Sector Report 051009 Religare
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SECTOR OUTLOOK POSITIVE
Infrastructure: Sector Report The time is right!
October 2009
Nimit Shah
Hardik Shah
(91-22) 6766 3464
(91-22) 6766 3465
[email protected]
[email protected]
Contents Section
Page No.
Sector snapshot
1
Valuations still offer room for upside
2
Infrastructure investments in India
5
- Short-term hiccups, long-term intact
5
- Opportunities across segments
8
- Funding a key challenge
10
- PPP – the way forward
13
- Opportunities abound for EPC players
14
- Key risks to our estimates
21
- RHH infrastructure universe: Valuation matrix
22
Sector-wise investment allocation
24
- Roads & Bridges
24
- Electricity
30
- Railways
33
- Irrigation
36
- Water supply and Sanitation
39
- Airports
41
- Ports
44
Companies - Hindustan Construction Co
46
- IRB Infrastructure
53
- IVRCL Infrastructure
64
- Jaiprakash Associates
70
- Larsen & Toubro
77
- Nagarjuna Construction
84
- Patel Engineering
90
- Punj Lloyd
96
- Simplex Infrastructure
102
- Voltas
108
- Ahluwalia Contracts
113
- Gayatri Projects
118
- Madhucon Projects
120
RHH: Winner of LIPPER-STARMINE broker award for “Earnings Estimates in Midcap Research 2008” “Honourable Mention” in Institutional Investor 2009 RHH Research is also available on Bloomberg FTIS and Thomson First Call
1
Infrastructure
Sector Report
05 October 2009
Infrastructure The time is right!
Recommendation snapshot
Run-up in valuations but still room for further upside: Over the last six months, our universe of infrastructure and construction stocks has run up by a massive 200% as against returns of 73% from the Sensex and 112% from the Capital Goods Index. The sharp rally has been spurred by hopes that the recently elected, pro-reform government will boost spending on infrastructure, eliminate policy bottlenecks, and simplify procedures for project approvals. The surge in stock prices is also a function of a re-rating in the broader market multiple, led by the restoration of liquidity flows. Last year, the construction & infrastructure sector suffered a major blow as India’s economic growth slowed from 9% in 2007–08 to below 7% and the global credit crunch starved infrastructure firms of funds. Now, with healthy liquidity conditions,
strong project execution, softening commodity prices, lower interest rates, and a healthy political climate, we expect upgrades to consensus earnings estimates in H2FY10, leading to a further re-rating of the sector. High-growth mid cap construction stocks look set to take the lead. Government spends to invigorate sector: Infrastructure spending of ~US$ 500bn in the 11th Five Year Plan and additional spending through government stimulus packages provide strong revenue visibility for infrastructure players over the next 4–5 years. At the same time, a rebound in economic growth and corporate capex along with improved availability of funds augur well for the sector. Public sector investments will be crucial going forward, with roads, irrigation, power and urban infrastructure likely to attract a bulk of the development funds. Mid caps at attractive valuations: Mid cap companies with strong revenue visibility are currently trading at a discount of ~40% to L&T and at par to the Sensex. Our mid cap construction universe traded at 18–20x one-year forward earnings during FY04-FY09, which was a period of buoyant growth. The topline of the RHH construction universe increased at ~34% CAGR and bottomline at ~36% over this period. Although we expect lower revenue growth at ~20% CAGR over the next two years on account of the higher base, we anticipate a healthy bottomline ramp-up of ~26% led by rationalisation of interest costs. With strong earnings growth, we firmly believe that valuations of our mid cap construction universe remain attractive at a P/E of 15.9x FY11E earnings and 12.7x excluding subsidiaries. Long-term growth drivers: While we expect stock performance to be volatile in the short term, we see opportunities for above-average returns in companies that have a strong track record, a sturdy financial backbone, and robust riskmanagement systems with the ability to scale up. As mentioned, softening commodity prices and lower interest costs offer potential for earnings upgrades. We remain positive on L&T and Punj Lloyd in the large cap space, IVRCL Infrastructures and Simplex Infrastructure in the mid cap space, and IRB Infrastructure in the developer segment.
Company
CMP
Target
Rating
Ahluwalia Cont
169
190
Buy
HCC
130
141
Hold
IRB Infra*
209
224
Buy
IVRCL
388
434
Buy
JP Associates
239
237
Hold
1,665
1,781
Buy
L&T NCC
153
166
Hold
Patel Engg.
484
532
Buy
Punj Lloyd*
262
306
Buy
Simplex Infra
510
577
Buy
Voltas*
145
160
Hold
* Consolidated
Profitability and return ratios Company
FY09-11 FY11E P/E (x) PAT ExP/E CAGR (%) sub#
Sensex
ROE (%) FY10E
FY11E
13.0
16.1
16.1
17.3
18.2
Standalone
22.1
24.1
21.3
23.8
24.6
Consolidated
22.8
21.5
Ahluwalia Cont
38.8
9.6
9.6
37.2
36.2
HCC
37.8
29.0
11.7
8.4
9.0
IVRCL
27.3
17.2
14.0
13.8
15.0
NCC
25.2
16.2
12.6
10.0
10.6
Patel Engg.
23.7
17.9
12.2
12.3
13.8
Punj Lloyd*
60.4
14.7
13.5
16.4
15.8
28.5
12.4
12.4
16.3
18.0
L&T
Simplex Infra * Consolidated
#Excluding subsidiaries
Stock performance Company
CMP
1mth
3mth
6mth
YTD
Sensex
17,135
10.2
17.0
73.0
77.6
Cap Goods Index
112.4
98.7
13,731
6.1
6.4
Ahluwalia Cont
169
13.0
94.4
406.6 478.6
HCC
130
22.9
25.1
223.4 156.2
IRB Infra*
209
(0.8)
28.1
138.2
IVRCL
388
7.5
10.3
202.2 169.9
JP Associates
239
7.8
15.1
180.3 188.6
L&T
61.5
1,665
7.4
5.8
147.6 115.2
NCC
153
13.4
11.1
143.3 112.5
Patel Engg*
484
10.5
12.9
244.3 177.0
Punj Lloyd*
262
1.6
22.6
184.5
Simplex Infra
510
18.6
30.7
213.0 195.6
Voltas
145
(4.0)
17.7
192.0 140.0
78.1
* Consolidated
RHH: Winner of LIPPER-STARMINE broker award for “Earnings Estimates in Midcap Research 2008” “Honourable Mention” in Institutional Investor 2009 RHH Research is also available on Bloomberg FTIS and Thomson First Call
1
Infrastructure
Sector Report
05 October 2009
Valuations still offer room for upside Over the last six months, infrastructure and construction stocks have witnessed a re-rating and rallied sharply by ~200% on the back of an improving global economic environment and political stability in the country. With significant order inflows, easing fund flows and a stronger government focus on infrastructure, we see opportunities for above-average returns in companies that have a strong track record, a sturdy financial backbone, and robust risk-management systems with the ability to scale up. Softening commodity prices and lower interest costs offer potential for earnings upgrades.
Expect above-average returns in select stocks despite sharp run-up
Fig 1 - RHH Construction sector growth trend Particulars (Rs mn) Sales
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10E
FY11E
CAGR FY09-11E (%)
CAGR FY04-09 (%)
117,508
148,520
202,289
239,214
330,731
471,113
646,588
763,366
932,522
20.1
34.2
EBITDA
9,828
11,825
14,776
19,685
32,081
52,038
65,765
80,607
98,528
22.4
40.9
Interest cost
3,302
2,574
3,373
3,933
5,092
8,495
14,811
16,249
17,880
9.9
41.9
PAT
5,238
7,838
9,229
12,209
20,740
31,200
35,915
46,018
56,965
25.9
35.6
Source: Company, RHH
Fig 2 - RHH Construction sector growth trend excluding L&T and Punj Lloyd Particulars (Rs mn) Sales
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10E
FY11E
CAGR FY09-11E (%)
CAGR FY04-09 (%)
23,907
52,020
70,437
91,583
154,589
221,019
307,325
361,480
430,443
18.3
42.7
EBITDA
2,704
6,426
6,691
9,027
14,296
22,459
27,423
35,117
41,968
23.7
33.7
Interest cost
1,050
1,653
2,533
2,627
4,162
7,269
11,309
12,237
13,493
9.2
46.9
891
1,293
2,400
3,786
4,759
6,207
6,470
8,436
10,548
27.7
38.0
PAT Source: Company, RHH
Our mid cap universe is trading at attractive valuations of12.7x FY11E EPS (ex-subsidiaries)
Mid caps trading at attractive valuations (ex-subsidiary valuations) L&T, the infrastructure bellwether, is trading at a premium of 35–40% to the Sensex. Mid cap companies with strong revenue visibility are currently quoting at a discount of ~40% to L&T and at par to the Sensex. Our construction universe is trading at a P/E of 21x FY11E earnings. Excluding subsidiaries, the multiple stands at 17.6x on FY11E which looks fairly valued. However, our mid cap construction universe (excluding L&T and Jaiprakash Associates) is trading at attractive valuations of 15.9x FY11E earnings and 12.7x excluding subsidiaries. Historically, our mid cap construction universe has traded at 18–20x one-year forward earnings during FY04-FY09, which was a period of buoyant growth. The topline of the RHH construction universe increased at ~34% CAGR and bottomline at ~36% over this period. Although we expect lower revenue growth at ~20% CAGR over the next two years on account of the higher base, we anticipate a healthy bottomline ramp-up of ~26% led by rationalisation of interest costs and operational efficiency. We remain bullish on the sector due to strong earnings visibility and healthy order flows. We have valued L&T based on its average P/E of the last four years and other companies in our universe at 30–45% discount to L&T depending upon balance sheet strength and future business outlook.
Stocks to buy: L&T, Punj Lloyd, IVRCL, Simplex and IRB
We remain positive on L&T and Punj Lloyd in the large cap space, IVRCL Infrastructures and Simplex Infrastructure in the mid cap space, and IRB Infrastructure in the developer segment.
2
Infrastructure
Sector Report
05 October 2009
Fig 3 - Sector valuation matrix Company
CMP
Target
Reco
OB / Order FY10E book Sales
(Rs)
(Rs)
Ahluwalia Cont
(Rs bn)
169
190
Buy
28.0
HCC
130
141
Hold
IRB Infra*
209
224
Buy
IVRCL
388
434
JP Associates*
239
237
L&T
1665
NCC
153
Patel Engg Punj Lloyd*
CAGR over FY09-11E (%) Revenue Earnings
P/E ex- sub valuation (x)
P/E (x)
ROE (%)
FY10E
FY11E
FY10E
FY11E
FY09E
FY10E
FY11E
37.2
36.2
1.9
27.6
38.8
13.3
9.6
13.3
9.6
37.9
134.7
3.3
22.0
37.8
37.5
29.0
15.1
11.7
7.6
8.4
9.0
NA
NA
93.1
94.0
20.2
15.4
20.2
15.4
7.1
18.1
19.7
Buy
149.0
2.3
24.9
27.3
20.4
17.2
16.6
14.0
11.0
13.8
15.0
Hold
NA
NA
35.2
33.5
25.5
22.1
17.4
15.1
17.2
21.5
20.5
1,781
Buy
716.5
1.8
21.7
22.1
29.8
24.1
26.4
21.3
24.6
23.8
24.6
166
Hold
139.0
2.9
17.0
25.2
19.3
16.2
15.0
12.6
9.4
10.0
10.6
484
532
Buy
73.5
3.3
23.7
23.7
22.7
17.9
15.5
12.2
11.5
12.3
13.8
262
306
Buy
278.9
2.1
13.9
60.4
17.4
14.7
16.0
13.5
9.0
16.4
15.8
Simplex Infra
510
577
Buy
100.1
1.8
19.0
28.5
15.9
12.4
15.9
12.4
14.9
16.3
18.0
Voltas*
145
160
Hold
NA
NA
17.2
21.1
17.9
14.5
17.9
14.5
32.9
29.9
29.2
1,619.8
2.1
22.3
29.4
25.7
21.0
21.6
17.6
Aggregate Source: RHH, Company
* Consolidated
Fig 4 - L&T* – Premium/discount to BSE 30 P/E
Fig 5 - HCC – Premium/discount to L&T P/E
(%) 120
(%) 250
100
200
80
150
60
100
40 20
50
0
0
(20) Aug-06 Source: RHH
Aug-07
Sep-08
Sep-09
* Consolidated
Mar-08
Dec-08
Sep-09
Fig 7 - NCC – Premium/discount to L&T P/E
(%)
Source: RHH
Jun-07
Source: RHH
Fig 6 - IVRCL – Premium/discount to L&T P/E
100 80 60 40 20 0 (20) (40) (60) (80) Aug-06
(50) Aug-06
(%) 80 60 40 20 0 (20) (40) Jun-07
Mar-08
Dec-08
Sep-09
(60) Aug-06
Jun-07
Mar-08
Dec-08
Sep-09
Source: RHH
3
Infrastructure
Sector Report
05 October 2009
Fig 8 - Patel Engg – Premium/discount to L&T P/E
Fig 9 - Punj Lloyd– Premium/discount to L&T P/E
0
0
(20)
(20)
(40)
(40) Jun-07
Mar-08
Dec-08
Sep-09
(60) Aug-06
Jun-07
Mar-08
20
0 (10)
0
(20) (18) (30) (40) (50)
(20) (40) (60) (80) Aug-06 Source: RHH
Jun-07
Mar-08
Dec-08
Sep-09
(60) (70)
JP Asso
(%)
IVRCL
(%) 40
IRB
Fig 11 - Price discount from peak
HCC
Fig 10 - Simplex Infra – Premium/discount to L&T P/E
Ahluwalia
Source: RHH
Semsex
Source: RHH
Dec-08
Sep-09
Voltas
20
Simplex
20
Punj
40
Patel
40
(60) Aug-06
(%)
NCC
60
L&T
(%) 60
(8) (25)
(32) (52) (49)
(51)
(26) (43) (58)
(53) (55)
Source: RHH
4
Infrastructure
Sector Report
05 October 2009
Infrastructure investments in India The formation of a stable government by the incumbent UPA party is a key positive for the infrastructure sector in the long term. Infrastructure investments in the 11th Five Year Plan are expected to more than double to ~US$ 500bn over FY08-FY12 with an emphasis on areas like roads, power, irrigation and water supply. Approximately 70% of this investment would come from government spending, with the Centre contributing ~37% and state governments ~33%. With the slowdown in private capex in the wake of global economic turmoil, government spends would be the key growth driver for the infrastructure sector going forward.
Short-term hiccups, long-term intact Execution of planned project expenditure in India has proved laggardly so far due to various regulatory and policy issues. The last six months in particular have been a challenging period as decisions on project awards were repeatedly deferred on account of the economic slowdown and the code of conduct applicable to public sector bodies prior to the elections in May ’09.
Contract awarding to scale up substantially across segments
With a stable government now in place and priority being accorded to infrastructure development, it is expected that government-led capex will increase and new business prospects will fructify in the latter half of this fiscal year. The government aims to increase infrastructure spending in India to over 9% of GDP by 2014 from the current 5.8%. With the private sector expected to invest ~30% of the projected expenditure, the public-private-partnership (PPP) model will gain traction. The recently announced stimulus packages also have the potential to fuel order book growth of EPC players. Fig 12 - Infrastructure investments
Fig 13 - Infrastructure investment as a % of GDP
(Rs bn) 3000 2,350
2500
2,040
2000 1500
7
2,700
1,230 1,280
1,450 1,450 1,440
5.7
6
1,610
4.8
5
5.1
4.9
6.0
5.3 4.5
4.7
4.0
1000
4
500 0
3 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08
FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 Source: Planning Commission, RHH
Source: Planning Commission, RHH
Fig 14 - Segment-wise infrastructure spending during 10th and 11th Plans (Rs bn) 7,000
10th Plan
6,665
11th Plan
6,000 5,000 4,000 3,000
2,919
3,142 1,449
2,000
2,584 1,034
2,618 1,197
1,000
2,533 1,115
1,437 648
880 141
68 310
48 224
97 169
Airports
Storage
Gas
0 Elect.
Roads and bridges
Telecom.
Railways (incl. MRTS)
Irrigation Water (incl. WD) Supply and Sanitation
Ports
Source: Plan Document, Planning Commission
5
Infrastructure
Sector Report
05 October 2009
Fig 15 - Infrastructure – 11th Plan physical targets 11th Plan targets
Sector
6-laning of 6,500km in Golden Quadrilateral (GQ); 4-laning of 6,736km in North South-East West (NS-EW)
Roads/Highways
corridor; 4-laning of 20,000km; 2-laning of 20,000km; building 1,000km of Expressways
Ports
New capacity: 485mmt in major ports; 345mmt in minor ports
Airports
Modernise 4 metro and 35 non-metro airports; 3 Greenfield in NER; 7 other Greenfield airports
Railways
8,132km of new railway track; 7,148km gauge conversion; modernise 22 stations; dedicated freight corridors
Power
Add 78,577MW; access to all rural households
Irrigation
Develop 16mha major and minor works; 10.25mha command area development (CAD); 2.18mha flood control
Telecom/IT
Reach 600mn subscribers – 200mn in rural areas; 20mn broadband; 40mn Internet
Source: Plan document
Fig 16 - Breakdown of 11th Plan spending in infrastructure Total 10th Plan
Share (%)
2007-08
2008-09
2009-10
2010-11
2011-12
Total 11th Plan
Share (%)
Electricity (incl. NCE)
2,919
33.5
820
1,016
1,264
1,580
1,986
6,665
32.4
Roads and bridges
1,449
16.6
518
548
592
684
800
3,142
15.3
Telecommunications
1,034
11.9
314
381
486
616
787
2,584
12.6
Railways (incl. MRTS)
1,197
13.7
342
410
495
604
767
2,618
12.7
Irrigation (incl. WD)
1,115
12.8
275
359
472
623
804
2,533
12.3
648
7.4
193
228
273
333
411
1,437
7.0
141
1.6
124
148
174
200
234
880
4.3
Airports
68
0.8
52
55
59
66
77
310
1.5
Storage
48
0.6
38
41
44
48
52
224
1.1
Gas
97
1.1
27
30
33
37
41
169
0.8
Total Investment (Rs bn)
8,714
100.0
2,703
3,216
3,893
4,791
5,959
20,562
100.0
Total Investment (US $ bn)
217.9
67.6
80.4
97.3
119.8
149.0
514.0
5.4
6.0
6.5
7.3
8.2
9.3
7.6
Sectors (Rs bn)
Water Supply and Sanitation Ports
As % of GDP Source: Plan document, Planning Commission
In CY08, China spent US$ 101bn on road infrastructure while India spent a paltry US$ 11.5bn
China to be a key motivator for India While the infrastructure sector is regarded as one of the major opportunities for the medium to long term in India, the country’s progress pales in comparison to China. In CY08, China spent US$ 101bn on road infrastructure while India spent a paltry US$ 11.5bn. With the most recent RMB 4tn stimulus package in China much of the new focus on infrastructure will be in rural and interior areas. Over the next few years China’s spending on infrastructure could be exponentially larger than that of India. China has the capital and execution capability to deliver infrastructure spending on a rapid and massive scale. In addition, the Chinese government has been edging towards a fiscal surplus over the last few years, although the deficit will likely reemerge in 2009 with the additional stimulus package. In China, capital for infrastructure spending is provided by the government and through the banking system, which witnessed strong loan growth in Q1CY09. The combined fiscal deficit at 11–12% of GDP severely impacts the ability of the Indian government to roll out a Chinese-style infrastructure-heavy stimulus package. The Indian government instead focuses on aggressively easing monetary policy and loosening liquidity conditions by providing windows for refinancing debt such as IIFCL.
6
Infrastructure
Sector Report
We estimate infrastructure spending of US$ 382bn by FY12 vs. US$ 503bn planned
05 October 2009
India’s infrastructure spend in 11th plan estimated at US$ 382bn From past experience, we know that government investment targets are usually overly optimistic. We estimate spending of US$ 382bn over the 11th plan period (FY08–FY12) as against US$ 503bn planned. Our estimate stems from challenges being encountered by the private sector in obtaining finance and also from the deceleration in India’s GDP growth.
Fig 17 - Gross capital formation (GCF) in infrastructure based on growth targets (Top-down estimates) (Rs bn at 2006-07 prices)
11th Plan
Base Year 2006-07
2007-08
2008-09
2009-10
2010-11
2011-12
41,458
45,189
49,256
53,689
58,521
63,788
9.0
9.0
9.0
9.0
9.0
9.0
GDP (market prices) Rate of growth of GDP (%) GCF in infrastructure as % of GDP GCF in infrastructure (Rs bn)
5.0
5.8
6.5
7.3
8.0
9.0
2,073
2,598
3,202
3,892
4,682
5,741
52
65
80
97
117
144
GCF in Infrastructure (US$ bn) th
11 plan GCF in infrastructure
Rs 20,115bn or US$ 502.9bn
Source: Plan document
Our estimates of investments in infrastructure have been derived using the top-down approach, based on the government’s GDP growth targets and estimates of the likely evolution of the share of gross capital formation in infrastructure as a proportion of GDP consistent with those targets. Fig 18 - RHH estimates – GCF in infrastructure based on growth targets (Top-down estimates) 11th Plan
Base Year
(Rs bn at 2006-07 prices)
2006-07
2007-08
2008-09
2009-10
2010-11
2011-12
Total
41,458
45,231 9.1%
47,990 6.1%
50,629 5.5%
54,173 7.0%
58,507 8.0%
256,530
GCF in Infrastructure (As a % of GDP)
5.7%
6.0%
5.8%
6.3%
6.7%
7.0%
GCF in Infrastructure (Rs bn)
2,363
2,714
2,783
3,190
3,630
4,095
16,412
55
63
65
74
84
95
382
RHH assumptions GDP at market prices GDP growth rate
GCF in Infrastructure (US$ bn) (Assumed ex. rate of 43$) Source: RHH
Fig 19 - Projected investment in infrastructure as percentage of GDP (Bottom-up estimates) 11th Plan
Base Year Years (Rs bn at 2006-07 prices) GDP
2006-07
2007-08
2008-09
2009-10
2010-11
2011-12
Total
41,458
45,189
49,256
53,689
58,521
63,788
270,445
Public Investment
1,754
1,921
2,273
2,735
3,324
4,112
14,366
Private Investment
499
782
943
1,157
1,468
1,847
6,196
2,252
2,703
3,216
3,893
4,791
5,959
20,562
Total investment
Infrastructure investment as percentage of GDP (%) Public
4.2
4.3
4.6
5.1
5.7
6.5
5.3
Private
1.2
1.7
1.9
2.2
2.5
2.9
2.3
Total
5.4
6.0
6.5
7.3
8.2
9.3
7.6
Source: Plan document
7
Infrastructure
Sector Report
05 October 2009
Opportunities across segments Infrastructure development in India is expected to garner a total investment of Rs 20,562bn over the 11th plan. We expect roads, power, irrigation and railways to absorb 91.2% of the planned investment and represent 92.8% of the construction opportunity generated by this plan.
Roads, power, irrigation and railways to absorb 91% of planned investment
Fig 20 - Construction opportunities and key beneficiaries 11th plan
Construction intensity (%)
Electricity (incl. NCE)
6,665
Roads and Bridges
Value of const. opportunity 11th plan
10th plan
Growth over 10th plan (%)
31
2,066
905
128.3
L&T, HCC, Patel Engg, NCC
3,142
95
2,984
1,449
106.0
IRB Infra, IVRCL, JP Associates, L&T
Railways (incl. MRTS)
2,618
42
1,100
503
118.6
L&T, Simplex Infra
Irrigation (incl. Watershed)
2,533
65
1,647
669
146.1
Water Supply and Sanitation
1,437
60
862
388
122.3
8,659
3,914
121.2
Particulars (Rs bn)
Total
16,395
Key beneficiaries
IVRCL, NCC, Patel Engg, HCC
Source: Crisil, RHH
Fig 21 - Key opportunities Sector
Key opportunities
Power
NTPC to award bulk tenders for super-critical equipment (660MWx11) in the near future
Roads
NHAI to invite tenders / award projects worth Rs 600bn–700bn over the next one year
Railways
Dedicated Rail Freight Corridor (DRFC) the biggest opportunity in rail; also railway station privatisation, metro rail, signalling, technical upgrades
Irrigation
Increased government spending in Andhra Pradesh, Gujarat, Maharashtra, Karnataka, Uttar Pradesh and Madhya Pradesh
Urban infra
Higher budgetary allocation for JNNURM and Bharat Nirman programmes
Source: RHH
Fig 22 - Higher budgetary allocations to various infrastructure schemes Particulars Bharat Nirman JNNURM (Jawaharlal Nehru National Urban Renewal Mission)
Budget allocations (Rs bn) FY08
FY09
FY10
246
312
452
55
69
129
120
160
391
99
121
139
NHDP (National Highway Development Programme)
109
129
159
RGGVY (Rajiv Gandhi Grameen Vidyutikaran Yojana)
39
55
70
NREGS (National Rural Employment Guarantee Scheme ) NRHM (National Rural Health Mission)
APDRP (Accelerated Power Development and Reform Programme) AIPB (Accelerated Irrigation Benefit Programme)
–
8
21
110
200
350
Source: RHH
8
Infrastructure
Sector Report
05 October 2009
Fig 23 - Thrust areas under 11th Plan
ROADS AND BRIDGES
ELECTRICITY
Lion’s share of planned investment at Rs 6,665bn – 32.4% of 11th plan spend and ~2.3x 10th plan amount
Private investment to make up ~28%
Targets – Power capacity addition of 78.7GW; we expect additions 60GW. Power minister Sushil Kumar Shinde pegs capacity addition at ~65GW
Demand-supply gap and government thrust to drive growth
Bulk tenders from NTPC a key trigger
Investment of Rs 3,142bn – 15.3% of 11th plan spend and ~2.2x 10th plan amount
Centre and states to contribute ~66% and private players 34% (vs 5% private sector share in 10th plan)
2009–10 allocation to National Highway Authority of India (NHAI) increased 23% to Rs 159bn
Targets – Addition of 6-lane stretches covering 6,500km in the GQ; 4-laning of the NS–EW corridor across 6,736km; 4-laning of 20,000km; 2-laning of 20,000km; building expressways covering 1,000km
Investment of Rs 2,533bn – 12.7% of 11th plan spend and 2.3x 10th plan amount
2009–10 allocation for Accelerated Irrigation Benefit Programme (AIBP) hiked 75% from Rs 200bn to Rs 350bn
Allocation for JNNURM upped 90% to Rs 129bn
Government spending to continue in this segment mainly in Andhra Pradesh, Gujarat, Maharashtra, Karnataka, Uttar Pradesh and Madhya Pradesh
Targets – Develop 16mha major and minor works; 10.25mha command area development (CAD); 2.18mha flood control
Major thrust areas in 11th Five Year Plan
IRRIGATION
RAILWAYS
Investment of Rs 2,618bn – 12.7% of 11th plan spend and ~2.2x 10th plan amount
Private investment at ~20% as against nil in 10th plan
2009–10 budgetary allocation increased by 46% to Rs 158bn
to
sector
Targets – Construction of Dedicated Rail Freight Corridor – the biggest opportunity in the sector Also, railway station privatisation, metro rail creation, signalling, technical upgrades
Source: RHH
9
Infrastructure
Sector Report
05 October 2009
Funding a key challenge Debt financing totals Rs 9,880bn in 11th plan; 16% shortfall in corresponding resources
Infrastructure investments are closely linked to the ability to raise debt to finance projects. The 11th plan investment of Rs 20,562bn is to be shared between the Centre, states and private sector in the proportion of 37.2%, 32.6% and 30.1%. Projects to be awarded on PPP basis would have a debt/equity ratio of 70:30 as against earlier levels of 85:15. The required debt financing has accordingly been estimated at Rs 9,880bn. The Planning Commission estimates the gap between the availability of debt resources and the debt requirement at Rs 1,625bn. This is sought to be bridged through enhanced credit, external commercial borrowings (ECB), pension and insurance funds, and other debt funds.
Fig 24 - Likely sources of debt financing for the 11th Plan 2007-08
2008-09
2009-10
2010-11
2011-12
Total 11th Plan
Domestic bank credit
498
632
801
1,016
1,289
4,237
Non-Banking Finance Companies (NBFCs)
239
315
416
549
724
2,242
91
100
110
121
133
554
196
218
242
269
299
1,223
Likely Total Debt Resources
1,024
1,264
1,569
1,954
2,444
8,255
Estimated Debt Requirement
1,317
1,557
1,873
2,296
2,837
9,880
32.9
38.9
46.8
57.4
70.9
247.0
293
293
305
341
393
1,625
7.3
7.3
7.6
8.5
9.8
40.6
(Rs bn at 2006-07 prices)
Pension/Insurance companies External Commercial Borrowings (ECB)
– In US$ bn Gap b/w estimated debt requirement & likely debt resources – In US$ bn Source: Plan document
Fig 25 - Deployment of gross bank credit (GBC) Industry (Rs bn)
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
Total GBC
1,610
1,790
2,001
2,188
2,295
2,956
3,131
4,231
5,504
6,973
8,719
10,398
Construction
26
26
27
32
40
49
60
83
133
200
283
382
Infrastructure
32
59
72
113
148
263
372
790
1,129
1,430
2,023
2,569
7
21
33
52
74
150
197
382
602
728
939
NA
20
23
20
36
40
58
84
157
185
194
371
NA
4
16
20
25
35
55
92
145
197
249
330
NA
i) Power ii) Telecom iii) Roads and ports Total Infrastructure
58
85
100
145
188
312
432
873
1,262
1,629
2,306
2,951
% of GBC
3.6
4.8
5.0
6.6
8.2
10.6
13.8
20.6
22.9
23.4
26.4
28.4
Source: RBI
Fig 26 - Total infrastructure outstanding as a % of gross bank credit (%) 26.4
30 25
20.6
22.9
28.4
23.4
20 13.8
15 10 3.6
5
4.8
5.0
6.6
8.2
10.6
0 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 Source: RBI
10
Infrastructure
Sector Report
05 October 2009
Fig 27 - Projected investment in infrastructure: Source-wise financing (Rs bn at 2006-07 prices) Centre
2007-08
2008-09
2009-10
2010-11
2011-12
Total 11th Plan
1,126
1,283
1,485
1,721
2,040
7,656
Central Budget
294
335
388
450
533
2,000
Internal Generation (IEBR)
250
284
329
381
452
1,697
Borrowings (IEBR)
582
664
768
890
1,055
3,959
States
795
990
1,250
1,602
2,072
6,709
States Budgets
527
656
828
1,062
1,373
4,447
Internal Generation (IEBR)
80
100
126
162
210
679
Borrowings (IEBR)
188
234
295
378
489
1,584
Private
782
943
1,157
1,468
1,847
6,196
Internal Accruals/Equity
235
283
347
440
554
1,859
Borrowings
547
660
810
1,027
1,293
4,337
Total Projected Investment
2,703
3,216
3,893
4,791
5,959
20,562
Non-Debt
1,386
1,659
2,019
2,495
3,122
10,681
Debt
1,317
1,557
1,873
2,296
2,837
9,880
Source: Plan document
Liquidity drought in FY09 Paucity of funds in FY09 dented project returns and viability
In FY09, the paucity of funds along with an increased cost of debt (up 300–400bps YoY) hit infrastructure projects hard, affecting project returns and viability. A sharp fall in the global equity markets along with a drop in appetite for Indian papers in the overseas market further exacerbated the funding issue. At the same time, domestic interest rates spiraled as high as 14–15%. At such high rates, infrastructure projects turned unviable and hence private sector participation fell dramatically. Even as policy rates were eased thereafter to sustain growth, the risk perception amongst banks was heightened. Hence, the development of new projects has been subdued. However, the government stimulus packages announced early this year coupled with RBI monetary measures has alleviated liquidity concerns to a great extent. On the flip side, a ballooning fiscal deficit (6.8% of GDP in FY10) will limit the government’s ability to spend on infrastructure projects in the short term, though disinvestment would help bridge the funding gap. IIFCL refinance scheme a key positive At present, public sector banks are the main providers of finance to infrastructure projects. Typically, infrastructure loans are for 10 years and above. However, 81% of bank deposits fall in the sub-5-year category. This implies an asset-liability mismatch for banks as they run the risk of financing long-term assets with short-term liabilities.
IIFCL refinance facility opens up a fresh avenue for infra project funding
To mitigate the situation, a scheme of refinance by India Infrastructure Finance Company (IIFCL) has been evolved. Under the scheme, refinance would be provided to banks for new commercially viable projects in the roads and port sector where bids have been submitted on or after 31 January 2009. IIFCL will provide refinance up to 60% of the loans provided by banks to these infrastructure projects at an interest rate of 7.85%. Banks will not charge more than 2.5% over and above the rate of refinance. IIFCL has already raised Rs 100bn till 31 March 2009 by way of tax-free bonds to provide this facility to banks, thereby supplementing resources to finance infrastructure projects. Further, with bank lending rates easing, the interest of private sector players in bidding for new projects has begun to revive.
11
Infrastructure
Sector Report
05 October 2009
Stimulus/budgetary measures eased access to funds Apart from a two-part stimulus package, the newly formed government has announced the following measures to boost the infrastructure sector in the recent budget: IIFCL authorised to raise Rs 400bn, thus supporting projects worth Rs 1,000bn
IIFCL has been authorised to raise Rs 400bn in two tranches, thereby supporting projects worth Rs 1,000bn.
Approvals accorded for several projects from August ’08 to January ’09, as follows: o 37 infrastructure projects worth Rs 700bn o 54 central infrastructure projects with a cost of Rs 677bn under PPP o 29 projects amounting to Rs 279bn for viability gap funding (VGF).
NBFCs, which are expected to provide 27% of the total debt financing in the 11th plan, have been permitted to access ECBs from multilateral or bilateral institutions under the approval route of the RBI. The government also plans to launch an SPV aimed at providing liquidity support against investment-grade paper to NBFCs fulfilling certain conditions.
Monetary measures injected liquidity into the banking system Since October ’08, RBI has reduced the cash reserve ratio (CRR) for banks by 400bps to 5% and statutory liquidity ratio (SLR) by 100bps to 24%, thereby injecting liquidity of more than Rs 1,500bn into the system. It also reduced repo rates by 425bps to 4.75%. These aggressive measures led to a significant improvement in the liquidity situation with wholesale rates declining sharply in the last nine months. World Bank lending plan of ~US$ 14bn In December ’08, the World Bank introduced a lending plan of ~US$ 14bn over three years for India. Of this, US$ 3bn will focus on areas most affected by the global financial crisis, including state-owned and housing banks, small and medium-sized enterprises and infrastructure. World Bank providing US$ 4.3bn to support India’s economic stimulus, infrastructure investments
Of the proposed funds, US$ 330mn has been disbursed in August ’09 while four projects worth US$ 4.3bn were recently approved. These projects are designed to support the government’s infrastructure agenda and bolster its economic stimulus programme. The loans (to the banking sector and PowerGrid) from the International Bank for Reconstruction and Development (IBRD) have a 30-year maturity, including a 5-year grace period. The IBRD loan to IIFCL (US$ 1.2bn) has a 28-year maturity including a 7.5-year grace period.
Fig 28 - Summary of the proposed disbursement of US$ 4.3bn Loan to Banking Sector Support Loan India Infrastructure Finance Company (IIFCL)
Amount (US$ bn) 2
Scope / Purpose To provide budgetary support to the government of India, helping it maintain its broad economic stimulus programme by enhancing the capital of select public sector banks. Will help maintain credit growth levels, support social banking and employment growth, and strengthen economic recovery.
1.2
To support its role to catalyse private financing for PPPs in infrastructure – mainly roads, powers, ports & airports – and stimulate the development of a long-term local currency debt financing market.
Power Grid (Power System Development Project)
1
To help address India’s acute deficit of power. The loan will help PowerGrid to strengthen five transmission systems in the northern, western and southern regions of the country. This will facilitate the transfer of power from energy surplus regions to towns and villages in the country’s under-served regions. It will enable PowerGrid to strengthen the existing transmission system and expand the National Grid.
Andhra Pradesh Rural Water Supply and Sanitation Project
0.15
To improve water supply and sanitation services in 2,600 villages across six districts of the state. Aims to provide piped water to 2.1mn people and extend sanitation services to 1mn people.
Total
4.3
Source: World Bank press release
12
Infrastructure
Sector Report
05 October 2009
PPP – the way forward The government plans to raise total investment in infrastructure from an estimated 5.4% of GDP in 2006–07 to over 9% by the 2014. An increase of this magnitude cannot be achieved through public investment alone. The 11th plan therefore proposes a strategy which involves a combined response – an increase in public sector investment in infrastructure as a percentage of GDP along with higher private sector investment through some form of PPP or directly, where feasible.
Private sector share at ~30% of planned investments
One-third of planned investment to come from private sector Of the 11th plan investment of Rs 20,562bn, ~30% is expected from private participation as against 20% in the 10th plan. The role of private players is much more prominent in central sector projects. As mentioned, in FY09, the severe liquidity crisis hampered the ability of private players to generate funds required for investments. The power and road segments in particular witnessed a sharp slowdown as a mix of macro and sectorspecific constraints induced a sharp deceleration in private participation for new project tenders. Now, however, we expect the process of project awards to be expedited given the following:
A marked improvement in the Indian economy along with reviving global cues
Incentives introduced for the PPP model
A softer interest rate regime leading to easier access to liquidity and a lower cost of debt (a key concern since projects are funded by debt to the extent of 75–80%)
Policy measures initiated to unplug the bottlenecks to project execution (mainly in the roads segment), which have been a principle cause of delays in project awards
Measures to unlock liquidity introduced in the two stimulus packages
Softening of commodity prices.
13
Infrastructure
Sector Report
05 October 2009
Opportunities abound for EPC players Opportunities in the construction space are estimated at 25–95% of infrastructure spending in each segment. With a total planned outlay of ~US$ 500bn charted out in the 11th plan, investments in construction are set to double over the next five years. The construction business opportunity up to FY12 is estimated at Rs 9,484bn with roads, power, railways and irrigation being the primary growth drivers.
Construction opportunity up to FY12 estimated at Rs 9,484bn
Fig 29 - Construction intensity during 10th and 11th Plans 11th Plan
Construction intensity (%)
Value of construction opportunity in 11th Plan
Value of construction opportunity in 10th Plan
Growth over 10th Plan (%)
Electricity (incl. NCE)
6,665
31
2,066.2
905
128.3
Roads and Bridges
3,142
95
2,984.5
1,449
116.8
Railways (incl. MRTS)
2,618
42
1,099.6
503
118.6
Irrigation (incl. Watershed)
2,533
65
1,646.5
669
146.1
Water Supply and Sanitation
Particulars (Rs bn)
1,437
60
862.4
388
122.3
Ports
880
50
440.0
70
528.5
Airports
310
42
130.1
28
364.5
Storage
224
25
55.9
12
366.2
Gas
169
25
42.1
25
68.6
9,484
4,049
134.2
Total excluding Telecom
17,977
Source: Plan document, Planning Commission, Crisil Research, RHH
Fig 30 - Year-wise construction intensity during 11th Plan Sectors (Rs bn) Electricity (incl. NCE) Roads and bridges Railways (incl. MRTS) Irrigation (incl. WD) Water Supply and Sanitation Ports
Const intensity (%)
Const 2007intensity 08 (%)
Const 2008intensity 09 (%)
Const 2009intensity 10 (%)
Const 2010intensity 11 (%)
201112
Const intensity (%)
Total Value of 11th constr Plan opportunity
31
820
254
1,016
315
1,264
392
1,580
490
1,986
616
6,665
2,066
95
518
492
548
520
592
562
684
650
800
760
3,142
2,984
42
342
144
410
172
495
208
604
254
767
322
2,618
1,100
65
275
179
359
233
472
307
623
405
804
523
2,533
1,646
60
193
116
228
137
273
164
333
200
411
246
1,437
862
50
124
62
148
74
174
87
200
100
234
117
880
440
Airports
42
52
22
55
23
59
25
66
28
77
32
310
130
Storage
25
38
9
41
10
44
11
48
12
52
13
224
56
Gas
25
27
7
30
8
33
8
37
9
41
10
169
42
2,389
1,285
2,834
1,493
3,407
1,764
4,175
2,146
5,172
2,639 17,977
9,327
Total Investment (Rs bn)
Source: Plan document, Planning Commission, Crisil Research, RHH
Construction contractors, equipment suppliers, lenders, consultants as well as owners of infrastructure assets would benefit from the large opportunity. With increasing project size and complexity, established and large construction contractors would continue to draw market share away from smaller contractors. We expect the government’s spending to hasten capacity expansion by contractors and developers.
Upturn in industrial activity to buoy corporate capex
Corporate capex – improving trend Construction companies have derived strong order book growth from exposure to corporate capex in the oil & gas, steel and cement industries over the past 2–3 years. However, investments across the board have taken a backseat after the economic downturn and rise in commodity prices. While projects which are under implementation or have achieved financial closure are at low risk, nascent works are likely to witness delays.
14
Infrastructure
Sector Report
05 October 2009
We expect continued capex in the hydrocarbon space and fertilisers (mainly due to availability of natural gas) in the near term. Also, corporate capex trends in the steel, and cement sectors suggest an improvement as demand picks up. July IIP data clearly reflects the upturn in industrial activity in India. We expect the recovery to accelerate on account of a favorable base effect and renewed consumption demand.
Fig 34 - IIP – Capital Goods (YoY change)
Source: RHH
Order flows of Rs 1,136bn expected for the RHH construction sector in FY10
7.8 6.8 (6) (6) (3)
2
Apr-09
Jul-09
7 Jan-09
0
4
13
16 12
21 Oct-08
Jul-08
1
4 Apr-08
Jan-08
Oct-07
3
8
12
18
20
21 21 24 18
11
12 Jul-07
22 23 11
Jul-09
Apr-09
Jan-09
Oct-08
Jul-08
Apr-08
Jan-08
Oct-07
Jul-07
Apr-07
0
(%) 35 30 25 20 15 10 5 0 (5) (10)
Apr-07
8.0 4.2
3.3
6.3 7.1 4.5
4.4 4.4 2.6 1.6 1.8 0.7
2
0.8
4
1.4 2.0 2.6
6
3.7
8
4.5 4.2 5.8 3.8 3.7
9.2
10
6.8 7.5
(%) 12
31
Fig 33 - IIP – Electricity (YoY change)
9.8
Source: RHH
8.7 9.4
Source: RHH
Jul-09
6.2
1.7
Oct-08
Jul-08
Apr-08
Jan-08
Oct-07
Jul-07
(0.6) 2.7 (0.6) 1.0 Jan-09 0.2 (0.3) Apr-09 0.4 2.1
8.6 6.7 9.6 5.7 6.7 4.5 6.1 6.9
4.7
12.4 11.3 9.7 8.8 10.8 7.4 13.8
(%) 16 14 12 10 8 6 4 2 0 (2)
Apr-07
Jul-09
Oct-08
Jul-08
Apr-08
Jan-08
Apr-07
Jul-07
Oct-07
0 (2)
2.5 (0.3) 1.0 Jan-09 0.2 0.3 1.1 Apr-09 2.2
6.0
1.7
2
8.2 6.8
9.5
4
0.1
6
5.5 6.2 4.4 5.4 6.4
8
8.0
10
Fig 32 - IIP – Manufacturing (YoY change)
6.2
12
4.9
(%) 14
11.3 10.6 8.9 8.3 10.9 7.0 12.2
Fig 31 - IIP (YoY change)
Source: RHH
Sector order book robust, back-ended growth in FY10 The order book of the infrastructure sector remains robust, providing strong revenue growth visibility. Order inflows for Q1FY10 were muted mainly due to the election period. With a new stable alliance in power, government spending would be a key growth driver for the sector. We expect Rs 1,136bn worth of new orders for companies under RHH construction sector in FY10, which would build up towards the latter part of the year and thereafter witness sustained momentum.
15
Infrastructure
Sector Report
05 October 2009
Fig 35 - RHH construction universe: Order book to sales analysis (x)
Q1FY08 Q2FY08
Ahluwalia Cont
Q3FY08
Q4FY08
Q1FY09
Q2FY09
Q3FY10
Q4FY09
Q1FY10
OB / FY10E Sales
FY10E sales (Rs mn)
-
-
-
-
-
-
1.9
2.1
2.2
1.9
14,444
HCC
3.0
2.9
2.5
2.7
2.6
2.7
3.0
4.4
4.1
3.3
41,091
IVRCL
3.2
3.3
3.3
3.5
3.2
3.2
3.1
3.0
1.4
2.3
63,465
L&T
2.2
2.2
2.2
2.1
2.1
2.1
2.2
2.1
2.1
1.8
401,887
NCC
2.6
3.0
3.2
3.3
3.3
3.1
2.9
2.9
3.2
2.9
47,326
Patel Engg
4.4
4.6
4.5
4.5
4.3
4.1
4.7
4.0
3.9
3.3
21,951
Punj Lloyd*
2.8
2.3
2.3
2.5
2.2
2.2
2.0
1.7
2.3
2.1
132,234
Simplex Infra
3.6
3.2
3.3
3.2
3.1
2.9
2.4
2.2
2.1
1.8
55,414
Total (ExAhluwalia Cont)
2.5
2.4
2.4
2.5
2.4
2.3
2.3
2.3
2.2
2.1
777,811
Source: Company, RHH
*Consolidated
Fig 36 - Order book position at the end of Q1FY10
Fig 37 - Order book to sales trend
(Rs bn)
(x) 2.6
717
2.5 2.4
2.5
2.4
2.5 2.4
2.4
135
149
139
28
Q1
Simplex
Punj
Patel
NCC
L&T
IVRCL
Source: RHH
2.3
2.2
2.1 2.0
HCC
2.3
2.2
100
74
2.3
2.3
279
Ahluwalia
800 700 600 500 400 300 200 100 0
Q2
Q3
Q4
Q1
Q2
FY08
Q3
Q4
FY09
Q1 FY10
Source: RHH
Fig 38 - Order intake trend (Rs mn)
FY05
FY06
FY07
FY08
Ahluwalia Cont
Roads, power, urban infrastructure and irrigation to contribute to order books in the near term
FY09
FY10
FY11
25,324
18,669
26,393
HCC
28,933
62,780
19,976
22,800
91,520
59,488
71,386
IVRCL
33,400
36,227
46,300 307,22 0 47,109
94,477 420,19 0 74,860
86,705 517,90 0 54,250
86,705
91,040
647,375
744,481
75,950
83,545
14,994 102,10 7 25,550 563,25 6
19,000 105,34 9 66,940 803,61 6
30,000 116,13 7 57,680 979,51 6
34,500
39,675
158,567
181,743
54,796 1,136,05 0
60,276 1,298,53 9
L&T NCC
32,250
36,226
Patel Engg
18,064
20,247 44,791
Punj Lloyd* Simplex Infra Total Source: Company, RHH
17,990 130,63 7
20,940 221,21 1
* Consolidated
16
Infrastructure
Sector Report
05 October 2009
Fig 39 - Order intake growth* (%) 50
Fig 40 - Sales growth of RHH construction universe (%) 50
42.7
42.2
40
42.5
37.2
40 30
30
18.7
17.1
20
13.9
22.4
18.1
20
39.0
17.7
19.7
10
10
0
0
FY08 FY08
FY09
Source: RHH, Company
FY10E
TOTAL
* Ex Ahluwalia Contracts
Lower commodity prices to aid slight margin improvement
FY09 FY10E FY11E FY08 FY09 FY10E FY11E
FY11E
EX L&T
Source: RHH
Softer commodity prices to support stable EBITDA margin The increase in commodity prices at the beginning of FY09 had a significant adverse impact on margins for companies owing to a higher proportion of fixed price contracts. However, with prices cooling off we expect a 50bps improvement in margins for our construction universe in FY10 and a flattish trend thereafter. In our view, margins are at a peak and offer little scope for improvement.
Fig 41 - EBITDA margin trend (%)
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10E
FY11E
9.4
10.4
12.1
11.8
12.5
12.4 12.5
Ahluwalia Contracts HCC
17.5
13.7
10.5
9.2
9.2
11.9
13.0
12.5
IVRCL
9.8
8.1
8.3
9.0
10.1
9.9
8.6
9.3
9.3
L&T
7.6
5.6
6.1
7.2
10.1
11.8
11.3
11.3
11.3
NCC
8.4
7.8
7.8
9.0
9.4
10.4
9.0
9.5
9.5
13.7
10.9
10.7
13.9
13.0
15.3
14.5
14.6
14.7
18.3
11.5
11.3
8.0
8.9
7.3
8.5
8.5
Patel Engg. Punj Lloyd Simplex Infra
6.1
6.8
7.0
8.7
9.3
9.4
8.2
9.3
9.3
Average EBITDA margin
8.4
8.0
7.3
8.2
9.7
11.1
10.2
10.6
10.6
Source: Company, RHH
Fig 42 - Average EBITDA margin trend EBITDA margins have peaked and would sustain at current levels
(%) 12
11.1
11
10.2
10.6
FY10E
FY11E
9.7
10 9
10.6
8.4
8.2
8.0
8
7.3
7 6 FY03
FY04
FY05
FY06
FY07
FY08
FY09
Source: RHH
17
Infrastructure
Sector Report
05 October 2009
Fig 43 - Cement prices remain firm…
Fig 44 - …but steel prices have corrected 35–40% in six months (Rs/tonne) 70,000
All India Avg
(Rs/Bag) 260 240
Landed HRC price (CIS)
60,000
220
50,000
200 180
40,000
160
30,000
140 120 Apr-04
Indian HRC price
Feb-05
Jan-06
Nov-06 Oct-07
Sep-08
Source: RHH
Jul-09
20,000 Mar-04 Feb-05
Jan-06 Dec-06 Nov-07 Oct-08 Sep-09
Source: Crisil
Fig 45 - Order book covered by escalation clauses and fixed price contracts Company
Fixed price contracts (%)
WPI Linked (%)
Star rated/Free issue of materials (%)
L&T
~25-30
~75-70
Punj Lloyd*
~70-75
~25-30
HCC
4
86
10
IVRCL
7
33
60
38
15
47
NCC Patel Engg
5-10
Simplex Infra Source: RHH
15
~90-95 85
*Consolidated
Interest expenses set to come down In FY09, construction companies witnessed spiralling interest costs mainly due to a heated interest rate environment and higher debt requirements (to support working capital needs and investments in subsidiaries). We expect interest cost to settle at manageable levels in FY10 on account of a more benign interest rate regime, lower investments in subsidiaries, resurgence of QIP funds and stable working capital requirements. Interest cost down 200bps from its peak in October ’08 – a key positive
Drop in interest rates: Interest cost has declined by 200bps from the peak in October ’08. For most construction companies, this cost constitutes roughly 3–5% of turnover and hence movement in interest rates has a significant impact on earnings. The 10-year benchmark interest rate has declined from 9–9.5% in Q2FY09 to 7% at present. With increased aversion to riskier assets in Q3FY09, the spread on AA rated corporate bonds had increased to 4.5–5%. But an improving macro-economic climate and restoration of liquidity in the banking system helped lower the spread to 2.5%.
18
Infrastructure
Sector Report
05 October 2009
Fig 46 - 10-year government bonds
Oct-09
Jul-09
Apr-09
Jan-09
Oct-08
Jul-08
Apr-08
Jan-08
Oct-07
Jul-07
Jan-07
Apr-07
Oct-06
Jul-06
Apr-06
Jan-06
Jul-05
Oct-05
Apr-05
(%) 10.0 9.5 9.0 8.5 8.0 7.5 7.0 6.5 6.0 5.5 5.0
Source: Bloomberg
Fig 47 - Interest cost as a percentage of sales Companies (%)
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10E
FY11E
HCC
6.4
3.8
2.8
1.0
1.0
1.3
1.3
1.7
1.7
2.4
3.5
5.1
6.8
5.8
IVRCL
3.7
2.8
5.2
2.7
2.4
2.4
3.2
4.1
3.5
3.5
L&T
2.4
NCC
2.5
1.0
0.6
0.9
0.5
0.5
1.0
1.0
0.9
1.8
1.2
1.7
2.2
3.2
3.9
3.6
3.2
Patel Engg
4.7
2.0
1.4
3.1
2.7
3.9
5.0
4.7
4.4
3.7
7.4
4.7
2.3
2.3
2.6
2.5
2.3
3.9
3.7
2.8
3.2
3.8
3.9
3.2
2.9
2.6
2.8
1.7
1.7
1.6
1.5
1.8
2.3
2.1
1.9
Ahluwalia Cont
Punj Lloyd* Simplex Infra Total Source: RHH
*Consolidated
Lower capital infusion into subsidiaries would help contain interest cost
Lower investments in subsidiaries or joint ventures: Most construction companies have diversified from pure EPC to BOT (build, operate, transfer) projects and real estate. Exposure to BOT projects weighs down the balance sheet and return ratios when such works are in the investment phase. From our coverage universe, Nagarjuna Construction (NCC) has the maximum exposure to BOT projects which will lead to pressure on its balance sheet in the near term. Fig 48 - Investments in subsidiary companies and JVs (Rs mn)
FY08
FY09
FY10E
FY11E
HCC
2,832
3,656
4,656
5,856
NCC
5,648
7,403
8,803
9,803
Patel Engg
1,103
2,558
3,557
4,557
IVRCL
3,409
3,893
4,095
4,295
Punj Lloyd*
5,458
6,609
6,609
6,609
26,396
33,841
44,041
54,041
L&T Source: Company, RHH
QIPs being used to replace high-cost debt and fund working capital
*Consolidated
QIPs back in action: Given the improved liquidity conditions, qualified institutional placements (QIP) have made a strong comeback. These issues are being used to replace high-cost debt and fund working capital requirements.
19
Infrastructure
Sector Report
05 October 2009
Fig 49 - Fund raising from capital markets Particulars
(Rs mn)
QIP raised HCC
4,800
Punj Lloyd
6,800
NCC
3,670
GVK Power & Infra
7,169
Lanco Infratech
7,274
QIP to be raised Era Infra
10,000
Unity Infra
2,500
Gammon India
10,000
IPO raised Adani Power
29,400
NHPC
60,400
Pipavav Shipyard
5100
Source: RHH
Earnings CAGR of 25.9% over FY09-FY11 We expect an earnings CAGR of 25.9% from our construction universe over FY09-FY11. Higher earnings growth as against our moderate margin estimates would arise from improved execution based on a strong order backlog and softening interest rate scenario. Fig 50 - Earnings growth Earnings to log CAGR of 25.9% over FY09-FY11 (27.7% ex-L&T & Punj)
(%) 60
50.7
50 40
28.3
30
32.6
31.1
24.0
26.2
15.0
20
4.7
10 0 FY08
FY09
FY10E
TOTAL TOTAL
FY11E
FY08
FY09
FY10E
FY11E
EX L&T & Punj Lloyd
Source: RHH
20
Infrastructure
Sector Report
05 October 2009
Key risks to our estimates Near-term macro concerns We note that a ballooning fiscal deficit (6.8% of GDP in FY10) will limit the government’s ability to spend on infrastructure projects in the short term.
A slower-than-anticipated economic revival would impede order flows
EPC players Slow growth in order inflows if economic revival takes longer than anticipated
Rising working capital levels
Challenges to raising capital
Infrastructure developers Hurdles related to land acquisition, shifting of utilities, right of way, environmental and other clearances, and contractor capacity
Inability to achieve financial closure
Execution delays
Risk on IRRs on account of rise in interest rate and, in case of road projects, lower traffic growth
21
Infrastructure
Sector Report
05 October 2009
RHH infrastructure universe: Valuation matrix Fig 51 - Infrastructure sector valuation matrix Company
CMP (Rs)
Target (Rs)
Reco
MCap
Sales (Rs mn)
Sales Growth (%)
EBITDA (Rs mn)
PAT (Rs mn)
FDEPS (Rs)
FDEPS Growth (%)
(Rs mn)
FY09E
FY10E
FY11E
FY09E
FY10E
FY11E
FY09E
FY10E
FY11E
FY09E
FY10E
FY11E
FY09E
FY10E
FY11E
FY09E
FY10E
FY11E
Ahluwalia Cont
169
190
Buy
10,604
12,087
14,444
19,673
37.3
19.5
36.2
1,429
1,808
2,439
572
796
1,102
9.1
12.7
17.6
10.8
39.2
38.4
HCC
130
141
Hold
39,468
33,137
41,091
49,309
7.5
24.0
20.0
4,314
5,154
6,163
760
1,074
1,443
2.8
3.5
4.5
5.0
25.2
29.4
IRB Infra*
209
224
Buy
69,464
8,834
18,693
32,940
20.6
111.6
76.2
3,289
8,564
11,610
1,197
3,432
4,504
3.6
10.3
13.6
(13.8)
186.7
31.2
IVRCL
388
434
Buy
51,804
48,819
63,465
76,157
33.4
30.0
20.0
4,218
5,873
7,099
1,880
2,564
3,044
13.9
19.0
22.6
0.6
36.4
18.7
335,651
57,750
91,167
105,623
44.9
57.9
15.9
16,200
24,804
27,482
8,891
13,746
15,840
7.1
9.4
10.8
45.4
31.6
15.2
978,520 339,264 401,887
502,079
35.7
18.5
24.9
38,342
45,490
56,559
27,097
32,610
40,373
46.4
55.9
69.2
24.1
20.4
23.8
239
237
Hold
L&T
1665
1,781
Buy
NCC
153
166
Hold
39,206
41,514
47,326
56,791
19.5
14.0
20.0
3,733
4,492
5,391
1,538
1,942
2,412
6.7
7.9
9.4
(10.1)
17.9
18.6
Patel Engg
484
532
Buy
28,860
17,774
21,951
27,220
34.2
23.5
24.0
2,576
3,205
4,001
1,053
1,271
1,612
17.6
21.3
27.0
(2.2)
20.8
26.8
Punj Lloyd*
262
306
Buy
86,927 119,120 132,234
154,470
53.6
11.0
16.8
8,710
11,240
13,130
2,348
4,972
6,044
7.5
15.1
17.8
(33.2)
99.8
18.2
Simplex Infra
510
577
Buy
25,248
46,961
55,414
66,496
67.2
18.0
20.0
3,873
5,153
6,184
1,242
1,585
2,038
25.1
32.0
41.2
23.9
27.7
28.6
Voltas*
145
160
Hold
47,929
43,259
51,289
59,372
35.1
18.6
15.8
2,831
3,642
4,510
2,254
2,677
3,304
6.8
8.1
10.0
28.0
18.8
23.4
Aggregate
-
1,713,681 768,519 938,960 1,150,130
37
22
22
89,515 119,424 144,569
48,830
66,669
81,714
JP Associates
Source: RHH
-
-
*Consolidated
Fig 52 - Infrastructure sector profitability and return ratios Company
EBITDA Margin (%)
PAT Margin (%)
ROE (%)
ROCE (%)
P/E (x)
EV/EBITDA (x)
P/BV (x)
FY09E
FY10E
FY11E
FY09E
FY10E
FY11E
FY09E
FY10E
FY11E
FY09E
FY10E
FY11E
FY09E
FY10E
FY11E
FY09E
FY10E
FY11E
FY09E
FY10E
Ahluwalia Cont
11.8
12.5
12.4
4.7
5.5
5.6
37.9
37.2
36.2
31.4
30.8
29.4
18.5
13.3
9.6
7.0
5.5
4.1
6.0
4.2
3.0
HCC
13.0
12.5
12.5
2.3
2.6
2.9
7.6
8.4
9.0
7.0
7.3
7.6
47.0
37.5
29.0
14.2
11.9
9.9
3.9
2.5
2.4
IRB Infra*
37.2
45.8
35.2
13.5
18.4
13.7
7.1
18.1
19.7
5.9
11.6
11.9
58.0
20.2
15.4
27.4
10.5
7.8
4.0
3.4
2.8
8.6
9.3
9.3
3.9
4.0
4.0
11.0
13.8
15.0
12.0
11.8
12.3
27.9
20.4
17.2
15.4
11.0
9.1
2.9
2.7
2.4
IVRCL
FY11E
JP Associates
28.1
27.2
26.0
15.4
15.1
15.0
17.2
21.5
20.5
9.0
11.2
11.2
33.5
25.5
22.1
25.4
16.6
15.0
5.8
4.8
4.0
L&T
11.3
11.3
11.3
8.0
8.1
8.0
24.6
23.8
24.6
18.5
17.2
18.2
35.9
29.8
24.1
27.0
22.8
18.3
7.9
6.6
5.5
NCC
9.0
9.5
9.5
3.7
4.1
4.2
9.4
10.0
10.6
9.8
9.9
9.7
22.7
19.3
16.2
13.5
11.2
9.3
2.3
1.8
1.7
14.5
14.6
14.7
5.9
5.8
5.9
11.5
12.3
13.8
10.3
9.2
9.8
27.4
22.7
17.9
14.6
11.7
9.4
2.9
2.6
2.3
Punj Lloyd*
7.3
8.5
8.5
2.0
3.8
3.9
9.0
16.4
15.8
10.8
11.6
12.2
34.7
17.4
14.7
13.1
10.2
8.7
3.5
2.4
2.1
Simplex Infra
8.2
9.3
9.3
2.6
2.9
3.1
14.9
16.3
18.0
13.9
12.0
8.5
20.3
15.9
12.4
9.4
7.0
5.9
2.8
2.4
2.1
32.9
29.9
29.2
28.6
26.3
26.9
21.3
17.9
14.5
16.0
12.4
10.0
6.1
4.8
3.8
35.1
25.7
21.0
21.9
16.4
13.5
5.8
4.7
4.0
Patel Engg
Voltas Aggregate
6.5
7.1
7.6
5.2
5.2
5.6
11.6
12.7
12.6
6.4
7.1
7.1
Source: RHH, Company
22
Infrastructure
Sector Report
05 October 2009
Fig 53 - Infrastructure sector valuation matrix (excluding subsidiaries) Company Ahluwalia Cont HCC
CMP (Exsub) (Rs)
Sub. Val (Rs)
Target (Rs)
Reco
MCap (Ex Sub) (Rs mn)
Sales (Rs mn) FY09E
FY10E
Sales Growth (%) FY11E
FY09E
FY10E
EBITDA (Rs mn)
FY11E
FY09E
PAT (Rs mn)
FY10E
FY11E
FY09E
FDEPS (Rs)
FY10E
FDEPS Growth (%)
FY11E
FY09E
FY10E
FY11E
FY09E
FY10E
FY11E
169
-
190
Buy
10604.2
12,087
14,444
19,673
37.3
19.5
36.2
1,429
1,808
2,439
572
796
1,102
9.1
12.7
17.6
10.8
39.2
38.4
52
78
141
Hold
15906.1
33,137
41,091
49,309
7.5
24.0
20.0
4,314
5,154
6,163
760
1,074
1,443
2.8
3.5
4.5
5.0
25.2
29.4
IRB Infra*
209
-
224
Buy
69464.1
8,834
18,693
32,940
20.6
111.6
76.2
3,289
8,564
11,610
1,197
3,432
4,504
3.6
10.3
13.6
(13.8)
186.7
31.2
IVRCL JP Associates L&T
315
73
434
Buy
42029.5
48,819
63,465
76,157
33.4
30.0
20.0
4,218
5,873
7,099
1,880
2,564
3,044
13.9
19.0
22.6
0.6
36.4
18.7
163
76
237
Hold
229095.1
57,750
91,167
105,623
44.9
57.9
15.9
16,200
24,804
27,482
8,891
13,746
15,840
7.1
9.4
10.8
45.4
31.6
15.2
1475
190
1,781
Buy
866722.5
339,264
401,887
502,079
35.7
18.5
24.9
38,342
45,490
56,559
27,097
32,610
40,373
46.4
55.9
69.2
24.1
20.4
23.8
NCC
119
34
166
Hold
30461.9
41,514
47,326
56,791
19.5
14.0
20.0
3,733
4,492
5,391
1,538
1,942
2,412
6.7
7.9
9.4
(10.1)
17.9
18.6
Patel Engg
330
154
532
Buy
19694.7
17,774
21,951
27,220
34.2
23.5
24.0
2,576
3,205
4,001
1,053
1,271
1,612
17.6
21.3
27.0
(2.2)
20.8
26.8
Punj Lloyd* Simplex Infra Voltas
241
21
306
Buy
80027.2
119,120
132,234
154,470
53.6
11.0
16.8
8,710
11,240
13,130
2,348
4,972
6,044
7.5
15.1
17.8
(33.2)
99.8
18.2
510
-
577
Buy
25248.0
46,961
55,414
66,496
67.2
18.0
20.0
3,873
5,153
6,184
1,242
1,585
2,038
25.1
32.0
41.2
23.9
27.7
28.6
145
-
160
Hold
47928.7
43,259
51,289
59,372
35.1
18.6
15.8
2,831
3,642
4,510
2,254
2,677
3,304
6.8
8.1
10.0
28.0
18.8
23.4
-
-
1,437,182
768,519
938,960 1,150,130
37
22
22
89,515 119,424
144,569
48,830
66,669
81,714
Aggregate Source: RHH
*Consolidated
Fig 54 - Infrastructure sector profitability and return ratios (excluding subsidiaries) Company
EBITDA Margin (%)
PAT Margin (%)
ROE (%)
ROCE (%)
P/E (x)
EV/EBITDA (x)
P/BV (x)
FY09E
FY10E
FY11E
FY09E
FY10E
FY11E
FY09E
FY10E
FY11E
FY09E
FY10E
FY11E
FY09E
FY10E
FY11E
FY09E
FY10E
FY11E
FY09E
FY10E
FY11E
Ahluwalia Cont
11.8
12.5
12.4
4.7
5.5
5.6
37.9
37.2
36.2
31.4
30.8
29.4
18.5
13.3
9.6
7.0
5.5
4.1
6.0
4.2
3.0
HCC
13.0
12.5
12.5
2.3
2.6
2.9
7.6
8.4
9.0
7.0
7.3
7.6
18.9
15.1
11.7
8.7
7.3
6.1
1.6
1.0
1.0
IRB Infra*
37.2
45.8
35.2
13.5
18.4
13.7
7.1
18.1
19.7
5.9
11.6
11.9
58.0
20.2
15.4
27.4
10.5
7.8
4.0
3.4
2.8
8.6
9.3
9.3
3.9
4.0
4.0
11.0
13.8
15.0
12.0
11.8
12.3
22.6
16.6
14.0
13.0
9.4
7.7
2.3
2.2
1.9
IVRCL JP Associates
28.1
27.2
26.0
15.4
15.1
15.0
17.2
21.5
20.5
9.0
11.2
11.2
22.9
17.4
15.1
18.8
12.3
11.1
4.0
3.3
2.7
L&T
11.3
11.3
11.3
8.0
8.1
8.0
24.6
23.8
24.6
18.5
17.2
18.2
31.8
26.4
21.3
24.1
20.3
16.3
7.0
5.8
4.8
NCC
9.0
9.5
9.5
3.7
4.1
4.2
9.4
10.0
10.6
9.8
9.9
9.7
17.7
15.0
12.6
11.1
9.2
7.7
1.8
1.4
1.3
14.5
14.6
14.7
5.9
5.8
5.9
11.5
12.3
13.8
10.3
9.2
9.8
18.7
15.5
12.2
11.0
8.8
7.1
2.0
1.8
1.6
Punj Lloyd*
7.3
8.5
8.5
2.0
3.8
3.9
9.0
16.4
15.8
10.8
11.6
12.2
32.0
16.0
13.5
12.3
9.6
8.2
3.2
2.2
2.0
Simplex Infra
8.2
9.3
9.3
2.6
2.9
3.1
14.9
16.3
18.0
13.9
12.0
8.5
20.3
15.9
12.4
9.4
7.0
5.9
2.8
2.4
2.1
32.9
29.9
29.2
28.6
26.3
26.9
21.3
17.9
14.5
16.0
12.4
10.0
6.1
4.8
3.8
29.4
21.6
17.6
18.8
14.1
11.6
4.8
3.9
3.3
Patel Engg
Voltas* Aggregate Source: RHH, Company
6.5
7.1
7.6
5.2
5.2
5.6
11.6
12.7
12.6
6.4
7.1
7.1
*Consolidated
23
Infrastructure
Sector Report
05 October 2009
Sector-wise investment allocation Infrastructure development is expected to garner a total investment of Rs 20,562bn over the 11th Plan, of which ~30% is likely to come from private participation. The sectorwise investment allocation is outlined below.
Roads & Bridges Road contract awards under NHDP picking up pace
As per the Economic Survey report 2008–09, out of the total length of national highways, ~30% are single-lane/intermediate-lane, 53% are two-lane and the remaining 17% are four-lanes or more. Though national highways comprise only ~2% of the total length of roads in India, they account for 40% of the aggregate traffic. As of 31 March 2009, work on 11,037km of national highways under the government-led National Highway Development Programme (NHDP) has been completed – a bulk of this comprises the Golden Quadrilateral (GQ) which connects the four metros.
Fig 55 - Status of NHDP phases as on 31 March 2009 Total length
Completed 4-lane
5,846
5,721
Under implementation 125
Port connectivity
380
206
168
6
Other NHs
962
781
161
20
7,142
3,436
2,915
791
12,109
787
1,878
9,444
6,500
106
928
5,470
Phase
NHDP component (km)
I
GQ Phase
I I II
NS-EW
III
NHDP –III
V
NHDP
VII
NHDP Total
Balance for award of civil works -
700
0
19
681
33,639
11,037
6,194
16,412
Source: Economic Survey Report 2008-09
We recently held a conference call with Dr. Didar Singh, IAS, Member (Finance) – NHAI, to discuss the road sector in India. Outlined below are the key takeaways:
Project awards for 32,000km over next 3–4 years Started in 2001, the government’s NHDP aims to complete 53,000km of road development in India by 2017; of this, 20,000km is being implemented by the Ministry of Road Transport and Highways (MORTH). So far, work on ~11,000km has been completed, while ~7,000km is under implementation. The government aims to put the balance 32,000km of projects out for bidding over the next four years. The overall project cost has been revised from ~Rs 2,200bn estimated in the first financing plan in 2005 to ~Rs 3,300bn; of this, ~Rs 2,000bn worth of investment is expected from the private sector.
Bid placement for 80–100 projects targeted in FY10 The NHAI plans to invite bids for 80–100 projects in FY10 and a similar number of works in FY11. The authority has awarded 13 projects (~1,200km) worth Rs 143.5bn so far in FY10, and has received bids for a further 11 works; these are currently under examination and will be awarded shortly. At present, the Request for Qualification (RFQ) procedure for an additional 50 projects (~4,600km) worth Rs 205bn is underway.
