 0.5Net debt/Equity (x) 0.8 0.4 0.4 0.4Valuation PER (x) 20.9 17.7 13.6 10.0PEG (x) ‐ y‐o‐y growth 1.9 1.0 0.5 0.3Price/Book (x) 3.0 2.5 2.2 1.8EV/Net sales (x) 1.8 1.6 1.3 1.1EV/EBITDA (x) 10.6 8.4 7.1 5.8EV/EBIT (x) 12.8 10.1 8.6 6.8

PHILLIPCAPITAL INDIA RESEARCH | 22 | P a g e


Annexure Transcript of Pre‐budget conference call with Mr. G. Suresh, CGM (Finance), National Highway Authority of India (NHAI) Date: 27th February, 2015 For listening to the audio recording, Click here Moderator Ladies and gentlemen good day and welcome to the Conference

Call hosted by PhillipCapital India Private Limited with Mr. G. Suresh – CGM (Finance) at NHAI. As a reminder all participant lines will be in the listen‐only mode. There will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference, please signal an operator by pressing ‘*’ and then ‘0’ on your touchtone telephone. Please note that this conference is being recorded. I now hand the conference over to Mr. Vibhor Singhal of PhillipCapital. Thank you and over to you sir.

Vibhor Singhal: Thanks Inba. I welcome you all to the pre‐budget conference call

with NHAI. We have with us Mr. G. Suresh who is a CGM of Finance at NHAI. Good afternoon sir thank you so much for joining us on this call. I would request if you could just give a brief introduction about what are the kind of things and announcement that we are expecting from the budget tomorrow in terms of the allocation to the road segment and all and how does the order pipeline for the NHAI look for the next couple of months and for FY16 and post that we can probably open up the session for question and answers.

G. Suresh: Well we have a large program going in between this year and the

next we need to complete approximately award completion of around 20,000 kilometers so the estimate is that we need may be around 2,30,000 crores as a total expenditure towards these projects being to be awarded as well as the project which are in the pipeline under execution so next year the general expectation was that probably we need to borrow from the market around 40 to 45,000 crores. And given the fact that the central government has already imposed an excise duty of Rs.4 on the petrol and diesel as such if that part of it can be diverted to the national highways it will be very useful and as far as the execution funding is considered we may then minimize our borrowing to that level and that is one. So in terms of quantum increase in allocation that is one expectation coming in. Number two, BOT has been out of favor in the last two, three years so some steps to make BOT more attractive would be helpful such as let say reduction in the MAT rate, as of now the MAT rate is roughly 20% given the fact that during the period when the companies were entitled for 80IA benefit that is 100% exemption on income tax the MAT application is actually reduced the window of benefit for them. So if MAT impact is minimized through this budget then that will be helpful. Then another thing is basically the interest and the lenders who are funding the infrastructure projects have been reduced in the past due to some of the tax interpretations related to the benefits give to the lenders on income on borrowings debt given to such infrastructure projects. So these are the three areas in which I would expect some relief to come through this budget otherwise there are many other concerns also such as

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depreciation benefits and non‐imposition of service tax and all those things as far as the road infrastructure is concerned but these are minimal, but three major these three now additional allocation of money that is number one, number two is basically minimizing the impact of MAT or doing away with that, and third is benefit to the lenders in as far as the tax exemption on income derive through lending to the infrastructure sectors. So this is broadly what we are expecting from the budget this time.

Vibhor Singhal: Right sir. And anything else on the pipeline of the order that you

expect that in the next couple of months and how much kilometers will we be able to award in the entire of FY15 and FY16 and the breakup in terms of EPC, BOT and whatever might be?

