september 2009 india transport infrastructure: the world's...

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THINK TANK SERIES

In collaboration with Feedback Ventures

September 2009

India Transport Infrastructure: The world's largest PPP playground

The Minister for Road Transport and Highways, Mr Kamal Nath, is

spearheading the effort to revamp the lacklustre performance of the National Highways Authority of India (NHAI). Although NHAI has a project pipeline of 135 projects valued at approximately INR1t, we believe approximately INR400b-500b will be bid out during FY10.

The ticket size of metro projects (approximately INR3.0b) has been too low to evoke interest among the larger developers. However, the three-fold approach comprising increasing complexity (and subsequent bigger tickets), the PPP route for development and the passing of the Metro Act should provide an impetus to the sector. The projects pipeline, worth INR1,010b for five metropolitan cities, will lead the development in the sector.

The game plan, according to the Minister for Shipping, Mr Thiru G K Vasan, involves the award of 22 projects during fiscal year 2010. However, the ministry has missed its first milestone: during the first 100 days of the new government, only three of the six scheduled projects were awarded.

We profile IRB Infrastructure Developers Limited, a pure-play highway developer, as an opportunity in the highway sector. Acceleration in highway project awards should also benefit other major infrastructure companies such as L&T, GMR Infra, and Reliance Infra; however, highways would contribute less than 10% of their revenue.

Vishal Sharma, CFA BNP Paribas Securities India Pvt Ltd

(91 22) 6628 [email protected]

Shashank Abhisheik BNP Paribas Securities India Pvt Ltd

(91 22) 6628 [email protected]

mailto:[email protected]

mailto:[email protected]

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Contents Highway projects in the pipeline .................................................................................... 3

The Ministry of Road Transport & Highways (MORTH) has set a target of achieving 20 kms of roads construction per day. One of the pre-conditions to achieve this vision is having a strong pipeline –INR1t by year-end. We expect only INR400-500b of these will be bid out in FY10. We feature some key projects that we believe will be attractive to private developers.

Update on progress or delays ....................................................................................... 5

The progress of National Highway Development Program (NHDP) had been sluggish in the last few years, missing all targets and its projects plagued by time and cost overruns and delays in terms of commissioning, financing & execution. A few of such delayed projects are discussed in this section.

Recently awarded projects ............................................................................................ 6

NHAI is poised to implement its ambitious work plans, including the target of building 35,000 km of roads in the next five years. This is partly reflected in the renewed pace of the bidding process, new initiatives relating to structural changes at NHAI, review of regulatory framework & other contentious issues.

Policy changes in favour of private developers ............................................................. 7

The regulatory framework is being tweaked to improve the risk-return perception. The key policy changes in recent times or potential amendments affecting highways and roads are discussed below. We expect some delays and re-runs of RfQ rounds of several of the projects in the pipeline because of the changes

Increased complexity of projects ................................................................................... 9

The Mass Rapid Transit System (MRTS) sector in India is still at a nascent stage. The contract packages till date have been too small (sub INR3b packages each) to attract major Indian players into the sector. However, changes are suggested to attract major players.

Ports: Left behind ........................................................................................................ 11

The shipping ministry under the previous government had paid little attention to the overall development of the ports sector. While the erstwhile shipping minister can be credited with the new Model Concession Agreement (MCA) for the ports sector, he was able to award only six PPP projects in the last three financial years.

Corporate – IRB Infrastructure Developers Ltd ........................................................... 13

IRB Infrastructure Developers Ltd (IRB) is one of the largest road developers in India. The company has secured 18 projects on a BOT basis. It derives revenue from: 1) toll from roads; 2) construction activity; and 3) real estate.

Interview – Mr Virendra D. Mhaiskar, CMD, IRB Infra ................................................. 15

Appendices.................................................................................................................. 17

1. Projects in the pipeline – Roads 17

2. Projects in the pipeline – Ports 18

3. IRB Infrastructure – Corporate Structure 19

4. About Feedback Ventures 20

Please see India Research Team list on page 21.



U P C O M I N G P R O J E C T S

Highway projects in the pipeline The vigour with which the resuscitated Ministry of Road Transport & Highways (MORTH) is planning to roll out the highway development program is set to transform India’s road infrastructure. The articulation of the vision in terms of pithy statements (such as 20 kilometres of road per day) gives it a sense of direction. One of the pre-conditions of achieving this vision is having a strong pipeline – INR1t by FY10. However, we expect only INR400b-500b worth of projects will be bid out by year-end. We feature some key projects that we believe will be attractive to private developers.

Opportunities ahead Opportunities in the road sector are present at not only the national level, but also at the state and rural levels. The national highways fall under the purview of the central (federal) government, while the state highways and the rural roads are under the respective state and village administrations. The 11th Five-Year Plan (2008-12) has proposed investments at all three levels. The major programs include:

National Highway Development Program (NHDP);

State highway development;

Rural road development;

Special accelerated road development (SARDP) in the North East region (central government);

Port connectivity (central government).

Barasat–Dalkhola, 417km in W Bengal, INR48.51b The four laning of the stretch on NH 34 from Barasat near Kolkata to Dalkhola in Uttar Dinajpur district will improve connectivity between south and north Bengal. This stretch is the only route from Kolkata to the north east (NE) region and is expected to carry significant traffic between W Bengal (and other southern/eastern states) and the NE region, which is likely to see substantial activity in the future, particularly related to roads and power. However, user willingness to pay tolls is untested in this region.

The project is broken into five stretches. Financial bids for four of these are due in October 2009; request-for-qualification (RfQ) submission for the last one stretch of 84km from Barasat-Krishnagar is due in September 2009.