24
Infrastructure
Sector Report
05 October 2009
Fig 56 - Projected investment in roads and bridges during the 11th Plan 2007-08
2008-09
2009-10
2010-11
2011-12
Total 11th Plan
National Highways
233
247
271
325
383
1,459
NHDP Public
101
105
110
123
152
591
Particulars (Rs bn at 2006-07 prices)
Other NH (Public)
12
13
14
15
16
69
NHDP Private
120
129
147
188
215
798
State Roads (Highways, major District Roads, Others)
215
224
238
270
322
1,270
Public
175
182
189
206
248
1,000
Private
40
43
49
64
74
270
Rural Roads: Bharat Nirman
63
69
73
78
83
366
North East Roads: SARDP
7
8
10
11
12
48
Total (Rs bn)
518
548
592
684
800
3,142
Total (US$ bn)
13.0
13.7
14.8
17.1
20.0
78.5
Source: Planning commission
Fig 57 - Comparative investment projections Roads (Rs bn)
10th Plan (anticipated)
11th Plan
Log-linear projection
Working group estimates
Centre
715
1,074
NA
NA
State
664
1,000
NA
NA
Public
1,379
2,074
2,502
1,218
Private
70
1,068
63
877
1,449
3,142
2,565
2,095
Total
Source: Plan document, Planning Commissio, RHH
Planned investment of Rs 3,142bn in roads
Road sector investment pegged at Rs 3,142bn – private share at 34% The investment in roads during the 11th Plan is projected at Rs 3,142bn, which is 2.2 times the targeted 10th Plan investment. Of this, ~66% will be contributed by the Centre and state governments, while 34% is expected from the private sector (as against 5% in the 10th Plan, depicting immense opportunities for private developers). Approximately Rs 1,459bn (46.4%) would be invested in national highways, Rs 1,270bn (40.4%) in state roads, Rs 366bn (11.6%) in rural roads, and Rs 48bn (1.5%) in roads in the northeast states. For the year 2009–10, allocation to the National Highway Authority of India (NHAI) has been increased by 23% from Rs 129bn to Rs 159bn. Fig 58 - Financial structure of NHAI Cess funds
External assistance
1999-00
10
4
-
-
-
-
14
2000-01
18
5
1
6
-
-
30
2001-02
21
8
1
8
-
-
38
2002-03
20
12
3
56
-
3
94
2003-04
20
12
3
-
-
4
38
2004-05
18
12
4
13
-
5
52
2005-06
33
24
6
15
14
8
100
2006-07
64
16
4
15
1
11
111
2007-08
65
18
4
20
2
14
123
2008-09
70
15
4
11
2
18*
119
339
126
29
144
19
62
719
(Rs bn)
Total Source: Crisil Research
Loans
Borrowings
Budgetary support
Toll collection
Total
*Crisil Estimates
25
Infrastructure
Sector Report
Slump in FY09 with bids received for only 22 of 60 projects; of these just 7 awarded
05 October 2009
FY09 – a slump year The NHAI had planned to allot 60 projects worth Rs 700bn, largely belonging to NHDP phase-III, in FY09. It called bids for ~50 projects, but received a positive response for only 22 works valued at ~Rs 220bn. Of these 22 projects, 7 contracts worth Rs 80bn have been awarded so far. The remaining 15 projects has been referred back to the government for approval since 7 of them are single-company bids, 4 are annuity bids as against the toll bid stipulation, and 4 pertain to phase V of the NHDP where the VGF is higher than 10%. The balance 38 projects failed to attract any bids since developers perceived the investment as being incommensurate with the expected returns. The NHAI has thus failed to award even a single contract to private players in FY09 for widening of highway stretches on Phase V of the Golden Quadrilateral project. In Q1FY10, the pace of project awards slowed due to the pre-poll embargo, but post the election outcome, the process of project bidding and awards has begun in full earnest. Slowdown in tenders due to multiple reasons Since January ’08, the pace of contract tenders under the government’s NHDP has slowed considerably. The key reasons behind the delays are as follows:
Financial crisis and heavy interest costs
Meltdown in the financial market and the credit crisis.
led to waning interest among private sector developers
High interest costs (increased to ~15% in the third quarter of FY09); projects are funded with debt to the extent of 70–75%.
Disputes relating to finalisation of the new MCA and issues with RFP and RFQ procedures.
Overly high risk perception leading to higher VGF demands by private players.
Delays in terms of land acquisition and environmental clearances. Project cost has increased by 40% from Rs 900bn to Rs 1,300bn due to delays for some projects.
Poor project preparation (including inaccurate assessment of demand), leading to frequent scope for changes.
Absence of a long-term bond market, which hinders financing. Currently 97% of the bond market is through G-secs.
Policy measures to revitalise developer interest In a bid to encourage developer interest in road projects, the NHAI and the government have recently introduced a host of facilitating measures as follows: NHAI to restructure future road projects to make them viable
The NHAI has decided to restructure future projects (including the 38 remaining works) by reducing ‘capital cost’ and by eliminating ‘over-engineering cost’ in order to make them viable, and then offering the same under the BOT toll model. According to media reports, it has also proposed to reduce the design period from 20 years to 10 or 15 years. Also, some projects will be awarded under the annuity mode if the BOT toll mode fails to generate interest.
Cost escalation of 20% will now be permitted for projects with DPRs (detailed project report) prepared before 2007 and 10% for those based on 2007 prices.
VGF has been raised to 40% of the project cost during the construction period as against the earlier distribution of 20% during the construction period and 20% post the commercial operation date (COD).
The clause limiting the number of bidders to 6 has been deleted for all future NHAI projects. Hence, all future projects except the above 60 would be under the open bidding system.
26
Infrastructure
Sector Report
Road development in terms of kilometres added per day
(Km) 6
4.9
5
4.6
4.3
4 3 2 1
2.0 0.4
1.0
2009
2008
2007
1992
1997
1962
0
Source: Planning commission
Refinance option may be extended for projects bid in 2008 as well
05 October 2009
Under the government stimulus package, IIFCL has been authorised to raise Rs 400bn (Rs 100bn by FY09 and Rs 300bn in FY10) to finance infrastructure projects. It has successfully raised Rs 100bn through the issue of bonds which will be used to finance projects at an interest of ~10.35%. This will substantially reduce borrowing costs.
The NHAI has launched tax-free bonds on 11 May 2009 to raise up to Rs 40bn in the current fiscal to fund its road projects.
The government has implemented a new toll policy in December ’08 for future projects. It stipulates that the upward revision of annual toll rates would be 3% in addition to 40% of the change in the wholesale price index (WPI). As per the old policy (1997), the revision of toll rates was fixed at 100% of the change in WPI, and as per MCA-2006, applicable in 2008, the percentage was 40%. This policy change will generate greater interest from developers for future projects as it will increase the equity IRR.
The NHAI has recently amended the land acquisition norms for road projects – a key contributor to execution delays in the past. As per the new guidelines, the authority will now issue letters of award to highway developers only after acquiring 80% of the land required for the project (50% previously). The balance 20% would be handed over within 90 days of the project award. If the stipulated timeline is not adhered to, the NHAI will pay damages to the concessionaire.
Government sets aggressive development targets… Road transport and highways minister, Kamal Nath, has stated that the government aims to build at least 20km of highways per day and is also mulling the set up of an Indian Road Finance Corp to mobilise funds for the highways sector. In order to generate easier access to liquidity, Mr Kamal Nath has hosted road-shows to attract the interest of financial institutions. These measures together with the softening interest rate regime should induce a more positive response towards projects that will be placed for bids in the near term. The government has approved 1,000km of expressways to be developed on BOT basis, at an indicative cost of Rs 166.8bn, scheduled to complete by December ’15. These expressways would be constructed on new alignments. A feasibility study for the Vadodara-Mumbai (400km) expressway has already been awarded and the process of alignment study and award of feasibility studies for another 600km of expressways (Kolkata-Dhanbad, Bangalore-Chennai and Delhi-Meerut) has also been initiated. Recently, Mr Kamal Nath said that the Ministry is examining the possibility of setting up an expressway authority on the lines of the NHAI. …with steps to bolster liquidity The government’s first stimulus package in December ’08 authorised IIFCL to raise Rs 100bn through tax-free bonds to refinance projects bid on or after 31 January 2009 in the road and port sectors. But IIFCL has been unable to disburse most of the funds as projects take a long time to bid out. For instance, although bids have been invited for nearly 40 highway projects post January ’09, none of these have been awarded so far. The finance ministry is thus considering a proposal to remove the cut-off date criteria, which may bring in the refinance option for projects bid in 2008 as well. IIFCL has disbursed Rs 32bn till March ’09 and has plans to disburse Rs 60bn in this fiscal (excluding disbursement under the refinance scheme).
27
Infrastructure
Sector Report
Take-out financing shores up banking
05 October 2009
The 2009–10 Budget authorises IIFCL to participate in take-out financing and to refinance 60% of bank loans given to projects developed via PPP. Under take-out financing, an institution buys out long-term project loans after a few years of disbursal of such loans. Under the existing refinance scheme, IIFCL can refinance up to 60% of loans provided by banks to infrastructure projects in the roads and port sectors at 7.85%. Banks can then charge a spread of up to 250bps above this, i.e., the bank’s lending rate to the developer will not exceed 10.35%. The refinance tenor is 10 years with a reset after 5 years, though this can be extended to 15 years with government approval. The takeout financing scheme, which is also a form of refinance, will draw upon the structure of the existing scheme.
sector resources to fund infra development
Significant project awards likely in H2FY10 At present, there are 38 projects worth Rs 423.3bn which will be up for bidding in FY10 (ref Fig 60). The tempo of project awards is set to gather speed in H2FY10 as developer interest revives on the back of an improving economic environment, stable governance, softening interest rates and commodity prices, and positive policy shifts as outlined earlier. We believe that IRB Infrastructure, L&T, IVRCL and Hindustan Construction Co would be among the key beneficiaries in the near future.
IRB, L&T, IVRCL and HCC to be the key beneficiaries of new contract awards
Fig 59 - PPP projects awarded during FY09 & FY10; bids under process for FY10 SN
Length (km)
TPC (Rs bn)
NHDP Phase
No. of bids received
Maharashtra
60
9.4
III
MP/Maharashtraborder-Dhule
Maharashtra
97
8.4
Pune-Sholapur (pkg-1)
Maharashtra
110
Gujarat AP
Name
State
1
Pimpalgaon-Nasik-Gonde
2 3 4 5 6 7 8
Gujarat/ MH Border-SuratHazira Cuddapah-Mydukur-Kumool Vadakkancherry-Thrissur Elevated Road from Chennai Port to Muduravoyal Kishangarh-Beawar
Kerala
Status
Name of Awardees / L1 bidder
3
Awarded
L&T-ABL consortium
III
4
Awarded
11.1
III
2
133
15.1
III
2
188
15.9
III
2
Awarded
KMC-IVRCL consortium
2
Awarded
KMC-CR18 consortium
30
6.2
II
Awarded Awarded
Awarded
19
13.5
VII
2
Rajasthan
94
8.0
III
4
Awarded
Isolusx-SOMA consortium GMR-Punj Lloyd consortium Navyuga-KPCL consortium
9
Hyderabad-Vijaywada
AP
181
17.4
III
5
10
Armur-Adloor Yellareddy
AP
60
4.9
II
2
Awarded
11
Hazaribagh-Ranchi*
Jharkhand
71
6.3
III
2
12
Kannur-Kuttipuram -Pkg 1
Kerala
83
13.7
III
2
13
Kannur-Kuttipuram -Pkg 2
Kerala
82
13.1
III
2
14
Amritsar-Pathankot
Punjab
102
7.1
III
2
16
Goa/KNT Border-Panji
Goa
65
4.7
III
2
17
Jaipur-Tonk-Deoli
Rajasthan
149
11.8
III
2
19
Talegaon-Amravati
Maharashtra
67
5.7
III
2
18
Pune-Sholapur -Pkg 2
Maharashtra
110
8.4
III
3
15
Ghaziabad-Aligarh
Uttar Pradesh
126
11.4
III
2
1,827
192
Total
Isolusx-SOMA consortium
Tamil Nadu
Awarded
Source: NHAI, RHH
HCC-John Laing-Sadbhav consortium Navinya-Buildcon-Atlantia Spa consortium
Bids under process Bids under process Bids under process Bids under evaluation Bids under evaluation Bids under evaluation Bids under evaluation Bids under evaluation Bids under evaluation
SOMA Enterprises
IRB Infra L1 - IRB Infra L1 - IRB Infra L1 - IRB Infra
* Annuity project
28
Infrastructure
Sector Report
05 October 2009
Fig 60 - PPP projects for which bidding process will be initiated during FY10 Sr. No.
Section
State
1
Hyderabad-Yadgiri
Andhra Pradesh
NH. No.
Length (km)
TPC (Rs bn)
202
36
5.2
2
Parwanoo-Solan
Himachal Pradesh
22
41
5.4
3 4
Bijapur-Hundud
Karnataka
13
97
9.1
Hungud – Hospet
Karnataka
13
98
12.3
5
Muradabad – Bareilly
Uttar Pradesh
24
121
14.9
6
Maharashtra/Goa border-Panaji Goa/KNT Border
Goa
17
123
20.8
7
Rohtak-Panipat
Haryana
71A
81
8.1
8
Bareilly-Sitapur
Uttar Pradesh
24
152
10.5
9
Rohtak-Bawal
Haryana
71
83
6.7
10
Ahmedabad-Godhra
Gujarat
59
118
10.3
11
Godhra-Gujarat/MP Border
Gujarat
59
84
7.5
12
Kandla-Mundra Port
Gujarat
8A Ext.
71
10.3
13
Muzaffarnagar-Haridwar*
Uttar Pradesh/Uttarakhand
58
80
8.0
14
Haridwar-Dehradun
Uttarakhand
58/72
37
4.9
15
Barasat-Krishnagar
West Bengal
34
84
8.9
16
Krishnagar-Bahrampore
West Bengal
34
78
6.9
17
Bahrampore-Farakka
West Bengal
34
101
10.0
18
Farakka-Raiganj
West Bengal
34
103
11.4
19
Raiganj-Dalkhola
West Bengal
34
50
5.6
20
Indore-Gujarat/MP Border
Madhya Pradesh
59
155
13.0
21
Belgaum-Goa/KNT Border
Karnataka
4A
82
6.6
22
Karnataka/AP Border-Mulgabal
Karnataka
4
22
2.6
23
Ranchi-Jamshedpur
Jharkhand
33
164
14.4
24
Kishangarh-Udaiapur
Rajasthan
76, 79 & 79A
315
25.3
25
Krishnagiri-Walajahpet
Tamil Nadu
46
148
12.5
26
Udaipur-Ahmedabad
Rajasthan
8
235
17.5
27
Pune-Satara
Maharashtra
4
145
17.3
28
Samakhiyali-Gandhidham
Gujarat
8A
56
8.1
29
Tumkur-Chitradurga
Karnataka
4
114
8.4
30
Satara-Kagal
Maharashtra
4
133
11.0
31
Srinagar to Banihal Section
Jammu & Kashmir
1A
99
12.0
32
Quazigund – Banihal
Jammu & Kashmir
1A
15
19.9
33
Ramban-Banihal
Jammu & Kashmir
1A
36
9.9
34
Udhampur-Ramban
Jammu & Kashmir
1A
43
9.7
35
Chenani-Nashri
Jammu & Kashmir
1A
12
25.8
36
Jammu-Udhampur
Jammu & Kashmir
1A
65
17.7
37
Chengapalli-Walayar
Tamil Nadu
47
55
8.5
38
Hyderabad-Bangalore (Km 534.72-Km 556.84)
Tamil Nadu
7
Total Source: NHAI, RHH
22
6.8
3,554
423.3
*Proposed annuity project
29
Infrastructure
Sector Report
05 October 2009
Electricity India is among the world’s largest power producing and consuming nations, with a total generation capacity of 150,323MW as on June ’09. The Ministry of Power has projected an annual growth of 9% in electricity demand over the 11th plan period and has thus set itself a target of augmenting India’s capacity by 78,700MW. Barring the first few five year plans, the actual capacity addition has been dismal – during the 10th plan, only 52% of the targeted additions were met. We anticipate significant incremental demand from the manufacturing sector and from rural electrification, as per the government’s mission of “Power for all” by 2012.
India’s total power generation capacity at 150,323MW
Fig 61 - Cumulative capacity over 6th to 11th plans (GW) 250
Capacity
Fig 62 - Target and achievements over last 10 five year plans (%) 70
Growth (R)
60
200
50
150
40
100
30 20
50
10 0
0 6th
7th
8th
9th
10th
11th
Source: CEA
(GW) Target Achieved 45 40 35 30 25 20 15 10 5 0 1st 2nd 3rd 4th 5th 6th
Achieved (R)
(%) 100 90 80 70 60 50 40
7th
8th
9th 10th
Source: CEA
Severe demand–supply mismatch India has been facing a demand–supply mismatch not just at peak demand level but also at the base level. With healthy economic growth expected to continue over the next few years, infrastructure augmentation especially in the power sector is imperative. Fig 63 - Historical energy demand-supply position in India (BUs)
Energy Demand
800
Energy Deficit
Fig 64 - Historical peak demand-supply position in India
(%)
(GW)
12.0
120
11.0
100
500
10.0
80
400
9.0
60
14
300
8.0
40
13
7.0
20
6.0
0
Energy Met
700 600
200 100 0 FY03
FY04
FY05
FY06
Source: CEA
India has one of the lowest per capita consumption rates of power
FY07
FY08
FY09
Peak Demand Peak Deficit (R)
Peak Met
(%) 18 17 16 15
12 11 10 FY03
FY04
FY05
FY06
FY07
FY08
FY09
Source: CEA
At 704.2kWh, India has one of the lowest per capita consumption rates of electricity. The government has a target of achieving per capita consumption of 1,000Kwh by 2012. Within the country itself, there is a huge disparity with respect to per capita consumption of power. According to the 2005–06 data, in states like Goa and Delhi, per capita consumption is as high as 1,970.1kWh and 1,766.9kWh respectively while in states like Bihar and Assam this drops to 85.9kWh and 170.7kWh respectively.
30
Infrastructure
Sector Report
05 October 2009
32% of infra spending earmarked for power sector Power is clearly the focus area of the government with ~32% of budgeted infrastructure spending being earmarked for the sector. The planned outlay for power has been doubled in the 11th plan period to Rs 6,665bn, with the Centre expected to contribute 38.3% and states 33.9%.
Power accounts for ~32% of budgeted infrastructure spending
Fig 65 - Anticipated public and private investment in electricity (incl. NCE) during the 10th and 11th Plans Year (Rs bn) Centre
Total 10th Plan (Anticipated)
Share (%)
2007-08
2008-09
2009-10
2010-11
2011-12
Total 11th Plan
Share (%)
1,025
35.1
378
435
500
576
664
2,553
38.3
976
33.4
210
297
414
567
770
2,257
33.9
918
31.5
232
284
350
437
552
1,855
27.8
2919
100.0
820
1,016
1,264
1,580
1,986
6,665
100.0
States Private Total Source: Planning Commission
Fig 66 - Comparative investment projections th
11 plan spend on power sector to be 2.3x 10th plan spending
10th Plan (anticipated)
Electricity (Rs bn) Centre State
11th Plan
Log-linear projection
Working group estimates
1,025
2,553
NA
2,994
976
2,257
NA
5,142
Public
2,001
4,810
2,876
8,136
Private
918
1,855
1,729
2,180
2,919
6,665
4,605
10,316
Total
Source: Plan Document, Planning Commission, RHH
Summary of capacity addition in 11th Plan Particulars
MW
Generation capacity at end of 10th Plan
132,329
Capacity added in FY08
9,263
Capacity added in FY09
3,454
Capacity added till July ’09 in FY10 Capacity addition in 11th Plan (till July ’09) Total capacity at end of July ’09 Source: CEA, RHH
3,108 15,825 151,073*
* Includes captive power projects
Capacity addition rate to outpace past plans India has been slow to augment generation capacity with an average addition rate of 5.6% per year during the past three plan periods. Further, only 51% of the targeted additions have been made during these plans, at 56,618MW against the goal of 111,893MW. The current plan envisages fresh capacity of 78.7GW. We expect the achievement run rate to be higher this time around given that over 80GW of power projects are already under implementation. We peg additions at 60–65GW, which would be the highest during any plan period. The ambitious Ultra Mega Power Projects (UMPP) will mainly contribute towards capacity addition in the 12th plan. Progress visible in FY10 Power generation capacity at the end of 10th plan stood at 132,329MW. Thereafter, 9,263MW and 3,454MW were added in FY08 and FY09 respectively (57% and 31% of targets). However, during the first four months of FY10, net fresh capacity has been higher at 3,108MW. T&D to get a concurrent boost To support the increasing generation capacity, the government is also looking to supplement the country’s transmission network from ~20GW to ~38GW. It aims to curb T&D losses across the country and has adopted a revised APDRP to aid this effort.
Fig 67 - Activity-wise investment in electricity during the 11th Plan Activity (Rs bn) Centre States
Generation
Transmission
Distribution
Total 11th Plan
1,440
616
497
2,553
915
448
893
2,257
Private
1,418
340
97
1,855
Total
3,773
1,404
1,488
6,665
Source: Planning Commission
31
Infrastructure
Sector Report
Bulk tenders worth Rs 210bn being placed by the government
05 October 2009
NTPC to award bulk tenders for supercritical equipment (660MWx11) Thermal power capacity addition is set to witness a structural shift from subcritical to supercritical technology. The government is leading this shift with bulk order tenders for 7,260MW (11x660MW) of supercritical sets for NTPC and DVC. In all, this clutch of orders would be worth ~Rs 210bn. Chinese companies have secured 60% of the supercritical unit orders placed so far. In order to reverse this trend, the government has made domestic manufacturing a mandatory qualification for participation in bulk tenders of NTPC. Accordingly, a number of foreign entities have tied up with domestic partners to become eligible for bulk tenders. Fig 68 - Capacity augmentation in supercritical BTG space Company / JV BHEL L&T / Mitsubishi Heavy Industries Bharat Forge–Alstom JSW – Toshiba GB Engineering – Ansaldo Total
Boiler (MW)
Turbine (MW)
10,000
10,000
4,000
4,000
-
5,000
-
3,000
2,000
-
16,000
22,000
Source: Infraline, RHH
32
Infrastructure
Sector Report
05 October 2009
Railways Planned investment of Rs 2,618bn in th
railways – 2x 10 plan expenditure
The Indian Railways (IR) holds the distinction of being the world’s second largest rail network under a single management and the principal mode of transportation for bulk freight and long distance passenger traffic, with a total route length of 63,221km. Public investment in the IR is projected at Rs 2,346bn during the 11th Plan. An additional Rs 272bn is likely to be invested in a Mass Rapid Transport System (MRTS – metro rail), of which Rs 72bn would be contributed by the Centre and Rs 100bn each by the states and private sector. The total investment of Rs 2,618bn is twice the anticipated 10th plan expenditure.
Fig 69 - Projected investment in railways during the 11th Plan Particulars (Rs bn at 2006-07 prices)
2009-10
2010-11
2011-12
Total 11th Plan
Share (%)
78
90
103
119
457
17.5
85
110
143
185
589
22.5
-
-
-
-
-
-
-
2007-08
2008-09
Rolling stock*
68
Capacity augmentation
66
and development Safety and other works
139
161
186
216
250
951
36.3
Investment in PSUs
16
17
19
20
22
94
3.6
Dedicated freight corridors
11
20
37
63
123
255
9.7
Metro Rail Projects
43
48
54
59
68
272
10.4
342
410
495
604
767
2,618
100.0
Total Source: Planning commission
* CSO and Ministry of Railways both account for rolling stock in infrastructure
Fig 70 - Comparative investment projections 10th Plan (anticipated)
11th Plan
Log-linear projection
Working group estimates
1,090
2,015
NA
NA
104
100
NA
NA
Public
1,194
2,115
2,367
2,540
Private
3
504
5
660
1,197
2,619
2,372
3,200
Railways (Including MRTS) (Rs bn) Centre State
Total Source: Plan Document, RHH
Private investment in railway sector pegged at Rs 504bn (20%)
It is assumed that ~17.2% of railway investment will come through PPPs. Thus, of the total investment of Rs 2,346bn in the IR, ~Rs 1,933bn will be invested by the public sector and Rs 504bn by private players. Including the projected investment of Rs 100bn in metro rail projects, the overall private investment in the sector comes to Rs 504bn (i.e. ~20% of the total). Fig 71 - Railway opportunities
Railway development opportunities Particulars (Rs bn) Indian railways RVNL
Construction contracting
Project development
1,600
600
70
35
DRFC
250
120
Metro
303
120
60
60
Private rail
Source: Working group report on Eleventh five year plan, Metro Authorities, DMRC, RVNL, DFCCIL, RHH
Source: Working Group Report on Eleventh Five Year Plan (2007-12)
33
Infrastructure
Sector Report
05 October 2009
Key opportunities for private players Rs 500bn Dedicated Rail Freight Corridor to generate large order flows
Freight corridor: The Dedicated Rail Freight Corridor (DRFC) is the biggest opportunity in the sector. The cost for the 1,279km eastern corridor (Ludhiana– Sonnagar) and 1,483km western corridor (Dadri–JNPT) put together is estimated at Rs 500bn. Financing arrangements for the project currently envisage external assistance of Rs 170bn from Japan Bank of International Cooperation (JBIC) and Rs 110bn from World Bank. These would cover about half of the capital cost. The rail ministry is exploring the possibility of attracting private investment in some segments of the project. Civil engineering works are expected to account for a bulk of the cost (65–70%), while signaling & communications (15–20%) and electrification (10–15%) would comprise the balance. Both corridors are proposed to have double lines and will be based on electric traction. Work on the eastern dedicated freight corridor has already started from February ’09 while construction work on the western corridor will begin later.
Metro projects worth Rs 380bn likely to be awarded under PPP
Privatisation / modernisation: Railway station privatisation, along the lines of airport privatisation, is another large opportunity. The government has identified 26 stations in metropolitan cities and major tourist centres for development as world class stations through the PPP route. Part of the real estate potential of these stations would be exploited for financing these projects. Preparatory work for the New Delhi and Patna stations is already in the advanced stage.
Logistic parks: Multi-modal logistic parks (MMLPs) are proposed to be built independently at strategic locations or in SEZs, particularly along the DRFC.
Metro projects: Mumbai Metro phases II and III and metro-rail projects in nonmetro towns are other PPP opportunities. Construction companies will also vie for the Chennai Metro that is to be undertaken by the government. The Cabinet has cleared this project and funding is in place as follows: 60% loan under the Japanese Cooperation Agreement; 20% state government equity, 15% central government equity, and 5% central government debt. In a recent development, award of the Hyderabad metro rail project to the Maytasled consortium has been cancelled due to the latter’s failure to achieve financial closure. Bids for the project will be re-invited from 15 July to 15 November. Surveys for construction of new lines from Jhargram to Purulia and the new line for extension of the Kolkata Metro, from Dum Dum to Dakshineshwar, have been completed. The West Bengal government has also given its consent to contribute 50% of the cost for extension. Further action is being taken to obtain necessary approvals for these projects. The ministry of railways has also commissioned a feasibility study for introduction of a 60km elevated, fully air-conditioned rail system between Churchgate and Virar stations in Mumbai. The project is proposed to be implemented through PPP on a design, build, finance, operate and transfer basis.
Fig 72 - Key upcoming metro rail projects likely to be awarded under PPP City/Project
Project cost (Rs bn)
Status
Mumbai Phase II (Charkop-Mankhurd)
110
Awarded to Reliance Infra-led consortium
Mumbai Phase III (Colaba-Bandra)
120
Project being finalised
Ahmedabad
32
DPR to be resubmitted
Kochi
30
First shortlist of bidders
Hyderabad
121
Awarded to Maytas-led consortium but contract withdrawn; will reopen for bids from 15 July to 15 November
Total
380
Source: News reports, RHH
34
Infrastructure
Sector Report
Heavy investments anticipated for rail expansion and technical upgrades
05 October 2009
Expansion and technical upgrades: Heavy investments will be required for enhancing the capacity of rolling stock, technical upgrades and technological advancements necessary to achieve the ambitious targets set for the passenger and freight business segments, in the 11th plan. The railways aim to complete gauge conversion across 4,900km, doubling across 1,800km and laying of 1,100km of new lines, over five years.
Bullet trains: The government has announced plans to conduct feasibility studies for bullet trains on a number of routes: Delhi – Amritsar, Ahmedabad – Mumbai – Pune, Hyderabad – Vijaywada – Chennai, Chennai – Bangalore – Ernakulam, and Howrah – Haldia.
Fig 73 - Indian railways - Financial performance summary (Rs bn) 900 800 700 600 500 400 300 200 100 0
Gross traffic receipts
Net revenues 819 717
411
121 26
1
FY81
429
474
11
38
45
53
FY91
FY03
FY04
FY05
545
101
FY06
800
627
145
FY07
183
FY08
164
174
FY09 FY09A (BE)
Source: Indian railways
35
Infrastructure
Sector Report
05 October 2009
Irrigation Overall outlay for the 11th plan Particulars State plan State sector schemes, i.e., AIBP and others Central plan Total
(Rs bn) 1,821 470 242 2,533
Source: Plan Document
India has 2.4% of the world’s total area but 16% of the population and only 4% of the available fresh water. This clearly indicates the need for water resource development, conservation, and optimum use. The gross irrigated area in the country is only 87.2mn hectares (mha). 11th plan irrigation targets The Indian government has taken up irrigation potential creation through public funding and assistance to farmers to create potential on their own farms. Substantial irrigation potential has been created through major and medium irrigation (MMI) schemes. India’s estimated irrigation potential is ~139.9mha. Of the total potential created (102.8mha), however, only 87.2mha is actually utilised at the end of the 10th plan.
Fig 74 - Ultimate irrigation potential, potential created and potential utilised Sector (mha)
Ultimate irrigation potential
Potential created
Potential utilised
Till end of 9th Plan
Anticipated in 10th Plan
Till end of 9th Plan
Anticipated in 10th Plan
58.5
37.1
5.3
31.0
3.4
Surface water
17.4
13.6
0.7
11.4
0.6
Groundwater
64.1
43.3
2.8
38.6
2.3
Subtotal
81.4
56.9
3.5
50.0
2.8
Total
139.9
94.0
8.8
81.0
6.2
Major & Medium irrigation Minor Irrigation
Source: Planning Commission
The Working Group on water resources for the 11th plan has proposed the creation of irrigation potential of 16mha (9mha from major & medium irrigation – MMI, and 7mha from minor irrigation – MI) during the plan period.
Rs 1,740bn to be invested in major & medium irrigation
MMI accounts for bulk of planned investment Of the overall 11th plan irrigation investment of Rs 2,533bn, ~Rs 1,740bn is to be invested in MMI, Rs 334bn in minor irrigation (MI), Rs 108bn in command area development (CAD), Rs 82bn in flood control, and Rs 270bn in watershed development.
Fig 75 - Projected investment for the 11th Plan in irrigation (including Watershed) Year (Rs bn at 2006-07 prices) Centre
2007-08
2008-09
2009-10
2010-11
2011-12
Total 11th Plan
34
40
48
57
69
248
Major and Medium
1
1
1
1
1
6
Irrigation
0
0
0
0
0
0
Minor Irrigation
1
1
1
1
1
4
Command Area Development
2
2
2
2
2
10
Flood Control
2
2
2
2
2
9
28
35
42
51
63
219
States
241
319
424
565
736
2,285
Major and Medium Irrigation
Watershed Development
170
232
318
436
577
1,733
Minor Irrigation
39
49
62
79
100
329
Command Area
13
16
19
23
28
98
Development
0
0
0
0
0
0
Flood Control
11
13
14
17
19
73
Watershed Development Total
9
9
10
11
12
51
275
359
472
623
804
2,533
Source: Planning Commission
36
Infrastructure
Sector Report
05 October 2009
With substantial investments planned for the Accelerated Irrigation Benefits and Bharat Nirman programmes, state spending has been assumed to grow annually at ~37% on MMI, at 27% on minor irrigation, at 21% on CAD, and at 15% on flood control. States’ investment in watershed development (WD) programmes is envisaged to grow at the rate of 24% per annum during the plan period. Fig 76 - Comparative investment projections Irrigation incl Watershed (Rs bn)
10th Plan (anticipated)
11th Plan
Log-linear projection
Working group estimates
136
248
NA
498
Centre State
979
2,285
NA
1,821
Public
1,115
2,533
1,869
2,318
Private
-
-
-
-
1,115
2,533
1,869
2,318
Total Source: Plan Document, RHH
AIBP a key thrust to the sector AIBP allocation hiked 75% to Rs 350bn for 2009–10
11th Plan irrigation outlay in key states State
State outlay (Rs bn)
Andhra Pradesh
343
Gujarat
292
Maharashtra
268
Karnataka
260
Uttar Pradesh
163
Madhya Pradesh
149
Bihar
79
Rajasthan
77
Orissa
65
Chhattisgarh
56
Tamil Nadu
33
Uttarakhand
27
West Bengal
26
Punjab
14
Total Source: Planning Commission
1,852
The central government initiated the Accelerated Irrigation Benefits Programme (AIBP) from 1996–97 to extend assistance for completion of unfinished irrigation schemes. Allocation for AIBP was raised 75% from Rs 200bn for 2008–09 to Rs 350bn for 2009–10. Under this programme, all projects which have investment approval from the Planning Commission are eligible for assistance. From being entirely funded by the Centre, the AIBP was modified to have a grant-cum-loan component from 2004–05. Reform measures such as revision of water rates to cover operation and maintenance (O&M) charges have been introduced, but the results were not satisfactory because of the sluggish efforts of state governments to comply with the reform measures. Moreover, the incentive to state governments, that is a 70% loan, was not attractive enough to carry out the reforms. In 2005–06, the government launched a second irrigation initiative entitled Bharat Nirman where 10mha of additional irrigational potential creation was targeted in a period of four years. To achieve this target, the AIBP guidelines were further modified in December ’06 wherein Central assistance was set as follows: a 25% grant for project cost for non-special category states and 90% for special category states & projects benefiting drought-prone and tribal areas. It was also decided to treat projects in the undivided Koraput, Bolangir, and Kalahandi (KBK) districts of Orissa at par with special category states. State governments to play a major role As per the Constitution, irrigation is a state subject; hence, a bulk of the investment into the sector will be contributed by state governments with little central allocation. State outlay for the sector is estimated at ~Rs 2,285bn (including state sector schemes) in the 11th Five Year Plan, of which ~70% will come from only six states, i.e., Andhra Pradesh (AP), Gujarat, Maharashtra, Karnataka, Uttar Pradesh and Madhya Pradesh. Fig 77 - State irrigation outlay for FY09 (Rs bn) 140 120 100 80
132.5
47.5
60 40 20 0 AP Source: RHH
Gujarat
59.5 34.7
Karnataka
21.8
Maharashtra
MP
* AP – Andhra Pradesh, MP – Madhya Pradesh
37
Infrastructure
Sector Report
AP to spend Rs 178bn for irrigation works in FY10, 34% higher than FY09
05 October 2009
AP irrigation spend to touch Rs 178bn in FY10 The AP government has successfully implemented irrigation projects in the state, as evidenced by a 50% budgetary allocation to these works. The state government’s spend on irrigation has increased at a CAGR of ~40% over FY05-FY09. For FY10, AP plans to expend Rs 178bn for major, medium and minor irrigation works, which is ~34% higher than the FY09 budget. Of the total outflow of Rs 178bn, Rs 50bn will be utilised for ongoing works and the balance for new works. Jalayagnam programme will play a key role Jalayagnam will continue to be the AP government’s flagship programme for the irrigation sector. Under Jalayagnam, 86 projects have been approved since 2004 with a total cost of Rs 1,760bn, of which Rs 450bn has been spent in the last five years. The programme includes projects such as construction of reservoirs and lift irrigation systems for lifting water from major rivers, particularly from the Godavari, to provide immediate benefits. Fig 78 - Andhra Pradesh: Summary of annual plans Sector (Rs bn)
A/C 2007-08
RE 2008-09
BE 2009-10
24.4
56.8
41.1
122.4
132.5
178.0
28
0.02
1.7
Social Services
81.6
141.5
109.1
Transport
16.9
17.1
22.0
Others (Industries, General Economic Services etc)
26.2
14
14.3
275.1
361.9
366.4
Agriculture & Allied Activities & Rural Development Irrigation Power
Total Source: Andhra Pradesh Budget document
IVRCL, HCC, NCC and Patel Engg will benefit from AP irrigation contracts
AP to remain the irrigation hub of India We expect the AP government to continue with its massive irrigation development drive going forward. Accordingly, we anticipate significant contract awards in this segment in the near future, which will benefit players like IVRCL, Hindustan Construction Co, Nagarjuna Construction Co and Patel Engineering.
Fig 79 - Andhra Pradesh: Annual plan 2009–10
Fig 80 - Andhra Pradesh: Fiscal deficit as a % of GSDP (%)
Source: Andhra Pradesh Budget document
5.1
4.3 4.5
3.9 3.9
2.5
3.5
2006-07
2005-06
2004-05
2003-04
2002-03
2001-02
2000-01
2.1
3.2 3.0
2008-09 (BE)
4.0
2007-08 (RE)
4.9
1999-00
Irrigation 48.6%
6 5 4 3 2 1 0
1998-99
Social services 29.8%
Power 0.5%
1997-98
Agri & Rural devp. 11.2%
Transport Others 3.9% 6.0%
Source: Planning commission
38
Infrastructure
Sector Report
05 October 2009
Water supply and Sanitation Increasing urbanisation of the country has led to a renewed focus on addressing the investment backlog in urban water and sanitation infrastructure through the JNNURM. Under the JNNURM, major contributions would be made by the central government in urban water and sanitation through ULBs. In addition, counterpart funding from state governments would result in a significant increase in states’ expenditure. Investment projected at Rs 1,437bn In view of the low levels of capital formation in the sector in the past and the need to urgently increase coverage in both rural and urban areas, total investment during the 11th plan is projected at Rs 1,437bn, of which Rs 420bn or ~29.2% would be Central spending with Rs 963bn or 67% of total spending by States. The private sector is expected to invest Rs 54bn or 3.8%. Of the total public sector spending in the sector, ~70% is allocated to water supply and 30% to sanitation. The private sector is projected to invest 80% in water supply and 20% in sanitation. Of the total investment, 63% is allocated to rural water supply and sanitation and 37% to urban projects.
Water supply and sanitation to attract investments of Rs 1,437bn
Fig 81 - Projected investment in the 11th Plan in water supply and sanitation 2007-08
2008-09
2009-10
2010-11
2011-12
Total 11th Plan
Centre
52
64
80
100
125
420
Water supply
36
45
56
70
87
294
Sanitation
15
19
24
30
37
126
135
156
183
220
269
963
Water supply
95
109
128
154
189
674
Sanitation
41
47
55
66
81
289
Private
6
8
10
13
16
54
Water supply
5
6
8
10
13
43
Sanitation
1
2
2
3
3
11
Total
193
228
273
333
411
1,437
Water supply
136
160
192
234
289
1,012
57
68
81
99
122
426
Year (Rs bn at 2006-07 prices)
States
Sanitation Source: Planning Commission
Fig 82 - Projected investment in the 11th Plan in rural and urban water supply and sanitation Year (Rs bn at 2006-07 prices)
2008-09
2009-10
2010-11
2011-12
126
146
172
208
255
67
82
101
125
155
530
193
228
273
333
411
1,437
Rural Urban* Total Source: Planning Commission
* Including investment through ULBs
Fig 83 - Comparative investment projections
Fig 84 - Comparative investment in Irrigation and Water supply
10th Plan (anticipated)
11th Plan
Log-linear projection
Centre
423
420
State
215
963
Public
638
1,383
Private
10
54
648
1,437
Water supply and Sanitation (Rs bn)
Total 11th Plan 907
2007-08
Total Source: Plan Document, RHH
Wrk group estimates
(Rs bn)
NA
NA
2,500
NA
NA
1,341 2 1,343
1,270 NA 1,270
Irrigation
Water supply and sanitation
3,000
2,533
2,000
1,437
1,500 1,000 500
275
193
359 228 472 273
623
804 333
411
0 2007-08
2008-09
2009-10
2010-11
2011-12
To tal 11th P lan
Source: Planning document
39
Infrastructure
Sector Report
05 October 2009
JNNURM JNNURM aims to improve economic and social infrastructure in 65 cities
Under JNNURM, the government intends to transform 65 cities in India in seven years by improving economic and social infrastructure. Currently, there are ~463 projects sanctioned with cost estimates of Rs 497bn. The projects include investments in roads, flyovers and urban transport systems, which would translate to increased order flows for infrastructure players. JNNURM, which was launched in 2005–06, provides for additional central assistance (ACA) of Rs 500bn for the 7-year period and an equal amount from state governments and urban local bodies (ULB). Allocation to JNNURM has been hiked by 90% to Rs 129bn for 2009–10 as compared to Rs 68bn for 2008–09. The scheme covers the following project types:
JNNURM allocation hiked by 90% to Rs 129bn for 2009–10
Urban renewal, i.e., redevelopment of inner city areas
Water supply (including desalination plants) and sanitation
Sewerage and solid waste management
Construction and improvement of drains/storm water drains
Urban transport, including roads, highways, expressways, MRTS, metro projects
Parking lots/spaces on PPP basis
Development of heritage areas
Prevention and handling of soil erosion/landslides only in case of special category states where such problems are common
Preservation of water bodies
Power, telecom, health, education and wage employment are excluded from the purview of this scheme. Fig 85 - Financing of projects under JNNURM Category of Cities/Towns/UAs
ULB or Para- State Share/Loan from Financial Institutions (%)
Grant Centre (%)
State (%)
Cities/UAs with 4mn+ population as per 2001 census
35
15
50
Cities/UAs with1mn+ but less than 4mn population as per 2001 census
50
20
30
Cities/towns/UAs in North Eastern States and Jammu & Kashmir
90
10
-
Cities/UAs other than those mentioned above
80
10
10
80
10
10
For setting up desalination plants within 20km from seashore and other urban areas facing water scarcity Source: JNNURM amended guidelines
40
Infrastructure
Sector Report
05 October 2009
Airports Air passenger growth in India has been one of the highest in the world and is expected to surpass countries like China, France and Australia in the years to come. India’s civil aviation market has logged a CAGR of 18% and was worth US$ 5.6bn in 2008. The Centre for Asia Pacific Aviation (CAPA) has forecast a market of more than 100mn passengers by 2010. In addition, ~3.4mt of cargo per annum is expected to be handled by 2010. Investment of Rs 310bn in 11th plan period The government’s strategy for the airport sector, supported by the development of a detailed financing plan, is expected to lead to a quantum jump in capital formation in the sector in the 11th plan. The Financing Plan for Airports has estimated an investment of ~Rs 400bn at 2006–07 prices over 2005–14.
Air passenger growth in India is one of the highest in the world
Taking into account an anticipated investment of Rs 48.9bn in 2005–07 and the spillover of ~Rs 38.8bn to the 12th plan, and with suitable re-phasing in light of the government’s subsequent decision to implement modernisation of the Kolkata and Chennai airports mainly through the public sector, an investment of Rs 310bn is projected for the 11th plan period. Fig 86 - Projected investment in airports during the 11th Plan Year (Rs bn at 2006-07 prices)
2007-08
2008-09
2009-10
2010-11
2011-12
Total 11th Plan
28
28
27
25
24
131
7
7
8
9
10
42
14
15
18
25
33
106
1
1
1
1
1
5
Metro airports Non-metro airports Greenfield airports (including Bangalore & Hyderabad) NE airports CNS-ATM and equipment Total
3
4
5
6
8
26
52
55
59
66
77
310
Source: Planning commission
Fig 87 - Projected public-private investment in airports during the 11th Plan Total 10th Plan (Anticipated)
2007-08
2008-09
2009-10
2010-11
2011-12
Public
38.4
12
14
19
22
27
93
Private
29.4*
40
42
40
44
50
216
67.7
52
55
59
66
77
310
Total Source: Planning commission
Total 11th Plan
* Provisional expenditure
Fig 88 - Comparative investment projections Airports (Rs bn) Centre State
10th Plan (anticipated)
11th Plan
Log-linear projection
Working group estimates
38
93
NA
NA
-
1
NA
NA
Public
38
94
90
92
Private
29
216
151
NA
Total
67
310
241
92
Source: Plan Document, RHH
41
Infrastructure
Sector Report
35 non-metro airports and 13 others to be developed in 11th plan
05 October 2009
Mega development targets During the 11th plan, the Airports Authority of India (AAI) will undertake the development of 35 non-metro airports and 13 other airports; development of Chennai and Kolkata airports; construction of new greenfield airports, including three in the NER; expansion of five airports in NER and other crucial areas; upgrades of technology from ground-based communication, navigation, and surveillance-air traffic management (CNS-ATM) to satellite-based CNS-ATM facilities; installation of new facilities including security equipment at various airports; installation of safety and facilitation equipment; development of airspace capacity enhancement; and development of IT. New Delhi and Mumbai airport revamp underway: The international airports at New Delhi and Mumbai are being restructured with modernisation and upgradation works being carried out through private participation. According to the Economic Survey report 2008–09, the construction of first phase development works in Delhi started in early 2007 and is likely to be completed by March ’10 at a cost of ~Rs 89.8bn. Construction works for the Mumbai airport started in January ’07. The development works for this project are to cost ~Rs 98bn and are expected to be completed by 2012. Development of 35 non-metro airports: AAI is upgrading and modernising 35 nonmetro airports in the county in a time bound manner. Development of airports in the north-eastern region is being taken up on a priority basis. Architectural design competitions have been held for terminal buildings at 18 airports. These buildings will be modular in design for easy expansion. At Nagpur and Srinagar, the terminals have already been expanded and modified for integrated operations. Terminal building works have been completed in Ahmedabad (domestic), Kullu, Kangra, Porbandar, Udaipur, Gaya, Nagpur, Belgaum, Akola, Calicut, Hubli, Surat, Aurangabad and Trichy airports.
City side development of 24 airports will be undertaken via PPP
Development works on the airside and city side are likely to be completed by March ’10. The city side development of 24 airports will be undertaken with private sector participation under PPP mode and will cover commercial development of property, car parking and cargo operations. Fig 89 - City side development via PPP Airports Agatti
Guwahati
Rajkot
Ahmedabad
Indore
Ranchi
Amritsar
Jaipur
Thiruvanthapurum
Aurangabad
Khajuraho
Trichy
Bhopal
Lucknow
Udaipur
Bhubaneswar
Madurai
Vadodara
Dehradun
Mangalore
Varanasi
Dimapur
Raipur
Vizag
Source: Planning Commission
Request for Qualification (RFQ) for Amritsar and Udaipur has already been issued and five interested parties have been short-listed for each of them. An MCA for development of non-metro airports has also been prepared and published. 13 more projects on the cards: Development works at an additional 13 non-metro airports are being undertaken for completion in a similar time frame.
42
Infrastructure
Sector Report
05 October 2009
Fig 90 - Non-metro airport development Airports Akola
Dibrugarh (Mohanbari)
Rajahmundry
Behar
Gondia
Srinagar
Belgaum
Hubli
Surat
Calicut
Kullu (Bhuntar)
Vijayawada
Cooch
Mysore
Source: Planning Commission
10 greenfield airports being set up on PPP basis
10 greenfield airports approved: The policy for greenfield airports was approved by the government in April ’08 to enable their set-up on a PPP basis, with an MCA also put into place. FDI up to 100% is permitted through the automatic approval route. Until December ’08, the central government had approved 10 greenfield airports, i.e., Goa, Navi Mumbai, Kannur, Bijapur, Simoga, Hassan, Gulbarga, Sindhudurg, Dabra and Durgapur. Fig 91 - Status of greenfield projects up to December ’08 Sr. No.
Name of airport
A
Project commissioned
1
Banglore International airport
Karnataka
Commissioned in May 2008
Andhra Pradesh
Commissioned in March 2008
State
Status
2
Hydrabad International airport
B
Approval granted by Central Government
3
Mopa airport
Goa
Planning stage
4
Navi Mumbai International Airport
Maharashtra
Planning stage
5
Kannur airport
Kerala
Planning stage
6
Bijapur airport
Karnataka
Awarded
7
Simoga airport
Karnataka
Awarded
8
Hassan airport
Karnataka
Awarded
9
Gulbarga airport
Karnataka
Awarded
10
Sindhudurg airport
Maharashtra
In-principle approval awarded
11
Dabra airport, Gwalior
Madhya Pradesh
In-principle approval awarded
12
Durgapur airport
West Bengal
In-principle approval awarded
C
Proposal under consideration with the Government
13
Greater Noida International airport
Uttar Pradesh
Under consideration
14
Chakan International airport
Maharashtra
Under consideration
15
Karaikal airport
Pondicherry
Under consideration
16
Airport at Jhajjar
Haryana
Under consideration
17
Airport at Jludhina
Punjab
Under consideration
18
Airport at Paladi-Ramsinghpur
Rajasthan
Under consideration
19
Airport at Ankleshwar, Bharuch
Gujarat
Under consideration
20
Airport at Ramnad, Rameshwaram
Tamil Nadu
Under consideration
Source: Planning Commission
43
Infrastructure
Sector Report
05 October 2009
Ports Close to 95% of the volume and 70% by value of the country’s international trade is conducted through its 12 major and 187 minor/intermediate (non-major) ports. Collectively, the major ports handle ~75% of India’s maritime cargo.
Rs 610bn to be invested in major ports and Rs 270bn in smaller ports
Investment of Rs 880bn over 11th plan Anticipated investment in the 10th plan was Rs 141bn comprising Rs 37bn from public sources and Rs 104bn from the private sector. With the expected higher public investment in major ports, a total investment of Rs 880bn is projected for the 11th plan with Rs 610bn being invested in major ports and Rs 270bn in non-major ports.
Fig 92 - Projected investment in ports during the 11th Plan 2007-08
2008-09
2009-10
2010-11
2011-12
Total 11th Plan
Major Ports
88
105
122
137
158
610
Non-Major Ports
36
43
52
63
76
270
124
148
174
200
234
880
Year (Rs bn at 2006-07 prices)
All Ports Source: Planning Commission
Fig 93 - Projected investment in ports during the 11th Plan by category 2007-08
2008-09
2009-10
2010-11
2011-12
Total 11th Plan
Major Ports
88
105
122
137
158
610
Public
49
57
62
64
67
299
Private
39
48
59
73
91
311
Non-Major Ports
36
43
52
63
76
270
Year (Rs bn at 2006-07 prices)
Public
6
7
7
8
9
36
Private
30
36
45
55
68
234
All Ports
124
148
174
200
234
880
Public
55
64
70
71
76
335
Private
69
85
104
128
159
545
Source: Planning Commission
Fig 94 - Comparative investment projections 10th Plan (anticipated)
11th Plan
Log-linear projection
Working group estimates
Centre
22
299
NA
NA
State
15
36
NA
NA
Ports (Rs bn)
Public
37
335
40
185
Private
104
545
474
369
Total
141
880
514
554
Source: Plan Document, RHH
The projections assume that ~49% of total investment in major ports and 13% of total investment in non-major ports would come from the public sector. The phasing of investment reflects a CAGR of ~8% in public investment in major ports and ~9% in non-major ports. Private investment in major and non-major ports is assumed to grow at a CAGR of ~23%. Thus, total public investment in ports is projected at Rs 335bn and private investment at Rs 545bn during the 11th plan. The overall ratio of public to private spending on investment in the sector is 38:62.
44
Infrastructure
Sector Report
05 October 2009
Companies
45
HCC
Sector Report
05 October 2009
HCC Growth across segments
What’s New?
Strong order book of Rs 135bn: At the end of Q1FY10, HCC had an outstanding order book of Rs 134.6bn (excluding Rs 19.4bn under dispute), which is 3.3x FY10E revenues. This apart, the company has L1 orders worth Rs 8bn.
Target
Rating
Estimates
BOT portfolio to expand four-fold to Rs 100bn: Currently, HCC Infrastructure (a 100% subsidiary) has three BOT projects under various stages of construction:
CMP
TARGET
RATING
RISK
Rs 130
Rs 141
HOLD
MEDIUM
Nirmal BOT, Andhra Pradesh – This is an annuity project (semi-annual instalments of Rs 230mn) that has been completed three months ahead of schedule. HCC is thus eligible for an early-completion bonus and can begin to recognise revenue in the current fiscal, once NHAI awards a completion certificate.
BSE
NSE
BLOOMBERG
500185
HCC
HCC IN
Badarpur Elevated Expressway connecting Delhi and Haryana – Construction work on this project commenced in January. It is 15–20% complete and scheduled to be fully ready by December ’10. BOT road project on Dhule–Maharashtra/Madhya Pradesh border (37% stake) – Financial closure is scheduled for December ’09.
Over the next four years, the management expects to expand its BOT portfolio four-fold, from Rs 25bn to Rs 100bn. It also intends to bid for six projects in the near future and pegs the equity IRR from the same at 16–17%. Lavasa Phase I revenue pegged at Rs 36bn: Lavasa, near Pune, is an all-new city in the making with a master plan of 12,500 acres. Dasve, the first town, is slated for completion in FY11. The management estimates revenues of Rs 36bn from Lavasa Phase I as follows: residential sales Rs 21bn, commercial and retail mall sales Rs 8bn, institutional sales Rs 4.5bn, and hospitality Rs 2.5bn. The company has received Rs 2.5bn out of the total pre-sales of Rs 9.4bn in Lavasa. At present, units at Dasve are being sold at an average rate of Rs 3,800psf for villas and Rs 3,200psf for other units. 55% of 247 Park project leased out: HCC has leased out 55% of the total 1.1mn sq ft of its commercial project, christened 247 Park, at an average lease rent of Rs 60–65psf. Rs 4.8bn via QIP raised: HCC has raised ~Rs 4.8bn via a QIP, by placing 47mn shares at Rs 102.15/share in June ’09. A majority of the funds will be utilised for loan repayment and to meet working capital needs, whereas the balance will be deployed towards infrastructure projects. With this QIP, we expect the company’s debt/equity ratio to decline from 2.5x to 1.5x. Target of Rs 141 – Hold: We have an SOTP target price of Rs 141 based on a core business P/E multiple of 14x on FY11E earnings. Hold.
Financial highlights (Rs mn)
FY09
FY10E
FY11E
30,827
33,137
41,091
49,309
30.8
7.5
24.0
20.0
Adj net income
724
760
1,074
1,443
Growth (%)
17.4
5.0
41.3
34.3
2.6
2.8
3.5
17.4
5.0
25.2
Growth (%)
FDEPS (Rs) Growth (%)
Market cap (Rs mn / US$ mn)
39,422 / 826
Outstanding equity shares (mn)
303
Free float (%)
52.8
Dividend yield (%)
0.6
52-week high/low (Rs)
137 / 29
2-month average daily volume
5,359,981
Stock performance Returns (%)
CMP
1-mth
3-mth
6-mth
130
22.9
25.1
223.4
17,135
10.2
17.0
73.0
HCC Sensex
P/E comparison (X) 50
HCC
Indust ry
46.9 37.5
40 30
29.6
28.9
24.9
21.1
20 10 0 FY09A
FY10E
FY11E
Valuation matrix (x)
FY08
FY09
FY10E
FY11E
P/E @ CMP
49.3
46.9
37.5
28.9
P/E @ Target
53.3
50.7
40.5
31.3
EV/EBITDA @ CMP
16.0
13.6
11.3
9.5
Profitability and return ratios FY08
Revenue
Company data
(%)
FY08
FY09
FY10E
FY11E
EBITDA margin
11.9
13.0
12.5
12.5
EBIT margin
8.8
9.5
9.2
9.3
Adj PAT margin
2.3
2.3
2.6
2.9
ROE
7.6
7.6
8.4
9.0
4.5
ROIC
6.6
7.0
7.3
7.6
29.4
ROCE
7.8
9.7
7.6
8.0
46
HCC
Sector Report
05 October 2009
Revenue and order book trend Fig 95 - Order book at Rs 134.6bn (excluding Rs 19.4bn under dispute) (Rs bn) 160
Order book
Order received
145
135
140 120 100 Strong order book ensures high revenue
80
visibility over the medium term
60
77
74
82
71
102
88
83
47 27
40 10
8
20
6
4
8
10
Q3
Q4
Q1A
Q2A
0
0 Q1
Q2 FY08
Q3A
Q4A
Q1A
FY09
FY10
Source: Company, RHH
Fig 96 - Order break-up segment-wise (%) 60 Since Q1FY08, power segment orders have increased, whereas transportation orders have steadily declined
50
Power 46
44
30
34
15
10
3
0
0 Q1
Q2
43 30
21
0 Q4
51
39 40
27 27
19 4
0
Q3
Others 50
47
32
22
21
20
Water & environment
47
44
37
36
40
Transportation
Q1
19
16
3 Q3
14 3
2
Q2
FY08
32
31
FY09
3 Q1
FY09
FY10
Source: Company, RHH
Fig 97 - Revenue break-up segment-wise (%)
Power
Transportation
Water & envuiorenment
Others
60 Power (40% of revenues) remains the
50
key revenue driver
40
48
30 26
36
20 10
4
15 8
40
39
33
22
46
45
44
41
28 18
34 24
25
28 25
3
2
1
5
26
Q2
Q3 FY08
Q4
Q1
Q2
0 Q3
FY09
34 27
40 38
20
0 Q1
38
34
2
1 FY09
Q1 FY10
Source: Company, RHH
47
HCC
Sector Report
05 October 2009
Fig 98 - Summary of BOT projects Project (Rs mn)
HCC’s stake (%)
Total cost
Equity
Debt
HCC’s equity commitment
Equity to be invested till FY10
Comments Project completed 3 months ahead of schedule
Nirmal BOT
100
3,200
300
2,900
300
300
Completion certificate awaited from NHAI; then becomes eligible for Bonus and can start recognising revenues in FY10 Achieved financial closure in FY09
Badarpur Elevated Expressway
Dhule - Maharashtra/ MP border Road project
100
5,700
1,700
4,000
1,700
500
Construction commenced in Jan ’09 and ~15% progress already achieved 15–20% complete and scheduled to be fully ready by December ’10
37
Total
14,000
4,000
10,000
1,480
400
22,900
6,000
16,900
3,480
1,200
Concession agreement signed on 24 June 2009 Financial closure scheduled by the end of December ’09
Source: Company, RHH
Valuation Fig 99 - SOTP valuation summary Particulars
Business
Method
HCC standalone
Construction
P/E FY11
Lavasa
Real estate
NPV (25% discount To NAV)
Vikhroli IT park
Real estate
Capitalisation method @11%
BOT project
Road - annuity
Book value FY10E
Total
Multiple(x)
Value(Rs mn)
Per share value (Rs)
14x
17,229
63
17,555
64
2,199
8
1.5x
1,800
6
38,782
141
Source: RHH
48
HCC
Sector Report
05 October 2009
Stock performance Fig 100 - Absolute performance from April ’04 300
Sensex
HCC
Fig 101 - Relative performance from April ’04 BSE CG Index
250 200 150 100 50 0 Apr-04
May-05
Jun-06
Jul-07
Aug-08
Sep-09
940 840 740 640 540 440 340 240 140 40 Apr-04
Sensex
May-05
HCC
Jun-06
BSE CG Index
Jul-07
Aug-08
Sep-09
Source: Bloomberg, RHH
Source: Bloomberg, RHH
Fig 102 - Relative performance from April ’06 to March ’07
Fig 103 - Relative performance from April ’07 to March ’08
Sensex
HCC
BSE CG Index
110
Sensex
100
BSE CG Index
175
90 80
150
70
125
60
100
50 40 Apr-06
HCC
200
Jul-06
Sep-06
Dec-06
Mar-07
75 Mar-07
Jun-07
Sep-07
Dec-07
Source: Bloomberg, RHH
Source: Bloomberg, RHH
Fig 104 - Relative performance from April ’08 to March ’09
Fig 105 - Relative performance from April ’09
Sensex
HCC
BSE CG Index
120
225
Sensex
HCC
Mar-08
BSE CG Index
200
100
175 150
80
125
60
100 40 20 Mar-08
75 Jun-08
Source: Bloomberg, RHH
Sep-08
Dec-08
Mar-09
50 Mar-09
Apr-09 May-09
Jun-09
Jul-09
Aug-09
Sep-09
Source: Bloomberg, RHH
49
HCC
Sector Report
05 October 2009
12-month forward rolling band Fig 106 - P/E band
Fig 107 - P/BV band
(Rs) 300
(Rs) 400
250
350
6.5x
300
200 40x
150 100
20x
50 0 Aug-06
10x 4x Jun-07
Mar-08
Dec-08
Sep-09
250 200 150
3x
100
1.5x
50
0.5x
0 Aug-06
Jun-07
Source: RHH
Source: RHH
Fig 108 - EV/EBITDA band
Fig 109 - EV/Sales band 100,000 21x
120,000 100,000 80,000 60,000 40,000 20,000 Jun-07
Mar-08
Dec-08
2x
15x
60,000
1.4x
10x
40,000
0.8x
5x
20,000
Sep-09
0 Aug-06
0.2x Jun-07
Mar-08
Source: RHH
Fig 110 - Premium/Discount to BSE 30 P/E
Fig 111 - Market Cap/Sales band
Dec-08
(Rs mn) 100,000
(%) 300 250
Sep-09
2x
80,000
200 150
60,000
100
40,000
50
1.4x 0.8x
20,000
0
Source: RHH
Sep-09
80,000
Source: RHH
(50) Aug-06
Dec-08
(Rs mn)
(Rs mn) 140,000
0 Aug-06
Mar-08
0.2x May-07
Feb-08
Nov-08
Sep-09
0 Aug-06
Jun-07
Mar-08
Dec-08
Sep-09
Source: RHH
50
HCC
Sector Report
05 October 2009
Standalone financials Profit and Loss statement Y/E March (Rs mn) Revenues Growth (%) EBITDA
Balance sheet FY08
FY09
FY10E
FY11E
30,827
33,137
41,091
49,309
30.8
7.5
24.0
20.0
3,666
4,314
5,154
6,163
Y/E March (Rs mn)
FY08
FY09
FY10E
FY11E
Cash and cash eq
2,648
1,537
2,296
656
Accounts receivable Inventories
45
47
113
135
21,660
27,766
30,396
37,826
Growth (%)
69.7
17.7
19.5
19.6
Other current assets
2,753
5,322
5,687
6,833
Depreciation & amortisation
962
1,152
1,380
1,569
Investments
2,956
3,656
4,656
5,856
2,704
3,162
3,774
4,594
Gross fixed assets
14,097
16,829
19,204
21,579
98.2
16.9
19.4
21.7
9,536
11,287
12,282
13,088
1,575
2,244
2,383
2,567
675
464
464
464
74
233
120
110
-
-
-
(1,132)
EBIT Growth (%) Interest Other income EBT
Net fixed assets CWIP Intangible assets
1,203
1,151
1,511
2,137
(1,133)
(1,132)
(1,132)
Income taxes
472
392
512
724
Other assets
-
-
-
-
Effective tax rate (%)
39.3
34.1
33.9
33.9
Total assets
39,139
48,949
54,762
63,727
-
-
-
-
Accounts payable
7,655
10,321
11,719
14,692
Other current liabilities
2,519
3,705
4,054
4,834
466
1,651
2,062
2,062
18,449
23,218
21,368
25,368
10
8
76
129
Extraordinary items Min into / inc from associates
(7)
1
75
30
Reported net income
1,088
1,245
1,074
1,443
Adjustments
(364)
(485)
-
-
724
760
1,074
1,443
Adjusted net income Growth (%) Shares outstanding (mn) FDEPS (Rs) (adj) Growth (%) DPS (Rs)
17.4
5.0
41.3
34.3
256.2
256.2
291.5
303.2
2.6
2.8
3.5
4.5
17.4
5.0
25.2
29.4
0.8
0.8
0.8
0.8
Cash flow statement
Deferred tax assets, net
Provisions Debt funds Other liabilities Equity capital
256
256
303
303
Reserves & surplus
9,784
9,789
15,181
16,340
Shareholder's funds
10,041
10,045
15,484
16,643
Total liabilities
39,139
48,949
54,762
63,727
39.2
39.2
53.1
54.9
FY08
FY09
FY10E
FY11E
BVPS (Rs)
Financial ratios
Y/E March (Rs mn)
FY08
FY09
FY10E
FY11E
Y/E March
Net income + Depreciation
2,050
2,397
2,454
3,011
Profitability & Return ratios (%)
Non-cash adjustments
(227)
(388)
34
27
11.9
13.0
12.5
12.5
(1,580)
(3,070)
(931)
(4,845)
EBIT margin
8.8
9.5
9.2
9.3
243
(1,060)
1,556
(1,807)
Net profit margin
2.3
2.3
2.6
2.9
(2,247)
(2,521)
(2,375)
(2,375)
ROE
7.6
7.6
8.4
9.0
(669)
(700)
(1,000)
(1,200)
ROCE
7.8
9.7
7.6
8.0
-
-
-
-
(2,917)
(3,221)
(3,375)
(3,575)
0
1
1
1
202
(300)
4,649
-
Inventory (days)
309
377
347
348
Issue/repay debt
3,225
4,769
(1,851)
4,000
Payables (days)
114
137
132
135
Dividends paid
(192)
(205)
(205)
(243)
Current ratio (x)
2.7
2.5
2.4
2.3
Other financing cash flow
4
(1,094)
(16)
(16)
Quick ratio (x)
0.0
0.0
0.0
0.0
Change in cash & cash eq
564
(1,111)
759
(1,640)
2,648
1,537
2,296
656
Gross asset turnover
2.5
2.1
2.3
2.4
Total asset turnover
0.8
0.8
0.8
0.8
Interest coverage ratio
1.7
1.4
1.6
1.8
Adjusted debt/equity
1.8
2.3
1.4
1.5
Changes in working capital Cash flow from operations Capital expenditure Change in investments Other investing cash flow Cash flow from investing Issue of equity
Closing cash & cash eq
Economic Value Added (EVA) analysis Y/E March
FY08
FY09
FY10E
FY11E
WACC (%)
11.5
12.1
12.1
12.1
6.6
7.0
7.3
7.6
Invested capital (Rs mn)
26,317
33,384
36,692
43,544
EVA (Rs mn)
(1,276)
(1,708)
(1,766)
(1,974)
(4.8)
(5.1)
(4.8)
(4.5)
ROIC (%)
EVA spread (%)
EBITDA margin
Working Capital & Liquidity ratios Receivables (days)
Turnover & Leverage ratios (x)
Valuation ratios (x) EV/Sales
1.9
1.8
1.4
1.2
EV/EBITDA
16.0
13.6
11.3
9.5
P/E
49.3
46.9
37.5
28.9
3.3
3.3
2.4
2.4
P/BV
51
HCC
Sector Report
05 October 2009
Quarterly trend Particulars
Q1FY09
Q2FY09
Q3FY09
Q4FY09
Q1FY10
Revenue (Rs mn)
8,659
6,489
8,194
9,795
8,725
YoY growth (%)
18.8
18.3
9.3
(7.2)
0.8
QoQ growth (%)
(17.9)
(25.1)
26.3
19.5
(10.9)
EBITDA (Rs mn)
911
834
1,060
1,504
1,115
EBITDA margin (%)
10.5
12.9
12.9
15.4
12.8
Adj net income (Rs mn)
195
(48)
290
308
208
38
(463)
47
(11)
7
(44)
(124)
(710)
6
(32)
(%)
FY07
FY08
FY09
FY10E
FY11E
Tax burden (Net income/PBT)
81.2
60.2
66.0
71.1
67.5
Interest burden (PBT/EBIT)
55.6
44.5
36.4
40.0
46.5
YoY growth (%) QoQ growth (%)
DuPont analysis
EBIT margin (EBIT/Revenues) Asset turnover (Revenues/Avg TA) Leverage (Avg TA/Avg equtiy)
5.8
8.8
9.5
9.2
9.3
75.5
84.9
75.2
79.2
83.2
348.1
380.5
438.6
406.2
368.8
6.9
7.6
7.6
8.4
9.0
Return on equity
Shareholding pattern
Company profile Hindustan Construction Co (HCC) is an integrated group with a
(%)
focus on construction, real estate, and infrastructure development.
Promoters
The HCC group comprises HCC Construction, HCC Infrastructure, HCC Real Estate, and Lavasa Corporation. The group specialises in technically complex, new-age construction
for infrastructure
projects, as well as EPC, BOT, integrated projects, and townships.
8.8
8.7
Banks & FIs
20.4
18.6
16.9
Public
25.7
25.4
27.2
97
157
Buy
6-Oct-08
Quarterly Preview
71
125
Buy
27-Oct-08 Results Review
37
52
Hold
19-Jan-09
Results Review
44
47
Sell
6-Apr-09
Quarterly Preview
38
47
Hold
57
55
Hold
111
120
Hold
130
141
Hold
Buy
●
Sell
●
Hold
Sep-09
Company Update
●
Jul-09
8-Sep-08
125 105 85 65 45 25
May-09
Buy
Results Review
6.7
FIIs
Mar-09
Reco
158
05-Oct-09 Sector Report
47.2
Jan-09
Reco price Tgt price 97
24-Jul-09
47.2
Stock performance
21-Aug-08 RHH Compendium
25-Apr-09 Results Review
47.2
Nov-08
Event
Jun-09
Sep-08
Date
Mar-09
Jul-08
Recommendation history
Dec-08
52
IRB Infrastructure
Sector Report
05 October 2009
IRB Infrastructure Ramp up in road contracts
What’s New?
Portfolio of 12 road projects: IRB Infrastructure (IRB) has a portfolio of 12 BOT road projects, of which 11 are contributing revenues, two are under construction, and one has recently achieved financial closure. These projects, entailing a capitalised cost of Rs 60.7bn, have been funded through a mix of equity (Rs 14.5bn) and debt (Rs 46.2bn). L1 for four projects worth Rs 43bn; secured one worth Rs 12bn: IRB has emerged as the lowest bidder for four BOT road projects; of these, one Rs 12.5bn contract, for four to six-laning of the 102km-long Pathankot to Amritsar section of NH-15 in Punjab, has been awarded to the company. The remaining three L1 projects are: 1) four-laning of a 65km stretch on NH-4A in Goa (estimated cost Rs 8.3bn), 2) the 148.7km Jaipur to Deoli section in Rajasthan (Rs 15bn), and 3) four-laning of the 67km-long Talegaon to Amravati section in Maharashtra (Rs 8bn). Contract awards may materialise in October ‘09, fuelling the company’s EPC order book from current Rs 56.6bn to Rs 99.6bn. This apart, IRB has recently won a project for development of a Greenfield airport in Sindhudurg, Maharashtra, on a DBFO basis. Strong in-house construction order book of Rs 56.6bn: IRB’s order book of Rs 56.6bn is bifurcated as follows: a) EPC (Rs 30.9bn) to be executed within three years, and b) O&M (Rs 25.7bn) to be executed within 10–12 years. IRB’s construction arm reports margins of ~18% vis-à-vis the industry average of 10%. This outperformance can be attributed to lower subcontracting expenses, a large fleet of equipment, ownership of aggregate mines, and higher cost assumptions while pricing project bids. Target price of Rs 224 – Buy: Over FY09-FY11, we anticipate a significant 93.1% CAGR in IRB’s revenues and a 94.0% CAGR in earnings led by its strong BOT road and construction portfolio. At present, the stock is trading at 20.2x FY10E and 15.4x FY11E earnings. We have a revised SOTP target of Rs 224 for IRB as follows:
BOT road projects valued at Rs 119 based on FY11E NPV. This implies a P/BV of 2.6x and 2.2x on FY10E and FY11E respectively. Core construction business valued at Rs 79 or 12x FY11E earnings. We have increased our target multiple from 11x earlier due increase in broader market multiples. Real estate valued at Rs 3 (book value). Provisional NPV valuation of the four new BOT projects at Rs 23.
Key triggers: A softening interest rate scenario and improved traffic growth as economic revival gains momentum would be key triggers for the stock.
Financial highlights FY08
FY09
FY10E
FY11E
Revenue
7,327
8,834
18,693
32,940
Growth (%)
139.7
20.6
111.6
76.2
Adj net income
1,139
1,197
3,432
4,504
Growth (%)
405.1
5.1
186.7
4.2
3.6
10.3
357.9
(13.8)
186.7
Growth (%)
Rating
Estimates
CMP
TARGET
RATING
RISK
Rs 209
Rs 224
BUY
MEDIUM
BSE
NSE
BLOOMBERG
532947
IRB
IRB IN
Company data Market cap (Rs mn / US$ mn)
69,464 / 1,455
Outstanding equity shares (mn)
332
Free float (%)
25.6
Dividend yield (%)
0.8
52-week high/low (Rs)
227 / 64
2-month average daily volume
2,093,089
Stock performance Returns (%)
CMP
IRB Sensex
1-mth
3-mth
6-mth
209
(0.8)
28.1
138.2
17,135
10.2
17.0
73.0
P/E comparison (x) 80
IRB
Cap. Go o ds
58.0
60 29.6
40
20.2 24.9
15.4
20
21.1
0 FY09
FY10E
FY11E
Valuation matrix (x)
FY08
FY09
FY10E
FY11E
P/E @ CMP
50.0
58.0
20.2
15.4
P/E @ Target
53.6
62.1
21.7
16.5
EV/EBITDA @ CMP
23.9
30.0
11.5
8.5
Profitability and return ratios
(Rs mn)
FDEPS (Rs)
Target
(%)
FY08
FY09E
FY10E
FY11E
EBITDA margin
56.2
37.2
45.8
35.2
EBIT margin
42.3
24.3
35.4
25.4
Adj PAT margin
15.5
13.5
18.4
13.7
31.2
ROE
11.4
7.1
18.1
19.7
13.6
ROIC
8.2
4.5
12.1
11.4
31.2
ROCE
8.2
5.9
11.6
11.9
53
IRB Infrastructure
Sector Report
05 October 2009
Revenue and order book trend Fig 112 - Comparative BOT toll revenue for last three years Sr. no.