G. Suresh: As we look at for this year and next year it’s overall expectation is

that we should be in a position to, or we will be in a position to put out around 25 to 30% is of kilometers award in BOT and the balance will be around 70% or 75% would be on EPC that is in terms of the overall frame work. As such if you look in terms of with 20,000 kilometer which had to be awarded this year in next between us and the ministry. This will be the structured as it is going forward. As of now, for this year we had started a bit late because the new government took over and it changed in policy and as far as the priority or the preference given towards EPC took some time in coming three, four months. Effectively I would say that we have been able to activate ourselves only for six or seven months. As the things as such we should be in a position to touch around 6000 to 7000 kilometers even though it is less than 8700 kilometers which was planned for this year, nevertheless we should be in a position to catch on the balance in the may be April or May or so.

Then the next year target itself is around 11,000 kilometers, I

would say that we are looking at awarding around 6 to 7,000 kilometers this year along with the ministry and next year around 11 to 12,000 kilometers so that we can complete the exercise of awarding 20,000 kilometers.

Vibhor Singhal: Fair enough sir. Thanks a lot for that deep insight sir. Sir, I think

now we can open the call to question and answer session? G. Suresh: Yes, we can. Moderator: Ladies and gentlemen we will now begin the question and answer

session. Our first question is from participant # 1. Please go ahead.

Participant # 1: Sir just wanted to know on recent proposal to award contracts

under hybrid mode where it was mentioned that 40% of the funds up to 40% of the funds would be provided by the government and 60% would be invested by the private sector and it will be annuity based model so if you can comment on the proposal and how do you see that evolving

G. Suresh: The main purpose of the government was to leverage the

government resources which are stretched as far as the outlay is concerned so this model has been taken up as it, the model was



actually proposed by Ernst & Young at one of the alternatives of mode of execution. So as you rightly said Manish the whole structuring is like this – 40% is the cost of the execution would be provided by the government in five installments during the construction period and the balance 60% will structured in such a way that it will give out as annuity after completion during a period of 10 years in 10 semiannual sort of a thing. This payments of annuity would be the principal amount added to that the bank rate of RBI plus 2% interest on that. Plus in addition to that there is a provision for providing in the same installments semiannual annuity installments during the period in which the concession is likely to be imposition of the completed stretch. Roughly around 1% of the total project cost to 4% in terms of operations and maintenance expenses. So if you look at the overall financial structuring, there is a 40% upfront input for the government, the balance 60% will be given out in terms of annuity payments for the next 10 years after completion in semiannual annuities and a separate payment for the purpose of meeting operations and maintenance of the highway. The bidding will be in terms of the project cost which the company would expect to be as signing for the project of which 40% will be given as the upfront payment during constriction and 60% as I said earlier as the annuity flow.

Participant # 1: So how would be the mode of bidding in terms of people so

private sector would have to bid on an annuity base, has to quote the annuity number or how is it?

G. Suresh: They will be coating the project cost. Participant # 1: Okay. G. Suresh: They will first give the quote the project cost of which 40% asset

will be given to them during the period of constriction in five equal installments as a stage of construction progresses. The balance 60% as annuity for the next 10 years and semiannual annuity same.

Participant # 1: So then in the scheme of things in terms of when you said 25%

under BOT and 75% under EPC so if you adopt this hybrid model how would this structure change going forward that this is kind of a semi BOT come so how would it, do you think that the ordering of this 20,000 kilometer the share of hybrid could be what in that sense?

G. Suresh: 25 and 75 I had said in the context of a period when the annuity

this particular hybrid mode was not in picture. This hybrid mode was actually introduced on 23rd of this month we will have to see if 13 projects are year marked for this particular purpose as such for awarding, we have to see how exactly the response goes as I said earlier, the problem which you are facing is that the BOT projects are not eliciting that much of a response neither from the developers nor from lenders. So if this is successful probably the whole mix of this 25, 75 can change. It is not like, this 25, 75 is not a very rigid structure. Given the necessity of the market as such we may change.

Participant # 1: Okay. And as you mentioned that Rs 230,000 crores is required

for 20,000 kilometer but say this would be spread over several



years so what would be the immediate requirement say FY15 what is the requirement for NHAI to borrow and invest and FY16 what would be the, as you said you will have to borrow 45,000 crores in FY16 but what would be the total cash requirement say for NHAI in FY15 and FY16?