Kishangarh-Ah’bad, 558km in RJ and Guj, INR42.84b Kishangarh-Udaipur-Ahmedabad is part of the existing Golden Quadrilateral (GQ) and is being 6-laned to cope with growth in traffic. In close proximity to the mineral-rich belt of Rajasthan, there is strong industrial activity in the area. The Delhi Mumbai Industrial Corridor is also being developed along this axis and holds huge potential upside for commercial traffic. There is also a high level of passenger traffic driven by tourism and religious travel along this stretch.

Bid submission for Kishangarh-Udaipur and RfQ submission for Udaipur-Ahmedabad is due in September 2009.

Opportunities in the highway sector are present at three levels – Central, State and Village administration

This is the only route from Kolkata to North-East region

Industrial activity in the region will result in robust traffic on this stretch



Pune-Kagal, 273km in Maharashtra, INR28.28b Pune-Satara-Kagal is part of the GQ and lies on the main highway connecting the states of Maharashtra & Gujarat (including the major ports in the region) to the non-coastal regions of south India. The increasing industrialization in the Pune belt and further development of the Kolhapur district as a textile hub will increase business activity in the region.

The six-laning bid submission for Pune-Satara and RfQ submission for Satara-Kagal is due in September 2009.

Jorabat-Shillong, 109km in Meghalaya, INR7.62b The Jorabat-Barapani-Shillong bypass will improve connectivity with the state of Meghalaya and remove frequent congestions faced by commuters on the national highway. Since the state does not have a rail head, this stretch can also help in development of the region by tapping into the mining & tourism potential of the state.

The project will be on BOT – annuity basis and hence will not carry any traffic risk. The bids for four laning of Jorabat-Barapani and two laning of Shillong bypass are due in September and October 2009, respectively.

Samakhiyali-Kandla-Mundra Port, 127km, INR17.59b The stretch is linked to the two biggest ports of Gujarat, namely Kandla and Mundra. The projects provide hinterland connectivity to the port, and the traffic growth will have a direct correlation to India’s external trade growth and the share of these ports in this trade. The increasing trend towards containerization of foreign trade will add to growth in MAV (Multi-axle vehicle) traffic.

The six-laning bid submission for Samakhiyali-Gandhidham (Kandla) is due in September 2009 and that for the four-laning of Gandhidham-Mundra port in October 2009.

Annuity based model removes the traffic risk on this stretch

This stretch connects two of the biggest ports of Gujarat- Kandla and Mundra



P A S T P R O J E C T S

Update on progress or delays The progress of the National Highway Development Program (NHDP) had been sluggish in the last few years, missing all targets and its projects plagued by time and cost overruns and delays in terms of commissioning, financing & execution. A few the delayed projects are discussed below.

Meerut-Muz’nagar, Gayatri proj-NCC-Maytas, INR5.35b This 79km stretch christened as the Western UP Tollway project was scheduled for a March 2009 completion; however, there has been a delay of one year due to delays in land acquisition, forest clearance and shifting of utility services with the project achieving physical progress of around 70-75%. Further, there are reports of stake dilution by Maytas to its other partners.

Bangalore Elev highway, Soma-NCC-Maytas, INR7.76b The ambitious Bangalore Elevated highway project, earlier expected to be completed by March 2009, has been rescheduled to September 2009. Multiple reasons like financial, technical and site-related issues have led to the delay.

NHDP Phase V and GSRDC projects; IRB, Soma, KMC, IDFC and L&T Several projects are facing significant delays between the bidding process and concession award/ financial closure of projects. While this does not have a direct impact on project cost/viability, there may be some revisions in project costs due to the inflationary impact. Construction has not begun or just began on the five concessions under NHDP Phase V that were bid in early 2008. The same holds true for three concessions awarded by GSRDC (Gujarat State Roads Development Corp) in the first quarter of 2008.

The concession period starts from the date of financial closure, and includes the construction period; any reduction in the construction period leads to higher toll/annuity revenue for private concessionaires. The Kondhalli Talegaon project, won by the Oriental Structural Engineers consortium, was completed almost 11 months ahead of schedule.

Land acquisition and Maytas’ involvement resulted in delays

Financial, technical and site-related issues hindered the progress of this project



R E C E N T A W A R D S

Recently awarded projects NHAI is poised to implement its ambitious work plans, including the target of building 35,000 km of roads in the next five years. This is partly reflected in the renewed pace of the bidding process, new initiatives relating to structural changes at NHAI, review of regulatory framework & other contentious issues.

The following are some of the projects awarded in the recent months. Most of them are relatively low risk, and likely to offer stable returns to the concessionaires.

Exhibit 1: Recently Awarded Projects

S no Name of Project Company Length Project cost Concession period Bid parameter (km) (INR b) years 1 Amritsar-Pathankot IRB Infra Developers 101 12.0 20 Grant of INR1.27b2 Jaipur-Tonk-Deoli IRB Infra Developers 149 15.0 25 Grant of INR3.06b3 Panaji-Karnataka Border IRB Infra Developers 65 8.0 30 Grant of INR1.86b4 Talegaon-Amravati Package I IRB Infra Developers 67 8.0 22 Grant of INR2.165 Hyderabad-Vijayawada GMR–Punj Lloyd 181 17.4 25 Rev share 6 MP Border-Dhule HCC–Laing (UK)–Sadbhav 98 8.4 18 Rev shareSources: Feedback Ventures; BNP Paribas

Most of the projects are relatively low risk and should offer stable returns to the concessionaires



P O L I C Y M A T T E R S

Policy changes in favour of private developers The regulatory framework is being tweaked to improve the risk-return perception. The key policy changes in recent times or potential amendments affecting highways and roads are discussed below. We expect some delays, and re-runs of RfQ rounds of several of the projects in the pipeline because of the changes.