Toll Plaza
1
Thane Bhivandi Bypass
2
Bhiwandi Wada *
3
Kaman Paygaon
4
Khambatki Ghat**
5
FY07 (Rs mn)
FY08 (Rs mn)
YoY Growth (%)
FY09 (Rs mn)
244
335
36.9
403
20.6
25
30
19.5
16
(48.5)
YoY Growth (%)
34
36
7.6
36
(0.1)
110
128
16.2
131
2.2
Kharpada Bridge
87
75
(13.7)
71
(5.9)
6
Nagar-Karmala-Tembhurni
89
110
23.5
113
3.1
7
Mohol-Kurul-Mandrup
37
61
62.8
65
7.4
8
Pune-Solapur
120
136
14
127
(6.9)
9
Pune-Nasik
154
160
3.6
164
2.5
10
Mumbai - Pune#
1,725
2,352
36.4
2,880
22.4
213
270
26.7
265
(1.8)
-
-
NA
336
NA
2,839
3,693
30.1
4,607
15.6
11
Thane Ghodbunder
12
Surat-Dahisar## Total
Source: RHH, Company * Concession period ended on 22 September 2008. ** Concession period expired during this month. #In FY07 revenue from NH-4 phase is from the date of project commission i.e. from September’’06 to March ’07. ## Revenue from Surat- Dahisar commissioned on 20 February 2009. # Growth calculated without considering revenue from Surat-Dahisar as this project was commissioned on 20 February 2009.
Fig 113 - Order book break-up – Q1FY10 Order book composition
Rs mn
% of Total
28,661
50.6
2,275
4.0
BOT projects in O&M phase
25,670
45.3
Total
56,606
100.0
EPC in ongoing BOT projects Funded projects
Source: Company
Fig 114 - Summary of L-1 projects / projects recently awarded Project cost
Positive grant
% of Total Cost
Equity
Debt
Concession period (yrs)
NPV FY11E
65.1
8,360
1,860
22.2
2,600
3,900
30
3.0
III
102
12,500
1,270
10.2
3,930
7,300
20
1.2
Jaipur to Deoli Section
III
148.8
15,000
3,060
20.4
3,582
8,358
25
10.7
Talegaon - Amravati
III
66.7
8,000
2,160
27.0
1,752
4,088
25
7.8
382.6
43,860
8,350
19.0
11,864
23,646
Sr. No.
Road (Rs mn)
NHDP Phase
Length (Km)
1
Goa / Karnataka Border to Panaji - Goa
III
2
Pathankot to Amritsar*
3 4
Total Source: Company, RHH
22.7
*Awarded
54
IRB Infrastructure
Sector Report
05 October 2009
Valuation Fig 115 - SOTP valuation summary Project
Subsidiary
Thane Bhivandi Bypass
IRB
NPV per share (Rs)
Bhiwandi Wada
IRB
Kaman Paygaon
IRB
Khambatki Ghat
IRB
Kharpada Bridge
IRB Infrastructure Pvt Ltd
2
NKT Road & Toll
2
MMK Toll Road
1
Nagar-KarmalaTembhurni Mohol-Kurul-Mandrup
14
Pune-Solapur
Aryan Toll Road
3
Pune-Nasik
ATR Infrastructure
5
Mumbai-Pune
Mhaiskar Infrastructure
Thane Ghodbunder
Thane Ghodbunder Toll Road
Bharuch-Surat
IDAA Infrastructure
42 4 23
Surat-Dahisar
IRB Surat Dahisar Tollway
3
IRDP-Kolhapur
IRB Kolhapur Integrated Road Development Co
5
Total FY09E NPV
105
FY10E NPV
119
Construction business
Modern Road Makers
Real Estate
Aryan Infrastructure Investments
NPV of Four L1 projects Total value
79 3 23 224
Source: RHH
Note:
We have revised the cost of equity to 12% from 13% earlier only for operational projects.
For the projects referred to in Fig 114, we have considered EPC revenue in our model. However, we await finalisation of the project awarding before considering balance sheet implications.
55
IRB Infrastructure
Sector Report
05 October 2009
Stock performance Fig 116 - Absolute performance from Feb ’08 250
Sensex
IRB
Fig 117 - Relative performance from Feb ’08 Sensex
BSE CG Index
BSE CG Index
140
210
120
170
100
130
80
90
60
50 Feb-08
IRB
Jun-08
Oct-08
Feb-09
Jun-09
Sep-09
40 Feb-08
Jun-08
Oct-08
Feb-09
Jun-09
Sep-09
Source: Bloomberg, RHH
Source: Bloomberg, RHH
Fig 118 - Relative performance from February ’08 to March ’08
Fig 119 - Relative performance from April ’08 to March ’09
Sensex
IRB
Sensex
BSE CG Index
120
140
115
120
110
IRB
BSE CG Index
100
105 80
100
60
95 90 Feb-08
Mar-08
Mar-08
Source: Bloomberg, RHH
40 Apr-08
Jun-08
Sep-08
Dec-08
Mar-09
Source: Bloomberg, RHH
Fig 120 - Relative performance from April ’09 Sensex
IRB
BSE CG Index
180 160 140 120 100 80 60 40 Apr-09
Jun-09
Sep-09
Source: Bloomberg, RHH
56
IRB Infrastructure
Sector Report
05 October 2009
12-month forward rolling band Fig 121 - P/E band
Fig 122 - P/BV band
(Rs) 300
24x
(Rs) 250
18x
200
12x
150
6x
100
250 200 150 100 50 0 Aug-08
Nov-08
Feb-09
May-09
3.5x
2.5x
1.5x
50 Aug-08
Aug-09
1x Nov-08
Source: RHH
Source: RHH
Fig 123 - EV/EBITDA band
Fig 124 - EV/Sales band
(Rs mn) 120,000
12x
Feb-09
May-09
(Rs mn) 140,000
5x
120,000 90,000
10x
100,000
8x
80,000
4x 2.5x
60,000
60,000
6x
40,000 1x
20,000 30,000 Aug-08
Nov-08
Feb-09
May-09
Aug-09
0 Aug-08
Nov-08
Feb-09
Source: RHH
Source: RHH
Fig 125 - Premium / Discount to BSE 30 P/E
Fig 126 - Market Cap/Sales band
(%) 200 150 100 50 0 (50)
Aug-08
Source: RHH
Nov-08
Feb-09
May-09
Aug-09
Aug-09
(Rs mn) 100,000 90,000 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 Aug-08
May-09
Aug-09
3.5x
2.5x 1.5x 1x Nov-08
Feb-09
May-09
Aug-09
Source: RHH
57
IRB Infrastructure
Sector Report
05 October 2009
FCFE valuation for L1 projects / works recently awarded Fig 127 - FCFE – Goa / Karnataka Border to Panaji - Goa FCFE (Rs mn)
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
FY21
FY22
FY23
FY24
FY25
Revenue
-
-
-
245
546
608
677
753
838
933
1,038
1,156
1,286
1,432
1,593
1,773
EBITDA
-
-
-
147
441
494
554
139
695
778
872
320
1,092
1,221
1,366
1,528
Tax
-
-
-
-
-
(1)
(13)
-
(40)
(56)
(73)
-
(112)
(134)
(159)
(186)
Interest
-
-
-
(229)
(442)
(425)
(407)
(390)
(373)
(355)
(338)
(321)
(303)
(286)
(269)
(251)
Working capital
-
12
13
8
8
13
14
14
15
16
16
17
32
23
20
21
Capex
(2,090)
(3,344)
(2,926)
-
-
-
-
-
-
-
-
-
-
-
-
-
Change in debt
975
1,560
1,365
(144)
(144)
(144)
(144)
(144)
(144)
(144)
(144)
(144)
(144)
(144)
(144)
(144)
NHAI Grant
465
744
651
-
-
-
-
-
-
-
-
-
-
-
-
-
(650)
(1,028)
(897)
(218)
(138)
(63)
3
(381)
153
239
333
(128)
564
680
814
967
FCFE NPV (Rs)
984
Value per share (Rs)
3.0
FCFE (Rs mn)
FY26
FY27
FY28
FY29
FY30
FY31
FY32
FY33
FY34
FY35
FY36
FY37
FY38
FY39
FY40
Revenue
1,974
2,197
2,445
2,721
3,029
3,371
3,752
4,176
4,648
5,173
5,758
6,409
7,133
7,939
8,836
EBITDA
746
1,911
2,136
2,388
2,669
1,567
3,332
3,723
4,158
4,644
3,107
5,791
6,466
7,219
8,058
Tax
(53)
(250)
(287)
(328)
(747)
(366)
(959)
(1,083)
(1,221)
(1,374)
(837)
(1,733)
(1,943)
(2,177)
(2,434)
(234)
(217)
(199)
(182)
(165)
(147)
(130)
(113)
(95)
(78)
(61)
(43)
(26)
(9)
(0)
22
23
23
24
25
26
27
28
29
29
30
31
32
32
217
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(144)
(144)
(144)
(144)
(144)
(144)
(144)
(144)
(144)
(144)
(144)
(144)
(144)
(144)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
336
1,322
1,529
1,758
1,638
935
2,125
2,410
2,726
3,077
2,095
3,902
4,384
4,921
5,841
Interest Working capital Capex Change in debt NHAI Grant FCFE Source: RHH
58
IRB Infrastructure
Sector Report
05 October 2009
Fig 128 - FCFE – Pathankot to Amritsar (recently awarded) FCFE (Rs mn) Revenue
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
FY21
FY22
FY23
FY24
FY25
FY26
FY27
FY28
FY29
FY30
-
-
-
580
1,288
1,427
1,581
1,751
1,940
2,149
2,380
2,637
2,921
3,236
3,585
3,971
4,399
4,873
5,398
5,979
6,623
EBIDTA
-
-
-
376
1,069
1,190
1,325
719
1,641
1,826
2,032
1,233
2,514
2,797
3,110
3,458
2,336
4,275
4,752
5,282
3,817
Tax
-
-
-
-
-
(19)
(44)
-
(101)
(133)
(168)
(31)
(246)
(290)
(338)
(391)
(192)
(1,023)
(1,161)
(1,313)
(773)
Interest
-
-
-
(424)
(799)
(747)
(696)
(644)
(593)
(541)
(490)
(438)
(386)
(335)
(283)
(232)
(180)
(129)
(77)
(26)
(0)
Working capital Capex Change in debt NHAI Grant FCFE
240
12
13
1
(1)
12
12
13
13
13
14
14
15
15
15
16
16
16
17
17
(620)
(3,304)
(5,287)
(4,626)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
1,825
2,920
2,555
(429)
(429)
(429)
(429)
(429)
(429)
(429)
(429)
(429)
(429)
(429)
(429)
(429)
(429)
(429)
(429)
(429)
-
318
508
445
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(922)
(1,847)
(1,614)
(476)
(160)
6
167
(342)
531
736
959
349
1,467
1,757
2,074
2,422
1,550
2,710
3,101
3,531
2,424
NPV (Rs)
409
Value per share (Rs)
1.2
Source: RHH
59
IRB Infrastructure
Sector Report
05 October 2009
Fig 129 - FCFE – Jaipur to Deoli FCFE (Rs mn)
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
FY21
FY22
-
-
-
576
1,285
1,431
1,592
1,772
1,972
2,195
2,443
2,720
3,027
Revenue EBIDTA
-
-
-
483
1,085
1,214
1,359
694
1,700
1,901
2,126
1,252
2,656
Tax
-
-
-
-
-
(22)
(50)
-
(115)
(152)
(192)
(45)
(284)
Interest
-
-
-
(489)
(935)
(889)
(843)
(798)
(752)
(707)
(661)
(615)
(570)
Working capital
240
12
13
1
(1)
12
12
12
13
13
13
14
29
(3,179)
(6,000)
(5,821)
-
-
-
-
-
-
-
-
-
-
1,672
3,343
3,343
(380)
(380)
(380)
(380)
(380)
(380)
(380)
(380)
(380)
(380)
612
1,224
1,224
-
-
-
-
-
-
-
-
-
-
FCFE
(655)
(1,421)
(1,241)
(384)
(230)
(65)
97
(472)
466
676
906
226
1,451
NPV (Rs)
3,545
Capex Change in debt NHAI Grant
Value per share (Rs)
10.7
FCFE (Rs mn)
FY23
FY24
FY25
FY26
FY27
FY28
FY29
FY30
FY31
FY32
FY33
FY34
FY35
Revenue
3,369
3,750
4,173
4,645
5,170
5,754
6,404
7,128
7,933
8,830
9,827
10,938
12,174
EBIDTA
2,968
3,317
3,706
2,489
4,625
5,166
5,769
6,442
4,766
8,029
8,963
10,004
11,166
Tax
(337)
(395)
(459)
(249)
(607)
(693)
(788)
(893)
(597)
(1,139)
(1,282)
(1,441)
(1,613)
Interest
(524)
(479)
(433)
(388)
(342)
(296)
(251)
(205)
(160)
(114)
(68)
(23)
0
19
16
16
16
16
16
17
17
16
16
16
15
15
-
-
-
-
-
-
-
-
-
-
-
-
-
(380)
(380)
(380)
(380)
(380)
(380)
(380)
(380)
(380)
(380)
(380)
(380)
-
Working capital Capex Change in debt NHAI Grant FCFE
-
-
-
-
-
-
-
-
-
-
-
-
-
1,746
2,079
2,450
1,489
3,312
3,813
4,366
4,980
3,645
6,413
7,248
8,176
9,567
Source: RHH
60
IRB Infrastructure
Sector Report
05 October 2009
Fig 130 - FCFE – Talegaon to Amravati FCFE (Rs mn)
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
FY21
FY22
-
-
-
323
721
803
894
995
1,107
1,232
1,371
1,526
1,699
Revenue EBIDTA
-
-
-
277
621
694
776
497
970
1,084
1,212
850
1,512
Tax
-
-
-
-
(12)
(26)
(41)
-
(77)
(97)
(119)
(58)
(170)
Interest
-
-
-
(239)
(459)
(437)
(416)
(395)
(373)
(352)
(331)
(309)
(288)
Working capital
240
12
13
6
6
13
13
14
15
15
16
16
31
(2,000)
(3,200)
(2,800)
-
-
-
-
-
-
-
-
-
-
1,022
1,635
1,431
(178)
(178)
(178)
(178)
(178)
(178)
(178)
(178)
(178)
(178)
540
864
756
-
-
-
-
-
-
-
-
-
-
FCFE
(198)
(689)
(601)
(134)
(22)
66
155
(61)
357
473
600
321
908
NPV (Rs)
2,591
Capex Change in debt NHAI Grant
Value per share (Rs)
7.8
FCFE (Rs mn)
FY23
FY24
FY25
FY26
FY27
FY28
FY29
FY30
FY31
FY32
FY33
FY34
FY35
Revenue
1,891
2,104
2,342
2,607
2,901
3,229
3,594
4,000
4,452
4,955
5,515
6,138
6,832
EBIDTA
1,689
1,887
2,107
1,612
2,627
2,933
3,275
3,655
2,991
4,553
5,081
5,669
6,325
Tax
(200)
(232)
(268)
(182)
(351)
(400)
(453)
(1,025)
(786)
(1,302)
(1,464)
(1,643)
(1,843)
Interest
(267)
(245)
(224)
(203)
(181)
(160)
(139)
(117)
(96)
(75)
(53)
(32)
(11)
22
19
20
20
21
22
22
23
24
(604)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(178)
(178)
(178)
(178)
(178)
(178)
(178)
(178)
(178)
(178)
(178)
(178)
(178)
Working capital Capex Change in debt NHAI Grant FCFE
-
-
-
-
-
-
-
-
-
-
-
-
-
1,067
1,251
1,457
1,071
1,938
2,218
2,528
2,358
1,955
2,395
3,386
3,816
4,294
Source: RHH
61
IRB Infrastructure
Sector Report
05 October 2009
Consolidated financials Profit and Loss statement
Balance sheet
Y/E March (Rs mn)
FY08
FY09
FY10E
FY11E
Revenues
7,327
8,834
18,693
32,940
Growth (%)
139.7
20.6
111.6
76.2
EBITDA
4,119
3,289
8,564
11,610
Growth (%)
149.0
(20.1)
160.4
35.6
Y/E March (Rs mn)
FY08
FY09E
FY10E
FY11E
Cash and cash eq
5,222
4,148
5,517
5,231
118
130
183
484
502
2,054
2,492
3,904
3,748
3,995
5,160
10,852
Accounts receivable Inventories Other current assets
Depreciation & amortisation
1,016
1,143
1,938
3,241
Investments
1,985
1,108
-
-
EBIT
3,103
2,146
6,626
8,369
Gross fixed assets
22,188
24,601
55,005
67,453
Growth (%)
175.0
(30.8)
208.7
26.3
Net fixed assets
18,848
20,161
48,627
57,842
Interest
1,958
1,304
2,777
3,622
CWIP
8,889
14,545
-
-
520
585
521
1,099
Intangible assets
-
-
-
-
1,666
1,427
4,371
5,846
Deferred tax assets, net
(26)
(182)
-
-
Other income EBT Income taxes
400
217
839
1,313
Other assets
16
9
8
-
Effective tax rate (%)
24.0
15.2
19.2
22.5
Total assets
39,300
45,968
61,986
78,313
Extraordinary items
-
-
-
-
Accounts payable
426
1,303
4,947
8,777
Min into / inc from associates
-
-
-
-
Other current liabilities
623
-
-
-
1,266
1,210
3,532
4,533
-
-
-
-
Adjusted net income
1,139
1,197
3,432
4,504
Growth (%)
405.1
5.1
186.7
31.2
Shares outstanding (mn)
332.4
332.4
332.4
332.4
Reserves & surplus
Reported net income Adjustments
FDEPS (Rs) (adj) Growth (%) DPS (Rs)
Provisions
1,551
1,908
1,589
1,795
Debt funds
20,212
24,859
34,690
42,587
281
599
100
29
Other liabilities Equity capital
3,324
3,324
3,324
13,977
17,337
21,802
4.2
3.6
10.3
13.6
Shareholder's funds
16,207
17,300
20,660
25,126
357.9
(13.8)
186.7
31.2
Total liabilities
39,300
45,968
61,986
78,313
0.0
1.7
1.0
1.0
48.8
52.1
62.2
75.6
FY08
FY09E
FY10E
FY11E
EBITDA margin
56.2
37.2
45.8
35.2
EBIT margin
42.3
24.3
35.4
25.4
Net profit margin
15.5
13.5
18.4
13.7
ROE
11.4
7.1
18.1
19.7
8.2
5.9
11.6
11.9
Cash flow statement
BVPS (Rs)
Financial ratios
Y/E March (Rs mn)
FY08
FY09E
FY10E
FY11E
Y/E March
Net income + Depreciation
2,282
2,353
5,471
7,774
Profitability & Return ratios (%)
Non-cash adjustments
3,324 12,883
(35)
707
49
40
(1,586)
(1,420)
1,669
(3,370)
662
1,640
7,190
4,444
(6,964)
(7,285)
(15,859)
(12,448)
Change in investments
(610)
930
1,108
-
ROCE
Other investing cash flow
1,802
2
-
-
Working Capital & Liquidity ratios
Cash flow from investing
(5,773)
(6,353)
(14,750)
(12,448)
Receivables (days)
39
5
3
4
8,358
208
-
-
Inventory (days)
34
84
87
55
(2,324)
4,581
9,831
7,897
Payables (days)
55
57
113
117
Current ratio (x)
9.1
7.9
2.7
2.3
Quick ratio (x)
0.1
0.1
0.0
0.1
Gross asset turnover
0.3
0.4
0.5
0.5
Total asset turnover
0.2
0.2
0.3
0.5
Interest coverage ratio
1.6
1.6
2.4
2.3
Adjusted debt/equity
1.2
1.4
1.7
1.7
3.0
Changes in working capital Cash flow from operations Capital expenditure
Issue of equity Issue/repay debt Dividends paid
(15)
(223)
652
372
Other financing cash flow
-
-
-
-
Change in cash & cash eq
908
(146)
2,922
265
5,222
4,148
5,517
5,231
Closing cash & cash eq
Economic Value Added (EVA) analysis Y/E March
FY08
FY09E
FY10E
FY11E
WACC (%)
11.5
11.9
11.9
11.9
8.2
4.5
12.1
11.4
Invested capital (Rs mn)
31,479
38,611
49,934
64,305
EVA (Rs mn)
(1,045)
(2,846)
110
(3.3)
(7.4)
0.2
ROIC (%)
EVA spread (%)
Turnover & Leverage ratios (x)
Valuation ratios (x) EV/Sales
13.5
11.2
5.3
EV/EBITDA
23.9
30.0
11.5
8.5
(331)
P/E
50.0
58.0
20.2
15.4
(0.5)
P/BV
4.3
4.0
3.4
2.8
62
IRB Infrastructure
Sector Report
05 October 2009
Quarterly trend Particulars
Q1FY09
Q2FY09
Q3FY09
Q4FY09
Q1FY10
Revenue (Rs mn)
2,301
2,016
2,391
3,211
4,141
YoY growth (%)
NA
NA
NA
NA
80.0
QoQ growth (%)
NA
(12.4)
18.6
34.3
29.0
1,174
985
1,015
1,205
1,662
EBITDA margin (%)
51.0
48.9
42.5
37.5
40.1
Adj net income (Rs mn)
542
412
382
422
888
YoY growth (%)
NA
NA
NA
NA
64
QoQ growth (%)
NA
(24)
(7)
10
110
Percentage
FY07
FY08
FY09E
FY10E
FY11E
Tax burden (Net income/PBT)
50.6
68.4
83.9
78.5
77.0
Interest burden (PBT/EBIT)
39.5
53.7
66.5
66.0
69.9
EBIT margin (EBIT/Revenues)
36.9
42.3
24.3
35.4
25.4
Asset turnover (Revenues/Avg TA)
18.9
20.4
20.7
34.6
47.0
857.8
358.7
254.5
284.4
306.4
11.9
11.4
7.1
18.1
19.7
EBITDA (Rs mn)
DuPont analysis
Leverage (Avg TA/Avg equtiy) Return on equity
Shareholding pattern
Company profile IRB Infrastructure is one of India’s leading private road infrastructure
(%)
companies operating primarily in two segments, i.e., road BOT and
Promoters FIIs
construction projects. The company has a portfolio of 12 BOT road projects, of which 10 are operational, one is under construction,
Dec-08
Mar-09
Jun-09
74.4
74.4
73.9
16.5
13.0
11.2
and one is yet to achieve financial closure. Its construction order
Banks & FIs
3.8
4.1
4.6
book totals Rs 63bn and is bifurcated between EPC (Rs 35bn)
Public
5.3
8.5
10.3
executable within three years, and O&M contracts (Rs 28bn) executable within 10–12 years.
Stock performance
126
Hold
27-Mar-09 Company Update
79
122
Buy
25-May-09 Results Review
136
125
Hold
22-Jun-09
Company Update
135
165
Buy
30-Jul-09
Results Review
188
208
Buy
209
224
Buy
05-Oct-09 Sector Report
Buy
135 90 45
Sep-09
112
●
Hold
Aug-09
Results Review
●
180
Jul-09
30-Jan-09
225
Jun-09
Hold
May-09
130
Apr-09
112
Mar-09
Initiating Coverage
Reco
Feb-09
14-Jan-09
Reco price Tgt price
Jan-09
Event
Dec-08
Date
Nov-08
Recommendation history
63
IVRCL Infrastructure
Sector Report
05 October 2009
IVRCL Infrastructure On a firm footing
What’s New?
Healthy order book with plans to diversify globally: IVRCL has an order book of Rs 149bn (including L1 orders of Rs. 10bn) at the end of June ’09, wherein water and environment projects account for the lion’s share of 65%, buildings 20%, power and transmission 10%, and transportation 5%. Post June, the company has bagged orders worth Rs 16.3bn. It is also the lowest bidder (L1) in one road project Sion-Panvel, valued at Rs 15bn respectively. IVRCL is looking to diversify geographically by entering into the Middle East, mainly in the water and power divisions. It expects to close FY10 with an order book of Rs 170bn–180bn, implying fresh inflows of Rs 90bn–100bn in FY10. About 90–95% of the order book consists of government projects. In terms of geography, Andhra Pradesh contributes 30% to the total book. IVRCL has maintained its topline growth guidance of 30–35% for FY10 with margins at ~9.5%.
Target
Rating
Estimates
CMP
TARGET
RATING
RISK
Rs 388
Rs 434
BUY
HIGH
BSE
NSE
BLOOMBERG
530773
IVRCLINFRA
IVRC IN
Company data Market cap (Rs mn / US$ mn)
51,682 / 1,082
Outstanding equity shares (mn)
133
Free float (%)
90.4
Matured BOT portfolio: The company plans to treble its road portfolio from the current Rs 18bn to Rs 60bn over the next 12 months with an average equity IRR of 16%. It expects three ongoing BOT projects to start contributing to revenue over the next 12 months with a daily toll collection of Rs 5mn. It intends to rope in some private equity players for funding or opt for a stake sale. The average cost of debt for BOT projects is ~10–11%.
Dividend yield (%)
Returns (%)
CMP
1-mth
3-mth
6-mth
Jalandhar–Amritsar project cost revised upwards: The Jalandhar–Amritsar Tollways project cost has been revised from Rs 2.4bn to Rs 3.4bn due to a change in scope of work. IVRCL has obtained a loan sanction for Rs 795mn to meet the increase in project cost; the balance will be funded through an equity infusion.
IVRCL Infra
388
7.5
10.3
202.2
17,135
10.2
17.0
73.0
Chennai desalination plant to be completed in Oct: IVRCL holds a 75% stake in the Chennai water desalination project. Owing to the impact of forex fluctuations on imported capital goods and delays in commissioning due to force majeure conditions, the project cost has escalated from Rs 4.9bn to Rs 5.7bn. The completion timeline has been extended from August ’08 to October ’09, mainly on account of consecutive cyclones, abnormal climatic conditions at the site and other unforeseen circumstances. Target raised to Rs 434: The stock is currently trading at 17.2x FY11E earnings and adjusting the subsidiary value, it trades at 14.0x FY11E earnings. We are revising our target price upward to Rs. 434 from 412 earlier. We maintain our Buy rating on the stock.
Financial highlights (Rs mn) Revenue Growth (%) Adj net income
0.4
52-week high/low (Rs)
402 / 57
2-month average daily volume
3,229,064
Stock performance
Sensex
P/E comparison (x) 40 30
IVRCL
Cap. Go o ds
27.9 29.6 20.4
24.9
17.2 21.1
20 10 0 FY09
FY10E
FY11E
Valuation matrix (x)
FY08
FY09
FY10E
FY11E
P/E @ CMP
28.0
27.9
20.4
17.2
P/E @ Target
31.4
31.2
22.8
19.2
EV/EBITDA @ CMP
19.1
16.3
11.7
9.7
Profitability and return ratios FY08
FY09
FY10E
FY11E
36,606
48,819
63,465
76,157
58.8
33.4
30.0
20.0
1,865
1,880
2,564
3,044
(%)
FY08
FY09
FY10E
FY11E
EBITDA margin
9.9
8.6
9.3
9.3
EBIT margin
9.0
7.7
8.3
8.4
Adj PAT margin
5.1
3.9
4.0
4.0
Growth (%)
28.4
0.8
36.4
18.7
ROE
12.7
11.0
13.8
15.0
FDEPS (Rs)
13.8
13.9
19.0
22.6
ROIC
11.6
10.9
10.4
10.9
Growth (%)
13.3
0.6
36.4
18.7
ROCE
12.1
12.0
11.8
12.3
64
IVRCL Infrastructure
Sector Report
05 October 2009
Order book trend Fig 131 - Q1FY10 order book at Rs 149bn (incl L1 of Rs 10bn) (Rs bn) 160 140 120 100 80 60 40 20 0
Order book
83
Q1
110
96
19
128
24
20
Q2
Q3
124
31
Q4
29
Q1
FY08
Order Received 138 143 145
24
22
Q2
Q3
12 Q4
FY09
Fig 132 - Order book position segment-wise – Q1FY10
149
11
Bldg & Industrial structure 20%
Power & Transmission 10%
Transportation 5%
Water and Environment 65%
Q1 FY10 Source: Company, RHH
Source: Company, RHH
Valuation Fig 133 - SOTP valuation summary Sum-of-the-parts
Business
Method
IVRCL standalone
Construction
FY11E earnings
IVR Prime
Real estate
Market capitalization (20% discount)
Hind Dorr Oliver BOT Project Total
Multiple
Value (Rs mn)
Per share value (Rs)
16x
48,709
361
3,584
27
2,052
15
4,249
31
58,593
434
Market capitalization (20% discount) Road/Water
P/BV
1.5x
Source: RHH
65
IVRCL Infrastructure
Sector Report
05 October 2009
Stock performance Fig 134 - Absolute performance from April ’04 Sensex
600
IVRCL
Fig 135 - Relative performance from April ’04
500 400 300 200 100 0 Apr-04
May-05
Jun-06
Sensex
BSE CG Index
Jul-07
Aug-08
Sep-09
490 440 390 340 290 240 190 140 90 40 Apr-04
May-05
IVRCL
Jun-06
BSE CG Index
Jul-07
Aug-08
Sep-09
Source: Bloomberg, RHH
Source: Bloomberg, RHH
Fig 136 - Relative performance from April ’06 to March ’07
Fig 137 - Relative performance from April ’07 to March ’08
Sensex
IVRCL
BSE CG Index
Sensex
140
185
130
165
120
145
110
125
100
105
90
85
80
65
70 Apr-06
Jul-06
Sep-06
Dec-06
Mar-07
45 Mar-07
Jun-07
IVRCL
Sep-07
BSE CG Index
Dec-07
Source: Bloomberg, RHH
Source: Bloomberg, RHH
Fig 138 - Relative performance from April ’08 to March ’09
Fig 139 - Relative performance from April ’09
Sensex
IVRCL
BSE CG Index
120
Sensex
IVRCL
Mar-08
BSE CG Index
220
100
170
80 120 60 70
40 20 Mar-08
Jun-08
Source: Bloomberg, RHH
Sep-08
Dec-08
Mar-09
20 Mar-09 Apr-09 May-09
Jun-09
Jul-09
Aug-09 Sep-09
Source: Bloomberg, RHH
66
IVRCL Infrastructure
Sector Report
05 October 2009
12-month forward rolling band Fig 140 - P/E band (Rs) 900 800 700 600 500 400 300 200 100 0 Aug-06
Fig 141 - P/BV band (Rs) 40x
1,200 1,000
6.5x
800 20x 10x 4x Jun-07
Mar-08
Dec-08
Sep-09
600 400
3x
200
1.5x
0 Aug-06
0.5x Jun-07
Source: RHH
Source: RHH
Fig 142 - EV/EBITDA band
Fig 143 - EV/Sales band
(Rs mn) 140,000
21x
120,000 100,000
15x
80,000
10x
60,000 40,000
5x
20,000 0 Aug-06
Mar-08
(Rs mn) 140,000 120,000 100,000
1.4x
80,000 60,000
0.8x
40,000 20,000
Jun-07
Mar-08
Dec-08
Sep-09
0 Aug-06
0.2x Jun-07
Mar-08
Source: RHH
Fig 144 - Premium/Discount to BSE 30 P/E
Fig 145 - Market Cap/Sales band
(%) 200
(Rs mn)
150
140,000
Dec-08
Sep-09
160,000 2x
120,000
100
100,000
50
80,000
0
60,000
(50)
20,000
Source: RHH
Sep-09
2x
Source: RHH
(100) Aug-06
Dec-08
1.4x 0.8x
40,000
May-07
Feb-08
Nov-08
Sep-09
0 Aug-06
0.2x Jun-07
Mar-08
Dec-08
Sep-09
Source: RHH
67
IVRCL Infrastructure
Sector Report
05 October 2009
Standalone financials Profit and Loss statement Y/E March (Rs mn) Revenues Growth (%)
Balance sheet FY08
FY09
FY10E
FY11E
36,606
48,819
63,465
76,157
Y/E March (Rs mn)
FY08
FY09
FY10E
FY11E
Cash and cash eq
1,772
1,009
715
516
Accounts receivable
6,585
11,430
13,910
16,692
Inventories
1,943
2,093
3,130
3,756
18,527
23,603
29,092
34,210
58.8
33.4
30.0
20.0
3,617
4,218
5,873
7,099
Growth (%)
55.6
16.6
39.2
20.9
Other current assets
Depreciation & amortisation
328
473
588
681
Investments
3,409
3,893
4,095
4,295
3,288
3,745
5,285
6,418
Gross fixed assets
4,176
6,624
7,644
8,764
56.0
13.9
41.1
21.4
Net fixed assets
3,192
5,208
5,640
6,079
1,165
1,980
2,207
2,674
541
196
400
400
730
973
750
800
-
-
-
(184)
EBITDA
EBIT Growth (%) Interest Other income EBT
CWIP Intangible assets
2,853
2,738
3,827
4,544
Deferred tax assets, net
(103)
(117)
(148)
Income taxes
749
478
1,263
1,499
Other assets
(110)
(188)
(190)
(190)
Effective tax rate (%)
26.2
17.5
33.0
33.0
Total assets
35,756
47,126
56,642
65,573
-
-
-
-
Accounts payable
5,892
10,406
13,340
15,995
Other current liabilities
2,888
4,381
5,757
6,801
238
247
612
612
10,678
13,980
17,980
20,480
-
-
-
-
Extraordinary items Min into / inc from associates
-
-
-
-
Reported net income
2,105
2,260
2,564
3,044
Adjustments
(240)
(380)
-
-
Adjusted net income
1,865
1,880
2,564
3,044
Growth (%)
Provisions Debt funds Other liabilities
28.4
0.8
36.4
18.7
266
267
267
267
133.2
133.5
133.5
133.5
Reserves & surplus
15,793
17,844
18,685
21,417
FDEPS (Rs) (adj)
13.8
13.9
19.0
22.6
Shareholder's funds
16,060
18,111
18,952
21,684
Growth (%)
13.3
0.6
36.4
18.7
Total liabilities
35,756
47,126
56,642
65,573
1.4
1.4
2.0
2.0
120.6
135.7
142.0
162.4
FY08
FY09
FY10E
FY11E
Shares outstanding (mn)
DPS (Rs)
Cash flow statement
Equity capital
BVPS (Rs)
Financial ratios
Y/E March (Rs mn)
FY08
FY09
FY10E
FY11E
Y/E March
Net income + Depreciation
2,433
2,733
3,152
3,725
Profitability & Return ratios (%)
Non-cash adjustments
(313)
(439)
31
36
Changes in working capital
(6,283)
(2,880)
(4,173)
(4,478)
Cash flow from operations
(4,163)
(586)
(990)
(717)
Capital expenditure
(1,627)
(2,153)
(1,224)
(1,120)
(399)
(1,057)
(450)
(550)
-
-
-
-
(2,026)
(3,210)
(1,674)
(1,670)
Receivables (days)
64
8
-
(1,411)
-
Inventory (days)
17
Issue/repay debt
5,929
3,222
4,000
2,500
Payables (days)
72
73
81
84
Dividends paid
(152)
(189)
(219)
(312)
Current ratio (x)
3.3
2.6
2.5
2.4
Quick ratio (x)
1.0
0.8
0.8
0.7
Gross asset turnover
10.8
9.0
8.9
9.3
Total asset turnover
1.1
1.2
1.2
1.2
Interest coverage ratio
2.8
1.9
2.4
2.4
Adjusted debt/equity
0.7
0.8
0.9
0.9
Change in investments Other investing cash flow Cash flow from investing Issue of equity
Other financing cash flow
(63)
-
-
-
Change in cash & cash eq
(466)
(763)
(294)
(199)
Closing cash & cash eq
1,772
1,009
715
516
Economic Value Added (EVA) analysis Y/E March
FY08
FY09
FY10E
FY11E
WACC (%)
12.5
13.1
13.1
13.1
ROIC (%)
11.6
10.9
10.4
10.9
25,202
31,329
36,828
42,258
EVA (Rs mn)
(221)
(664)
(981)
EVA spread (%)
(0.9)
(2.1)
(2.7)
Invested capital (Rs mn)
EBITDA margin
9.9
8.6
9.3
9.3
EBIT margin
9.0
7.7
8.3
8.4
Net profit margin
5.1
3.9
4.0
4.0
ROE
12.7
11.0
13.8
15.0
ROCE
12.1
12.0
11.8
12.3
67
73
73
18
18
20
Working Capital & Liquidity ratios
Turnover & Leverage ratios (x)
Valuation ratios (x) EV/Sales
1.9
1.4
1.1
0.9
EV/EBITDA
19.1
16.3
11.7
9.7
(921)
P/E
28.0
27.9
20.4
17.2
(2.2)
P/BV
3.2
2.9
2.7
2.4
68
IVRCL Infrastructure
Sector Report
05 October 2009
Quarterly trend Particulars
Q1FY09
Q2FY09
Q3FY09
Q4FY09
Q1FY10
Revenue (Rs mn)
9,285
11,366
11,896
16,272
10,807
YoY growth (%)
37.1
65.1
22.0
23.1
16.4
(29.7)
22.4
4.7
36.8
(33.6)
820
913
1,085
1,419
943
QoQ growth (%) EBITDA (Rs mn) EBITDA margin (%)
8.8
8.0
9.1
8.7
8.7
Adj net income (Rs mn)
436
571
465
799
351
YoY growth (%)
14.9
62.0
(27.4)
8.8
(19.5)
(40.6)
31.0
(18.5)
71.6
(56.0)
(%)
FY07
FY08
FY09
FY10E
FY11E
Tax burden (Net income/PBT)
79.9
65.4
68.7
67.0
67.0
Interest burden (PBT/EBIT)
86.2
86.8
73.1
72.4
70.8
9.1
9.0
7.7
8.3
8.4
Asset turnover (Revenues/Avg TA)
101.0
114.8
117.8
122.3
124.6
Leverage (Avg TA/Avg equtiy)
254.0
217.9
242.6
280.0
300.8
16.1
12.7
11.0
13.8
15.0
QoQ growth (%)
DuPont analysis
EBIT margin (EBIT/Revenues)
Return on equity
Shareholding pattern
Company profile IVRCL Infrastructure (IVRCL) is a leading Hyderabad-based civil
(%)
construction company promoted by Mr E Sudhir Reddy. Established
Dec-08
Mar-09
Jun-09
Promoters
9.7
9.7
9.7
FIIs
43.0
48.6
48.4
qualifications. It has executed a variety of projects from irrigation to
Banks & FIs
23.1
19.2
19.1
desalination works. Today, IVRCL has a well-diversified, derisked
Public
24.2
22.5
22.8
in 1987, the company has created a niche for itself in the water segment and is one of the largest players with strong pre-
business mix with a presence across various sectors – buildings and industrial structures, transportation, water and environment.
Stock performance 400
440
Buy
06-Oct-08 Quarterly Preview
225
336
Buy
06-Nov-08 Results Review
105
176
Buy
200
31-Jan-09
Results Review
110
146
Buy
100
02-Jun-09
Results Review
332
370
Buy
0
29-Jul-09
Results Review
317
382
Buy
10-Sep-09 Company Update
346
412
Buy
05-Oct-09 Sector Report
388
434
Buy
●
Buy
Sep-09
Aug-09
Jul-09
Jun-09
May-09
Apr-09
Mar-09
Feb-09
Jan-09
300
Dec-08
Reco
318
Nov-08
Reco price Tgt price
Oct-08
Event
21-Aug-08 RHH Compendium
Sep-08
Date
Aug-08
Recommendation history
69
Jaiprakash Associates
Sector Report
05 October 2009
Jaiprakash Associates On an expansion spree
What’s New?
Aggressive plans across segments: Jaiprakash Associates (JP Associates) intends to embark on an ambitious plan in pursuit of becoming one of India’s largest cement manufacturers with a capacity of 32mn tonnes (mt) by FY12. It also intends to attain leadership in BOT operations and evolve as a key player in power (10-fold capacity ramp up by 2017) and real estate sectors. We expect JP Associates to add 3.1mt of cement capacity this year to its existing capacity of 17mt. The company has a power portfolio of 13,470MW with 60% thermal-hydro mix and 40% merchant power. It also has India’s two largest expressway projects: (a) Ganga Expressway – 1,047 km (with real estate development rights of 3.3bn sq ft), and (b) Yamuna Expressway – 165km (with real estate development rights over 6,250 acres). This provides strong revenue visibility, going forward.
Target
Rating
Estimates
CMP
TARGET
RATING
RISK
Rs 239
Rs 237
HOLD
HIGH
BSE
NSE
BLOOMBERG
532532
JPASSOCIAT
JPA IN
Company data Market cap (Rs mn / US$ mn)
335,489 / 7,025
Outstanding equity shares (mn)
1,404
Raised Rs 15bn through sale of treasury stock: Recently, JP Associates raised Rs 15bn in two tranches: 1) Rs 11.9bn through sale of treasury shares of 50mn at Rs 238/share, 2) ~Rs 5bn through sale of treasury shares of 25mn at ~Rs 200/share. These funds will be used to repay debt and finance expansions of various businesses. JP Associates plans to invest Rs 15bn in the cement division, Rs 5bn in the power division, and Rs 4bn in the E&C division.
Free float (%)
55
Dividend yield (%)
0.4
Securitisation of power assets to ease funding concerns: JP Associates has recently mobilised resources through the securitisation of its 400MW Vishnuprayag Hydro Project, resulting in an inflow of Rs 16.5bn. Securitisation of receivables on JHPLBASPA is also anticipated; the management foresees a net realisation of Rs 11bn from this transaction. In addition, the company has acquired two power generation companies for setting up a 3,300MW plant on BOO basis and is likely to raise funds for these ventures in three tranches this fiscal.
Returns (%)
CMP
1-mth
3-mth
6-mth
JP Associates
239
7.8
15.1
180.3
17,135
10.2
17.0
73.0
52-week high/low (Rs)
Earnings to grow at 33.5% over FY09-FY11: We expect the company’s revenues and earnings to grow at a CAGR of 35.2% and 33.5% respectively over FY09FY11, primarily driven by incremental contribution from enhanced cement capacities and strong execution of construction projects. Maintain Hold: Currently, the stock trades at 22.1x FY11E earnings. We have a revised SOTP target price of Rs 237 from Rs 220 earlier and maintain a Hold rating on the stock. However, we believe the stock has significant embedded value in the long term based on a revival of residential real estate and faster execution of power projects.
Financial highlights (Rs mn) Revenue Growth (%) Adj net income Growth (%) FDEPS (Rs) Growth (%)
19,178,910
Stock performance
Sensex
P/E comparison (x) 40
3,300 flats of Jaypee Green sold in 24 hrs: JP Associates has received an overwhelming response for Jaypee Greens Aman, its newly launched residential project, with 3,300 flats sold within 24 hours.
259 / 47
2-month average daily volume
JP A sso ciates 33.5
29.6
30
Industry
25.5 24.9
22.1 21.1
20 10 0 FY09
FY10E
FY11E
Valuation matrix (x)
FY08
FY09
FY10E
FY11E
P/E @ CMP
48.7
33.5
25.5
22.1
P/E @ Target
48.4
33.3
25.3
21.9
EV/EBITDA @ CMP
39.4
26.7
17.4
15.7
Profitability and return ratios (%)
FY08
FY09E
FY10E
FY11E
EBITDA margin
27.5
28.1
27.2
26.0
EBIT margin
22.4
22.9
22.9
21.5
Adj PAT margin
15.3
15.4
15.1
15.0
ROE
16.3
17.2
21.5
20.5
10.8
ROIC
6.9
7.5
9.5
8.7
15.2
ROCE
8.3
9.0
11.2
11.2
FY08
FY09
FY10E
FY11E
39,851
57,750
91,167
105,623
14.6
44.9
57.9
15.9
6,097
8,891
13,746
15,840
16.4
47.7
53.1
10.8
4.9
7.1
9.4
39.2
45.4
31.6
70
Jaiprakash Associates
Sector Report
05 October 2009
Key developments 3,300MW capacity to be set up through newly acquired power companies
Acquires two power companies On 3 July, 2009, Jaiprakash Power Ventures, a subsidiary of JP Associates, acquired Sangam Power Generation Company (2x660MW) and Prayagraj Power Generation Company (3x660 MW) from UP Power Corporation. Through these acquisitions, JP Associates plans to set up 3,300MW of generation capacity on BOO basis. The management is likely to raise funds for the power venture business in 2–3 tranches this year.
Fig 146 - Power portfolio Regulated Tariff (MW) 300
Merchant Power (MW) -
VERs/CERs
COD
Hydro
Capacity (MW) 300
1.00 Mn VERs
2003
Hydro
400
400
-
1.32 Mn.VERs
2006
Hydro
1,000
800
200
3.35mn CERs*
2011*
Bina Power
Thermal
1,250
625*
625*
-
2011^
Jaypee Nigrie
Thermal
1,320
660*
660*
CERs expected
2012*
6
Karchana
Thermal
1,980
1,320*
660*
1.5mn CERs
2014*
7
Bara
Thermal
3,300
1,980*
1,320*
2.5mn CERs
2014*
8
Lower Siang
Hydro
2,700
1,350*
1,350*
TBD
2015#
9
Hirong
Hydro
500
250*
250*
TBD
2015*
10
Kynshi Stage -II
Hydro
450
225*
225*
TBD
2016*
11
Umngot Stage -I
Hydro
270
135*
135*
TBD
2016*
13,470
8,045
5,425
S.N.
Project
Fuel
1
Baspa-II
2
Vishnuprayag
3
Karcham Wangtoo
4 5
Total Source: RHH, Company
* Expected ^500MW Phase-I by 2011, # 900MW Phase-I by 2015
Residential business – Jaypee Greens Aman generates overwhelming response JP Associates has received an overwhelming response for Jaypee Greens Aman, its newly launched residential project. The company sold 3,300 flats sold in 24 hours and 301,000 sq ft of residential space under this project in April’09. Fig 147 - Real estate development plans 3,300 flats booked in Jaypee Green Aman within 24 hours
Sr. No.
Project
Proposed Development (mn sq ft)
1
Jaypee Greens
2
Yamuna Expressway
3
Ganga Expressway
8 400 3300
Source: Company
Fig 148 - Real estate realisations Project Jaypee Greens Yamuna Expressway
Sold till Apr ’09 (mn sq ft)
Collections (Rs mn)
Avg realisation (Rs/sq ft)
2.9
9,930
5,500
5.45
10,670
5,024
Source: Company
71
Jaiprakash Associates
Sector Report
05 October 2009
Valuation We have valued the stock on SOTP basis and revised our target price upwards to Rs 237 from Rs 220 earlier. Fig 149 - SOTP valuation summary Particulars
Method
Holding
Multiple
Rs mn
No of Shares (mn)
Value per share (Rs)
Construction
EV/EBITDA
9x
105,710
1,464
72
Cement
Ev/tonne $
95
115,425
1,464
79
66,833
1,464
46
915
1,464
1
6,951
1,464
5
104,825
1,464
72
1,007
1,464
1
34,560
1,464
24
436,226
1,464
298
88,751
1,464
61
347,475
1,464
237
Real estate including Yamuna Ganga Expressway
BV of investments in FY09
Jaypee Greens Jaypee hydro (merged entity) Jaypee hotels
M cap (20% holding) P/E
Treasury shares
M cap (30% holding)
Total Less Net debt Total
76.55% 74.78%
6x
Source: RHH
72
Jaiprakash Associates
Sector Report
05 October 2009
Stock performance Fig 150 - Absolute performance from June ’04 Sensex
500
JP Associates
Fig 151 - Relative performance from June ’04 BSE CG Index
Sensex
JP Associates
BSE CG Index
540
400
440
300
340
200
240
100
140
0 Jun-04
Jul-05
Jul-06
Aug-07
Sep-08
Sep-09
40 Jun-04
Jul-05
Jul-06
Aug-07
Sep-08
Sep-09
Source: Bloomberg, RHH
Source: Bloomberg, RHH
Fig 152 - Relative performance from April ’06 to March ’07
Fig 153 - Relative performance from April ’07 to March ’08
Sensex
135
JP Associates
Sensex
BSE CG Index
JP Associates
BSE CG Index
315
125
265
115
215
105
165
95
115
85 75 Mar-06
Jun-06
Sep-06
Dec-06
Mar-07
65 Apr-07
Jul-07
Sep-07
Dec-07
Source: Bloomberg, RHH
Source: Bloomberg, RHH
Fig 154 - Relative performance from April ’08 to March ’09
Fig 155 - Relative performance from April ’09
Sensex
JP Associates
BSE CG Index
120
JP Associates
BSE CG Index
200
110
180
100
160
90 80
140
70
120
60
100
50 40 Mar-08
Sensex
Mar-08
Jun-08
Source: Bloomberg, RHH
Sep-08
Dec-08
Mar-09
80 Mar-09 Apr-09 May-09
Jun-09
Jul-09
Aug-09 Sep-09
Source: Bloomberg, RHH
73
Jaiprakash Associates
Sector Report
05 October 2009
12-month forward rolling band Fig 156 - P/E band
Fig 157 - P/BV band
(Rs) 800
(Rs) 600
700
70x
600 50x
500 400
10x
500 400 6x
300
300 200 100 0 Aug-04
Aug-05
Aug-06
Aug-07
Aug-08
25x
200
10x
100
Aug-09
3x 1x
0 Aug-04
Aug-05
Source: RHH
Source: RHH
Fig 158 - EV/EBITDA band
Fig 159 - EV/Sales band
(Rs mn) 1,400,000
Aug-06
Aug-09
(Rs mn) 45x
1,000,000
1,200,000
12x
1,000,000
800,000
30x
600,000
800,000
8x
600,000
400,000 200,000 0 Aug-04
Aug-05
Aug-06
Aug-07
Aug-08
15x
400,000
5x
200,000 0 Aug-04
Aug-09
4x 1.5x Aug-05
Aug-06
Source: RHH
Source: RHH
Fig 160 - Premium / Discount to BSE 30 P/E
Fig 161 - Market Cap/Sales band
Aug-07
Aug-08
(Rs mn) 1,200,000
(%) 200
Aug-09
11.5x
1,000,000
150
800,000
100
8x
600,000
50
400,000
0
Source: RHH
Aug-08
1,400,000
1,200,000
(50) Aug-04
Aug-07
4x
200,000 Aug-05
Aug-06
Aug-07
Aug-08
0 Aug-04 Aug-05
Aug-09
0.5x Aug-06 Aug-07 Aug-08
Aug-09
Source: RHH
74
Jaiprakash Associates
Sector Report
05 October 2009
Standalone financials Profit and Loss statement Y/E March (Rs mn) Revenues Growth (%)
Balance sheet FY08
FY09
FY10E
FY11E
39,851
57,750
91,167
105,623
14.6
44.9
57.9
15.9
10,970
16,200
24,804
27,482
16.4
47.7
53.1
10.8
Depreciation & amortisation
2,033
2,957
3,931
4,798
EBIT
8,937
13,243
20,873
22,684
14.6
48.2
57.6
8.7
Interest
3,391
5,023
6,528
Other income
2,888
4,147
EBT
8,434
Income taxes
2,337
EBITDA Growth (%)
Growth (%)
Effective tax rate (%) Extraordinary items Min into / inc from associates Reported net income Adjustments Adjusted net income Growth (%) Shares outstanding (mn) FDEPS (Rs) (adj) Growth (%) DPS (Rs)
Y/E March (Rs mn) Cash and cash eq
FY09E
FY10E
FY11E
19,160
6,739
10,272
5,862
8,702
13,738
15,916
Inventories
13,075
19,777
31,222
37,619
Other current assets
22,538
24,649
32,747
35,607
Investments
32,248
40,448
47,948
54,948
Gross fixed assets
51,662
81,662
101,662
121,162
Net fixed assets
37,115
64,214
80,284
94,985
7,240
CWIP
42,190
25,000
25,000
20,000
5,014
6,866
Intangible assets
-
-
-
-
12,367
19,360
22,309
(5,597)
(5,663)
(5,723)
(5,760)
3,477
5,614
6,470
Other assets
1
1
1
1
27.7
28.1
29.0
29.0
Total assets
165,587
196,308
231,956
263,589
-
-
-
-
Accounts payable
7,010
8,702
14,986
17,363
Other current liabilities
41,148
-
-
-
-
6,097
8,891
13,746
15,840
-
-
-
-
6,097
8,891
13,746
15,840
46.9
45.8
54.6
15.2
1,171.5
1,183.8
1,403.7
1,403.7
4.9
7.1
9.4
39.2
45.4
1.0
1.0
Accounts receivable
FY08 18,155
Deferred tax assets, net
26,481
30,414
37,081
Provisions
3,061
4,088
5,836
6,573
Debt funds
83,056
95,431
103,931
113,931
-
-
-
-
Other liabilities
2,343
2,368
2,372
2,372
Reserves & surplus
43,637
55,306
67,750
82,203
10.8
Shareholder's funds
45,980
57,674
70,122
84,575
31.6
15.2
Total liabilities
165,587
196,308
231,956
263,589
0.8
0.8
41.2
50.7
51.6
61.9
FY08
FY09E
FY10E
FY11E
Cash flow statement
Equity capital
BVPS (Rs)
Financial ratios
Y/E March (Rs mn)
FY08
FY09E
FY10E
FY11E
Net income + Depreciation
8,169
11,848
17,676
20,638
Non-cash adjustments
3,818
(724)
1,748
737
EBITDA margin
27.5
28.1
27.2
26.0
332
(5,115)
(11,569)
(4,955)
EBIT margin
22.4
22.9
22.9
21.5
12,319
6,009
7,855
16,421
Net profit margin
15.3
15.4
15.1
15.0
Capital expenditure
(30,475)
(12,810)
(20,000)
(14,500)
ROE
16.3
17.2
21.5
20.5
Change in investments
(14,461)
(8,200)
(7,500)
(7,000)
8.3
9.0
11.2
11.2
1,035
-
-
-
(43,901)
(21,010)
(27,500)
(21,500)
8,517
3,950
90
-
Inventory (days)
Issue/repay debt
28,125
13,146
8,500
10,000
Payables (days)
64
55
60
60
Dividends paid
(1,204)
(1,341)
(1,385)
(1,387)
Current ratio (x)
1.8
1.9
1.6
1.7
Quick ratio (x)
0.7
0.2
0.3
0.3
Gross asset turnover
0.9
0.9
1.0
0.9
Total asset turnover
0.3
0.3
0.4
0.4
Interest coverage ratio
2.6
2.6
3.2
3.1
Adjusted debt/equity
1.1
1.1
1.1
1.0
Changes in working capital Cash flow from operations
Other investing cash flow Cash flow from investing Issue of equity
Other financing cash flow
-
-
-
-
Change in cash & cash eq
3,856
754
(12,440)
3,533
18,155
19,160
6,739
10,272
Closing cash & cash eq
Economic Value Added (EVA) analysis Y/E March
FY08
FY09E
FY10E
FY11E
WACC (%)
12.1
12.6
12.7
12.9
6.9
7.5
9.5
8.7
114,786
138,952
174,031
195,651
(5,997)
(7,027)
(5,701)
(8,206)
(5.2)
(5.1)
(3.3)
(4.2)
ROIC (%) Invested capital (Rs mn) EVA (Rs mn) EVA spread (%)
Y/E March Profitability & Return ratios (%)
ROCE Working Capital & Liquidity ratios Receivables (days)
54
55
55
55
120
125
125
130
Turnover & Leverage ratios (x)
Valuation ratios (x) EV/Sales
10.9
7.5
4.7
4.1
EV/EBITDA
39.4
26.7
17.4
15.7
P/E
48.7
33.5
25.5
22.1
5.8
4.7
4.6
3.9
P/BV
75
Jaiprakash Associates
Sector Report
05 October 2009
Quarterly trend Particulars
Q1FY09
Q2FY09
Q3FY09
Q4FY09
Q1FY10
Revenue (Rs mn)
11,591
11,826
13,217
20,846
20,671
YoY growth (%)
23.0
37.1
46.9
62.8
78.3
QoQ growth (%) EBITDA (Rs mn) EBITDA margin (%)
(9.5)
2.0
11.8
57.7
(0.8)
3,200
3,478
2,473
7,050
5,417
27.6
29.4
18.7
33.8
26.2
1,252
2,031
1,655
3,853
2,181
YoY growth (%)
(10)
96
6
83
74
QoQ growth (%)
(41)
62
(19)
133
(43)
(%)
FY07
FY08
FY09E
FY10E
FY11E
Tax burden (Net income/PBT)
66.9
72.3
71.9
71.0
71.0
Interest burden (PBT/EBIT)
79.5
94.4
93.4
92.7
98.3
EBIT margin (EBIT/Revenues)
22.4
22.4
22.9
22.9
21.5
Asset turnover (Revenues/Avg TA)
36.0
29.2
31.9
42.6
42.6
348.0
364.8
349.2
335.2
320.4
14.9
16.3
17.2
21.5
20.5
Adj net income (Rs mn)
DuPont analysis
Leverage (Avg TA/Avg equtiy) Return on equity
Shareholding pattern
Company profile The Jaiprakash group is a well-diversified infrastructure-oriented
(%)
conglomerate with a formidable presence in engineering &
Dec-08
Mar-09
Jul-09
Promoters
45.3
45.2
50.1
FIIs
23.8
25.0
24.5
expressway businesses. The group has a total cement capacity of
Banks & FIs
12.7
11.8
10.4
9mn tonnes and intends to expand this to 32mn tonnes by FY12.
Public
18.2
18.0
15.0
construction and cement. The group also has interests in the power and hospitality sectors and has recently entered real estate and
Sell
250
29-Apr-09 Results Review
130
120
Hold
200
8-Jul-09
Company Update
194
193
Hold
150
27-Jul-09
Results Review
240
220
Hold
100
239
237
Hold
05-Oct-09 Sector Report
50
●
Sell
●
Hold
Sep-09
69
Aug-09
84
Jul-09
300
25-Mar-09 Initiating Coverage
Jun-09
Reco
May-09
Reco price Tgt price
Apr-09
Event
Mar-09
Date
Stock performance
Feb-09
Recommendation history
76
Larsen & Toubro
Sector Report
05 October 2009
Larsen & Toubro Going strong!
What’s New?
Concerns on order inflows alleviated: Although Larsen & Toubro (L&T) registered a 21.5% YoY decline in order booking in Q1FY10 (Rs 96bn), the pace has picked up substantially since then with order wins worth Rs 140bn post Q1. We expect order inflows to reach Rs 650bn in FY10 (25% growth: lower end of the management guidance) which will provide strong revenue visibility. Power business gains traction: L&T intends to aggressively enter the power business in order to tap the sector’s immense potential and capitalise on the limited competition in this space (BHEL enjoys a monopoly at present). The company has already made a headway in the power equipment market by securing orders from APGENCO (Rs 15.5bn), JP Group (Rs 40bn) and GMR Infrastructure (Rs 20bn). It is also amongst the strongest contenders for securing orders worth Rs 350bn–400bn from NTPC’s bulk tenders by Q1FY11 and orders of Rs 90bn from the JP Group. Earnings to grow by 22.1% over FY09-FY11: We expect L&T’s standalone and consolidated earnings to increase at a 22.1% CAGR and 22.8% CAGR respectively over FY09-FY11, led by strong execution and order booking. Maintain Buy: The stock is currently trading at 24.1x on FY11E standalone earnings and 21.5x on FY11E consolidated earnings. It has traded at an average premium of 35% to the Sensex over the last three years. We expect the stock to maintain this premium over the next few years, given the robust outlook for the sector and L&T’s strong positioning. We have valued L&T’s core business at 23x FY11E earnings and subsidiaries at Rs 190 (11% of SOTP target). We reiterate a Buy on the stock; our recommendation is based on the expected earnings growth over FY09-FY11 and strong incremental contribution from new business verticals like power, nuclear and defence projects.
Target
Rating
Estimates
CMP
TARGET
RATING
RISK
Rs 1,665
Rs 1,781
BUY
MEDIUM
BSE
NSE
BLOOMBERG
500510
LT
LT IN
Company data Market cap (Rs mn / US$ mn)
978,403 / 20,488
Outstanding equity shares (mn)
586
Free float (%)
86
Dividend yield (%)
0.9
52-week high/low (Rs)
1,800 / 556
2-month average daily volume
2,077,750
Stock performance Returns (%) L&T
CMP
1-mth
3-mth
6-mth
1,665
7.4
5.8
147.6
BSE Sector
13,731
6.1
6.4
112.4
Sensex
17,135
10.2
17.0
73.0
P/E comparison (X) 40
L&T*
Industry
35.9 29.6
30
26.6 24.9
21.5 21.1
20 10 0 FY09
FY10E
FY11E
* Consolidated
Valuation matrix (x)
Financial highlights (Rs mn) Revenue Growth (%) Adj net income
FY08
FY09
FY10E
FY11E
P/E @ CMP
44.5
35.9
29.8
24.1
P/E @ Target
47.6
38.4
31.9
25.8
EV/EBITDA @ CMP
35.2
27.2
22.9
18.4
Profitability and return ratios FY08
FY09
FY10E
FY11E
250,094
339,264
401,887
502,079
42.0
35.7
18.5
24.9
21,713
27,097
32,610
56,559
(%)
FY08
FY09
FY10E
FY11E
EBITDA margin
11.8
11.3
11.3
11.3
EBIT margin
11.0
10.5
10.5
10.5
8.7
8.0
8.1
8.0
Adj PAT margin
Growth (%)
54.9
24.8
20.3
24.3
ROE
28.3
24.6
23.8
24.6
FDEPS (Rs)
37.4
46.4
55.9
69.2
ROIC
22.9
20.1
16.7
17.5
Growth (%)
54.4
24.1
20.4
23.8
ROCE
21.5
18.5
17.2
18.2
77
Larsen & Toubro
Sector Report
05 October 2009
Revenue and order book trend Fig 162 - Trend in order book & order inflows (Rs bn) Order Book Order Booking 800 688 703 717 630 700 582 600 496 527 416 440 500 357 369 400 287 307 300 130 116 122 125 146 125 200 96 99 95 75 61 77 71 100 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 FY07
FY08
FY09
FY10
Source: Company, RHH
Fig 163 - Sector wise break-up of order book – Q1FY10 Process
Hydrocarbons
Order book
16
12
Power
Infrastructure
24
39
Fig 164 - Geographical break-up – Q1FY10 others
9
Domestic Net sales
Middle East
9
30
12
38
20
40
60
33
94
11 Order book
(%) 0
80
100
(%)
8 6
86
0
20
40
60
Source: Company, RHH
Source: Company, RHH
Fig 165 - Order book (customer-wise)
Fig 166 - Order inflows (customer-wise)
(%) 60
55
Q1FY09
(%) 70
Q1FY10
51
50
Q1FY09
50
36
13
10
2
120
Q1FY10 51
28
30
20
100
43
40
30
80
59
60
43
40
6
15
79
Order inflow Order inflows
Other exports
20
6
10
13
0
0 Public
Source: Company, RHH
Private
Development projects (L&T)
Public
Private
Development projects (L&T)
Source: Company, RHH
78
Larsen & Toubro
Sector Report
05 October 2009
Fig 167 - E&C segment: Sales and order book trend E&C (Rs bn)
Q1FY08
Q2FY08
Q3FY08
Q4FY08
FY08
Q1FY09
Q2FY09
Q3FY09
Q4FY09
FY09
Q1FY10
Order book
396.9
420.3
476.1
509.3
509.3
563.4
609.3
670.3
687.5
687.5
699.5
order inflow
82.2
59.1
114.6
98.1
353.9
105.2
104.3
133.8
112.9
456.2
83.7
YoY (%)
30.4
27.5
40.3
60.2
40.3
28.0
76.7
16.7
15.1
28.9
(20.4)
Sales
33.2
41.1
48.9
66.2
189.5
55.8
59.4
73.4
91.7
279.8
65.7
YoY (%)
28.7
59.1
89.5
156.5
44.4
67.8
44.6
50.0
38.5
47.7
17.9
9.6
11.7
12.1
15.7
12.8
9.7
11.5
11.4
16.5
12.9
10.6
EBIT Margins (%) Source: Company, RHH
Fig 168 - E&E segment: Sales and margin trend E&E (Rs bn)
Q1FY08
Q2FY08
Q3FY08
Q4FY08
FY08
Q1FY09
Q2FY09
Q3FY09
Q4FY09
FY09
Q1FY10
5.0
6.2
5.7
7.2
24.2
5.8
7.0
5.9
6.9
25.1
5.8
YoY (%)
31.7
43.4
29.5
23.8
31.8
14.9
12.2
3.2
(3.3)
3.6
(0.3)
EBIT Margins (%)
16.7
18.4
17.5
15.7
15.7
11.8
12.9
12.2
14.1
13.2
11.8
Sales
Source: Company, RHH
Fig 169 - MIP segment: Sales and margin trend MIP (Rs bn)
Q1FY08
Q2FY08
Q3FY08
Q4FY08
FY08
Q1FY09
Q2FY09
Q3FY09
Q4FY09
FY09
Q1FY10
4.1
5.6
5.7
7.8
23.3
6.4
6.6
5.1
6.1
24.0
4.4
YoY (%)
28.1
33.3
41.8
21.9
30.8
55.1
18.2
(9.3)
(22.2)
3.0
(31.3)
EBIT Margins (%)
22.4
15.9
21.0
18.2
18.9
23.2
21.1
13.6
19.9
20.1
21.8
Sales
Source: Company, RHH
Valuation Fig 170 - SOTP valuation summary Particulars
Basis
L&T Standalone
23x FY11 EPS
1,591.0
L&T Infotech
12x FY11 EPS
66.7
L&T IDPL
Based on PE deal
44.5
L&T Finance
1.1x FY11 book value
14.9
L&TIFC
1.1x FY11 book value
21.8
Manufacturing JVs
10x FY11 EPS
16.6
International Subsidiaries
10x FY11 EPS
25.7
Total
Per share value (Rs)
1,781
Source: RHH
79
Larsen & Toubro
Sector Report
05 October 2009
Stock performance Fig 171 - Absolute performance from April ’04 Sensex
2,500
L&T
Fig 172 - Relative performance from April ’04 Sensex
BSE CG Index
L&T
BSE CG Index
390
2,000
340 290
1,500
240
1,000
190 140
500
90
0 Apr-04
May-05
Jun-06
Jul-07
Aug-08
Sep-09
40 Apr-04
May-05
Jun-06
Jul-07
Aug-08
Sep-09
Source: Bloomberg, RHH
Source: Bloomberg, RHH
Fig 173 - Relative performance from April ’06 to March ’07
Fig 174 - Relative performance from April ’07 to March ’08
Sensex
L&T
BSE CG Index
Sensex
120
205
110
185
100
165
90
145
80
125
70
105
60 Apr-06
Jul-06
Sep-06
Dec-06
Mar-07
85 Mar-07
L&T
Jun-07
Sep-07
BSE CG Index
Dec-07
Source: Bloomberg, RHH
Source: Bloomberg, RHH
Fig 175 - Relative performance from April ’08 to March ’09
Fig 176 - Relative performance from April ’09
Sensex
L&T
BSE CG Index
Sensex
120
180
110
160
100
BSE CG Index
140
90
120
80
100
70
80
60 50 Mar-08
L&T
Mar-08
Jun-08
Source: Bloomberg, RHH
Sep-08
Dec-08
Mar-09
60 Mar-09
May-09
Jun-09
Jul-09
Aug-09
Sep-09
Source: Bloomberg, RHH
80
Larsen & Toubro
Sector Report
05 October 2009
12-month forward rolling band Fig 177 - P/E band
Fig 178 - P/BV band
(Rs)
(Rs)
3,000
2,500
2,500
40x
2,000
8x
2,000
6x
1,500
1,500 1,000 500
20x
1,000
4x
10x
500
2x
4x
0 Aug-06
Jun-07
Mar-08
Dec-08
Sep-09
0 Aug-06
Jun-07
Source: RHH
Source: RHH
Fig 179 - EV/EBITDA band
Fig 180 - EV/Sales band
Mar-08
1,400,000 1,200,000
25x
1,000,000
20x
800,000
15x
600,000
10x
400,000 200,000 0 Aug-06
Jun-07
Mar-08
Dec-08
Sep-09
1,800,000 1,600,000 1,400,000 1,200,000 1,000,000 800,000 600,000 400,000 200,000 0 Aug-06
3.5x 2.5x 1.5x 0.8x
Jun-07
Mar-08
Source: RHH
Source: RHH
Fig 181 - Premium/Discount to BSE 30 P/E
Fig 182 - Market Cap/Sales band
Dec-08
Sep-09
(Rs mn)
(%) 200 150 100 50
Source: RHH
Sep-09
(Rs mn)
(Rs mn) 1,600,000
0 Aug-06
Dec-08
May-07
Feb-08
Nov-08
Sep-09
1,800,000 1,600,000 1,400,000 1,200,000 1,000,000 800,000 600,000 400,000 200,000 0 Aug-06
3.5x 2.5x 1.5x 0.8x
Jun-07
Mar-08
Dec-08
Sep-09
Source: RHH
81
Larsen & Toubro
Sector Report
05 October 2009
Standalone financials Profit and Loss statement Y/E March (Rs mn) Revenues Growth (%) EBITDA Growth (%) Depreciation & amortisation EBIT Growth (%)
Balance sheet FY08
FY09
FY10E
FY11E
250,094
339,264
401,887
502,079
42.0
35.7
18.5
24.9
29,579
38,342
45,490
56,559
66.3
29.6
18.6
24.3
2,022
2,828
3,295
3,795
27,556
35,513
42,195
52,764
Y/E March (Rs mn)
FY08
FY09
FY10E
FY11E
Cash and cash eq
9,644
7,727
10,022
11,348
Accounts receivable
73,650
100,555
115,611
144,434
Inventories
43,059
58,051
66,944
83,634
Other current assets
37,714
68,122
66,279
82,749
Investments
69,223
82,637
92,837
102,837
Gross fixed assets
42,058
55,905
65,905
75,905
Net fixed assets
29,192
41,174
47,879
54,083
7,293
10,803
12,000
11,000
-
-
-
-
(614)
(485)
(485)
(485)
71.1
28.9
18.8
25.0
Interest
1,227
3,502
4,013
4,387
CWIP
Other income
5,203
15,122
8,403
9,299
Intangible assets
31,533
47,134
46,585
57,676
Deferred tax assets, net
9,821
12,312
13,976
17,303
Other assets
-
(28)
923
3,645
31.1
26.1
30.0
30.0
Total assets
269,162
368,581
412,011
493,245
Extraordinary items
-
-
-
-
Accounts payable
54,922
68,136
71,128
88,861
Min into / inc from associates
-
-
-
-
Other current liabilities
62,495
79,623
89,736
112,108
21,713
34,822
32,610
40,373
-
(7,725)
-
-
21,713
27,097
32,610
40,373
EBT Income taxes Effective tax rate (%)
Reported net income Adjustments Adjusted net income Growth (%) Shares outstanding (mn)
Provisions
20,354
30,665
28,953
36,198
Debt funds
35,840
65,560
72,960
76,968
-
-
-
-
Other liabilities
54.9
24.8
20.3
23.8
583.6
584.0
583.6
583.6
Reserves & surplus
Equity capital
FDEPS (Rs) (adj)
37.4
46.4
55.9
69.2
Shareholder's funds
Growth (%)
54.4
24.1
20.4
23.8
Total liabilities
9.8
15.5
14.5
18.0
BVPS (Rs)
42.1
51.1
62.6
77.1
DPS (Rs) Consol FDEPS (Rs)
Cash flow statement Y/E March (Rs mn)
FY08
FY09
FY10E
FY11E
40,263
35,905
44,168
(389)
(22,314)
-
-
Changes in working capital
(3,767)
(20,515)
(10,559)
(19,372)
Cash flow from operations
21,056
(2,565)
25,346
24,796
Net profit margin
Capital expenditure
(16,221)
(19,798)
(11,197)
(9,000)
Change in investments
(37,886)
5,930
(10,200)
(10,000)
(664)
(6,236)
-
-
Non-cash adjustments
Other investing cash flow Cash flow from investing
1,171
1,171
1,171
123,426
148,062
177,938
95,551
124,597
149,234
179,110
269,162
368,581
412,011
493,245
163.7
213.4
255.7
306.9
FY08
FY09
FY10E
FY11E
Financial ratios 25,212
Net income + Depreciation
585 94,966
Y/E March Profitability & Return ratios (%) EBITDA margin
11.8
11.3
11.3
11.3
EBIT margin
11.0
10.5
10.5
10.5
8.7
8.0
8.1
8.0
ROE
28.3
24.6
23.8
24.6
ROCE
21.5
18.5
17.2
18.2
Working Capital & Liquidity ratios
(54,770)
(20,105)
(21,397)
(19,000)
Receivables (days)
94
94
98
95
Issue of equity
17,016
230
-
-
Inventory (days)
70
70
75
72
Issue/repay debt
16,740
25,576
7,400
4,008
Payables (days)
90
86
83
77
Dividends paid
(1,335)
(4,388)
(9,054)
(8,478)
Current ratio (x)
1.4
1.6
1.6
1.6
Quick ratio (x)
0.7
0.7
0.8
0.8
Gross asset turnover
7.1
6.9
6.6
7.1
Total asset turnover
1.1
1.1
1.0
1.1
22.5
10.1
10.5
12.0
0.4
0.5
0.5
0.4
Other financing cash flow
(5)
(667)
-
-
Change in cash & cash eq
(1,300)
(1,917)
2,295
1,325
9,644
7,727
10,022
11,348
Closing cash & cash eq
Economic Value Added (EVA) analysis Y/E March
FY08
FY09
FY10E
FY11E
WACC (%)
14.3
14.2
14.2
13.8
ROIC (%)
22.9
20.1
16.7
17.5
98,515
162,967
190,850
230,654
8,485
9,606
4,814
8,500
8.6
5.9
2.5
3.7
Invested capital (Rs mn) EVA (Rs mn) EVA spread (%)
Turnover & Leverage ratios (x)
Interest coverage ratio Adjusted debt/equity Valuation ratios (x) EV/Sales
4.2
3.1
2.6
2.1
EV/EBITDA
35.2
27.2
22.9
18.4
P/E
44.5
35.9
29.8
24.1
P/BV
10.2
7.8
6.5
5.4
82
Larsen & Toubro
Sector Report
05 October 2009
Quarterly trend Particulars
Q1FY09
Q2FY09
Q3FY09
Q4FY09
Q1FY10
Revenue (Rs mn)
69,014
76,822
86,156
104,690
73,627
YoY growth (%)
53.1
39.7
34.9
23.6
6.7
QoQ growth (%)
(18.5)
11.3
12.1
21.5
(29.7)
EBITDA (Rs mn)
6,695
7,317
7,799
14,509
7,863
EBITDA margin (%)
9.7
9.5
9.1
13.9
10.7
5,024
4,603
6,041
11,424
5,783
33
32
25.4
17.6
15.1
(48)
(8)
31.2
89.1
(49.4)
Percentage
FY07
FY08
FY09
FY10E
FY11E
Tax burden (Net income/PBT)
70.0
68.9
57.5
70.0
70.0
124.4
114.4
132.7
110.4
109.3
Adj net income (Rs mn) YoY growth (%) QoQ growth (%)
DuPont analysis
Interest burden (PBT/EBIT) EBIT margin (EBIT/Revenues)
9.1
11.0
10.5
10.5
10.5
Asset turnover (Revenues/Avg TA)
116.7
113.4
106.4
103.0
110.9
Leverage (Avg TA/Avg equtiy)
290.0
287.8
289.7
285.1
275.7
26.9
28.3
24.6
23.8
24.6
Return on equity
Shareholding pattern
Company profile L&T is one of the largest technology, engineering, construction and
(%)
manufacturing companies in India. Seven decades of a strong,
Promoters
customer-focused approach and the continuous quest for worldclass quality have enabled it to attain and sustain leadership in all its major lines of business.