G. Suresh: Let me correct myself in that from the observation which you

made. We have around 12,000 kilometers under execution plus this year and next we are expecting to award 20,000 kilometers so the expenditure of 2,30,000 crores which we said is basically for all these things as such. Now once that is clear we were looking at earlier 8,700 kilometers award of this year of which approximately 6000‐7000 kilometers likely to fructify, and the balance in the next year. May be some spill over would be there but we cannot really divide this period into actual dates and horizons and all that. In that sense as such we in addition to what we are getting through the budget allocation we need to borrow around Rs 180,000 crores roughly. Of which Rs 45,000 cores would be required next year, the year next to that would be around 70 to 75,000 crores and the year next to that would be around 50,000 crores – slightly tapering off. So this is the overall debt acquiring pattern which we expect it to have. It could change ultimately on the basis of the bid values which will be coming in because in many of the cases on empirical data what is found is that, as far as BOT is concerned. Generally that is a tendency for the market to quote above our own estimate which is exactly the reverse in the case of EPC given the fact that we are trying to have predominately EPC as the award mode it is quite possible that the actual award value goes down and maybe we may have to borrow less. So will be able to say the exact figures only once the awards are complete not before that but, overall this is the figure which I am expecting to have.

Participant # 1: In last question, how much budgetary allocation was there last

year for the roads and how much can it go up in the current may be tomorrow what can be announced?

G. Suresh: Well the national highways have allocation in the last year budget

approximately 14,000 crores plus we have our own sources roughly 6,000 crores coming from our own toll collection premium payments and all that. So, I would say that from the government sources budgetary sources 14,000 crores plus 6,000 crores 20,000 crores is what is available this year for the NH program. The general trend is that mostly the premium and other things goes up by around 10% every year that is 6,000 value whereas the cess money that is 14,000 crores goes up by around 5 to 6%. So this has been promised to us to continue till at 2030‐31. So in image as such 20,000 crores is this years probably next year it would be going up by around 7 to 8% and so on till 2030‐31.

Participant # 1: Okay. So you don’t expect any incremental money which can

probably float to NHAI as a support for better execution? G. Suresh: Not really. Government has actually imposed Rs.4 excise on

petroleum products as such so, if we look at that the government I don’t know what exactly is the outlook as far as the petroleum prices are concerned – but then the whole impression given is



that probably the low pricing petroleum would continue for the next at least 2‐3 years at least till such time Saudi Arabia impose further any kind of cost increases. So this $50‐60 a barrel would continue for some time and probably the government would like to gather some money out of that and Rs.4 of excise duty imposed on fuel is something which is outside the road funds so if you look at that road funds has got Rs.2 coming from each liter of petrol and diesel, now they have imposed Rs.4 excise. If actually this was supposed to be given to highways then this excise instead of it being excise it would have been structured more as cess. So we hope may be some part of this excise duty imposed now would be transferred to cess so that cess amount instead of the current Rs.2 per unit liter of petrol and diesel gets increased to may be Rs.3 or Rs.4 or whatever. If that is the case there is a change of allocation to highways will go up. But we will have to wait and see as to what exactly is going to happen tomorrow in the budget.

Moderator: Thank you. We will take our next question from participant # 2.

Please go ahead. Participant # 2: Sir just in the initial data point if you just re‐iterate for me, you

said this year we would complete 6000‐7000 versus 8,500 that is right?

G. Suresh: Yes. Participant # 2: And then next two years what is the number you gave? G. Suresh: 20,000 kilometers is total. To the extent we are able to award this

year, the balance will be awarded next year. Participant # 2: Okay. So that would mean 13,000? G. Suresh: Yes, 13,000 kilometers. Participant # 2: In FY16 itself or it will spill over to FY17 also? G. Suresh: Some marginal spill over will be there because even in this year