Pre-qualification criteria Recently, projects that have not attracted bids (38 of 60) were modified to reflect more realistic costs, thus, attracting bidders in the next round of bidding. The cap on the number of financial bids (six) has been removed. Instead, now the bidders should have experience (Threshold Technical Capacity or TTC) of executing projects worth 200% of the project bid on. The industry is demanding a reduction of the threshold to 100%. However, NHAI will have the flexibility to reduce the TTC by 50% of the Total Project Cost (TPC), that is: provide for TTC to be one-and-a-half times of TPC. This is expected to increase the competition for smaller roads. However, very few players would be able to pre-qualify for the larger road packages without partnering with large foreign developers/construction companies.

Modification of minimum equity holding criterion on cards In response to the industry demands, the government is now considering modifying the minimum equity provision to promote investments in the sector. Relaxation of this clause should also lead to matching risks and investor profile. For example, the construction companies should be allowed to exit once the construction is done or the construction risk is eliminated. The present agreement requires the developers to hold at least a majority stake (51%) in the project for the first three years and 26% thereafter.

Changes to tolling policy will increase toll rates In order to attract developers to take traffic risks, the government has modified the tolling policy to include a 3% (without compounding) fixed escalation plus 40% of change in Wholesale Price Index (WPI). This change results in higher toll-rates to developers. For structures (bridges, bypass or tunnels), the toll fee will be linked to the capital cost instead of length implying a greater linkage between the cost of construction and toll tariff. A provision exists for charging an overloading fee, if a weighbridge is installed at a toll plaza. Given the rampant practice of overloading on Indian roads, the implementation of this rule is circumspect.

Timing of viability gap funding Those projects that had received a viability gap funding were facing the problem of timing of cash flows as half of the viability gap funding was paid during construction and the other half during the first five years of commencement date. The government, in turn, has decided to meet the funding gap upfront, which has made such projects more attractive.

Relaxation of pre-qualification criteria will results in increased competition

Enabling of an exit clause will attract fresh investments in the sector

Favourable changes to toll rates will attract private developers

Upfront payment of viability gap funding will improve cash flows



Land acquisition Land acquisition has been a major impediment for road project execution. The government had proposed transferring 50% of land at the time of the award and the remaining during construction. To facilitate execution further, it has now planned to hand over 80% of land at the time of the award and the remaining during construction. Separately, there were projects that were not awarded commencement certificates due to the inability of the government to acquire 5-10% of land. The private developer and lenders were not allowed to collect toll until the commencement certificate was awarded. Now, the private developers will be allowed to collect toll if they deposit 80% of the estimated cost of construction on the undeveloped stretch of road.

Termination clause By introducing a termination clause, the NHAI essentially stripped the concessionaire off of upside for taking traffic risks. According to the clause, the NHAI could end the concession period if the traffic increases beyond the designed capacity of the road for more than three years. However, the industry is lobbying strongly against this provision and we expect relief in the near future.

Conflict of interest clause Under the present scenario, two different bidders cannot directly/indirectly hold more than 5% in the other. This threshold was raised from 1%. Furthermore, it excludes banks, insurance companies, pension funds and public financial institutions from this clause. Though this hike is expected to bring in more investments in the sector, it might not be sufficient as a PE fund typically holds more than 5% stake in companies, thereby still invoking this clause. It is likely that the limit will be raised to 25% as appealed by the investor class.

80% of land to be handed over at the time of award – to speed up the execution

Modification of termination clause to balance risk and returns

Flexibility in forming consortia improved



M A S S R A P I D T R A N S I T S Y S T E M

Increased complexity of projects The Mass Rapid Transit System (MRTS) sector in India is still at a nascent stage. The contract packages till date have been too small (sub INR3b packages each) to attract major Indian players into the sector. However, changes are suggested to attract major players.

Three major discontinuities are expected to change the outlook of the sector in India and attract large players:

Increasing complexity of projects (primarily through increased proportion of underground works), as demonstrated by the Kolkata Metro Line 2 project;

Increased focus on PPP (private sector involvement as developers instead of contractors);

Passing of the Metro Railways (Amendment) Bill, and the Central Government’s intention of passing on the benefits of the bill to all cities with a million-plus population.

Kolkata Metro Line 2 Line 2 of Kolkata Metro (also known as the East West Metro) aims to connect Kolkata with Howrah by an underwater metro line. The total length will be 14.67 km (8.9 km underground and 5.77 km elevated). This line will be developed and maintained by a separate body named Kolkata Metro Rail Corp (KMRC), unlike Line 1, which is operated by Indian Railways.

Delhi Metro Rail Corp (DMRC) has conducted feasibility study for Line 2. The route will cover 12 stations and go under the Hooghly River through a tunnel to reach Howrah. This makes Kolkata Metro Line 2 as probably the most challenging of the metro rail projects in the country.

The RfP for the construction works is expected in 3QFY10. The project has been broken up into two packages:

UG1 – Starting from Howrah Maidan UG Station up till east end of Central UG Station (passing below Hooghly River);

UG2 – Starting from west end of Central UG Station up till Subhas Sarobar.

Some of the major Indian players that have been pre qualified for one or both packages are L&T, Gammon, HCC, IVRCL, Simplex, ITD Cementation and Patel Engineering (all these in consortia with various international players).

Increased focus on PPP Primarily due to funding constraints, most cities are shifting toward developing viable stretches of metro rail through the PPP route. Various cities have adopted different approaches toward PPP in metro rail. Some cities (such as Hyderabad) intend to develop their entire metro rail systems on PPP basis, while other cities (such as Delhi, Bangalore and Mumbai) intend to develop specific high-density stretches (such as airport connection lines) on PPP basis.

There have also been variations on the mode of PPP (pure versus hybrid structures) being applied to metro rail systems in various cities.