18.1
15.8
Banks & FIs
37.5
37.4
38.4
Public
43.2
44.5
45.8
Hold
770
Hold
680
770
Hold
29-May-09 Results Review
1,341
1,498
Buy
2-Jul-09
1,591
1,498
Hold
16-Jul-09
Results Review
1,378
1,527
Buy
5-Oct-09
Sector Report
1,665
1,781
Buy
Oct-09
790
690
Sep-09
730
31-Jan-09
Aug-09
10-Dec-08 Company Update
Jul-09
Hold
Buy
Jun-09
977
●
Hold
May-09
823
●
Apr-09
17-Oct-08 Results Review
1,900 1,700 1,500 1,300 1,100 900 700 500
Mar-09
Reco Hold
Quarterly Preview
19.3
Jan-09
Reco price Tgt price 1,398
30-Mar-09 Company Update
FIIs
Stock performance
1,158
Results Review
-
Feb-09
Quarterly Preview
-
Dec-08
6-Oct-08
-
Nov-08
Event
Mar-09
Oct-08
Date
Dec-08
Sep-08
Recommendation history
Sep-08
83
Nagarjuna Construction
Sector Report
05 October 2009
Nagarjuna Construction Buoyant order traction
What’s New?
Strong order wins to boost revenue growth in FY11: Nagarjuna Construction Co (NCC) has bagged orders worth Rs 43bn to date, which is roughly 65% of the full-year management guidance of Rs 65bn in new orders for FY10. We expect order flows to total Rs 76bn for FY10 which will provide strong revenue visibility for subsequent years. The company ended the first quarter with an order book of Rs 139bn, which is 2.9x FY10E revenues. International business contributes roughly 22% to the current order book. Raised Rs 4.8bn through QIP and stake sale: NCC raised Rs 3.7bn via a QIP at a price of Rs 133/share which has led to a dilution of 12%. The funds raised would be utilised for investments in various BOT projects and to meet working capital requirements. Following the QIP, NCC’s debt/equity ratio has reduced from 0.8x to 0.5x in FY10. In a bid to raise further funds, the company recently sold a 9.5% stake in Gautami Power to the GVK group for a consideration of Rs 1.1bn. It anticipates a capital gain of Rs 500mn from this sale.
Target
Rating
Estimates
CMP
TARGET
RATING
RISK
Rs 153
Rs 166
HOLD
HIGH
BSE
NSE
BLOOMBERG
500294
NAGARCONST
NJCC IN
Company data Market cap (Rs mn / US$ mn)
35,000 / 733
Outstanding equity shares (mn)
229
Free float (%)
75.6
Dividend yield (%)
1.0
52-week high/low (Rs)
Building its BOT portfolio: NCC has a portfolio of five road BOT projects (one operational), three power projects apart from Gautami Power and two airport works. The total equity commitment for the above portfolio is Rs 4.8bn (excluding power projects worth Rs 10.5bn which are long term in nature and currently at a nascent stage). Of this sum, the company has already invested Rs 2.9bn till FY09. Target price raised, maintain Hold: The stock is currently trading at a P/E of 16.3x on FY11E earnings. Excluding subsidiaries, it trades at 12.7x FY11E earnings. We are increasing our earnings estimates for FY11 by 12% mainly due to upward revision in our sales and margin estimates based on strong order inflows. We are also increasing our target multiple from 12x to 14x and BOT valuation to 1.5x FY10E BV as against 1x FY10 BV. Our target price thus rises from Rs 138 to Rs 166 – we maintain our Hold rating on the stock.
159 / 34
2-month average daily volume
2,212,339
Stock performance Returns (%)
CMP
Nagarjuna Sensex
1-mth
3-mth
6-mth
153
13.4
11.1
143.3
17,135
10.2
17.0
73.0
P/E comparison (x)
Nagarjuna Co nst.
40 30
29.6 22.8
Cap Go o ds 24.9
21.1
19.3
16.3
20 10 0 FY09
FY10E
FY11E
Valuation matrix
Financial highlights (Rs mn) Revenue Growth (%) Adj net income Growth (%) FDEPS (Rs) Growth (%)
(x)
FY08
FY09
FY10E
FY11E
P/E @ CMP
20.5
22.8
19.3
16.3
P/E @ Target
22.2
24.6
20.9
17.6
EV/EBITDA @ CMP
12.4
11.9
9.9
8.3
Profitability and return ratios FY08
FY09
FY10E
FY11E
(%)
FY08
34,729
41,514
47,326
56,791
21.0
19.5
14.0
20.0
EBITDA margin
1,636
1,538
1,942
2,412
33.1
3.7
20.3
20.0
ROE
7.5
6.7
7.9
9.4
ROIC
14.7
(10.1)
17.9
18.6
ROCE
FY09E
FY10E
FY11E
10.4
9.0
9.5
9.5
EBIT margin
9.0
7.7
8.2
8.3
Adj PAT margin
4.7
3.7
4.1
4.2
12.5
9.4
10.0
10.6
11.4
8.6
8.8
8.7
11.7
9.8
9.9
9.7
84
Nagarjuna Construction
Sector Report
05 October 2009
Order book trend Fig 183 - Quarterly order book and order inflows (Rs bn)
Order book
Order received
160 140 120 100 80 60 40 20
114
12
124
124
139 122
98
90
78
122
19
29
15
17
29
14
12
10
0 Q1
Q2
Q3
Q4
FY08
Q1
Q2
Q3 FY09
Q4
Q1 FY10
Source: Company, RHH
Valuation Fig 184 - SOTP valuation summary Sum-of-the-parts
Business
Method
Multiple (x)
Value (Rs mn)
Per share value (Rs)
NCC standalone
Construction
P/E 1 year forward
NCC Urban Infra (80% stake)
Real estate
NAV
14
33,768
132
1
1,497
Jubliee Hills
Real estate
6
BV
1
453
HUDA
2
Real estate
BV
1
825
3
NCC Vizag Urban
Real estate
BV
1
499
2
Gautami Power
Power
P/BV
1
522
2
BOT Project
Road/Power/ Port
P/BV
1.5
4,946
19
42,509
166
Total Source: RHH
85
Nagarjuna Construction
Sector Report
05 October 2009
Stock performance Fig 185 - Absolute performance from April ’04 400
Sensex
NCC
Fig 186 - Relative performance from April ’04
BSE CG Index
740
350
640
300
540
250
NCC
BSE CG Index
440
200
340
150
240
100
140
50 0 Apr-04
Sensex
May-05
Jun-06
Jul-07
Aug-08
Sep-09
40 Apr-04
May-05
Jun-06
Jul-07
Aug-08
Sep-09
Source: Bloomberg, RHH
Source: Bloomberg, RHH
Fig 187 - Relative performance from April ’06 to March ’07
Fig 188 - Relative performance from April ’07 to March ’08
Sensex
NCC
105
NCC
BSE CG Index
165 155
95
145 135
85
125
75
115 105
65 55 Apr-06
Sensex
BSE CG Index
95 Jul-06
Sep-06
Dec-06
Mar-07
85 Mar-07
Jun-07
Sep-07
Dec-07
Source: Bloomberg, RHH
Source: Bloomberg, RHH
Fig 189 - Relative performance from April ’08 to March ’09
Fig 190 - Relative performance from April ’09
Sensex
NCC
BSE CG Index
Sensex
120
160
100
140
80
120
60
100
40
80
20 Mar-08
Jun-08
Source: Bloomberg, RHH
Sep-08
Dec-08
Mar-09
60 Mar-09
Apr-09 May-09
NCC
Jun-09
Mar-08
BSE CG Index
Jul-09
Aug-09
Sep-09
Source: Bloomberg, RHH
86
Nagarjuna Construction
Sector Report
05 October 2009
12-month forward rolling band Fig 191 - P/E band (Rs) 450 400 350 300 250 200 150 100 50 0 Aug-06
Fig 192 - P/BV band (Rs) 500 45x
400
30x
300
16x 8x Jun-07
Mar-08
Dec-08
Sep-09
5x
3x
200 1.5x
100 0 Aug-06
0.5x Jun-07
Source: RHH
Source: RHH
Fig 193 - EV/EBITDA band
Fig 194 - EV/Sales band
120,000 100,000
21x
80,000
15x
60,000 10x
40,000
5x
20,000 Jun-07
Mar-08
Dec-08
Sep-09
2x
80,000
1.4x
60,000
0.8x
40,000 20,000 0 Aug-06
0.2x Jun-07
Mar-08
Source: RHH
Fig 195 - Premium/Discount to BSE 30 P/E
Fig 196 - Market Cap/Sales band
(%) 200
(Rs mn)
150
100,000
100
80,000
50
60,000
0
40,000
(50)
20,000
Source: RHH
Sep-09
100,000
Source: RHH
(100) Aug-06
Dec-08
(Rs mn) 120,000
(Rs mn)
0 Aug-06
Mar-08
Dec-08
Sep-09
120,000
May-07
Feb-08
Nov-08
Sep-09
0 Aug-06
2x 1.4x 0.8x 0.2x Jun-07
Mar-08
Dec-08
Sep-09
Source: RHH
87
Nagarjuna Construction
Sector Report
05 October 2009
Standalone financials Profit and Loss statement Y/E March (Rs mn) Revenues Growth (%)
Balance sheet FY08
FY09
FY10E
FY11E
34,729
41,514
47,326
56,791
Y/E March (Rs mn)
FY08
FY09E
FY10E
FY11E
Cash and cash eq
2,329
1,346
1,365
722
Accounts receivable
8,677
10,260
11,410
13,692
Inventories
5,493
7,495
8,298
9,958
13,786
14,514
16,934
19,231
21.0
19.5
14.0
20.0
3,598
3,733
4,492
5,391
Growth (%)
33.1
3.7
20.3
20.0
Other current assets
Depreciation & amortisation
482
533
588
697
Investments
5,648
7,403
8,803
9,803
3,116
3,200
3,904
4,694
Gross fixed assets
6,608
6,219
7,514
9,079
29.6
2.7
22.0
20.2
Net fixed assets
5,186
4,592
5,300
6,168
1,116
1,621
1,686
1,844
143
281
100
100
444
697
680
750
13
-
-
(188)
EBITDA
EBIT Growth (%) Interest Other income EBT
CWIP Intangible assets
2,444
2,278
2,898
3,600
Deferred tax assets, net
(167)
(188)
(188)
Income taxes
811
743
956
1,188
Other assets
(2)
(27)
203
201
Effective tax rate (%)
33.2
32.6
33.0
33.0
Total assets
41,106
45,702
52,249
59,711
(8)
(3)
-
-
Accounts payable
6,025
6,360
7,746
9,349
Other current liabilities
9,539
9,181
10,251
11,386
880
867
1,377
1,818
8,938
12,439
10,939
13,439
-
-
-
-
Extraordinary items Min into / inc from associates Reported net income Adjustments Adjusted net income Growth (%) Shares outstanding (mn) FDEPS (Rs) (adj) Growth (%) DPS (Rs)
-
-
-
-
1,619
1,532
1,942
2,412
16
(3)
-
-
1,636
1,538
1,942
2,412
21.2
(6.0)
26.3
24.2
228.8
228.8
256.5
256.5
7.5
6.7
7.9
9.4
14.7
(10.1)
17.9
18.6
1.3
1.4
1.4
2.1
Cash flow statement
Provisions Debt funds Other liabilities Equity capital
458
458
513
513
Reserves & surplus
15,266
16,397
21,424
23,206
Shareholder's funds
15,724
16,855
21,937
23,719
Total liabilities
41,106
45,702
52,249
59,711
68.7
73.7
85.5
92.5
FY08
FY09E
FY10E
FY11E
BVPS (Rs)
Financial ratios
Y/E March (Rs mn)
FY08
FY09E
FY10E
FY11E
Y/E March
Net income + Depreciation
2,101
2,065
2,530
3,109
Profitability & Return ratios (%)
Non-cash adjustments
(212)
(592)
(686)
232
Changes in working capital
(4,693)
(3,955)
(1,207)
(3,501)
Cash flow from operations
(2,803)
(2,482)
637
(160)
Capital expenditure
(1,588)
(75)
(1,099)
(1,565)
Change in investments
(2,104)
(1,290)
(1,398)
(998)
1
(819)
-
-
Other investing cash flow Cash flow from investing
EBITDA margin
10.4
9.0
9.5
9.5
EBIT margin
9.0
7.7
8.2
8.3
Net profit margin
4.7
3.7
4.1
4.2
ROE
12.5
9.4
10.0
10.6
ROCE
11.7
9.8
9.9
9.7
Working Capital & Liquidity ratios
(3,691)
(2,184)
(2,497)
(2,563)
Receivables (days)
76
83
84
81
Issue of equity
4,049
-
3,673
-
Inventory (days)
65
73
77
74
Issue/repay debt
2,569
4,025
(1,500)
2,500
Payables (days)
69
69
69
69
Dividends paid
(229)
(348)
(295)
(420)
Current ratio (x)
1.9
2.2
2.1
2.1
Quick ratio (x)
0.6
0.7
0.6
0.7
Gross asset turnover
6.0
6.5
6.9
6.8
Total asset turnover
1.0
1.0
1.0
1.0
Interest coverage ratio
2.8
2.0
2.3
2.5
Adjusted debt/equity
0.6
0.7
0.5
0.7
Other financing cash flow
-
-
-
-
Change in cash & cash eq
(105)
(989)
19
(643)
Closing cash & cash eq
2,329
1,346
1,365
722
Economic Value Added (EVA) analysis Y/E March
FY08
FY09E
FY10E
FY11E
WACC (%)
11.9
11.8
11.8
11.8
ROIC (%)
11.4
8.6
8.8
8.7
22,332
27,924
31,487
40,730
EVA (Rs mn)
(118)
(904)
(948)
(1,266)
EVA spread (%)
(0.5)
(3.2)
(3.0)
(3.1)
Invested capital (Rs mn)
Turnover & Leverage ratios (x)
Valuation ratios (x) EV/Sales
1.3
1.1
0.9
0.8
EV/EBITDA
12.4
11.9
9.9
8.3
P/E
20.5
22.8
19.3
16.3
2.2
2.1
1.8
1.7
P/BV
88
Nagarjuna Construction
Sector Report
05 October 2009
Quarterly trend Particulars
Q1FY09
Q2FY09
Q3FY09
Q4FY09
Q1FY10
Revenue (Rs mn)
9,709
10,558
10,266
10,981
10,004
YoY growth (%)
27.4
55.9
31.7
(12.4)
3.0
(22.6)
8.7
(2.8)
7.0
(8.9)
774
935
780
715
905
QoQ growth (%) EBITDA (Rs mn) EBITDA margin (%)
8.0
8.9
7.6
6.5
9.0
Adj net income (Rs mn)
371
423
363
382
382
YoY growth (%)
3
26
(9)
(27)
3
9,709
10,558
10,266
10,981
10,004
(%)
FY07
FY08
FY09E
FY10E
FY11E
Tax burden (Net income/PBT)
69.9
66.9
67.5
67.0
67.0
Interest burden (PBT/EBIT)
80.2
78.4
71.2
74.2
76.7
QoQ growth (%)
DuPont analysis
EBIT margin (EBIT/Revenues)
8.4
9.0
7.7
8.2
8.3
Asset turnover (Revenues/Avg TA)
118.9
97.9
95.6
96.6
101.4
Leverage (Avg TA/Avg equtiy)
243.4
271.7
266.5
252.5
245.2
13.6
12.5
9.4
10.0
10.6
Return on equity
Company profile
Shareholding pattern
Nagarjuna Construction (NCC) is a leading Hyderabad-based civil
(%)
construction company promoted by Mr A V S Raju. Established in
Dec-08
Mar-09
Jun-09
Promoters
24.4
24.4
24.4
FIIs
27.4
28.0
24.9
conglomerate with BOT and real estate projects. Today, it has a
Banks & FIs
25.2
22.3
26.0
well-diversified, de-risked business mix with a presence across
Public
23.1
25.3
24.7
1980, the company has transformed itself from a subcontractor in residential and industrial construction to a diversified infrastructure
various sectors – buildings and housing, transportation, water and environment, electrical, irrigation, hydropower, oil & gas pipelines and EPC capabilities in metals and power sector.
Buy
18-Sep-08 Company Update
112
173
Buy
6-Oct-08
92
142
Buy
29-Oct-08 Results Review
52
90
Hold
28-Jan-09
50
78
Hold
Quarterly Preview Results Review
29-May-09 Results Review
129
121
Hold
3-Aug-09
Results Review
143
138
Hold
5-Oct-09
Sector Report
153
166
Hold
170 150 130 110 90 70 50 30
●
Hold
●
Buy
Sep-09
175
Jul-09
125
May-09
21-Aug-08 RHH Compendium
Mar-09
Reco
Jan-09
Reco price Tgt price
Nov-08
Event
Sep-08
Date
Jul-08
Stock performance
Recommendation history
89
Patel Engineering
Sector Report
05 October 2009
Patel Engineering Power, real estate to drive value
What’s New?
Order book at Rs 73.5bn: As on 30 June 2009, Patel Engineering’s (PEL) order book stood at Rs 73.5bn, 2.6x its FY10E consolidated revenues. The order book is split between the standalone entity (Rs 65.7bn), US operations (Rs 3.8bn) and Michigan operations (Rs 4bn). The company has secured orders worth Rs 7bn in Q1FY10, which include a Rs 5.5bn order from Vidarbha Irrigation Development and a Rs 1.5bn contract from the Himachal Pradesh Power Corporation. In addition, PEL has L1 orders worth Rs 30bn. Hydro and irrigation projects contribute ~44% each to the order book, while urban infrastructure accounts for the balance 12%.
Target
Rating
CMP
TARGET
RATING
RISK
Rs 484
Rs 532
BUY
HIGH
BSE
NSE
BLOOMBERG
531120
PATELENG
PEC IN
Gradually building its power portfolio: PEL plans to develop a 1,200MW thermal power plant in four phases of 300MW each. Land for the same has been acquired in Tamil Nadu. The company has an equity commitment of Rs 1.8bn over the next four years for its power portfolio for Phase 1. To ease the pressure on its balance sheet, PEL plans to dilute a 49% stake in its power assets to the equipment supplier or opt for private equity funding. Apart from the thermal plant, the company also intends to develop a 120MW hydro-based plant in Arunachal Pradesh for which a DPR is under preparation.
Company data
Real estate back in the limelight: PEL’s land bank of 1,027 acres is spread across India’s four major cities: Hyderabad, Chennai, Bangalore, and Mumbai. This features in PEL’s books and the company has given development rights to its subsidiary, Patel Realty India. In this manner, the potential upside from this business has been retained with PEL, thereby benefiting its existing shareholders.
Stock performance
S80IA benefits dropped; normal tax rate to be effective: In view of the proposed retrospective change in S80IA, PEL has not claimed any tax benefit this quarter. Deductions claimed under the said section in earlier years would impact the company’s net worth by ~Rs 1.6bn and result in cash outflows of ~Rs 400mn.
P/E comparison
Market cap (Rs mn / US$ mn)
28,875 / 605
Outstanding equity shares (mn)
60
Free float (%) Dividend yield (%)
0.4
52-week high/low (Rs)
526 / 103
2-month average daily volume
Returns (%)
CMP
Patel Engg. Sensex
(x) 40 30
283,322
1-mth
(Rs mn)
10.5
12.9
244.3
10.2
17.0
73.0
P atel Engg. 27.4 29.6
Cap. Go o ds
22.7 24.9
17.9
FY09
FY10E
FY11E
13,245
17,774
21,951
27,220
21.6
34.2
23.5
24.0
1,076
1,053
1,271
1,612
Growth (%)
28.6
(2.2)
20.8
26.8
FDEPS (Rs)
18.0
17.6
21.3
27.0
Growth (%)
28.6
(2.2)
20.8
26.8
Growth (%) Adj net income
21.1
10 0 FY09
FY10E
FY11E
Valuation matrix FY08
FY09
FY10E
FY11E
P/E @ CMP
26.8
27.4
22.7
17.9
P/E @ Target
29.5
30.1
25.0
19.7
EV/EBITDA @ CMP
19.7
15.5
12.4
10.0
Profitability and return ratios FY08
Revenue
6-mth
484
(x)
Financial highlights
3-mth
17,135
20
Maintain Buy: We anticipate an earnings growth at a CAGR of 23.7% over FY09FY11. The stock currently trades at a P/E of 17.9x FY11E earnings and adjusting subsidiary value, it trades at 12.2x FY11E earnings. Valuing the stock on an SOTP basis, we arrive at a target price of Rs 532 from Rs 460 earlier. We maintain our Buy rating on the stock.
Estimates
(%)
FY08
FY09
FY10E
FY11E
EBITDA margin
15.3
14.5
14.6
14.7
EBIT margin
12.8
12.0
12.2
12.3
8.1
5.9
5.8
5.9
ROE
13.9
11.5
12.3
13.8
ROIC
12.2
9.6
7.3
7.8
ROCE
12.3
10.3
9.2
9.8
Adj PAT margin
90
Patel Engineering
Sector Report
05 October 2009
Order book trend Fig 197 - Order book trend (Rs bn)
Closng order book
Hydro
Irrigartion
80
50 40 30 20 10
50 28 14
9
60
55
54
30
31
11 12
11 13
60
35
10
15
74
72
71
70 60
Transport
60
35
10
15
31 28
31 17
12
11
32 29 11
32 32 9
0 Q1FY08 Q2FY08 Q3FY08 Q4FY08 Q1FY09 Q2FY09 Q3FY09 Q4FY09 Q1FY10 Source: Company, RHH
Fig 198 - Order book break-up – Q1FY10
Transport 12% Hydro 44% Irrigartion 44%
Source: Company, RHH
Valuation Fig 199 - SOTP valuation summary Particulars
Business
PEL Standalone
Core construction business
Real estate
Real estate
Land bank value (Hyd+Bangalore)
Real estate
BOT Projects
Roads
Value of Subsidiares
Core construction business
Power projects
Power
BV
Total
Multiple
Value (Rs mn)
Per share value (Rs)
14x
22,565
378
NAV
3,496
58
BV
2,000
34
NAV
1,100
18
8x
1,790
30
800
13
31,751
532
Source: RHH
91
Patel Engineering
Sector Report
05 October 2009
Stock performance Fig 200 - Relative performance from April ’04
Fig 200 - Absolute performance from April ’04 1,000 900 800 700 600 500 400 300 200 100 0 Apr-04
Sensex
Patel Engg.
BSE CG Index
Sensex
1,440
Patel Engg.
BSE CG Index
1,240 1,040 840 640 440 240 May-05
Jun-06
Jul-07
Aug-08
Sep-09
40 Apr-04
May-05
Jun-06
Jul-07
Aug-08
Sep-09
Source: Bloomberg, RHH
Source: Bloomberg, RHH
Fig 201 - Relative performance from April ’06 to March ’07
Fig 202 - Relative performance from April ’07 to March ’08
Sensex
Patel Engg.
BSE CG Index
Sensex
130
205
120
185
110
Patel Engg.
BSE CG Index
165
100
145
90
125
80
105
70 60 Apr-06
Jul-06
Sep-06
Dec-06
Mar-07
85 Mar-07
Jun-07
Sep-07
Dec-07
Source: Bloomberg, RHH
Source: Bloomberg, RHH
Fig 203 - Relative performance from April ’08 to March ’09
Fig 204 - Relative performance from April ’09
Sensex
Patel Engg.
BSE CG Index
Sensex
120
320
100
270
Patel Engg.
Mar-08
BSE CG Index
220
80
170 60
120
40 20 Mar-08
70 Jun-08
Source: Bloomberg, RHH
Sep-08
Dec-08
Mar-09
20 Mar-09
Apr-09
May-09
Jun-09
Jul-09
Aug-09
Source: Bloomberg, RHH
92
Patel Engineering
Sector Report
05 October 2009
12-month forward rolling band Fig 205 - P/E band
Fig 206 - P/BV band
(Rs) 1,200
(Rs) 1,400 40x
1,000
1,000
800
800
600 20x
400
10x 4x
200 0 Aug-06
6.5x
1,200
Jun-07
Mar-08
Dec-08
Sep-09
3x
600 400
1.5x
200 0 Aug-06
0.5x Jun-07
Source: RHH
Source: RHH
Fig 207 - EV/EBITDA band
Fig 208 - EV/Sales band
(Rs mn) 80,000
21x
70,000
Dec-08
Sep-09
(Rs mn) 80,000 70,000
60,000
15x
50,000 40,000
10x
30,000
60,000 2x
50,000 40,000
1.4x
30,000
20,000
5x
10,000 0 Aug-06
Mar-08
0.8x
20,000 10,000
Jun-07
Mar-08
Dec-08
Sep-09
0 Aug-06
0.2x Jun-07
Mar-08
Source: RHH
Source: RHH
Fig 209 - Premium/Discount to BSE 30 P/E
Fig 210 - Market Cap/Sales band
Dec-08
Sep-09
(Rs mn) 70,000
(%) 150
60,000 100
50,000
50
Source: RHH
1.4x
30,000 20,000
0 (50) Aug-06
2x
40,000
0.8x
10,000 May-07
Feb-08
Nov-08
Sep-09
0 Aug-06
0.2x Jun-07
Mar-08
Dec-08
Sep-09
Source: RHH
93
Patel Engineering
Sector Report
05 October 2009
Standalone financials Profit and Loss statement Y/E March (Rs mn) Revenues Growth (%)
Balance sheet FY08
FY09
FY10E
FY11E
13,245
17,774
21,951
27,220
Y/E March (Rs mn)
FY08
FY09
FY10E
FY11E
Cash and cash eq
1,912
1,553
702
253
21.6
34.2
23.5
24.0
2,021
2,576
3,205
4,001
Growth (%)
43.1
27.4
24.4
24.8
Other current assets
4,621
Depreciation & amortisation
327
441
535
657
Investments
1,443
Gross fixed assets
4,165
Net fixed assets
2,897
EBITDA
EBIT
1,694
2,135
2,670
3,344
Growth (%)
46.8
26.1
25.0
25.3
Interest
519
886
1,038
1,204
Other income
352
184
220
220
EBT
Accounts receivable
3,586
4,616
5,713
7,085
Inventories
6,952
9,832
11,727
14,393
7,163
6,916
8,203
2,898
3,857
4,857
4,862
6,062
7,262
3,168
3,833
4,376
94
231
100
100
-
-
-
(137)
CWIP Intangible assets
1,527
1,580
1,852
2,361
(104)
(97)
(117)
Income taxes
106
233
626
794
Other assets
-
(1)
19
39
Effective tax rate (%)
6.9
14.7
33.8
33.6
Total assets
21,400
29,363
32,751
39,169
-
330
-
-
3,447
4,964
6,315
7,830
Extraordinary items Min into / inc from associates Reported net income
56
66
45
45
1,476
1,743
1,271
1,612
Deferred tax assets, net
Accounts payable Other current liabilities
636
-
-
-
23
78
45
45
Debt funds
6,579
10,205
11,705
14,205
Other liabilities
2,274
4,328
3,732
4,627
Provisions
Adjustments
(400)
(690)
-
-
Adjusted net income
1,076
1,053
1,271
1,612
Growth (%)
28.6
(2.2)
20.8
26.8
Equity capital
60
60
60
60
Shares outstanding (mn)
59.7
59.7
59.7
59.7
Reserves & surplus
8,382
9,729
10,895
12,403
FDEPS (Rs) (adj)
18.0
17.6
21.3
27.0
Shareholder's funds
8,442
9,789
10,955
12,462
Growth (%)
28.6
(2.2)
20.8
26.8
Total liabilities
21,400
29,363
32,751
39,169
1.5
1.8
1.5
1.5
141.5
164.1
183.6
208.9
FY08
FY09
FY10E
FY11E
DPS (Rs)
Cash flow statement
BVPS (Rs)
Financial ratios
Y/E March (Rs mn)
FY08
FY09
FY10E
FY11E
Y/E March
Net income + Depreciation
1,803
2,184
1,806
2,269
Profitability & Return ratios (%)
(34)
(1,440)
(0)
(0)
Changes in working capital
(3,470)
(4,437)
(2,025)
(2,912)
Cash flow from operations
(1,701)
(3,693)
(219)
(644)
Capital expenditure
(1,284)
(790)
(1,069)
(1,200)
Change in investments
(1,137)
(1,436)
(960)
(1,000)
-
-
-
-
Non-cash adjustments
Other investing cash flow Cash flow from investing
EBITDA margin
15.3
14.5
14.6
14.7
EBIT margin
12.8
12.0
12.2
12.3
8.1
5.9
5.8
5.9
ROE
13.9
11.5
12.3
13.8
ROCE
12.3
10.3
9.2
9.8
Net profit margin
Working Capital & Liquidity ratios
(2,422)
(2,226)
(2,028)
(2,200)
86
84
86
86
Issue of equity
(534)
-
-
-
Inventory (days)
196
220
232
227
Issue/repay debt
4,249
5,630
1,500
2,500
Payables (days)
102
110
122
123
(94)
(70)
(105)
(105)
Current ratio (x)
4.2
4.7
4.0
3.8
Other financing cash flow
-
-
-
-
Quick ratio (x)
0.9
0.9
0.9
0.9
Change in cash & cash eq
(502)
(359)
(852)
(448)
Closing cash & cash eq
1,912
1,553
702
253
Gross asset turnover
3.7
3.9
4.0
4.1
Total asset turnover
0.7
0.7
0.7
0.8
Interest coverage ratio
3.3
2.4
2.6
2.8
Adjusted debt/equity
0.8
1.0
1.1
1.1
Dividends paid
Economic Value Added (EVA) analysis Y/E March
FY08
FY09
FY10E
FY11E
WACC (%)
12.7
13.8
13.8
13.8
ROIC (%)
12.2
9.6
7.3
7.8
15,043
22,768
25,690
31,086
EVA (Rs mn)
(78)
(961)
(1,683)
(1,874)
EVA spread (%)
(0.5)
(4.2)
(6.6)
(6.0)
Invested capital (Rs mn)
Receivables (days)
Turnover & Leverage ratios (x)
Valuation ratios (x) EV/Sales
3.0
2.2
1.8
1.5
EV/EBITDA
19.7
15.5
12.4
10.0
P/E
26.8
27.4
22.7
17.9
3.4
2.9
2.6
2.3
P/BV
94
Patel Engineering
Sector Report
05 October 2009
Quarterly trend Particulars
Q1FY09
Q2FY09
Q3FY09
Q4FY09
Q1FY10
Revenue (Rs mn)
3,962
3,092
3,171
7,615
4,763
YoY growth (%)
20.0
31.1
21.0
51.7
20.2
QoQ growth (%)
(21.1)
(22.0)
2.6
140.1
(37.5)
EBITDA (Rs mn)
475
479
567
679
602
EBITDA margin (%)
12.0
15.5
17.9
8.9
12.6
Adj net income (Rs mn)
234
335
351
455
250
YoY growth (%)
(11.3)
3.2
0.2
(15.4)
7.0
QoQ growth (%)
(56.5)
43.2
4.8
29.7
(45.0)
(%)
FY07
FY08
FY09
FY10E
FY11E
Tax burden (Net income/PBT)
70.8
70.5
66.6
68.6
68.3
102.5
90.1
74.0
69.4
70.6
EBIT margin (EBIT/Revenues)
10.6
12.8
12.0
12.2
12.3
Asset turnover (Revenues/Avg TA)
94.1
73.8
70.0
70.7
75.7
258.0
231.9
278.5
299.4
307.1
18.6
13.9
11.5
12.3
13.8
DuPont analysis
Interest burden (PBT/EBIT)
Leverage (Avg TA/Avg equtiy) Return on equity
Shareholding pattern
Company profile Patel Engineering (PEL) is one of India’s oldest and largest
(%)
construction companies, with a strong presence in the hydropower
Promoters
sector. It is one of the few players with pre-qualifications in hydro, irrigation, and other projects. PEL possesses niche technologies (via
Dec-08
Mar-09
Jun-09
53.4
53.8
53.2
7.4
7.1
7.7
FIIs
subsidiaries) such as RCC dam construction, micro tunnelling, and
Banks & FIs
12.3
11.1
11.1
lake water tapping. It has also ventured into the real estate business
Public
26.9
28.1
28.0
and has a developable land bank of ~100mn sq ft in four Indian cities, including Mumbai.
Sell
6-Apr-09
Quarterly Preview
136
155
Hold
25-May-09 Company Update
353
309
Hold
1-Jul-09
Results Review
429
406
Hold
3-Aug-09
Results Review
413
460
Buy
5-Oct-09
Sector Report
484
532
Buy
Hold
●
Buy
Oct-09
155
●
Sep-09
147
Sell
Aug-09
Results Review
●
Jul-09
2-Feb-09
600 500 400 300 200 100 0
Jun-09
Sell
May-09
148
Apr-09
139
Mar-09
18-Nov-08 Initiating Coverage
Feb-09
Reco
Jan-09
Reco price Tgt price
Dec-08
Event
Nov-08
Date
Oct-08
Stock performance
Recommendation history
95
Punj Lloyd
Sector Report
05 October 2009
Punj Lloyd Soaring orders to drive a turnaround
What’s New?
Orders worth Rs 99bn booked in Q1FY10: As on 30 June 2009, Punj Lloyd’s (PLL) order book stood at Rs 278bn, 2.1x its FY10E revenues. The company has booked orders worth Rs 99bn in Q1FY10, which is nearly equivalent to its fullyear inflow of Rs 117bn for FY09. We expect PLL to end the year with Rs 170bn of order inflows. An improved macro scenario and a strong Q1 order book could provide further upsides. Set to stage a turnaround: In FY09, PLL reported a loss of Rs 2.3bn on account of forex headwinds and a provision of Rs 4.3bn towards the disputed SABIC project. We expect the company to report an EPS of Rs 15.1 in FY10 and Rs 17.8 in FY11 (23% earnings growth) due to improved revenue visibility and a 120bps expansion in EBITDA margin to 8.5% in FY10. Raised Rs 6.7bn via QIP: PLL raised US$ 140mn (Rs 6.7bn) in a share sale to institutions at a price of Rs 241/share. These funds will be utilised for the repayment of existing loans and to finance working capital requirements. Lucrative stake in Pipavav Shipyard: Pipavav Shipyard has successfully raised Rs 5.1bn through an initial public offering of 85.5mn shares, taking the company’s value to ~Rs 41bn. In 2007, PLL had bought a 22.3% stake in Pipavav Shipyard for Rs 3.5bn, now valued at Rs 8bn. Adjusting for a 20% holding company discount, the investment is valued at Rs 21/share (Rs 11 assigned in our SOTP target price). Variation claims of US$ 117mn on ONGC Heera project: Cost overruns from the ONGC Heera development project have already been provided for in FY09. PLL has filed variation claims amounting to US$ 117mn which would be settled post completion of the contract, if successfully contested.
Target
Rating
CMP
TARGET
RATING
RISK
Rs 262
Rs 306
BUY
HIGH
BSE
NSE
BLOOMBERG
532693
PUNJLLOYD
PUNJ IN
Company data Market cap (Rs mn / US$ mn)
79,512 / 1,665
Outstanding equity shares (mn)
303
Free float (%)
58.5
Dividend yield (%)
0.1
52-week high/low (Rs)
295 / 66
2-month average daily volume
7,258,253
Stock performance Returns (%)
CMP
Punj Lloyd Sensex
1-mth
Key risks: PLL is exposed to the currency risk as ~75% of its revenues and order book are derived from the international markets. This apart, execution delays could hinder profitability.
Financial highlights (Rs mn)
1.6
22.6
184.5
10.2
17.0
73.0
P/E comparison
(x) 40
P unj Llo yd 34.7
Industry
29.6
24.9
20
14.7
10 0 FY09E
FY10E
FY11E
Valuation matrix (x)
FY08
FY09
FY10E
FY11E
P/E @ CMP
23.2
34.7
17.4
14.7
P/E @ Target
27.1
40.5
20.3
17.2
EV/EBITDA @ CMP
15.1
12.0
9.3
7.9
Profitability and return ratios FY10E
FY11E
77,530
119,120
132,234
154,470
51.2
53.6
11.0
16.8
3,281
2,348
4,972
6,044
Growth (%)
66.9
(28.4)
111.8
21.5
ROE
16.4
FDEPS (Rs)
11.3
7.5
15.1
17.8
ROIC
13.6
Growth (%)
59.0
(33.2)
99.8
18.2
ROCE
12.9
8.3
Adj net income
21.1
17.4
FY09
Growth (%)
6-mth
262
FY08
Revenue
3-mth
17,135
30
Maintain Buy: The stock has been re-rated on the strength of record order inflows in Q1FY10 and the improved macro climate. Currently, it trades at a P/E of 17.4x on FY10E earnings and 14.7x FY11E earnings. Excluding its stake in Pipavav Shipyard, PLL trades at 13.9x on FY11E. We value the core construction business at 16x FY11E earnings (discount of 32% to L&T) and maintain our Buy rating on the stock with a target price of Rs 306.
Estimates
(%)
FY08
FY09
FY10E
FY11E
EBITDA margin
8.9
7.3
8.5
8.5
EBIT margin
7.0
5.8
6.9
6.9
Adj PAT margin
4.2
2.0
3.8
3.9
9.0
16.4
15.8
10.4
11.1
11.3
11.6
12.2
96
Punj Lloyd
Sector Report
05 October 2009
Order book trend Fig 211 - Order book break-up by vertical – Q1FY10
Pipelines 20.3%
Fig 212 - Order book break-up by geography – Q1FY10
Tankages 1.9%
Process palnts,others 22.0%
Europe / Africa 4%
South asia 17%
Infrastructure 55.9%
Source: Company, RHH
Caspian 36%
Middle East 17% SE asia & asia pacific 26%
Source: Company, RHH
Valuation Fig 213 - SOTP valuation summary Sum of the parts
Business
Method
PLL Consolidated
Construction
Pipavav Shipyard
Shipbuilding
P/E on FY11E earnings BV
Real estate
BV
Real estate ventures Total
Multiple (x)
Value (Rs mn)
Per share value (Rs)
16
96,698
285
1.5
5,250
15
1
1800
5
103,748
306
Source: RHH
97
Punj Lloyd
Sector Report
05 October 2009
Stock performance Fig 214 - Absolute performance from Jan ’06 Sensex
Punj Lloyd
Fig 215 - Relative performance from Jan ’06
700 600 500 400 300 200 100 0 Jan-06
Mar-07
Sensex
BSE CG Index
Jun-08
Sep-09
Punj Lloyd
220 200 180 160 140 120 100 80 60 40 Jan-06
Mar-07
BSE CG Index
Jun-08
Sep-09
Source: Bloomberg, RHH
Source: Bloomberg, RHH
Fig 216 - Relative performance from April ’06 to March ’07
Fig 217 - Relative performance from April ’07 to March ’08
Sensex
Punj Lloyd
BSE CG Index
110 100 90 80 70 60 50 Apr-06
Jun-06
Sep-06
Dec-06
Mar-07
Sensex 250 230 210 190 170 150 130 110 90 70 Apr-07
Punj Lloyd
Jul-07
BSE CG Index
Sep-07
Dec-07
Source: Bloomberg, RHH
Source: Bloomberg, RHH
Fig 218 - Relative performance from April ’08 to March ’09
Fig 219 - Relative performance from April ’09
Sensex
Punj Lloyd
BSE CG Index
115
200
105
180
95
Punj Lloyd
BSE CG Index
160
85 75
140
65
120
55
100
45 35 Apr-08
Sensex
Mar-08
Jun-08
Source: Bloomberg, RHH
Sep-08
Dec-08
Mar-09
80 Apr-09 May-09 May-09
Jun-09
Jul-09
Aug-09 Sep-09
Source: Bloomberg, RHH
98
Punj Lloyd
Sector Report
05 October 2009
12-month forward rolling band Fig 220 - P/E band
Fig 221 - P/BV band
(Rs) 700
(Rs) 700 600
600
32x
500
500
4x
400
400 300
16x
200
8x 4x
100 0 Aug-06
Jun-07
Mar-08
Dec-08
Sep-09
300 200
2x
100
1x 0.5x
0 Aug-06
Jun-07
Source: RHH
Source: RHH
Fig 222 - EV/EBITDA band
Fig 223 - EV/Sales band
250,000
20x
200,000
150,000 0.75x
100,000
100,000
6x
50,000
4x Jun-07
Mar-08
Dec-08
Sep-09
0.5x
50,000 0 Aug-06
0.25x Jun-07
Mar-08
Source: RHH
Source: RHH
Fig 224 - Premium/Discount to BSE 30 P/E
Fig 225 - Market Cap/Sales band
(%) 200
(Rs mn) 250,000
150
200,000
100
Dec-08
Sep-09
1.5x
150,000
50
0.75x
100,000
0
0.5x
50,000
(50)
Source: RHH
Sep-09
1.5x
200,000
12x
150,000
(100) Aug-06
Dec-08
(Rs mn) 250,000
(Rs mn) 300,000
0 Aug-06
Mar-08
Jun-07
Mar-08
Dec-08
Sep-09
0 Aug-06
0.25x Jun-07
Mar-08
Dec-08
Sep-09
Source: RHH
99
Punj Lloyd
Sector Report
05 October 2009
Consolidated financials Profit and Loss statement Y/E March (Rs mn) Revenues Growth (%)
Balance sheet FY08
FY09
FY10E
FY11E
77,530
119,120
132,234
154,470
Y/E March (Rs mn)
FY08
FY09
FY10E
FY11E
Cash and cash eq
6,898
8,122
5,066
6,241
51.2
53.6
11.0
16.8
6,922
8,710
11,240
13,130
68.7
25.8
29.0
16.8
Depreciation & amortisation
1,462
1,771
2,111
2,532
EBIT
5,460
6,939
9,129
10,598
79.5
27.1
31.6
16.1
1,806
3,070
3,316
3,476
CWIP
811
5,347
1,190
1,390
Intangible assets
EBITDA Growth (%)
Growth (%) Interest Other income
Accounts receivable
20,901
26,686
38,040
44,437
Inventories
20,592
36,686
36,228
42,321
Other current assets
7,429
11,461
10,506
12,273
Investments
5,458
6,609
6,609
6,609
Gross fixed assets
20,835
26,529
29,328
33,913
Net fixed assets
14,110
18,754
19,492
21,546
2,124
2,973
2,899
2,900
-
-
-
(1,549)
EBT
4,836
13
7,003
8,512
Deferred tax assets, net
(748)
(1,482)
(1,549)
Income taxes
1,235
2,260
2,031
2,469
Other assets
-
-
(608)
(983)
25.5
17,960.3
29.0
29.0
Total assets
76,765
109,810
116,685
133,795
-
-
-
-
Accounts payable
19,284
28,836
32,026
37,411
Other current liabilities
19,764
Effective tax rate (%) Extraordinary items Min into / inc from associates
(18)
(130)
-
-
Reported net income
3,585
(2,254)
4,972
6,044
Adjustments
(304)
4,602
-
-
Adjusted net income
3,281
2,348
4,972
6,044
Growth (%)
12,195
18,263
16,919
Provisions
1,558
1,853
1,953
1,966
Debt funds
16,072
35,592
29,737
33,237
224
446
446
437
Other liabilities
66.9
(28.4)
111.8
21.5
607
607
663
663
303.0
303.0
330.9
330.9
Reserves & surplus
26,826
24,238
34,969
40,335
FDEPS (Rs) (adj)
11.3
7.5
15.1
17.8
Shareholder's funds
27,432
24,845
35,631
40,998
Growth (%)
59.0
(33.2)
99.8
18.2
Total liabilities
76,765
109,810
116,685
133,795
0.4
0.3
0.7
0.8
89.7
82.0
107.7
123.9
FY08
FY09
FY10E
FY11E
Shares outstanding (mn)
DPS (Rs)
Cash flow statement
Equity capital
BVPS (Rs)
Financial ratios
Y/E March (Rs mn)
FY08
FY09
FY10E
FY11E
Y/E March
Net income + Depreciation
5,418
(5,085)
7,083
8,576
Profitability & Return ratios (%)
Non-cash adjustments
(450)
4,932
(0)
-
Changes in working capital
(11,133)
(9,640)
(7,996)
(6,013)
Cash flow from operations
(6,164)
(9,792)
(913)
2,563
Capital expenditure
(4,208)
(6,364)
(2,775)
(4,586)
Change in investments
(3,429)
(1,296)
-
-
(151)
Cash flow from investing
(7,637)
Issue of equity
11,300
Issue/repay debt Dividends paid
EBITDA margin
8.9
7.3
8.5
8.5
EBIT margin
7.0
5.8
6.9
6.9
Net profit margin
4.2
2.0
3.8
3.9
ROE
16.4
9.0
16.4
15.8
-
ROCE
12.9
8.3
11.6
12.2
-
-
Working Capital & Liquidity ratios
(7,810)
(2,775)
(4,586)
78
73
89
97
(365)
6,752
-
Inventory (days)
242
279
296
273
(920)
19,520
(5,855)
3,500
Payables (days)
213
234
247
241
(92)
(107)
(264)
(302)
Current ratio (x)
1.8
1.8
1.8
1.8
Other financing cash flow
-
392
-
-
Quick ratio (x)
0.9
0.7
0.9
0.8
Change in cash & cash eq
(3,512)
1,838
(3,055)
1,175
Turnover & Leverage ratios (x)
6,898
8,122
5,066
6,241
Gross asset turnover
3.9
5.0
4.7
4.9
Total asset turnover
1.1
1.3
1.2
1.2
Interest coverage ratio
3.0
2.3
2.8
3.0
Adjusted debt/equity
0.5
1.2
0.7
0.7
Other investing cash flow
Closing cash & cash eq
Economic Value Added (EVA) analysis Y/E March
FY08
FY09
FY10E
FY11E
WACC (%)
14.8
14.9
14.9
14.9
ROIC (%)
13.6
10.4
11.1
11.3
38,388
54,590
62,675
70,379
EVA (Rs mn)
(477)
(2,426)
(2,405)
(2,521)
EVA spread (%)
(1.2)
(4.4)
(3.8)
(3.6)
Invested capital (Rs mn)
Receivables (days)
Valuation ratios (x) EV/Sales
1.3
0.9
0.8
0.7
EV/EBITDA
15.1
12.0
9.3
7.9
P/E
23.2
34.7
17.4
14.7
2.9
3.2
2.4
2.1
P/BV
100
Punj Lloyd
Sector Report
05 October 2009
Quarterly trend Particulars
Q1FY09
Q2FY09
Q3FY09
Q4FY09
Q1FY10
Revenue (Rs mn)
26,488
29,261
31,200
32,173
29,551
YoY growth (%)
89.9
54.5
47.4
37.1
11.6
QoQ growth (%) EBITDA (Rs mn)
12.9
10.5
6.6
3.1
(8.1)
2,596
3,124
2,389
1,450
2,918
EBITDA margin (%)
9.8
10.7
7.7
4.5
9.9
1,336
1,741
830
(343)
1,272
YoY growth (%)
125
95
35
(129)
(5)
QoQ growth (%)
13
30
(52)
(141)
(471)
Adj net income (Rs mn)
DuPont analysis (%)
FY07
FY08
FY09
FY10E
FY11E
Tax burden (Net income/PBT)
67.8
18,656.5
71.0
71.0
67.8
Interest burden (PBT/EBIT)
88.6
0.2
76.7
80.3
88.6
EBIT margin (EBIT/Revenues)
7.0
5.8
6.9
6.9
7.0
Asset turnover (Revenues/Avg TA)
114.4
127.7
116.8
123.3
114.4
Leverage (Avg TA/Avg equtiy)
337.0
356.9
374.5
326.9
337.0
16.3
9.0
16.4
15.8
16.3
Return on equity
Shareholding pattern
Company profile Punj Lloyd (PLL), a US$ 2bn conglomerate, comprises Punj Lloyd in
(%)
India, Sembawang E&C in Singapore, and Simon Carves in the U.K.
Dec-08
Mar-09
Jul-09
Promoters
44.3
41.5
41.3
FIIs
18.0
19.0
19.3
strong service provider in the oil & gas, infrastructure, and
Banks & FIs
16.2
12.5
17.7
petrochemical domains.
Public
21.5
27.0
21.7
Besides these, various subsidiaries of the group spread across the world further strengthen its rich international presence, making it a
Stock performance
Hold
29-Oct-08 Results Review
165
208
Hold
11-Dec-08 Company Update
156
166
Sell
25-Jan-09
Results Review
92
93
Sell
6-Apr-09
Quarterly Preview
87
93
Hold
20-May-09 Results Review
161
165
Hold
28-Jul-09
240
292
Buy
262
306
Buy
Results Review
05-Oct-09 Sector Report
350 300 250 200 150 100 50
●
Sell
●
Hold
●
Buy
Sep-09
320
Jul-09
272
May-09
21-Aug-08 RHH Compendium
Mar-09
Reco
Jan-09
Reco price Tgt price
Nov-08
Event
Sep-08
Date
Jul-08
Recommendation history
101
Simplex Infrastructure
Sector Report
05 October 2009
Simplex Infrastructure Healthy prospects
What’s New?
Robust order book of Rs 100bn: Simplex Infrastructure currently holds an order book of Rs 100.1bn (1.8x FY10E revenue), composed largely of domestic (77.4%) and international contracts (22.6%). The order intake was Rs 10.8bn for Q1FY10. This apart, the company is the lowest bidder (L1) for projects worth Rs 18.6bn. Simplex’s Q1FY10 revenue grew by 9% YoY to Rs 11.1bn, lower than our estimate by 9%. The muted growth was on account of the elections which led to an exodus of project labourers to their home states for voting purposes – this had a negative impact on the company’s turnover to the extent of Rs 2.5bn. For the quarter, the industrial segment contributed 22%, piling 13%, roads, railways & bridges 19%, power 16%, urban utilities 10%, building & housing 12% and marine projects 9%. Earnings CAGR of 29% expected through FY11: We expect Simplex to register strong revenue and earnings growth at a CAGR of 19% and 29% respectively over FY09-FY11 on account of its strong order book, improving margins (by an estimated 100bps) and lower debt levels. The reduction in debt will be led by stable working capital requirements and reduced capex. Superior return ratios vis-à-vis peers: The company has better return ratios than its peers due to lower dilution in the past, a focus on the core EPC business and better working capital management. However, FY08 and FY09 ratios are depressed due to the dilution of ~13% following its QIP. Going forward, we expect Simplex to earn an ROE of ~18%. S80IA benefits dropped, return to normal tax: In view of the proposed retrospective change in S80IA, Simplex has not claimed any tax deduction in this quarter. Further, in respect of deductions claimed in earlier years aggregating to Rs 300mn, the company has set aside an equivalent amount to a contingency reserve. This would result in a reduction in net worth but have no impact on cash flows. Maintain Buy: The stock is currently trading at 15.9x FY10E earnings and 12.4x FY11E earnings. We are revising our target P/E multiple to 14x (from 12x earlier) on FY11E earnings. Our target price thus has been revised from Rs 462 to Rs 577. Considering the company’s robust order book and the improving demand environment, we maintain our Buy rating on the stock.
Financial highlights (Rs mn) Revenue
Target
Rating
Estimates
CMP
TARGET
RATING
RISK
Rs 510
Rs 577
BUY
HIGH
BSE
NSE
BLOOMBERG
523838
SIMPLEXINF
SINF IN
Company data Market cap (Rs mn / US$ mn)
25,230 / 528
Outstanding equity shares (mn)
49
Free float (%)
45.9
Dividend yield (%)
0.4
52-week high/low (Rs)
530 / 102
2-month average daily volume
57,993
Stock performance Returns (%)
CMP
1-mth
3-mth
6-mth
510
18.6
30.7
213.0
17,135
10.2
17.0
73.0
Simplex Sensex
P/E comparison (x)
Simplex
40 30
Cap. Go o ds
29.6 20.3
24.9
21.1
15.9
20
12.4
10 0 FY09
FY10E
FY11E
Valuation matrix (x)
FY08
FY09
FY10E
FY11E
P/E @ CMP
25.2
20.3
15.9
12.4
P/E @ Target
28.5
23.0
18.0
14.0
EV/EBITDA @ CMP
14.1
9.6
7.2
6.0
Profitability and return ratios FY08
FY09
FY10E
FY11E
28,081
46,961
55,414
66,496
Growth (%)
64.4
67.2
18.0
20.0
Adj net income
901
1,242
1,585
2,038
(%)
FY08
FY09
FY10E
FY11E
EBITDA margin
9.4
8.2
9.3
9.3
EBIT margin
7.1
5.4
6.5
6.6
Adj PAT margin
3.2
2.6
2.9
3.1
Growth (%)
65.6
47.0
33.1
20.0
ROE
17.5
14.9
16.3
18.0
FDEPS (Rs)
20.3
25.1
32.0
41.2
ROIC
12.1
10.8
11.3
9.6
Growth (%)
61.7
23.9
27.7
28.6
ROCE
14.2
13.9
12.0
8.5
102
Simplex Infrastructure
Sector Report
05 October 2009
Order book trend Fig 226 - Order book mix – Q1FY10 Segments (%)
Domestic
Foreign
Total
Piling & Ground Engg
3.4
0.5
3.9
20.3
3.7
24
5.3
0.7
6
9
8.5
17.5
Roads,, Railways & Bridges
14.9
2.1
17
Urban Utilities
18.2
0
18.2
6.2
7.2
13.4
77.3
22.7
100
Power (Thermal, Hydel & Nuclear) Marine Industrial
Building & Housing Total Source: Company, RHH
Fig 227 - Order book position (Rs bn) 120 100 80 60 40 20 0
Fig 228 - Order book by segment – Q1FY10
Order received
69 69
Closing order book
79
90
100 107 102 101100 Urban Utilities 18%
51 44 45 43 5
4
3
14
24 6
Piling & Ground Engg 4%
Power (Thermal, Hydel & Nuclear) 24%
17 21 20 16 14 11 11
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 FY07
Building. & Housing 13%
FY08
FY09
FY10
Roads,Railw ays & Bridges 17%
Marine 6%
Industrial 18%
Source: Company, RHH
Source: Company, RHH
Fig 229 - Domestic order book break-up – Q1FY10
Fig 230 - Foreign order book break-up – Q1FY10
Urban Utilities 24%
Building. & Housing 8%
Roads,Railw ays & Bridges 19% Source: Company, RHH
Piling & Ground Engg 4%
Industrial 12%
Power (Thermal, Hydel & Nuclear) 26%
Marine 7%
Building. & Housing 32% Roads,Railw ays & Bridges 9%
Power (Thermal, Hydel & Nuclear) 16%
Piling & Ground Engg 2%
Marine 3%
Industrial 38%
Source: Company, RHH
103
Simplex Infrastructure
Sector Report
05 October 2009
Stock performance Fig 231 - Absolute performance from April ’04 Sensex
Simplex
Fig 232 - Relative performance from April ’04 Sensex
BSE CG Index
800
1640
700
1440
600
1240
500
1040
400 300
840 640
200
440
100
240
0 Apr-04
May-05
Jun-06
Jul-07
Aug-08
Sep-09
40 Apr-04
May-05
Simplex
Jun-06
BSE CG Index
Jul-07
Aug-08
Sep-09
Source: Bloomberg, RHH
Source: Bloomberg, RHH
Fig 233 - Relative performance from April ’06 to March ’07
Fig 234 - Relative performance from April ’07 to March ’08
Sensex
Simplex
BSE CG Index
Sensex
130
185
120
165
110
145
100
125
90
105
80
85
70
65
60 Apr-06
Jul-06
Sep-06
Dec-06
Mar-07
45 Mar-07
Jun-07
Simplex
Sep-07
BSE CG Index
Dec-07
Source: Bloomberg, RHH
Source: Bloomberg, RHH
Fig 235 - Relative performance from April ’08 to March ’09
Fig 236 - Relative performance from April ’09
Sensex
Simplex
BSE CG Index
120 100 80 60 40 20 Mar-08
Jun-08
Source: Bloomberg, RHH
Sep-08
Dec-08
Mar-09
Sensex
Simplex
200 180 160 140 120 100 80 60 40 20 Mar-09 Apr-09 May-09 Jun-09
Mar-08
BSE CG Index
Jul-09
Aug-09 Sep-09
Source: Bloomberg, RHH
104
Simplex Infrastructure
Sector Report
05 October 2009
12-month forward rolling band Fig 237 - P/E band
Fig 238 - P/BV band
(Rs) 1,000
(Rs) 1,000 24x
800
18x
600
4x 800 600
2.5x 1.5x
400
12x
400
200
6x
200
0 Aug-06
Jun-07
Mar-08
Dec-08
Sep-09
0.5x
0 Aug-06
Jun-07
Source: RHH
Source: RHH
Fig 239 - EV/EBITDA band
Fig 240 - EV/Sales band
70,000
12x
60,000
9x
50,000 40,000
6x
30,000 20,000
3x
10,000 Jun-07
Mar-08
Dec-08
Sep-09
50,000 0.7x
40,000 30,000
0.4x
20,000
0.2x
10,000 0 Aug-06
Jun-07
Mar-08
Source: RHH
Fig 241 - Premium/Discount to BSE 30 P/E
Fig 242 - Market Cap/Sales band
(%) 80
(Rs mn) 70,000
60
60,000
40
50,000
20
0.7x 0.4x
20,000
(40)
0.2x
10,000
(60) May-07
Feb-08
Nov-08
Sep-09
0 Aug-06
Sep-09
1x
30,000
(20)
Source: RHH
Dec-08
40,000
0
Sep-09
1x
60,000
Source: RHH
(80) Aug-06
Dec-08
(Rs mn) 70,000
(Rs mn) 80,000
0 Aug-06
Mar-08
Jun-07
Mar-08
Dec-08
Sep-09
Source: RHH
105
Simplex Infrastructure
Sector Report
05 October 2009
Standalone financials Profit and Loss statement Y/E March (Rs mn) Revenues Growth (%)
Balance sheet FY08
FY09
FY10E
FY11E
28,081
46,961
55,414
66,496
Y/E March (Rs mn)
FY08
FY09E
FY10E
FY11E
Cash and cash eq
1,229
1,178
1,087
1,664
64.4
67.2
18.0
20.0
2,635
3,873
5,153
6,184
Growth (%)
65.6
47.0
33.1
20.0
Depreciation & amortisation
642
1,320
1,571
1,785
Investments
1,993
2,553
3,583
4,399
66.1
28.1
40.3
22.8
1,088
1,512
1,607
1,728
325
690
390
370
EBITDA
EBIT Growth (%) Interest Other income EBT
Accounts receivable
11,497
16,821
20,495
24,595
Inventories
4,741
6,792
8,654
10,384
Other current assets
3,673
4,653
5,314
6,376
99
21
21
21
Gross fixed assets
7,567
12,192
13,510
15,030
Net fixed assets
6,295
10,109
9,842
9,563
243
139
200
200
-
-
-
(639)
CWIP Intangible assets
1,232
1,732
2,366
3,041
Deferred tax assets, net
(371)
(579)
(609)
Income taxes
370
490
781
1,004
Other assets
2
(7)
1
11
Effective tax rate (%)
30.0
28.3
33.0
33.0
Total assets
27,407
39,139
45,017
52,188
-
-
-
-
Accounts payable
-
-
-
-
Other current liabilities
12,267
17,721
21,450
25,704
116
119
116
116
7,493
12,205
13,105
14,105
-
6
5
-
Extraordinary items Min into / inc from associates
40
-
-
-
902
1,242
1,585
2,038
(1)
(1)
-
-
Adjusted net income
901
1,242
1,585
2,038
Growth (%)
67.7
37.8
27.7
28.6
Equity capital
99
99
99
99
Shares outstanding (mn)
49.7
49.5
49.5
49.5
Reserves & surplus
7,432
8,989
10,243
12,165
FDEPS (Rs) (adj)
20.3
25.1
32.0
41.2
Shareholder's funds
7,531
9,088
10,342
12,264
Growth (%)
61.7
23.9
27.7
28.6
Total liabilities
27,407
39,139
45,017
52,188
2.0
2.0
2.0
2.0
151.6
183.7
209.0
247.9
FY08
FY09E
FY10E
FY11E
Reported net income Adjustments
DPS (Rs)
Cash flow statement
Provisions Debt funds Other liabilities
BVPS (Rs)
Financial ratios
Y/E March (Rs mn)
FY08
FY09E
FY10E
FY11E
Y/E March
Net income + Depreciation
1,544
2,031
3,156
3,823
Profitability & Return ratios (%)
262
1,144
30
30
(2,034)
(3,581)
(2,471)
(2,639)
(228)
(405)
714
1,213
(3,157)
(4,069)
(1,377)
(1,520)
(40)
2
-
(465)
(55)
(3,662) 4,161
Issue/repay debt Dividends paid
Non-cash adjustments Changes in working capital Cash flow from operations Capital expenditure Change in investments Other investing cash flow Cash flow from investing Issue of equity
EBITDA margin
9.4
8.2
9.3
9.3
EBIT margin
7.1
5.4
6.5
6.6
Net profit margin
3.2
2.6
2.9
3.1
ROE
17.5
14.9
16.3
18.0
-
ROCE
14.2
13.9
12.0
8.5
-
-
Working Capital & Liquidity ratios
(4,122)
(1,377)
(1,520)
130
110
123
124
6
(213)
-
Inventory (days)
57
51
59
60
621
4,438
900
1,000
Payables (days)
76
67
79
-
(80)
(116)
(116)
(116)
Current ratio (x)
1.7
1.7
1.7
1.7
Quick ratio (x)
1.0
1.0
1.0
1.0
Gross asset turnover
4.7
4.8
4.3
4.7
Total asset turnover
1.3
1.4
1.3
1.4
Interest coverage ratio
1.8
1.7
2.2
2.5
Adjusted debt/equity
1.0
1.3
1.3
2.3
Other financing cash flow
-
-
-
-
Change in cash & cash eq
812
(199)
(91)
578
1,229
1,178
1,087
1,664
Closing cash & cash eq
Economic Value Added (EVA) analysis Y/E March
FY08
FY09E
FY10E
FY11E
WACC (%)
12.7
12.8
12.8
12.8
ROIC (%)
12.1
10.8
11.3
9.6
13,787
20,109
22,352
39,024
EVA (Rs mn)
(80)
(408)
(341)
(1,260)
EVA spread (%)
(0.6)
(2.0)
(1.5)
(3.2)
Invested capital (Rs mn)
Receivables (days)
Turnover & Leverage ratios (x)
Valuation ratios (x) EV/Sales
1.3
0.8
0.7
0.6
EV/EBITDA
14.1
9.6
7.2
6.0
P/E
25.2
20.3
15.9
12.4
3.4
2.8
2.4
2.1
P/BV
106
Simplex Infrastructure
Sector Report
05 October 2009
Quarterly trend Particulars
Q1FY09
Q2FY09
Q3FY09
Q4FY09
Q1FY10
Revenue (Rs mn)
10,181
10,081
12,703
13,876
11,082
YoY growth (%)
71.3
76.5
80.4
44.6
8.9
QoQ growth (%)
6.1
(1.0)
26.0
9.2
(20.1)
1,115
1,019
1,156
1,123
1,103
EBITDA margin (%)
11.0
10.1
9.1
8.1
9.9
Adj net income (Rs mn)
421
303
253
299
257
YoY growth (%)
113.7
58.8
14.6
3.1
(39.0)
QoQ growth (%)
45.3
(27.9)
(16.8)
18.3
(14.1)
(%)
FY07
FY08
FY09E
FY10E
FY11E
Tax burden (Net income/PBT)
79.7
73.1
71.7
67.0
67.0
Interest burden (PBT/EBIT)
56.2
61.8
67.8
66.0
69.1
EBITDA (Rs mn)
DuPont analysis
EBIT margin (EBIT/Revenues)
7.0
7.1
5.4
6.5
6.6
Asset turnover (Revenues/Avg TA)
119.5
125.2
141.1
131.7
136.8
Leverage (Avg TA/Avg equtiy)
561.7
435.9
400.4
433.1
430.0
21.1
17.5
14.9
16.3
18.0
Return on equity
Shareholding pattern
Company profile Simplex Infrastructure is a large, well-established construction
(%)
company with experience in civil and structural construction since
Promoters FIIs
foundations, ground engineering and earth works. Simplex has a
Banks & FIs
presence across various construction verticals – piling, industrial,
Public
1924. The company’s service offerings include design, engineering and construction, fittings and finishing work on structures, piling
Dec-08
Mar-09
Jun-09
49.4
54.1
54.1
17.1
13.7
13.2
13.4
14.6
17.3
20.1
17.6
15.4
power, urban infrastructure, buildings and housing, marine and roads, railways and bridges.
Stock performance
326
Buy
137
186
Buy
150
31-Jan-09
Results Review
137
178
Buy
Company Update
169
178
Hold
Results Review
398
483
Buy
3-Aug-09
Results Review
380
462
Buy
5-Oct-09
Quarterly Preview
510
577
Buy
6-Apr-09 1-Jul-09
50
Sep-09
225
Company Update
Jul-09
Results Review
2-Dec-08
Aug-09
5-Nov-08
350 250
Jun-09
Buy
Apr-09
568
May-09
365
Buy
Mar-09
6-Oct-08
●
Hold
Jan-09
450
Feb-09
Buy
Dec-08
644
Oct-08
479
Quarterly Preview
●
550
21-Aug-08 RHH Compendium
Nov-08
Reco
Sep-08
Event Reco price Tgt price
Jul-08
Date
Aug-08
Recommendation history
107
Voltas
Sector Report
05 October 2009
Voltas Limited upside
What’s New?
MEP order book at Rs 47bn: Order inflows for electro-mechanical projects (MEP) totalled Rs 5.8bn during Q1FY10, taking the outstanding order book for the division to Rs 46.7bn. This is 1.4x FY10E MEP sales. The orders comprise domestic projects worth Rs 12.5bn (~27%) and international orders worth Rs 34.1bn (~73%). All of Voltas’ contracts are on a fixed price basis and the company enters into back-to-back arrangements with vendors to protect margins. The management is confident of reasonable growth in MEP, both in the domestic and international arenas, on the back of its healthy, well-diversified order profile. It has received a number of new business inquiries and anticipates a pick-up in order booking in the near future. Voltas pegs potential order flows from the international division at Rs 10bn in H2FY10. In the domestic market, the company is looking at opportunities in the infrastructure space, which include airports, hotels, hospitals, and electrical works for power plants.
Target
CMP
TARGET
RATING
RISK
Rs 160
HOLD
MEDIUM
BSE
NSE
BLOOMBERG
500575
VOLTAS
VOLT IN
Company data Market cap (Rs mn / US$ mn)
331
Free float (%)
62.3
Acquired a further 16% stake in Rohini Electricals: During the quarter, Voltas acquired an additional 16% stake in Rohini Electricals, a turnkey electrical and instrumentation project provider, for a consideration of Rs 230mn. This takes its total stake in the company to 67%. This acquisition will enable it to prequalify for electrical and instrumental works of power plants.
Returns (%)
Superior return ratios, cash-rich position: At the end of FY09, Voltas had a consolidated cash balance of Rs 4.6bn as against debt of Rs 1.8bn. We expect an ROE of 30% over the next two years.
P/E comparison
Financial highlights (Rs mn) Revenue Growth (%) Adj net income Growth (%) FDEPS (Rs) Growth (%)
47,952 / 1,004
Outstanding equity shares (mn)
Dividend yield (%)
Key risks: The MEP division, which contributed over 60% to the company’s topline in FY09, derives 80% of its order backlog from the Middle East. A reduction in oil prices would lead to lower spending in the Middle East and hence lower order flows. Also, a sharp appreciation of the rupee against the US dollar would affect profitability. However, a majority of the exchange risk is mitigated by the import of materials in the company’s EPS and UCP divisions.