also the award position is slightly lower only for the reason that most of the promoters have being requesting further times so that they can estimate the cost of each project and also have some sense what exactly the budget is going to carry. Hence the award process has been slightly pushed to the fag end of the year so that some spillover can take place in the next year. So the actual idea was that we should be in a position to award around 8,700 kilometers this year and the balance in the next year but as you see around 25 to 30% is in BOT and the BOT response has been particularly bad. 14 projects this year in BOT which were had bid out there was no response from the market. So, once the BOT respond does not come through then we have to try to see that it is pushed into the EPC space so that takes sometime. So the shortfall is on account of number one, due to promoters seeking further time for placing their awards, number two on account of non‐response to BOT these projects having to be found in the EPC space. So if that happens next year also then probably may be another 2,000 to 3,000 kilometers can get spilled over into the next year.



Moderator: Thank you. Our next question is from Vibhor Singhal. Please go

ahead. Vibhor Singhal: Sir just I wanted to ask you about the entire award process in this

financial year so, ever since the new government came in, the award process has been quite slow and I understand that probably as you mentioned that lot of BOT projects did not elicit any response and so they had to be worked back again in trying to award them on EPC basis. But just wanted to get your perspective on are we basically working towards clearing the hurdles which were there in the earlier award process like environmental clearance and land acquisition and have those hurdles been cleared that will ensure a smooth award process over the next 12 to 15 months let say?

G. Suresh: I really won’t agree with you and as far as the award having

slowed down after the new Ministry has come up. In fact if you look at that 2010‐11 onwards if you see the award number in 2010‐11 it was 5581, ‘11‐12 was 6,491 and then the slide happen, in ‘12‐13 it was only 1,116 kilometers and ‘13‐14 it was only 1,435. Now the reason why these were low because primarily on account of the most of projects were earmarked for BOT and the earlier government was not willing to convert this BOT projects into EPC – even though we have been seeking that particular dispensation. So this year after the new ministry came up they have been quite willing to accept the fact that the market for BOT is substantially down and hence if at all we have to go through the award program we have to have EPC as a predominant mode. So this year so far as such if you look at that we are in a position to nearly go ahead to 5,000 to 6,000 kilometers if BOT is responsive then may be even 7000 kilometers appears to be a distinct possibility. So this is the position as such so if you look at that way the response in this year, the award in this year is substantially picked up from 1,116 kilometers to 1,435 to 5,000 to 6,000 kilometers is not really a bad performance I would say. It is good given the fact that the market was quite uncertain and the ministry has taken charge only in the 2014 middle and the policy changes and other things had to take some time so, we effectively had only during this year around 6 to 7 months not beyond so that is the position as such.

Vibhor Singhal: Fair enough sir. Sir but any progress on the land acquisition and

environmental clearances for the projects which were earlier awarded and then canceled on those terms, can we expect many of those projects which were canceled from the ‘12, ‘13, ‘14 years to come back and be awarded over the next year?

G. Suresh: Certainly yes. This particular 20,000 kilometers which I am talking

about includes all those projects which were terminated on account of one reason or the other and one is the land acquisition, position is made clear as such the land acquisition becomes far easier. If you look back 2011‐12 and 2012‐13 as such the government had given out an impression that they are coming out with a very good compensation package for the land owners and hence till such time that was not finalized not many people are willing to part with the land. So the land acquisition became a problem. You are well aware of the problem which was



there as far as the environment and the forest clearance was concerned so that has also been sorted out during 2013 middle after we took the Environment Ministry to the Supreme Court. So as of now, as such, much of the issues which were affecting the execution of projects in the past has already gone away. So we hope that things will be better in future.

Vibhor Singhal: Okay. Are we seeing any on the ground progress in land

acquisition process that the land for some of the projects which are now being considered that is being done as a much rapid pace than the earlier project?

G. Suresh: Yes, you can say that I mean if you look in terms of the land

notification in ‘11‐12 we have notified approximately 10,500 hectares, ‘12‐13 it was 8,000 hectares and ‘13‐14 it was 12,220 and last year also a similar amount would have been there, we are looking to acquire roughly around 24,000 hectares.

