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Your success is our success
Emkay
Sec
torUpdate
Emka Global Financial Services Ltd. 1
Construction
Strengthening the Weak Links
October 14, 2013
Nitin Arora
+91-22-66242491
Ajit Motwani
+91-22-66121255
Premium restructuring another bid to clear clog, may not be enough to
improve project viability
The Cabinet Committee on Economic Affairs (CCEA) has given the principal approval for
restructuring premium payments for certain projects with the aim to improve projectviability and ease cashflows of already strained developer balance sheets. The deferred
premium payments would help concessionaires to use cashflows from the initial few
years for equity commitments for the project. However, it may not be sufficient to improve
viability of projects due to aggressive bids. In our view, the cancellation and re-bidding of
projects would be a prudent option [recently the National Highway Authority of India
(NHAI) cancelled four BOT projects, which are set to come up for re-bidding] against
premium restructuring, which is likely to face challenges.
Re-bidding of stalled contracts likely to push awarding activity upwards in
2HFY14E; NHAI targets 4000km
In the last 6 months, the NHAI has made attempts to resolve issues pertaining to the
sector by: a) de-linking forest and environmental clearances for linear projects, b)directing banks to lower land acquisition requirements for disbursal of loans, c) classifying
debts for BOT projects as secured loans, d) CCEAs exit offer for road developers
irrespective of the construction stage, and e) restructuring of projects via rescheduling of
premium. As a result, the NHAI is now aims to award more than 50% of the total target of
4000km in FY14E on an EPC basis. Given the prevailing financial and structural
challenges in the sector, we see scope of new orders to emerge from potential re-bidding
of stalled contracts and EPC projects (will not garner interest of large developers due to
the small project size). However, the window for resolving the major reform premium
restructuring is very short given the upcoming elections in 2014. In case the standoff
continues it is unlikely that NHAI will be able to bid out a sizeable number of BOT projects
this year/H1FY15.
Substitution of concessionaire not to address financial unviable projects
The government/NHAI-approved substitution of developers (to replace SPV in
consultation with lenders) allowed the latter to sell projects irrespective of the stage of
construction. The substitution policy entails the SPV to hold a 51% stake in the project
post the sale. We believe the policy will not make any significant impact to help revive the
sector sentiment, as it would not largely benefit financially unviable projects, as: a)
developers opting for substitution of stalled contracts, where delays occurred due to the
concessionaire default, the new SPV becomes liable to pay a penalty on delayed
completion, and b) only eight projects of the 47 projects tendered in FY12 have
commenced construction till June 2013. This implies that the majority of the projects were
not given the appointed date, since exit policy would be applicable for projects that have
achieved the appointed date. Also, the ambiguities related to whether tax benefits would
pass on to the new SPV would involve additional costs (stamp duty that itself is 2.5% ofthe transaction value).
Authority aims to clear the clog: Maintain Buy on IRB, Ashoka Buildcon
In the last 2 years, the road sector did not witness any awarding or construction activity.
A large part of the construction work did not keep up with execution run rates, which led
to project delays, mainly due to EC FC clearances and the limited ability of prospective
bidders to mobilize additional equity and competitive bidding, making the project
cashflows unviable to support premium payments. Heightened risk perception about BOT
projects causes financial institutions to be reluctant to take additional exposure in
highway BOT projects.
In this scenario, we maintain a Buy rating on IRB infrastructure and Ashoka Buildcon
because of their strong road-asset portfolio and stable order-books. With a minimalfunding requirement, these companies remain well-funded for exploiting new
opportunities as and when the NHAI awarding activity picks up. We retain a hold rating on
ITNL, given its high parent leverage, along with decelerating high margin fee income
could mean rising interest cost pressures, thereby causing deterioration in profitability.
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CCEA in-principle approval for rescheduling of premiums
With regard to Kishangarh-Udaipur-Ahmedabad, Cuttuck-Angul, and Shivpuri-Dewas
projects, which have asked for rescheduling of the premium on account of delays in
acquiring land and variations in traffic seen from the time of bidding (which would make the
projects financially unviable), CCEA has approved rescheduling of premiums for 23 road
projects wherein appointed dates were not given . The underlying principle of this
rescheduling process is to maintain the NPV of these premium payments while allowingsome relief in the initial years to compensate for delays in clearances and traffic slowdown.
CCEA stated that NHAI would now consider each project on a case-to-case basis to
determine its eligibility for the rescheduling of restructuring. However, details are still
awaited regarding broad principles agreed on rescheduling like the discounting rate (10-
12%), besides conditions such as bank guarantee and upfront penalty. Developers of
another 16 road projects have also approached the NHAI for restructuring of premiums, but
the roads ministry is not yet to consider their proposals
Exhibit 1: Projects considered for premium restructuring
Projects Concessionaire Length Km Project cost Rsmn Premium Quoted Rsmn Bid date
Rampur- Kathgodam ERA-Sibmost 93 8,500 340 23-Nov-11
Lucknow - Sultanpur Essar-Atlanta 123 10,790 96 13-Sep-11Agra - Etawa by pass Ramky Infrastructure 125 13,460 1,281 24-Nov-11
Hospet-Chitradurga NH-13 Ramky Infrastructure 120 10,450 630 18-Nov-11
Cuttack-Angul NH-42 Ashoka Buildcon 112 11,240 611 18-Nov-11
Solapur - MH/KNT border NH-9 Coastal-SREI 100 9,230 280 12-Dec-11
Shivpuri-Dewas GVK 332 28,150 1,809 1-Aug-11
Raipur - Bilaspur IVRCL A&H 126 12,160 455 18-Nov-11
Vijaywada - Gundugolanu Gammon Infrastructure 104 17,430 576 24-Jan-12
Obdedullganj-Betul Transstroy 123 9,120 330 17-Jan-12
Solapur - Bijapur Sadbhav 111 10,025 756 26-Mar-12
Aurangabad-Barwa Adda KMC 222 24,190 1,350 30-Mar-12
Rajumundary - Gundugulanu IVRCl A&H 121 17,510 721 30-Mar-12
Jalgaon - Gujarat/MH Border L&T 209 19,730 1,451 30-Mar-12
Amravati - Jalgaon L&T 275 25,259 1,310 30-Mar-12
Jind-Punjab/Haryana Border Unity Infra 69 4,388 102 30-Mar-12
Kota - Jhalwar Keti Constructions 88 5,300 35 15-Apr-11
Sangareddy to MH-KNT Border NH-9 L&T 145 12,660 800 30-Sep-11
Hospet-Bellary NH-63 PNC 95 9,101 180 29-Jul-11
Kishangarh-Udaipur-Ahmedabad GMR Infrastructure 555 53,870 6,360 29-Jul-11
Anandpuram - Vishakhapatnam - Ankapalli Transstroy 58 8,630 820 30-Mar-12
Coimbatore Mettupalayam Transstroy-OJSC 53 5,920
Barwa Adda Panagarh IL&FS Transportation 123 1,665 420 10-Apr-13
Total 328777 20712
Source:
Premium Restructuring: Attempt to resolve developers/project cashflow
issues for the short term
The government has made attempts to kick-start the projects worth over Rs300bn, which
also remains essential in terms of creating appetite for contracts lined up for the next round
of bidding. However, it remains to be seen whether the relief offered to developers under
this proposal would be sufficient and acceptable to developers. The underlying statement
of the NHAI that restructuring would be looked into on a case to case basis implies its
ambiguous applicability across all projects is likely to engender litigation issues. Our view
on this development is as follows:
Loans provided by the NHAI, which will not reflect in developers books; however, itwould provide interim relief to concessionaire, as deferred premium payments would
help concessionaires to use cashflows from the initial few years for equity
commitments for the project, ultimately to improve project viability and ease cashflowsof already strained developer balance sheets. At the same time, the government also
wants to ensure adequate financial commitment from developers so as to ensure
timely completion of projects.
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As the NHAI would be considering rescheduling on a case to case basis, small-premium projects and premium projects, which have commenced work, are likely to
remain out of the mechanism. There is a risk that some of these developers may
litigate if they, too, are not given this premium restructuring option, causing further
delays.
The window for resolving this standoff is very short, given the upcoming elections inearly 2014. In case the standoff continues, it is unlikely that the NHAI would be able tobid out a sizeable number of BOT projects in 2HFY14E/1HFY15E.
The prudent strategy, we believe, is to kick-start the projects that have been weigheddown due to financial closure and aggressive biddings, and re-invite them for re-
bidding, which would attract serious developers and discover a new premium or a grant
base.
In our view, the major persistent issue with regard to projects involves financial
restructuring, since other structural problems related to land acquisition, re-bidding for
those projects that have not achieved financial closure (though the intensity can be lower),
and asking financial Institutions to take additional exposure in highway BOT projects,
especially in those cases where the NHAI satisfies all precedent conditions, can still be
resolved.
Premium restructuring not enough, re-bid of projects the prudent option
The projects are broadly categorized into four segments: a) projects wherein developers
are prepared to make progress based on the original bidding parameters as long as the
NHAI fulfills its obligations, b) projects that need to be terminated with a penalty in cases
where the concessionaire has defaulted, c) projects that would be terminated and re-bid
but without a penalty in cases where the concessionaire has defaulted and the NHAI has
failed to meet its obligations, and d) projects wherein concessionaires may be willing to
make progress with some changes to bidding conditions (such as premium restructuring).
As per NHAI estimates, 28 projects (3042.60km) were awarded, but they have not
achieved financial closure, whose grace period of 120 days (over and above the 180 days
required to achieve financial closure) end in October 2013. Recently, the NHAI scrapped
four road projects without penalising the developer as wildlife clearance was still pending.
Kota-Jhalawar road project (80km, a 4-laning project won by Keti Construction) Meerut Bulandshahr (60km, a 4-laning project won by C&C Construction) Rampur-Kathgodam (93km, a 4-laning project won Era Infrastructure) Agra-Etawah (125km, a 6-laning project, won by Ramky Infrastructure)We have noticed that developers are weighed down by economically unviable road projects
as a result of aggressive biddings and due to a lack incentives to help them keep the
projects in their kitty (in some cases the performance guarantee was not submitted which
forms 1% of the project cost). We have highlighted a list of 21 stalled projects (Exhibit 10)
on account of land acquisition issues (delay caused due to EC/FC clearances ), with
majority of them considered for premium for restructuring, part of which is likely to come upfor re-bidding . We believe the solution to kick-start these projects that are weighed down
due to financial closure is to re-invite them for re-bidding, which would attract serious
developers and discover a new premium or a grant base.