Estimates
Rs 145
Earnings CAGR of 21% over FY09-FY11: We expect Voltas to record a healthy earnings CAGR of 21% over FY09-FY11. While the MEP and unitary cooling product (UCP) divisions would lead growth in the near term, engineering products & services (EPS) is set to witness a moderate uptick as demand for material handling and construction equipment revives.
Target price of Rs 160 – Hold: The stock is currently trading at 17.9x FY10E and 14.5x FY11E earnings. We have valued Voltas at 16x FY11E earnings based on its superior ROE, strong earnings outlook and relatively modest capex plans (Rs 1bn in FY10-FY11). However, due to the limited upside from current levels, we are changing our rating from Buy to Hold, while maintaining our target at Rs 160.
Rating
1.1
52-week high/low (Rs)
165 / 31
2-month average daily volume
2,364,858
Stock performance Voltas
CMP
1-mth
3-mth
6-mth
145
(4.0)
17.7
192.0
Cap. Goods
13,731
6.1
6.4
112.4
Sensex
17,135
10.2
17.0
73.0
Vo ltas
(x) 40 30
Industry
29.6 21.3
24.9
21.1
17.9
20
14.5
10 0 FY09
FY10E
FY11E
Valuation matrix (x)
FY08
FY09
FY10E
FY11E
P/E @ CMP
27.2
21.3
17.9
14.5
P/E @ Target
30.0
23.5
19.8
16.0
EV/EBITDA @ CMP
18.1
16.2
12.6
10.2
Profitability and return ratios FY08
FY09
FY10E
FY11E
32,029
43,259
51,289
59,372
26.8
35.1
18.6
15.8
1,761
2,254
2,677
3,304
33.5
28.0
18.8
23.4
5.3
6.8
8.1
10.0
33.5
28.0
18.8
23.4
(%)
FY08
FY09E
FY10E
FY11E
EBITDA margin
7.9
6.5
7.1
7.6
EBIT margin
7.4
6.1
6.6
7.1
Adj PAT margin
5.5
5.2
5.2
5.6
ROE
35.2
32.9
29.9
29.2
ROIC
29.3
25.9
24.8
24.1
ROCE
30.7
28.6
26.3
26.9
108
Voltas
Sector Report
05 October 2009
Order book trend Fig 243 - MEP order book Particulars (Rs mn)
Q1FY08
Q2FY08
Q3FY08
Q4FY08
Q1FY09
Q2FY09
Q3FY09
Q4FY09
Q1 FY10
YoY growth (%)
QoQ growth (%)
Opening order book
21,852
20,000
27,000
35,000
45,952
56,703
55,703
53,293
47,133
2.6
(11.6)
1,883
11,208
11,737
15,683
15,382
4,874
3,848
2,541
5,805
(62.3)
128.5
Order inflows Sales Closing order book
3,735
4,208
3,737
4,731
4,632
5,874
6,258
8,701
6,272
35.4
(27.9)
20,000
27,000
35,000
45,952
56,703
55,703
53,293
47,133
46,666
(17.7)
(1.0)
Source: Company, RHH
Stock performance Fig 244 - Absolute performance from April ’04 300
Sensex
VOLTAS
Fig 245 - Relative performance from April ’04
BSE CG Index
Sensex
VOLTAS
BSE CG Index
640
250
540
200
440
150
340
100
240
50 0 Apr-04
740
140 May-05
Jun-06
Jul-07
Aug-08
Sep-09
40 Apr-04
May-05
Jun-06
Jul-07
Aug-08
Sep-09
Source: Bloomberg, RHH
Source: Bloomberg, RHH
Fig 246 - Relative performance from April ’06 to March ’07
Fig 247 - Relative performance from April ’07 to March ’08
115
Sensex
VOLTAS
BSE CG Index
225
Sensex
VOLTAS
BSE CG Index
200
105
175
95
150 85
125
75 65 Apr-06
100 Jul-06
Sep-06
Dec-06
Mar-07
75 Mar-07
Jun-07
Sep-07
Dec-07
Source: Bloomberg, RHH
Source: Bloomberg, RHH
Fig 248 - Relative performance from April ’08 to March ’09
Fig 249 - Relative performance from April ’09
Sensex
VOLTAS
BSE CG Index
Sensex
VOLTAS
Mar-08
BSE CG Index
220
120 100
170
80 120 60 70
40 20 Mar-08
Jun-08
Source: Bloomberg, RHH
Sep-08
Dec-08
Mar-09
20 Mar-09
Apr-09 May-09
Jun-09
Jul-09
Aug-09
Sep-09
Source: Bloomberg, RHH
109
Voltas
Sector Report
05 October 2009
12-month forward rolling band Fig 250 - P/E band
Fig 251 - P/BV band
(Rs)
(Rs) 300
400 350
40x
300
6.5x
200
250 200
20x
150 100
10x
50 0 Aug-06
250
4x Aug-07
Aug-08
Aug-09
150
4.5x
100
2.5x
50
1x
0 Aug-06
Aug-07
Source: RHH
Source: RHH
Fig 252 - EV/EBITDA band
Fig 253 - EV/Sales band
(Rs mn) 90,000 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 Aug-06
21x
2x
100,000 15x
80,000
10x
60,000
5x
Aug-07
Aug-08
Aug-09
1.4x
40,000
0.8x
20,000
0.2x
0 Aug-06
Aug-07
Source: RHH
Fig 254 - Premium / Discount to BSE 30 P/E
Fig 255 - Market Cap/Sales band
(%) 200
(Rs mn) 120,000
150
100,000
100
80,000
50
60,000
0
40,000
(50)
20,000
Source: RHH
Aug-09
(Rs mn) 120,000
Source: RHH
(100) Aug-06
Aug-08
Aug-07
Aug-08
Aug-09
0 Jan-06
Aug-08
Aug-09
2x 1.4x
0.8x 0.2x Oct-06
Jun-07
Mar-08
Dec-08
Sep-09
Source: RHH
110
Voltas
Sector Report
05 October 2009
Consolidated financials Profit and Loss statement Y/E March (Rs mn)
Balance sheet Y/E March (Rs mn)
FY08
FY09E
FY10E
Cash and cash eq
3,001
4,570
3,672
3,513
Accounts receivable
5,703
9,521
10,539
12,200
Inventories
6,398
11,194
11,944
13,826
2,203
2,810
3,253
1,562
2,487
2,697
3,986
4,586
5,186
1,702
2,148
2,483
2,770
197
132
120
140
-
-
-
-
189
224
(20)
(40)
684
484
734
FY08
FY09
FY10E
FY11E
32,029
43,259
51,289
59,372
26.8
35.1
18.6
15.8
2,531
2,831
3,642
4,510
Growth (%)
97.4
11.9
28.6
23.9
Other current assets
1,528
Depreciation & amortisation
166
209
265
313
Investments
2,585
EBIT
2,364
2,622
3,377
4,198
Gross fixed assets
3,163
Growth (%)
109.9
10.9
28.8
24.3
Net fixed assets
Revenues Growth (%) EBITDA
Interest Other income EBT Income taxes
90
110
166
130
CWIP
479
742
800
868
Intangible assets
2,753
3,254
4,010
4,935
Deferred tax assets, net
997
1,172
1,303
1,599
Other assets
8
Total assets
Effective tax rate (%)
36.2
36.0
32.5
32.4
Extraordinary items
(316)
(261)
-
-
3
26
30
32
2,077
2,515
2,677
3,304
Min into / inc from associates Reported net income
FY11E
21,311
32,239
34,519
39,094
Accounts payable
6,397
11,754
12,225
12,955
Other current liabilities
6,222
7,961
8,196
9,485
Provisions
2,169
2,645
2,423
2,673
737
1,814
1,514
1,088
5
159
189
221
331
331
331
331
Adjustments
(316)
(261)
-
-
Adjusted net income
1,761
2,254
2,677
3,304
33.5
28.0
18.8
23.4
330.7
330.7
330.7
330.7
Reserves & surplus
5,449
7,575
9,641
12,342
5.3
6.8
8.1
10.0
Shareholder's funds
5,780
7,906
9,972
12,672
33.5
28.0
18.8
23.4
Total liabilities
21,311
32,239
34,519
39,094
1.4
1.6
1.6
1.6
17.5
23.9
30.2
38.3
Y/E March (Rs mn)
FY08
FY09E
FY10E
FY11E
Y/E March
FY08
FY09E
FY10E
FY11E
Net income + Depreciation
2,244
2,724
2,942
3,617
Profitability & Return ratios (%)
Growth (%) Shares outstanding (mn) FDEPS (Rs) (adj) Growth (%) DPS (Rs)
Cash flow statement
Non-cash adjustments
Debt funds Other liabilities Equity capital
BVPS (Rs)
Financial ratios
110
162
(40)
(22)
Changes in working capital
1,279
(1,760)
(1,459)
(1,967)
Cash flow from operations
3,632
1,126
1,443
1,628
Net profit margin
5.5
5.2
5.2
5.6
Capital expenditure
(287)
(367)
(588)
(620)
ROE
35.2
32.9
29.9
29.2
(1,311)
1,076
(924)
(210)
ROCE
30.7
28.6
26.3
26.9
73
(314)
-
-
(1,525)
395
(1,512)
(830)
Receivables (days)
60
64
71
70
0
0
-
-
Inventory (days)
90
101
114
109
Change in investments Other investing cash flow Cash flow from investing Issue of equity
EBITDA margin
7.9
6.5
7.1
7.6
EBIT margin
7.4
6.1
6.6
7.1
Working Capital & Liquidity ratios
Issue/repay debt
(378)
577
(300)
(427)
Payables (days)
92
105
118
107
Dividends paid
(388)
(520)
(529)
(529)
Current ratio (x)
1.3
1.4
1.4
1.5
Quick ratio (x)
0.7
0.7
0.7
0.7
10.7
12.1
12.0
12.2
Other financing cash flow
(1)
(11)
-
-
Change in cash & cash eq
1,340
1,569
(898)
(158)
Turnover & Leverage ratios (x)
Closing cash & cash eq
3,001
4,570
3,672
3,513
Gross asset turnover
Economic Value Added (EVA) analysis
Total asset turnover
Y/E March
FY08
FY09E
FY10E
FY11E
WACC (%)
14.5
12.1
12.1
12.1
ROIC (%)
29.3
25.9
24.8
24.1
5,550
7,955
10,426
13,141
EVA (Rs mn)
822
1,096
1,324
1,574
EVA spread (%)
14.8
13.8
12.7
12.0
Invested capital (Rs mn)
Interest coverage ratio Adjusted debt/equity
1.7
1.6
1.5
1.6
26.3
23.9
20.3
32.3
0.1
0.2
0.2
0.1
Valuation ratios (x) EV/Sales
1.4
1.1
0.9
0.8
EV/EBITDA
18.1
16.2
12.6
10.2
P/E
27.2
21.3
17.9
14.5
8.3
6.1
4.8
3.8
P/BV
111
Voltas
Sector Report
05 October 2009
Quarterly trend* Particulars
Q1FY09
Q2FY09
Q3FY09
Q4FY09
Q1FY10
Revenue (Rs mn)
10,163
9,285
8,660
12,531
11,789
YoY growth (%)
21.9
29.7
30.0
49.1
16.0
QoQ growth (%)
20.9
(8.6)
(6.7)
44.7
(5.9)
EBITDA (Rs mn)
872
808
495
774
1,007
EBITDA margin (%)
8.6
8.7
5.7
6.2
8.5
Adj net income (Rs mn)
619
591
426
370
709
YoY growth (%)
20.5
38.2
11.0
(19.6)
14.5
QoQ growth (%)
34.7
(4.5)
(28.0)
(13.2)
91.8
FY07
FY08
FY09E
FY10E
FY11E
* Standalone
DuPont analysis (%) Tax burden (Net income/PBT) Interest burden (PBT/EBIT)
76.3
64.0
69.3
66.8
66.9
153.4
116.5
124.1
118.8
117.6
EBIT margin (EBIT/Revenues)
4.5
7.4
6.1
6.6
7.1
Asset turnover (Revenues/Avg TA)
174.2
169.3
161.6
153.7
161.3
Leverage (Avg TA/Avg equtiy)
417.3
377.8
391.3
373.4
325.1
38.0
35.2
32.9
29.9
29.2
Return on equity
Shareholding pattern
Company profile Voltas offers engineering solutions for a wide spectrum of industries
(%)
Dec-08
Mar-09
Jun-09
in areas such as heating, ventilation and air conditioning (HVAC),
Promoters
27.6
27.7
27.7
FIIs
16.4
12.7
11.7
handling, water management, building management systems,
Banks & FIs
26.5
27.2
29.9
indoor air quality and chemicals.
Public
29.5
32.4
30.7
refrigeration,
electro-mechanical
projects,
textile
machinery,
machine tools, mining and construction equipment, material
Recommendation history
Stock performance
Date
Event
Reco price Tgt price
Reco
3-Jul-09
Initiating Coverage
125
170
160
Buy
31-Jul-09
Results Review
150
137
160
Buy
5-Oct-09
Sector Report
130
145
160
Hold
110 90
●
70 50 Apr-09
May-09
Jun-09
Buy
Jul-09
●
Aug-09
Hold
Sep-09
112
Ahluwalia Contracts
Sector Report
05 October 2009
Ahluwalia Contracts Strong revenue visibility
What’s New?
Healthy order book: ACL currently has a gross order book of Rs 45bn, with unbilled orders worth Rs 28bn which are to be executed over a period of 24 months. The orders are well diversified geographically, covering 14 states and split between government and private clients in a ratio of 33:67. About 85% of the projects are covered by cost escalation clauses. The company’s real estate exposure stands at 60% including orders for the 2010 Commonwealth Games in New Delhi (45% excluding these contracts). Management sees order inflows of Rs 25bn in FY10: Order inflows totalled Rs 20bn in FY09 and the management expects a 25% incremental intake during FY10. The company has already bagged Rs 4bn of orders in Q1FY10. In addition, ACL is the lowest bidder (L1) for projects worth Rs 3bn and has placed further bids worth Rs 12bn. Emaar receivables under control: With the Delhi Development Authority (DDA) bailing out the Emaar MGF project, the company’s outstanding debtor position on this deal has reduced from Rs 750mn as on 31 March 2009 to Rs 350mn. Work on the project is 45–50% complete and payments are being received on time. To date, Rs 3bn has been billed, with Rs 4bn to be billed in FY10. Tighter working capital cycle: ACL’s working capital cycle peaked at 120 days in March ’09, but has now tapered down to 60–75 days. The company has witnessed the cancellation of orders for SEZ projects and a retail outlet for Reliance, but there have been no bad debts on these accounts. Capex of Rs 750mn over the next two years: ACL has incurred capex of Rs 750mn in FY09 and is likely expend a similar sum for each of the next two years. The cost of scaffolding which constituted Rs 350mn of the Rs 750mn capex in FY09 has been fully written-off during the year. The life of scaffolding items is close to five years. Since the write-off led to high depreciation, the company has deferred tax assets on its books.
TARGET
RATING
RISK
Rs 169
Rs 190
BUY
HIGH
BSE
NSE
BLOOMBERG
532811
-
AHLU IN
Market cap (Rs mn / US$ mn)
FY08
FY09
FY10E
FY11E
Revenue
8,801
12,087
14,444
19,673
31.5
37.3
19.5
36.2
Adj net income
516
572
796
1,102
Growth (%)
65.6
10.8
39.2
38.4
8.2
9.1
12.7
17.6
65.6
10.8
39.2
38.4
FDEPS (Rs) Growth (%)
10,607 / 222
Outstanding equity shares (mn)
63
Free float (%)
25.5
Dividend yield (%)
0.4
52-week high/low (Rs)
177 / 25
2-month average daily volume
277,518
Stock performance Returns (%) Ahluwalia Cont. Sensex
CMP
1-mth
3-mth
6-mth
169
13.0
94.4
406.6
17,135
10.2
17.0
73.0
P/E comparison (x)
A hluwalia co ntracts
Industry
40 30 20
29.6 24.9
18.5
21.1
13.3
9.6
10 0 FY09
FY10E
FY11E
Valuation matrix (x)
FY08
FY09
FY10E
P/E @ CMP
20.5
18.5
13.3
FY11E 9.6
P/E @ Target
23.1
20.9
15.0
10.8
9.1
6.8
5.4
4.0
Profitability and return ratios
(Rs mn) Growth (%)
Estimates
CMP
EV/EBITDA @ CMP
Financial highlights
Rating
Company data
No dilution on the cards: The management is not looking to raise equity in the near term, though this possibility may arise in future if it opts to undertake BOT projects or achieve inorganic growth. We anticipate EPS of Rs 12.7 and Rs 17.6 in FY10 and in FY11 respectively. Upgrade target, maintain Buy: With the improving economic environment, the construction industry has witnessed a re-rating. Accordingly, we have revised our target P/E multiple for ACL from 12x to 15x on FY10E, giving us a price target of Rs 190 from Rs 152 earlier. We maintain our Buy rating on the stock.
Target
(%)
FY08
FY09
FY10E
FY11E
EBITDA margin
12.1
12.1
11.8
12.5
9.5
9.5
7.9
8.8
EBIT margin
5.9
5.9
4.7
5.5
ROE
50.5
50.5
37.9
37.2
ROIC
75.8
75.8
58.2
48.9
ROCE
36.8
36.8
31.4
30.8
Adj PAT margin
113
Ahluwalia Contracts
Sector Report
05 October 2009
Stock performance Fig 256 - Absolute performance from Feb ’07 400
Sensex
Ahluwalia
Fig 257 - Relative performance from Feb ’07
BSE CG Index
350 300 250 200 150 100 50 0 Feb-07
Aug-07
Mar-08
Sep-08
Mar-09
Sep-09
Sensex 220 200 180 160 140 120 100 80 60 40 20 Feb-07 Aug-07
Ahluwalia
Mar-08
BSE CG Index
Sep-08
Mar-09
Sep-09
Source: Bloomberg, RHH
Source: Bloomberg, RHH
Fig 258 - Relative performance from Feb ’07 to March ’07
Fig 259 - Relative performance from April ’07 to March ’08
Sensex
Ahluwalia
BSE CG Index
105
260
100
220
95
Sensex
Ahluwalia
BSE CG Index
180
90
140
85 80
100
75 Feb-07
Mar-07
Mar-07
Mar-07
60 Apr-07
Jul-07
Sep-07
Dec-07
Source: Bloomberg, RHH
Source: Bloomberg, RHH
Fig 260 - Relative performance from April ’08 to March ’09
Fig 261 - Relative performance from April ’09
110 100 90
Sensex
Ahluwalia
BSE CG Index
Sensex
Ahluwalia
BSE CG Index
270 220
80 70 60 50 40 30 20 Apr-08
320
Mar-08
170 120 70 Jun-08
Source: Bloomberg, RHH
Sep-08
Dec-08
Mar-09
20 Apr-09
May-09
Jun-09
Aug-09
Sep-09
Source: Bloomberg, RHH
114
Ahluwalia Contracts
Sector Report
05 October 2009
12-month forward rolling band Fig 262 - P/E band
Fig 263 - P/BV band
(Rs) 700 600
40x
500 400 300 15x
200
10x 5x
100 0 Feb-07
Oct-07
Jun-08
Jan-09
Sep-09
(Rs) 450 400 350 300 250 200 150 100 50 0 Feb-07
8x
4x 2x 1x Oct-07
Source: RHH
Source: RHH
Fig 264 - EV/EBITDA band
Fig 265 - EV/Sales band
(Rs mn) 50,000
21x
40,000 15x
30,000
10x
20,000
5x
10,000 0 Feb-07
Oct-07
Jun-08
Jan-09
Sep-09
Jun-08
1.8x
30,000 25,000 20,000
1.2x
15,000
0.8x
10,000
0.4x
5,000 0 Feb-07
Oct-07
Jun-08
Source: RHH
Fig 266 - Premium/Discount to BSE 30 P/E
Fig 267 - Market Cap/Sales band
Jan-09
Sep-09
(Rs mn)
(%) 100
35,000 1.8x
30,000
50
25,000
0
20,000
(50)
15,000
1.2x 0.8x
10,000
(100)
Source: RHH
Sep-09
(Rs mn) 35,000
Source: RHH
(150) Feb-07
Jan-09
0.4x
5,000 Sep-07
May-08
Jan-09
Sep-09
0 Feb-07
Oct-07
Jun-08
Jan-09
Sep-09
Source: RHH
115
Ahluwalia Contracts
Sector Report
05 October 2009
Standalone financials Profit and Loss statement
Balance sheet Y/E March (Rs mn)
FY08
FY09
FY10E
FY11E
Cash and cash eq
1,165
1,365
2,154
3,258
Accounts receivable
2,261
3,200
3,600
4,400
Inventories
755
907
1,300
1,620
35.0
Other current assets
330
773
887
1,018
Investments
Y/E March (Rs mn)
FY08
FY09
FY10E
FY11E
Revenues
8,801
12,087
14,444
19,673
31.5
37.3
19.5
36.2
1,063
1,429
1,808
2,439
52.8
34.5
26.5
Growth (%) EBITDA Growth (%) Depreciation & amortisation
228
479
540
650
EBIT
835
950
1,268
1,789
Growth (%)
68.1
13.8
33.4
Interest
118
159
250
Other income EBT
42
42
42
42
Gross fixed assets
1,808
2,112
2,862
3,612
41.2
Net fixed assets
1,102
927
1,137
1,237
330
CWIP
104
400
400
400
Intangible assets
65
88
150
160
781
880
1,168
1,619
Deferred tax assets, net
2
1
1
0
38
32
35
35
Income taxes
265
308
371
518
Other assets
-
-
-
-
Effective tax rate (%)
33.9
35.0
31.8
32.0
Total assets
5,799
7,647
9,555
12,011
Extraordinary items
-
-
-
-
Accounts payable
1,139
1,300
1,500
1,600
Min into / inc from associates
-
-
-
-
Other current liabilities
2,733
3,500
3,846
4,600
516
572
796
1,102
Provisions
113
355
443
594
Debt funds
565
721
1,251
1,651
-
-
-
-
126
126
126
126
1,124
1,645
2,390
3,440
Reported net income Adjustments
-
-
-
-
Adjusted net income
516
572
796
1,102
Growth (%)
65.6
10.8
39.2
38.4
Equity capital
Shares outstanding (mn)
62.8
62.8
62.8
62.8
Reserves & surplus
FDEPS (Rs) (adj) Growth (%) DPS (Rs)
8.2
9.1
12.7
17.6
Shareholder's funds
1,250
1,771
2,516
3,566
65.6
10.8
39.2
38.4
Total liabilities
5,799
7,647
9,555
12,011
0.7
0.7
0.7
0.7
21.9
30.2
42.1
58.8
FY08
FY09
FY10E
FY11E
Cash flow statement Y/E March (Rs mn)
Other liabilities
BVPS (Rs)
Financial ratios FY08
FY09
FY10E
FY11E
Y/E March
Net income + Depreciation
744
1,051
1,336
1,752
Profitability & Return ratios (%)
Non-cash adjustments
(32)
270
85
151
12.1
11.8
12.5
12.4
Changes in working capital
447
(627)
(361)
(397)
EBIT margin
9.5
7.9
8.8
9.1
Cash flow from operations
1,159
694
1,060
1,506
Net profit margin
5.9
4.7
5.5
5.6
Capital expenditure
(668)
(599)
(749)
(750)
ROE
50.5
37.9
37.2
36.2
Change in investments
0
-
-
-
ROCE
36.8
31.4
30.8
29.4
Other investing cash flow
7
-
-
-
Working Capital & Liquidity ratios
(662)
(599)
(749)
(750)
Receivables (days)
74
82
86
74
-
0
0
0
Inventory (days)
32
34
34
33
Issue/repay debt
(27)
156
530
385
Payables (days)
51
50
43
35
Dividends paid
(22)
(52)
(52)
(36)
Current ratio (x)
1.2
1.3
1.5
1.7
Other financing cash flow
-
-
-
-
Quick ratio (x)
0.9
0.7
0.7
0.7
Change in cash & cash eq
448
200
789
1,105
Turnover & Leverage ratios (x)
1,165
1,365
2,154
3,258
Gross asset turnover
5.8
6.2
5.8
6.1
Total asset turnover
1.9
1.8
1.7
1.8
Cash flow from investing Issue of equity
Closing cash & cash eq
Economic Value Added (EVA) analysis
EBITDA margin
Interest coverage ratio
7.1
6.0
5.1
5.4
Adjusted debt/equity
0.5
0.4
0.5
0.5
1.1
0.8
0.7
0.5
Y/E March
FY08
FY09
FY10E
FY11E
WACC (%)
13.9
16.3
16.3
16.3
ROIC (%)
75.8
58.2
48.9
52.8
Invested capital (Rs mn)
736
1,482
2,056
2,553
EVA (Rs mn)
456
622
670
933
P/E
EVA spread (%)
61.9
42.0
32.6
36.6
P/BV
Valuation ratios (x) EV/Sales EV/EBITDA
9.1
6.8
5.4
4.0
20.5
18.5
13.3
9.6
7.7
5.6
4.0
2.9
116
Ahluwalia Contracts
Sector Report
05 October 2009
Quarterly trend Particulars
Q1FY09
Q2FY09
Q3FY09
Q4FY09
Q1FY10
Revenue (Rs mn)
2,540
3,017
2,963
3,567
3,046
YoY growth (%)
48.9
60.5
33.3
19.2
19.9
(15.1)
18.8
(1.8)
20.4
(14.6)
199
235
228
289
304
QoQ growth (%) EBITDA (Rs mn) EBITDA margin (%)
7.8
7.8
7.7
8.1
10.0
Adj net income (Rs mn)
129
145
128
170
184
YoY growth (%)
52.2
18.9
16.7
(15.0)
43.3
(35.7)
12.8
(11.8)
33.0
8.3
(%)
FY07
FY08
FY09
FY10E
FY11E
Tax burden (Net income/PBT)
64.4
66.1
65.0
68.2
68.0
Interest burden (PBT/EBIT)
97.5
93.6
92.6
92.1
90.5
7.4
9.5
7.9
8.8
9.1
Asset turnover (Revenues/Avg TA)
228.8
186.8
179.8
167.9
182.4
Leverage (Avg TA/Avg equtiy)
443.7
460.5
445.1
401.3
354.6
47.3
50.5
37.9
37.2
36.2
QoQ growth (%)
DuPont analysis
EBIT margin (EBIT/Revenues)
Return on equity
Shareholding pattern
Company profile Set up in 1979, Ahluwalia Contracts India (ACL) is an engineering-
(%)
procurement-construction (EPC) company engaged in the civil
Promoters
construction business, which includes retail malls, residential complexes, offices, hotels, IT parks and hospitals.
Dec-08
Mar-09
Jun-09
74.5
74.5
74.5
5.6
5.0
2.9
16.3
16.0
17.1
3.6
4.5
5.5
FIIs Banks & FIs Public
Stock performance 200
21-Aug-08 RHH Compendium
96
140
Buy
6-Oct-08
Quarterly Preview
79
112
Buy
2-Jan-09
Quarterly Preview
31
42
Hold
31-Jan-09
Results Review
37
42
Hold
50
16-Feb-09 Company Update
32
42
Hold
0
20-Jul-09
Company Update
97
127
Buy
4-Aug-09
Results Review
126
152
Buy
5-Oct-09
Sector Report
169
190
Buy
●
●
Hold
Buy
150
Oct-09
Aug-09
Jun-09
100
Apr-09
Reco
Feb-09
Reco price Tgt price
Dec-08
Event
Oct-08
Date
Aug-08
Recommendation history
117
Gayatri Projects
Sector Report
05 October 2009
Gayatri Projects Robust BOT portfolio
What’s New?
Gayatri Projects (GPL) has two business verticals, i.e., construction and BOT roads. The BOT projects are being executed by Gayatri Infra Ventures (GIVL), its 70% subsidiary. Construction order book of Rs 58bn: GPL’s outstanding order book in the construction segment stands at Rs 57.7bn (~5.7x FY09 revenue), to be executed over 3–4 years. Of this, contracts worth Rs 4.2bn are in-house BOT road construction works. The irrigation segment, which derives ~90% of its orders from the Andhra Pradesh government, contributes 66% to the order book, while the road and industrial building segments contribute 30% and 4% respectively. For FY10 (standalone), the management expects a topline growth of 25–30% to Rs 12.5bn–13bn with an EBITDA margin of 11–11.5% and earnings growth of 20–25% to Rs 50/share. Large BOT portfolio: Subsidiary company GIVL has a portfolio of five BOT projects comprising one toll contract and four annuity-based works. All the projects are under construction, and entail a cumulative equity commitment of ~Rs 1.7bn from the company. Of this, GIVL has invested Rs 1.3bn so far and expects to bring in the balance by the end of this fiscal. Apart from its ongoing works, GIVL has emerged as the lowest bidder for Karim Nagar – a Hyderabad BOT toll project that has an estimated cost of Rs 22bn with a positive grant of Rs 5.3bn. The company holds a 26% stake in the SPV. Dilution in GIVL, stake placement by GPL: In August ’08, GIVL diluted 30% equity to AMP Capital Finance Mauritius for a consideration of Rs 1bn. This values GIVL at Rs 3.4bn. This apart, GPL recently placed a 9.9% stake (1mn equity shares) with Reliance Capital Trustee Co – Reliance Infrastructure Fund – at Rs 185/share. The board is also considering the allotment of 1mn warrants convertible into equity shares of Rs 10 each at a premium of Rs 132.5/share on preferential basis to the promoters.
Target
Rating
Estimates
CMP
TARGET
RATING
RISK
Rs 305
NA
NA
NA
BSE
NSE
BLOOMBERG
531497
NA
GAYP IN
Company data Market cap (Rs mn / US$ mn)
3,081 / 65
Outstanding equity shares (mn)
10.1
Free float (%)
39.8
Dividend yield (%)
-
52-week high/low (Rs)
318 / 42
2-month average daily volume
64,981
Stock performance Returns (%)
CMP
1-mth
3-mth
6-mth
Gayatri
305
3.8
57.5
347.8
Sensex
17,135
10.8
16.9
65.6
Valuation: The company is trading at 7.5x FY09 reported earnings, which looks attractive considering its healthy BOT portfolio. We do not have a rating on the stock.
Financial highlights
Profitability and return ratios
(Rs mn)
FY06
FY07
FY08
FY09
Revenue
3,712
5,021
7,524
10,046
23
35
50
34
Adj net income
177
236
393
413
Growth (%)
102
33
67
5
19.65
24.7
39.1
40.9
19.7
24.8
34.0
32.6
Growth (%)
FDEPS (Rs) Growth (%)
(%)
FY06
FY07
FY08
FY09
EBITDA margin
17.6
15.0
14.1
11.3
EBIT margin
17.6
12.5
11.9
9.3
4.8
4.7
5.2
4.1
ROE
19.7
21.7
24.6
20.9
ROCE
19.2
11.7
13.5
12.3
Adj PAT margin
118
Gayatri Projects
Sector Report
05 October 2009
Fig 268 - GIVL – BOT project portfolio SN
Name
Length (km)
Concession period (yrs)
78.5
20
Holding (%)
Total Cost (Rs mn)
Equity (Rs mn)
Debt (Rs mn)
NHAI grant (Rs mn)
SemiAnnuity (Rs mn)
Under construction
49%
5,340
940
3,850
560
NA*
Status
1
Western UP Tollway
2
Gayatri Lalitpur Roadways
50
20
Under construction
51%
3,126
600
2.526
0
239.5
3
Gayatri Jhansi Roadways
50
20
Under construction
51%
4,210
800
3,420
0
299.5
4
Hyderabad Expressways
13
15
Under construction
50%
4,310
682
2.900
719
304.9
5
Cyberabad Expressways
11.7
15
Under construction
50%
5,018
447
3,763
810
395
22,004
3,469
16,459
2,089
Total Source: Company
*BOT Toll project
119
Madhucon Projects
Sector Report
05 October 2009
Madhucon Projects Listing of infra subsidiary a potential trigger
What’s New?
Strong order book of Rs 46bn: MPL has a current order backlog of ~Rs 46bn which is 4.6x FY09 revenues. The order book is composed of in-house contracts worth Rs 16bn (roads Rs 2.5bn, power Rs 9.6bn and hotels & office complexes Rs 3.9bn) and external projects worth Rs 30bn. Margins for in-house works are in the range of 9–10% except for power projects where a higher subcontracting component caps margins at ~5%. For FY10, MPL pegs topline growth at 30% with a margin of 11% and bottomline growth of 20%, translating to an EPS of ~Rs 16. BOT portfolio of four projects: The company’s 100% subsidiary, Madhucon Infrastructure, has a portfolio of four toll roads. Toll collections have begun on one stretch, while another project will deliver from the end of September. The company will commence operations on the remaining two toll roads by end-FY10. It expects toll revenue of Rs 5mn–5.5mn per day once all its BOT projects are commissioned. Power portfolio totals 540MW: MPL is executing power projects in two phases of 270MW each, besides signing an MOU with the Jharkhand government for a 1,000MW thermal plant. Phase I of its power project entails a cost of Rs 13.4bn and has achieved financial closure with an equity component of Rs 3.3bn and debt of Rs 10bn. The company has invested Rs 1.2bn and will invest the balance equity before FY11. It holds a 76% stake in the project while the promoters hold the balance. MPL has signed a 25-year MOU with PTC for sale of 70% of the power generated at Rs 1.25/unit. PTC will supply coal for power generation. The balance 30% will be sold to Reliance at Rs 4.5/unit for three years. For the second phase, the company has already acquired 700 acres of land at a cost of Rs 400,000/acre and applied for another 220 acres. This phase is proposed to be expanded from 270MW to 1,330MW. Indonesian coal mines: MPL has invested Rs 1.2bn in coal mines in Indonesia, of which equity investments total Rs 200mn. It plans to invest further Rs 2.5bn in FY11. The management expects to sell 0.5mt of coal in FY10 and 1.5mt in FY11.
Target
Rating
Estimates
CMP
TARGET
RATING
RISK
Rs 262
NA
NA
NA
BSE
NSE
BLOOMBERG
531497
MADHUCON
MDHPJ IN
Company data Market cap (Rs mn / US$ mn)
9,689 / 202
Outstanding equity shares (mn)
36.9
Free float (%)
42.2
Dividend yield (%)
-
52-week high/low (Rs)
275 / 41
2-month average daily volume
312,131
Stock performance Returns (%)
CMP
1-mth
3-mth
6-mth
262
10.5
52.5
322.9
17,135
10.8
16.9
65.6
Madhucon Sensex
Subsidiary listing a potential trigger for the stock: So far, MPL has infused equity of Rs 4.6bn in roads (Rs 3.2bn), power (Rs 1.2bn) and coal mines (Rs 200mn). It intends to invest a further Rs 3.9bn by FY11 (phase I power and coal mines). The management is targeting an EPS of Rs 16 for FY10. The stock is currently trading at a P/E of 15.7x FY10E consensus earnings. Excluding the book value of investments in roads, power and coal mining, the stock trades at 9.8x FY10E consensus earnings. MPL plans to transfer all its infrastructure assets to its subsidiary, Madhucon Infrastructure, and may list the same by January ’10 to raise ~Rs 5bn. This would be a key trigger for the stock. We do not have a rating on MPL at present.
Financial highlights
Profitability and return ratios
(Rs mn)
FY06
FY07
FY08
FY09
(%)
FY06
FY07
FY08
FY09
Revenue
3,421
5,100
7,380
9,719
EBITDA margin
18.3
15.0
14.5
12.1
12
49
45
32
EBIT margin
12.7
10.0
9.9
7.7
Adj net income
333
416
472
493
Growth (%)
105
25
14
4
9.7
8.1
6.4
5.1
FDEPS (Rs)
11.8
11.3
12.8
13.4
ROE
13.0
9.7
10.0
9.5
(60.6)
(4.6)
13.7
4.4
ROCE
13.7
8.9
8.7
7.6
Growth (%)
Growth (%)
Adj PAT margin
120
Madhucon Projects
Sector Report
05 October 2009
Fig 269 - Road BOT business summary (Rs mn) Madhucon Agra– Jaipur Expressways
Length
Concession years
57
25
Avg. toll collection per day
Total Cost
Equity
Debt
NHAI positive grant
Toll collection started in May ’09
0.7
3,554
610
1,984
960
460
12.5
1.15
3,847
747
2,240
860
747
20.2
Status
Equity P/BV - 1x invested (Rs/share)
TN (DK) Expressways
68
20
Expects completion certificate by Sept ’09 end
Trichy – Tanjavur Expressways
56
20
Completion in Jan ’10
1.4
4,041
647
2,610
784
647
17.5
Madurai – Tuticorin Expressways
128
20
Completion in Feb ’10
2.4
9,204
1,780
5,980
1,444
1350
36.6
Total
309
5.7
20,646
3,784
12,814
4,048
3,204
86.8
Source: Company, RHH
121
Coverage Profile By recommendation (%) 60 50 40 30 20 10 0
By market cap (US$) (%) 60 50 40 30 20 10 0
59
31 10 Buy
Hold
Sell
57 33 10 > $1bn
$200mn - $1bn
< $200mn
Recommendation interpretation Recommendation
Expected absolute returns (%) over 12 months
Buy
More than 15%
Hold
Between 15% and –5%
Sell
Less than –5% Recommendation structure changed with effect from March 1, 2009
Expected absolute returns are based on share price at market close unless otherwise stated. Stock recommendations are based on absolute upside (downside) and have a 12-month horizon. Our target price represents the fair value of the stock based upon the analyst’s discretion. We note that future price fluctuations could lead to a temporary mismatch between upside/downside for a stock and our recommendation.
Religare Capital Markets Ltd th
4 Floor, GYS Infinity, Paranjpe ‘B’ Scheme, Subhash Road, Vile Parle (E), Mumbai 400 057.
Disclaimer This document is NOT addressed to or intended for distribution to retail clients (as defined by the FSA). This document is issued by Religare Hichens, Harrison & Co Plc (“Hichens”) in the UK, which is authorised and regulated by the Financial Services Authority in connection with its UK distribution. Hichens is a member of the London Stock Exchange. This material should not be construed as an offer or recommendation to buy or sell or solicitation of any offer to buy any security or other financial instrument, nor shall it, or the fact of its distribution, form the basis of, or be relied upon in connection with, any contract relating to such action or any other matter. The material in this report is based on information that we consider reliable and accurate at, and share prices are given as at close of business on, the date of this report but we do not warrant or represent (expressly or impliedly) that it is accurate, complete, not misleading or as to its fitness for the purpose intended and it should not be relied upon as such. Any opinion expressed (including estimates and forecasts) is given as of the date of this report and may be subject to change without notice. Hichens, and any of its connected or affiliated companies or their directors or employees, may have a position in any of the securities or may have provided corporate finance advice, other investment services in relation to any of the securities or related investments referred to in this document. Our asset management area, our proprietary trading desks and investing businesses may make investment decisions that are inconsistent with the recommendations or views expressed in this briefing note. Hichens accepts no liability whatsoever for any direct, indirect or consequential loss or damage of any kind arising out of the use of or reliance upon all or any of this material howsoever arising. Investors should make their own investment decisions based upon their own financial objectives and financial resources and it should be noted that investment involves risk, including the risk of capital loss. This document is confidential and is supplied to you for information purposes only. It may not (directly or indirectly) be reproduced, further distributed to any person or published, in whole or in part, for any purpose whatsoever. Neither this document, nor any copy of it, may be taken or transmitted into the United States, Canada, Australia, Ireland, South Africa or Japan or into any jurisdiction where it would be unlawful to do so. Any failure to comply with this restriction may constitute a violation of relevant local securities laws. If you have received this document in error please telephone Nicholas Malins-Smith on +44 (0) 20 7382 4479.
“Religare Enterprises Limited proposes, subject to receipt of requisite approvals, market conditions and other considerations, to make a rights issue of its equity shares to its existing shareholders and has filed a draft letter of offer (“DLOF”) with the Securities and Exchange Board of India (“SEBI”). The DLOF is available on the website of SEBI at www.sebi.gov.in as well as on the websites of the lead manager at www.enam.com. Investment in equity shares involves a high degree of risk and for details relating to the same, please refer to the section titled “Risk Factors” of the DLOF.”
Infrastructure: Sector Report The time is right!
October 2009
Nimit Shah
Hardik Shah
(91-22) 6766 3464
(91-22) 6766 3465
[email protected]
[email protected]
Contents Section
Page No.
Sector snapshot
1
Valuations still offer room for upside
2
Infrastructure investments in India
5
- Short-term hiccups, long-term intact
5
- Opportunities across segments
8
- Funding a key challenge
10
- PPP – the way forward
13
- Opportunities abound for EPC players
14
- Key risks to our estimates
21
- RHH infrastructure universe: Valuation matrix
22
Sector-wise investment allocation
24
- Roads & Bridges
24
- Electricity
30
- Railways
33
- Irrigation
36
- Water supply and Sanitation
39
- Airports
41
- Ports
44
Companies - Hindustan Construction Co
46
- IRB Infrastructure
53
- IVRCL Infrastructure
64
- Jaiprakash Associates
70
- Larsen & Toubro
77
- Nagarjuna Construction
84
- Patel Engineering
90
- Punj Lloyd
96
- Simplex Infrastructure
102
- Voltas
108
- Ahluwalia Contracts
113
- Gayatri Projects
118
- Madhucon Projects
120
RHH: Winner of LIPPER-STARMINE broker award for “Earnings Estimates in Midcap Research 2008” “Honourable Mention” in Institutional Investor 2009 RHH Research is also available on Bloomberg FTIS
1
Infrastructure
Sector Report
05 October 2009
Infrastructure The time is right!
Recommendation snapshot
Run-up in valuations but still room for further upside: Over the last six months, our universe of infrastructure and construction stocks has run up by a massive 200% as against returns of 73% from the Sensex and 112% from the Capital Goods Index. The sharp rally has been spurred by hopes that the recently elected, pro-reform government will boost spending on infrastructure, eliminate policy bottlenecks, and simplify procedures for project approvals. The surge in stock prices is also a function of a re-rating in the broader market multiple, led by the restoration of liquidity flows. Last year, the construction & infrastructure sector suffered a major blow as India’s economic growth slowed from 9% in 2007–08 to below 7% and the global credit crunch starved infrastructure firms of funds. Now, with healthy liquidity conditions,
strong project execution, softening commodity prices, lower interest rates, and a healthy political climate, we expect upgrades to consensus earnings estimates in H2FY10, leading to a further re-rating of the sector. High-growth mid cap construction stocks look set to take the lead. Government spends to invigorate sector: Infrastructure spending of ~US$ 500bn in the 11th Five Year Plan and additional spending through government stimulus packages provide strong revenue visibility for infrastructure players over the next 4–5 years. At the same time, a rebound in economic growth and corporate capex along with improved availability of funds augur well for the sector. Public sector investments will be crucial going forward, with roads, irrigation, power and urban infrastructure likely to attract a bulk of the development funds. Mid caps at attractive valuations: Mid cap companies with strong revenue visibility are currently trading at a discount of ~40% to L&T and at par to the Sensex. Our mid cap construction universe traded at 18–20x one-year forward earnings during FY04-FY09, which was a period of buoyant growth. The topline of the RHH construction universe increased at ~34% CAGR and bottomline at ~36% over this period. Although we expect lower revenue growth at ~20% CAGR over the next two years on account of the higher base, we anticipate a healthy bottomline ramp-up of ~26% led by rationalisation of interest costs. With strong earnings growth, we firmly believe that valuations of our mid cap construction universe remain attractive at a P/E of 15.9x FY11E earnings and 12.7x excluding subsidiaries. Long-term growth drivers: While we expect stock performance to be volatile in the short term, we see opportunities for above-average returns in companies that have a strong track record, a sturdy financial backbone, and robust riskmanagement systems with the ability to scale up. As mentioned, softening commodity prices and lower interest costs offer potential for earnings upgrades. We remain positive on L&T and Punj Lloyd in the large cap space, IVRCL Infrastructures and Simplex Infrastructure in the mid cap space, and IRB Infrastructure in the developer segment.
Company
CMP
Target
Rating
Ahluwalia Cont
169
190
Buy
HCC
130
141
Hold
IRB Infra*
209
224
Buy
IVRCL
388
434
Buy
JP Associates
239
237
Hold
1,665
1,781
Buy
L&T NCC
153
166
Hold
Patel Engg.
484
532
Buy
Punj Lloyd*
262
306
Buy
Simplex Infra
510
577
Buy
Voltas*
145
160
Hold
* Consolidated
Profitability and return ratios Company
FY09-11 FY11E P/E (x) PAT ExP/E CAGR (%) sub#
Sensex
ROE (%) FY10E
FY11E
13.0
16.1
16.1
17.3
18.2
Standalone
22.1
24.1
21.3
23.8
24.6
Consolidated
22.8
21.5
Ahluwalia Cont
38.8
9.6
9.6
37.2
36.2
HCC
37.8
29.0
11.7
8.4
9.0
IVRCL
27.3
17.2
14.0
13.8
15.0
NCC
25.2
16.2
12.6
10.0
10.6
Patel Engg.
23.7
17.9
12.2
12.3
13.8
Punj Lloyd*
60.4
14.7
13.5
16.4
15.8
28.5
12.4
12.4
16.3
18.0
L&T
Simplex Infra * Consolidated
#Excluding subsidiaries
Stock performance Company
CMP
1mth
3mth
6mth
YTD
Sensex
17,135
10.2
17.0
73.0
77.6
Cap Goods Index
112.4
98.7
13,731
6.1
6.4
Ahluwalia Cont
169
13.0
94.4
406.6 478.6
HCC
130
22.9
25.1
223.4 156.2
IRB Infra*
209
(0.8)
28.1
138.2
IVRCL
388
7.5
10.3
202.2 169.9
JP Associates
239
7.8
15.1
180.3 188.6
L&T
61.5
1,665
7.4
5.8
147.6 115.2
NCC
153
13.4
11.1
143.3 112.5
Patel Engg*
484
10.5
12.9
244.3 177.0
Punj Lloyd*
262
1.6
22.6
184.5
Simplex Infra
510
18.6
30.7
213.0 195.6
Voltas
145
(4.0)
17.7
192.0 140.0
78.1
* Consolidated
RHH: Winner of LIPPER-STARMINE broker award for “Earnings Estimates in Midcap Research 2008” “Honourable Mention” in Institutional Investor 2009 RHH Research is also available on Bloomberg FTIS
1
Infrastructure
Sector Report
05 October 2009
Valuations still offer room for upside Over the last six months, infrastructure and construction stocks have witnessed a re-rating and rallied sharply by ~200% on the back of an improving global economic environment and political stability in the country. With significant order inflows, easing fund flows and a stronger government focus on infrastructure, we see opportunities for above-average returns in companies that have a strong track record, a sturdy financial backbone, and robust risk-management systems with the ability to scale up. Softening commodity prices and lower interest costs offer potential for earnings upgrades.
Expect above-average returns in select stocks despite sharp run-up
Fig 1 - RHH Construction sector growth trend Particulars (Rs mn) Sales
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10E
FY11E
CAGR FY09-11E (%)
CAGR FY04-09 (%)
117,508
148,520
202,289
239,214
330,731
471,113
646,588
763,366
932,522
20.1
34.2
EBITDA
9,828
11,825
14,776
19,685
32,081
52,038
65,765
80,607
98,528
22.4
40.9
Interest cost
3,302
2,574
3,373
3,933
5,092
8,495
14,811
16,249
17,880
9.9
41.9
PAT
5,238
7,838
9,229
12,209
20,740
31,200
35,915
46,018
56,965
25.9
35.6
Source: Company, RHH
Fig 2 - RHH Construction sector growth trend excluding L&T and Punj Lloyd Particulars (Rs mn) Sales
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10E
FY11E
CAGR FY09-11E (%)
CAGR FY04-09 (%)
23,907
52,020
70,437
91,583
154,589
221,019
307,325
361,480
430,443
18.3
42.7
EBITDA
2,704
6,426
6,691
9,027
14,296
22,459
27,423
35,117
41,968
23.7
33.7
Interest cost
1,050
1,653
2,533
2,627
4,162
7,269
11,309
12,237
13,493
9.2
46.9
891
1,293
2,400
3,786
4,759
6,207
6,470
8,436
10,548
27.7
38.0
PAT Source: Company, RHH
Our mid cap universe is trading at attractive valuations of12.7x FY11E EPS (ex-subsidiaries)
Mid caps trading at attractive valuations (ex-subsidiary valuations) L&T, the infrastructure bellwether, is trading at a premium of 35–40% to the Sensex. Mid cap companies with strong revenue visibility are currently quoting at a discount of ~40% to L&T and at par to the Sensex. Our construction universe is trading at a P/E of 21x FY11E earnings. Excluding subsidiaries, the multiple stands at 17.6x on FY11E which looks fairly valued. However, our mid cap construction universe (excluding L&T and Jaiprakash Associates) is trading at attractive valuations of 15.9x FY11E earnings and 12.7x excluding subsidiaries. Historically, our mid cap construction universe has traded at 18–20x one-year forward earnings during FY04-FY09, which was a period of buoyant growth. The topline of the RHH construction universe increased at ~34% CAGR and bottomline at ~36% over this period. Although we expect lower revenue growth at ~20% CAGR over the next two years on account of the higher base, we anticipate a healthy bottomline ramp-up of ~26% led by rationalisation of interest costs and operational efficiency. We remain bullish on the sector due to strong earnings visibility and healthy order flows. We have valued L&T based on its average P/E of the last four years and other companies in our universe at 30–45% discount to L&T depending upon balance sheet strength and future business outlook.
Stocks to buy: L&T, Punj Lloyd, IVRCL, Simplex and IRB
We remain positive on L&T and Punj Lloyd in the large cap space, IVRCL Infrastructures and Simplex Infrastructure in the mid cap space, and IRB Infrastructure in the developer segment.
2
Infrastructure
Sector Report
05 October 2009
Fig 3 - Sector valuation matrix Company
CMP
Target
Reco
OB / Order FY10E book Sales
(Rs)
(Rs)
Ahluwalia Cont
(Rs bn)
169
190
Buy
28.0
HCC
130
141
Hold
IRB Infra*
209
224
Buy
IVRCL
388
434
JP Associates*
239
237
L&T
1665
NCC
153
Patel Engg Punj Lloyd*
CAGR over FY09-11E (%) Revenue Earnings
P/E ex- sub valuation (x)
P/E (x)
ROE (%)
FY10E
FY11E
FY10E
FY11E
FY09E
FY10E
FY11E
37.2
36.2
1.9
27.6
38.8
13.3
9.6
13.3
9.6
37.9
134.7
3.3
22.0
37.8
37.5
29.0
15.1
11.7
7.6
8.4
9.0
NA
NA
93.1
94.0
20.2
15.4
20.2
15.4
7.1
18.1
19.7
Buy
149.0
2.3
24.9
27.3
20.4
17.2
16.6
14.0
11.0
13.8
15.0
Hold
NA
NA
35.2
33.5
25.5
22.1
17.4
15.1
17.2
21.5
20.5
1,781
Buy
716.5
1.8
21.7
22.1
29.8
24.1
26.4
21.3
24.6
23.8
24.6
166
Hold
139.0
2.9
17.0
25.2
19.3
16.2
15.0
12.6
9.4
10.0
10.6
484
532
Buy
73.5
3.3
23.7
23.7
22.7
17.9
15.5
12.2
11.5
12.3
13.8
262
306
Buy
278.9
2.1
13.9
60.4
17.4
14.7
16.0
13.5
9.0
16.4
15.8
Simplex Infra
510
577
Buy
100.1
1.8
19.0
28.5
15.9
12.4
15.9
12.4
14.9
16.3
18.0
Voltas*
145
160
Hold
NA
NA
17.2
21.1
17.9
14.5
17.9
14.5
32.9
29.9
29.2
1,619.8
2.1
22.3
29.4
25.7
21.0
21.6
17.6
Aggregate Source: RHH, Company
* Consolidated
Fig 4 - L&T* – Premium/discount to BSE 30 P/E
Fig 5 - HCC – Premium/discount to L&T P/E
(%) 120
(%) 250
100
200
80
150
60
100
40 20
50
0
0
(20) Aug-06 Source: RHH
Aug-07
Sep-08
Sep-09
* Consolidated
Mar-08
Dec-08
Sep-09
Fig 7 - NCC – Premium/discount to L&T P/E
(%)
Source: RHH
Jun-07
Source: RHH
Fig 6 - IVRCL – Premium/discount to L&T P/E
100 80 60 40 20 0 (20) (40) (60) (80) Aug-06
(50) Aug-06
(%) 80 60 40 20 0 (20) (40) Jun-07
Mar-08
Dec-08
Sep-09
(60) Aug-06
Jun-07
Mar-08
Dec-08
Sep-09
Source: RHH
3
Infrastructure
Sector Report
05 October 2009
Fig 8 - Patel Engg – Premium/discount to L&T P/E
Fig 9 - Punj Lloyd– Premium/discount to L&T P/E
0
0
(20)
(20)
(40)
(40) Jun-07
Mar-08
Dec-08
Sep-09
(60) Aug-06
Jun-07
Mar-08
20
0 (10)
0
(20) (18) (30) (40) (50)
(20) (40) (60) (80) Aug-06 Source: RHH
Jun-07
Mar-08
Dec-08
Sep-09
(60) (70)
JP Asso
(%)
IVRCL
(%) 40
IRB
Fig 11 - Price discount from peak
HCC
Fig 10 - Simplex Infra – Premium/discount to L&T P/E
Ahluwalia
Source: RHH
Semsex
Source: RHH
Dec-08
Sep-09
Voltas
20
Simplex
20
Punj
40
Patel
40
(60) Aug-06
(%)
NCC
60
L&T
(%) 60
(8) (25)
(32) (52) (49)
(51)
(26) (43) (58)
(53) (55)
Source: RHH
4
Infrastructure
Sector Report
05 October 2009
Infrastructure investments in India The formation of a stable government by the incumbent UPA party is a key positive for the infrastructure sector in the long term. Infrastructure investments in the 11th Five Year Plan are expected to more than double to ~US$ 500bn over FY08-FY12 with an emphasis on areas like roads, power, irrigation and water supply. Approximately 70% of this investment would come from government spending, with the Centre contributing ~37% and state governments ~33%. With the slowdown in private capex in the wake of global economic turmoil, government spends would be the key growth driver for the infrastructure sector going forward.
Short-term hiccups, long-term intact Execution of planned project expenditure in India has proved laggardly so far due to various regulatory and policy issues. The last six months in particular have been a challenging period as decisions on project awards were repeatedly deferred on account of the economic slowdown and the code of conduct applicable to public sector bodies prior to the elections in May ’09.
Contract awarding to scale up substantially across segments
With a stable government now in place and priority being accorded to infrastructure development, it is expected that government-led capex will increase and new business prospects will fructify in the latter half of this fiscal year. The government aims to increase infrastructure spending in India to over 9% of GDP by 2014 from the current 5.8%. With the private sector expected to invest ~30% of the projected expenditure, the public-private-partnership (PPP) model will gain traction. The recently announced stimulus packages also have the potential to fuel order book growth of EPC players. Fig 12 - Infrastructure investments
Fig 13 - Infrastructure investment as a % of GDP
(Rs bn) 3000 2,350
2500
2,040
2000 1500
7
2,700
1,230 1,280
1,450 1,450 1,440
5.7
6
1,610
4.8
5
5.1
4.9
6.0
5.3 4.5
4.7
4.0
1000
4
500 0
3 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08
FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 Source: Planning Commission, RHH
Source: Planning Commission, RHH
Fig 14 - Segment-wise infrastructure spending during 10th and 11th Plans (Rs bn) 7,000
10th Plan
6,665
11th Plan
6,000 5,000 4,000 3,000
2,919
3,142 1,449
2,000
2,584 1,034
2,618 1,197
1,000
2,533 1,115
1,437 648
880 141
68 310
48 224
97 169
Airports
Storage
Gas
0 Elect.
Roads and bridges
Telecom.
Railways (incl. MRTS)
Irrigation Water (incl. WD) Supply and Sanitation
Ports
Source: Plan Document, Planning Commission
5
Infrastructure
Sector Report
05 October 2009
Fig 15 - Infrastructure – 11th Plan physical targets 11th Plan targets
Sector
6-laning of 6,500km in Golden Quadrilateral (GQ); 4-laning of 6,736km in North South-East West (NS-EW)
Roads/Highways
corridor; 4-laning of 20,000km; 2-laning of 20,000km; building 1,000km of Expressways
Ports
New capacity: 485mmt in major ports; 345mmt in minor ports
Airports
Modernise 4 metro and 35 non-metro airports; 3 Greenfield in NER; 7 other Greenfield airports
Railways
8,132km of new railway track; 7,148km gauge conversion; modernise 22 stations; dedicated freight corridors
Power
Add 78,577MW; access to all rural households
Irrigation
Develop 16mha major and minor works; 10.25mha command area development (CAD); 2.18mha flood control
Telecom/IT
Reach 600mn subscribers – 200mn in rural areas; 20mn broadband; 40mn Internet
Source: Plan document
Fig 16 - Breakdown of 11th Plan spending in infrastructure Total 10th Plan
Share (%)
2007-08
2008-09
2009-10
2010-11
2011-12
Total 11th Plan
Share (%)
Electricity (incl. NCE)
2,919
33.5
820
1,016
1,264
1,580
1,986
6,665
32.4
Roads and bridges
1,449
16.6
518
548
592
684
800
3,142
15.3
Telecommunications
1,034
11.9
314
381
486
616
787
2,584
12.6
Railways (incl. MRTS)
1,197
13.7
342
410
495
604
767
2,618
12.7
Irrigation (incl. WD)
1,115
12.8
275
359
472
623
804
2,533
12.3
648
7.4
193
228
273
333
411
1,437
7.0
141
1.6
124
148
174
200
234
880
4.3
Airports
68
0.8
52
55
59
66
77
310
1.5
Storage
48
0.6
38
41
44
48
52
224
1.1
Gas
97
1.1
27
30
33
37
41
169
0.8
Total Investment (Rs bn)
8,714
100.0
2,703
3,216
3,893
4,791
5,959
20,562
100.0
Total Investment (US $ bn)
217.9
67.6
80.4
97.3
119.8
149.0
514.0
5.4
6.0
6.5
7.3
8.2
9.3
7.6
Sectors (Rs bn)
Water Supply and Sanitation Ports
As % of GDP Source: Plan document, Planning Commission
In CY08, China spent US$ 101bn on road infrastructure while India spent a paltry US$ 11.5bn
China to be a key motivator for India While the infrastructure sector is regarded as one of the major opportunities for the medium to long term in India, the country’s progress pales in comparison to China. In CY08, China spent US$ 101bn on road infrastructure while India spent a paltry US$ 11.5bn. With the most recent RMB 4tn stimulus package in China much of the new focus on infrastructure will be in rural and interior areas. Over the next few years China’s spending on infrastructure could be exponentially larger than that of India. China has the capital and execution capability to deliver infrastructure spending on a rapid and massive scale. In addition, the Chinese government has been edging towards a fiscal surplus over the last few years, although the deficit will likely reemerge in 2009 with the additional stimulus package. In China, capital for infrastructure spending is provided by the government and through the banking system, which witnessed strong loan growth in Q1CY09. The combined fiscal deficit at 11–12% of GDP severely impacts the ability of the Indian government to roll out a Chinese-style infrastructure-heavy stimulus package. The Indian government instead focuses on aggressively easing monetary policy and loosening liquidity conditions by providing windows for refinancing debt such as IIFCL.
6
Infrastructure
Sector Report
We estimate infrastructure spending of US$ 382bn by FY12 vs. US$ 503bn planned
05 October 2009
India’s infrastructure spend in 11th plan estimated at US$ 382bn From past experience, we know that government investment targets are usually overly optimistic. We estimate spending of US$ 382bn over the 11th plan period (FY08–FY12) as against US$ 503bn planned. Our estimate stems from challenges being encountered by the private sector in obtaining finance and also from the deceleration in India’s GDP growth.
Fig 17 - Gross capital formation (GCF) in infrastructure based on growth targets (Top-down estimates) (Rs bn at 2006-07 prices)
11th Plan
Base Year 2006-07
2007-08
2008-09
2009-10
2010-11
2011-12
41,458
45,189
49,256
53,689
58,521
63,788
9.0
9.0
9.0
9.0
9.0
9.0
GDP (market prices) Rate of growth of GDP (%) GCF in infrastructure as % of GDP GCF in infrastructure (Rs bn)
5.0
5.8
6.5
7.3
8.0
9.0
2,073
2,598
3,202
3,892
4,682
5,741
52
65
80
97
117
144
GCF in Infrastructure (US$ bn) th
11 plan GCF in infrastructure
Rs 20,115bn or US$ 502.9bn
Source: Plan document
Our estimates of investments in infrastructure have been derived using the top-down approach, based on the government’s GDP growth targets and estimates of the likely evolution of the share of gross capital formation in infrastructure as a proportion of GDP consistent with those targets. Fig 18 - RHH estimates – GCF in infrastructure based on growth targets (Top-down estimates) 11th Plan
Base Year
(Rs bn at 2006-07 prices)
2006-07
2007-08
2008-09
2009-10
2010-11
2011-12
Total
41,458
45,231 9.1%
47,990 6.1%
50,629 5.5%
54,173 7.0%
58,507 8.0%
256,530
GCF in Infrastructure (As a % of GDP)
5.7%
6.0%
5.8%
6.3%
6.7%
7.0%
GCF in Infrastructure (Rs bn)
2,363
2,714
2,783
3,190
3,630
4,095
16,412
55
63
65
74
84
95
382
RHH assumptions GDP at market prices GDP growth rate
GCF in Infrastructure (US$ bn) (Assumed ex. rate of 43$) Source: RHH
Fig 19 - Projected investment in infrastructure as percentage of GDP (Bottom-up estimates) 11th Plan
Base Year Years (Rs bn at 2006-07 prices) GDP
2006-07
2007-08
2008-09
2009-10
2010-11
2011-12
Total
41,458
45,189
49,256
53,689
58,521
63,788
270,445
Public Investment
1,754
1,921
2,273
2,735
3,324
4,112
14,366
Private Investment
499
782
943
1,157
1,468
1,847
6,196
2,252
2,703
3,216
3,893
4,791
5,959
20,562
Total investment
Infrastructure investment as percentage of GDP (%) Public
4.2
4.3
4.6
5.1
5.7
6.5
5.3
Private
1.2
1.7
1.9
2.2
2.5
2.9
2.3
Total
5.4
6.0
6.5
7.3
8.2
9.3
7.6
Source: Plan document
7
Infrastructure
Sector Report
05 October 2009
Opportunities across segments Infrastructure development in India is expected to garner a total investment of Rs 20,562bn over the 11th plan. We expect roads, power, irrigation and railways to absorb 91.2% of the planned investment and represent 92.8% of the construction opportunity generated by this plan.
Roads, power, irrigation and railways to absorb 91% of planned investment
Fig 20 - Construction opportunities and key beneficiaries 11th plan
Construction intensity (%)
Electricity (incl. NCE)
6,665
Roads and Bridges
Value of const. opportunity 11th plan
10th plan
Growth over 10th plan (%)
31
2,066
905
128.3
L&T, HCC, Patel Engg, NCC
3,142
95
2,984
1,449
106.0
IRB Infra, IVRCL, JP Associates, L&T
Railways (incl. MRTS)
2,618
42
1,100
503
118.6
L&T, Simplex Infra
Irrigation (incl. Watershed)
2,533
65
1,647
669
146.1
Water Supply and Sanitation
1,437
60
862
388
122.3
8,659
3,914
121.2
Particulars (Rs bn)
Total
16,395
Key beneficiaries
IVRCL, NCC, Patel Engg, HCC
Source: Crisil, RHH
Fig 21 - Key opportunities Sector
Key opportunities
Power
NTPC to award bulk tenders for super-critical equipment (660MWx11) in the near future
Roads
NHAI to invite tenders / award projects worth Rs 600bn–700bn over the next one year
Railways
Dedicated Rail Freight Corridor (DRFC) the biggest opportunity in rail; also railway station privatisation, metro rail, signalling, technical upgrades
Irrigation
Increased government spending in Andhra Pradesh, Gujarat, Maharashtra, Karnataka, Uttar Pradesh and Madhya Pradesh
Urban infra
Higher budgetary allocation for JNNURM and Bharat Nirman programmes
Source: RHH
Fig 22 - Higher budgetary allocations to various infrastructure schemes Particulars Bharat Nirman JNNURM (Jawaharlal Nehru National Urban Renewal Mission)
Budget allocations (Rs bn) FY08
FY09
FY10
246
312
452
55
69
129
120
160
391
99
121
139
NHDP (National Highway Development Programme)
109
129
159
RGGVY (Rajiv Gandhi Grameen Vidyutikaran Yojana)
39
55
70
NREGS (National Rural Employment Guarantee Scheme ) NRHM (National Rural Health Mission)
APDRP (Accelerated Power Development and Reform Programme) AIPB (Accelerated Irrigation Benefit Programme)
–
8
21
110
200
350
Source: RHH
8
Infrastructure
Sector Report
05 October 2009
Fig 23 - Thrust areas under 11th Plan
ROADS AND BRIDGES
ELECTRICITY
Lion’s share of planned investment at Rs 6,665bn – 32.4% of 11th plan spend and ~2.3x 10th plan amount
Private investment to make up ~28%
Targets – Power capacity addition of 78.7GW; we expect additions 60GW. Power minister Sushil Kumar Shinde pegs capacity addition at ~65GW
Demand-supply gap and government thrust to drive growth
Bulk tenders from NTPC a key trigger
Investment of Rs 3,142bn – 15.3% of 11th plan spend and ~2.2x 10th plan amount
Centre and states to contribute ~66% and private players 34% (vs 5% private sector share in 10th plan)
2009–10 allocation to National Highway Authority of India (NHAI) increased 23% to Rs 159bn
Targets – Addition of 6-lane stretches covering 6,500km in the GQ; 4-laning of the NS–EW corridor across 6,736km; 4-laning of 20,000km; 2-laning of 20,000km; building expressways covering 1,000km
Investment of Rs 2,533bn – 12.7% of 11th plan spend and 2.3x 10th plan amount
2009–10 allocation for Accelerated Irrigation Benefit Programme (AIBP) hiked 75% from Rs 200bn to Rs 350bn
Allocation for JNNURM upped 90% to Rs 129bn
Government spending to continue in this segment mainly in Andhra Pradesh, Gujarat, Maharashtra, Karnataka, Uttar Pradesh and Madhya Pradesh
Targets – Develop 16mha major and minor works; 10.25mha command area development (CAD); 2.18mha flood control
Major thrust areas in 11th Five Year Plan
IRRIGATION
RAILWAYS
Investment of Rs 2,618bn – 12.7% of 11th plan spend and ~2.2x 10th plan amount
Private investment at ~20% as against nil in 10th plan
2009–10 budgetary allocation increased by 46% to Rs 158bn
to
sector
Targets – Construction of Dedicated Rail Freight Corridor – the biggest opportunity in the sector Also, railway station privatisation, metro rail creation, signalling, technical upgrades
Source: RHH
9
Infrastructure
Sector Report
05 October 2009
Funding a key challenge Debt financing totals Rs 9,880bn in 11th plan; 16% shortfall in corresponding resources
Infrastructure investments are closely linked to the ability to raise debt to finance projects. The 11th plan investment of Rs 20,562bn is to be shared between the Centre, states and private sector in the proportion of 37.2%, 32.6% and 30.1%. Projects to be awarded on PPP basis would have a debt/equity ratio of 70:30 as against earlier levels of 85:15. The required debt financing has accordingly been estimated at Rs 9,880bn. The Planning Commission estimates the gap between the availability of debt resources and the debt requirement at Rs 1,625bn. This is sought to be bridged through enhanced credit, external commercial borrowings (ECB), pension and insurance funds, and other debt funds.
Fig 24 - Likely sources of debt financing for the 11th Plan 2007-08
2008-09
2009-10
2010-11
2011-12
Total 11th Plan
Domestic bank credit
498
632
801
1,016
1,289
4,237
Non-Banking Finance Companies (NBFCs)
239
315
416
549
724
2,242
91
100
110
121
133
554
196
218
242
269
299
1,223
Likely Total Debt Resources
1,024
1,264
1,569
1,954
2,444
8,255
Estimated Debt Requirement
1,317
1,557
1,873
2,296
2,837
9,880
32.9
38.9
46.8
57.4
70.9
247.0
293
293
305
341
393
1,625
7.3
7.3
7.6
8.5
9.8
40.6
(Rs bn at 2006-07 prices)
Pension/Insurance companies External Commercial Borrowings (ECB)
– In US$ bn Gap b/w estimated debt requirement & likely debt resources – In US$ bn Source: Plan document
Fig 25 - Deployment of gross bank credit (GBC) Industry (Rs bn)
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
Total GBC
1,610
1,790
2,001
2,188
2,295
2,956
3,131
4,231
5,504
6,973
8,719
10,398
Construction
26
26
27
32
40
49
60
83
133
200
283
382
Infrastructure
32
59
72
113
148
263
372
790
1,129
1,430
2,023
2,569
7
21
33
52
74
150
197
382
602
728
939
NA
20
23
20
36
40
58
84
157
185
194
371
NA
4
16
20
25
35
55
92
145
197
249
330
NA
i) Power ii) Telecom iii) Roads and ports Total Infrastructure
58
85
100
145
188
312
432
873
1,262
1,629
2,306
2,951
% of GBC
3.6
4.8
5.0
6.6
8.2
10.6
13.8
20.6
22.9
23.4
26.4
28.4
Source: RBI
Fig 26 - Total infrastructure outstanding as a % of gross bank credit (%) 26.4
30 25
20.6
22.9
28.4
23.4
20 13.8
15 10 3.6
5
4.8
5.0
6.6
8.2
10.6
0 FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 Source: RBI
10
Infrastructure
Sector Report
05 October 2009
Fig 27 - Projected investment in infrastructure: Source-wise financing (Rs bn at 2006-07 prices) Centre
2007-08
2008-09
2009-10
2010-11
2011-12
Total 11th Plan
1,126
1,283
1,485
1,721
2,040
7,656
Central Budget
294
335
388
450
533
2,000
Internal Generation (IEBR)
250
284
329
381
452
1,697
Borrowings (IEBR)
582
664
768
890
1,055
3,959
States
795
990
1,250
1,602
2,072
6,709
States Budgets
527
656
828
1,062
1,373
4,447
Internal Generation (IEBR)
80
100
126
162
210
679
Borrowings (IEBR)
188
234
295
378
489
1,584
Private
782
943
1,157
1,468
1,847
6,196
Internal Accruals/Equity
235
283
347
440
554
1,859
Borrowings
547
660
810
1,027
1,293
4,337
Total Projected Investment
2,703
3,216
3,893
4,791
5,959
20,562
Non-Debt
1,386
1,659
2,019
2,495
3,122
10,681
Debt
1,317
1,557
1,873
2,296
2,837
9,880
Source: Plan document
Liquidity drought in FY09 Paucity of funds in FY09 dented project returns and viability
In FY09, the paucity of funds along with an increased cost of debt (up 300–400bps YoY) hit infrastructure projects hard, affecting project returns and viability. A sharp fall in the global equity markets along with a drop in appetite for Indian papers in the overseas market further exacerbated the funding issue. At the same time, domestic interest rates spiraled as high as 14–15%. At such high rates, infrastructure projects turned unviable and hence private sector participation fell dramatically. Even as policy rates were eased thereafter to sustain growth, the risk perception amongst banks was heightened. Hence, the development of new projects has been subdued. However, the government stimulus packages announced early this year coupled with RBI monetary measures has alleviated liquidity concerns to a great extent. On the flip side, a ballooning fiscal deficit (6.8% of GDP in FY10) will limit the government’s ability to spend on infrastructure projects in the short term, though disinvestment would help bridge the funding gap. IIFCL refinance scheme a key positive At present, public sector banks are the main providers of finance to infrastructure projects. Typically, infrastructure loans are for 10 years and above. However, 81% of bank deposits fall in the sub-5-year category. This implies an asset-liability mismatch for banks as they run the risk of financing long-term assets with short-term liabilities.