Vibhor Singhal: In FY15? G. Suresh: Yes. And as far as the expenditure is concerned ‘11‐12 it was

around 4,500 crores and ‘12‐13 was around 4,600 which was increased in 2013‐14 to around 6900 crores, this year also the similar kind of figure is lightly.

Moderator: Thank you. Our next question is from participant # 3. Please go

ahead. Participant # 3: Question was you were talking about the part where you

awarded the contract to the various companies I would like to know the execution part of it, I am sorry if I miss that I joined a little late. For example if you said you awarded 12,000 crores of project how is the execution and is the whole project is being timely executed?

G. Suresh: If you look in terms of the general award pattern if you award a

BOT project today, let say I give an LOA today let say, it takes roughly around 60 days for the company to create an SPV which will be operating that and then sign the concession agreement. Thereafter they have a period of 180 day of financial close which can be extended even up to nearly 300 days so in terms of BOT between the actual award and the commencement execution there is almost a gap of one year. But when it comes to EPC once the EPC award is made there is no requirement as far as the financial close is concerned – all they have to do is basically execute the documents related to that and give the performance guarantee which takes not more than two months. So in terms of a mere shift in more from BOT to EPC itself there is a rough advantage in terms of time to the extent of 10 to 12 months. So the current awards once it is made on EPC there is a relative haste or rather speed with which the whole execution process can commence. So I would say that once you shifted the EPC there was recent CRISIL report also which said that roughly 75% of the project which are awarded are up and running and the execution is going ahead – which really cannot be the case in the case of BOT because the structural issues in terms of starting the project itself slows down the project to roughly by one year after award. So as far as EPC is concerned there is a relative advantage



in having it awarded on EPC in terms of this time advantage. So the execution would be faster.

Moderator: Thank you. As there are no further questions I now hand the floor

back to Mr. Vibhor Singhal go ahead sir. Vibhor Singhal: Yes. Sir I will probably just ask the last question in terms of the

prospects for the road sector that we are looking at. So as you mentioned that we are looking at around 5,000 to 6,000 kilometer for this year and around 11,000 to 12,000 kilometers of odd for the next financial year. So you mentioned that you are looking for additional budgetary support and basically MAT credit and those kinds of benefits as well but basically what in your opinion could be other supports that you could get from either the Government or RBI in terms of let say the 5‐25 Scheme that they have done, so any other things in those terms which you think that will help you expedite the award process or may be some of the risk that you see which might lead to you not being able to achieve the target that has been set out to?

G. Suresh: The 5‐25 which you referred to is particularly is a very welcomed

step, primarily if you look at in BOT – most of the BOT projects are awarded up for a concession period that are running up to 30 years. On an average I would say that 20 to 22 years is the main concession period as such. But then, the funding for all these projects have been predominantly coming from the commercial banks and they have a problem as far as the liquidity is concerned, asset liability mismatch is concerned they can even for a project which has got a cash flow coming in for 20‐22 years they have to assess the viability of the project considering in mind, keeping in mind only the initial 10‐12 years. So that means that the project is viable. The actual viability of the project is actually ignored and viability is always estimated on the basis of the initial cash flows. In any concession, in any kind of a BOT project the initial four, five years are very critical, the cash flows will be minimum because you are still grappling with many of the issues and a higher cash outgo is always there, the company will not be able to generate that much of money. So if the whole financial structuring is to be done by the banks who are the major lenders as far as these projects are concerned keeping in mind only the initial 12‐13 years of cash flow and then say whether the project is viable or not on that reminds us as such it totally ignores the period beyond that 12 years which could run for another 10 years where the entire cash flow does not even enter the consideration. So there has to be some kind of a policy initiative similar to ‐525 by RBI by permitting the banks or providing some kind of a refinance window so that they can have some remedy towards its asset liability mismatch. So already the government has taken steps for the purpose of ensuring that at least as far as the mode of execution is concerned EPC can be primary. They also will to look at a higher level of borrowing, we are in fact talking to EPFO and such other funds which have got a long‐term horizon of funds as such. So the funding issues are being tackled at the policy level as well as the ground level. Policy issues as far as RBI is concerned prudential norms, income recognition norms and all those things some kind of a tweaking is required so that in this particular aspect where project viability is established or assessed totally in the initial 12 years cash flow



that needs to be addressed. I think it is something that can be done by the government on that even if it is outside the budget exercise which most probably it will be that will be quite helpful.