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Exhibit 2: Projects delayed due to land acquisition
Road projects stuck due to land Acquisition Contractor (km) Cost (bn) Lane
1. Vijayawada-Eluru-Gundu Golanu VG Road project 103.6 16.8 6
2. Rajahmundry-Gundu Golanu IVRCL 121.0 16.2 6
3. Anandapuram-Vskp-Anakapalli TRanstroytollway 59.0 8.6 6
4. Raipur-Bilaspur IVRCLAssets 126.5 12.2 4
5. Jind-Punjab/Haryana border UnityInfra 69.4 4.4 4
6. Aurangabad-Barwa Adda KMCConstruction 220.0 24.2 6
7. Hospet-Bellary PNCBetul 95.4 9.1 4
8. Sangareddyto Maha border L&T DPL 145.0 12.7
9. Hospet-Chitradurga RamkeyInfra 120.0 10.3
10. Shivpuri-Dewas GVK 332.5 28.2 4
11. Obedullaganj-Betul TRanstroyOJSC 121.0 9.1 4
12. Solapur-Karnataka border Coartal Srei 100.0 9.2 4
13. Solapur-Bijapur SadhbhavEngineering 110.0 9.9 4
14. Jalgaon-Gujaratborder L&T Infra 208.0 19.7 4
15. Amravati-Jalgaon L&T Infra 275.0 25.4 4
16. Agra-Etawah RamalkyInfra 124.5 12.1 617. Cuttack-Angul Ashoka Buildcon 112.0 11.2 4
18. Kota-Jhalawar Keti Construction 88.1 5.3 4
19. Kishangarh-Ahmedabad GMR Infra 555.5 53.9 6
20. Lucknow-Sultanpur Essar Atlanta 125.9 10.4 4
21. Rampur-Kathgodam ERA-Sibmost 93.2 7.9 4
Source: Emkay Research, NHAI
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Awarding activity to inch upwards in 2HFY14E; NHAI targets 4000km
In FY13, project award activity fell sharply and was at its lowest levels since FY05, with the
exception of FY09. Both BOT (build-operate-transfer) and EPC (engineering, procurement
and construction) project awards by the NHAI declined to 1128km in FY13 from 6380km in
FY12. We have seen a surge in ordering activity in BOT mode between FY09 and FY12,
while the contribution of projects awarded in EPC mode was negligible. However, in FY13,
we noticed the tapering off awarding activity, with 14 BOT projects worth Rs150bn/1822 kmfailing to attract any bids. This led to awarding of only 1128kms of BOT projects as against
the original target of 8800km. As a result, the NHAI is now aims to award more than 50% of
the total target of 4000km in FY14E on an EPC basis. Till date, the NHAI has awarded
(YTD FY14E) 356km and 123km in EPC and BOT modes, respectively. Given the
prevailing financial and structural challenges in the sector, we see scope of new orders to
emerge through the EPC route and potential re-bidding of stalled contracts.
Exhibit 3: Ordering activity remains sedate
1608 1390 1145 643
33605058
6380
1116 4790
1000
2000
30004000
5000
6000
7000
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
(Sep2013)
Length awarded (Km)
Source: Emkay Research , NHAI
Exhibit 4: Construction work per km
753 635
16822205
2693
17842249
2848
6370
500
1000
1500
2000
2500
3000
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
(Sep2013)
Length completed (Km)
Source: Emkay Research , NHAI
Exhibit 5: Awarding activity in BOT and EPC
1608 1390 1145643
3360
50586380
1116
123
3055
345 89 356
0
1000
2000
3000
4000
5000
60007000
FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14
(Sep2013)
Length aw arded (Km) BOT Length aw arded (Km) EPC
Source: Emkay Research, NHAI
Exhibit 6: Balance of work to be awarded
NHDP component
Total
Length (km)
Completed
4/6 lane(km)
Under
Length (km)
Implementation
No. of projects
Balance for award of
civil works (km)
NHDP Phase-I 7522 7514 8 10 -
NHDP Phase-II 6647 5647 610 52 385
NHDP Phase-III 12109 5611 4813 89 1685
NHDP Phase-IV 20000^ 285 4130 33 10384
NHDP Phase-V 6500 1584 2496 28 2420
NHDP Phase-VI 1000 - - - 1000
NHDP Phase-VII 700* 21 20 2 659
Misc. Projects 656 363 293 9 -
NH-34 5.5 5.5 1
SARDP-NE 388 69 43 2 276
Total 55528 21094 12419 226 16808
Source: Company, Emkay Research
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Exhibit 7: BOT Projects to be tendered
Road Stretch State (kms) Cost (Rs.mn) Status
Barwa Adda-Panagarh West Bengal 122.9 16,650 Work Awarded to ITNL
Jabalpur-Lakhanadone Madhya Pradesh 80.8 7,770 Bids invited
Bhavnagar-Verawal (4 lane) Gujarat 260.0 32,400 Bids invited
Yadgiri-Warangal (4 lane) Andhra Pradesh 99.0 9,570 NA
Hospet-Hubli (4 lane) Karnataka 143.3 12,930 Bids to be re-invited
Numaligarh-Jorhat (4 lane) Assam 51.2 5,850 No bids received, project to be restructured
Ghoshpukur-Salsabari (4 lane) West Bengal 154.9 22,120 Bids to be invited
Karaikudi-Ramanathapuram (2 lane) Tamil Nadu 80.0 3,360 Bids to be re-invited
Demoh-Dibrugarh (4 lane) Assam 46.0 4,730 No bids received, project to be restructured
Jorhat-Demoh (4 lane) Assam 81.8 8,750 No bids received, project to be restructured
Chas-Ramgarh (2/4 lane) Jharkhand 78.3 2,980
Aurangabad-Vedishi (4 lane) Maharashtra 189.1 18,710
Chandikhole-Dubari-Bhuban (4 lane) Odisha 62.2 6,520 Bids invited
Parwanoo-Shimla (4 lane) Himachal Pradesh 89.6 22,930
Chhutmalpur-Saharapur-Yamunagarh-Haryana/UP border Uttarakhand/ UP 104.8 10,240
EPS (6 lane) Haryana/ UP 135.0 NASolapur-Vedishi (4 lane) Maharashtra 98.7 9,700
Hissar-Dabwali (4 lane) Haryana 145.8 13,320 PPPAC proposal circulated
Total 2,023.30 208,530
Source: Emkay Research, NHAI
Substitution/exit policy to bring back momentum?
In order to clear the clog in the sector, the government has made provisions to allow
developers to sell projects (replace the SPV in consultation with lenders) irrespective of the
stage of construction. The substitution policy entails the SPV to hold a 51% stake in the
project post the sale. However, according to the NHAI, there are no restrictions on second
sale. The decision would be applicable to following projects:
The on-going 2- and 4-laning NHAI projects, where financial closures have beenachieved by the concessionaire, but COD has not yet been declared by the authority.
The 6-laning NHAI projects, where financial closures have been achieved by theconcessionaire, but a project completion certificate has not yet been declared by the
authority.
Completed 2-, 4- and 6-laning NHAI projects awarded in BOT mode. All new NHAI projects under PPP yet to be bid out in BOT mode in line with case a, b,
and c as the case may be.
The provision substitution has always been in-built in the model concession
agreement:
Concession agreement for 2000: 51% during the construction period for 3 yearsfollowing COD and to hold 26% for the remaining concession period.
Concession agreement post-November 2009 (B. K. Chaturvedi Committee): 51%during the construction period till COD, and for a period up to 3 years, the bidder can
reduce the shareholding to 33%. Thereafter, the shareholding can be brought down to
26% for the remaining concession period.
The current concession agreement provides a 51% stake during the constructionperiod for 2 years following COD.
However, the current concession agreement contains provision for substitution of the
existing concessionaire to lenders, and such a substitution could have been involved in
case of: (a) financial default (delays of 3 months in servicing debt), (b) concessionaire
default (lender gets 270 days to substitute concessionaire), and (c) other cases of breachof provisions of MCA.
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Substitution/exit policy to help financially viable projects
Arguably, the move would benefit only financially viable projects (presumably, the projects
will not have too many problems), the exit option may not garner interest for projects which
have been bid aggressively (buyers focus only on value generating projects, and it lacks
incentives to share upfront losses). But the real problem lies with economically unviable
projects. However, we do not rule out possibilities, where weaker developers could use this
exit option to sell their stakes in projects (both completed and under-construction can besold) and use the resulting equity in other projects or on fresh bids without being blacklisted
for not complying with concession agreement commitments. Besides, such provision can
also help lenders to exercise greater control over projects funded by them (creates
flexibility to substitute concessionaires, particularly the non-performing ones).
Exit policy for projects achieved appointed date
It is to be noted that the substitution of the SPV would be applicable for projects that have
achieved the appointed date (all clearances related to EC and FC and other pre-conditions
of the NHAI). However, we have observed that of the total 47 projects tendered in FY12,
only eight projects have commenced construction till June 2013. This implies that the
majority of the projects were not given the appointed date. This move, we believe, would
not benefit these projects. It also presents ambiguity about whether the tax holiday that thefirst SPV is eligible for would be passed on to the new SPV, the additional cost of new
stamp duty for forming a new SPV, which is usually 2.5% of the value of the transaction,
and the imposition of penalty for exiting the projects.
83% of projects awarded in FY12 yet to commence construction
The NHAI awarded 15,894km of road projects over FY10-13, both in BOT and EPC mode,
with 98% of the projects on a BOT basis. However, the strong tendering activity did not
corroborate the real progress on the execution front. We have observed that of the total 47
projects tendered during FY12, only eight projects commenced construction activity till
June 2013, increasing the average time to begin construction after a BOT project is
awarded to 18 months (the difference between the LOA date and till date). This is likely to
increase even further if the current clog is not cleared soon. Among the 11 projects
tendered in FY13, only one has started construction, which implies that the average time to
commence construction is 10-12 months, as 80% of the projects were tendered in 1HFY13.
This is expected to increase in the future. The NHAI targets to undertake 2500km of
construction activity in FY14E (the target was 2580km in FY13), with 637km of road
construction already completed till July 2013.