IIFCL refinance facility opens up a fresh avenue for infra project funding
To mitigate the situation, a scheme of refinance by India Infrastructure Finance Company (IIFCL) has been evolved. Under the scheme, refinance would be provided to banks for new commercially viable projects in the roads and port sector where bids have been submitted on or after 31 January 2009. IIFCL will provide refinance up to 60% of the loans provided by banks to these infrastructure projects at an interest rate of 7.85%. Banks will not charge more than 2.5% over and above the rate of refinance. IIFCL has already raised Rs 100bn till 31 March 2009 by way of tax-free bonds to provide this facility to banks, thereby supplementing resources to finance infrastructure projects. Further, with bank lending rates easing, the interest of private sector players in bidding for new projects has begun to revive.
11
Infrastructure
Sector Report
05 October 2009
Stimulus/budgetary measures eased access to funds Apart from a two-part stimulus package, the newly formed government has announced the following measures to boost the infrastructure sector in the recent budget: IIFCL authorised to raise Rs 400bn, thus supporting projects worth Rs 1,000bn
IIFCL has been authorised to raise Rs 400bn in two tranches, thereby supporting projects worth Rs 1,000bn.
Approvals accorded for several projects from August ’08 to January ’09, as follows: o 37 infrastructure projects worth Rs 700bn o 54 central infrastructure projects with a cost of Rs 677bn under PPP o 29 projects amounting to Rs 279bn for viability gap funding (VGF).
NBFCs, which are expected to provide 27% of the total debt financing in the 11th plan, have been permitted to access ECBs from multilateral or bilateral institutions under the approval route of the RBI. The government also plans to launch an SPV aimed at providing liquidity support against investment-grade paper to NBFCs fulfilling certain conditions.
Monetary measures injected liquidity into the banking system Since October ’08, RBI has reduced the cash reserve ratio (CRR) for banks by 400bps to 5% and statutory liquidity ratio (SLR) by 100bps to 24%, thereby injecting liquidity of more than Rs 1,500bn into the system. It also reduced repo rates by 425bps to 4.75%. These aggressive measures led to a significant improvement in the liquidity situation with wholesale rates declining sharply in the last nine months. World Bank lending plan of ~US$ 14bn In December ’08, the World Bank introduced a lending plan of ~US$ 14bn over three years for India. Of this, US$ 3bn will focus on areas most affected by the global financial crisis, including state-owned and housing banks, small and medium-sized enterprises and infrastructure. World Bank providing US$ 4.3bn to support India’s economic stimulus, infrastructure investments
Of the proposed funds, US$ 330mn has been disbursed in August ’09 while four projects worth US$ 4.3bn were recently approved. These projects are designed to support the government’s infrastructure agenda and bolster its economic stimulus programme. The loans (to the banking sector and PowerGrid) from the International Bank for Reconstruction and Development (IBRD) have a 30-year maturity, including a 5-year grace period. The IBRD loan to IIFCL (US$ 1.2bn) has a 28-year maturity including a 7.5-year grace period.
Fig 28 - Summary of the proposed disbursement of US$ 4.3bn Loan to Banking Sector Support Loan India Infrastructure Finance Company (IIFCL)
Amount (US$ bn) 2
Scope / Purpose To provide budgetary support to the government of India, helping it maintain its broad economic stimulus programme by enhancing the capital of select public sector banks. Will help maintain credit growth levels, support social banking and employment growth, and strengthen economic recovery.
1.2
To support its role to catalyse private financing for PPPs in infrastructure – mainly roads, powers, ports & airports – and stimulate the development of a long-term local currency debt financing market.
Power Grid (Power System Development Project)
1
To help address India’s acute deficit of power. The loan will help PowerGrid to strengthen five transmission systems in the northern, western and southern regions of the country. This will facilitate the transfer of power from energy surplus regions to towns and villages in the country’s under-served regions. It will enable PowerGrid to strengthen the existing transmission system and expand the National Grid.
Andhra Pradesh Rural Water Supply and Sanitation Project
0.15
To improve water supply and sanitation services in 2,600 villages across six districts of the state. Aims to provide piped water to 2.1mn people and extend sanitation services to 1mn people.
Total
4.3
Source: World Bank press release
12
Infrastructure
Sector Report
05 October 2009
PPP – the way forward The government plans to raise total investment in infrastructure from an estimated 5.4% of GDP in 2006–07 to over 9% by the 2014. An increase of this magnitude cannot be achieved through public investment alone. The 11th plan therefore proposes a strategy which involves a combined response – an increase in public sector investment in infrastructure as a percentage of GDP along with higher private sector investment through some form of PPP or directly, where feasible.
Private sector share at ~30% of planned investments
One-third of planned investment to come from private sector Of the 11th plan investment of Rs 20,562bn, ~30% is expected from private participation as against 20% in the 10th plan. The role of private players is much more prominent in central sector projects. As mentioned, in FY09, the severe liquidity crisis hampered the ability of private players to generate funds required for investments. The power and road segments in particular witnessed a sharp slowdown as a mix of macro and sectorspecific constraints induced a sharp deceleration in private participation for new project tenders. Now, however, we expect the process of project awards to be expedited given the following:
A marked improvement in the Indian economy along with reviving global cues
Incentives introduced for the PPP model
A softer interest rate regime leading to easier access to liquidity and a lower cost of debt (a key concern since projects are funded by debt to the extent of 75–80%)
Policy measures initiated to unplug the bottlenecks to project execution (mainly in the roads segment), which have been a principle cause of delays in project awards
Measures to unlock liquidity introduced in the two stimulus packages
Softening of commodity prices.
13
Infrastructure
Sector Report
05 October 2009
Opportunities abound for EPC players Opportunities in the construction space are estimated at 25–95% of infrastructure spending in each segment. With a total planned outlay of ~US$ 500bn charted out in the 11th plan, investments in construction are set to double over the next five years. The construction business opportunity up to FY12 is estimated at Rs 9,484bn with roads, power, railways and irrigation being the primary growth drivers.
Construction opportunity up to FY12 estimated at Rs 9,484bn
Fig 29 - Construction intensity during 10th and 11th Plans 11th Plan
Construction intensity (%)
Value of construction opportunity in 11th Plan
Value of construction opportunity in 10th Plan
Growth over 10th Plan (%)
Electricity (incl. NCE)
6,665
31
2,066.2
905
128.3
Roads and Bridges
3,142
95
2,984.5
1,449
116.8
Railways (incl. MRTS)
2,618
42
1,099.6
503
118.6
Irrigation (incl. Watershed)
2,533
65
1,646.5
669
146.1
Water Supply and Sanitation
Particulars (Rs bn)
1,437
60
862.4
388
122.3
Ports
880
50
440.0
70
528.5
Airports
310
42
130.1
28
364.5
Storage
224
25
55.9
12
366.2
Gas
169
25
42.1
25
68.6
9,484
4,049
134.2
Total excluding Telecom
17,977
Source: Plan document, Planning Commission, Crisil Research, RHH
Fig 30 - Year-wise construction intensity during 11th Plan Sectors (Rs bn) Electricity (incl. NCE) Roads and bridges Railways (incl. MRTS) Irrigation (incl. WD) Water Supply and Sanitation Ports
Const intensity (%)
Const 2007intensity 08 (%)
Const 2008intensity 09 (%)
Const 2009intensity 10 (%)
Const 2010intensity 11 (%)
201112
Const intensity (%)
Total Value of 11th constr Plan opportunity
31
820
254
1,016
315
1,264
392
1,580
490
1,986
616
6,665
2,066
95
518
492
548
520
592
562
684
650
800
760
3,142
2,984
42
342
144
410
172
495
208
604
254
767
322
2,618
1,100
65
275
179
359
233
472
307
623
405
804
523
2,533
1,646
60
193
116
228
137
273
164
333
200
411
246
1,437
862
50
124
62
148
74
174
87
200
100
234
117
880
440
Airports
42
52
22
55
23
59
25
66
28
77
32
310
130
Storage
25
38
9
41
10
44
11
48
12
52
13
224
56
Gas
25
27
7
30
8
33
8
37
9
41
10
169
42
2,389
1,285
2,834
1,493
3,407
1,764
4,175
2,146
5,172
2,639 17,977
9,327
Total Investment (Rs bn)
Source: Plan document, Planning Commission, Crisil Research, RHH
Construction contractors, equipment suppliers, lenders, consultants as well as owners of infrastructure assets would benefit from the large opportunity. With increasing project size and complexity, established and large construction contractors would continue to draw market share away from smaller contractors. We expect the government’s spending to hasten capacity expansion by contractors and developers.
Upturn in industrial activity to buoy corporate capex
Corporate capex – improving trend Construction companies have derived strong order book growth from exposure to corporate capex in the oil & gas, steel and cement industries over the past 2–3 years. However, investments across the board have taken a backseat after the economic downturn and rise in commodity prices. While projects which are under implementation or have achieved financial closure are at low risk, nascent works are likely to witness delays.
14
Infrastructure
Sector Report
05 October 2009
We expect continued capex in the hydrocarbon space and fertilisers (mainly due to availability of natural gas) in the near term. Also, corporate capex trends in the steel, and cement sectors suggest an improvement as demand picks up. July IIP data clearly reflects the upturn in industrial activity in India. We expect the recovery to accelerate on account of a favorable base effect and renewed consumption demand.
Fig 34 - IIP – Capital Goods (YoY change)
Source: RHH
Order flows of Rs 1,136bn expected for the RHH construction sector in FY10
7.8 6.8 (6) (6) (3)
2
Apr-09
Jul-09
7 Jan-09
0
4
13
16 12
21 Oct-08
Jul-08
1
4 Apr-08
Jan-08
Oct-07
3
8
12
18
20
21 21 24 18
11
12 Jul-07
22 23 11
Jul-09
Apr-09
Jan-09
Oct-08
Jul-08
Apr-08
Jan-08
Oct-07
Jul-07
Apr-07
0
(%) 35 30 25 20 15 10 5 0 (5) (10)
Apr-07
8.0 4.2
3.3
6.3 7.1 4.5
4.4 4.4 2.6 1.6 1.8 0.7
2
0.8
4
1.4 2.0 2.6
6
3.7
8
4.5 4.2 5.8 3.8 3.7
9.2
10
6.8 7.5
(%) 12
31
Fig 33 - IIP – Electricity (YoY change)
9.8
Source: RHH
8.7 9.4
Source: RHH
Jul-09
6.2
1.7
Oct-08
Jul-08
Apr-08
Jan-08
Oct-07
Jul-07
(0.6) 2.7 (0.6) 1.0 Jan-09 0.2 (0.3) Apr-09 0.4 2.1
8.6 6.7 9.6 5.7 6.7 4.5 6.1 6.9
4.7
12.4 11.3 9.7 8.8 10.8 7.4 13.8
(%) 16 14 12 10 8 6 4 2 0 (2)
Apr-07
Jul-09
Oct-08
Jul-08
Apr-08
Jan-08
Apr-07
Jul-07
Oct-07
0 (2)
2.5 (0.3) 1.0 Jan-09 0.2 0.3 1.1 Apr-09 2.2
6.0
1.7
2
8.2 6.8
9.5
4
0.1
6
5.5 6.2 4.4 5.4 6.4
8
8.0
10
Fig 32 - IIP – Manufacturing (YoY change)
6.2
12
4.9
(%) 14
11.3 10.6 8.9 8.3 10.9 7.0 12.2
Fig 31 - IIP (YoY change)
Source: RHH
Sector order book robust, back-ended growth in FY10 The order book of the infrastructure sector remains robust, providing strong revenue growth visibility. Order inflows for Q1FY10 were muted mainly due to the election period. With a new stable alliance in power, government spending would be a key growth driver for the sector. We expect Rs 1,136bn worth of new orders for companies under RHH construction sector in FY10, which would build up towards the latter part of the year and thereafter witness sustained momentum.
15
Infrastructure
Sector Report
05 October 2009
Fig 35 - RHH construction universe: Order book to sales analysis (x)
Q1FY08 Q2FY08
Ahluwalia Cont
Q3FY08
Q4FY08
Q1FY09
Q2FY09
Q3FY10
Q4FY09
Q1FY10
OB / FY10E Sales
FY10E sales (Rs mn)
-
-
-
-
-
-
1.9
2.1
2.2
1.9
14,444
HCC
3.0
2.9
2.5
2.7
2.6
2.7
3.0
4.4
4.1
3.3
41,091
IVRCL
3.2
3.3
3.3
3.5
3.2
3.2
3.1
3.0
1.4
2.3
63,465
L&T
2.2
2.2
2.2
2.1
2.1
2.1
2.2
2.1
2.1
1.8
401,887
NCC
2.6
3.0
3.2
3.3
3.3
3.1
2.9
2.9
3.2
2.9
47,326
Patel Engg
4.4
4.6
4.5
4.5
4.3
4.1
4.7
4.0
3.9
3.3
21,951
Punj Lloyd*
2.8
2.3
2.3
2.5
2.2
2.2
2.0
1.7
2.3
2.1
132,234
Simplex Infra
3.6
3.2
3.3
3.2
3.1
2.9
2.4
2.2
2.1
1.8
55,414
Total (ExAhluwalia Cont)
2.5
2.4
2.4
2.5
2.4
2.3
2.3
2.3
2.2
2.1
777,811
Source: Company, RHH
*Consolidated
Fig 36 - Order book position at the end of Q1FY10
Fig 37 - Order book to sales trend
(Rs bn)
(x) 2.6
717
2.5 2.4
2.5
2.4
2.5 2.4
2.4
135
149
139
28
Q1
Simplex
Punj
Patel
NCC
L&T
IVRCL
Source: RHH
2.3
2.2
2.1 2.0
HCC
2.3
2.2
100
74
2.3
2.3
279
Ahluwalia
800 700 600 500 400 300 200 100 0
Q2
Q3
Q4
Q1
Q2
FY08
Q3
Q4
FY09
Q1 FY10
Source: RHH
Fig 38 - Order intake trend (Rs mn)
FY05
FY06
FY07
FY08
Ahluwalia Cont
Roads, power, urban infrastructure and irrigation to contribute to order books in the near term
FY09
FY10
FY11
25,324
18,669
26,393
HCC
28,933
62,780
19,976
22,800
91,520
59,488
71,386
IVRCL
33,400
36,227
46,300 307,22 0 47,109
94,477 420,19 0 74,860
86,705 517,90 0 54,250
86,705
91,040
647,375
744,481
75,950
83,545
14,994 102,10 7 25,550 563,25 6
19,000 105,34 9 66,940 803,61 6
30,000 116,13 7 57,680 979,51 6
34,500
39,675
158,567
181,743
54,796 1,136,05 0
60,276 1,298,53 9
L&T NCC
32,250
36,226
Patel Engg
18,064
20,247 44,791
Punj Lloyd* Simplex Infra Total Source: Company, RHH
17,990 130,63 7
20,940 221,21 1
* Consolidated
16
Infrastructure
Sector Report
05 October 2009
Fig 39 - Order intake growth* (%) 50
Fig 40 - Sales growth of RHH construction universe (%) 50
42.7
42.2
40
42.5
37.2
40 30
30
18.7
17.1
20
13.9
22.4
18.1
20
39.0
17.7
19.7
10
10
0
0
FY08 FY08
FY09
Source: RHH, Company
FY10E
TOTAL
* Ex Ahluwalia Contracts
Lower commodity prices to aid slight margin improvement
FY09 FY10E FY11E FY08 FY09 FY10E FY11E
FY11E
EX L&T
Source: RHH
Softer commodity prices to support stable EBITDA margin The increase in commodity prices at the beginning of FY09 had a significant adverse impact on margins for companies owing to a higher proportion of fixed price contracts. However, with prices cooling off we expect a 50bps improvement in margins for our construction universe in FY10 and a flattish trend thereafter. In our view, margins are at a peak and offer little scope for improvement.
Fig 41 - EBITDA margin trend (%)
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10E
FY11E
9.4
10.4
12.1
11.8
12.5
12.4 12.5
Ahluwalia Contracts HCC
17.5
13.7
10.5
9.2
9.2
11.9
13.0
12.5
IVRCL
9.8
8.1
8.3
9.0
10.1
9.9
8.6
9.3
9.3
L&T
7.6
5.6
6.1
7.2
10.1
11.8
11.3
11.3
11.3
NCC
8.4
7.8
7.8
9.0
9.4
10.4
9.0
9.5
9.5
13.7
10.9
10.7
13.9
13.0
15.3
14.5
14.6
14.7
18.3
11.5
11.3
8.0
8.9
7.3
8.5
8.5
Patel Engg. Punj Lloyd Simplex Infra
6.1
6.8
7.0
8.7
9.3
9.4
8.2
9.3
9.3
Average EBITDA margin
8.4
8.0
7.3
8.2
9.7
11.1
10.2
10.6
10.6
Source: Company, RHH
Fig 42 - Average EBITDA margin trend EBITDA margins have peaked and would sustain at current levels
(%) 12
11.1
11
10.2
10.6
FY10E
FY11E
9.7
10 9
10.6
8.4
8.2
8.0
8
7.3
7 6 FY03
FY04
FY05
FY06
FY07
FY08
FY09
Source: RHH
17
Infrastructure
Sector Report
05 October 2009
Fig 43 - Cement prices remain firm…
Fig 44 - …but steel prices have corrected 35–40% in six months (Rs/tonne) 70,000
All India Avg
(Rs/Bag) 260 240
Landed HRC price (CIS)
60,000
220
50,000
200 180
40,000
160
30,000
140 120 Apr-04
Indian HRC price
Feb-05
Jan-06
Nov-06 Oct-07
Sep-08
Source: RHH
Jul-09
20,000 Mar-04 Feb-05
Jan-06 Dec-06 Nov-07 Oct-08 Sep-09
Source: Crisil
Fig 45 - Order book covered by escalation clauses and fixed price contracts Company
Fixed price contracts (%)
WPI Linked (%)
Star rated/Free issue of materials (%)
L&T
~25-30
~75-70
Punj Lloyd*
~70-75
~25-30
HCC
4
86
10
IVRCL
7
33
60
38
15
47
NCC Patel Engg
5-10
Simplex Infra Source: RHH
15
~90-95 85
*Consolidated
Interest expenses set to come down In FY09, construction companies witnessed spiralling interest costs mainly due to a heated interest rate environment and higher debt requirements (to support working capital needs and investments in subsidiaries). We expect interest cost to settle at manageable levels in FY10 on account of a more benign interest rate regime, lower investments in subsidiaries, resurgence of QIP funds and stable working capital requirements. Interest cost down 200bps from its peak in October ’08 – a key positive
Drop in interest rates: Interest cost has declined by 200bps from the peak in October ’08. For most construction companies, this cost constitutes roughly 3–5% of turnover and hence movement in interest rates has a significant impact on earnings. The 10-year benchmark interest rate has declined from 9–9.5% in Q2FY09 to 7% at present. With increased aversion to riskier assets in Q3FY09, the spread on AA rated corporate bonds had increased to 4.5–5%. But an improving macro-economic climate and restoration of liquidity in the banking system helped lower the spread to 2.5%.
18
Infrastructure
Sector Report
05 October 2009
Fig 46 - 10-year government bonds
Oct-09
Jul-09
Apr-09
Jan-09
Oct-08
Jul-08
Apr-08
Jan-08
Oct-07
Jul-07
Jan-07
Apr-07
Oct-06
Jul-06
Apr-06
Jan-06
Jul-05
Oct-05
Apr-05
(%) 10.0 9.5 9.0 8.5 8.0 7.5 7.0 6.5 6.0 5.5 5.0
Source: Bloomberg
Fig 47 - Interest cost as a percentage of sales Companies (%)
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10E
FY11E
HCC
6.4
3.8
2.8
1.0
1.0
1.3
1.3
1.7
1.7
2.4
3.5
5.1
6.8
5.8
IVRCL
3.7
2.8
5.2
2.7
2.4
2.4
3.2
4.1
3.5
3.5
L&T
2.4
NCC
2.5
1.0
0.6
0.9
0.5
0.5
1.0
1.0
0.9
1.8
1.2
1.7
2.2
3.2
3.9
3.6
3.2
Patel Engg
4.7
2.0
1.4
3.1
2.7
3.9
5.0
4.7
4.4
3.7
7.4
4.7
2.3
2.3
2.6
2.5
2.3
3.9
3.7
2.8
3.2
3.8
3.9
3.2
2.9
2.6
2.8
1.7
1.7
1.6
1.5
1.8
2.3
2.1
1.9
Ahluwalia Cont
Punj Lloyd* Simplex Infra Total Source: RHH
*Consolidated
Lower capital infusion into subsidiaries would help contain interest cost
Lower investments in subsidiaries or joint ventures: Most construction companies have diversified from pure EPC to BOT (build, operate, transfer) projects and real estate. Exposure to BOT projects weighs down the balance sheet and return ratios when such works are in the investment phase. From our coverage universe, Nagarjuna Construction (NCC) has the maximum exposure to BOT projects which will lead to pressure on its balance sheet in the near term. Fig 48 - Investments in subsidiary companies and JVs (Rs mn)
FY08
FY09
FY10E
FY11E
HCC
2,832
3,656
4,656
5,856
NCC
5,648
7,403
8,803
9,803
Patel Engg
1,103
2,558
3,557
4,557
IVRCL
3,409
3,893
4,095
4,295
Punj Lloyd*
5,458
6,609
6,609
6,609
26,396
33,841
44,041
54,041
L&T Source: Company, RHH
QIPs being used to replace high-cost debt and fund working capital
*Consolidated
QIPs back in action: Given the improved liquidity conditions, qualified institutional placements (QIP) have made a strong comeback. These issues are being used to replace high-cost debt and fund working capital requirements.
19
Infrastructure
Sector Report
05 October 2009
Fig 49 - Fund raising from capital markets Particulars
(Rs mn)
QIP raised HCC
4,800
Punj Lloyd
6,800
NCC
3,670
GVK Power & Infra
7,169
Lanco Infratech
7,274
QIP to be raised Era Infra
10,000
Unity Infra
2,500
Gammon India
10,000
IPO raised Adani Power
29,400
NHPC
60,400
Pipavav Shipyard
5100
Source: RHH
Earnings CAGR of 25.9% over FY09-FY11 We expect an earnings CAGR of 25.9% from our construction universe over FY09-FY11. Higher earnings growth as against our moderate margin estimates would arise from improved execution based on a strong order backlog and softening interest rate scenario. Fig 50 - Earnings growth Earnings to log CAGR of 25.9% over FY09-FY11 (27.7% ex-L&T & Punj)
(%) 60
50.7
50 40
28.3
30
32.6
31.1
24.0
26.2
15.0
20
4.7
10 0 FY08
FY09
FY10E
TOTAL TOTAL
FY11E
FY08
FY09
FY10E
FY11E
EX L&T & Punj Lloyd
Source: RHH
20
Infrastructure
Sector Report
05 October 2009
Key risks to our estimates Near-term macro concerns We note that a ballooning fiscal deficit (6.8% of GDP in FY10) will limit the government’s ability to spend on infrastructure projects in the short term.
A slower-than-anticipated economic revival would impede order flows
EPC players Slow growth in order inflows if economic revival takes longer than anticipated
Rising working capital levels
Challenges to raising capital
Infrastructure developers Hurdles related to land acquisition, shifting of utilities, right of way, environmental and other clearances, and contractor capacity
Inability to achieve financial closure
Execution delays
Risk on IRRs on account of rise in interest rate and, in case of road projects, lower traffic growth
21
Infrastructure
Sector Report
05 October 2009
RHH infrastructure universe: Valuation matrix Fig 51 - Infrastructure sector valuation matrix Company
CMP (Rs)
Target (Rs)
Reco
MCap
Sales (Rs mn)
Sales Growth (%)
EBITDA (Rs mn)
PAT (Rs mn)
FDEPS (Rs)
FDEPS Growth (%)
(Rs mn)
FY09E
FY10E
FY11E
FY09E
FY10E
FY11E
FY09E
FY10E
FY11E
FY09E
FY10E
FY11E
FY09E
FY10E
FY11E
FY09E
FY10E
FY11E
Ahluwalia Cont
169
190
Buy
10,604
12,087
14,444
19,673
37.3
19.5
36.2
1,429
1,808
2,439
572
796
1,102
9.1
12.7
17.6
10.8
39.2
38.4
HCC
130
141
Hold
39,468
33,137
41,091
49,309
7.5
24.0
20.0
4,314
5,154
6,163
760
1,074
1,443
2.8
3.5
4.5
5.0
25.2
29.4
IRB Infra*
209
224
Buy
69,464
8,834
18,693
32,940
20.6
111.6
76.2
3,289
8,564
11,610
1,197
3,432
4,504
3.6
10.3
13.6
(13.8)
186.7
31.2
IVRCL
388
434
Buy
51,804
48,819
63,465
76,157
33.4
30.0
20.0
4,218
5,873
7,099
1,880
2,564
3,044
13.9
19.0
22.6
0.6
36.4
18.7
335,651
57,750
91,167
105,623
44.9
57.9
15.9
16,200
24,804
27,482
8,891
13,746
15,840
7.1
9.4
10.8
45.4
31.6
15.2
978,520 339,264 401,887
502,079
35.7
18.5
24.9
38,342
45,490
56,559
27,097
32,610
40,373
46.4
55.9
69.2
24.1
20.4
23.8
239
237
Hold
L&T
1665
1,781
Buy
NCC
153
166
Hold
39,206
41,514
47,326
56,791
19.5
14.0
20.0
3,733
4,492
5,391
1,538
1,942
2,412
6.7
7.9
9.4
(10.1)
17.9
18.6
Patel Engg
484
532
Buy
28,860
17,774
21,951
27,220
34.2
23.5
24.0
2,576
3,205
4,001
1,053
1,271
1,612
17.6
21.3
27.0
(2.2)
20.8
26.8
Punj Lloyd*
262
306
Buy
86,927 119,120 132,234
154,470
53.6
11.0
16.8
8,710
11,240
13,130
2,348
4,972
6,044
7.5
15.1
17.8
(33.2)
99.8
18.2
Simplex Infra
510
577
Buy
25,248
46,961
55,414
66,496
67.2
18.0
20.0
3,873
5,153
6,184
1,242
1,585
2,038
25.1
32.0
41.2
23.9
27.7
28.6
Voltas*
145
160
Hold
47,929
43,259
51,289
59,372
35.1
18.6
15.8
2,831
3,642
4,510
2,254
2,677
3,304
6.8
8.1
10.0
28.0
18.8
23.4
Aggregate
-
1,713,681 768,519 938,960 1,150,130
37
22
22
89,515 119,424 144,569
48,830
66,669
81,714
JP Associates
Source: RHH
-
-
*Consolidated
Fig 52 - Infrastructure sector profitability and return ratios Company
EBITDA Margin (%)
PAT Margin (%)
ROE (%)
ROCE (%)
P/E (x)
EV/EBITDA (x)
P/BV (x)
FY09E
FY10E
FY11E
FY09E
FY10E
FY11E
FY09E
FY10E
FY11E
FY09E
FY10E
FY11E
FY09E
FY10E
FY11E
FY09E
FY10E
FY11E
FY09E
FY10E
Ahluwalia Cont
11.8
12.5
12.4
4.7
5.5
5.6
37.9
37.2
36.2
31.4
30.8
29.4
18.5
13.3
9.6
7.0
5.5
4.1
6.0
4.2
3.0
HCC
13.0
12.5
12.5
2.3
2.6
2.9
7.6
8.4
9.0
7.0
7.3
7.6
47.0
37.5
29.0
14.2
11.9
9.9
3.9
2.5
2.4
IRB Infra*
37.2
45.8
35.2
13.5
18.4
13.7
7.1
18.1
19.7
5.9
11.6
11.9
58.0
20.2
15.4
27.4
10.5
7.8
4.0
3.4
2.8
8.6
9.3
9.3
3.9
4.0
4.0
11.0
13.8
15.0
12.0
11.8
12.3
27.9
20.4
17.2
15.4
11.0
9.1
2.9
2.7
2.4
IVRCL
FY11E
JP Associates
28.1
27.2
26.0
15.4
15.1
15.0
17.2
21.5
20.5
9.0
11.2
11.2
33.5
25.5
22.1
25.4
16.6
15.0
5.8
4.8
4.0
L&T
11.3
11.3
11.3
8.0
8.1
8.0
24.6
23.8
24.6
18.5
17.2
18.2
35.9
29.8
24.1
27.0
22.8
18.3
7.9
6.6
5.5
NCC
9.0
9.5
9.5
3.7
4.1
4.2
9.4
10.0
10.6
9.8
9.9
9.7
22.7
19.3
16.2
13.5
11.2
9.3
2.3
1.8
1.7
14.5
14.6
14.7
5.9
5.8
5.9
11.5
12.3
13.8
10.3
9.2
9.8
27.4
22.7
17.9
14.6
11.7
9.4
2.9
2.6
2.3
Punj Lloyd*
7.3
8.5
8.5
2.0
3.8
3.9
9.0
16.4
15.8
10.8
11.6
12.2
34.7
17.4
14.7
13.1
10.2
8.7
3.5
2.4
2.1
Simplex Infra
8.2
9.3
9.3
2.6
2.9
3.1
14.9
16.3
18.0
13.9
12.0
8.5
20.3
15.9
12.4
9.4
7.0
5.9
2.8
2.4
2.1
32.9
29.9
29.2
28.6
26.3
26.9
21.3
17.9
14.5
16.0
12.4
10.0
6.1
4.8
3.8
35.1
25.7
21.0
21.9
16.4
13.5
5.8
4.7
4.0
Patel Engg
Voltas Aggregate
6.5
7.1
7.6
5.2
5.2
5.6
11.6
12.7
12.6
6.4
7.1
7.1
Source: RHH, Company
22
Infrastructure
Sector Report
05 October 2009
Fig 53 - Infrastructure sector valuation matrix (excluding subsidiaries) Company Ahluwalia Cont HCC
CMP (Exsub) (Rs)
Sub. Val (Rs)
Target (Rs)
Reco
MCap (Ex Sub) (Rs mn)
Sales (Rs mn) FY09E
FY10E
Sales Growth (%) FY11E
FY09E
FY10E
EBITDA (Rs mn)
FY11E
FY09E
PAT (Rs mn)
FY10E
FY11E
FY09E
FDEPS (Rs)
FY10E
FDEPS Growth (%)
FY11E
FY09E
FY10E
FY11E
FY09E
FY10E
FY11E
169
-
190
Buy
10604.2
12,087
14,444
19,673
37.3
19.5
36.2
1,429
1,808
2,439
572
796
1,102
9.1
12.7
17.6
10.8
39.2
38.4
52
78
141
Hold
15906.1
33,137
41,091
49,309
7.5
24.0
20.0
4,314
5,154
6,163
760
1,074
1,443
2.8
3.5
4.5
5.0
25.2
29.4
IRB Infra*
209
-
224
Buy
69464.1
8,834
18,693
32,940
20.6
111.6
76.2
3,289
8,564
11,610
1,197
3,432
4,504
3.6
10.3
13.6
(13.8)
186.7
31.2
IVRCL JP Associates L&T
315
73
434
Buy
42029.5
48,819
63,465
76,157
33.4
30.0
20.0
4,218
5,873
7,099
1,880
2,564
3,044
13.9
19.0
22.6
0.6
36.4
18.7
163
76
237
Hold
229095.1
57,750
91,167
105,623
44.9
57.9
15.9
16,200
24,804
27,482
8,891
13,746
15,840
7.1
9.4
10.8
45.4
31.6
15.2
1475
190
1,781
Buy
866722.5
339,264
401,887
502,079
35.7
18.5
24.9
38,342
45,490
56,559
27,097
32,610
40,373
46.4
55.9
69.2
24.1
20.4
23.8
NCC
119
34
166
Hold
30461.9
41,514
47,326
56,791
19.5
14.0
20.0
3,733
4,492
5,391
1,538
1,942
2,412
6.7
7.9
9.4
(10.1)
17.9
18.6
Patel Engg
330
154
532
Buy
19694.7
17,774
21,951
27,220
34.2
23.5
24.0
2,576
3,205
4,001
1,053
1,271
1,612
17.6
21.3
27.0
(2.2)
20.8
26.8
Punj Lloyd* Simplex Infra Voltas
241
21
306
Buy
80027.2
119,120
132,234
154,470
53.6
11.0
16.8
8,710
11,240
13,130
2,348
4,972
6,044
7.5
15.1
17.8
(33.2)
99.8
18.2
510
-
577
Buy
25248.0
46,961
55,414
66,496
67.2
18.0
20.0
3,873
5,153
6,184
1,242
1,585
2,038
25.1
32.0
41.2
23.9
27.7
28.6
145
-
160
Hold
47928.7
43,259
51,289
59,372
35.1
18.6
15.8
2,831
3,642
4,510
2,254
2,677
3,304
6.8
8.1
10.0
28.0
18.8
23.4
-
-
1,437,182
768,519
938,960 1,150,130
37
22
22
89,515 119,424
144,569
48,830
66,669
81,714
Aggregate Source: RHH
*Consolidated
Fig 54 - Infrastructure sector profitability and return ratios (excluding subsidiaries) Company
EBITDA Margin (%)
PAT Margin (%)
ROE (%)
ROCE (%)
P/E (x)
EV/EBITDA (x)
P/BV (x)
FY09E
FY10E
FY11E
FY09E
FY10E
FY11E
FY09E
FY10E
FY11E
FY09E
FY10E
FY11E
FY09E
FY10E
FY11E
FY09E
FY10E
FY11E
FY09E
FY10E
FY11E
Ahluwalia Cont
11.8
12.5
12.4
4.7
5.5
5.6
37.9
37.2
36.2
31.4
30.8
29.4
18.5
13.3
9.6
7.0
5.5
4.1
6.0
4.2
3.0
HCC
13.0
12.5
12.5
2.3
2.6
2.9
7.6
8.4
9.0
7.0
7.3
7.6
18.9
15.1
11.7
8.7
7.3
6.1
1.6
1.0
1.0
IRB Infra*
37.2
45.8
35.2
13.5
18.4
13.7
7.1
18.1
19.7
5.9
11.6
11.9
58.0
20.2
15.4
27.4
10.5
7.8
4.0
3.4
2.8
8.6
9.3
9.3
3.9
4.0
4.0
11.0
13.8
15.0
12.0
11.8
12.3
22.6
16.6
14.0
13.0
9.4
7.7
2.3
2.2
1.9
IVRCL JP Associates
28.1
27.2
26.0
15.4
15.1
15.0
17.2
21.5
20.5
9.0
11.2
11.2
22.9
17.4
15.1
18.8
12.3
11.1
4.0
3.3
2.7
L&T
11.3
11.3
11.3
8.0
8.1
8.0
24.6
23.8
24.6
18.5
17.2
18.2
31.8
26.4
21.3
24.1
20.3
16.3
7.0
5.8
4.8
NCC
9.0
9.5
9.5
3.7
4.1
4.2
9.4
10.0
10.6
9.8
9.9
9.7
17.7
15.0
12.6
11.1
9.2
7.7
1.8
1.4
1.3
14.5
14.6
14.7
5.9
5.8
5.9
11.5
12.3
13.8
10.3
9.2
9.8
18.7
15.5
12.2
11.0
8.8
7.1
2.0
1.8
1.6
Punj Lloyd*
7.3
8.5
8.5
2.0
3.8
3.9
9.0
16.4
15.8
10.8
11.6
12.2
32.0
16.0
13.5
12.3
9.6
8.2
3.2
2.2
2.0
Simplex Infra
8.2
9.3
9.3
2.6
2.9
3.1
14.9
16.3
18.0
13.9
12.0
8.5
20.3
15.9
12.4
9.4
7.0
5.9
2.8
2.4
2.1
32.9
29.9
29.2
28.6
26.3
26.9
21.3
17.9
14.5
16.0
12.4
10.0
6.1
4.8
3.8
29.4
21.6
17.6
18.8
14.1
11.6
4.8
3.9
3.3
Patel Engg
Voltas* Aggregate Source: RHH, Company
6.5
7.1
7.6
5.2
5.2
5.6
11.6
12.7
12.6
6.4
7.1
7.1
*Consolidated
23
Infrastructure
Sector Report
05 October 2009
Sector-wise investment allocation Infrastructure development is expected to garner a total investment of Rs 20,562bn over the 11th Plan, of which ~30% is likely to come from private participation. The sectorwise investment allocation is outlined below.
Roads & Bridges Road contract awards under NHDP picking up pace
As per the Economic Survey report 2008–09, out of the total length of national highways, ~30% are single-lane/intermediate-lane, 53% are two-lane and the remaining 17% are four-lanes or more. Though national highways comprise only ~2% of the total length of roads in India, they account for 40% of the aggregate traffic. As of 31 March 2009, work on 11,037km of national highways under the government-led National Highway Development Programme (NHDP) has been completed – a bulk of this comprises the Golden Quadrilateral (GQ) which connects the four metros.
Fig 55 - Status of NHDP phases as on 31 March 2009 Total length
Completed 4-lane
5,846
5,721
Under implementation 125
Port connectivity
380
206
168
6
Other NHs
962
781
161
20
7,142
3,436
2,915
791
12,109
787
1,878
9,444
6,500
106
928
5,470
Phase
NHDP component (km)
I
GQ Phase
I I II
NS-EW
III
NHDP –III
V
NHDP
VII
NHDP Total
Balance for award of civil works -
700
0
19
681
33,639
11,037
6,194
16,412
Source: Economic Survey Report 2008-09
We recently held a conference call with Dr. Didar Singh, IAS, Member (Finance) – NHAI, to discuss the road sector in India. Outlined below are the key takeaways:
Project awards for 32,000km over next 3–4 years Started in 2001, the government’s NHDP aims to complete 53,000km of road development in India by 2017; of this, 20,000km is being implemented by the Ministry of Road Transport and Highways (MORTH). So far, work on ~11,000km has been completed, while ~7,000km is under implementation. The government aims to put the balance 32,000km of projects out for bidding over the next four years. The overall project cost has been revised from ~Rs 2,200bn estimated in the first financing plan in 2005 to ~Rs 3,300bn; of this, ~Rs 2,000bn worth of investment is expected from the private sector.
Bid placement for 80–100 projects targeted in FY10 The NHAI plans to invite bids for 80–100 projects in FY10 and a similar number of works in FY11. The authority has awarded 13 projects (~1,200km) worth Rs 143.5bn so far in FY10, and has received bids for a further 11 works; these are currently under examination and will be awarded shortly. At present, the Request for Qualification (RFQ) procedure for an additional 50 projects (~4,600km) worth Rs 205bn is underway.
24
Infrastructure
Sector Report
05 October 2009
Fig 56 - Projected investment in roads and bridges during the 11th Plan 2007-08
2008-09
2009-10
2010-11
2011-12
Total 11th Plan
National Highways
233
247
271
325
383
1,459
NHDP Public
101
105
110
123
152
591
Particulars (Rs bn at 2006-07 prices)
Other NH (Public)
12
13
14
15
16
69
NHDP Private
120
129
147
188
215
798
State Roads (Highways, major District Roads, Others)
215
224
238
270
322
1,270
Public
175
182
189
206
248
1,000
Private
40
43
49
64
74
270
Rural Roads: Bharat Nirman
63
69
73
78
83
366
North East Roads: SARDP
7
8
10
11
12
48
Total (Rs bn)
518
548
592
684
800
3,142
Total (US$ bn)
13.0
13.7
14.8
17.1
20.0
78.5
Source: Planning commission
Fig 57 - Comparative investment projections Roads (Rs bn)
10th Plan (anticipated)
11th Plan
Log-linear projection
Working group estimates
Centre
715
1,074
NA
NA
State
664
1,000
NA
NA
Public
1,379
2,074
2,502
1,218
Private
70
1,068
63
877
1,449
3,142
2,565
2,095
Total
Source: Plan document, Planning Commissio, RHH
Planned investment of Rs 3,142bn in roads
Road sector investment pegged at Rs 3,142bn – private share at 34% The investment in roads during the 11th Plan is projected at Rs 3,142bn, which is 2.2 times the targeted 10th Plan investment. Of this, ~66% will be contributed by the Centre and state governments, while 34% is expected from the private sector (as against 5% in the 10th Plan, depicting immense opportunities for private developers). Approximately Rs 1,459bn (46.4%) would be invested in national highways, Rs 1,270bn (40.4%) in state roads, Rs 366bn (11.6%) in rural roads, and Rs 48bn (1.5%) in roads in the northeast states. For the year 2009–10, allocation to the National Highway Authority of India (NHAI) has been increased by 23% from Rs 129bn to Rs 159bn. Fig 58 - Financial structure of NHAI Cess funds
External assistance
1999-00
10
4
-
-
-
-
14
2000-01
18
5
1
6
-
-
30
2001-02
21
8
1
8
-
-
38
2002-03
20
12
3
56
-
3
94
2003-04
20
12
3
-
-
4
38
2004-05
18
12
4
13
-
5
52
2005-06
33
24
6
15
14
8
100
2006-07
64
16
4
15
1
11
111
2007-08
65
18
4
20
2
14
123
2008-09
70
15
4
11
2
18*
119
339
126
29
144
19
62
719
(Rs bn)
Total Source: Crisil Research
Loans
Borrowings
Budgetary support
Toll collection
Total
*Crisil Estimates
25
Infrastructure
Sector Report
Slump in FY09 with bids received for only 22 of 60 projects; of these just 7 awarded
05 October 2009
FY09 – a slump year The NHAI had planned to allot 60 projects worth Rs 700bn, largely belonging to NHDP phase-III, in FY09. It called bids for ~50 projects, but received a positive response for only 22 works valued at ~Rs 220bn. Of these 22 projects, 7 contracts worth Rs 80bn have been awarded so far. The remaining 15 projects has been referred back to the government for approval since 7 of them are single-company bids, 4 are annuity bids as against the toll bid stipulation, and 4 pertain to phase V of the NHDP where the VGF is higher than 10%. The balance 38 projects failed to attract any bids since developers perceived the investment as being incommensurate with the expected returns. The NHAI has thus failed to award even a single contract to private players in FY09 for widening of highway stretches on Phase V of the Golden Quadrilateral project. In Q1FY10, the pace of project awards slowed due to the pre-poll embargo, but post the election outcome, the process of project bidding and awards has begun in full earnest. Slowdown in tenders due to multiple reasons Since January ’08, the pace of contract tenders under the government’s NHDP has slowed considerably. The key reasons behind the delays are as follows:
Financial crisis and heavy interest costs
Meltdown in the financial market and the credit crisis.
led to waning interest among private sector developers
High interest costs (increased to ~15% in the third quarter of FY09); projects are funded with debt to the extent of 70–75%.
Disputes relating to finalisation of the new MCA and issues with RFP and RFQ procedures.
Overly high risk perception leading to higher VGF demands by private players.
Delays in terms of land acquisition and environmental clearances. Project cost has increased by 40% from Rs 900bn to Rs 1,300bn due to delays for some projects.
Poor project preparation (including inaccurate assessment of demand), leading to frequent scope for changes.
Absence of a long-term bond market, which hinders financing. Currently 97% of the bond market is through G-secs.
Policy measures to revitalise developer interest In a bid to encourage developer interest in road projects, the NHAI and the government have recently introduced a host of facilitating measures as follows: NHAI to restructure future road projects to make them viable
The NHAI has decided to restructure future projects (including the 38 remaining works) by reducing ‘capital cost’ and by eliminating ‘over-engineering cost’ in order to make them viable, and then offering the same under the BOT toll model. According to media reports, it has also proposed to reduce the design period from 20 years to 10 or 15 years. Also, some projects will be awarded under the annuity mode if the BOT toll mode fails to generate interest.
Cost escalation of 20% will now be permitted for projects with DPRs (detailed project report) prepared before 2007 and 10% for those based on 2007 prices.
VGF has been raised to 40% of the project cost during the construction period as against the earlier distribution of 20% during the construction period and 20% post the commercial operation date (COD).
The clause limiting the number of bidders to 6 has been deleted for all future NHAI projects. Hence, all future projects except the above 60 would be under the open bidding system.
26
Infrastructure
Sector Report
Road development in terms of kilometres added per day
(Km) 6
4.9
5
4.6
4.3
4 3 2 1
2.0 0.4
1.0
2009
2008
2007
1992
1997
1962
0
Source: Planning commission
Refinance option may be extended for projects bid in 2008 as well
05 October 2009
Under the government stimulus package, IIFCL has been authorised to raise Rs 400bn (Rs 100bn by FY09 and Rs 300bn in FY10) to finance infrastructure projects. It has successfully raised Rs 100bn through the issue of bonds which will be used to finance projects at an interest of ~10.35%. This will substantially reduce borrowing costs.
The NHAI has launched tax-free bonds on 11 May 2009 to raise up to Rs 40bn in the current fiscal to fund its road projects.
The government has implemented a new toll policy in December ’08 for future projects. It stipulates that the upward revision of annual toll rates would be 3% in addition to 40% of the change in the wholesale price index (WPI). As per the old policy (1997), the revision of toll rates was fixed at 100% of the change in WPI, and as per MCA-2006, applicable in 2008, the percentage was 40%. This policy change will generate greater interest from developers for future projects as it will increase the equity IRR.
The NHAI has recently amended the land acquisition norms for road projects – a key contributor to execution delays in the past. As per the new guidelines, the authority will now issue letters of award to highway developers only after acquiring 80% of the land required for the project (50% previously). The balance 20% would be handed over within 90 days of the project award. If the stipulated timeline is not adhered to, the NHAI will pay damages to the concessionaire.
Government sets aggressive development targets… Road transport and highways minister, Kamal Nath, has stated that the government aims to build at least 20km of highways per day and is also mulling the set up of an Indian Road Finance Corp to mobilise funds for the highways sector. In order to generate easier access to liquidity, Mr Kamal Nath has hosted road-shows to attract the interest of financial institutions. These measures together with the softening interest rate regime should induce a more positive response towards projects that will be placed for bids in the near term. The government has approved 1,000km of expressways to be developed on BOT basis, at an indicative cost of Rs 166.8bn, scheduled to complete by December ’15. These expressways would be constructed on new alignments. A feasibility study for the Vadodara-Mumbai (400km) expressway has already been awarded and the process of alignment study and award of feasibility studies for another 600km of expressways (Kolkata-Dhanbad, Bangalore-Chennai and Delhi-Meerut) has also been initiated. Recently, Mr Kamal Nath said that the Ministry is examining the possibility of setting up an expressway authority on the lines of the NHAI. …with steps to bolster liquidity The government’s first stimulus package in December ’08 authorised IIFCL to raise Rs 100bn through tax-free bonds to refinance projects bid on or after 31 January 2009 in the road and port sectors. But IIFCL has been unable to disburse most of the funds as projects take a long time to bid out. For instance, although bids have been invited for nearly 40 highway projects post January ’09, none of these have been awarded so far. The finance ministry is thus considering a proposal to remove the cut-off date criteria, which may bring in the refinance option for projects bid in 2008 as well. IIFCL has disbursed Rs 32bn till March ’09 and has plans to disburse Rs 60bn in this fiscal (excluding disbursement under the refinance scheme).
27
Infrastructure
Sector Report
Take-out financing shores up banking
05 October 2009
The 2009–10 Budget authorises IIFCL to participate in take-out financing and to refinance 60% of bank loans given to projects developed via PPP. Under take-out financing, an institution buys out long-term project loans after a few years of disbursal of such loans. Under the existing refinance scheme, IIFCL can refinance up to 60% of loans provided by banks to infrastructure projects in the roads and port sectors at 7.85%. Banks can then charge a spread of up to 250bps above this, i.e., the bank’s lending rate to the developer will not exceed 10.35%. The refinance tenor is 10 years with a reset after 5 years, though this can be extended to 15 years with government approval. The takeout financing scheme, which is also a form of refinance, will draw upon the structure of the existing scheme.
sector resources to fund infra development
Significant project awards likely in H2FY10 At present, there are 38 projects worth Rs 423.3bn which will be up for bidding in FY10 (ref Fig 60). The tempo of project awards is set to gather speed in H2FY10 as developer interest revives on the back of an improving economic environment, stable governance, softening interest rates and commodity prices, and positive policy shifts as outlined earlier. We believe that IRB Infrastructure, L&T, IVRCL and Hindustan Construction Co would be among the key beneficiaries in the near future.
IRB, L&T, IVRCL and HCC to be the key beneficiaries of new contract awards
Fig 59 - PPP projects awarded during FY09 & FY10; bids under process for FY10 SN
Length (km)
TPC (Rs bn)
NHDP Phase
No. of bids received
Maharashtra
60
9.4
III
MP/Maharashtraborder-Dhule
Maharashtra
97
8.4
Pune-Sholapur (pkg-1)
Maharashtra
110
Gujarat AP
Name
State
1
Pimpalgaon-Nasik-Gonde
2 3 4 5 6 7 8
Gujarat/ MH Border-SuratHazira Cuddapah-Mydukur-Kumool Vadakkancherry-Thrissur Elevated Road from Chennai Port to Muduravoyal Kishangarh-Beawar
Kerala
Status
Name of Awardees / L1 bidder
3
Awarded
L&T-ABL consortium
III
4
Awarded
11.1
III
2
133
15.1
III
2
188
15.9
III
2
Awarded
KMC-IVRCL consortium
2
Awarded
KMC-CR18 consortium
30
6.2
II
Awarded Awarded
Awarded
19
13.5
VII
2
Rajasthan
94
8.0
III
4
Awarded
Isolusx-SOMA consortium GMR-Punj Lloyd consortium Navyuga-KPCL consortium
9
Hyderabad-Vijaywada
AP
181
17.4
III
5
10
Armur-Adloor Yellareddy
AP
60
4.9
II
2
Awarded
11
Hazaribagh-Ranchi*
Jharkhand
71
6.3
III
2
12
Kannur-Kuttipuram -Pkg 1
Kerala
83
13.7
III
2
13
Kannur-Kuttipuram -Pkg 2
Kerala
82
13.1
III
2
14
Amritsar-Pathankot
Punjab
102
7.1
III
2
16
Goa/KNT Border-Panji
Goa
65
4.7
III
2
17
Jaipur-Tonk-Deoli
Rajasthan
149
11.8
III
2
19
Talegaon-Amravati
Maharashtra
67
5.7
III
2
18
Pune-Sholapur -Pkg 2
Maharashtra
110
8.4
III
3
15
Ghaziabad-Aligarh
Uttar Pradesh
126
11.4
III
2
1,827
192
Total
Isolusx-SOMA consortium
Tamil Nadu
Awarded
Source: NHAI, RHH
HCC-John Laing-Sadbhav consortium Navinya-Buildcon-Atlantia Spa consortium
Bids under process Bids under process Bids under process Bids under evaluation Bids under evaluation Bids under evaluation Bids under evaluation Bids under evaluation Bids under evaluation
SOMA Enterprises
IRB Infra L1 - IRB Infra L1 - IRB Infra L1 - IRB Infra
* Annuity project
28
Infrastructure
Sector Report
05 October 2009
Fig 60 - PPP projects for which bidding process will be initiated during FY10 Sr. No.
Section
State
1
Hyderabad-Yadgiri
Andhra Pradesh
NH. No.
Length (km)
TPC (Rs bn)
202
36
5.2
2
Parwanoo-Solan
Himachal Pradesh
22
41
5.4
3 4
Bijapur-Hundud
Karnataka
13
97
9.1
Hungud – Hospet
Karnataka
13
98
12.3
5
Muradabad – Bareilly
Uttar Pradesh
24
121
14.9
6
Maharashtra/Goa border-Panaji Goa/KNT Border
Goa
17
123
20.8
7
Rohtak-Panipat
Haryana
71A
81
8.1
8
Bareilly-Sitapur
Uttar Pradesh
24
152
10.5
9
Rohtak-Bawal
Haryana
71
83
6.7
10
Ahmedabad-Godhra
Gujarat
59
118
10.3
11
Godhra-Gujarat/MP Border
Gujarat
59
84
7.5
12
Kandla-Mundra Port
Gujarat
8A Ext.
71
10.3
13
Muzaffarnagar-Haridwar*
Uttar Pradesh/Uttarakhand
58
80
8.0
14
Haridwar-Dehradun
Uttarakhand
58/72
37
4.9
15
Barasat-Krishnagar
West Bengal
34
84
8.9
16
Krishnagar-Bahrampore
West Bengal
34
78
6.9
17
Bahrampore-Farakka
West Bengal
34
101
10.0
18
Farakka-Raiganj
West Bengal
34
103
11.4
19
Raiganj-Dalkhola
West Bengal
34
50
5.6
20
Indore-Gujarat/MP Border
Madhya Pradesh
59
155
13.0
21
Belgaum-Goa/KNT Border
Karnataka
4A
82
6.6
22
Karnataka/AP Border-Mulgabal
Karnataka
4
22
2.6
23
Ranchi-Jamshedpur
Jharkhand
33
164
14.4
24
Kishangarh-Udaiapur
Rajasthan
76, 79 & 79A
315
25.3
25
Krishnagiri-Walajahpet
Tamil Nadu
46
148
12.5
26
Udaipur-Ahmedabad
Rajasthan
8
235
17.5
27
Pune-Satara
Maharashtra
4
145
17.3
28
Samakhiyali-Gandhidham
Gujarat
8A
56
8.1
29
Tumkur-Chitradurga
Karnataka
4
114
8.4
30
Satara-Kagal
Maharashtra
4
133
11.0
31
Srinagar to Banihal Section
Jammu & Kashmir
1A
99
12.0
32
Quazigund – Banihal
Jammu & Kashmir
1A
15
19.9
33
Ramban-Banihal
Jammu & Kashmir
1A
36
9.9
34
Udhampur-Ramban
Jammu & Kashmir
1A
43
9.7
35
Chenani-Nashri
Jammu & Kashmir
1A
12
25.8
36
Jammu-Udhampur
Jammu & Kashmir
1A
65
17.7
37
Chengapalli-Walayar
Tamil Nadu
47
55
8.5
38
Hyderabad-Bangalore (Km 534.72-Km 556.84)
Tamil Nadu
7
Total Source: NHAI, RHH
22
6.8
3,554
423.3
*Proposed annuity project
29
Infrastructure
Sector Report
05 October 2009
Electricity India is among the world’s largest power producing and consuming nations, with a total generation capacity of 150,323MW as on June ’09. The Ministry of Power has projected an annual growth of 9% in electricity demand over the 11th plan period and has thus set itself a target of augmenting India’s capacity by 78,700MW. Barring the first few five year plans, the actual capacity addition has been dismal – during the 10th plan, only 52% of the targeted additions were met. We anticipate significant incremental demand from the manufacturing sector and from rural electrification, as per the government’s mission of “Power for all” by 2012.
India’s total power generation capacity at 150,323MW
Fig 61 - Cumulative capacity over 6th to 11th plans (GW) 250
Capacity
Fig 62 - Target and achievements over last 10 five year plans (%) 70
Growth (R)
60
200
50
150
40
100
30 20
50
10 0
0 6th
7th
8th
9th
10th
11th
Source: CEA
(GW) Target Achieved 45 40 35 30 25 20 15 10 5 0 1st 2nd 3rd 4th 5th 6th
Achieved (R)
(%) 100 90 80 70 60 50 40
7th
8th
9th 10th
Source: CEA
Severe demand–supply mismatch India has been facing a demand–supply mismatch not just at peak demand level but also at the base level. With healthy economic growth expected to continue over the next few years, infrastructure augmentation especially in the power sector is imperative. Fig 63 - Historical energy demand-supply position in India (BUs)
Energy Demand
800
Energy Deficit
Fig 64 - Historical peak demand-supply position in India
(%)
(GW)
12.0
120
11.0
100
500
10.0
80
400
9.0
60
14
300
8.0
40
13
7.0
20
6.0
0
Energy Met
700 600
200 100 0 FY03
FY04
FY05
FY06
Source: CEA
India has one of the lowest per capita consumption rates of power
FY07
FY08
FY09
Peak Demand Peak Deficit (R)
Peak Met
(%) 18 17 16 15
12 11 10 FY03
FY04
FY05
FY06
FY07
FY08
FY09
Source: CEA
At 704.2kWh, India has one of the lowest per capita consumption rates of electricity. The government has a target of achieving per capita consumption of 1,000Kwh by 2012. Within the country itself, there is a huge disparity with respect to per capita consumption of power. According to the 2005–06 data, in states like Goa and Delhi, per capita consumption is as high as 1,970.1kWh and 1,766.9kWh respectively while in states like Bihar and Assam this drops to 85.9kWh and 170.7kWh respectively.
30
Infrastructure
Sector Report
05 October 2009
32% of infra spending earmarked for power sector Power is clearly the focus area of the government with ~32% of budgeted infrastructure spending being earmarked for the sector. The planned outlay for power has been doubled in the 11th plan period to Rs 6,665bn, with the Centre expected to contribute 38.3% and states 33.9%.
Power accounts for ~32% of budgeted infrastructure spending
Fig 65 - Anticipated public and private investment in electricity (incl. NCE) during the 10th and 11th Plans Year (Rs bn) Centre
Total 10th Plan (Anticipated)
Share (%)
2007-08
2008-09
2009-10
2010-11
2011-12
Total 11th Plan
Share (%)
1,025
35.1
378
435
500
576
664
2,553
38.3
976
33.4
210
297
414
567
770
2,257
33.9
918
31.5
232
284
350
437
552
1,855
27.8
2919
100.0
820
1,016
1,264
1,580
1,986
6,665
100.0
States Private Total Source: Planning Commission
Fig 66 - Comparative investment projections th
11 plan spend on power sector to be 2.3x 10th plan spending
10th Plan (anticipated)
Electricity (Rs bn) Centre State
11th Plan
Log-linear projection
Working group estimates
1,025
2,553
NA
2,994
976
2,257
NA
5,142
Public
2,001
4,810
2,876
8,136
Private
918
1,855
1,729
2,180
2,919
6,665
4,605
10,316
Total
Source: Plan Document, Planning Commission, RHH
Summary of capacity addition in 11th Plan Particulars
MW
Generation capacity at end of 10th Plan
132,329
Capacity added in FY08
9,263
Capacity added in FY09
3,454
Capacity added till July ’09 in FY10 Capacity addition in 11th Plan (till July ’09) Total capacity at end of July ’09 Source: CEA, RHH
3,108 15,825 151,073*
* Includes captive power projects
Capacity addition rate to outpace past plans India has been slow to augment generation capacity with an average addition rate of 5.6% per year during the past three plan periods. Further, only 51% of the targeted additions have been made during these plans, at 56,618MW against the goal of 111,893MW. The current plan envisages fresh capacity of 78.7GW. We expect the achievement run rate to be higher this time around given that over 80GW of power projects are already under implementation. We peg additions at 60–65GW, which would be the highest during any plan period. The ambitious Ultra Mega Power Projects (UMPP) will mainly contribute towards capacity addition in the 12th plan. Progress visible in FY10 Power generation capacity at the end of 10th plan stood at 132,329MW. Thereafter, 9,263MW and 3,454MW were added in FY08 and FY09 respectively (57% and 31% of targets). However, during the first four months of FY10, net fresh capacity has been higher at 3,108MW. T&D to get a concurrent boost To support the increasing generation capacity, the government is also looking to supplement the country’s transmission network from ~20GW to ~38GW. It aims to curb T&D losses across the country and has adopted a revised APDRP to aid this effort.
Fig 67 - Activity-wise investment in electricity during the 11th Plan Activity (Rs bn) Centre States
Generation
Transmission
Distribution
Total 11th Plan
1,440
616
497
2,553
915
448
893
2,257
Private
1,418
340
97
1,855
Total
3,773
1,404
1,488
6,665
Source: Planning Commission
31
Infrastructure
Sector Report
Bulk tenders worth Rs 210bn being placed by the government
05 October 2009
NTPC to award bulk tenders for supercritical equipment (660MWx11) Thermal power capacity addition is set to witness a structural shift from subcritical to supercritical technology. The government is leading this shift with bulk order tenders for 7,260MW (11x660MW) of supercritical sets for NTPC and DVC. In all, this clutch of orders would be worth ~Rs 210bn. Chinese companies have secured 60% of the supercritical unit orders placed so far. In order to reverse this trend, the government has made domestic manufacturing a mandatory qualification for participation in bulk tenders of NTPC. Accordingly, a number of foreign entities have tied up with domestic partners to become eligible for bulk tenders. Fig 68 - Capacity augmentation in supercritical BTG space Company / JV BHEL L&T / Mitsubishi Heavy Industries Bharat Forge–Alstom JSW – Toshiba GB Engineering – Ansaldo Total
Boiler (MW)
Turbine (MW)
10,000
10,000
4,000
4,000
-
5,000
-
3,000
2,000
-
16,000
22,000
Source: Infraline, RHH
32
Infrastructure
Sector Report
05 October 2009
Railways Planned investment of Rs 2,618bn in th
railways – 2x 10 plan expenditure
The Indian Railways (IR) holds the distinction of being the world’s second largest rail network under a single management and the principal mode of transportation for bulk freight and long distance passenger traffic, with a total route length of 63,221km. Public investment in the IR is projected at Rs 2,346bn during the 11th Plan. An additional Rs 272bn is likely to be invested in a Mass Rapid Transport System (MRTS – metro rail), of which Rs 72bn would be contributed by the Centre and Rs 100bn each by the states and private sector. The total investment of Rs 2,618bn is twice the anticipated 10th plan expenditure.
Fig 69 - Projected investment in railways during the 11th Plan Particulars (Rs bn at 2006-07 prices)
2009-10
2010-11
2011-12
Total 11th Plan
Share (%)
78
90
103
119
457
17.5
85
110
143
185
589
22.5
-
-
-
-
-
-
-
2007-08
2008-09
Rolling stock*
68
Capacity augmentation
66
and development Safety and other works
139
161
186
216
250
951
36.3
Investment in PSUs
16
17
19
20
22
94
3.6
Dedicated freight corridors
11
20
37
63
123
255
9.7
Metro Rail Projects
43
48
54
59
68
272
10.4
342
410
495
604
767
2,618
100.0
Total Source: Planning commission
* CSO and Ministry of Railways both account for rolling stock in infrastructure
Fig 70 - Comparative investment projections 10th Plan (anticipated)
11th Plan
Log-linear projection
Working group estimates
1,090
2,015
NA
NA
104
100
NA
NA
Public
1,194
2,115
2,367
2,540
Private
3
504
5
660
1,197
2,619
2,372
3,200
Railways (Including MRTS) (Rs bn) Centre State
Total Source: Plan Document, RHH
Private investment in railway sector pegged at Rs 504bn (20%)
It is assumed that ~17.2% of railway investment will come through PPPs. Thus, of the total investment of Rs 2,346bn in the IR, ~Rs 1,933bn will be invested by the public sector and Rs 504bn by private players. Including the projected investment of Rs 100bn in metro rail projects, the overall private investment in the sector comes to Rs 504bn (i.e. ~20% of the total). Fig 71 - Railway opportunities
Railway development opportunities Particulars (Rs bn) Indian railways RVNL
Construction contracting
Project development
1,600
600
70
35
DRFC
250
120
Metro
303
120
60
60
Private rail
Source: Working group report on Eleventh five year plan, Metro Authorities, DMRC, RVNL, DFCCIL, RHH
Source: Working Group Report on Eleventh Five Year Plan (2007-12)
33
Infrastructure
Sector Report
05 October 2009
Key opportunities for private players Rs 500bn Dedicated Rail Freight Corridor to generate large order flows
Freight corridor: The Dedicated Rail Freight Corridor (DRFC) is the biggest opportunity in the sector. The cost for the 1,279km eastern corridor (Ludhiana– Sonnagar) and 1,483km western corridor (Dadri–JNPT) put together is estimated at Rs 500bn. Financing arrangements for the project currently envisage external assistance of Rs 170bn from Japan Bank of International Cooperation (JBIC) and Rs 110bn from World Bank. These would cover about half of the capital cost. The rail ministry is exploring the possibility of attracting private investment in some segments of the project. Civil engineering works are expected to account for a bulk of the cost (65–70%), while signaling & communications (15–20%) and electrification (10–15%) would comprise the balance. Both corridors are proposed to have double lines and will be based on electric traction. Work on the eastern dedicated freight corridor has already started from February ’09 while construction work on the western corridor will begin later.
Metro projects worth Rs 380bn likely to be awarded under PPP
Privatisation / modernisation: Railway station privatisation, along the lines of airport privatisation, is another large opportunity. The government has identified 26 stations in metropolitan cities and major tourist centres for development as world class stations through the PPP route. Part of the real estate potential of these stations would be exploited for financing these projects. Preparatory work for the New Delhi and Patna stations is already in the advanced stage.
Logistic parks: Multi-modal logistic parks (MMLPs) are proposed to be built independently at strategic locations or in SEZs, particularly along the DRFC.
Metro projects: Mumbai Metro phases II and III and metro-rail projects in nonmetro towns are other PPP opportunities. Construction companies will also vie for the Chennai Metro that is to be undertaken by the government. The Cabinet has cleared this project and funding is in place as follows: 60% loan under the Japanese Cooperation Agreement; 20% state government equity, 15% central government equity, and 5% central government debt. In a recent development, award of the Hyderabad metro rail project to the Maytasled consortium has been cancelled due to the latter’s failure to achieve financial closure. Bids for the project will be re-invited from 15 July to 15 November. Surveys for construction of new lines from Jhargram to Purulia and the new line for extension of the Kolkata Metro, from Dum Dum to Dakshineshwar, have been completed. The West Bengal government has also given its consent to contribute 50% of the cost for extension. Further action is being taken to obtain necessary approvals for these projects. The ministry of railways has also commissioned a feasibility study for introduction of a 60km elevated, fully air-conditioned rail system between Churchgate and Virar stations in Mumbai. The project is proposed to be implemented through PPP on a design, build, finance, operate and transfer basis.
Fig 72 - Key upcoming metro rail projects likely to be awarded under PPP City/Project
Project cost (Rs bn)
Status
Mumbai Phase II (Charkop-Mankhurd)
110
Awarded to Reliance Infra-led consortium
Mumbai Phase III (Colaba-Bandra)
120
Project being finalised
Ahmedabad
32
DPR to be resubmitted
Kochi
30
First shortlist of bidders
Hyderabad
121
Awarded to Maytas-led consortium but contract withdrawn; will reopen for bids from 15 July to 15 November
Total
380
Source: News reports, RHH
34
Infrastructure
Sector Report
Heavy investments anticipated for rail expansion and technical upgrades
05 October 2009
Expansion and technical upgrades: Heavy investments will be required for enhancing the capacity of rolling stock, technical upgrades and technological advancements necessary to achieve the ambitious targets set for the passenger and freight business segments, in the 11th plan. The railways aim to complete gauge conversion across 4,900km, doubling across 1,800km and laying of 1,100km of new lines, over five years.
Bullet trains: The government has announced plans to conduct feasibility studies for bullet trains on a number of routes: Delhi – Amritsar, Ahmedabad – Mumbai – Pune, Hyderabad – Vijaywada – Chennai, Chennai – Bangalore – Ernakulam, and Howrah – Haldia.
Fig 73 - Indian railways - Financial performance summary (Rs bn) 900 800 700 600 500 400 300 200 100 0
Gross traffic receipts
Net revenues 819 717
411
121 26
1
FY81
429
474
11
38
45
53
FY91
FY03
FY04
FY05
545
101
FY06
800
627
145
FY07
183
FY08
164
174
FY09 FY09A (BE)
Source: Indian railways
35
Infrastructure
Sector Report
05 October 2009
Irrigation Overall outlay for the 11th plan Particulars State plan State sector schemes, i.e., AIBP and others Central plan Total
(Rs bn) 1,821 470 242 2,533
Source: Plan Document
India has 2.4% of the world’s total area but 16% of the population and only 4% of the available fresh water. This clearly indicates the need for water resource development, conservation, and optimum use. The gross irrigated area in the country is only 87.2mn hectares (mha). 11th plan irrigation targets The Indian government has taken up irrigation potential creation through public funding and assistance to farmers to create potential on their own farms. Substantial irrigation potential has been created through major and medium irrigation (MMI) schemes. India’s estimated irrigation potential is ~139.9mha. Of the total potential created (102.8mha), however, only 87.2mha is actually utilised at the end of the 10th plan.
Fig 74 - Ultimate irrigation potential, potential created and potential utilised Sector (mha)
Ultimate irrigation potential
Potential created
Potential utilised
Till end of 9th Plan
Anticipated in 10th Plan
Till end of 9th Plan
Anticipated in 10th Plan
58.5
37.1
5.3
31.0
3.4
Surface water
17.4
13.6
0.7
11.4
0.6
Groundwater
64.1
43.3
2.8
38.6
2.3
Subtotal
81.4
56.9
3.5
50.0
2.8
Total
139.9
94.0
8.8
81.0
6.2
Major & Medium irrigation Minor Irrigation
Source: Planning Commission
The Working Group on water resources for the 11th plan has proposed the creation of irrigation potential of 16mha (9mha from major & medium irrigation – MMI, and 7mha from minor irrigation – MI) during the plan period.
Rs 1,740bn to be invested in major & medium irrigation
MMI accounts for bulk of planned investment Of the overall 11th plan irrigation investment of Rs 2,533bn, ~Rs 1,740bn is to be invested in MMI, Rs 334bn in minor irrigation (MI), Rs 108bn in command area development (CAD), Rs 82bn in flood control, and Rs 270bn in watershed development.