The Mumbai Metropolitan Regional Development Authority’s (MMRDA) model has been to award concession for all aspects related to development of its lines. Line 1 and

Size of the projects to increase; will attract larger developers


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Line 2 have been awarded to Anil Dhirubhai Ambani Group (ADAG) companies – Reliance Infrastructure Ltd.

DMRC adopted a hybrid model for Delhi Metro’s airport link. In this, the funding responsibility for all civil structures lies with DMRC, while the concessionaire is expected to install all equipment and procure the rolling stock. We expect the developing authorities will look at more such hybrid PPP structures for important metro rail stretches that may not be economically viable on a stand-alone basis.

However, the risk profile of pure PPP projects in metro rail remains high (due to high dependence on real estate revenues). In fact, in Line 2 of Mumbai metro, ADAG was the sole bidder. The viability and risk profile of PPP in metro rail has to be evaluated on a case-to-case basis.

The Metro Railways (Amendment) Bill On 6 August of this year, the Indian Parliament passed the Metro Railways (Amendment) Bill providing for extension of metro rail services beyond Delhi. The Bill facilitates extension of metro rail transport to all cities with populations of more than one million. Under this, the Central Government will provide 50% equity to any city for developing a metro rail network if the respective State Government could arrange for the remaining funds.

With each metro rail project expected to be at least INR10b, and over 45 cities with a population of more than a million, the total size of the MRTS sector in India would become huge.

In the more immediate context, coming as direct consequence to the passing of the Metro Railways (Amendment) Bill, the Haryana State Government has cleared a bid submitted by a consortium consisting of IL&FS and DLF for a 6.1km metro link connecting DLF’s townships in Gurgaon, at a projected cost of INR9b. The most attractive feature of the project is the concession period of 99 years.

Exhibit 2: Opportunities For Private Sector – BOT

S no Name of project Overall investment Packages Remarks (INR b) 1 Mumbai Metro Line 2 110 Concession awarded to Reliance Infra. Construction contract

expected in FY11 (Civil contract of INR4b for viaduct in Line 1 with Simplex)

2 Hyderabad Metro 120 3 Being re-bid. New concession to be awarded by 4QFY10 Opportunities for private sector – Government financed 3 Kolkata Metro Rail Corp Ltd 272.5 2 RfP expected in 3QFY10. Consortia of L&T, Gammon, HCC,

IVRCL, Simplex, ITD Cementation and Patel Engineering, among others, short listed.

4 Delhi Metro – Phase 3 347 13 First tender expected in FY11 5 Chennai Metro Rail Ltd 160 9 First tender expected in FY11 Sources: Feedback Ventures; BNP Paribas

Centre to provide financial assistance for metro rail systems in all cities with more than 1m population.



P O R T S

Ports: Left behind The shipping ministry under the previous government had paid little attention to the overall development of the ports sector. While the erstwhile shipping minister can be credited with the new Model Concession Agreement (MCA) for the ports sector and also the draft of an act which will establish a new and more powerful regulatory authority for major ports, he was able to award only six PPP projects in the last three financial years.

The appointment of a new minister and his 100-day agenda for the ministry has brought in much needed action in the sector. The shipping minister had said that it was his aim to award 6 PPP Projects in the first 100 days in the ministry. But only three have been awarded in the 100 days. The shipping ministry plans to award an additional 22 projects over and above these six projects during this year.

Projects recently awarded

Paradip Iron Ore Terminal; Gammon, MMTC, Noble Group; 10m tpa; INR5.06b The project had two consecutive rounds of bidding. In the first round of bidding, Essar Shipping Ports and Logistics Ltd was the winner by default as the only other bid (by a Sical led consortium) was disqualified on procedural grounds.

However, a second round of bidding had to be undertaken as an Orissa court ruled in the favor of Noble Group led consortium, which contended that it was not given enough time to submit the price bids.

A consortium led by Noble Group and also including Gammon and MMTC won the bid in the second round and has been awarded the INR5.06b project with a revenue share of 36.8% and Essar came second with a revenue share of 30% (as against 25% in their first round).

Paradip Coal Term.; Essar Shipping Ports and Logistics Ltd; 10m tpa; INR4.79b The Paradip Coal terminal was bid out thrice before finally being awarded. In the first round, Essar Shipping Ports and Logistics Ltd had emerged as the winner with a 24% revenue share as against 11% revenue share quoted by Mundra Port and SEZ Ltd (MPSEZ). However, since Essar had emerged the topmost bidder for both the iron ore and coal terminals (this was against tender rules which allow only one terminal in the port to be awarded to any private party), MPSEZ agreed to match Essar’s price.

Despite this, a second round of bidding had to be undertaken as an Orissa court ruled in the favor of Noble Group led consortium, which contended that it was not given enough time to submit the price bids.

In the second round for the coal berth, MPSEZ was the highest bidder at 12% and Essar came second with 11%. Since these bids were much lower than those in round 1, the Supreme Court allowed Paradip Port Trust to undertake another round of bidding.

In the third round of bidding, Essar emerged the winner at a 31% revenue share and has been awarded the project.

100-day agenda incomplete – three projects not awarded so far

Projects bid out had to go through multiple rounds of bidding



Mormugao Port; Mundra Port and SEZ Ltd; 6.5m tpa; INR2.52b Five applicants namely L&T; consortium of Vadinar Oil Ltd and Essar; consortium of MPSEZ and Adani group; consortium of IL&FS Maritime and Punj Lloyd; and Gammon Infrastructure were selected at the Request for Qualification (RfQ) stage. However only consortia led by MPSEZ and IL&FS submitted the price bids. The project was awarded to MPSEZ on DBFOT basis at a revenue share of 20%.