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Exhibit 8: Out 47 projects tendered during FY12, only eight projects commenced construction till date
Projects Bidder Award date Km Type Construction Start date
Nagpur-Wainganga bridge JMC projects, Artefact projects May-11 45 BOT Apr-12
Panikholi-Rimoli Gayatri projects Aug-11 163 BOT May-13
2 laning of Kisnagiri-Tindivanam Transitory-OJSC corporation May-11 176 Annuity Apr-12
Vijaywada-Machhlioatnam Madhucon projects Nov-11 64 BOT
Kota -Jhalwar Keti construction Apr-11 88 BOT
Rampur-Kathgodam Era infra-OJSC-SIBMOST Nov-11 93 BOT
MH/KNT Border Sangareddy L&T IDPL Nov-11 145 BOT
Hospet Chitradurga Ramkey infra Nov-11 120 BOT
4-laning Solapur-Bijapur Sadbhav eng Mar-12 110 BOT
4-laning of Cuttcuk-Aangul Ashoka Buildcon Nov-11 12 BOT
4-laning of UP Harayana border-Yamunagar-Saha-Barwala Gammon Infra Mar-12 107 BOT
4-laining of Solapur-Maharashtra/KTK section Coastal-srie Consortium Dec-11 100 BOT
4-laning of Rohtak-Jind Vijai infra Dec-11 48 BOT
4-laining of Mulbagal-Karnatka/AP Border JSR Construction Mar-12 22 BOT
4-laining of Kiratpur ner chowk IL&FS transportation Feb-12 84 BOT
Beawer-Pali-indwara L&T IDPL May-11 244 BOT Dec-112-laining with PS Motihari-Raxaul Tantia-Jiangsu Jan-11 69 BOT Oct-11
4-laning of Punjab-Harayana border-Jind Unity Infra Mar-12 68 BOT
2-laning of Jowai-Meghalaya/Assam border Simplex infra Mar-12 102 BOT
Patna Buxar Gammon infra Nov-11 124 BOT
4- laning of Obedullnganj-Betul Transitory Feb-12 125 BOT
4-laning of Khagaria-Bakhtiarpur Navayuga Engineering Mar-12 112
4-laning of Hoskote-Dobbaspet Transitory-OJSC Consortium Mar-12 80 BOT
4-laining of Jalgaon-Maharashtra/Gujarat L&T IDPL Mar-12 208 BOT
4-laining of Amravati-Jalgoan L&T IDPL Mar-12 275 BOT
Jabalpur to Lakhanadone Gannon Dunkerley Jul-11 80 BOT
4-laning of Gwalior-Shivpuri Essel infraprojects Sep-11 125 BOT
4-laning of Shivpuri-Dewas GVK Transportation Sep-11 330 BOT
4-laning of Raipur-Bilaspur IVRCL Asset holding Nov-11 126 BOT
Rehabitation & upgradation to Birmitrapur to barkote Gammon infrastructure Mar-12 125 BOT
4-laning to Hospet-Bellary-Karnataka/AP PNC Infratech-BF utility Oct-11 95 BOT
4-laning of Mahulia to Behgora to Kharagpur Simplex infrastructure Dec-11 127 BOT
4-laning of Gomti-Chauraha-udaipur Sadbhav Engg, Arvee Mar-12 79.3 BOT
4-laning of Meerut-Bulandshahar C&C construction Sep-11 66 BOT
4-laning of Lucknow-Sultanpur Essar-Atlanta(JV) Oct-11 125 BOT
2-laning of Muzaffarpur-Barauni KNR, frischmann prabhu Oct-11 107 BOT Jul-12
Lucknow-Raibareli Essel infratructure Nov-11 70 Annuity
4-laning of Angul, Sambalpur Abhijit Roads Nov-11 153 BOT
4-laining of Jabalpur-Katni-Rewa Soma Tollways Aug-11 225 BOT6-laning of Gundugolanu-Rajamundry IVRCL asset & holding Mar-12 120 BOT
6-laning of Anandapuram-visakapatnam-Anakapalli Transtroy-OJSC corporation Mar-12 58 BOT
Ahmedabad to Vadodra IRB infrastructure Apr-11 102 BOT Jan-13
6-lanining of Aurangabad-Barwa Adda KMC construction Mar-12 221 BOT
Vijaywada-Gundugolanu Gammon Infra Feb-12 103 BOT
Eatawah-Chakeri (Kanpur) Oriental structural Nov-11 160 BOT Mar-13
Agra-Etawah Bypass Ramky Infra Nov-11 124 BOT
6-laning of Kishangarh-Udaipur-Ahmedabad GMR Infra Sep-11 555 BOT
Source: Emkay Research, NHAI
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EPC to propel momentum?
As awarding activity has stagnated in FY13 and 1HFY14E for various reasons discussed
above, the NHAI is trying to make progress to get the order momentum back on track via
awarding EPC projects. Till date, the NHAI has awarded six projects of 356km via the EPC
route. It is targeting to tender awards of 2000km in 2HFY14E.
Features of EPC Model concession agreement:The agreement is stringent with regard to technical criteria, where EPC contracts have set
minimum criteria of 2.5x the estimated project cost for projects and construction business
(both highways and other core sectors combined) carried out by the bidder over the past 5
financial years. This compares with the BOT contract requirement of 1x the project costs
worth of project business (highways and other core sectors) accumulated over the past 5
years.
Leeway provided on financial net worth. The concession agreement currently providesleeway in terms of minimum net-worth threshold, which is at 10% of the project cost as
against 25% of the project cost for BOT contracts.
DLP (defect liability period) of 2 years on completion of the project highway andadditional DLP for major bridges and structures of 3 years (total 5 years).
Defined maintenance period of 2 years after the completion of work; 1.5% and 2% ofthe contract price to be paid to the contractor in the first and second year, respectively.
Incentive for the contractor for early completion in the form of a bonus. Damages up to 1% of the project cost would be paid by the authority on account of any
delay from their side.
The contractor cannot sub-contract any work in more than 70% of the total projectlength.
The EPC contractallows for a JV of maximum three players, with the lead memberresponsible for satisfying 60%of technical and financial requirements (others have tosatisfy 30% of requirements). This is in addition to the weighted score exceeding the
technical and financial requirements.
Large players may deter to participate in EPC projects
Our discussions with the NHAI and road companies reveal aggressive biddings across
EPC projects in the past, since the EPC qualification document, as per our understanding,
encourages participation with no cap on the number of bidders (it is leant that some bidders
have quoted at a 30% discount to the NHAI benchmark cost) in small-size projects of
Rs3bn (20 bidders) and project size of Rs3-5bn (10 bidders). We consider this aggressive
bidding in EPC projects as generation of negative value for bidders, as: a) scalability of
margins is capped in EPC, b) project value is at risk due to delays in land acquisition (this
would increase overheads), and c) if any change in scope of work, which ultimately would
put project completion at risk.We also believe that small project size of Rs3-4bn (Rs30-
40mn/km) may dissuade large players such IRB Infrastructure and ITNL.
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Exhibit 9: Projects to tendered on EPC basis
Road Stretch State (kms) Cost (Rs.mn) Status
Bheem-Parsoli including Bheem & Parsoli Bypass Rajasthan 33.0 1,000 Awarded
Parsoli-Gulabpura Rajasthan 36.3 1,140 Awarded
Jhalawar-Rajasthan/ Madhya Pradesh Border Rajasthan 62.2 1,770 Awarded
Merta City-Lambia-Jaitaran-Raipur Rajasthan 52.8 1,580 Awarded
Raipur-Bheem (Jassa Khera) Rajasthan 32.4 1,490 Awarded
Ambedkarnagar-Raebareilly (2 lane) Uttar Pradesh 155.9 4,960 Bids invited
Raebareilly-Banda (2 lane) Uttar Pradesh 133.3 3,510 Bids invited
Ladnu Nimbi Jodhan-Degna-Merta City (2 lane) Rajasthan 139.0 3,680 Bids invited
Bhilwara-Ladpura (2 lane) Rajasthan 67.8 2,370 Bids invited
Padhi-Dahod (2 lane) Rajasthan 85.6 2,790 Proposal given
Unaira-Gulabpura (2 lane) Rajasthan 214.0 5,710 RFP stage
Sitarganj-Tanakpur (2 lane) Uttarakhand 52.2 2,200 -
Karauli-Dholpur (2 lane) Rajasthan 100.9 2,890 -
Biharsharif-Barbigha-Mokama (2 lane) Bihar 56.3 1,940 -
Chhapra-Rewaghat-Muzzaffarpur (2 lane) Bihar 75.0 3,050 -
Patna-Gaya-Dhobi (4 lane) Bihar 127.2 10,270 -Jalandhar-Amritsar (6 lane) Punjab 20.0 4,930 -
Thanjavur-Pudukkotai (2 lane) Tamil Nadu 55.2 1,700 -
Tirumayam-Mannamadurai (2 lane) Tamil Nadu 77.7 2,520 -
Bareilly-Sitarganj (2 lane) UP 74.5 2,970 -
Uncha Nagar-Khanuawa-Roppas-Dholpur (4 lane) Rajasthan 75.0 - -
Bar-Bilara-Jodhupur (2 lane) Rajasthan 125.0 - -
Barmer-Sanchor-Gujarat Border (2 lane) Rajasthan 154.0 - -
Total 2,005.10 62,470
Source: NHAI
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Construction Sector Update
Emkay Research October 14, 2013 11
To reduce competitive intensity further among new BOT projects
With the competitive intensity edging lower in FY13 across 11 projects, developers stayed
away for putting final bids across projects barring one project, where erratic bidding was
witnessed in the Walajahpet-Poonamallee road project, with 19 financial bids being placed.
We analysed 38 projects accounting for around 50% of the total length awarded by the
NHAI since FY11. In FY13, the final participation (final bids submitted as percentage of pre-
qualified bidders) has fallen sharply, barring four projects, which witnessed double-digitparticipation. The average participation from pre-qualified players in the final bidding for the
projects awarded between FY11-12 has declined from 36% to 13% for the projects
awarded in FY13. We also see an increase in the awarding activity of EPC road projects
will garner interest for core construction players, thereby further reducing competitive
intensity in the BOT space. Given that 2000km is ready to get awarded via the BOT route,
we believe, developers who have the financial muscle will benefit the most in the next
round of bidding.