Fig 75 - Projected investment for the 11th Plan in irrigation (including Watershed) Year (Rs bn at 2006-07 prices) Centre
2007-08
2008-09
2009-10
2010-11
2011-12
Total 11th Plan
34
40
48
57
69
248
Major and Medium
1
1
1
1
1
6
Irrigation
0
0
0
0
0
0
Minor Irrigation
1
1
1
1
1
4
Command Area Development
2
2
2
2
2
10
Flood Control
2
2
2
2
2
9
28
35
42
51
63
219
States
241
319
424
565
736
2,285
Major and Medium Irrigation
Watershed Development
170
232
318
436
577
1,733
Minor Irrigation
39
49
62
79
100
329
Command Area
13
16
19
23
28
98
Development
0
0
0
0
0
0
Flood Control
11
13
14
17
19
73
Watershed Development Total
9
9
10
11
12
51
275
359
472
623
804
2,533
Source: Planning Commission
36
Infrastructure
Sector Report
05 October 2009
With substantial investments planned for the Accelerated Irrigation Benefits and Bharat Nirman programmes, state spending has been assumed to grow annually at ~37% on MMI, at 27% on minor irrigation, at 21% on CAD, and at 15% on flood control. States’ investment in watershed development (WD) programmes is envisaged to grow at the rate of 24% per annum during the plan period. Fig 76 - Comparative investment projections Irrigation incl Watershed (Rs bn)
10th Plan (anticipated)
11th Plan
Log-linear projection
Working group estimates
136
248
NA
498
Centre State
979
2,285
NA
1,821
Public
1,115
2,533
1,869
2,318
Private
-
-
-
-
1,115
2,533
1,869
2,318
Total Source: Plan Document, RHH
AIBP a key thrust to the sector AIBP allocation hiked 75% to Rs 350bn for 2009–10
11th Plan irrigation outlay in key states State
State outlay (Rs bn)
Andhra Pradesh
343
Gujarat
292
Maharashtra
268
Karnataka
260
Uttar Pradesh
163
Madhya Pradesh
149
Bihar
79
Rajasthan
77
Orissa
65
Chhattisgarh
56
Tamil Nadu
33
Uttarakhand
27
West Bengal
26
Punjab
14
Total Source: Planning Commission
1,852
The central government initiated the Accelerated Irrigation Benefits Programme (AIBP) from 1996–97 to extend assistance for completion of unfinished irrigation schemes. Allocation for AIBP was raised 75% from Rs 200bn for 2008–09 to Rs 350bn for 2009–10. Under this programme, all projects which have investment approval from the Planning Commission are eligible for assistance. From being entirely funded by the Centre, the AIBP was modified to have a grant-cum-loan component from 2004–05. Reform measures such as revision of water rates to cover operation and maintenance (O&M) charges have been introduced, but the results were not satisfactory because of the sluggish efforts of state governments to comply with the reform measures. Moreover, the incentive to state governments, that is a 70% loan, was not attractive enough to carry out the reforms. In 2005–06, the government launched a second irrigation initiative entitled Bharat Nirman where 10mha of additional irrigational potential creation was targeted in a period of four years. To achieve this target, the AIBP guidelines were further modified in December ’06 wherein Central assistance was set as follows: a 25% grant for project cost for non-special category states and 90% for special category states & projects benefiting drought-prone and tribal areas. It was also decided to treat projects in the undivided Koraput, Bolangir, and Kalahandi (KBK) districts of Orissa at par with special category states. State governments to play a major role As per the Constitution, irrigation is a state subject; hence, a bulk of the investment into the sector will be contributed by state governments with little central allocation. State outlay for the sector is estimated at ~Rs 2,285bn (including state sector schemes) in the 11th Five Year Plan, of which ~70% will come from only six states, i.e., Andhra Pradesh (AP), Gujarat, Maharashtra, Karnataka, Uttar Pradesh and Madhya Pradesh. Fig 77 - State irrigation outlay for FY09 (Rs bn) 140 120 100 80
132.5
47.5
60 40 20 0 AP Source: RHH
Gujarat
59.5 34.7
Karnataka
21.8
Maharashtra
MP
* AP – Andhra Pradesh, MP – Madhya Pradesh
37
Infrastructure
Sector Report
AP to spend Rs 178bn for irrigation works in FY10, 34% higher than FY09
05 October 2009
AP irrigation spend to touch Rs 178bn in FY10 The AP government has successfully implemented irrigation projects in the state, as evidenced by a 50% budgetary allocation to these works. The state government’s spend on irrigation has increased at a CAGR of ~40% over FY05-FY09. For FY10, AP plans to expend Rs 178bn for major, medium and minor irrigation works, which is ~34% higher than the FY09 budget. Of the total outflow of Rs 178bn, Rs 50bn will be utilised for ongoing works and the balance for new works. Jalayagnam programme will play a key role Jalayagnam will continue to be the AP government’s flagship programme for the irrigation sector. Under Jalayagnam, 86 projects have been approved since 2004 with a total cost of Rs 1,760bn, of which Rs 450bn has been spent in the last five years. The programme includes projects such as construction of reservoirs and lift irrigation systems for lifting water from major rivers, particularly from the Godavari, to provide immediate benefits. Fig 78 - Andhra Pradesh: Summary of annual plans Sector (Rs bn)
A/C 2007-08
RE 2008-09
BE 2009-10
24.4
56.8
41.1
122.4
132.5
178.0
28
0.02
1.7
Social Services
81.6
141.5
109.1
Transport
16.9
17.1
22.0
Others (Industries, General Economic Services etc)
26.2
14
14.3
275.1
361.9
366.4
Agriculture & Allied Activities & Rural Development Irrigation Power
Total Source: Andhra Pradesh Budget document
IVRCL, HCC, NCC and Patel Engg will benefit from AP irrigation contracts
AP to remain the irrigation hub of India We expect the AP government to continue with its massive irrigation development drive going forward. Accordingly, we anticipate significant contract awards in this segment in the near future, which will benefit players like IVRCL, Hindustan Construction Co, Nagarjuna Construction Co and Patel Engineering.
Fig 79 - Andhra Pradesh: Annual plan 2009–10
Fig 80 - Andhra Pradesh: Fiscal deficit as a % of GSDP (%)
Source: Andhra Pradesh Budget document
5.1
4.3 4.5
3.9 3.9
2.5
3.5
2006-07
2005-06
2004-05
2003-04
2002-03
2001-02
2000-01
2.1
3.2 3.0
2008-09 (BE)
4.0
2007-08 (RE)
4.9
1999-00
Irrigation 48.6%
6 5 4 3 2 1 0
1998-99
Social services 29.8%
Power 0.5%
1997-98
Agri & Rural devp. 11.2%
Transport Others 3.9% 6.0%
Source: Planning commission
38
Infrastructure
Sector Report
05 October 2009
Water supply and Sanitation Increasing urbanisation of the country has led to a renewed focus on addressing the investment backlog in urban water and sanitation infrastructure through the JNNURM. Under the JNNURM, major contributions would be made by the central government in urban water and sanitation through ULBs. In addition, counterpart funding from state governments would result in a significant increase in states’ expenditure. Investment projected at Rs 1,437bn In view of the low levels of capital formation in the sector in the past and the need to urgently increase coverage in both rural and urban areas, total investment during the 11th plan is projected at Rs 1,437bn, of which Rs 420bn or ~29.2% would be Central spending with Rs 963bn or 67% of total spending by States. The private sector is expected to invest Rs 54bn or 3.8%. Of the total public sector spending in the sector, ~70% is allocated to water supply and 30% to sanitation. The private sector is projected to invest 80% in water supply and 20% in sanitation. Of the total investment, 63% is allocated to rural water supply and sanitation and 37% to urban projects.
Water supply and sanitation to attract investments of Rs 1,437bn
Fig 81 - Projected investment in the 11th Plan in water supply and sanitation 2007-08
2008-09
2009-10
2010-11
2011-12
Total 11th Plan
Centre
52
64
80
100
125
420
Water supply
36
45
56
70
87
294
Sanitation
15
19
24
30
37
126
135
156
183
220
269
963
Water supply
95
109
128
154
189
674
Sanitation
41
47
55
66
81
289
Private
6
8
10
13
16
54
Water supply
5
6
8
10
13
43
Sanitation
1
2
2
3
3
11
Total
193
228
273
333
411
1,437
Water supply
136
160
192
234
289
1,012
57
68
81
99
122
426
Year (Rs bn at 2006-07 prices)
States
Sanitation Source: Planning Commission
Fig 82 - Projected investment in the 11th Plan in rural and urban water supply and sanitation Year (Rs bn at 2006-07 prices)
2008-09
2009-10
2010-11
2011-12
126
146
172
208
255
67
82
101
125
155
530
193
228
273
333
411
1,437
Rural Urban* Total Source: Planning Commission
* Including investment through ULBs
Fig 83 - Comparative investment projections
Fig 84 - Comparative investment in Irrigation and Water supply
10th Plan (anticipated)
11th Plan
Log-linear projection
Centre
423
420
State
215
963
Public
638
1,383
Private
10
54
648
1,437
Water supply and Sanitation (Rs bn)
Total 11th Plan 907
2007-08
Total Source: Plan Document, RHH
Wrk group estimates
(Rs bn)
NA
NA
2,500
NA
NA
1,341 2 1,343
1,270 NA 1,270
Irrigation
Water supply and sanitation
3,000
2,533
2,000
1,437
1,500 1,000 500
275
193
359 228 472 273
623
804 333
411
0 2007-08
2008-09
2009-10
2010-11
2011-12
To tal 11th P lan
Source: Planning document
39
Infrastructure
Sector Report
05 October 2009
JNNURM JNNURM aims to improve economic and social infrastructure in 65 cities
Under JNNURM, the government intends to transform 65 cities in India in seven years by improving economic and social infrastructure. Currently, there are ~463 projects sanctioned with cost estimates of Rs 497bn. The projects include investments in roads, flyovers and urban transport systems, which would translate to increased order flows for infrastructure players. JNNURM, which was launched in 2005–06, provides for additional central assistance (ACA) of Rs 500bn for the 7-year period and an equal amount from state governments and urban local bodies (ULB). Allocation to JNNURM has been hiked by 90% to Rs 129bn for 2009–10 as compared to Rs 68bn for 2008–09. The scheme covers the following project types:
JNNURM allocation hiked by 90% to Rs 129bn for 2009–10
Urban renewal, i.e., redevelopment of inner city areas
Water supply (including desalination plants) and sanitation
Sewerage and solid waste management
Construction and improvement of drains/storm water drains
Urban transport, including roads, highways, expressways, MRTS, metro projects
Parking lots/spaces on PPP basis
Development of heritage areas
Prevention and handling of soil erosion/landslides only in case of special category states where such problems are common
Preservation of water bodies
Power, telecom, health, education and wage employment are excluded from the purview of this scheme. Fig 85 - Financing of projects under JNNURM Category of Cities/Towns/UAs
ULB or Para- State Share/Loan from Financial Institutions (%)
Grant Centre (%)
State (%)
Cities/UAs with 4mn+ population as per 2001 census
35
15
50
Cities/UAs with1mn+ but less than 4mn population as per 2001 census
50
20
30
Cities/towns/UAs in North Eastern States and Jammu & Kashmir
90
10
-
Cities/UAs other than those mentioned above
80
10
10
80
10
10
For setting up desalination plants within 20km from seashore and other urban areas facing water scarcity Source: JNNURM amended guidelines
40
Infrastructure
Sector Report
05 October 2009
Airports Air passenger growth in India has been one of the highest in the world and is expected to surpass countries like China, France and Australia in the years to come. India’s civil aviation market has logged a CAGR of 18% and was worth US$ 5.6bn in 2008. The Centre for Asia Pacific Aviation (CAPA) has forecast a market of more than 100mn passengers by 2010. In addition, ~3.4mt of cargo per annum is expected to be handled by 2010. Investment of Rs 310bn in 11th plan period The government’s strategy for the airport sector, supported by the development of a detailed financing plan, is expected to lead to a quantum jump in capital formation in the sector in the 11th plan. The Financing Plan for Airports has estimated an investment of ~Rs 400bn at 2006–07 prices over 2005–14.
Air passenger growth in India is one of the highest in the world
Taking into account an anticipated investment of Rs 48.9bn in 2005–07 and the spillover of ~Rs 38.8bn to the 12th plan, and with suitable re-phasing in light of the government’s subsequent decision to implement modernisation of the Kolkata and Chennai airports mainly through the public sector, an investment of Rs 310bn is projected for the 11th plan period. Fig 86 - Projected investment in airports during the 11th Plan Year (Rs bn at 2006-07 prices)
2007-08
2008-09
2009-10
2010-11
2011-12
Total 11th Plan
28
28
27
25
24
131
7
7
8
9
10
42
14
15
18
25
33
106
1
1
1
1
1
5
Metro airports Non-metro airports Greenfield airports (including Bangalore & Hyderabad) NE airports CNS-ATM and equipment Total
3
4
5
6
8
26
52
55
59
66
77
310
Source: Planning commission
Fig 87 - Projected public-private investment in airports during the 11th Plan Total 10th Plan (Anticipated)
2007-08
2008-09
2009-10
2010-11
2011-12
Public
38.4
12
14
19
22
27
93
Private
29.4*
40
42
40
44
50
216
67.7
52
55
59
66
77
310
Total Source: Planning commission
Total 11th Plan
* Provisional expenditure
Fig 88 - Comparative investment projections Airports (Rs bn) Centre State
10th Plan (anticipated)
11th Plan
Log-linear projection
Working group estimates
38
93
NA
NA
-
1
NA
NA
Public
38
94
90
92
Private
29
216
151
NA
Total
67
310
241
92
Source: Plan Document, RHH
41
Infrastructure
Sector Report
35 non-metro airports and 13 others to be developed in 11th plan
05 October 2009
Mega development targets During the 11th plan, the Airports Authority of India (AAI) will undertake the development of 35 non-metro airports and 13 other airports; development of Chennai and Kolkata airports; construction of new greenfield airports, including three in the NER; expansion of five airports in NER and other crucial areas; upgrades of technology from ground-based communication, navigation, and surveillance-air traffic management (CNS-ATM) to satellite-based CNS-ATM facilities; installation of new facilities including security equipment at various airports; installation of safety and facilitation equipment; development of airspace capacity enhancement; and development of IT. New Delhi and Mumbai airport revamp underway: The international airports at New Delhi and Mumbai are being restructured with modernisation and upgradation works being carried out through private participation. According to the Economic Survey report 2008–09, the construction of first phase development works in Delhi started in early 2007 and is likely to be completed by March ’10 at a cost of ~Rs 89.8bn. Construction works for the Mumbai airport started in January ’07. The development works for this project are to cost ~Rs 98bn and are expected to be completed by 2012. Development of 35 non-metro airports: AAI is upgrading and modernising 35 nonmetro airports in the county in a time bound manner. Development of airports in the north-eastern region is being taken up on a priority basis. Architectural design competitions have been held for terminal buildings at 18 airports. These buildings will be modular in design for easy expansion. At Nagpur and Srinagar, the terminals have already been expanded and modified for integrated operations. Terminal building works have been completed in Ahmedabad (domestic), Kullu, Kangra, Porbandar, Udaipur, Gaya, Nagpur, Belgaum, Akola, Calicut, Hubli, Surat, Aurangabad and Trichy airports.
City side development of 24 airports will be undertaken via PPP
Development works on the airside and city side are likely to be completed by March ’10. The city side development of 24 airports will be undertaken with private sector participation under PPP mode and will cover commercial development of property, car parking and cargo operations. Fig 89 - City side development via PPP Airports Agatti
Guwahati
Rajkot
Ahmedabad
Indore
Ranchi
Amritsar
Jaipur
Thiruvanthapurum
Aurangabad
Khajuraho
Trichy
Bhopal
Lucknow
Udaipur
Bhubaneswar
Madurai
Vadodara
Dehradun
Mangalore
Varanasi
Dimapur
Raipur
Vizag
Source: Planning Commission
Request for Qualification (RFQ) for Amritsar and Udaipur has already been issued and five interested parties have been short-listed for each of them. An MCA for development of non-metro airports has also been prepared and published. 13 more projects on the cards: Development works at an additional 13 non-metro airports are being undertaken for completion in a similar time frame.
42
Infrastructure
Sector Report
05 October 2009
Fig 90 - Non-metro airport development Airports Akola
Dibrugarh (Mohanbari)
Rajahmundry
Behar
Gondia
Srinagar
Belgaum
Hubli
Surat
Calicut
Kullu (Bhuntar)
Vijayawada
Cooch
Mysore
Source: Planning Commission
10 greenfield airports being set up on PPP basis
10 greenfield airports approved: The policy for greenfield airports was approved by the government in April ’08 to enable their set-up on a PPP basis, with an MCA also put into place. FDI up to 100% is permitted through the automatic approval route. Until December ’08, the central government had approved 10 greenfield airports, i.e., Goa, Navi Mumbai, Kannur, Bijapur, Simoga, Hassan, Gulbarga, Sindhudurg, Dabra and Durgapur. Fig 91 - Status of greenfield projects up to December ’08 Sr. No.
Name of airport
A
Project commissioned
1
Banglore International airport
Karnataka
Commissioned in May 2008
Andhra Pradesh
Commissioned in March 2008
State
Status
2
Hydrabad International airport
B
Approval granted by Central Government
3
Mopa airport
Goa
Planning stage
4
Navi Mumbai International Airport
Maharashtra
Planning stage
5
Kannur airport
Kerala
Planning stage
6
Bijapur airport
Karnataka
Awarded
7
Simoga airport
Karnataka
Awarded
8
Hassan airport
Karnataka
Awarded
9
Gulbarga airport
Karnataka
Awarded
10
Sindhudurg airport
Maharashtra
In-principle approval awarded
11
Dabra airport, Gwalior
Madhya Pradesh
In-principle approval awarded
12
Durgapur airport
West Bengal
In-principle approval awarded
C
Proposal under consideration with the Government
13
Greater Noida International airport
Uttar Pradesh
Under consideration
14
Chakan International airport
Maharashtra
Under consideration
15
Karaikal airport
Pondicherry
Under consideration
16
Airport at Jhajjar
Haryana
Under consideration
17
Airport at Jludhina
Punjab
Under consideration
18
Airport at Paladi-Ramsinghpur
Rajasthan
Under consideration
19
Airport at Ankleshwar, Bharuch
Gujarat
Under consideration
20
Airport at Ramnad, Rameshwaram
Tamil Nadu
Under consideration
Source: Planning Commission
43
Infrastructure
Sector Report
05 October 2009
Ports Close to 95% of the volume and 70% by value of the country’s international trade is conducted through its 12 major and 187 minor/intermediate (non-major) ports. Collectively, the major ports handle ~75% of India’s maritime cargo.
Rs 610bn to be invested in major ports and Rs 270bn in smaller ports
Investment of Rs 880bn over 11th plan Anticipated investment in the 10th plan was Rs 141bn comprising Rs 37bn from public sources and Rs 104bn from the private sector. With the expected higher public investment in major ports, a total investment of Rs 880bn is projected for the 11th plan with Rs 610bn being invested in major ports and Rs 270bn in non-major ports.
Fig 92 - Projected investment in ports during the 11th Plan 2007-08
2008-09
2009-10
2010-11
2011-12
Total 11th Plan
Major Ports
88
105
122
137
158
610
Non-Major Ports
36
43
52
63
76
270
124
148
174
200
234
880
Year (Rs bn at 2006-07 prices)
All Ports Source: Planning Commission
Fig 93 - Projected investment in ports during the 11th Plan by category 2007-08
2008-09
2009-10
2010-11
2011-12
Total 11th Plan
Major Ports
88
105
122
137
158
610
Public
49
57
62
64
67
299
Private
39
48
59
73
91
311
Non-Major Ports
36
43
52
63
76
270
Year (Rs bn at 2006-07 prices)
Public
6
7
7
8
9
36
Private
30
36
45
55
68
234
All Ports
124
148
174
200
234
880
Public
55
64
70
71
76
335
Private
69
85
104
128
159
545
Source: Planning Commission
Fig 94 - Comparative investment projections 10th Plan (anticipated)
11th Plan
Log-linear projection
Working group estimates
Centre
22
299
NA
NA
State
15
36
NA
NA
Ports (Rs bn)
Public
37
335
40
185
Private
104
545
474
369
Total
141
880
514
554
Source: Plan Document, RHH
The projections assume that ~49% of total investment in major ports and 13% of total investment in non-major ports would come from the public sector. The phasing of investment reflects a CAGR of ~8% in public investment in major ports and ~9% in non-major ports. Private investment in major and non-major ports is assumed to grow at a CAGR of ~23%. Thus, total public investment in ports is projected at Rs 335bn and private investment at Rs 545bn during the 11th plan. The overall ratio of public to private spending on investment in the sector is 38:62.
44
Infrastructure
Sector Report
05 October 2009
Companies
45
HCC
Sector Report
05 October 2009
HCC Growth across segments
What’s New?
Strong order book of Rs 135bn: At the end of Q1FY10, HCC had an outstanding order book of Rs 134.6bn (excluding Rs 19.4bn under dispute), which is 3.3x FY10E revenues. This apart, the company has L1 orders worth Rs 8bn.
Target
Rating
Estimates
BOT portfolio to expand four-fold to Rs 100bn: Currently, HCC Infrastructure (a 100% subsidiary) has three BOT projects under various stages of construction:
CMP
TARGET
RATING
RISK
Rs 130
Rs 141
HOLD
MEDIUM
Nirmal BOT, Andhra Pradesh – This is an annuity project (semi-annual instalments of Rs 230mn) that has been completed three months ahead of schedule. HCC is thus eligible for an early-completion bonus and can begin to recognise revenue in the current fiscal, once NHAI awards a completion certificate.
BSE
NSE
BLOOMBERG
500185
HCC
HCC IN
Badarpur Elevated Expressway connecting Delhi and Haryana – Construction work on this project commenced in January. It is 15–20% complete and scheduled to be fully ready by December ’10. BOT road project on Dhule–Maharashtra/Madhya Pradesh border (37% stake) – Financial closure is scheduled for December ’09.
Over the next four years, the management expects to expand its BOT portfolio four-fold, from Rs 25bn to Rs 100bn. It also intends to bid for six projects in the near future and pegs the equity IRR from the same at 16–17%. Lavasa Phase I revenue pegged at Rs 36bn: Lavasa, near Pune, is an all-new city in the making with a master plan of 12,500 acres. Dasve, the first town, is slated for completion in FY11. The management estimates revenues of Rs 36bn from Lavasa Phase I as follows: residential sales Rs 21bn, commercial and retail mall sales Rs 8bn, institutional sales Rs 4.5bn, and hospitality Rs 2.5bn. The company has received Rs 2.5bn out of the total pre-sales of Rs 9.4bn in Lavasa. At present, units at Dasve are being sold at an average rate of Rs 3,800psf for villas and Rs 3,200psf for other units. 55% of 247 Park project leased out: HCC has leased out 55% of the total 1.1mn sq ft of its commercial project, christened 247 Park, at an average lease rent of Rs 60–65psf. Rs 4.8bn via QIP raised: HCC has raised ~Rs 4.8bn via a QIP, by placing 47mn shares at Rs 102.15/share in June ’09. A majority of the funds will be utilised for loan repayment and to meet working capital needs, whereas the balance will be deployed towards infrastructure projects. With this QIP, we expect the company’s debt/equity ratio to decline from 2.5x to 1.5x. Target of Rs 141 – Hold: We have an SOTP target price of Rs 141 based on a core business P/E multiple of 14x on FY11E earnings. Hold.
Financial highlights (Rs mn)
FY09
FY10E
FY11E
30,827
33,137
41,091
49,309
30.8
7.5
24.0
20.0
Adj net income
724
760
1,074
1,443
Growth (%)
17.4
5.0
41.3
34.3
2.6
2.8
3.5
17.4
5.0
25.2
Growth (%)
FDEPS (Rs) Growth (%)
Market cap (Rs mn / US$ mn)
39,422 / 826
Outstanding equity shares (mn)
303
Free float (%)
52.8
Dividend yield (%)
0.6
52-week high/low (Rs)
137 / 29
2-month average daily volume
5,359,981
Stock performance Returns (%)
CMP
1-mth
3-mth
6-mth
130
22.9
25.1
223.4
17,135
10.2
17.0
73.0
HCC Sensex
P/E comparison (X) 50
HCC
Indust ry
46.9 37.5
40 30
29.6
28.9
24.9
21.1
20 10 0 FY09A
FY10E
FY11E
Valuation matrix (x)
FY08
FY09
FY10E
FY11E
P/E @ CMP
49.3
46.9
37.5
28.9
P/E @ Target
53.3
50.7
40.5
31.3
EV/EBITDA @ CMP
16.0
13.6
11.3
9.5
Profitability and return ratios FY08
Revenue
Company data
(%)
FY08
FY09
FY10E
FY11E
EBITDA margin
11.9
13.0
12.5
12.5
EBIT margin
8.8
9.5
9.2
9.3
Adj PAT margin
2.3
2.3
2.6
2.9
ROE
7.6
7.6
8.4
9.0
4.5
ROIC
6.6
7.0
7.3
7.6
29.4
ROCE
7.8
9.7
7.6
8.0
46
HCC
Sector Report
05 October 2009
Revenue and order book trend Fig 95 - Order book at Rs 134.6bn (excluding Rs 19.4bn under dispute) (Rs bn) 160
Order book
Order received
145
135
140 120 100 Strong order book ensures high revenue
80
visibility over the medium term
60
77
74
82
71
102
88
83
47 27
40 10
8
20
6
4
8
10
Q3
Q4
Q1A
Q2A
0
0 Q1
Q2 FY08
Q3A
Q4A
Q1A
FY09
FY10
Source: Company, RHH
Fig 96 - Order break-up segment-wise (%) 60 Since Q1FY08, power segment orders have increased, whereas transportation orders have steadily declined
50
Power 46
44
30
34
15
10
3
0
0 Q1
Q2
43 30
21
0 Q4
51
39 40
27 27
19 4
0
Q3
Others 50
47
32
22
21
20
Water & environment
47
44
37
36
40
Transportation
Q1
19
16
3 Q3
14 3
2
Q2
FY08
32
31
FY09
3 Q1
FY09
FY10
Source: Company, RHH
Fig 97 - Revenue break-up segment-wise (%)
Power
Transportation
Water & envuiorenment
Others
60 Power (40% of revenues) remains the
50
key revenue driver
40
48
30 26
36
20 10
4
15 8
40
39
33
22
46
45
44
41
28 18
34 24
25
28 25
3
2
1
5
26
Q2
Q3 FY08
Q4
Q1
Q2
0 Q3
FY09
34 27
40 38
20
0 Q1
38
34
2
1 FY09
Q1 FY10
Source: Company, RHH
47
HCC
Sector Report
05 October 2009
Fig 98 - Summary of BOT projects Project (Rs mn)
HCC’s stake (%)
Total cost
Equity
Debt
HCC’s equity commitment
Equity to be invested till FY10
Comments Project completed 3 months ahead of schedule
Nirmal BOT
100
3,200
300
2,900
300
300
Completion certificate awaited from NHAI; then becomes eligible for Bonus and can start recognising revenues in FY10 Achieved financial closure in FY09
Badarpur Elevated Expressway
Dhule - Maharashtra/ MP border Road project
100
5,700
1,700
4,000
1,700
500
Construction commenced in Jan ’09 and ~15% progress already achieved 15–20% complete and scheduled to be fully ready by December ’10
37
Total
14,000
4,000
10,000
1,480
400
22,900
6,000
16,900
3,480
1,200
Concession agreement signed on 24 June 2009 Financial closure scheduled by the end of December ’09
Source: Company, RHH
Valuation Fig 99 - SOTP valuation summary Particulars
Business
Method
HCC standalone
Construction
P/E FY11
Lavasa
Real estate
NPV (25% discount To NAV)
Vikhroli IT park
Real estate
Capitalisation method @11%
BOT project
Road - annuity
Book value FY10E
Total
Multiple(x)
Value(Rs mn)
Per share value (Rs)
14x
17,229
63
17,555
64
2,199
8
1.5x
1,800
6
38,782
141
Source: RHH
48
HCC
Sector Report
05 October 2009
Stock performance Fig 100 - Absolute performance from April ’04 300
Sensex
HCC
Fig 101 - Relative performance from April ’04 BSE CG Index
250 200 150 100 50 0 Apr-04
May-05
Jun-06
Jul-07
Aug-08
Sep-09
940 840 740 640 540 440 340 240 140 40 Apr-04
Sensex
May-05
HCC
Jun-06
BSE CG Index
Jul-07
Aug-08
Sep-09
Source: Bloomberg, RHH
Source: Bloomberg, RHH
Fig 102 - Relative performance from April ’06 to March ’07
Fig 103 - Relative performance from April ’07 to March ’08
Sensex
HCC
BSE CG Index
110
Sensex
100
BSE CG Index
175
90 80
150
70
125
60
100
50 40 Apr-06
HCC
200
Jul-06
Sep-06
Dec-06
Mar-07
75 Mar-07
Jun-07
Sep-07
Dec-07
Source: Bloomberg, RHH
Source: Bloomberg, RHH
Fig 104 - Relative performance from April ’08 to March ’09
Fig 105 - Relative performance from April ’09
Sensex
HCC
BSE CG Index
120
225
Sensex
HCC
Mar-08
BSE CG Index
200
100
175 150
80
125
60
100 40 20 Mar-08
75 Jun-08
Source: Bloomberg, RHH
Sep-08
Dec-08
Mar-09
50 Mar-09
Apr-09 May-09
Jun-09
Jul-09
Aug-09
Sep-09
Source: Bloomberg, RHH
49
HCC
Sector Report
05 October 2009
12-month forward rolling band Fig 106 - P/E band
Fig 107 - P/BV band
(Rs) 300
(Rs) 400
250
350
6.5x
300
200 40x
150 100
20x
50 0 Aug-06
10x 4x Jun-07
Mar-08
Dec-08
Sep-09
250 200 150
3x
100
1.5x
50
0.5x
0 Aug-06
Jun-07
Source: RHH
Source: RHH
Fig 108 - EV/EBITDA band
Fig 109 - EV/Sales band 100,000 21x
120,000 100,000 80,000 60,000 40,000 20,000 Jun-07
Mar-08
Dec-08
2x
15x
60,000
1.4x
10x
40,000
0.8x
5x
20,000
Sep-09
0 Aug-06
0.2x Jun-07
Mar-08
Source: RHH
Fig 110 - Premium/Discount to BSE 30 P/E
Fig 111 - Market Cap/Sales band
Dec-08
(Rs mn) 100,000
(%) 300 250
Sep-09
2x
80,000
200 150
60,000
100
40,000
50
1.4x 0.8x
20,000
0
Source: RHH
Sep-09
80,000
Source: RHH
(50) Aug-06
Dec-08
(Rs mn)
(Rs mn) 140,000
0 Aug-06
Mar-08
0.2x May-07
Feb-08
Nov-08
Sep-09
0 Aug-06
Jun-07
Mar-08
Dec-08
Sep-09
Source: RHH
50
HCC
Sector Report
05 October 2009
Standalone financials Profit and Loss statement Y/E March (Rs mn) Revenues Growth (%) EBITDA
Balance sheet FY08
FY09
FY10E
FY11E
30,827
33,137
41,091
49,309
30.8
7.5
24.0
20.0
3,666
4,314
5,154
6,163
Y/E March (Rs mn)
FY08
FY09
FY10E
FY11E
Cash and cash eq
2,648
1,537
2,296
656
Accounts receivable Inventories
45
47
113
135
21,660
27,766
30,396
37,826
Growth (%)
69.7
17.7
19.5
19.6
Other current assets
2,753
5,322
5,687
6,833
Depreciation & amortisation
962
1,152
1,380
1,569
Investments
2,956
3,656
4,656
5,856
2,704
3,162
3,774
4,594
Gross fixed assets
14,097
16,829
19,204
21,579
98.2
16.9
19.4
21.7
9,536
11,287
12,282
13,088
1,575
2,244
2,383
2,567
675
464
464
464
74
233
120
110
-
-
-
(1,132)
EBIT Growth (%) Interest Other income EBT
Net fixed assets CWIP Intangible assets
1,203
1,151
1,511
2,137
(1,133)
(1,132)
(1,132)
Income taxes
472
392
512
724
Other assets
-
-
-
-
Effective tax rate (%)
39.3
34.1
33.9
33.9
Total assets
39,139
48,949
54,762
63,727
-
-
-
-
Accounts payable
7,655
10,321
11,719
14,692
Other current liabilities
2,519
3,705
4,054
4,834
466
1,651
2,062
2,062
18,449
23,218
21,368
25,368
10
8
76
129
Extraordinary items Min into / inc from associates
(7)
1
75
30
Reported net income
1,088
1,245
1,074
1,443
Adjustments
(364)
(485)
-
-
724
760
1,074
1,443
Adjusted net income Growth (%) Shares outstanding (mn) FDEPS (Rs) (adj) Growth (%) DPS (Rs)
17.4
5.0
41.3
34.3
256.2
256.2
291.5
303.2
2.6
2.8
3.5
4.5
17.4
5.0
25.2
29.4
0.8
0.8
0.8
0.8
Cash flow statement
Deferred tax assets, net
Provisions Debt funds Other liabilities Equity capital
256
256
303
303
Reserves & surplus
9,784
9,789
15,181
16,340
Shareholder's funds
10,041
10,045
15,484
16,643
Total liabilities
39,139
48,949
54,762
63,727
39.2
39.2
53.1
54.9
FY08
FY09
FY10E
FY11E
BVPS (Rs)
Financial ratios
Y/E March (Rs mn)
FY08
FY09
FY10E
FY11E
Y/E March
Net income + Depreciation
2,050
2,397
2,454
3,011
Profitability & Return ratios (%)
Non-cash adjustments
(227)
(388)
34
27
11.9
13.0
12.5
12.5
(1,580)
(3,070)
(931)
(4,845)
EBIT margin
8.8
9.5
9.2
9.3
243
(1,060)
1,556
(1,807)
Net profit margin
2.3
2.3
2.6
2.9
(2,247)
(2,521)
(2,375)
(2,375)
ROE
7.6
7.6
8.4
9.0
(669)
(700)
(1,000)
(1,200)
ROCE
7.8
9.7
7.6
8.0
-
-
-
-
(2,917)
(3,221)
(3,375)
(3,575)
0
1
1
1
202
(300)
4,649
-
Inventory (days)
309
377
347
348
Issue/repay debt
3,225
4,769
(1,851)
4,000
Payables (days)
114
137
132
135
Dividends paid
(192)
(205)
(205)
(243)
Current ratio (x)
2.7
2.5
2.4
2.3
Other financing cash flow
4
(1,094)
(16)
(16)
Quick ratio (x)
0.0
0.0
0.0
0.0
Change in cash & cash eq
564
(1,111)
759
(1,640)
2,648
1,537
2,296
656
Gross asset turnover
2.5
2.1
2.3
2.4
Total asset turnover
0.8
0.8
0.8
0.8
Interest coverage ratio
1.7
1.4
1.6
1.8
Adjusted debt/equity
1.8
2.3
1.4
1.5
Changes in working capital Cash flow from operations Capital expenditure Change in investments Other investing cash flow Cash flow from investing Issue of equity
Closing cash & cash eq
Economic Value Added (EVA) analysis Y/E March
FY08
FY09
FY10E
FY11E
WACC (%)
11.5
12.1
12.1
12.1
6.6
7.0
7.3
7.6
Invested capital (Rs mn)
26,317
33,384
36,692
43,544
EVA (Rs mn)
(1,276)
(1,708)
(1,766)
(1,974)
(4.8)
(5.1)
(4.8)
(4.5)
ROIC (%)
EVA spread (%)
EBITDA margin
Working Capital & Liquidity ratios Receivables (days)
Turnover & Leverage ratios (x)
Valuation ratios (x) EV/Sales
1.9
1.8
1.4
1.2
EV/EBITDA
16.0
13.6
11.3
9.5
P/E
49.3
46.9
37.5
28.9
3.3
3.3
2.4
2.4
P/BV
51
HCC
Sector Report
05 October 2009
Quarterly trend Particulars
Q1FY09
Q2FY09
Q3FY09
Q4FY09
Q1FY10
Revenue (Rs mn)
8,659
6,489
8,194
9,795
8,725
YoY growth (%)
18.8
18.3
9.3
(7.2)
0.8
QoQ growth (%)
(17.9)
(25.1)
26.3
19.5
(10.9)
EBITDA (Rs mn)
911
834
1,060
1,504
1,115
EBITDA margin (%)
10.5
12.9
12.9
15.4
12.8
Adj net income (Rs mn)
195
(48)
290
308
208
38
(463)
47
(11)
7
(44)
(124)
(710)
6
(32)
(%)
FY07
FY08
FY09
FY10E
FY11E
Tax burden (Net income/PBT)
81.2
60.2
66.0
71.1
67.5
Interest burden (PBT/EBIT)
55.6
44.5
36.4
40.0
46.5
YoY growth (%) QoQ growth (%)
DuPont analysis
EBIT margin (EBIT/Revenues) Asset turnover (Revenues/Avg TA) Leverage (Avg TA/Avg equtiy)
5.8
8.8
9.5
9.2
9.3
75.5
84.9
75.2
79.2
83.2
348.1
380.5
438.6
406.2
368.8
6.9
7.6
7.6
8.4
9.0
Return on equity
Shareholding pattern
Company profile Hindustan Construction Co (HCC) is an integrated group with a
(%)
focus on construction, real estate, and infrastructure development.
Promoters
The HCC group comprises HCC Construction, HCC Infrastructure, HCC Real Estate, and Lavasa Corporation. The group specialises in technically complex, new-age construction
for infrastructure
projects, as well as EPC, BOT, integrated projects, and townships.
8.8
8.7
Banks & FIs
20.4
18.6
16.9
Public
25.7
25.4
27.2
97
157
Buy
6-Oct-08
Quarterly Preview
71
125
Buy
27-Oct-08 Results Review
37
52
Hold
19-Jan-09
Results Review
44
47
Sell
6-Apr-09
Quarterly Preview
38
47
Hold
57
55
Hold
111
120
Hold
130
141
Hold
Buy
●
Sell
●
Hold
Sep-09
Company Update
●
Jul-09
8-Sep-08
125 105 85 65 45 25
May-09
Buy
Results Review
6.7
FIIs
Mar-09
Reco
158
05-Oct-09 Sector Report
47.2
Jan-09
Reco price Tgt price 97
24-Jul-09
47.2
Stock performance
21-Aug-08 RHH Compendium
25-Apr-09 Results Review
47.2
Nov-08
Event
Jun-09
Sep-08
Date
Mar-09
Jul-08
Recommendation history
Dec-08
52
IRB Infrastructure
Sector Report
05 October 2009
IRB Infrastructure Ramp up in road contracts
What’s New?
Portfolio of 12 road projects: IRB Infrastructure (IRB) has a portfolio of 12 BOT road projects, of which 11 are contributing revenues, two are under construction, and one has recently achieved financial closure. These projects, entailing a capitalised cost of Rs 60.7bn, have been funded through a mix of equity (Rs 14.5bn) and debt (Rs 46.2bn). L1 for four projects worth Rs 43bn; secured one worth Rs 12bn: IRB has emerged as the lowest bidder for four BOT road projects; of these, one Rs 12.5bn contract, for four to six-laning of the 102km-long Pathankot to Amritsar section of NH-15 in Punjab, has been awarded to the company. The remaining three L1 projects are: 1) four-laning of a 65km stretch on NH-4A in Goa (estimated cost Rs 8.3bn), 2) the 148.7km Jaipur to Deoli section in Rajasthan (Rs 15bn), and 3) four-laning of the 67km-long Talegaon to Amravati section in Maharashtra (Rs 8bn). Contract awards may materialise in October ‘09, fuelling the company’s EPC order book from current Rs 56.6bn to Rs 99.6bn. This apart, IRB has recently won a project for development of a Greenfield airport in Sindhudurg, Maharashtra, on a DBFO basis. Strong in-house construction order book of Rs 56.6bn: IRB’s order book of Rs 56.6bn is bifurcated as follows: a) EPC (Rs 30.9bn) to be executed within three years, and b) O&M (Rs 25.7bn) to be executed within 10–12 years. IRB’s construction arm reports margins of ~18% vis-à-vis the industry average of 10%. This outperformance can be attributed to lower subcontracting expenses, a large fleet of equipment, ownership of aggregate mines, and higher cost assumptions while pricing project bids. Target price of Rs 224 – Buy: Over FY09-FY11, we anticipate a significant 93.1% CAGR in IRB’s revenues and a 94.0% CAGR in earnings led by its strong BOT road and construction portfolio. At present, the stock is trading at 20.2x FY10E and 15.4x FY11E earnings. We have a revised SOTP target of Rs 224 for IRB as follows:
BOT road projects valued at Rs 119 based on FY11E NPV. This implies a P/BV of 2.6x and 2.2x on FY10E and FY11E respectively. Core construction business valued at Rs 79 or 12x FY11E earnings. We have increased our target multiple from 11x earlier due increase in broader market multiples. Real estate valued at Rs 3 (book value). Provisional NPV valuation of the four new BOT projects at Rs 23.
Key triggers: A softening interest rate scenario and improved traffic growth as economic revival gains momentum would be key triggers for the stock.
Financial highlights FY08
FY09
FY10E
FY11E
Revenue
7,327
8,834
18,693
32,940
Growth (%)
139.7
20.6
111.6
76.2
Adj net income
1,139
1,197
3,432
4,504
Growth (%)
405.1
5.1
186.7
4.2
3.6
10.3
357.9
(13.8)
186.7
Growth (%)
Rating
Estimates
CMP
TARGET
RATING
RISK
Rs 209
Rs 224
BUY
MEDIUM
BSE
NSE
BLOOMBERG
532947
IRB
IRB IN
Company data Market cap (Rs mn / US$ mn)
69,464 / 1,455
Outstanding equity shares (mn)
332
Free float (%)
25.6
Dividend yield (%)
0.8
52-week high/low (Rs)
227 / 64
2-month average daily volume
2,093,089
Stock performance Returns (%)
CMP
IRB Sensex
1-mth
3-mth
6-mth
209
(0.8)
28.1
138.2
17,135
10.2
17.0
73.0
P/E comparison (x) 80
IRB
Cap. Go o ds
58.0
60 29.6
40
20.2 24.9
15.4
20
21.1
0 FY09
FY10E
FY11E
Valuation matrix (x)
FY08
FY09
FY10E
FY11E
P/E @ CMP
50.0
58.0
20.2
15.4
P/E @ Target
53.6
62.1
21.7
16.5
EV/EBITDA @ CMP
23.9
30.0
11.5
8.5
Profitability and return ratios
(Rs mn)
FDEPS (Rs)
Target
(%)
FY08
FY09E
FY10E
FY11E
EBITDA margin
56.2
37.2
45.8
35.2
EBIT margin
42.3
24.3
35.4
25.4
Adj PAT margin
15.5
13.5
18.4
13.7
31.2
ROE
11.4
7.1
18.1
19.7
13.6
ROIC
8.2
4.5
12.1
11.4
31.2
ROCE
8.2
5.9
11.6
11.9
53
IRB Infrastructure
Sector Report
05 October 2009
Revenue and order book trend Fig 112 - Comparative BOT toll revenue for last three years Sr. no.
Toll Plaza
1
Thane Bhivandi Bypass
2
Bhiwandi Wada *
3
Kaman Paygaon
4
Khambatki Ghat**
5
FY07 (Rs mn)
FY08 (Rs mn)
YoY Growth (%)
FY09 (Rs mn)
244
335
36.9
403
20.6
25
30
19.5
16
(48.5)
YoY Growth (%)
34
36
7.6
36
(0.1)
110
128
16.2
131
2.2
Kharpada Bridge
87
75
(13.7)
71
(5.9)
6
Nagar-Karmala-Tembhurni
89
110
23.5
113
3.1
7
Mohol-Kurul-Mandrup
37
61
62.8
65
7.4
8
Pune-Solapur
120
136
14
127
(6.9)
9
Pune-Nasik
154
160
3.6
164
2.5
10
Mumbai - Pune#
1,725
2,352
36.4
2,880
22.4
213
270
26.7
265
(1.8)
-
-
NA
336
NA
2,839
3,693
30.1
4,607
15.6
11
Thane Ghodbunder
12
Surat-Dahisar## Total
Source: RHH, Company * Concession period ended on 22 September 2008. ** Concession period expired during this month. #In FY07 revenue from NH-4 phase is from the date of project commission i.e. from September’’06 to March ’07. ## Revenue from Surat- Dahisar commissioned on 20 February 2009. # Growth calculated without considering revenue from Surat-Dahisar as this project was commissioned on 20 February 2009.
Fig 113 - Order book break-up – Q1FY10 Order book composition
Rs mn
% of Total
28,661
50.6
2,275
4.0
BOT projects in O&M phase
25,670
45.3
Total
56,606
100.0
EPC in ongoing BOT projects Funded projects
Source: Company
Fig 114 - Summary of L-1 projects / projects recently awarded Project cost
Positive grant
% of Total Cost
Equity
Debt
Concession period (yrs)
NPV FY11E
65.1
8,360
1,860
22.2
2,600
3,900
30
3.0
III
102
12,500
1,270
10.2
3,930
7,300
20
1.2
Jaipur to Deoli Section
III
148.8
15,000
3,060
20.4
3,582
8,358
25
10.7
Talegaon - Amravati
III
66.7
8,000
2,160
27.0
1,752
4,088
25
7.8
382.6
43,860
8,350
19.0
11,864
23,646
Sr. No.
Road (Rs mn)
NHDP Phase
Length (Km)
1
Goa / Karnataka Border to Panaji - Goa
III
2
Pathankot to Amritsar*
3 4
Total Source: Company, RHH
22.7
*Awarded
54
IRB Infrastructure
Sector Report
05 October 2009
Valuation Fig 115 - SOTP valuation summary Project
Subsidiary
Thane Bhivandi Bypass
IRB
NPV per share (Rs)
Bhiwandi Wada
IRB
Kaman Paygaon
IRB
Khambatki Ghat
IRB
Kharpada Bridge
IRB Infrastructure Pvt Ltd
2
NKT Road & Toll
2
MMK Toll Road
1
Nagar-KarmalaTembhurni Mohol-Kurul-Mandrup
14
Pune-Solapur
Aryan Toll Road
3
Pune-Nasik
ATR Infrastructure
5
Mumbai-Pune
Mhaiskar Infrastructure
Thane Ghodbunder
Thane Ghodbunder Toll Road
Bharuch-Surat
IDAA Infrastructure
42 4 23
Surat-Dahisar
IRB Surat Dahisar Tollway
3
IRDP-Kolhapur
IRB Kolhapur Integrated Road Development Co
5
Total FY09E NPV
105
FY10E NPV
119
Construction business
Modern Road Makers
Real Estate
Aryan Infrastructure Investments
NPV of Four L1 projects Total value
79 3 23 224
Source: RHH
Note:
We have revised the cost of equity to 12% from 13% earlier only for operational projects.
For the projects referred to in Fig 114, we have considered EPC revenue in our model. However, we await finalisation of the project awarding before considering balance sheet implications.
55
IRB Infrastructure
Sector Report
05 October 2009
Stock performance Fig 116 - Absolute performance from Feb ’08 250
Sensex
IRB
Fig 117 - Relative performance from Feb ’08 Sensex
BSE CG Index
BSE CG Index
140
210
120
170
100
130
80
90
60
50 Feb-08
IRB
Jun-08
Oct-08
Feb-09
Jun-09
Sep-09
40 Feb-08
Jun-08
Oct-08
Feb-09
Jun-09
Sep-09
Source: Bloomberg, RHH
Source: Bloomberg, RHH
Fig 118 - Relative performance from February ’08 to March ’08
Fig 119 - Relative performance from April ’08 to March ’09
Sensex
IRB
Sensex
BSE CG Index
120
140
115
120
110
IRB
BSE CG Index
100
105 80
100
60
95 90 Feb-08
Mar-08
Mar-08
Source: Bloomberg, RHH
40 Apr-08
Jun-08
Sep-08
Dec-08
Mar-09
Source: Bloomberg, RHH
Fig 120 - Relative performance from April ’09 Sensex
IRB
BSE CG Index
180 160 140 120 100 80 60 40 Apr-09
Jun-09
Sep-09
Source: Bloomberg, RHH
56
IRB Infrastructure
Sector Report
05 October 2009
12-month forward rolling band Fig 121 - P/E band
Fig 122 - P/BV band
(Rs) 300
24x
(Rs) 250
18x
200
12x
150
6x
100
250 200 150 100 50 0 Aug-08
Nov-08
Feb-09
May-09
3.5x
2.5x
1.5x
50 Aug-08
Aug-09
1x Nov-08
Source: RHH
Source: RHH
Fig 123 - EV/EBITDA band
Fig 124 - EV/Sales band
(Rs mn) 120,000
12x
Feb-09
May-09
(Rs mn) 140,000
5x
120,000 90,000
10x
100,000
8x
80,000
4x 2.5x
60,000
60,000
6x
40,000 1x
20,000 30,000 Aug-08
Nov-08
Feb-09
May-09
Aug-09
0 Aug-08
Nov-08
Feb-09
Source: RHH
Source: RHH
Fig 125 - Premium / Discount to BSE 30 P/E
Fig 126 - Market Cap/Sales band
(%) 200 150 100 50 0 (50)
Aug-08
Source: RHH
Nov-08
Feb-09
May-09
Aug-09
Aug-09
(Rs mn) 100,000 90,000 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 Aug-08
May-09
Aug-09
3.5x
2.5x 1.5x 1x Nov-08
Feb-09
May-09
Aug-09
Source: RHH
57
IRB Infrastructure
Sector Report
05 October 2009
FCFE valuation for L1 projects / works recently awarded Fig 127 - FCFE – Goa / Karnataka Border to Panaji - Goa FCFE (Rs mn)
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
FY21
FY22
FY23
FY24
FY25
Revenue
-
-
-
245
546
608
677
753
838
933
1,038
1,156
1,286
1,432
1,593
1,773
EBITDA
-
-
-
147
441
494
554
139
695
778
872
320
1,092
1,221
1,366
1,528
Tax
-
-
-
-
-
(1)
(13)
-
(40)
(56)
(73)
-
(112)
(134)
(159)
(186)
Interest
-
-
-
(229)
(442)
(425)
(407)
(390)
(373)
(355)
(338)
(321)
(303)
(286)
(269)
(251)
Working capital
-
12
13
8
8
13
14
14
15
16
16
17
32
23
20
21
Capex
(2,090)
(3,344)
(2,926)
-
-
-
-
-
-
-
-
-
-
-
-
-
Change in debt
975
1,560
1,365
(144)
(144)
(144)
(144)
(144)
(144)
(144)
(144)
(144)
(144)
(144)
(144)
(144)
NHAI Grant
465
744
651
-
-
-
-
-
-
-
-
-
-
-
-
-
(650)
(1,028)
(897)
(218)
(138)
(63)
3
(381)
153
239
333
(128)
564
680
814
967
FCFE NPV (Rs)
984
Value per share (Rs)
3.0
FCFE (Rs mn)
FY26
FY27
FY28
FY29
FY30
FY31
FY32
FY33
FY34
FY35
FY36
FY37
FY38
FY39
FY40
Revenue
1,974
2,197
2,445
2,721
3,029
3,371
3,752
4,176
4,648
5,173
5,758
6,409
7,133
7,939
8,836
EBITDA
746
1,911
2,136
2,388
2,669
1,567
3,332
3,723
4,158
4,644
3,107
5,791
6,466
7,219
8,058
Tax
(53)
(250)
(287)
(328)
(747)
(366)
(959)
(1,083)
(1,221)
(1,374)
(837)
(1,733)
(1,943)
(2,177)
(2,434)
(234)
(217)
(199)
(182)
(165)
(147)
(130)
(113)
(95)
(78)
(61)
(43)
(26)
(9)
(0)
22
23
23
24
25
26
27
28
29
29
30
31
32
32
217
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(144)
(144)
(144)
(144)
(144)
(144)
(144)
(144)
(144)
(144)
(144)
(144)
(144)
(144)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
336
1,322
1,529
1,758
1,638
935
2,125
2,410
2,726
3,077
2,095
3,902
4,384
4,921
5,841
Interest Working capital Capex Change in debt NHAI Grant FCFE Source: RHH
58
IRB Infrastructure
Sector Report
05 October 2009
Fig 128 - FCFE – Pathankot to Amritsar (recently awarded) FCFE (Rs mn) Revenue
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
FY21
FY22
FY23
FY24
FY25
FY26
FY27
FY28
FY29
FY30
-
-
-
580
1,288
1,427
1,581
1,751
1,940
2,149
2,380
2,637
2,921
3,236
3,585
3,971
4,399
4,873
5,398
5,979
6,623
EBIDTA
-
-
-
376
1,069
1,190
1,325
719
1,641
1,826
2,032
1,233
2,514
2,797
3,110
3,458
2,336
4,275
4,752
5,282
3,817
Tax
-
-
-
-
-
(19)
(44)
-
(101)
(133)
(168)
(31)
(246)
(290)
(338)
(391)
(192)
(1,023)
(1,161)
(1,313)
(773)
Interest
-
-
-
(424)
(799)
(747)
(696)
(644)
(593)
(541)
(490)
(438)
(386)
(335)
(283)
(232)
(180)
(129)
(77)
(26)
(0)
Working capital Capex Change in debt NHAI Grant FCFE
240
12
13
1
(1)
12
12
13
13
13
14
14
15
15
15
16
16
16
17
17
(620)
(3,304)
(5,287)
(4,626)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
1,825
2,920
2,555
(429)
(429)
(429)
(429)
(429)
(429)
(429)
(429)
(429)
(429)
(429)
(429)
(429)
(429)
(429)
(429)
(429)
-
318
508
445
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(922)
(1,847)
(1,614)
(476)
(160)
6
167
(342)
531
736
959
349
1,467
1,757
2,074
2,422
1,550
2,710
3,101
3,531
2,424
NPV (Rs)
409
Value per share (Rs)
1.2
Source: RHH
59
IRB Infrastructure
Sector Report
05 October 2009
Fig 129 - FCFE – Jaipur to Deoli FCFE (Rs mn)
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
FY21
FY22
-
-
-
576
1,285
1,431
1,592
1,772
1,972
2,195
2,443
2,720
3,027
Revenue EBIDTA
-
-
-
483
1,085
1,214
1,359
694
1,700
1,901
2,126
1,252
2,656
Tax
-
-
-
-
-
(22)
(50)
-
(115)
(152)
(192)
(45)
(284)
Interest
-
-
-
(489)
(935)
(889)
(843)
(798)
(752)
(707)
(661)
(615)
(570)
Working capital
240
12
13
1
(1)
12
12
12
13
13
13
14
29
(3,179)
(6,000)
(5,821)
-
-
-
-
-
-
-
-
-
-
1,672
3,343
3,343
(380)
(380)
(380)
(380)
(380)
(380)
(380)
(380)
(380)
(380)
612
1,224
1,224
-
-
-
-
-
-
-
-
-
-
FCFE
(655)
(1,421)
(1,241)
(384)
(230)
(65)
97
(472)
466
676
906
226
1,451
NPV (Rs)
3,545
Capex Change in debt NHAI Grant
Value per share (Rs)
10.7
FCFE (Rs mn)
FY23
FY24
FY25
FY26
FY27
FY28
FY29
FY30
FY31
FY32
FY33
FY34
FY35
Revenue
3,369
3,750
4,173
4,645
5,170
5,754
6,404
7,128
7,933
8,830
9,827
10,938
12,174
EBIDTA
2,968
3,317
3,706
2,489
4,625
5,166
5,769
6,442
4,766
8,029
8,963
10,004
11,166
Tax
(337)
(395)
(459)
(249)
(607)
(693)
(788)
(893)
(597)
(1,139)
(1,282)
(1,441)
(1,613)
Interest
(524)
(479)
(433)
(388)
(342)
(296)
(251)
(205)
(160)
(114)
(68)
(23)
0
19
16
16
16
16
16
17
17
16
16
16
15
15
-
-
-
-
-
-
-
-
-
-
-
-
-
(380)
(380)
(380)
(380)
(380)
(380)
(380)
(380)
(380)
(380)
(380)
(380)
-
Working capital Capex Change in debt NHAI Grant FCFE
-
-
-
-
-
-
-
-
-
-
-
-
-
1,746
2,079
2,450
1,489
3,312
3,813
4,366
4,980
3,645
6,413
7,248
8,176
9,567
Source: RHH
60
IRB Infrastructure
Sector Report
05 October 2009
Fig 130 - FCFE – Talegaon to Amravati FCFE (Rs mn)
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17
FY18
FY19
FY20
FY21
FY22
-
-
-
323
721
803
894
995
1,107
1,232
1,371
1,526
1,699
Revenue EBIDTA
-
-
-
277
621
694
776
497
970
1,084
1,212
850
1,512
Tax
-
-
-
-
(12)
(26)
(41)
-
(77)
(97)
(119)
(58)
(170)
Interest
-
-
-
(239)
(459)
(437)
(416)
(395)
(373)
(352)
(331)
(309)
(288)
Working capital
240
12
13
6
6
13
13
14
15
15
16
16
31
(2,000)
(3,200)
(2,800)
-
-
-
-
-
-
-
-
-
-
1,022
1,635
1,431
(178)
(178)
(178)
(178)
(178)
(178)
(178)
(178)
(178)
(178)
540
864
756
-
-
-
-
-
-
-
-
-
-
FCFE
(198)
(689)
(601)
(134)
(22)
66
155
(61)
357
473
600
321
908
NPV (Rs)
2,591
Capex Change in debt NHAI Grant
Value per share (Rs)
7.8
FCFE (Rs mn)
FY23
FY24
FY25
FY26
FY27
FY28
FY29
FY30
FY31
FY32
FY33
FY34
FY35
Revenue
1,891
2,104
2,342
2,607
2,901
3,229
3,594
4,000
4,452
4,955
5,515
6,138
6,832
EBIDTA
1,689
1,887
2,107
1,612
2,627
2,933
3,275
3,655
2,991
4,553
5,081
5,669
6,325
Tax
(200)
(232)
(268)
(182)
(351)
(400)
(453)
(1,025)
(786)
(1,302)
(1,464)
(1,643)
(1,843)
Interest
(267)
(245)
(224)
(203)
(181)
(160)
(139)
(117)
(96)
(75)
(53)
(32)
(11)
22
19
20
20
21
22
22
23
24
(604)
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
-
(178)
(178)
(178)
(178)
(178)
(178)
(178)
(178)
(178)
(178)
(178)
(178)
(178)
Working capital Capex Change in debt NHAI Grant FCFE
-
-
-
-
-
-
-
-
-
-
-
-
-
1,067
1,251
1,457
1,071
1,938
2,218
2,528
2,358
1,955
2,395
3,386
3,816
4,294
Source: RHH
61
IRB Infrastructure
Sector Report
05 October 2009
Consolidated financials Profit and Loss statement
Balance sheet
Y/E March (Rs mn)
FY08
FY09
FY10E
FY11E
Revenues
7,327
8,834
18,693
32,940
Growth (%)
139.7
20.6
111.6
76.2
EBITDA
4,119
3,289
8,564
11,610
Growth (%)
149.0
(20.1)
160.4
35.6
Y/E March (Rs mn)
FY08
FY09E
FY10E
FY11E
Cash and cash eq
5,222
4,148
5,517
5,231
118
130
183
484
502
2,054
2,492
3,904
3,748
3,995
5,160
10,852
Accounts receivable Inventories Other current assets
Depreciation & amortisation
1,016
1,143
1,938
3,241
Investments
1,985
1,108
-
-
EBIT
3,103
2,146
6,626
8,369
Gross fixed assets
22,188
24,601
55,005
67,453
Growth (%)
175.0
(30.8)
208.7
26.3
Net fixed assets
18,848
20,161
48,627
57,842
Interest
1,958
1,304
2,777
3,622
CWIP
8,889
14,545
-
-
520
585
521
1,099
Intangible assets
-
-
-
-
1,666
1,427
4,371
5,846
Deferred tax assets, net
(26)
(182)
-
-
Other income EBT Income taxes
400
217
839
1,313
Other assets
16
9
8
-
Effective tax rate (%)
24.0
15.2
19.2
22.5
Total assets
39,300
45,968
61,986
78,313
Extraordinary items
-
-
-
-
Accounts payable
426
1,303
4,947
8,777
Min into / inc from associates
-
-
-
-
Other current liabilities
623
-
-
-
1,266
1,210
3,532
4,533
-
-
-
-
Adjusted net income
1,139
1,197
3,432
4,504
Growth (%)
405.1
5.1
186.7
31.2
Shares outstanding (mn)
332.4
332.4
332.4
332.4
Reserves & surplus
Reported net income Adjustments
FDEPS (Rs) (adj) Growth (%) DPS (Rs)
Provisions
1,551
1,908
1,589
1,795
Debt funds
20,212
24,859
34,690
42,587
281
599
100
29
Other liabilities Equity capital
3,324
3,324
3,324
13,977
17,337
21,802
4.2
3.6
10.3
13.6
Shareholder's funds
16,207
17,300
20,660
25,126
357.9
(13.8)
186.7
31.2
Total liabilities
39,300
45,968
61,986
78,313
0.0
1.7
1.0
1.0
48.8
52.1
62.2
75.6
FY08
FY09E
FY10E
FY11E
EBITDA margin
56.2
37.2
45.8
35.2
EBIT margin
42.3
24.3
35.4
25.4
Net profit margin
15.5
13.5
18.4
13.7
ROE
11.4
7.1
18.1
19.7
8.2
5.9
11.6
11.9
Cash flow statement
BVPS (Rs)
Financial ratios
Y/E March (Rs mn)
FY08
FY09E
FY10E
FY11E
Y/E March
Net income + Depreciation
2,282
2,353
5,471
7,774
Profitability & Return ratios (%)
Non-cash adjustments
3,324 12,883
(35)
707
49
40
(1,586)
(1,420)
1,669
(3,370)
662
1,640
7,190
4,444
(6,964)
(7,285)
(15,859)
(12,448)
Change in investments
(610)
930
1,108
-
ROCE
Other investing cash flow
1,802
2
-
-
Working Capital & Liquidity ratios
Cash flow from investing
(5,773)
(6,353)
(14,750)
(12,448)
Receivables (days)
39
5
3
4
8,358
208
-
-
Inventory (days)
34
84
87
55
(2,324)
4,581
9,831
7,897
Payables (days)
55
57
113
117
Current ratio (x)
9.1
7.9
2.7
2.3
Quick ratio (x)
0.1
0.1
0.0
0.1
Gross asset turnover
0.3
0.4
0.5
0.5
Total asset turnover
0.2
0.2
0.3
0.5
Interest coverage ratio
1.6
1.6
2.4
2.3
Adjusted debt/equity
1.2
1.4
1.7
1.7
3.0
Changes in working capital Cash flow from operations Capital expenditure
Issue of equity Issue/repay debt Dividends paid
(15)
(223)
652
372
Other financing cash flow
-
-
-
-
Change in cash & cash eq
908
(146)
2,922
265
5,222
4,148
5,517
5,231
Closing cash & cash eq
Economic Value Added (EVA) analysis Y/E March
FY08
FY09E
FY10E
FY11E
WACC (%)
11.5
11.9
11.9
11.9
8.2
4.5
12.1
11.4
Invested capital (Rs mn)
31,479
38,611
49,934
64,305
EVA (Rs mn)
(1,045)
(2,846)
110
(3.3)
(7.4)
0.2
ROIC (%)
EVA spread (%)
Turnover & Leverage ratios (x)
Valuation ratios (x) EV/Sales
13.5
11.2
5.3
EV/EBITDA
23.9
30.0
11.5
8.5
(331)
P/E
50.0
58.0
20.2
15.4
(0.5)
P/BV
4.3
4.0
3.4
2.8
62
IRB Infrastructure
Sector Report
05 October 2009
Quarterly trend Particulars
Q1FY09
Q2FY09
Q3FY09
Q4FY09
Q1FY10
Revenue (Rs mn)
2,301
2,016
2,391
3,211
4,141
YoY growth (%)
NA
NA
NA
NA
80.0
QoQ growth (%)
NA
(12.4)
18.6
34.3
29.0
1,174
985
1,015
1,205
1,662
EBITDA margin (%)
51.0
48.9
42.5
37.5
40.1
Adj net income (Rs mn)
542
412
382
422
888
YoY growth (%)
NA
NA
NA
NA
64
QoQ growth (%)
NA
(24)
(7)
10
110
Percentage
FY07
FY08
FY09E
FY10E
FY11E
Tax burden (Net income/PBT)
50.6
68.4
83.9
78.5
77.0
Interest burden (PBT/EBIT)
39.5
53.7
66.5
66.0
69.9
EBIT margin (EBIT/Revenues)
36.9
42.3
24.3
35.4
25.4
Asset turnover (Revenues/Avg TA)
18.9
20.4
20.7
34.6
47.0
857.8
358.7
254.5
284.4
306.4
11.9
11.4
7.1
18.1
19.7
EBITDA (Rs mn)
DuPont analysis
Leverage (Avg TA/Avg equtiy) Return on equity
Shareholding pattern
Company profile IRB Infrastructure is one of India’s leading private road infrastructure
(%)
companies operating primarily in two segments, i.e., road BOT and
Promoters FIIs
construction projects. The company has a portfolio of 12 BOT road projects, of which 10 are operational, one is under construction,
Dec-08
Mar-09
Jun-09
74.4
74.4
73.9
16.5
13.0
11.2
and one is yet to achieve financial closure. Its construction order
Banks & FIs
3.8
4.1
4.6
book totals Rs 63bn and is bifurcated between EPC (Rs 35bn)
Public
5.3
8.5
10.3
executable within three years, and O&M contracts (Rs 28bn) executable within 10–12 years.
Stock performance
126
Hold
27-Mar-09 Company Update
79
122
Buy
25-May-09 Results Review
136
125
Hold
22-Jun-09
Company Update
135
165
Buy
30-Jul-09
Results Review
188
208
Buy
209
224
Buy
05-Oct-09 Sector Report
Buy
135 90 45
Sep-09
112
●
Hold
Aug-09
Results Review
●
180
Jul-09
30-Jan-09
225
Jun-09
Hold
May-09
130
Apr-09
112
Mar-09
Initiating Coverage
Reco
Feb-09
14-Jan-09
Reco price Tgt price
Jan-09
Event
Dec-08
Date
Nov-08
Recommendation history
63
IVRCL Infrastructure
Sector Report
05 October 2009
IVRCL Infrastructure On a firm footing
What’s New?
Healthy order book with plans to diversify globally: IVRCL has an order book of Rs 149bn (including L1 orders of Rs. 10bn) at the end of June ’09, wherein water and environment projects account for the lion’s share of 65%, buildings 20%, power and transmission 10%, and transportation 5%. Post June, the company has bagged orders worth Rs 16.3bn. It is also the lowest bidder (L1) in one road project Sion-Panvel, valued at Rs 15bn respectively. IVRCL is looking to diversify geographically by entering into the Middle East, mainly in the water and power divisions. It expects to close FY10 with an order book of Rs 170bn–180bn, implying fresh inflows of Rs 90bn–100bn in FY10. About 90–95% of the order book consists of government projects. In terms of geography, Andhra Pradesh contributes 30% to the total book. IVRCL has maintained its topline growth guidance of 30–35% for FY10 with margins at ~9.5%.
Target
Rating
Estimates
CMP
TARGET
RATING
RISK
Rs 388
Rs 434
BUY
HIGH
BSE
NSE
BLOOMBERG
530773
IVRCLINFRA
IVRC IN
Company data Market cap (Rs mn / US$ mn)
51,682 / 1,082
Outstanding equity shares (mn)
133
Free float (%)
90.4
Matured BOT portfolio: The company plans to treble its road portfolio from the current Rs 18bn to Rs 60bn over the next 12 months with an average equity IRR of 16%. It expects three ongoing BOT projects to start contributing to revenue over the next 12 months with a daily toll collection of Rs 5mn. It intends to rope in some private equity players for funding or opt for a stake sale. The average cost of debt for BOT projects is ~10–11%.
Dividend yield (%)
Returns (%)
CMP
1-mth
3-mth
6-mth
Jalandhar–Amritsar project cost revised upwards: The Jalandhar–Amritsar Tollways project cost has been revised from Rs 2.4bn to Rs 3.4bn due to a change in scope of work. IVRCL has obtained a loan sanction for Rs 795mn to meet the increase in project cost; the balance will be funded through an equity infusion.
IVRCL Infra
388
7.5
10.3
202.2
17,135
10.2
17.0
73.0
Chennai desalination plant to be completed in Oct: IVRCL holds a 75% stake in the Chennai water desalination project. Owing to the impact of forex fluctuations on imported capital goods and delays in commissioning due to force majeure conditions, the project cost has escalated from Rs 4.9bn to Rs 5.7bn. The completion timeline has been extended from August ’08 to October ’09, mainly on account of consecutive cyclones, abnormal climatic conditions at the site and other unforeseen circumstances. Target raised to Rs 434: The stock is currently trading at 17.2x FY11E earnings and adjusting the subsidiary value, it trades at 14.0x FY11E earnings. We are revising our target price upward to Rs. 434 from 412 earlier. We maintain our Buy rating on the stock.