Unawarded projects in the 100-day agenda The following projects are part of the shipping ministry’s 100-day agenda and are yet to be awarded.

Ennore Container Terminal, INR13b The project is under litigation due to the omission of players like D P World and PSA from the technically qualified bidder’s declaration of Ennore Port Authority.

Tuticorin Container Terminals, INR3.2b Eleven entities had submitted the RfQ in 2005 for the box container terminal at Tuticorin of which only five were shortlisted by the port trust. The five shortlisted companies include Chettinad Logistics, L&T, Afcons Infrastructure, Oceanic Transport and PSA-Sical Terminals. However, the shipping ministry had barred PSA-Sical from participating in the process as it is already the developer of the first container terminal at Tuticorin.

The financial bids were invited from the remaining four bidders and have been submitted. The port trust is likely to sign the concession agreement with the selected developer in November.

New Mangalore Iron Ore Terminal, INR2.8b RfP document has been issued to 11 qualified players for the price bids to be submitted latest by 15 September 2009.

Major Ports Regulatory Authority (MPRA) Act, 2009 The Major Ports Regulatory Authority (MPRA) Act, 2009 proposes the institution of a MPRA whose regulatory powers will far exceed those of its predecessor, the Tariff Authority for Major Ports (TAMP). The new regulatory authority would not only have the power to regulate port-related tariffs like the TAMP, but also specify performance norms and standards, enforce the same and order corrective/penal measures in the case of non-adherence. Further, the MPRA is also expected to act as an appellate body for disputes between public and private port operators and also port users. The new regime is expected to be much more stable than the TAMP regime. It would ensure higher efficiency and performance standards at the major ports and would also result in speedier resolution on some specific disputes without approaching a court.

The Act however has not been able to ensure the regulation of the entire ports sector in India as it covers only the 11 major ports and Ennore Port (which falls under the Companies Act) and is unlikely to affect minor ports directly. Minor ports in India are a state subject and most of these are not regulated

New rules enforce norms and standards of performance, focus on efficiency



C O R P O R A T E

IRB Infrastructure Developers Ltd IRB Infrastructure Developers Ltd (IRB) is one of the largest road developers in India. The company has secured 18 projects on a BOT basis. It derives revenue from: 1) toll from roads; 2) construction activity; and 3) real estate.

Road development IRB Infrastructure Developers Ltd (IRB) has secured 18 BOT road projects (10 are operational, two under implementation, four projects where IRB is the lowest bidder (L1), two completed the concession period). Mumbai-Pune is the largest contributor to its daily toll revenue. Refer Appendix 3 for corporate structure.

Exhibit 3: IRB Projects

Project Project

cost Equity DebtGrant/

(rev share)Const

costCon

period Base

traffic Traffic

growth Freq (INR m) (INR m) (INR m) (INR m) (INR m) years PCUs (%)Mumbai-Pune BOT Project 12,920 1,050 11,870 (9,180) 3,740 15.0 39,478 7 every yearThane Bhiwandi Bypass 4 Lane BOT project 1,040 340 700 — 1,040 18.5 17,326 7 every yearBhiwandi-Wada (concession completed) 95 25 70 — 95 10.7 3,311 7 every yearKaman-Paygaon 144 44 100 — 144 15.0 3,310 7 every yearKhambhatgi Ghat (concession completed) 450 150 300 — 450 9.8 9,494 7 every yearThane Ghodbunder BOT project 2,490 320 2,170 (1,400) 1,090 15.0 23,101 7 every yearPune-Nashik BOT project 740 60 680 — 740 18.0 8,491 7 every yearPune-Solapur BOT project 630 180 450 — 630 16.0 10,885 7 every yearNagar-Karmala-Tembhurni BOT project 368 150 218 — 368 15.0 3,248 7 every yearKharpada Bridge BOT project 320 100 220 — 320 15.8 7,696 7 every yearMohol-Mandrup-Kamtee BOT project 450 150 300 — 450 16.2 2,847 7 every yearPanaji-Goa (L1) 8,357 2,598 3,897 1,863 8,357 30.0 Na 7 every yearAmritsar Pathankot (L1) 13,172 3,571 8,332 1,269 13,172 20.0 Na 7 every yearJaipur-Tonk-Deoli (L1) 16,636 4,073 9,503 3,060 16,636 25.0 Na 7 every yearTalegaon Amravati (L1) 8,549 1,917 4,472 2,160 8,549 26.0 Na 7 every yearBharuch-Surat Project 14,040 1,930 12,110 (5,040) 9,000 15.0 24,442 7 every 5 yearsDahisar-Surat (Under implementation) 25,870 12,330 13,540 — 25,870 12.0 Na 7 every yearKolhapur IRDP (Under implementation) 4,300 1,720 2,580 — 4,300 30.0 Na 7 every year 110,571 30,707 71,512 94,951 Sources: IRB Infrastructure Developers; BNP Paribas

Construction IRB has a construction arm housed in Modern Road Makers Pvt Ltd, which specializes in road construction. It executes its internal BOT projects and certain other government projects on a cash-contract basis. The current order book primarily has internal projects only. The order book is highly dependent on one project – Surat Dahisar – which is 60% of the order book. Bharuch-Surat and Mumbai-Pune constitute 30% of the order book.

EBITDA margins are almost double their peers (22-23%). This can be attributed primarily to lesser sub-contracting (about 5-6%). Wherever it sub-contracts, it is generally for labor (excluding material). Additionally, material procurement is centralized, which saves them additional margins. Use of own equipment also results in higher margins. Ownership of aggregate quarries also results in lower construction costs; aggregates form 30-40% of total raw material costs. The company also undertakes operation and maintenance contracts for their operational assets on which the EBITDA margins are relatively higher.