Exhibit 10: Competitive intensity amongst developers
Date Name of Project Winners
Cost
(Rs
bn)
Length
(km)
Final
bidders
Players
pre-
qualified
% Final
bids
participationApr-11 Ahmedabad Vadodara IRB Infrastructure 49.2 195 13 22 59%
Apr-11 Beawar-Pali-Pindwara L&T 23.9 244 16 19 84%
May-11 Barwa Panagarh DSC 16.7 123 9 20 45%
Jul-11 Kishangarh--Ahmedabad GMR Infra 53.9 556 7 11 64%
Sep-11 Gwalior Shivpuri Essel Infraprojects 10.6 125 15 28 54%
Sep-11 Shivpuri Dewas GVK 28.2 330 14 19 74%
Oct-11 Lucknow Sultanpur Essar - Atlanta 10.4 126 12 34 35%
Nov-11 Cuttak Angul Ashoka Buildcon 11.2 112 16 27 59%
Nov-11 Etawah and Chakeri (Kanpur) Oriental Structural 14.9 160 9 35 26%
Nov-11 Hospet Chitradurga Ramky Infra 10.5 120 14 37 38%
Nov-11 Mah/KNT- Sangareddy L&T 12.7 145 19 37 51%
Nov-11 Patna - Buxar Gammon Infra 8.1 105 1 36 3%
Nov-11 Raipur Bilaspur IVRCL 12.2 127 17 33 52%
Dec-11 Bikaner - Suratgarh MBL Infra 5.1 172 6 33 18%
Dec-11 Chittorgarh Neemachah Chetak Enterprises Ltd. 5.1 117 9 36 25%
Jan-12 Kiratpur - Ner chowk IL&FS Transportation 18.2 113 4 28 14%
Jan-12 Obdellagang - Betul Transtroy 9.1 121 6 36 17%
Mar-12 Amravati Jalgaon L&T 25.4 275 12 22 55%
Mar-12 Anadpuram- Visakhapatnam - Ankapalli Transtroy - OJSC 8.4 58 6 35 17%
Mar-12 Gomti Chauraha - Udaipur Sadbhav Engineering 11.1 79 10 39 26%
Mar-12 Hoskote - Dobaspet Transtroy - OJSC 7.2 80 4 36 11%
Mar-12 Jalgaon - Guj/Mah Border L&T 19.7 209 17 29 59%
Mar-12 Jind - Punjab/Haryana Border Unity infrastructure 4.4 69 5 40 13%
Mar-12 Kharagpur-Baleshwar IL&FS Transportation 4.8 119 5 40 13%
Mar-12 Rajahmundry - Gundugulunu IVRCL Asset 16.2 121 3 35 9%Mar-12 Sikar - Bikaner IL&FS Transportation 6.3 238 1 30 9%
Mar-12 Solapur - Bijapur Sadbhav engineering 11.0 110 16 38 42%
Apr-12 Bridge across Narmada (Vadodara - Surat section) HCC 5.1 6 2 35 6%
May-12 Walajahpet - Poonamallee Essel project 12.9 93 19 37 51%
May-12 Goa karnataka - Kundapur IRB Infra 24.0 187 2 35 6%
Jul-12 Raebareli-Jaunpur PNC Infratech 5.7 166 8 30 27%
Jul-12 Coimbatore-Mettupalayam Transstroy-OJSC Consortium 5.9 54 6 35 17%
Aug-12 Walayar-Vadakkancherry KNR Construction 6.8 54 1 32 3%
Nov-12 Kashipur-Sitarganj Galfar Engg & Contracting SAOG 6.1 77 1 30 3%
Nov-12 Rajasthan border-Fatehpur-Salasar Galfar Engg & Contracting SAOG 5.3 154 2 32 6%
Nov-12 Rajsamand-Gangapur-Bhilwara 87 6.8 Sadbhav Engg Ltd Sadbhav Engg Ltd 6.8 87 1 35 3%
Mar-13 Rohtak-Hissar Sadbhav Engg Ltd 9.6 99 5 34 15%
Mar-13 Khed-Sinnar IL&FS Transportation Networks 13.5 138 4 40 10%
Total 479.6 5,686 296 942 33%
Source:
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Construction Sector Update
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Traffic growth muted
Our analysis of traffic growth over a period of 17 quarters in 21 road projects owned by IRB
infrastructure, Ashoka Buildcon, ITNL, GMR Infrastructure and Sadbhav Engineering
shows a declining trend. The sectors flat traffic growth in the past 2-3 quarters can be
attributed largely to: a) lower port traffic witnessed across major ports, which has been
declining for seven consecutive quarters, b) early arrival of the monsoon, with the higher-
than-expected rainfall during June-July 2013, and c) overall economic slowdown and theresultant lower GDP growth.
Exhibit 11: Road Traffic growth Flattish
Traffic grow th9.7
3.74.9
6.9
3.1
5.8
1.8
0.41.2
0.0(1.3)
0.0 (0.1)
(2.0)
-
2.0
4.0
6.0
8.0
10.0
12.0
Q1FY11
Q2FY11
Q3FY11
Q4FY11
Q1FY12
Q2FY12
Q3FY12
Q4FY12
Q1FY13
Q2FY13
Q3FY13
Q4FY13
Q1FY14
Source: Emkay Research , Companies
Exhibit 12: Port traffic edged lower
54 4
55.8
0.8
(1.4)(1.4)
(0.8)(5.4)(4.8)
(2.2)(7.2)
-8
-6
-4
-2
0
2
4
6
8
Q
1FY11
Q
2FY11
Q
3FY11
Q
4FY11
Q
1FY12
Q
2FY12
Q
3FY12
Q
4FY12
Q
1FY13
Q
2FY13
Q
3FY13
Q
4FY13
Q
1FY14
Port traffic
Source: Emkay Research , IPA
Exhibit 13: Container traffic declined
5.06.0
5.06.0
3.3
5.7
3.2
0.2 (0.3)
2.5
(6.3)
1.0
(3.8)
(8.0)
(6.0)
(4.0)
(2.0)-
2.0
4.0
6.0
8.0
Q1FY11 Q2FY11 Q3FY11 Q4FY11 Q1FY12 Q2FY12 Q3FY12 Q4FY12 Q1FY13 Q2FY13 Q3FY13 Q4FY13 Q1FY14
Container traffic
Source: Emkay Research, IPA
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Construction Sector Update
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Major amendments discussed under Model ConcessionAgreement
Proposed amendments in pre-qualification criteria of the RFQ document
The current RFQ document has been able to encourage a large number of bidders to
participate in the pre-qualification process. It has also been observed that many bidders,
who are not competent to undertake the project, are also getting pre-qualified. This isleading to problems in the post-award scenario of the projects with such bidders. The
overcrowding and aggressive bidding by such bidders have also led to a situation, where
reputed and competent bidders stay away. Lately, a number of projects with such bidders
either have failed to achieve financial closure or are facing substantial delays in completion.
Such projects in distress are susceptible to defaulting on loan repayments and becoming
non-performing assets (NPAs). In the course of experience gained in evaluating the RFQ
applications for various projects, it has been felt that some provisions of the Model RFQ
required modifications and/or clarifications.
A) Assessment of Available Capacity for execution of future projects
The technical capacity of the applicant is calculated on the basis of aggregate
project/construction execution experience under different categories of projects during thelast 5 financial years preceding the applications due date. However, the above
methodology of assessing technical capacity only takes into account the past experience of
the applicant and does not capture the available technical capacity of the firm at the time of
bidding with respect to present commitment on deployment of resources for other projects
undertaken by the firm for development/implementation. As a result, applicants with limited
or no capacity available for execution of additional projects are also pre-qualified, and in
the event of the project award are failing to either achieve financial closure or execute the
project in a timely manner. Therefore, it is pertinent to consider the applicants
committed resources/investments on the ongoing projects to arrive at the available
technical capacity. Thus, it is proposed that in addition to assessing the past
performance of project executions, the available bid capacity with respect to
resource commitment in projects under development/execution may also be
assessed while pre-qualifying the applicants.
B)Assessment of Financial Capacity
The applicants financial capacity is assessed on the basis of the net worth of the firm in the
preceding financial year. In order to qualify, the net worth of the applicant is required to be
minimum 25% of the total project cost for which the applications are invited, and the net
worth of the applicant is computed as the sum of subscribed and paid-up equity and
reserves from which the sum of revaluation reserve, miscellaneous expenditure not written-
off and reserves not available for distribution to equity shareholders is deducted. However,
it has been observed in a number of cases that applicants qualifying in the net worth
criteria are failing to achieve financial closure or unable to infuse equity in the awarded
projects due to unavailability of adequate equity capital and/or a highly leverage balance
sheet of the applicant. It clearly demarcates that net worth as the only deciding factoris not the sufficient parameter to assess the applicants ability to arrange financing
required for the project.
Therefore, it has proposed to introduce the following additional qualification criteria in the
RFQ document with respect to financial capacity of the applicants:
(i) Adjustment of Net Worth with respect to Debt-Equity ratio of the Applicant:
It is proposed that net worth of the applicants shall be suitably adjusted with a factor linked
to the debt-to-equity ratio of the applicant. This will reduce the applicable net worth of the
applicant in case of a highly leveraged entity, thus preventing it from qualifying for high-
value projects.
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Exhibit 14: Adjustment to net worth for debt-equity ratio
Debt-Equity Ratio Applicable Factor
Less than or equal to 3:1 1
More than 3:1 & upto 6:1 0.85
More than 6:1 &upto 10:1 0.6
More than 10:1 0.2
Source: Emkay Research, NHAI
(ii) Submission of Equity Financing Plan by the Applicants:
It is proposed that applicants will have to furnish a detailed equity financing plan on the
equity requirement with regard to the total project cost for the project indicated in the RFQ
document. The proposed equity financing plan shall include submission of certificates with
regard to sources of equity to the applicant. Additionally, the applicants shall also require to
furnish their equity commitment for projects to be executed during the construction period
of the project, which will prevent bidders from participating in projects unrealistically without
ensuring availability of equity required for the project.
Exhibit 15: TPC of the project that bidder has applied (Rsbn)
Debt-Equity Project cost
0-2.5 30% of TPC
Above 2.5-upto-6.5 25% of TPC
Above 6.5 205 of TPC
Source: Emkay Research, NHAI
(iii) Restriction on the Applicants on account of pending financial closure and non-
performing assets
It is proposed that applicants shall be restricted from participating in the project in case
financial closure of three or more awarded projects is pending on the date of the RFQ
submission for reasons attributable solely to the applicant. Currently, this provision is
provided in the RFP document.
Payment of Premium by the ConcessionaireWith a view to mitigating the initial cash-flow constraints, it is proposed that the payment of
premium may start 3 years after COD for 4-laning projects, and from the scheduled project
completion date for 6-laning projects. Further, keeping in view the likely increase in the
cashflows of the projects and the reduction in debt service requirements, it is proposed that
after the 10th anniversary of COD for 4-laning projects/project completion date for 6-laning
projects, the percentage/absolute increase in premium would be higher compared with the
initial period.
The following options are being proposed:
Option 1 Revenue Sharing Principle
To ensure that there is no revenue sharing during the initial years of the project, it isproposed to modify the concession agreement provision as per the following:
For 4-laning projects: Percentage revenue sharing would start from the fourth year ofCOD or thereafter (depending on the bid), and would increase by 1% every year till the
tenth anniversary of COD. Thereafter, the increase would be 2% per year for the rest of
the phase of the concession period.
For 6-laning projects: Percentage revenue sharing would start from the scheduledproject completion date or thereafter (depending on the bid), and would increase by 1%
every year till the tenth anniversary of project completion date. Thereafter, the increase
would be 2% per year for the rest of the phase of the concession period.
Option 2 Fixed Monetary Value Principle
For 4-laning projects: Bidders should quote a specific monetary amount that is payableto the authority from the fourth year of COD, and this amount should increase by 5%
per year till the tenth anniversary of COD. Thereafter, the increase would be 8% per
year for the rest of the phase of the concession period.
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Construction Sector Update
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For 6-laning projects: Bidders should quote a specific monetary amount that is payableto the authority from the scheduled project completion date, and this amount should
increase by 5% per year till the tenth anniversary of completion of construction.
Thereafter, the increase would be 8% per year for the rest of the phase of the
concession period.