Vibhor Singhal: Thanks a lot sir. Can we take a last question? Moderator: Sure sir. It is from participant # 4. Please go ahead. Participant # 4: Couple of things, one was there was this proposal to raise some

funding aboard, to fund some of these projects as Japanese funding for example was one that was talked about – has there been any progress on that side could you share with us?

G. Suresh: Well we have no progress on that particular front. Issue of raising

money aboard is very easy and lot of avenues are there, ready cash flows are available here so that servicing is not much of an issue but then the question is what would be the ultimate hedged cost. As far as the road sector is concerned it has all its cash flow come from Rupees so you don’t have a natural hedge. So talking money from aboard for the purpose of these projects is a very hazardous operation and unless the Central Government comes out and then provides hedging mechanism so that the whole thing is covered up. So as of now as such nothing much has moved on this front.

Participant # 4: Right. The other element would be on concretization of roads on

a larger scale there were some talks about sourcing cement at cost or whatever. Has there been any progress on that front as well?

G. Suresh: I believe that the ministry has been seeking some kind of quotes

from some of the cement manufacturers, I really don’t have the data on that because it has been not handled at our level it is basically being handled at the Ministry level.

Moderator: Thank you. Our now hand the floor back to Mr. Vibhor Singhal for

closing comments. Vibhor Singhal: Thank you so much sir on behalf of PhillipCapital and our investor

community I would like to thank you for taking time out from your precious schedule. Thank you so much for joining the call sir.

G. Suresh: Thank you very much and have a nice day all of you. Vibhor Singhal: Thank you sir. Moderator: Thank you. On behalf of PhillipCapital India Private Limited that

concludes this conference. Thank you for joining us and you may now disconnect your line.



Contact Information (Regional Member Companies)

SINGAPORE Phillip Securities Pte Ltd

250 North Bridge Road, #06‐00 Raffles City Tower, Singapore 179101

Tel : (65) 6533 6001 Fax: (65) 6535 3834 www.phillip.com.sg

MALAYSIA Phillip Capital Management Sdn Bhd B‐3‐6 Block B Level 3, Megan Avenue II,

No. 12, Jalan Yap Kwan Seng, 50450 Kuala Lumpur Tel (60) 3 2162 8841 Fax (60) 3 2166 5099

www.poems.com.my

HONG KONG Phillip Securities (HK) Ltd

11/F United Centre 95 Queensway Hong Kong Tel (852) 2277 6600 Fax: (852) 2868 5307

www.phillip.com.hk

JAPAN Phillip Securities Japan, Ltd

4‐2 Nihonbashi Kabutocho, Chuo‐ku Tokyo 103‐0026

Tel: (81) 3 3666 2101 Fax: (81) 3 3664 0141 www.phillip.co.jp

INDONESIA PT Phillip Securities Indonesia

ANZ Tower Level 23B, Jl Jend Sudirman Kav 33A, Jakarta 10220, Indonesia

Tel (62) 21 5790 0800 Fax: (62) 21 5790 0809 www.phillip.co.id

CHINA Phillip Financial Advisory (Shanghai) Co. Ltd.

No 550 Yan An East Road, Ocean Tower Unit 2318 Shanghai 200 001

Tel (86) 21 5169 9200 Fax: (86) 21 6351 2940 www.phillip.com.cn

THAILAND Phillip Securities (Thailand) Public Co. Ltd.

15th Floor, Vorawat Building, 849 Silom Road, Silom, Bangrak, Bangkok 10500 Thailand

Tel (66) 2 2268 0999 Fax: (66) 2 2268 0921 www.phillip.co.th

FRANCE King & Shaxson Capital Ltd.