The only listed pure-play highway developer in the market

Construction capabilities complement the developer model



Real estate IRB has recently ventured into real estate with plans to develop an integrated township on approximately 1,400 acres in Pune District, Maharashtra. Land acquisition of approximately 1,250 acres has already been completed. The total developable area is expected to be about 30.6m sqft over 8-9 years for an investment size of INR110b. The proportionate share (66%) of book value in Aryan Investments (its real estate SPV) amounts to INR586m.

Relatively new venture, gradual progress on the project



I N T E R V I E W

Mr Virendra D. Mhaiskar, CMD, IRB Infra What is the potential in the sector? In terms of size of opportunity, NHAI’s opportunity is approximately INR3t. This is large enough to accommodate all the industry players, Mr Mhaiskar believes. He favors NHAI projects over states’ because of viability. States, he believes, do not present a master plan of their requirements. For instance, recently there was a bid for collecting toll at all five entry points to Mumbai. While the bid was out, the local authorities were contemplating another road, which could result in the creation of an additional entry point that was not included the toll-collection bid.

What is your strategy to diversify risk? The company’s portfolio is concentrated in the Western region (Maharashtra). Now, management is making a deliberate attempt to de-risk this concentration by bidding for projects in other states. Specifically, they are looking at Goa, Rajasthan and Punjab. Toll collection is relatively better in these states. They have already won Amritsar-Pathankot in Punjab; should soon announce victories in the other states. They have recently won four projects. Execution should start by April 2010

Besides, IRB is contemplating to penetrate other sectors that have higher civil component; looking at airports and hydropower sectors (up to 70% civil component). It had constructed Nagpur and Ahmedabad airports on a cash contract. It had also bid for the Sindhudurg airport in North Goa (later awarded to Reliance Infrastructure Ltd).

What changes/initiative he would like from the authorities’ side? Mr Mhaiskar said he would like to get clarity on the proposed Direct Taxes Code. On the face of it, the proposal is adverse to asset intensive businesses such as theirs. Second, he would like to see bureaucrats actively executing the promises made. For instance, there still are delays in handing out Letter of Intent (LOI) after the bids have been opened. There are also delays in toll notification on completed projects. By rule, no concessionaire can start collecting tolls until the tolls have been notified in the public gazette. He believes this process could be expedited as it is not linked to physical execution of the projects. It is a procedural step and should not hinder toll collection.

He suggests NHAI should have two dedicated teams – one should work on speeding up the award of the existing projects and the other should identify newer opportunities (to replenish the pipeline). He is happy that the clause limiting the number of bidders has been removed. He does not believe that the cap on traffic is as adverse as it is portrayed, because bidders would have factored this condition in their bid. One thing that he would like the industry to do is to quickly expand their execution capacity; there is shortage of skilled labor that is hindering capacity expansion.

What is your perception of land acquisition in India? Mr Mhaiskar believes that land acquisition issues are overblown. Recently, the mandate of land acquisition was modified. Now, NHAI will have to hand over 80% (50% earlier) of land before the start of construction and the remainder during construction. There have been instances where the developer got stuck just due to the government’s inability to acquire the final 5-10% of the land, essentially impeding toll



collection. To counter this, now there is a provision that allows the concessionaires to deposit 80% of the estimated cost of the un-built portion of the road, and the developer can start toll collection. This is a clause that IRB has not exercised yet since its introduction in the last 1.5-2.0 years.

How has the financing environment changed? Financing for roads is available aplenty; however, the financing costs are still high (in the range of 12%). Generally, rates are reset every one or two years. The industry has requested the finance ministry to allow ECB for refinancing. Mr Mhaiskar suspects the public sector banks will oppose this move. He does not believe IIFCL can have a significant impact, as it finances up to 20% of the cost.

What is your balance sheet position like? IRB is not looking to securitize any toll collection. It has eight projects where debt has been paid down. With the existing cash flow situation, it can finance equity for an additional INR22b worth of projects. (assuming debt equity of 70:30). Securitization of toll will be the most favored option in case it has to invest equity in future project wins relative to equity dilution.

Please update us with the real estate plans The real estate plans are progressing gradually. IRB has acquired 1,250 acres of the 1,400 acres, approximately 20km from Pune. The plan is to build an integrated township for mixed use. It will ideally look for a partner for joint development. IRB will develop the infrastructure portion of the project. The project is still at the tendering stage.