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Your success is our success
Emkay
Comp
anyUpdate
Emkay Global Financial Services Ltd. 16
Financial Snapshot (Consolidated) (Rsmn)
YE- Net EBITDA EPS EPS RoE EV/
Mar Sales (Core) (%) APAT (Rs) % chg (%) P/E EBITDA P/BV
FY12A 31,307 13,735 43.9 4,960 14.9 9.6 18.8 5.3 5.6 0.9
FY13A 36,872 16,333 44.3 5,567 16.7 12.2 20.4 4.7 5.5 1.0
FY14E 41,433 18,705 45.1 4,471 13.5 -19.7 16.1 5.8 5.7 0.9
FY15E 44,109 21,184 48.0 5,636 17.0 26.1 17.8 4.6 5.9 0.8
IRB Infrastructure
Separating Fundamentals from the Noise
October 14, 2013
Rating
Buy
Previous Reco
Buy
CMP
Rs78
Target Price
Rs158
EPS Chg FY14E/FY15E (%) NA/NA
Target Price change (%) -7
Nifty 6,096
Sensex 20,529
Price Performance
(%) 1M 3M 6M 12M
Absolute 1 -22 -31 -50
Rel. to Nifty -1 -25 -38 -54
Source: Bloomberg
Relative price chart
50
75
100
125
150
175
Oct-12 Dec-12 Feb-13 Apr-13 Jun-13 Aug-13 Oct-13
Rs
-70
-56
-42
-28
-14
0%
IRB Infrast ructure (LHS) Rel to Nifty (RHS) Source: Bloomberg
Stock DetailsSector Construction
Bloomberg IRB IB
Equity Capital (Rs mn) 3,324
Face Value(Rs) 10
No of shares o/s (mn) 332
52 Week H/L 158/ 52
Market Cap (Rs bn/USD mn) 26/ 427
Daily Avg Volume (No of sh) 3,061,331
Daily Avg Turnover (US$mn) 3.7
Shareholding Pattern (%)
Sep'13 Mar'13 Dec'12
Promoters 62.9 62.9 62.7
FII/NRI 22.3 22.3 22.7
Institutions 4.0 4.0 4.0
Private Corp 3.9 3.9 4.3
Public 6.9 6.9 6.3
Source: Bloomberg
Nitin Arora
+91-22-66242491
Ajit Motwani
+91-22-66121255
n Strong cashflows from a healthy mix of operating and under-
construction assets, and moderate gearing the key
competitive differentiators in a capital-intensive business
n Earnings to remain flat over FY13-15E. But we expect a
CAGR of 10% in cash profits, providing the ability to fund
equity in new projects
n Biggest beneficiary of new road projects to be tendered out
in 2HFY14E. 4 projects scheduled to commence toll
collections over the next.
n Attractive valuations at 0.8x P/BV & 5.9x PE near the end
2008 troughs IRB remains our preferred road BoT asset play.
Maintain buy with the revised target price of Rs158/share
Equity requirement of Rs3-4bn in FY14E, Rs17-18bn over 2-3 yearsIRB Infrastructure Developers (IRB) has 15 road projects under it portfolio, of which 10
are currently operational and the rest are under construction. The companys total equity
requirements over the next 2-3 years have been estimated at Rs17bn. On account of
commissioning of 4 road projects i.e. Jaipur-Deoli, Amravati-Talegaon, Amritsar-
Pathankot, & Ahmedabad-Vadodra along with EPC arm will garner cumulative operating
cash flow Rs19.6 bn from FY13-15E. These, coupled with current cash of Rs14.7bn,
would be sufficient to meet equity requirements of the company for the next 2 years.
Peak D:E of 2.33x still manageable
IRB Infrastructures consolidated debt (adjusted for loans and advances) stands at
Rs79bn, including its standalone debt of Rs11.4bn, with cash balance of Rs14.7bn as of
March 31, 2013. Debt worth Rs71.3bn, accounted for individual road projects, is fairlypositive for the company compared to other road developers like ITNL, which has debt
worth Rs37bn on its standalone balance sheet as of March 2013, with no certainty of
recurring income to offset the surge in the interest cost. We estimate peak debt (for
current projects in its kitty) of Rs116bn, which would imply debt equity of 2.33x.
Current price implies less than 1x book value adjusted for Mumbai-Pune
The stock has corrected 34% over the last 3 months. The current market price of Rs79
(market capitalization of Rs26.2bn) implies value of 0.4x the invested book (historically
seen at 1x) adjusted for the Mumbai-Pune Expressway Project (MIPL). IRB has invested
Rs33bn in FY13 as equity investments, and loans and advances in BOT road projects.
We have adjusted the value for MIPL of Rs13.6bn (FY13 revenue is Rs4.16bn; likely to
report revenue of Rs4.39bn and Rs5.43bn in FY14E and15E, respectively), with
relatively low debt of Rs8.76 bn. MIPL (Mumbai - pune ) accounts for 24% of our SOTPand 40% of value derived for the total BOT road assets. This is one the non-disputable
road assets, which has certainty of cashflows, with a revenue CAGR of 14% over FY13-
15E as against 13% during FY11-13. We understand that there have been concerns
over the recent project (Ahmedabad-Vadodara), with relatively aggressive bid & traffic
disappointment. However, we believe, Amritsar-Pathankot, Jaipur-Deoli and Amravati-
Talegaon projects have potential value, as these were won in a low-competitive
environment and at high grant levels (close to 40%).
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IRB Infrastructure Company Update
Emkay Research October 14, 2013 17
Despite strong execution E&C order-book at Rs56bn provide reasonable
visibility; however, growth could remain subdued
IRB Infrastructures order-book at the end of March 2013 stood at Rs 76.6bn. Out of this,
Rs56bn worth of orders would be executed over the next 3 years. The backlog includes
Rs23bn worth of Goa-Kundapur project, which the company added in Q2FY13.
The companys construction revenue is likely to moderate, due to completion or nearingcompletion of its key projects. Recently, the Talegaon-Amravati project was completed,
while Jaipur-Deoli, Amritsar-Pathankot and Tumkur are complete 95%, 90% and 85%,
respectively. Irrespective of the completion of its four key projects, the company would able
to maintain construction revenue for FY14E at the similar level of what it had garnered in
FY13, due to increase in contributions from Ahmedabad-Vadodara and Goa-Kundapur
(which is expected to be executed in 2HFY14E; it is waiting for financial closure) .
IRB Infrastructure expects the bidding activity to regain momentum during Q3/Q4FY14
(expects 1,000-2,000km of fresh projects to come up from the NHAI, while 3,000-4,000km
to be bid out during 3Q/4QFY14E), and expects new orders to come from potential re-bids
(projects stalled on account of non-achievement of financial closure and fresh biddings).
Exhibit 16: Revenue CAGR of 9.4% over FY13-15E
1724
31 37
41 44
-
10
20
30
40
50
FY10 FY11 FY12 FY13 FY14E FY15E
Source: Company, Emkay Research
Exhibit 17: EBITDA CAGR of 14% over FY13-15E
8 10
14 16
19 21
-
5
10
15
20
25
FY10 FY11 FY12 FY13 FY14E FY15E
Source: Company, Emkay Research
Exhibit 18: PAT growth to remain Flat
4.5 4.05.0
5.64.5
5.6
-
1.0
2.0
3.0
4.0
5.0
6.0
FY10 FY11 FY12 FY13 FY14E FY15E
Source: Company, Emkay Research
Exhibit 19: EPS
13 1215
1713
17
-
2
4
6
8
10
12
14
16
18
FY10 FY11 FY12 FY13 FY14E FY15E
Source: Company, Emkay Research
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IRB Infrastructure Company Update
Emkay Research October 14, 2013 18
Exhibit 20: Flat EPC revenue growth
10
1721 26 26 24
0
5
10
15
20
25
30
FY10 FY11 FY12 FY13 FY14E FY15E
Source: Company, Emkay Research
Exhibit 21: BOT revenue to surge higher
7 8 9 11
1520
-
5
10
15
20
25
FY10 FY11 FY12 FY13 FY14E FY15E
Source: Company, Emkay Research
Exhibit 22: Current market price implies less than 1x invested book value
CMP 79
No of shares 332
Market cap Rsmn 26260
Value for Mumbai Pune Rsmn 13,411
Market cap adj. for Mumbai Pune project 12,849
Investments (equity + L&A) in road projects at end-FY2013 33,075
Investments in MIPL at end-FY2013 1,073
Investments adjusted for MIPL 32,002
Implied P/B (x) 0.40
Source: Company, Emkay Research
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IRB Infrastructure Company Update
Emkay Research October 14, 2013 19
Exhibit 23: Total Investments (Equity, Loans & advances )
FY11 FY12 FY13
Project Rsmn Loans & advances Loans & advances Loans & advances
Investments in road projects Equity
Short
term
Long
term Total Equity
Short
term
Long
term Total Equity
Short
term
Long
term Total
Thane-Bhiwandi bypass 611 611 611 18 629 611 611
Mumbai-Pune Expressway 778 200 978 778 434 1212 778 295 1,073
Pune-Sholapur 451 451 451 451 451 451
Pune-Nashik 519 12 531 519 15 534 519 519
Ahmednagar-Karmala-Tembhurni 80 0 80 80 80 80 80
Bridge over Patalganga River-Kharpada 80 80 80 80 80 80
Thane-Ghodbunder 222 707 929 222 500 722 222 6 228
Bharuch-Surat 872 2,297 3169 872 5,472 6344 872 2680 3,552
Integrated Road Development in Kolhapur 855 855 1,336 227 1563 1,336 566 1,902
Surat-Dahisar 2,611 2611 4,653 1,117 5770 4,653 847.8 5,501
Pathankot-Amritsar 355 1,180 257 1792 355 162 1,145 1662 774 7.9 2326.3 3,109
Talegaon-Amravati 322 2 57 381 322 151 828 1301 364 352 1093.4 1,810
Jaipur-Deoli 390 264 272 926 780 200 1,837 2817 975 480.62 2924.9 4,380Panji-Goa 311 929 1240 311.4 1,173 1484 311 1173.1 1,485
Tumkur-Chitradurg 0 1,181 156 1337 476 476 952 1110 315.727 1110.7 2,537
Ahmedabad-Vadodara Expressway 1,000 69 2,950 4019 1000 33.61 2950.0 3,984
MVR Infra 801 972.92 1,775
Subtotal - Investment in road projects 8,457 6,772 742 15971 12,846 7,832 8,942 29620.4 14,939 6,558 11578.2 33,075
Investments in other subsidiaries
Construction subsidiary 312 1,588 1900 312 1353.2 1665.2 312 957 1,269
Real estate subsidiary 586 1 587 586 1 587 586 1 587
Hospitality subsidiary 0 26 26 0 119.4 119.5 0.09 182 182
Sindhudurg Airport 0 182 182 0 10.1 10.2 0.09 211 211
Subtotal - Investment in other subsidiaries 898 1,796 2694 898 1483.81 2381.81 898 1351 2,249
Total investments in subsidiaries 9,354 8,570 742 18666 13,744 9,316 8,942 32002 15,837 7,909 11,578 35,324
Source: Company, Emkay Research
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IRB Infrastructure Company Update
Emkay Research October 14, 2013 20
Maintain Buy with a Revised Target price of Rs 158
With significant slow down in NHAI awarding activity (only 1300 km awarded in FY13
Annual target ~9K kms) and possibly impact on NHAI funding plan on account of recent
termination of road project we do not foresee meaningful increase in awarding activity by
NHAI. Hence we have build in just Rs20bn of new project wins for IRB in FY14 similar to
levels the company has achieved till FY13.