3rd Floor, 35 Rue de la Bienfaisance 75008 Paris France

Tel (33) 1 4563 3100 Fax : (33) 1 4563 6017 www.kingandshaxson.com

UNITED KINGDOM King & Shaxson Ltd.

6th Floor, Candlewick House, 120 Cannon Street London, EC4N 6AS

Tel (44) 20 7929 5300 Fax: (44) 20 7283 6835 www.kingandshaxson.com

UNITED STATES Phillip Futures Inc.

141 W Jackson Blvd Ste 3050 The Chicago Board of Trade Building

Chicago, IL 60604 USA Tel (1) 312 356 9000 Fax: (1) 312 356 9005

AUSTRALIA PhillipCapital Australia

Level 37, 530 Collins Street Melbourne, Victoria 3000, Australia

Tel: (61) 3 9629 8380 Fax: (61) 3 9614 8309 www.phillipcapital.com.au

SRI LANKA Asha Phillip Securities Limited

Level 4, Millennium House, 46/58 Navam Mawatha, Colombo 2, Sri Lanka

Tel: (94) 11 2429 100 Fax: (94) 11 2429 199 www.ashaphillip.net/home.htm

INDIA PhillipCapital (India) Private Limited

No. 1, 18th Floor, Urmi Estate, 95 Ganpatrao Kadam Marg, Lower Parel West, Mumbai 400013 Tel: (9122) 2300 2999 Fax: (9122) 6667 9955 www.phillipcapital.in

(91 22) 2300 2999Kinshuk Bharti Tiwari (Head – Institutional Equity) (91 22) 6667 9946

(91 22) 6667 9735

Research Engineering, Capital Goods Pharma

Dhawal Doshi (9122) 6667 9769 Ankur Sharma (9122) 6667 9759 Surya Patra (9122) 6667 9768Priya Ranjan (9122) 6667 9965 Hrishikesh Bhagat (9122) 6667 9986 Mehul Sheth (9122) 6667 9996

Infrastructure & IT Services Retail, Real EstateManish Agarwalla (9122) 6667 9962 Vibhor Singhal (9122) 6667 9949 Abhishek Ranganathan, CFA (9122) 6667 9952Pradeep Agrawal (9122) 6667 9953 Deepan Kapadia (9122) 6667 9992Paresh Jain (9122) 6667 9948 Portfolio Strategy

Midcap Anindya Bhowmik (9122) 6667 9764Consumer, Media, Telecom Vikram Suryavanshi (9122) 6667 9951Naveen Kulkarni, CFA, FRM (9122) 6667 9947 TechnicalsJubil Jain (9122) 6667 9766 Metals Subodh Gupta, CMT (9122) 6667 9762Manoj Behera (9122) 6667 9973 Dhawal Doshi (9122) 6667 9769

Ankit Gor (9122) 6667 9987 Production ManagerCement Ganesh Deorukhkar (9122) 6667 9966Vaibhav Agarwal (9122) 6667 9967 Oil&Gas, Agri Inputs

Gauri Anand (9122) 6667 9943 Database ManagerEconomics Deepak Pareek (9122) 6667 9950 Deepak Agarwal (9122) 6667 9944Anjali Verma (9122) 6667 9969

Sr. Manager – Equities SupportRosie Ferns (9122) 6667 9971

Sales & Distribution Ashvin Patil (9122) 6667 9991 Sales Trader Zarine Damania (9122) 6667 9976Shubhangi Agrawal (9122) 6667 9964 Dilesh Doshi (9122) 6667 9747 Kishor Binwal (9122) 6667 9989 Suniil Pandit (9122) 6667 9745Sidharth Agrawal (9122) 6667 9934 ExecutionBhavin Shah (9122) 6667 9974 Mayur Shah (9122) 6667 9945

Corporate Communications

Vineet Bhatnagar (Managing Director)

Jignesh Shah (Head – Equity Derivatives)

Automobiles

Banking, NBFCs

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