A P P E N D I X 1

Projects in the pipeline – Roads Exhibit 1.1: Projects Coming Up For Tender

S No Stretch LengthProject

cost Plan State RFQ

submissionRFP

submission (km) (INR b) 1 Bijapur - Hungund 97 8.94 III Karnataka 30-Oct2 Hungund - Hospet 98 12.09 III Karnataka 30-Oct3 Godhra - MP Border 84 7.17 III Gujarat 20-Oct4 Rimuli-Roxy-Rajamunda 96 4.49 III Orissa 15-Oct5 Chandikhole-Dubari-Talcher 133 5.61 III Orissa 15-Oct6 Deoli - Kota 83 5.93 III Rajasthan 15-Oct7 Vijayawada - Gundugulanu - Rajahmundry 202 11.00 V Andhra 14-Oct8 4 laning Jorabat - Barapani section 62 5.36 SARDP Meghalaya 14-Oct9 Panikoili – Rimuli 166 9.23 III Orissa 13-Oct10 Walajapet-Poonamallee 93 10.45 V Tamil Nadu 12-Oct11 Ahmedabad - Godhra 117 10.09 III Gujarat 12-Oct12 Gandhidham - Mundra Port 71 9.54 III Gujarat 9-Oct13 Hosur - Krishnagiri 60 5.35 V Tamil Nadu 8-Oct14 Hyderabad - Yadgiri 36 5.15 III AP 30-Sep15 2 lane Shillong bypass 47 2.26 SARDP Meghalaya 30-Sep16 Kerala Border - Kanyakumari 71 6.52 III Tamil Nadu 30-Sep17 Beawar - Pali 115 11.02 III Rajasthan 29-Sep18 Pali - Pindwara 129 13.08 III Rajasthan 29-Sep19 Delhi - Agra 179 21.58 V UP 29-Sep20 Indore to Gujarat border 155 11.75 III MP 25-Sep21 Pune - Satara 140 17.25 V Maharashtra 23-Sep22 Dankuni - Baleshwar 231 19.78 V WB & Orissa 21-Sep23 Kishangarh - Udaipur 315 25.34 V Rajasthan 18-Sep24 Samakhiali - Gandhidham 56 8.05 V Gujarat 16-Sep25 Dalkola-Islampur-Purnea-Gayakota 141 0.94 OMT WB 9-Sep26 Kota - MP Border 104 0.54 OMT Rajasthan 9-Sep27 Rajkot-Bamanbore 130 0.94 OMT Gujarat 9-Sep28 Ranchi - Jamshedpur 164 14.36 III Jharkhand 9-Sep29 Barasat-Krishnagar 84 8.90 III WB 7-Sep30 Kagal - Satara 133 11.03 V Maharashtra 7-Sep31 Udaipur – Ahmedabad 243 17.50 V Rajasthan & Gujarat 3-Sep32 Ochira-Thiruvananthapuram 87 — III Kerala Bid sub-

mission soon33 Cherthalai-Ochira 86 — III Kerala Bid sub-

mission soon34 Krishnagar-Baharampore 78 8.41 III WB Bid sub-

mission soon35 Baharampore-Farakka 102 11.58 III WB Bid sub-

mission soon36 Farakka-Raiganj 103 11.56 III WB Bid sub-

mission soon37 Raiganj-Dalkhola 50 8.06 III WB Bid sub-

mission soon38 Krishnagiri - Walahjpet 148 12.50 V Tamil Nadu Bid sub-

mission soon39 Coimbatore – Mettupalayam 50 5.00 III Tamil Nadu Bid date to be

decided 4,539 358.35

Sources: NHAI; Feedback Ventures; BNP Paribas



A P P E N D I X 2

Projects in the pipeline – Ports Exhibit 2.1: Port Projects Coming Up For Tender

S no Name of Project Project cost Status (INR b) 1&2 Multi purpose berth at Paradip Port Trust Project-1 and

Project -2 (2 projects) 3.87 Tender invited; Last date – 10 September 2009

3&4 Mechanisation of Cargo Handling Project-1 and 2 at Paradip Port (2 projects)

— Planned; No RFQs invited

5&6 Mechanisation at HDC berth nos 2 and 8 at Kolkata (2 projects)

— Planned; No RFQs invited

7 Fertilizer mechanized facility at Vizag Port 1.53 Two consortia shortlisted – IL&FS, SICAL; RFPs awaited

8 Coal Handling Facilities at Outer Harbor at Vizag Port 4.14 Six consortia shortlisted – Sterlite-Leighton, L&T, Vadinar-Essar, Gammon-John Laing, IMICL-Punj Lloyd, Mundra Port-Adani ; RFPs awaited

9 Container Terminal at outer Harbor OR1/OR2 at Vizag Port — Planned; No RFQs invited 10 Development of East berth at Vizag for Cargo

- North Berth (INR3.13b) - South Berth (INR3.44b)

6.57 Tenders were invited but later cancelled

11 Installation of handling facilities at WQ 8 at Vizag 4.00 Tender invited; Last date – 6 October 2009 12 Development of Dry Port & Multi Model Logistic Park at

Chennai — Planned; No RFQs invited

13 Creation of Mega Container Terminal at Chennai 36.00 9 firms have submitted RFQs; Evaluation in progress for RFP

14 Construction of North Cargo Berth No- II at Tuticorin 3.19 Tender invited; Last date – 28 August 2009 15 International Bunkering Terminal at Cochin 1.84 Tender invited; Last date – 27 August 2009 16 International Cruise Terminal Cum Public Plaza at Cochin 3.75 Planned; No RFQs invited 17 330 m container terminal at Jawaharlal Nehru Port Trust

(JNPT) 6.00 2 bidders shortlisted; Identity of bidders unknown

18 4th Container Terminal at JNPT 67.00 Tender invited; Last date – 30 September 2009 19 Development of conventional cargo terminal at Mumbai 0.75 Planned; No RFQs invited 20 Creation of berthing of Tekkra near Tuna at Kandla (4

berths ) 8.82 Planned; No EOI/RFQs Invited

21 Single Point Mooring ( SPM ) at Kandla 8.30 Tender invited; Last date – 15 September 2009 22 Development of Container Terminal at NMPT 2.60 Tender invited; Last date – 10 September 2009 Sources: Ministry of Shipping; Port Trust Authorities; Feedback Ventures; BNP Paribas



A P P E N D I X 3

Corporate structure Exhibit 3.1 : Corporate Structure

Road projects

Ideal Road Builders [IRBPL](BOT projects + EPC)

Mhaiskar Infrastructure [MIPL](Mumbai Pune BOT) - 100%

IDAA Infrastructure [IDAA](Bharuch Surat BOT) - 100%

IRB Infrastructure [IRB Infra](Patalganga bridge) - 100%

MMK Toll Road [MMK](Mohol Mandrup Road) - 100%

Thane Ghodbunder Toll Road [TGTRPL](Thane Ghodbunder BOT) - 100%

ATR Infrastructure [ATR Infra](Pune Nashik BOT) - 100%

Modern Road Makers [MRMPL](Engg & Construction arm) - 100%

NKT Road and Toll [NKT](Ahmednagar Temburni BOT) - 100%

Aryan Toll Road [ATRPL](Pune Solapur BOT) - 100%

SPV InvestmentsMIPL - 26% NKT - 47%TGTRPL - 26% IRB Infra - 20% IDAA - 12% MMK - 100%