With minimal funding requirement IRB remains well funded for exploiting new opportunities
as and when NHAI awarding activity pick up. However in the mean time company is
focusing on reducing its interest cost and has managed to lower the interest rates at
Bharuch Surat by 150bps to 10.65% and is evaluating the prospect of refinancing debt of
Surat Dahisar from IIFCL which will again lead to similar correction in interest rates at the
project debt level.
We have revised our target price lower by 6% as we lowered E&C multiple for construction
business from 4x to 5x at Rs42/share (Earlier Rs53/share) on account lower carry forward
order backlog as order offtake slows down.
With 4 projects schedule to commence toll collection over the next year, minimal funding
requirement and benefits of lower interest rate, we believe IRB remains the Road BoT
asset to play. We maintain our BUY rating and revised our TP to Rs 158 as compared toRs169 earlier.
Exhibit 24: SoTP Fair value at Rs 158
Asset Operated Holding
Valuation
Measure Disc rate
Value
(Rs mn)
Value
/Share
EPC Business 100% PER 4 14128 42.5
PV of O&M Contracts 100% NPV 13.5% 3,178 9.6
Value of Construction segment - (a) 17,306 52
Mumbai Pune Expressway & NH4 100% FCFE 12.5% 13,411 40.3
Surat Dahisar 90% FCFE 13.5% 2,590 7.8
Bharuch Surat 100% FCFE 13.5% 3,442 10.4
Mohol-Mandrup Road 100% FCFE 13.5% -37 -0.1
Kharpada-Patalganga Bridge 100% FCFE 13.5% 226 0.7
Ahmednagar Tembhurni Road 100% FCFE 13.5% 244 0.7
Thane Ghodbunder 100% FCFE 13.5% 1,109 3.3
Pune Nashik 100% FCFE 13.5% 306 0.9
Pune Sholapur 100% FCFE 13.5% 522 1.6
Thane Bhiwandi Bypass 100% FCFE 13.5% 1,462 4.4
Kolhapur City Roads 100% FCFE 14.5% 3,268 9.8
Namakkal - Omallur - NH-7 100% FCFE 13.0% 656 2.0
Amritsar Pathankot 100% FCFE 14.5% 6,531 19.7
Jaipur - Deoli 100% FCFE 14.5% 6,952 20.9
Amravati Talegaon 100% FCFE 14.5% 2,970 8.9Tumkur Chitradurga 100% FCFE 14.5% 200 0.6
Ahmedabad Vadodara 100% FCFE 14.5% -3,731 -11.2
Goa - Kundapur 100% FCFE 15.5% -610 -1.8
Gross value of BOT 39,513 119
Add: PV of Loans to SPV 2,411 7.3
Less : Net Debt at Parent Level -8,275 -24.9
Value of BOT - Net of debt - (b) 33648.7 101.2
Aryan Infra Investment - (C) 66% Book value 1,650 5.0
Total Value - (a+b+c) 56,137 158
Source: Emkay Research
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IRB Infrastructure Company Update
Emkay Research October 14, 2013 21
Key Financials (Consolidated)
Income Statement
Y/E Mar (Rsmn) FY12A FY13A FY14E FY15E
Net Sales 31,307 36,872 41,433 44,109
Growth (%) 28.4 17.8 12.4 6.5
Expenditure 17,572 20,540 22,728 22,925
Employee Cost 1,376 1,557 1,731 1,722
Other Exp 0 0 0 0
SG&A 970 1,223 1,330 1,330
EBITDA 13,735 16,333 18,705 21,184
Growth (%) 25.6 18.9 14.5 13.3
EBITDA marg in (%) 43.9 44.3 45.1 48.0
Depreciation 2,970 4,415 5,581 6,538
EBIT 10,765 11,918 13,124 14,646
EBIT mar gin (%) 34.4 32.3 31.7 33.2
Other Income 1,252 1,301 1,236 1,193
Interest expenses 5,505 6,153 7,730 7,917
PBT 6,512 7,066 6,630 7,923
Tax 1,552 1,530 2,221 2,390
Effective tax rate (%) 23.8 21.7 33.5 30.2
Adjusted PAT 4,960 5,536 4,409 5,533
Growth (%) 6.9 11.6 -20.4 25.5
Net Marg in (%) 15.8 15.0 10.6 12.5
(Profit)/loss from JVs/Ass/MI 0 -31 -62 -103
Adj. PAT After JVs/Ass/MI 4,960 5,567 4,471 5,636
E/O items 0 0 0 0
Reported PAT 4,960 5,567 4,471 5,636
PAT after MI 4,960 5,567 4,471 5,636
Growth (%) 9.6 12.2 -19.7 26.1
Balance Sheet
Y/E Mar (Rsmn) FY12A FY13A FY14E FY15E
Equity share capital 3,324 3,324 3,324 3,324
Reserves & surplus 25,243 29,232 32,630 37,139
Net worth 28,566 32,556 35,954 40,463
Minority Interest 1,123 1,092 1,030 927
Secured Loans 50,455 66,349 72,259 90,491
Unsecured Loans 17,913 12,712 12,712 12,712
Loan Funds 68,367 79,060 84,970 103,203
Net deferred tax liability 259 259 259 259
Total Liabilities 98,315 112,967 122,213 144,851
Gross Block 57,817 57,918 91,005 96,030
Less: Depreciation 2,283 2,830 3,368 3,917
Net block 55,534 55,088 87,636 92,113
Capital work in progress 24,452 49,160 36,024 48,548
Investment 186 620 620 620
Current Assets 28,399 27,205 17,714 16,802
Inventories 1,624 2,488 2,171 1,003
Sundry debtors 141 310 1,033 1,046
Cash & bank balance 18,208 14,710 4,813 5,057
Loans & advances 8,427 9,696 9,696 9,696
Other current assets 0 0 0 0
Current lia & Prov 10,265 19,106 19,954 13,403
Current liabilities 10,017 15,996 16,844 10,293
Provisions 248 3,110 3,110 3,110
Net current assets 18,134 8,099 -2,240 3,399
Misc. exp 9 0 0 0
Total Assets 98,315 112,967 122,041 144,680
Cash Flow
Y/E Mar (Rsmn) FY12A FY13A FY14E FY15E
PBT (Ex-Other income) 5,260 5,765 5,394 6,730
Depreciation 2,970 4,415 5,581 6,538
Interest Provided 5,505 6,153 7,730 7,917
Other Non-Cash items 0 0 0 0
Chg in working cap -779 476 442 -5,395
Tax paid -1,587 -2,422 -2,221 -2,390
Operating Cashflow 11,369 14,387 16,925 13,400
Capital expenditure -24,201 -25,456 -24,994 -23,538
Free Cash Flow -12,832 -11,069 -8,068 -10,138
Other income 1,252 1,301 1,236 1,193Investments -3,702 1,680 0 0
Investing Cashflow -25,484 -21,167 -23,758 -22,344
Equity Capital Raised 0 0 0 0
Loans Taken / (Repaid) 24,457 14,815 5,910 18,232
Interest Paid -5,505 -6,153 -7,730 -7,917
Dividend paid (incl tax) -1,319 -1,191 -1,245 -1,127
Income from investments 0 0 0 0
Others 0 0 0 0
Financing Cashflow 17,633 7,471 -3,064 9,188
Net chg in cash 3,518 691 -9,897 244
Opening cash position 12,000 18,208 14,710 4,813
Closing cash position 15,518 18,899 4,813 5,057
Key Ratios
Y/E Mar FY12A FY13A FY14E FY15E
Profitability (%)
EBITDA Margin 43.9 44.3 45.1 48.0
Net Margin 15.8 15.0 10.6 12.5
ROCE 14.1 12.9 12.9 12.5
ROE 18.8 20.4 16.1 17.8
RoIC 24.0 22.9 20.3 17.1
Per Share Data (Rs)
EPS 14.9 16.7 13.5 17.0
CEPS 23.9 30.0 30.2 36.6
BVPS 85.9 78.4 88.7 102.2DPS 1.8 4.0 3.2 0.0
Valuations (x)
PER 5.3 4.7 5.8 4.6
P/CEPS 3.3 2.6 2.6 2.1
P/BV 0.9 1.0 0.9 0.8
EV / Sales 2.4 2.5 2.6 2.8
EV / EBITDA 5.6 5.5 5.7 5.9
Dividend Yield (%) 2.3 5.1 4.1 0.0
Gearing Ratio (x)
Net Debt/ Equity 1.8 2.5 2.7 2.9
Net Debt/EBIDTA 3.7 3.9 4.3 4.6
Working Cap Cycle (days) -0.9 -65.4 -62.1 -13.7
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Your success is our success
Emkay
Compa
nyUpdate
Emkay Global Financial Services Ltd. 22
Financial Snapshot (Consolidated) (Rsmn)
YE- Net EBITDA EPS EPS RoE EV/
Mar Sales (Core) (%) APAT (Rs) % chg (%) P/E EBITDA P/BV
FY12A 56,056 14,656 26.1 4,970 25.6 14.8 20.2 4.3 8.3 0.8
FY13A 66,449 18,396 27.7 5,194 26.7 4.5 16.4 4.2 8.8 0.6
FY14E 64,185 19,171 29.9 4,368 22.5 -15.9 11.4 4.9 8.8 0.5
FY15E 77,908 24,430 31.4 4,711 24.2 7.8 11.2 4.6 7.7 0.5
IL&FS Transportation
Higher Leverage to Suppress Earnings
October 14, 2013
Rating
Hold
Previous Reco
Buy
CMP
Rs111
Target Price
Rs134
EPS Chg FY14E/FY15E (%) NA/NA
Target Price change (%) 3
Nifty 6,096
Sensex 20,529
Price Performance
(%) 1M 3M 6M 12M
Absolute -7 -25 -39 -40
Rel. to Nifty -9 -28 -45 -45
Source: Bloomberg
Relative price chart
100
125
150
175
200
225
O ct -1 2 D ec -1 2 F eb -1 3 A pr -1 3 J un -1 3 A ug -1 3 O ct -1 3
Rs
-60
-44
-28
-12
4
20%
IL&FS Transportation (LHS) Rel to Nifty (RHS) Source: Bloomberg
Stock DetailsSector Construction
Bloomberg ILFT IB
Equity Capital (Rs mn) 1,943
Face Value(Rs) 10
No of shares o/s (mn) 194
52 Week H/L 229/ 97
Market Cap (Rs bn/USD mn) 22/ 353
Daily Avg Volume (No of sh) 88,829
Daily Avg Turnover (US$mn) 0.2
Shareholding Pattern (%)Jun10 May10 Dec10
Promoters 46.3 46.5 46.5
FII/NRI 43.3 43.6 42.6
Institutions 6.5 7.0 7.0
Private Corp 1.8 1.0 1.2
Public 2.2 2.1 2.6
Source: Bloomberg
Nitin Arora
+91-22-66242491
Ajit Motwani
+91-22-66121255
n Robust order backlog (3x FY13 E&C rev) to help construction
income CAGR of 24% over FY13-15E, but high margin fee
income to stagnate, implying a muted EBITDA CAGR of 4%
n Standalone leverage to surge higher to 2.2x, as ITNL pumps
in equity (Rs24bn) to complete the projects
n High leverage in the absence of meaningful rate cuts to
exert pressure on standalone profitability
n Dilution imminent in and post-FY15E, as standalone leverage
unsustainable. Earnings highly leveraged to new orders.
Retain hold with the revised target price of Rs134
Construction revenue growth intact, but fee income to stagnate
Supported by back-ended FY13 order wins (Rs38bn), ITNLs order-book currently
stands at healthy Rs146bn. With robust revenue visibility (3.1x FY13E constructionrevenues), we expect the standalone construction revenues to surge at a CAGR of 24%
over FY14-15E. In Q1FY14, the company witnessed execution delays in projects such
as Chennai Nashri (due to regional violence and unrest) and Moradabad Bareilly (delays
in land acquisition), besides delays in other projects caused by early monsoons.
However, with majority of the fee income on new order wins has already been booked in
FY13, we see fee income stagnating over FY13-15E (50% of the booked FY14E fee
income in Q1 to edge lower from Q2 onwards). With only Rs3-3.5bn of residual fee
income to be booked on the current backlog (driven largely by projects such as Khed-
Sinnar and Barwa-Adda), arguably the company will have to significantly depend on new
order wins for fee income growth. Hence, we see ITNLs fee income stagnating at
Rs5.5bn, as we model an order inflow of Rs90bn over FY14-15E (Rs45bn each year).
Muted EBIDTA a CAGR of 4%
Since fee income is a high-margin stream of revenue for ITNL and the contribution of fee
income to total revenues is expected to tumble from 17% in FY13E to 10.9% in FY15E
as per our calculations, we estimate standalone EBIDTA growth to remain muted at a
CAGR of 4% over FY13-15E, with the EBITDA margin likely to contract by 200bps and
260bps in FY14E and FY15E, respectively.
Leverage to surge higher putting pressure on standalone profitability
Due to lower contribution of fee income to overall revenue, we see ITNL resorting to
taking further debt on the standalone book to infuse equity requirements towards funding
its new projects. The company plans to raise Rs15.5 bn via preferential issue (already
raised Rs4 bn) and rights issue to address the equity requirement (Rs24 bn over FY13-
15E) for future projects. We believe that even after raising funds at upper end 40% ofthe equity requirements will be funded by taking debt on standalone books (Q1FY14
debt at Rs40 bn) and will increase further on account of new orders. Hence, we see a
surge in debt on the standalone balance-sheet from Rs37bn in FY13 to Rs53 bn by
FY15E, which would lead to further deterioration in its leverage ratios, which would
increase the interest burden on ITNL. However, in case leverage increases further, it
would become essential for the company to maintain its EBITDA at Rs6.5bn and Rs7bn
in FY14E and FY15E, respectively, to service interest costs on standalone level.
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IL&FS Transportation Company Update
Emkay Research October 14, 2013 23
Earnings highly leveraged to order inflows, high debt still remain a concern:
Maintain Hold
With robust order inflow in till FY13, ITNL has been able to deliver 17% earnings growth
over FY10-13 led by its high margin fee income. However as ITNLs earning & cash flows
are highly leverage to new order inflows, we believe sustaining such high growth rate in fee
income is unlikely. Given this backdrop of decelerating high margin fee income growth, the
high parent leverage (standalone debt at Rs53 bn with D:E at 2.2x in FY15E) could meanincreasing interest cost pressures for ITNL. High leverage in absence on meaningful rate
cuts to put pressure on standalone profitability and could mean increasing interest cost
pressures for ITNL. Dilution eminent in/post FY15E as standalone leverage unsustainable.
We have cut our target price to Rs134 (Earlier TP 150) as we have adjusted traffic for some
of the projects like kiratpur ner chowk (implied P/BV0.45x) as well as for projects like sikar
Bikaner & khed sinnar and reduced our E&C multiple to EV EBITDA of 3x from 3.5x as
construction earnings will edge lower in FY14E and construction earnings trajectory
remains uncertain as some projects faces structural issues.
Exhibit 25: Fee income to stagnate
6.95.6 5.7 5.7 5.7
5.2
-
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
FY10 FY11 FY12 FY13 FY14E FY15E
(Rsbn)
Fee income
Source: Company, Emkay Research
Exhibit 26: Fee income as a % of total revenue
34%
21%17%
15%10.9%
0%
5%
10%
15%
20%
25%
30%
35%
40%
FY11 FY12 FY13 FY14E FY15E
(Rsbn)
Fee income as a % total revenue
Source: Company, Emkay Research
Exhibit 27: Consolidated debt to inch higher
169
3355
102
144 148
1.6
2.1
3.3 3.6 3.4 3.5
-
50
100
150
200
FY10 FY11 FY12 FY13 FY14E FY15E
(Rsbn)
-
0.5
1.0
1.5
2.0
2.5
3.0
3.5
4.0
Consolidated Debt Net Debt/equity
Source: Company, Emkay Research
Exhibit 28: Standalone debt to surge higher
15.3 18.927.3
37.4 41.553.5
0.91.1
1.4
1.8 1.8
2.2
-
0.5
1.0
1.5
2.0
2.5
FY10 FY11 FY12 FY13 FY14E FY15E
(Rsbn)
0
10
20
30
40
50
60
Standalone Debt Debt/equity
Source: Company, Emkay Research
Exhibit 29: Consolidated revenue
24.1
40.5
56.166.4 64.2
77.9
0.0
20.0
40.0
60.0
80.0
100.0
FY10 FY11 FY12 FY13 FY14E FY15E
(Rsbn)
Revenue
Source: Company, Emkay Research
Exhibit 30: Consolidated EBITDA
8
12
1518 19
24
0
5
10
15
20
25
30
FY10 FY11 FY12 FY13 FY14E FY15E
(Rsbn)
EBITDA
Source: Company, Emkay Research
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IL&FS Transportation Company Update
Emkay Research October 14, 2013 24
Exhibit 31: Consolidated PAT
3.4
4.35.0 5.2
4.4 4.7
-
1.0
2.0
3.0
4.0
5.0
6.0
FY10 FY11 FY12 FY13 FY14E FY15E
(
Rsbn)
PAT
Source: Company, Emkay Research
Exhibit 32: Consolidated ROE
27.0
22.220.2
16.4
11.4 11.1
-
5.0
10.0
15.0
20.0
25.0
30.0
FY10 FY11 FY12 FY13 FY14E FY15E
(%)
ROE
Source: Company, Emkay Research
Exhibit 33: Standalone revenue
8.5
16.2
27.733.7
37.7
47.9
0
10
20
30
40
50
60
FY10 FY11 FY12 FY13 FY14E FY15E
(Rsbn)
Revenue
Source: Company, Emkay Research
Exhibit 34: Standalone EBITDA
5.48 5.32 5.52
6.46 6.496.98
0
1
2
3
4
5
6
7
8
FY10 FY11 FY12 FY13 FY14E FY15E
(Rsbn)
EBITDA
Source: Company, Emkay Research
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IL&FS Transportation Company Update
Emkay Research October 14, 2013 25
Exhibit 35: SOTP fair value at Rs134hare
SPV Holding
Valuation
Measure
Disc
rate
Equity
alue
(Rs mn)
Stake
alue
(Rs mn)
alue/
Share
BOT
Gujarat Road and Infrastructure company ltd 83.6% Operational FCFE 13% 7,525.5 6,292.1 32.4
WGEL 100.0% Operational FCFE 14% 1,613.9 1,613.9 8.3
Delhi - Noida 25.4% Operational FCFE 14% 6,268.8 1,589.1 8.2
Gomti - Beawar 100.0% Operational FCFE 14% 350.4 350.4 1.8
RIDCOR 50.0% Operational FCFE 14% 8,130.2 4,065.1 20.9
RIDCORII 50.0% Under development FCFE 15% 3,783.6 1,891.8 9.7
Pune Sholapur NH-9 Road Project 100.0% Under Construction FCFE 15% 2,846.3 2,846.3 14.7
Chadrapur Warora Road Project 35.0% Under development FCFE 15% 1,683.5 589.2 3.0
Narkatapally to Addanki Road Project 50.0% Under development FCFE 15% 3,288.7 1,644.3 8.5
Moradabad Bareili Road Project 100.0% Under development FCFE 15% 7,088.7 7,088.7 36.5
Kharagpur - Baleshwar 100.0% Under development FCFE 15% -258.3 -258.3 -1.3
Kiratpur Ner Chowk 100% Under development FCFE 15% 2923 2923 15Sikar Bikaner 100% Under development FCFE 15% 829.8 829.8 4.3
Khed Sinnar 100% Under development FCFE 15% 816.5 816.5 4.2
Barwa Adda Panagarh 100% Under development FCFE 15% 623.5 623.5 3.2
Toll Projects - (A) 47,514 32,905.4 169
North Karnataka expressway ltd Road Project 94% Operational FCFE 13% 1,145.6 1,071.2 5.5
Thiruvananthpuram Road Development Company Ltd Road Project 50% Operational FCFE 13% -468.7 -234.0 -1.2
Andhra Pradesh expressway ltd Road Project 100% Operational FCFE 13% -494.9 -494.9 -2.5
East Hyderabad expressway ltd Road Project 74% Under Construction FCFE 13% 537.2 397.5 2.0
Hyderabad Ring Road 26% Under Construction FCFE 13% -54.9 -14.3 -0.1
Hazaribaug Ranchi expressway ltd Road Project 74% Under Construction FCFE 14% 185.0 136.9 0.7
Jharkhand - Ph - I Road Project 100% Under Construction FCFE 14% 157.2 157.2 0.8
Jharkhand Ph - II Road Project 100% Under development FCFE 14% 544.9 544.9 2.8
Shillong Jorbat Road Project 50% Under development FCFE 14% 1121.2 560.6 2.8
Chenani Nashri Road Project 100% Under development FCFE 14% 1,791.0 1,791.0 9.2
Annuity Projects - (B) 4,463.6 3,915.9 20.2
Vansh Nimay infraprojects Ltd 100% Operational FCFE 14% 301.6 301.5 1.6
ITNL ENSO Rail system limited 70% Under Construction FCFE 14% 1,159.2 811.5 4.2
MP Check post 51% Under development BV 0.75x 1,174.2 880.6 4.5