IRB Infrastructure

Thane Bhiwandi Bypass BOTKaman Paygaon BOT

Real estate

Aryan infrastructure investments(66%)

IRB Surat Dahisar Tollway Pvt Ltd (IRBSDTPL)(Surat Dahisar Road) - 90%

IRB Kolhapur Integ. Road Develop. Co Pvt Ltd.(IRBKIRDCPL) Road Develop. In Kolhapur - 100%

Sources: IRB Infrastructure Developers; BNP Paribas



A P P E N D I X 4

About Feedback Ventures Feedback Ventures is India’s leading integrated infrastructure-services company, with a mission of “Making Infrastructure Happen”. Totally focused on infrastructure development, Feedback Ventures offers an integrated suite of services across the core and social sectors of infrastructure.

Feedback is known for its innovative work and for making operational challenging projects in difficult locations. No wonder, 17 of India’s 50 biggest listed companies are Feedback’s clients. So are the governments of 22 of the 28 Indian states and four of India’s seven Union Territories.

Feedback Ventures is presently working on more than 35,000 MW of new power generation capacity; 20,000 km of National and State Highways; 100,000 acres of real estate development and a building area of more than 22m sqft.

Feedback is enabled by a large pool of multidisciplinary experts; cutting-edge functional and domain knowledge; an all-India network of offices; and a strong shareholding – L&T, IDFC, and HDFC.

Feedback offers: An ‘INTEGRATED SUITE OF SERVICES’ covering all the steps “From Concept to Commissioning”

FEEDBACK WORKS ACROSS ALL CORE AND SOCIAL SECTORS OF INFRASTRUCTURE Feedback today has India’s largest independent group of multi-disciplinary infrastructure professionals. The team comprising planners, architects, engineers, social and environmental scientists, and MBAs is considered the best in the industry. Having the right mix of experience and expertise with a commitment to stay ahead of the competition has made Feedback the most admired infrastructure services company.

Transportation & Logistics Highways Railways MRTS Ports Airports Logistics

Energy Power Generation Power Transmission Power Distribution Power Trading Power Regulation Coal Oil and Gas

Realty & Townships Water & Sanitation SEZs Hospitals Urban Planning & Development IT Parks, Offices, Buildings Hotels, Clubs, Convention

Centers



India Research Team Manishi Raychaudhuri Head of India Research BNP Paribas Securities India Pvt Ltd (91 22) 6628 2403 [email protected]

Karan Gupta Metals & Mining (Associate) BNP Paribas Securities India Pvt Ltd (91 22) 6628 2427 [email protected]

Vishal Sharma, CFA Infrastructure - E&C BNP Paribas Securities India Pvt Ltd (91 22) 6628 2441 [email protected]

Shashank Abhisheik Infrastructure - E&C (Associate) BNP Paribas Securities India Pvt Ltd (91 22) 6628 2446 [email protected]

Sandeep Mathew Real Estate BNP Paribas Securities India Pvt Ltd (91 22) 6628 2431 [email protected]

Avneesh Sukhija Real Estate (Associate) BNP Paribas Securities India Pvt Ltd (91 22) 6628 2432 [email protected]

Lakshminarayana Ganti Capital Goods/Cement BNP Paribas Securities India Pvt Ltd (91 22) 6628 2438 [email protected]

Charanjit Singh Capital Goods/Cement (Associate) BNP Paribas Securities India Pvt Ltd (91 22) 6628 2448 [email protected]

Girish Nair Utilities BNP Paribas Securities India Pvt Ltd (91 22) 6628 2449 [email protected]

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Abhiram Eleswarapu Tech - IT BNP Paribas Securities India Pvt Ltd (91 22) 6628 2406 [email protected]

Avinash Singh Tech - IT (Associate) BNP Paribas Securities India Pvt Ltd (91 22) 6628 2407 [email protected]

Sameer Naringrekar Tech - Telecom BNP Paribas Securities India Pvt Ltd (91 22) 6628 2454 [email protected]

Kunal Vora, CFA Tech - Telecom (Associate) BNP Paribas Securities India Pvt Ltd (91 22) 6628 2453 [email protected]

Vijay Sarathi, CFA Financial Services BNP Paribas Securities India Pvt Ltd (91 22) 6628 2412 [email protected]

Abhishek Bhattacharya Financial Services (Associate) BNP Paribas Securities India Pvt Ltd (91 22) 6628 2411 [email protected]

Joseph George Consumer BNP Paribas Securities India Pvt Ltd (91 22) 6628 2452 [email protected]

Manish A Gupta Consumer (Associate) BNP Paribas Securities India Pvt Ltd (91 22) 6628 2451 [email protected]

Anmol Ganjoo Healthcare BNP Paribas Securities India Pvt Ltd (91 22) 6628 2421 [email protected]

Swati Kamath Healthcare (Associate) BNP Paribas Securities India Pvt Ltd (91 22) 6628 2425 [email protected]



NOTES



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Stock recommendations are based on absolute upside (downside), which we define as (target price* - current price) / current price. If the upside is 10% or more, the recommendation is BUY. If the downside is 10% or more, the recommendation is REDUCE. For stocks where the upside or downside is less than 10%, the recommendation is HOLD. In addition, we have key buy and key sell lists in each market, which are our most commercial and/or actionable BUY and REDUCE calls and are limited to at most five key buys and five key sells in each market at any point in time.

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