YuHe Project - Chonguin Road project 49% Operational BV 0.8x 1,176.0 6.1
Urban Infra Projects - '(C) 2,635.0 3,169.6 16.3
Investments in Elsamax 100% BV 1.0x 14.0 2,722.2 14.0Investments in other Companies 1,109.3 1,109.3 5.7
Pipavav rail corporation BV 1.0x 179.1 179.1
Autovia Spain 48% BV 1.0x 930.2 930.2
Other Subsidiaries - (D) 1,123.4 3,831.6 19.7
E&C business EV/EBITDA 3x 19,525 19,525 100.5
Construction business - (E) 26,663.4 26,663.4 117
Net Debt at parent levels -37,329 -37,329 -192
Total Value (A+B+C+D+E) 37,931.7 26,018.2 134
Source:
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IL&FS Transportation Company Update
Emkay Research October 14, 2013 26
Key Financials (Consolidated)
Income Statement
Y/E Mar (Rsmn) FY12A FY13A FY14E FY15E
Net Sales 56,056 66,449 64,185 77,908
Growth (%) 38.5 18.5 -3.4 21.4
Expenditure 41,401 48,053 45,014 53,478
Employee Cost 3,694 3,819 4,074 4,775
Other Exp 1,704 2,016 2,016 2,016
SG&A 3,210 4,483 4,957 5,816
EBITDA 14,656 18,396 19,171 24,430
Growth (%) 26.9 25.5 4.2 27.4
EBITDA marg in (%) 26.1 27.7 29.9 31.4
Depreciation 766 944 1,336 1,826
EBIT 13,890 17,452 17,835 22,604
EBIT mar gin (%) 24.8 26.3 27.8 29.0
Other Income 1,238 1,414 1,591 1,769
Interest expenses 7,282 11,190 12,672 17,204
PBT 7,846 7,676 6,754 7,169
Tax 2,457 2,274 2,001 2,124
Effective tax rate (%) 31.3 29.6 29.6 29.6
Adjusted PAT 5,389 5,402 4,753 5,045
Growth (%) 19.8 0.2 -12.0 6.1
Net Margin (%) 9.6 8.1 7.4 6.5
(Profit)/loss from JVs/Ass/MI 419 208 385 334
Adj. PAT After JVs/Ass/MI 4,970 5,194 4,368 4,711
E/O items 0 0 0 0
Reported PAT 4,970 5,194 4,368 4,711
PAT after MI 4,970 5,194 4,368 4,711
Growth (%) 14.8 4.5 -15.9 7.8
Balance Sheet
Y/E Mar (Rsmn) FY12A FY13A FY14E FY15E
Equity share capital 1,943 1,943 1,943 1,943
Reserves & surplus 24,834 34,456 38,028 41,943
Net worth 26,777 36,398 39,970 43,885
Minority Interest 2,935 2,716 3,444 3,778
Secured Loans 81,124 135,931 104,735 113,801
Unsecured Loans 21,996 8,522 44,524 56,149
Loan Funds 103,120 144,453 149,259 169,951
Net deferred tax liability 2,047 2,425 2,425 2,425
Total Liabilities 134,878 185,992 195,098 220,039
Gross Block 122,174 174,991 176,703 198,337
Less: Depreciation 4,412 5,356 6,692 8,518
Net block 117,762 169,635 170,011 189,820
Capital work in progress 0 0 0 0
Investment 3,954 6,871 6,871 7,077
Current Assets 30,759 29,277 37,671 46,232
Inventories 210 169 311 311
Sundry debtors 8,820 7,517 10,276 12,728
Cash & bank balance 2,838 4,544 1,679 4,273
Loans & advances 17,143 14,170 19,629 22,024
Other current assets 1,748 2,877 5,777 6,896
Current lia & Prov 17,602 19,911 19,574 23,209
Current liabilities 15,455 17,297 17,458 21,093
Provisions 2,146 2,614 2,116 2,116
Net current assets 13,157 9,367 18,098 23,024
Misc. exp 0 0 0 0
Total Assets 134,873 185,873 194,980 219,921
Cash Flow
Y/E Mar (Rsmn) FY12A FY13A FY14E FY15E
PBT (Ex-Other income) 7,846 7,676 6,754 7,169
Depreciation 766 944 1,336 1,826
Interest Provided 7,282 11,190 12,672 17,204
Other Non-Cash items 0 0 0 0
Chg in working cap 3,212 5,497 -11,597 -2,332
Tax paid -2,457 -2,274 -2,001 -2,124
Operating Cashflow 16,648 23,033 7,164 21,744
Capital expenditure -56,318 -47,495 -1,712 -21,634
Free Cash Flow -39,670 -24,462 5,453 109
Other income 0 0 0 0Investments -2,010 -2,917 0 -206
Investing Cashflow -58,328 -50,412 -1,712 -21,840
Equity Capital Raised 0 0 0 0
Loans Taken / (Repaid) 47,590 41,332 4,806 20,692
Interest Paid -7,282 -11,190 -12,672 -17,204
Dividend paid (incl tax) -903 -786 -796 -796
Income from investments 0 0 0 0
Others -162 -271 343 0
Financing Cashflow 39,242 29,085 -8,318 2,691
Net chg in cash -2,438 1,707 -2,866 2,594
Opening cash position 5,275 2,838 4,544 1,679
Closing cash position 2,838 4,544 1,679 4,273
Key Ratios
Y/E Mar FY12A FY13A FY14E FY15E
Profitability (%)
EBITDA Margin 26.1 27.7 29.9 31.4
Net Margin 9.6 8.1 7.4 6.5
ROCE 14.0 11.8 10.2 11.7
ROE 20.2 16.4 11.4 11.2
RoIC 13.8 11.5 9.9 11.4
Per Share Data (Rs)
EPS 25.6 26.7 22.5 24.2
CEPS 29.5 31.6 29.4 33.6
BVPS 137.8 187.4 205.7 225.9DPS 4.0 3.4 3.4 0.0
Valuations (x)
PER 4.3 4.2 4.9 4.6
P/CEPS 3.8 3.5 3.8 3.3
P/BV 0.8 0.6 0.5 0.5
EV / Sales 2.2 2.4 2.6 2.4
EV / EBITDA 8.3 8.8 8.8 7.7
Dividend Yield (%) 3.6 3.1 3.1 0.0
Gearing Ratio (x)
Net Debt/ Equity 3.7 3.8 3.7 3.8
Net Debt/EBIDTA 6.8 7.6 7.7 6.8
Working Cap Cycle (days) 67.2 26.5 93.4 87.8
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Emkay Research October 14, 2013 28
Exhibit 36: EPC Revenue to propel higher
5.5
10.3 11.414.8 14.7 16.8
-
2.0
4.0
6.08.0
10.0
12.0
14.0
16.0
18.0
FY10 FY11 FY12 FY13 FY14E FY15E
Source: Company, Emkay research
Exhibit 37: Toll revenue CAGR 13.4% over FY13-15E
1.7 1.92.6 2.9 3.0
4.3
-
1.0
2.0
3.0
4.0
5.0
FY10 FY11 FY12 FY13 FY14E FY15E
Source: Company, Emkay research
Exhibit 38: Revenue CAGR 8.8% over FY13-15E
8.0
13.015.0
18.5 18.421.9
0.0
5.0
10.0
15.0
20.0
25.0
FY10 FY11 FY12 FY13 FY14E FY15E
Source: Company, Emkay research
Exhibit 39: EBITDA to inch higher
2.1 2.53.3
3.7 4.0
5.3
-
1.0
2.0
3.0
4.0
5.0
6.0
FY10 FY11 FY12 FY13 FY14E FY15E
Source: Company, Emkay research
Exhibit 40: EPS
5.46.5
7.3
3.9
5.74.9
-
1.0
2.0
3.0
4.0
5.0
6.0
7.0
8.0
FY10 FY11 FY12 FY13 FY14E FY15E
Source: Company, Emkay research
Exhibit 41: EBITDA Margin
26.9
19.4 21.7 20.1 21.724.0
-
5.0
10.0
15.0
20.0
25.0
30.0
FY10 FY11 FY12 FY13 FY14E FY15E
Source: Company, Emkay research
Exhibit 42: Incremental Equity requirement over FY14-15E
Project Rsmn Source of funds Rsmn
Dhankuni , Belguam, Sambalpur(adj for stake) 1,500 FY13 Cash 338
Chennai orr(adj for stake) 1,000 BoT CFO over FY13-15E 1,919
Working capital Requirement 1,000 E&C CFO Over FY13-15E 2549
Debt repayment 2,695
Total 6,195 4,806
Surplus/(Shortfall) (1,389)
Source: Emkay research
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Emkay Research October 14, 2013 29
New projects to drive Toll revenue growth
Revenue from BOT business adjusted for stake to surge higher 13.4% CAGR over FY13-
15E whereas total revenue from BOT to post CAGR of 23% over FY13-15E. Majority of the
ramp in revenue will come from projects like Durg Chattisgarh and Chattisgarh Bhandara in
FY14E followed by commissioning of Sambalpur Baragarh & Belgaum Dharwad. The
Belgaum-Dharwad (have scalability for high traffic growth due to traffic running from
Mumbai to Bangalore on GQ) and Dhankuni-Kharagpur projects (Goods to Eastern belts ,Traffic from Haldia post to Northern & Southern region , handles minerals as well ) being 6-
laning projects, impart high visibility and comfort over futurerevenue ramp-up.
Partnership with SBI-Macquarie gives scalability
SBI Macquarie (SBI-M) has committed to invest Rs7bn (Already invested till sate of Rs3.8
bn in ACL), the holding company for ABLs new road concessions (ABL is required to invest
its share of equity of Rs8.5bn, already invested Rs7 bn). According to the agreement SBI
will have 34% stake in ACL which implies pre-money valuation of 1.6x P/B for ACL. These
valuations appear attractive considering the IRR profile of the underlying projects, and also
lend considerable credibility to ACLs project portfolio. The terms of the agreement assure
SBI-M a guaranteed 12% IRR on its initial investment of Rs7bn in ACL which entails outgo
of Rs14.6 bn by FY20E.According to the agreement there are three ways that the private investor can exit:
IPO of ACL Sale to others or swap into the individual asset SPVs. In case of a shortfall in realizing
the guaranteed returns even after swapping into the SPVs, SBI-M can increase its
stake in ACL to a maximum of 49% however; no provision to swap into the parent
company, ABL which we believe is a key positive for the shareholders of ABL.
We believe that investment is a value creating proposition considering the interest rates are
currently holding up for road project financing at 12-13% and availability of equity capital
ensures timely project completion and faster cash generation from the BOT assets. We
dont believe that 12% capital protection rate a concern considering the IRR of ACL
projects under ranges between 13-20%.
Exhibit 43: NPV of ACL portfolio
NPV ACL Stake FY14E FY15E FY16E FY17E FY18E FY19E FY20E
Dhankuni - Kharagpur 100% 3732 6241 8332 10175 12174 13820 15435
Sambhalpur - Baragarh 100% 1216 2228 2562 2937 3360 3861 4438
Belgaum - Dharwad 100% 860 972 1484 2008 2563 3145 3981
Pimpalgaon - Nasik 26% 1008 1242 1408 1612 1789 2090 2340
Under construction project