Financial highlights (Rs mn) Revenue Growth (%) Adj net income
0.4
52-week high/low (Rs)
402 / 57
2-month average daily volume
3,229,064
Stock performance
Sensex
P/E comparison (x) 40 30
IVRCL
Cap. Go o ds
27.9 29.6 20.4
24.9
17.2 21.1
20 10 0 FY09
FY10E
FY11E
Valuation matrix (x)
FY08
FY09
FY10E
FY11E
P/E @ CMP
28.0
27.9
20.4
17.2
P/E @ Target
31.4
31.2
22.8
19.2
EV/EBITDA @ CMP
19.1
16.3
11.7
9.7
Profitability and return ratios FY08
FY09
FY10E
FY11E
36,606
48,819
63,465
76,157
58.8
33.4
30.0
20.0
1,865
1,880
2,564
3,044
(%)
FY08
FY09
FY10E
FY11E
EBITDA margin
9.9
8.6
9.3
9.3
EBIT margin
9.0
7.7
8.3
8.4
Adj PAT margin
5.1
3.9
4.0
4.0
Growth (%)
28.4
0.8
36.4
18.7
ROE
12.7
11.0
13.8
15.0
FDEPS (Rs)
13.8
13.9
19.0
22.6
ROIC
11.6
10.9
10.4
10.9
Growth (%)
13.3
0.6
36.4
18.7
ROCE
12.1
12.0
11.8
12.3
64
IVRCL Infrastructure
Sector Report
05 October 2009
Order book trend Fig 131 - Q1FY10 order book at Rs 149bn (incl L1 of Rs 10bn) (Rs bn) 160 140 120 100 80 60 40 20 0
Order book
83
Q1
110
96
19
128
24
20
Q2
Q3
124
31
Q4
29
Q1
FY08
Order Received 138 143 145
24
22
Q2
Q3
12 Q4
FY09
Fig 132 - Order book position segment-wise – Q1FY10
149
11
Bldg & Industrial structure 20%
Power & Transmission 10%
Transportation 5%
Water and Environment 65%
Q1 FY10 Source: Company, RHH
Source: Company, RHH
Valuation Fig 133 - SOTP valuation summary Sum-of-the-parts
Business
Method
IVRCL standalone
Construction
FY11E earnings
IVR Prime
Real estate
Market capitalization (20% discount)
Hind Dorr Oliver BOT Project Total
Multiple
Value (Rs mn)
Per share value (Rs)
16x
48,709
361
3,584
27
2,052
15
4,249
31
58,593
434
Market capitalization (20% discount) Road/Water
P/BV
1.5x
Source: RHH
65
IVRCL Infrastructure
Sector Report
05 October 2009
Stock performance Fig 134 - Absolute performance from April ’04 Sensex
600
IVRCL
Fig 135 - Relative performance from April ’04
500 400 300 200 100 0 Apr-04
May-05
Jun-06
Sensex
BSE CG Index
Jul-07
Aug-08
Sep-09
490 440 390 340 290 240 190 140 90 40 Apr-04
May-05
IVRCL
Jun-06
BSE CG Index
Jul-07
Aug-08
Sep-09
Source: Bloomberg, RHH
Source: Bloomberg, RHH
Fig 136 - Relative performance from April ’06 to March ’07
Fig 137 - Relative performance from April ’07 to March ’08
Sensex
IVRCL
BSE CG Index
Sensex
140
185
130
165
120
145
110
125
100
105
90
85
80
65
70 Apr-06
Jul-06
Sep-06
Dec-06
Mar-07
45 Mar-07
Jun-07
IVRCL
Sep-07
BSE CG Index
Dec-07
Source: Bloomberg, RHH
Source: Bloomberg, RHH
Fig 138 - Relative performance from April ’08 to March ’09
Fig 139 - Relative performance from April ’09
Sensex
IVRCL
BSE CG Index
120
Sensex
IVRCL
Mar-08
BSE CG Index
220
100
170
80 120 60 70
40 20 Mar-08
Jun-08
Source: Bloomberg, RHH
Sep-08
Dec-08
Mar-09
20 Mar-09 Apr-09 May-09
Jun-09
Jul-09
Aug-09 Sep-09
Source: Bloomberg, RHH
66
IVRCL Infrastructure
Sector Report
05 October 2009
12-month forward rolling band Fig 140 - P/E band (Rs) 900 800 700 600 500 400 300 200 100 0 Aug-06
Fig 141 - P/BV band (Rs) 40x
1,200 1,000
6.5x
800 20x 10x 4x Jun-07
Mar-08
Dec-08
Sep-09
600 400
3x
200
1.5x
0 Aug-06
0.5x Jun-07
Source: RHH
Source: RHH
Fig 142 - EV/EBITDA band
Fig 143 - EV/Sales band
(Rs mn) 140,000
21x
120,000 100,000
15x
80,000
10x
60,000 40,000
5x
20,000 0 Aug-06
Mar-08
(Rs mn) 140,000 120,000 100,000
1.4x
80,000 60,000
0.8x
40,000 20,000
Jun-07
Mar-08
Dec-08
Sep-09
0 Aug-06
0.2x Jun-07
Mar-08
Source: RHH
Fig 144 - Premium/Discount to BSE 30 P/E
Fig 145 - Market Cap/Sales band
(%) 200
(Rs mn)
150
140,000
Dec-08
Sep-09
160,000 2x
120,000
100
100,000
50
80,000
0
60,000
(50)
20,000
Source: RHH
Sep-09
2x
Source: RHH
(100) Aug-06
Dec-08
1.4x 0.8x
40,000
May-07
Feb-08
Nov-08
Sep-09
0 Aug-06
0.2x Jun-07
Mar-08
Dec-08
Sep-09
Source: RHH
67
IVRCL Infrastructure
Sector Report
05 October 2009
Standalone financials Profit and Loss statement Y/E March (Rs mn) Revenues Growth (%)
Balance sheet FY08
FY09
FY10E
FY11E
36,606
48,819
63,465
76,157
Y/E March (Rs mn)
FY08
FY09
FY10E
FY11E
Cash and cash eq
1,772
1,009
715
516
Accounts receivable
6,585
11,430
13,910
16,692
Inventories
1,943
2,093
3,130
3,756
18,527
23,603
29,092
34,210
58.8
33.4
30.0
20.0
3,617
4,218
5,873
7,099
Growth (%)
55.6
16.6
39.2
20.9
Other current assets
Depreciation & amortisation
328
473
588
681
Investments
3,409
3,893
4,095
4,295
3,288
3,745
5,285
6,418
Gross fixed assets
4,176
6,624
7,644
8,764
56.0
13.9
41.1
21.4
Net fixed assets
3,192
5,208
5,640
6,079
1,165
1,980
2,207
2,674
541
196
400
400
730
973
750
800
-
-
-
(184)
EBITDA
EBIT Growth (%) Interest Other income EBT
CWIP Intangible assets
2,853
2,738
3,827
4,544
Deferred tax assets, net
(103)
(117)
(148)
Income taxes
749
478
1,263
1,499
Other assets
(110)
(188)
(190)
(190)
Effective tax rate (%)
26.2
17.5
33.0
33.0
Total assets
35,756
47,126
56,642
65,573
-
-
-
-
Accounts payable
5,892
10,406
13,340
15,995
Other current liabilities
2,888
4,381
5,757
6,801
238
247
612
612
10,678
13,980
17,980
20,480
-
-
-
-
Extraordinary items Min into / inc from associates
-
-
-
-
Reported net income
2,105
2,260
2,564
3,044
Adjustments
(240)
(380)
-
-
Adjusted net income
1,865
1,880
2,564
3,044
Growth (%)
Provisions Debt funds Other liabilities
28.4
0.8
36.4
18.7
266
267
267
267
133.2
133.5
133.5
133.5
Reserves & surplus
15,793
17,844
18,685
21,417
FDEPS (Rs) (adj)
13.8
13.9
19.0
22.6
Shareholder's funds
16,060
18,111
18,952
21,684
Growth (%)
13.3
0.6
36.4
18.7
Total liabilities
35,756
47,126
56,642
65,573
1.4
1.4
2.0
2.0
120.6
135.7
142.0
162.4
FY08
FY09
FY10E
FY11E
Shares outstanding (mn)
DPS (Rs)
Cash flow statement
Equity capital
BVPS (Rs)
Financial ratios
Y/E March (Rs mn)
FY08
FY09
FY10E
FY11E
Y/E March
Net income + Depreciation
2,433
2,733
3,152
3,725
Profitability & Return ratios (%)
Non-cash adjustments
(313)
(439)
31
36
Changes in working capital
(6,283)
(2,880)
(4,173)
(4,478)
Cash flow from operations
(4,163)
(586)
(990)
(717)
Capital expenditure
(1,627)
(2,153)
(1,224)
(1,120)
(399)
(1,057)
(450)
(550)
-
-
-
-
(2,026)
(3,210)
(1,674)
(1,670)
Receivables (days)
64
8
-
(1,411)
-
Inventory (days)
17
Issue/repay debt
5,929
3,222
4,000
2,500
Payables (days)
72
73
81
84
Dividends paid
(152)
(189)
(219)
(312)
Current ratio (x)
3.3
2.6
2.5
2.4
Quick ratio (x)
1.0
0.8
0.8
0.7
Gross asset turnover
10.8
9.0
8.9
9.3
Total asset turnover
1.1
1.2
1.2
1.2
Interest coverage ratio
2.8
1.9
2.4
2.4
Adjusted debt/equity
0.7
0.8
0.9
0.9
Change in investments Other investing cash flow Cash flow from investing Issue of equity
Other financing cash flow
(63)
-
-
-
Change in cash & cash eq
(466)
(763)
(294)
(199)
Closing cash & cash eq
1,772
1,009
715
516
Economic Value Added (EVA) analysis Y/E March
FY08
FY09
FY10E
FY11E
WACC (%)
12.5
13.1
13.1
13.1
ROIC (%)
11.6
10.9
10.4
10.9
25,202
31,329
36,828
42,258
EVA (Rs mn)
(221)
(664)
(981)
EVA spread (%)
(0.9)
(2.1)
(2.7)
Invested capital (Rs mn)
EBITDA margin
9.9
8.6
9.3
9.3
EBIT margin
9.0
7.7
8.3
8.4
Net profit margin
5.1
3.9
4.0
4.0
ROE
12.7
11.0
13.8
15.0
ROCE
12.1
12.0
11.8
12.3
67
73
73
18
18
20
Working Capital & Liquidity ratios
Turnover & Leverage ratios (x)
Valuation ratios (x) EV/Sales
1.9
1.4
1.1
0.9
EV/EBITDA
19.1
16.3
11.7
9.7
(921)
P/E
28.0
27.9
20.4
17.2
(2.2)
P/BV
3.2
2.9
2.7
2.4
68
IVRCL Infrastructure
Sector Report
05 October 2009
Quarterly trend Particulars
Q1FY09
Q2FY09
Q3FY09
Q4FY09
Q1FY10
Revenue (Rs mn)
9,285
11,366
11,896
16,272
10,807
YoY growth (%)
37.1
65.1
22.0
23.1
16.4
(29.7)
22.4
4.7
36.8
(33.6)
820
913
1,085
1,419
943
QoQ growth (%) EBITDA (Rs mn) EBITDA margin (%)
8.8
8.0
9.1
8.7
8.7
Adj net income (Rs mn)
436
571
465
799
351
YoY growth (%)
14.9
62.0
(27.4)
8.8
(19.5)
(40.6)
31.0
(18.5)
71.6
(56.0)
(%)
FY07
FY08
FY09
FY10E
FY11E
Tax burden (Net income/PBT)
79.9
65.4
68.7
67.0
67.0
Interest burden (PBT/EBIT)
86.2
86.8
73.1
72.4
70.8
9.1
9.0
7.7
8.3
8.4
Asset turnover (Revenues/Avg TA)
101.0
114.8
117.8
122.3
124.6
Leverage (Avg TA/Avg equtiy)
254.0
217.9
242.6
280.0
300.8
16.1
12.7
11.0
13.8
15.0
QoQ growth (%)
DuPont analysis
EBIT margin (EBIT/Revenues)
Return on equity
Shareholding pattern
Company profile IVRCL Infrastructure (IVRCL) is a leading Hyderabad-based civil
(%)
construction company promoted by Mr E Sudhir Reddy. Established
Dec-08
Mar-09
Jun-09
Promoters
9.7
9.7
9.7
FIIs
43.0
48.6
48.4
qualifications. It has executed a variety of projects from irrigation to
Banks & FIs
23.1
19.2
19.1
desalination works. Today, IVRCL has a well-diversified, derisked
Public
24.2
22.5
22.8
in 1987, the company has created a niche for itself in the water segment and is one of the largest players with strong pre-
business mix with a presence across various sectors – buildings and industrial structures, transportation, water and environment.
Stock performance 400
440
Buy
06-Oct-08 Quarterly Preview
225
336
Buy
06-Nov-08 Results Review
105
176
Buy
200
31-Jan-09
Results Review
110
146
Buy
100
02-Jun-09
Results Review
332
370
Buy
0
29-Jul-09
Results Review
317
382
Buy
10-Sep-09 Company Update
346
412
Buy
05-Oct-09 Sector Report
388
434
Buy
●
Buy
Sep-09
Aug-09
Jul-09
Jun-09
May-09
Apr-09
Mar-09
Feb-09
Jan-09
300
Dec-08
Reco
318
Nov-08
Reco price Tgt price
Oct-08
Event
21-Aug-08 RHH Compendium
Sep-08
Date
Aug-08
Recommendation history
69
Jaiprakash Associates
Sector Report
05 October 2009
Jaiprakash Associates On an expansion spree
What’s New?
Aggressive plans across segments: Jaiprakash Associates (JP Associates) intends to embark on an ambitious plan in pursuit of becoming one of India’s largest cement manufacturers with a capacity of 32mn tonnes (mt) by FY12. It also intends to attain leadership in BOT operations and evolve as a key player in power (10-fold capacity ramp up by 2017) and real estate sectors. We expect JP Associates to add 3.1mt of cement capacity this year to its existing capacity of 17mt. The company has a power portfolio of 13,470MW with 60% thermal-hydro mix and 40% merchant power. It also has India’s two largest expressway projects: (a) Ganga Expressway – 1,047 km (with real estate development rights of 3.3bn sq ft), and (b) Yamuna Expressway – 165km (with real estate development rights over 6,250 acres). This provides strong revenue visibility, going forward.
Target
Rating
Estimates
CMP
TARGET
RATING
RISK
Rs 239
Rs 237
HOLD
HIGH
BSE
NSE
BLOOMBERG
532532
JPASSOCIAT
JPA IN
Company data Market cap (Rs mn / US$ mn)
335,489 / 7,025
Outstanding equity shares (mn)
1,404
Raised Rs 15bn through sale of treasury stock: Recently, JP Associates raised Rs 15bn in two tranches: 1) Rs 11.9bn through sale of treasury shares of 50mn at Rs 238/share, 2) ~Rs 5bn through sale of treasury shares of 25mn at ~Rs 200/share. These funds will be used to repay debt and finance expansions of various businesses. JP Associates plans to invest Rs 15bn in the cement division, Rs 5bn in the power division, and Rs 4bn in the E&C division.
Free float (%)
55
Dividend yield (%)
0.4
Securitisation of power assets to ease funding concerns: JP Associates has recently mobilised resources through the securitisation of its 400MW Vishnuprayag Hydro Project, resulting in an inflow of Rs 16.5bn. Securitisation of receivables on JHPLBASPA is also anticipated; the management foresees a net realisation of Rs 11bn from this transaction. In addition, the company has acquired two power generation companies for setting up a 3,300MW plant on BOO basis and is likely to raise funds for these ventures in three tranches this fiscal.
Returns (%)
CMP
1-mth
3-mth
6-mth
JP Associates
239
7.8
15.1
180.3
17,135
10.2
17.0
73.0
52-week high/low (Rs)
Earnings to grow at 33.5% over FY09-FY11: We expect the company’s revenues and earnings to grow at a CAGR of 35.2% and 33.5% respectively over FY09FY11, primarily driven by incremental contribution from enhanced cement capacities and strong execution of construction projects. Maintain Hold: Currently, the stock trades at 22.1x FY11E earnings. We have a revised SOTP target price of Rs 237 from Rs 220 earlier and maintain a Hold rating on the stock. However, we believe the stock has significant embedded value in the long term based on a revival of residential real estate and faster execution of power projects.
Financial highlights (Rs mn) Revenue Growth (%) Adj net income Growth (%) FDEPS (Rs) Growth (%)
19,178,910
Stock performance
Sensex
P/E comparison (x) 40
3,300 flats of Jaypee Green sold in 24 hrs: JP Associates has received an overwhelming response for Jaypee Greens Aman, its newly launched residential project, with 3,300 flats sold within 24 hours.
259 / 47
2-month average daily volume
JP A sso ciates 33.5
29.6
30
Industry
25.5 24.9
22.1 21.1
20 10 0 FY09
FY10E
FY11E
Valuation matrix (x)
FY08
FY09
FY10E
FY11E
P/E @ CMP
48.7
33.5
25.5
22.1
P/E @ Target
48.4
33.3
25.3
21.9
EV/EBITDA @ CMP
39.4
26.7
17.4
15.7
Profitability and return ratios (%)
FY08
FY09E
FY10E
FY11E
EBITDA margin
27.5
28.1
27.2
26.0
EBIT margin
22.4
22.9
22.9
21.5
Adj PAT margin
15.3
15.4
15.1
15.0
ROE
16.3
17.2
21.5
20.5
10.8
ROIC
6.9
7.5
9.5
8.7
15.2
ROCE
8.3
9.0
11.2
11.2
FY08
FY09
FY10E
FY11E
39,851
57,750
91,167
105,623
14.6
44.9
57.9
15.9
6,097
8,891
13,746
15,840
16.4
47.7
53.1
10.8
4.9
7.1
9.4
39.2
45.4
31.6
70
Jaiprakash Associates
Sector Report
05 October 2009
Key developments 3,300MW capacity to be set up through newly acquired power companies
Acquires two power companies On 3 July, 2009, Jaiprakash Power Ventures, a subsidiary of JP Associates, acquired Sangam Power Generation Company (2x660MW) and Prayagraj Power Generation Company (3x660 MW) from UP Power Corporation. Through these acquisitions, JP Associates plans to set up 3,300MW of generation capacity on BOO basis. The management is likely to raise funds for the power venture business in 2–3 tranches this year.
Fig 146 - Power portfolio Regulated Tariff (MW) 300
Merchant Power (MW) -
VERs/CERs
COD
Hydro
Capacity (MW) 300
1.00 Mn VERs
2003
Hydro
400
400
-
1.32 Mn.VERs
2006
Hydro
1,000
800
200
3.35mn CERs*
2011*
Bina Power
Thermal
1,250
625*
625*
-
2011^
Jaypee Nigrie
Thermal
1,320
660*
660*
CERs expected
2012*
6
Karchana
Thermal
1,980
1,320*
660*
1.5mn CERs
2014*
7
Bara
Thermal
3,300
1,980*
1,320*
2.5mn CERs
2014*
8
Lower Siang
Hydro
2,700
1,350*
1,350*
TBD
2015#
9
Hirong
Hydro
500
250*
250*
TBD
2015*
10
Kynshi Stage -II
Hydro
450
225*
225*
TBD
2016*
11
Umngot Stage -I
Hydro
270
135*
135*
TBD
2016*
13,470
8,045
5,425
S.N.
Project
Fuel
1
Baspa-II
2
Vishnuprayag
3
Karcham Wangtoo
4 5
Total Source: RHH, Company
* Expected ^500MW Phase-I by 2011, # 900MW Phase-I by 2015
Residential business – Jaypee Greens Aman generates overwhelming response JP Associates has received an overwhelming response for Jaypee Greens Aman, its newly launched residential project. The company sold 3,300 flats sold in 24 hours and 301,000 sq ft of residential space under this project in April’09. Fig 147 - Real estate development plans 3,300 flats booked in Jaypee Green Aman within 24 hours
Sr. No.
Project
Proposed Development (mn sq ft)
1
Jaypee Greens
2
Yamuna Expressway
3
Ganga Expressway
8 400 3300
Source: Company
Fig 148 - Real estate realisations Project Jaypee Greens Yamuna Expressway
Sold till Apr ’09 (mn sq ft)
Collections (Rs mn)
Avg realisation (Rs/sq ft)
2.9
9,930
5,500
5.45
10,670
5,024
Source: Company
71
Jaiprakash Associates
Sector Report
05 October 2009
Valuation We have valued the stock on SOTP basis and revised our target price upwards to Rs 237 from Rs 220 earlier. Fig 149 - SOTP valuation summary Particulars
Method
Holding
Multiple
Rs mn
No of Shares (mn)
Value per share (Rs)
Construction
EV/EBITDA
9x
105,710
1,464
72
Cement
Ev/tonne $
95
115,425
1,464
79
66,833
1,464
46
915
1,464
1
6,951
1,464
5
104,825
1,464
72
1,007
1,464
1
34,560
1,464
24
436,226
1,464
298
88,751
1,464
61
347,475
1,464
237
Real estate including Yamuna Ganga Expressway
BV of investments in FY09
Jaypee Greens Jaypee hydro (merged entity) Jaypee hotels
M cap (20% holding) P/E
Treasury shares
M cap (30% holding)
Total Less Net debt Total
76.55% 74.78%
6x
Source: RHH
72
Jaiprakash Associates
Sector Report
05 October 2009
Stock performance Fig 150 - Absolute performance from June ’04 Sensex
500
JP Associates
Fig 151 - Relative performance from June ’04 BSE CG Index
Sensex
JP Associates
BSE CG Index
540
400
440
300
340
200
240
100
140
0 Jun-04
Jul-05
Jul-06
Aug-07
Sep-08
Sep-09
40 Jun-04
Jul-05
Jul-06
Aug-07
Sep-08
Sep-09
Source: Bloomberg, RHH
Source: Bloomberg, RHH
Fig 152 - Relative performance from April ’06 to March ’07
Fig 153 - Relative performance from April ’07 to March ’08
Sensex
135
JP Associates
Sensex
BSE CG Index
JP Associates
BSE CG Index
315
125
265
115
215
105
165
95
115
85 75 Mar-06
Jun-06
Sep-06
Dec-06
Mar-07
65 Apr-07
Jul-07
Sep-07
Dec-07
Source: Bloomberg, RHH
Source: Bloomberg, RHH
Fig 154 - Relative performance from April ’08 to March ’09
Fig 155 - Relative performance from April ’09
Sensex
JP Associates
BSE CG Index
120
JP Associates
BSE CG Index
200
110
180
100
160
90 80
140
70
120
60
100
50 40 Mar-08
Sensex
Mar-08
Jun-08
Source: Bloomberg, RHH
Sep-08
Dec-08
Mar-09
80 Mar-09 Apr-09 May-09
Jun-09
Jul-09
Aug-09 Sep-09
Source: Bloomberg, RHH
73
Jaiprakash Associates
Sector Report
05 October 2009
12-month forward rolling band Fig 156 - P/E band
Fig 157 - P/BV band
(Rs) 800
(Rs) 600
700
70x
600 50x
500 400
10x
500 400 6x
300
300 200 100 0 Aug-04
Aug-05
Aug-06
Aug-07
Aug-08
25x
200
10x
100
Aug-09
3x 1x
0 Aug-04
Aug-05
Source: RHH
Source: RHH
Fig 158 - EV/EBITDA band
Fig 159 - EV/Sales band
(Rs mn) 1,400,000
Aug-06
Aug-09
(Rs mn) 45x
1,000,000
1,200,000
12x
1,000,000
800,000
30x
600,000
800,000
8x
600,000
400,000 200,000 0 Aug-04
Aug-05
Aug-06
Aug-07
Aug-08
15x
400,000
5x
200,000 0 Aug-04
Aug-09
4x 1.5x Aug-05
Aug-06
Source: RHH
Source: RHH
Fig 160 - Premium / Discount to BSE 30 P/E
Fig 161 - Market Cap/Sales band
Aug-07
Aug-08
(Rs mn) 1,200,000
(%) 200
Aug-09
11.5x
1,000,000
150
800,000
100
8x
600,000
50
400,000
0
Source: RHH
Aug-08
1,400,000
1,200,000
(50) Aug-04
Aug-07
4x
200,000 Aug-05
Aug-06
Aug-07
Aug-08
0 Aug-04 Aug-05
Aug-09
0.5x Aug-06 Aug-07 Aug-08
Aug-09
Source: RHH
74
Jaiprakash Associates
Sector Report
05 October 2009
Standalone financials Profit and Loss statement Y/E March (Rs mn) Revenues Growth (%)
Balance sheet FY08
FY09
FY10E
FY11E
39,851
57,750
91,167
105,623
14.6
44.9
57.9
15.9
10,970
16,200
24,804
27,482
16.4
47.7
53.1
10.8
Depreciation & amortisation
2,033
2,957
3,931
4,798
EBIT
8,937
13,243
20,873
22,684
14.6
48.2
57.6
8.7
Interest
3,391
5,023
6,528
Other income
2,888
4,147
EBT
8,434
Income taxes
2,337
EBITDA Growth (%)
Growth (%)
Effective tax rate (%) Extraordinary items Min into / inc from associates Reported net income Adjustments Adjusted net income Growth (%) Shares outstanding (mn) FDEPS (Rs) (adj) Growth (%) DPS (Rs)
Y/E March (Rs mn) Cash and cash eq
FY09E
FY10E
FY11E
19,160
6,739
10,272
5,862
8,702
13,738
15,916
Inventories
13,075
19,777
31,222
37,619
Other current assets
22,538
24,649
32,747
35,607
Investments
32,248
40,448
47,948
54,948
Gross fixed assets
51,662
81,662
101,662
121,162
Net fixed assets
37,115
64,214
80,284
94,985
7,240
CWIP
42,190
25,000
25,000
20,000
5,014
6,866
Intangible assets
-
-
-
-
12,367
19,360
22,309
(5,597)
(5,663)
(5,723)
(5,760)
3,477
5,614
6,470
Other assets
1
1
1
1
27.7
28.1
29.0
29.0
Total assets
165,587
196,308
231,956
263,589
-
-
-
-
Accounts payable
7,010
8,702
14,986
17,363
Other current liabilities
41,148
-
-
-
-
6,097
8,891
13,746
15,840
-
-
-
-
6,097
8,891
13,746
15,840
46.9
45.8
54.6
15.2
1,171.5
1,183.8
1,403.7
1,403.7
4.9
7.1
9.4
39.2
45.4
1.0
1.0
Accounts receivable
FY08 18,155
Deferred tax assets, net
26,481
30,414
37,081
Provisions
3,061
4,088
5,836
6,573
Debt funds
83,056
95,431
103,931
113,931
-
-
-
-
Other liabilities
2,343
2,368
2,372
2,372
Reserves & surplus
43,637
55,306
67,750
82,203
10.8
Shareholder's funds
45,980
57,674
70,122
84,575
31.6
15.2
Total liabilities
165,587
196,308
231,956
263,589
0.8
0.8
41.2
50.7
51.6
61.9
FY08
FY09E
FY10E
FY11E
Cash flow statement
Equity capital
BVPS (Rs)
Financial ratios
Y/E March (Rs mn)
FY08
FY09E
FY10E
FY11E
Net income + Depreciation
8,169
11,848
17,676
20,638
Non-cash adjustments
3,818
(724)
1,748
737
EBITDA margin
27.5
28.1
27.2
26.0
332
(5,115)
(11,569)
(4,955)
EBIT margin
22.4
22.9
22.9
21.5
12,319
6,009
7,855
16,421
Net profit margin
15.3
15.4
15.1
15.0
Capital expenditure
(30,475)
(12,810)
(20,000)
(14,500)
ROE
16.3
17.2
21.5
20.5
Change in investments
(14,461)
(8,200)
(7,500)
(7,000)
8.3
9.0
11.2
11.2
1,035
-
-
-
(43,901)
(21,010)
(27,500)
(21,500)
8,517
3,950
90
-
Inventory (days)
Issue/repay debt
28,125
13,146
8,500
10,000
Payables (days)
64
55
60
60
Dividends paid
(1,204)
(1,341)
(1,385)
(1,387)
Current ratio (x)
1.8
1.9
1.6
1.7
Quick ratio (x)
0.7
0.2
0.3
0.3
Gross asset turnover
0.9
0.9
1.0
0.9
Total asset turnover
0.3
0.3
0.4
0.4
Interest coverage ratio
2.6
2.6
3.2
3.1
Adjusted debt/equity
1.1
1.1
1.1
1.0
Changes in working capital Cash flow from operations
Other investing cash flow Cash flow from investing Issue of equity
Other financing cash flow
-
-
-
-
Change in cash & cash eq
3,856
754
(12,440)
3,533
18,155
19,160
6,739
10,272
Closing cash & cash eq
Economic Value Added (EVA) analysis Y/E March
FY08
FY09E
FY10E
FY11E
WACC (%)
12.1
12.6
12.7
12.9
6.9
7.5
9.5
8.7
114,786
138,952
174,031
195,651
(5,997)
(7,027)
(5,701)
(8,206)
(5.2)
(5.1)
(3.3)
(4.2)
ROIC (%) Invested capital (Rs mn) EVA (Rs mn) EVA spread (%)
Y/E March Profitability & Return ratios (%)
ROCE Working Capital & Liquidity ratios Receivables (days)
54
55
55
55
120
125
125
130
Turnover & Leverage ratios (x)
Valuation ratios (x) EV/Sales
10.9
7.5
4.7
4.1
EV/EBITDA
39.4
26.7
17.4
15.7
P/E
48.7
33.5
25.5
22.1
5.8
4.7
4.6
3.9
P/BV
75
Jaiprakash Associates
Sector Report
05 October 2009
Quarterly trend Particulars
Q1FY09
Q2FY09
Q3FY09
Q4FY09
Q1FY10
Revenue (Rs mn)
11,591
11,826
13,217
20,846
20,671
YoY growth (%)
23.0
37.1
46.9
62.8
78.3
QoQ growth (%) EBITDA (Rs mn) EBITDA margin (%)
(9.5)
2.0
11.8
57.7
(0.8)
3,200
3,478
2,473
7,050
5,417
27.6
29.4
18.7
33.8
26.2
1,252
2,031
1,655
3,853
2,181
YoY growth (%)
(10)
96
6
83
74
QoQ growth (%)
(41)
62
(19)
133
(43)
(%)
FY07
FY08
FY09E
FY10E
FY11E
Tax burden (Net income/PBT)
66.9
72.3
71.9
71.0
71.0
Interest burden (PBT/EBIT)
79.5
94.4
93.4
92.7
98.3
EBIT margin (EBIT/Revenues)
22.4
22.4
22.9
22.9
21.5
Asset turnover (Revenues/Avg TA)
36.0
29.2
31.9
42.6
42.6
348.0
364.8
349.2
335.2
320.4
14.9
16.3
17.2
21.5
20.5
Adj net income (Rs mn)
DuPont analysis
Leverage (Avg TA/Avg equtiy) Return on equity
Shareholding pattern
Company profile The Jaiprakash group is a well-diversified infrastructure-oriented
(%)
conglomerate with a formidable presence in engineering &
Dec-08
Mar-09
Jul-09
Promoters
45.3
45.2
50.1
FIIs
23.8
25.0
24.5
expressway businesses. The group has a total cement capacity of
Banks & FIs
12.7
11.8
10.4
9mn tonnes and intends to expand this to 32mn tonnes by FY12.
Public
18.2
18.0
15.0
construction and cement. The group also has interests in the power and hospitality sectors and has recently entered real estate and
Sell
250
29-Apr-09 Results Review
130
120
Hold
200
8-Jul-09
Company Update
194
193
Hold
150
27-Jul-09
Results Review
240
220
Hold
100
239
237
Hold
05-Oct-09 Sector Report
50
●
Sell
●
Hold
Sep-09
69
Aug-09
84
Jul-09
300
25-Mar-09 Initiating Coverage
Jun-09
Reco
May-09
Reco price Tgt price
Apr-09
Event
Mar-09
Date
Stock performance
Feb-09
Recommendation history
76
Larsen & Toubro
Sector Report
05 October 2009
Larsen & Toubro Going strong!
What’s New?
Concerns on order inflows alleviated: Although Larsen & Toubro (L&T) registered a 21.5% YoY decline in order booking in Q1FY10 (Rs 96bn), the pace has picked up substantially since then with order wins worth Rs 140bn post Q1. We expect order inflows to reach Rs 650bn in FY10 (25% growth: lower end of the management guidance) which will provide strong revenue visibility. Power business gains traction: L&T intends to aggressively enter the power business in order to tap the sector’s immense potential and capitalise on the limited competition in this space (BHEL enjoys a monopoly at present). The company has already made a headway in the power equipment market by securing orders from APGENCO (Rs 15.5bn), JP Group (Rs 40bn) and GMR Infrastructure (Rs 20bn). It is also amongst the strongest contenders for securing orders worth Rs 350bn–400bn from NTPC’s bulk tenders by Q1FY11 and orders of Rs 90bn from the JP Group. Earnings to grow by 22.1% over FY09-FY11: We expect L&T’s standalone and consolidated earnings to increase at a 22.1% CAGR and 22.8% CAGR respectively over FY09-FY11, led by strong execution and order booking. Maintain Buy: The stock is currently trading at 24.1x on FY11E standalone earnings and 21.5x on FY11E consolidated earnings. It has traded at an average premium of 35% to the Sensex over the last three years. We expect the stock to maintain this premium over the next few years, given the robust outlook for the sector and L&T’s strong positioning. We have valued L&T’s core business at 23x FY11E earnings and subsidiaries at Rs 190 (11% of SOTP target). We reiterate a Buy on the stock; our recommendation is based on the expected earnings growth over FY09-FY11 and strong incremental contribution from new business verticals like power, nuclear and defence projects.
Target
Rating
Estimates
CMP
TARGET
RATING
RISK
Rs 1,665
Rs 1,781
BUY
MEDIUM
BSE
NSE
BLOOMBERG
500510
LT
LT IN
Company data Market cap (Rs mn / US$ mn)
978,403 / 20,488
Outstanding equity shares (mn)
586
Free float (%)
86
Dividend yield (%)
0.9
52-week high/low (Rs)
1,800 / 556
2-month average daily volume
2,077,750
Stock performance Returns (%) L&T
CMP
1-mth
3-mth
6-mth
1,665
7.4
5.8
147.6
BSE Sector
13,731
6.1
6.4
112.4
Sensex
17,135
10.2
17.0
73.0
P/E comparison (X) 40
L&T*
Industry
35.9 29.6
30
26.6 24.9
21.5 21.1
20 10 0 FY09
FY10E
FY11E
* Consolidated
Valuation matrix (x)
Financial highlights (Rs mn) Revenue Growth (%) Adj net income
FY08
FY09
FY10E
FY11E
P/E @ CMP
44.5
35.9
29.8
24.1
P/E @ Target
47.6
38.4
31.9
25.8
EV/EBITDA @ CMP
35.2
27.2
22.9
18.4
Profitability and return ratios FY08
FY09
FY10E
FY11E
250,094
339,264
401,887
502,079
42.0
35.7
18.5
24.9
21,713
27,097
32,610
56,559
(%)
FY08
FY09
FY10E
FY11E
EBITDA margin
11.8
11.3
11.3
11.3
EBIT margin
11.0
10.5
10.5
10.5
8.7
8.0
8.1
8.0
Adj PAT margin
Growth (%)
54.9
24.8
20.3
24.3
ROE
28.3
24.6
23.8
24.6
FDEPS (Rs)
37.4
46.4
55.9
69.2
ROIC
22.9
20.1
16.7
17.5
Growth (%)
54.4
24.1
20.4
23.8
ROCE
21.5
18.5
17.2
18.2
77
Larsen & Toubro
Sector Report
05 October 2009
Revenue and order book trend Fig 162 - Trend in order book & order inflows (Rs bn) Order Book Order Booking 800 688 703 717 630 700 582 600 496 527 416 440 500 357 369 400 287 307 300 130 116 122 125 146 125 200 96 99 95 75 61 77 71 100 0 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 FY07
FY08
FY09
FY10
Source: Company, RHH
Fig 163 - Sector wise break-up of order book – Q1FY10 Process
Hydrocarbons
Order book
16
12
Power
Infrastructure
24
39
Fig 164 - Geographical break-up – Q1FY10 others
9
Domestic Net sales
Middle East
9
30
12
38
20
40
60
33
94
11 Order book
(%) 0
80
100
(%)
8 6
86
0
20
40
60
Source: Company, RHH
Source: Company, RHH
Fig 165 - Order book (customer-wise)
Fig 166 - Order inflows (customer-wise)
(%) 60
55
Q1FY09
(%) 70
Q1FY10
51
50
Q1FY09
50
36
13
10
2
120
Q1FY10 51
28
30
20
100
43
40
30
80
59
60
43
40
6
15
79
Order inflow Order inflows
Other exports
20
6
10
13
0
0 Public
Source: Company, RHH
Private
Development projects (L&T)
Public
Private
Development projects (L&T)
Source: Company, RHH
78
Larsen & Toubro
Sector Report
05 October 2009
Fig 167 - E&C segment: Sales and order book trend E&C (Rs bn)
Q1FY08
Q2FY08
Q3FY08
Q4FY08
FY08
Q1FY09
Q2FY09
Q3FY09
Q4FY09
FY09
Q1FY10
Order book
396.9
420.3
476.1
509.3
509.3
563.4
609.3
670.3
687.5
687.5
699.5
order inflow
82.2
59.1
114.6
98.1
353.9
105.2
104.3
133.8
112.9
456.2
83.7
YoY (%)
30.4
27.5
40.3
60.2
40.3
28.0
76.7
16.7
15.1
28.9
(20.4)
Sales
33.2
41.1
48.9
66.2
189.5
55.8
59.4
73.4
91.7
279.8
65.7
YoY (%)
28.7
59.1
89.5
156.5
44.4
67.8
44.6
50.0
38.5
47.7
17.9
9.6
11.7
12.1
15.7
12.8
9.7
11.5
11.4
16.5
12.9
10.6
EBIT Margins (%) Source: Company, RHH
Fig 168 - E&E segment: Sales and margin trend E&E (Rs bn)
Q1FY08
Q2FY08
Q3FY08
Q4FY08
FY08
Q1FY09
Q2FY09
Q3FY09
Q4FY09
FY09
Q1FY10
5.0
6.2
5.7
7.2
24.2
5.8
7.0
5.9
6.9
25.1
5.8
YoY (%)
31.7
43.4
29.5
23.8
31.8
14.9
12.2
3.2
(3.3)
3.6
(0.3)
EBIT Margins (%)
16.7
18.4
17.5
15.7
15.7
11.8
12.9
12.2
14.1
13.2
11.8
Sales
Source: Company, RHH
Fig 169 - MIP segment: Sales and margin trend MIP (Rs bn)
Q1FY08
Q2FY08
Q3FY08
Q4FY08
FY08
Q1FY09
Q2FY09
Q3FY09
Q4FY09
FY09
Q1FY10
4.1
5.6
5.7
7.8
23.3
6.4
6.6
5.1
6.1
24.0
4.4
YoY (%)
28.1
33.3
41.8
21.9
30.8
55.1
18.2
(9.3)
(22.2)
3.0
(31.3)
EBIT Margins (%)
22.4
15.9
21.0
18.2
18.9
23.2
21.1
13.6
19.9
20.1
21.8
Sales
Source: Company, RHH
Valuation Fig 170 - SOTP valuation summary Particulars
Basis
L&T Standalone
23x FY11 EPS
1,591.0
L&T Infotech
12x FY11 EPS
66.7
L&T IDPL
Based on PE deal
44.5
L&T Finance
1.1x FY11 book value
14.9
L&TIFC
1.1x FY11 book value
21.8
Manufacturing JVs
10x FY11 EPS
16.6
International Subsidiaries
10x FY11 EPS
25.7
Total
Per share value (Rs)
1,781
Source: RHH
79
Larsen & Toubro
Sector Report
05 October 2009
Stock performance Fig 171 - Absolute performance from April ’04 Sensex
2,500
L&T
Fig 172 - Relative performance from April ’04 Sensex
BSE CG Index
L&T
BSE CG Index
390
2,000
340 290
1,500
240
1,000
190 140
500
90
0 Apr-04
May-05
Jun-06
Jul-07
Aug-08
Sep-09
40 Apr-04
May-05
Jun-06
Jul-07
Aug-08
Sep-09
Source: Bloomberg, RHH
Source: Bloomberg, RHH
Fig 173 - Relative performance from April ’06 to March ’07
Fig 174 - Relative performance from April ’07 to March ’08
Sensex
L&T
BSE CG Index
Sensex
120
205
110
185
100
165
90
145
80
125
70
105
60 Apr-06
Jul-06
Sep-06
Dec-06
Mar-07
85 Mar-07
L&T
Jun-07
Sep-07
BSE CG Index
Dec-07
Source: Bloomberg, RHH
Source: Bloomberg, RHH
Fig 175 - Relative performance from April ’08 to March ’09
Fig 176 - Relative performance from April ’09
Sensex
L&T
BSE CG Index
Sensex
120
180
110
160
100
BSE CG Index
140
90
120
80
100
70
80
60 50 Mar-08
L&T
Mar-08
Jun-08
Source: Bloomberg, RHH
Sep-08
Dec-08
Mar-09
60 Mar-09
May-09
Jun-09
Jul-09
Aug-09
Sep-09
Source: Bloomberg, RHH
80
Larsen & Toubro
Sector Report
05 October 2009
12-month forward rolling band Fig 177 - P/E band
Fig 178 - P/BV band
(Rs)
(Rs)
3,000
2,500
2,500
40x
2,000
8x
2,000
6x
1,500
1,500 1,000 500
20x
1,000
4x
10x
500
2x
4x
0 Aug-06
Jun-07
Mar-08
Dec-08
Sep-09
0 Aug-06
Jun-07
Source: RHH
Source: RHH
Fig 179 - EV/EBITDA band
Fig 180 - EV/Sales band
Mar-08
1,400,000 1,200,000
25x
1,000,000
20x
800,000
15x
600,000
10x
400,000 200,000 0 Aug-06
Jun-07
Mar-08
Dec-08
Sep-09
1,800,000 1,600,000 1,400,000 1,200,000 1,000,000 800,000 600,000 400,000 200,000 0 Aug-06
3.5x 2.5x 1.5x 0.8x
Jun-07
Mar-08
Source: RHH
Source: RHH
Fig 181 - Premium/Discount to BSE 30 P/E
Fig 182 - Market Cap/Sales band
Dec-08
Sep-09
(Rs mn)
(%) 200 150 100 50
Source: RHH
Sep-09
(Rs mn)
(Rs mn) 1,600,000
0 Aug-06
Dec-08
May-07
Feb-08
Nov-08
Sep-09
1,800,000 1,600,000 1,400,000 1,200,000 1,000,000 800,000 600,000 400,000 200,000 0 Aug-06
3.5x 2.5x 1.5x 0.8x
Jun-07
Mar-08
Dec-08
Sep-09
Source: RHH
81
Larsen & Toubro
Sector Report
05 October 2009
Standalone financials Profit and Loss statement Y/E March (Rs mn) Revenues Growth (%) EBITDA Growth (%) Depreciation & amortisation EBIT Growth (%)
Balance sheet FY08
FY09
FY10E
FY11E
250,094
339,264
401,887
502,079
42.0
35.7
18.5
24.9
29,579
38,342
45,490
56,559
66.3
29.6
18.6
24.3
2,022
2,828
3,295
3,795
27,556
35,513
42,195
52,764
Y/E March (Rs mn)
FY08
FY09
FY10E
FY11E
Cash and cash eq
9,644
7,727
10,022
11,348
Accounts receivable
73,650
100,555
115,611
144,434
Inventories
43,059
58,051
66,944
83,634
Other current assets
37,714
68,122
66,279
82,749
Investments
69,223
82,637
92,837
102,837
Gross fixed assets
42,058
55,905
65,905
75,905
Net fixed assets
29,192
41,174
47,879
54,083
7,293
10,803
12,000
11,000
-
-
-
-
(614)
(485)
(485)
(485)
71.1
28.9
18.8
25.0
Interest
1,227
3,502
4,013
4,387
CWIP
Other income
5,203
15,122
8,403
9,299
Intangible assets
31,533
47,134
46,585
57,676
Deferred tax assets, net
9,821
12,312
13,976
17,303
Other assets
-
(28)
923
3,645
31.1
26.1
30.0
30.0
Total assets
269,162
368,581
412,011
493,245
Extraordinary items
-
-
-
-
Accounts payable
54,922
68,136
71,128
88,861
Min into / inc from associates
-
-
-
-
Other current liabilities
62,495
79,623
89,736
112,108
21,713
34,822
32,610
40,373
-
(7,725)
-
-
21,713
27,097
32,610
40,373
EBT Income taxes Effective tax rate (%)
Reported net income Adjustments Adjusted net income Growth (%) Shares outstanding (mn)
Provisions
20,354
30,665
28,953
36,198
Debt funds
35,840
65,560
72,960
76,968
-
-
-
-
Other liabilities
54.9
24.8
20.3
23.8
583.6
584.0
583.6
583.6
Reserves & surplus
Equity capital
FDEPS (Rs) (adj)
37.4
46.4
55.9
69.2
Shareholder's funds
Growth (%)
54.4
24.1
20.4
23.8
Total liabilities
9.8
15.5
14.5
18.0
BVPS (Rs)
42.1
51.1
62.6
77.1
DPS (Rs) Consol FDEPS (Rs)
Cash flow statement Y/E March (Rs mn)
FY08
FY09
FY10E
FY11E
40,263
35,905
44,168
(389)
(22,314)
-
-
Changes in working capital
(3,767)
(20,515)
(10,559)
(19,372)
Cash flow from operations
21,056
(2,565)
25,346
24,796
Net profit margin
Capital expenditure
(16,221)
(19,798)
(11,197)
(9,000)
Change in investments
(37,886)
5,930
(10,200)
(10,000)
(664)
(6,236)
-
-
Non-cash adjustments
Other investing cash flow Cash flow from investing
1,171
1,171
1,171
123,426
148,062
177,938
95,551
124,597
149,234
179,110
269,162
368,581
412,011
493,245
163.7
213.4
255.7
306.9
FY08
FY09
FY10E
FY11E
Financial ratios 25,212
Net income + Depreciation
585 94,966
Y/E March Profitability & Return ratios (%) EBITDA margin
11.8
11.3
11.3
11.3
EBIT margin
11.0
10.5
10.5
10.5
8.7
8.0
8.1
8.0
ROE
28.3
24.6
23.8
24.6
ROCE
21.5
18.5
17.2
18.2
Working Capital & Liquidity ratios
(54,770)
(20,105)
(21,397)
(19,000)
Receivables (days)
94
94
98
95
Issue of equity
17,016
230
-
-
Inventory (days)
70
70
75
72
Issue/repay debt
16,740
25,576
7,400
4,008
Payables (days)
90
86
83
77
Dividends paid
(1,335)
(4,388)
(9,054)
(8,478)
Current ratio (x)
1.4
1.6
1.6
1.6
Quick ratio (x)
0.7
0.7
0.8
0.8
Gross asset turnover
7.1
6.9
6.6
7.1
Total asset turnover
1.1
1.1
1.0
1.1
22.5
10.1
10.5
12.0
0.4
0.5
0.5
0.4
Other financing cash flow
(5)
(667)
-
-
Change in cash & cash eq
(1,300)
(1,917)
2,295
1,325
9,644
7,727
10,022
11,348
Closing cash & cash eq
Economic Value Added (EVA) analysis Y/E March
FY08
FY09
FY10E
FY11E
WACC (%)
14.3
14.2
14.2
13.8
ROIC (%)
22.9
20.1
16.7
17.5
98,515
162,967
190,850
230,654
8,485
9,606
4,814
8,500
8.6
5.9
2.5
3.7
Invested capital (Rs mn) EVA (Rs mn) EVA spread (%)
Turnover & Leverage ratios (x)
Interest coverage ratio Adjusted debt/equity Valuation ratios (x) EV/Sales
4.2
3.1
2.6
2.1
EV/EBITDA
35.2
27.2
22.9
18.4
P/E
44.5
35.9
29.8
24.1
P/BV
10.2
7.8
6.5
5.4
82
Larsen & Toubro
Sector Report
05 October 2009
Quarterly trend Particulars
Q1FY09
Q2FY09
Q3FY09
Q4FY09
Q1FY10
Revenue (Rs mn)
69,014
76,822
86,156
104,690
73,627
YoY growth (%)
53.1
39.7
34.9
23.6
6.7
QoQ growth (%)
(18.5)
11.3
12.1
21.5
(29.7)
EBITDA (Rs mn)
6,695
7,317
7,799
14,509
7,863
EBITDA margin (%)
9.7
9.5
9.1
13.9
10.7
5,024
4,603
6,041
11,424
5,783
33
32
25.4
17.6
15.1
(48)
(8)
31.2
89.1
(49.4)
Percentage
FY07
FY08
FY09
FY10E
FY11E
Tax burden (Net income/PBT)
70.0
68.9
57.5
70.0
70.0
124.4
114.4
132.7
110.4
109.3
Adj net income (Rs mn) YoY growth (%) QoQ growth (%)
DuPont analysis
Interest burden (PBT/EBIT) EBIT margin (EBIT/Revenues)
9.1
11.0
10.5
10.5
10.5
Asset turnover (Revenues/Avg TA)
116.7
113.4
106.4
103.0
110.9
Leverage (Avg TA/Avg equtiy)
290.0
287.8
289.7
285.1
275.7
26.9
28.3
24.6
23.8
24.6
Return on equity
Shareholding pattern
Company profile L&T is one of the largest technology, engineering, construction and
(%)
manufacturing companies in India. Seven decades of a strong,
Promoters
customer-focused approach and the continuous quest for worldclass quality have enabled it to attain and sustain leadership in all its major lines of business.
18.1
15.8
Banks & FIs
37.5
37.4
38.4
Public
43.2
44.5
45.8
Hold
770
Hold
680
770
Hold
29-May-09 Results Review
1,341
1,498
Buy
2-Jul-09
1,591
1,498
Hold
16-Jul-09
Results Review
1,378
1,527
Buy
5-Oct-09
Sector Report
1,665
1,781
Buy
Oct-09
790
690
Sep-09
730
31-Jan-09
Aug-09
10-Dec-08 Company Update
Jul-09
Hold
Buy
Jun-09
977
●
Hold
May-09
823
●
Apr-09
17-Oct-08 Results Review
1,900 1,700 1,500 1,300 1,100 900 700 500
Mar-09
Reco Hold
Quarterly Preview
19.3
Jan-09
Reco price Tgt price 1,398
30-Mar-09 Company Update
FIIs
Stock performance
1,158
Results Review
-
Feb-09
Quarterly Preview
-
Dec-08
6-Oct-08
-
Nov-08
Event
Mar-09
Oct-08
Date
Dec-08
Sep-08
Recommendation history
Sep-08
83
Nagarjuna Construction
Sector Report
05 October 2009
Nagarjuna Construction Buoyant order traction
What’s New?
Strong order wins to boost revenue growth in FY11: Nagarjuna Construction Co (NCC) has bagged orders worth Rs 43bn to date, which is roughly 65% of the full-year management guidance of Rs 65bn in new orders for FY10. We expect order flows to total Rs 76bn for FY10 which will provide strong revenue visibility for subsequent years. The company ended the first quarter with an order book of Rs 139bn, which is 2.9x FY10E revenues. International business contributes roughly 22% to the current order book. Raised Rs 4.8bn through QIP and stake sale: NCC raised Rs 3.7bn via a QIP at a price of Rs 133/share which has led to a dilution of 12%. The funds raised would be utilised for investments in various BOT projects and to meet working capital requirements. Following the QIP, NCC’s debt/equity ratio has reduced from 0.8x to 0.5x in FY10. In a bid to raise further funds, the company recently sold a 9.5% stake in Gautami Power to the GVK group for a consideration of Rs 1.1bn. It anticipates a capital gain of Rs 500mn from this sale.
Target
Rating
Estimates
CMP
TARGET
RATING
RISK
Rs 153
Rs 166
HOLD
HIGH
BSE
NSE
BLOOMBERG
500294
NAGARCONST
NJCC IN
Company data Market cap (Rs mn / US$ mn)
35,000 / 733
Outstanding equity shares (mn)
229
Free float (%)
75.6
Dividend yield (%)
1.0
52-week high/low (Rs)
Building its BOT portfolio: NCC has a portfolio of five road BOT projects (one operational), three power projects apart from Gautami Power and two airport works. The total equity commitment for the above portfolio is Rs 4.8bn (excluding power projects worth Rs 10.5bn which are long term in nature and currently at a nascent stage). Of this sum, the company has already invested Rs 2.9bn till FY09. Target price raised, maintain Hold: The stock is currently trading at a P/E of 16.3x on FY11E earnings. Excluding subsidiaries, it trades at 12.7x FY11E earnings. We are increasing our earnings estimates for FY11 by 12% mainly due to upward revision in our sales and margin estimates based on strong order inflows. We are also increasing our target multiple from 12x to 14x and BOT valuation to 1.5x FY10E BV as against 1x FY10 BV. Our target price thus rises from Rs 138 to Rs 166 – we maintain our Hold rating on the stock.
159 / 34
2-month average daily volume
2,212,339
Stock performance Returns (%)
CMP
Nagarjuna Sensex
1-mth
3-mth
6-mth
153
13.4
11.1
143.3
17,135
10.2
17.0
73.0
P/E comparison (x)
Nagarjuna Co nst.
40 30
29.6 22.8
Cap Go o ds 24.9
21.1
19.3
16.3
20 10 0 FY09
FY10E
FY11E
Valuation matrix
Financial highlights (Rs mn) Revenue Growth (%) Adj net income Growth (%) FDEPS (Rs) Growth (%)
(x)
FY08
FY09
FY10E
FY11E
P/E @ CMP
20.5
22.8
19.3
16.3
P/E @ Target
22.2
24.6
20.9
17.6
EV/EBITDA @ CMP
12.4
11.9
9.9
8.3
Profitability and return ratios FY08
FY09
FY10E
FY11E
(%)
FY08
34,729
41,514
47,326
56,791
21.0
19.5
14.0
20.0
EBITDA margin
1,636
1,538
1,942
2,412
33.1
3.7
20.3
20.0
ROE
7.5
6.7
7.9
9.4
ROIC
14.7
(10.1)
17.9
18.6
ROCE
FY09E
FY10E
FY11E
10.4
9.0
9.5
9.5
EBIT margin
9.0
7.7
8.2
8.3
Adj PAT margin
4.7
3.7
4.1
4.2
12.5
9.4
10.0
10.6
11.4
8.6
8.8
8.7
11.7
9.8
9.9
9.7
84
Nagarjuna Construction
Sector Report
05 October 2009
Order book trend Fig 183 - Quarterly order book and order inflows (Rs bn)
Order book
Order received
160 140 120 100 80 60 40 20
114
12
124
124
139 122
98
90
78
122
19
29
15
17
29
14
12
10
0 Q1
Q2
Q3
Q4
FY08
Q1
Q2
Q3 FY09
Q4
Q1 FY10
Source: Company, RHH
Valuation Fig 184 - SOTP valuation summary Sum-of-the-parts
Business
Method
Multiple (x)
Value (Rs mn)
Per share value (Rs)
NCC standalone
Construction
P/E 1 year forward
NCC Urban Infra (80% stake)
Real estate
NAV
14
33,768
132
1
1,497
Jubliee Hills
Real estate
6
BV
1
453
HUDA
2
Real estate
BV
1
825
3
NCC Vizag Urban
Real estate
BV
1
499
2
Gautami Power
Power
P/BV
1
522
2
BOT Project
Road/Power/ Port
P/BV
1.5
4,946
19
42,509
166
Total Source: RHH
85
Nagarjuna Construction
Sector Report
05 October 2009
Stock performance Fig 185 - Absolute performance from April ’04 400
Sensex
NCC
Fig 186 - Relative performance from April ’04
BSE CG Index
740
350
640
300
540
250
NCC
BSE CG Index
440
200
340
150
240
100
140
50 0 Apr-04
Sensex
May-05
Jun-06
Jul-07
Aug-08
Sep-09
40 Apr-04
May-05
Jun-06
Jul-07
Aug-08
Sep-09
Source: Bloomberg, RHH
Source: Bloomberg, RHH
Fig 187 - Relative performance from April ’06 to March ’07
Fig 188 - Relative performance from April ’07 to March ’08
Sensex
NCC
105
NCC
BSE CG Index
165 155
95
145 135
85
125
75
115 105
65 55 Apr-06
Sensex
BSE CG Index
95 Jul-06
Sep-06
Dec-06
Mar-07
85 Mar-07
Jun-07
Sep-07
Dec-07
Source: Bloomberg, RHH
Source: Bloomberg, RHH
Fig 189 - Relative performance from April ’08 to March ’09
Fig 190 - Relative performance from April ’09
Sensex
NCC
BSE CG Index
Sensex
120
160
100
140
80
120
60
100
40
80
20 Mar-08
Jun-08
Source: Bloomberg, RHH
Sep-08
Dec-08
Mar-09
60 Mar-09
Apr-09 May-09
NCC
Jun-09
Mar-08
BSE CG Index
Jul-09
Aug-09
Sep-09
Source: Bloomberg, RHH
86
Nagarjuna Construction
Sector Report
05 October 2009
12-month forward rolling band Fig 191 - P/E band (Rs) 450 400 350 300 250 200 150 100 50 0 Aug-06
Fig 192 - P/BV band (Rs) 500 45x
400
30x
300
16x 8x Jun-07
Mar-08
Dec-08
Sep-09
5x
3x
200 1.5x
100 0 Aug-06
0.5x Jun-07
Source: RHH
Source: RHH
Fig 193 - EV/EBITDA band
Fig 194 - EV/Sales band
120,000 100,000
21x
80,000
15x
60,000 10x
40,000
5x
20,000 Jun-07
Mar-08
Dec-08
Sep-09
2x
80,000
1.4x
60,000
0.8x
40,000 20,000 0 Aug-06
0.2x Jun-07
Mar-08
Source: RHH
Fig 195 - Premium/Discount to BSE 30 P/E
Fig 196 - Market Cap/Sales band
(%) 200
(Rs mn)
150
100,000
100
80,000
50
60,000
0
40,000
(50)
20,000
Source: RHH
Sep-09
100,000
Source: RHH
(100) Aug-06
Dec-08
(Rs mn) 120,000
(Rs mn)
0 Aug-06
Mar-08
Dec-08
Sep-09
120,000
May-07
Feb-08
Nov-08
Sep-09
0 Aug-06
2x 1.4x 0.8x 0.2x Jun-07
Mar-08
Dec-08
Sep-09
Source: RHH
87
Nagarjuna Construction
Sector Report
05 October 2009
Standalone financials Profit and Loss statement Y/E March (Rs mn) Revenues Growth (%)
Balance sheet FY08
FY09
FY10E
FY11E
34,729
41,514
47,326
56,791
Y/E March (Rs mn)
FY08
FY09E
FY10E
FY11E
Cash and cash eq
2,329
1,346
1,365
722
Accounts receivable
8,677
10,260
11,410
13,692
Inventories
5,493
7,495
8,298
9,958
13,786
14,514
16,934
19,231
21.0
19.5
14.0
20.0
3,598
3,733
4,492
5,391
Growth (%)
33.1
3.7
20.3
20.0
Other current assets
Depreciation & amortisation
482
533
588
697
Investments
5,648
7,403
8,803
9,803
3,116
3,200
3,904
4,694
Gross fixed assets
6,608
6,219
7,514
9,079
29.6
2.7
22.0
20.2
Net fixed assets
5,186
4,592
5,300
6,168
1,116
1,621
1,686
1,844
143
281
100
100
444
697
680
750
13
-
-
(188)
EBITDA
EBIT Growth (%) Interest Other income EBT
CWIP Intangible assets
2,444
2,278
2,898
3,600
Deferred tax assets, net
(167)
(188)
(188)
Income taxes
811
743
956
1,188
Other assets
(2)
(27)
203
201
Effective tax rate (%)
33.2
32.6
33.0
33.0
Total assets
41,106
45,702
52,249
59,711
(8)
(3)
-
-
Accounts payable
6,025
6,360
7,746
9,349
Other current liabilities
9,539
9,181
10,251
11,386
880
867
1,377
1,818
8,938
12,439
10,939
13,439
-
-
-
-
Extraordinary items Min into / inc from associates Reported net income Adjustments Adjusted net income Growth (%) Shares outstanding (mn) FDEPS (Rs) (adj) Growth (%) DPS (Rs)
-
-
-
-
1,619
1,532
1,942
2,412
16
(3)
-
-
1,636
1,538
1,942
2,412
21.2
(6.0)
26.3
24.2
228.8
228.8
256.5
256.5
7.5
6.7
7.9
9.4
14.7
(10.1)
17.9
18.6
1.3
1.4
1.4
2.1
Cash flow statement
Provisions Debt funds Other liabilities Equity capital
458
458
513
513
Reserves & surplus
15,266
16,397
21,424
23,206
Shareholder's funds
15,724
16,855
21,937
23,719
Total liabilities
41,106
45,702
52,249
59,711
68.7
73.7
85.5
92.5
FY08
FY09E
FY10E
FY11E
BVPS (Rs)
Financial ratios
Y/E March (Rs mn)
FY08
FY09E
FY10E
FY11E
Y/E March
Net income + Depreciation
2,101
2,065
2,530
3,109
Profitability & Return ratios (%)
Non-cash adjustments
(212)
(592)
(686)
232
Changes in working capital
(4,693)
(3,955)
(1,207)
(3,501)
Cash flow from operations
(2,803)
(2,482)
637
(160)
Capital expenditure
(1,588)
(75)
(1,099)
(1,565)
Change in investments
(2,104)
(1,290)
(1,398)
(998)
1
(819)
-
-
Other investing cash flow Cash flow from investing
EBITDA margin
10.4
9.0
9.5
9.5
EBIT margin
9.0
7.7
8.2
8.3
Net profit margin
4.7
3.7
4.1
4.2
ROE
12.5
9.4
10.0
10.6
ROCE
11.7
9.8
9.9
9.7
Working Capital & Liquidity ratios
(3,691)
(2,184)
(2,497)
(2,563)
Receivables (days)
76
83
84
81
Issue of equity
4,049
-
3,673
-
Inventory (days)
65
73
77
74
Issue/repay debt
2,569
4,025
(1,500)
2,500
Payables (days)
69
69
69
69
Dividends paid
(229)
(348)
(295)
(420)
Current ratio (x)
1.9
2.2
2.1
2.1
Quick ratio (x)
0.6
0.7
0.6
0.7
Gross asset turnover
6.0
6.5
6.9
6.8
Total asset turnover
1.0
1.0
1.0
1.0
Interest coverage ratio
2.8
2.0
2.3
2.5
Adjusted debt/equity
0.6
0.7
0.5
0.7
Other financing cash flow
-
-
-
-
Change in cash & cash eq
(105)
(989)
19
(643)
Closing cash & cash eq
2,329
1,346
1,365
722
Economic Value Added (EVA) analysis Y/E March
FY08
FY09E
FY10E
FY11E
WACC (%)
11.9
11.8
11.8
11.8
ROIC (%)
11.4
8.6
8.8
8.7
22,332
27,924
31,487
40,730
EVA (Rs mn)
(118)
(904)
(948)
(1,266)
EVA spread (%)
(0.5)
(3.2)
(3.0)
(3.1)
Invested capital (Rs mn)
Turnover & Leverage ratios (x)
Valuation ratios (x) EV/Sales
1.3
1.1
0.9
0.8
EV/EBITDA
12.4
11.9
9.9
8.3
P/E
20.5
22.8
19.3
16.3
2.2
2.1
1.8
1.7
P/BV
88
Nagarjuna Construction
Sector Report
05 October 2009
Quarterly trend Particulars
Q1FY09
Q2FY09
Q3FY09
Q4FY09
Q1FY10
Revenue (Rs mn)
9,709
10,558
10,266
10,981
10,004
YoY growth (%)
27.4
55.9
31.7
(12.4)
3.0
(22.6)
8.7
(2.8)
7.0
(8.9)
774
935
780
715
905
QoQ growth (%) EBITDA (Rs mn) EBITDA margin (%)
8.0
8.9
7.6
6.5
9.0
Adj net income (Rs mn)
371
423
363
382
382
YoY growth (%)
3
26
(9)
(27)
3
9,709
10,558
10,266
10,981
10,004
(%)
FY07
FY08
FY09E
FY10E
FY11E
Tax burden (Net income/PBT)
69.9
66.9
67.5
67.0
67.0
Interest burden (PBT/EBIT)
80.2
78.4
71.2
74.2
76.7
QoQ growth (%)
DuPont analysis
EBIT margin (EBIT/Revenues)
8.4
9.0
7.7
8.2
8.3
Asset turnover (Revenues/Avg TA)
118.9
97.9
95.6
96.6
101.4
Leverage (Avg TA/Avg equtiy)
243.4
271.7
266.5
252.5
245.2
13.6
12.5
9.4
10.0
10.6
Return on equity
Company profile
Shareholding pattern
Nagarjuna Construction (NCC) is a leading Hyderabad-based civil
(%)
construction company promoted by Mr A V S Raju. Established in
Dec-08
Mar-09
Jun-09
Promoters
24.4
24.4
24.4
FIIs
27.4
28.0
24.9
conglomerate with BOT and real estate projects. Today, it has a
Banks & FIs
25.2
22.3
26.0
well-diversified, de-risked business mix with a presence across
Public
23.1
25.3
24.7
1980, the company has transformed itself from a subcontractor in residential and industrial construction to a diversified infrastructure
various sectors – buildings and housing, transportation, water and environment, electrical, irrigation, hydropower, oil & gas pipelines and EPC capabilities in metals and power sector.
Buy
18-Sep-08 Company Update
112
173
Buy
6-Oct-08
92
142
Buy
29-Oct-08 Results Review
52
90
Hold
28-Jan-09
50
78
Hold
Quarterly Preview Results Review
29-May-09 Results Review
129
121
Hold
3-Aug-09
Results Review
143
138
Hold
5-Oct-09
Sector Report
153
166
Hold
170 150 130 110 90 70 50 30
●
Hold
●
Buy
Sep-09
175
Jul-09
125
May-09
21-Aug-08 RHH Compendium
Mar-09
Reco
Jan-09
Reco price Tgt price
Nov-08
Event
Sep-08
Date
Jul-08
Stock performance
Recommendation history
89
Patel Engineering
Sector Report
05 October 2009
Patel Engineering Power, real estate to drive value
What’s New?
Order book at Rs 73.5bn: As on 30 June 2009, Patel Engineering’s (PEL) order book stood at Rs 73.5bn, 2.6x its FY10E consolidated revenues. The order book is split between the standalone entity (Rs 65.7bn), US operations (Rs 3.8bn) and Michigan operations (Rs 4bn). The company has secured orders worth Rs 7bn in Q1FY10, which include a Rs 5.5bn order from Vidarbha Irrigation Development and a Rs 1.5bn contract from the Himachal Pradesh Power Corporation. In addition, PEL has L1 orders worth Rs 30bn. Hydro and irrigation projects contribute ~44% each to the order book, while urban infrastructure accounts for the balance 12%.
Target
Rating
CMP
TARGET
RATING
RISK
Rs 484
Rs 532
BUY
HIGH
BSE
NSE
BLOOMBERG
531120
PATELENG
PEC IN
Gradually building its power portfolio: PEL plans to develop a 1,200MW thermal power plant in four phases of 300MW each. Land for the same has been acquired in Tamil Nadu. The company has an equity commitment of Rs 1.8bn over the next four years for its power portfolio for Phase 1. To ease the pressure on its balance sheet, PEL plans to dilute a 49% stake in its power assets to the equipment supplier or opt for private equity funding. Apart from the thermal plant, the company also intends to develop a 120MW hydro-based plant in Arunachal Pradesh for which a DPR is under preparation.
Company data
Real estate back in the limelight: PEL’s land bank of 1,027 acres is spread across India’s four major cities: Hyderabad, Chennai, Bangalore, and Mumbai. This features in PEL’s books and the company has given development rights to its subsidiary, Patel Realty India. In this manner, the potential upside from this business has been retained with PEL, thereby benefiting its existing shareholders.
Stock performance
S80IA benefits dropped; normal tax rate to be effective: In view of the proposed retrospective change in S80IA, PEL has not claimed any tax benefit this quarter. Deductions claimed under the said section in earlier years would impact the company’s net worth by ~Rs 1.6bn and result in cash outflows of ~Rs 400mn.
P/E comparison
Market cap (Rs mn / US$ mn)
28,875 / 605
Outstanding equity shares (mn)
60
Free float (%) Dividend yield (%)
0.4
52-week high/low (Rs)
526 / 103
2-month average daily volume
Returns (%)
CMP
Patel Engg. Sensex
(x) 40 30
283,322
1-mth
(Rs mn)
10.5
12.9
244.3
10.2
17.0
73.0
P atel Engg. 27.4 29.6
Cap. Go o ds
22.7 24.9
17.9
FY09
FY10E
FY11E
13,245
17,774
21,951
27,220
21.6
34.2
23.5
24.0
1,076
1,053
1,271
1,612
Growth (%)
28.6
(2.2)
20.8
26.8
FDEPS (Rs)
18.0
17.6
21.3
27.0
Growth (%)
28.6
(2.2)
20.8
26.8
Growth (%) Adj net income
21.1
10 0 FY09
FY10E
FY11E
Valuation matrix FY08
FY09
FY10E
FY11E
P/E @ CMP
26.8
27.4
22.7
17.9
P/E @ Target
29.5
30.1
25.0
19.7
EV/EBITDA @ CMP
19.7
15.5
12.4
10.0
Profitability and return ratios FY08
Revenue
6-mth
484
(x)
Financial highlights
3-mth
17,135
20
Maintain Buy: We anticipate an earnings growth at a CAGR of 23.7% over FY09FY11. The stock currently trades at a P/E of 17.9x FY11E earnings and adjusting subsidiary value, it trades at 12.2x FY11E earnings. Valuing the stock on an SOTP basis, we arrive at a target price of Rs 532 from Rs 460 earlier. We maintain our Buy rating on the stock.
Estimates
(%)
FY08
FY09
FY10E
FY11E
EBITDA margin
15.3
14.5
14.6
14.7
EBIT margin
12.8
12.0
12.2
12.3
8.1
5.9
5.8
5.9
ROE
13.9
11.5
12.3
13.8
ROIC
12.2
9.6
7.3
7.8
ROCE
12.3
10.3
9.2
9.8
Adj PAT margin
90
Patel Engineering
Sector Report
05 October 2009
Order book trend Fig 197 - Order book trend (Rs bn)
Closng order book
Hydro
Irrigartion
80
50 40 30 20 10
50 28 14
9
60
55
54
30
31
11 12
11 13
60
35
10
15
74
72
71
70 60
Transport
60
35
10
15
31 28
31 17
12
11
32 29 11
32 32 9
0 Q1FY08 Q2FY08 Q3FY08 Q4FY08 Q1FY09 Q2FY09 Q3FY09 Q4FY09 Q1FY10 Source: Company, RHH
Fig 198 - Order book break-up – Q1FY10
Transport 12% Hydro 44% Irrigartion 44%
Source: Company, RHH
Valuation Fig 199 - SOTP valuation summary Particulars
Business
PEL Standalone
Core construction business
Real estate
Real estate
Land bank value (Hyd+Bangalore)
Real estate
BOT Projects
Roads
Value of Subsidiares
Core construction business
Power projects
Power
BV
Total
Multiple
Value (Rs mn)
Per share value (Rs)
14x
22,565
378
NAV
3,496
58
BV
2,000
34
NAV
1,100
18
8x
1,790
30
800
13
31,751
532
Source: RHH
91
Patel Engineering
Sector Report
05 October 2009
Stock performance Fig 200 - Relative performance from April ’04
Fig 200 - Absolute performance from April ’04 1,000 900 800 700 600 500 400 300 200 100 0 Apr-04
Sensex
Patel Engg.
BSE CG Index
Sensex
1,440
Patel Engg.
BSE CG Index
1,240 1,040 840 640 440 240 May-05
Jun-06
Jul-07
Aug-08
Sep-09
40 Apr-04
May-05
Jun-06
Jul-07
Aug-08
Sep-09
Source: Bloomberg, RHH
Source: Bloomberg, RHH
Fig 201 - Relative performance from April ’06 to March ’07
Fig 202 - Relative performance from April ’07 to March ’08
Sensex
Patel Engg.
BSE CG Index
Sensex
130
205
120
185
110
Patel Engg.
BSE CG Index
165
100
145
90
125
80
105
70 60 Apr-06
Jul-06
Sep-06
Dec-06
Mar-07
85 Mar-07
Jun-07
Sep-07
Dec-07
Source: Bloomberg, RHH
Source: Bloomberg, RHH
Fig 203 - Relative performance from April ’08 to March ’09
Fig 204 - Relative performance from April ’09
Sensex
Patel Engg.
BSE CG Index
Sensex
120
320
100
270
Patel Engg.
Mar-08
BSE CG Index
220
80
170 60
120
40 20 Mar-08
70 Jun-08
Source: Bloomberg, RHH
Sep-08
Dec-08
Mar-09
20 Mar-09
Apr-09
May-09
Jun-09
Jul-09
Aug-09
Source: Bloomberg, RHH
92
Patel Engineering
Sector Report
05 October 2009
12-month forward rolling band Fig 205 - P/E band
Fig 206 - P/BV band
(Rs) 1,200
(Rs) 1,400 40x
1,000
1,000
800
800
600 20x
400
10x 4x
200 0 Aug-06
6.5x
1,200
Jun-07
Mar-08
Dec-08
Sep-09
3x
600 400
1.5x
200 0 Aug-06
0.5x Jun-07
Source: RHH
Source: RHH
Fig 207 - EV/EBITDA band
Fig 208 - EV/Sales band
(Rs mn) 80,000
21x
70,000
Dec-08
Sep-09
(Rs mn) 80,000 70,000
60,000
15x
50,000 40,000
10x
30,000
60,000 2x
50,000 40,000
1.4x
30,000
20,000
5x
10,000 0 Aug-06
Mar-08
0.8x
20,000 10,000
Jun-07
Mar-08
Dec-08
Sep-09
0 Aug-06
0.2x Jun-07
Mar-08
Source: RHH
Source: RHH
Fig 209 - Premium/Discount to BSE 30 P/E
Fig 210 - Market Cap/Sales band
Dec-08
Sep-09
(Rs mn) 70,000
(%) 150
60,000 100
50,000
50
Source: RHH
1.4x
30,000 20,000
0 (50) Aug-06
2x
40,000
0.8x
10,000 May-07
Feb-08
Nov-08
Sep-09
0 Aug-06
0.2x Jun-07
Mar-08
Dec-08
Sep-09
Source: RHH
93
Patel Engineering
Sector Report
05 October 2009
Standalone financials Profit and Loss statement Y/E March (Rs mn) Revenues Growth (%)
Balance sheet FY08
FY09
FY10E
FY11E
13,245
17,774
21,951
27,220
Y/E March (Rs mn)
FY08
FY09
FY10E
FY11E
Cash and cash eq
1,912
1,553
702
253
21.6
34.2
23.5
24.0
2,021
2,576
3,205
4,001
Growth (%)
43.1
27.4
24.4
24.8
Other current assets
4,621
Depreciation & amortisation
327
441
535
657
Investments
1,443
Gross fixed assets
4,165
Net fixed assets
2,897
EBITDA
EBIT
1,694
2,135
2,670
3,344
Growth (%)
46.8
26.1
25.0
25.3
Interest
519
886
1,038
1,204
Other income
352
184
220
220
EBT
Accounts receivable
3,586
4,616
5,713
7,085
Inventories
6,952
9,832
11,727
14,393
7,163
6,916
8,203
2,898
3,857
4,857
4,862
6,062
7,262
3,168
3,833
4,376
94
231
100
100
-
-
-
(137)
CWIP Intangible assets
1,527
1,580
1,852
2,361
(104)
(97)
(117)
Income taxes
106
233
626
794
Other assets
-
(1)
19
39
Effective tax rate (%)
6.9
14.7
33.8
33.6
Total assets
21,400
29,363
32,751
39,169
-
330
-
-
3,447
4,964
6,315
7,830
Extraordinary items Min into / inc from associates Reported net income
56
66
45
45
1,476
1,743
1,271
1,612
Deferred tax assets, net
Accounts payable Other current liabilities
636
-
-
-
23
78
45
45
Debt funds
6,579
10,205
11,705
14,205
Other liabilities
2,274
4,328
3,732
4,627
Provisions
Adjustments
(400)
(690)
-
-
Adjusted net income
1,076
1,053
1,271
1,612
Growth (%)
28.6
(2.2)
20.8
26.8
Equity capital
60
60
60
60
Shares outstanding (mn)
59.7
59.7
59.7
59.7
Reserves & surplus
8,382
9,729
10,895
12,403
FDEPS (Rs) (adj)
18.0
17.6
21.3
27.0
Shareholder's funds
8,442
9,789
10,955
12,462
Growth (%)
28.6
(2.2)
20.8
26.8
Total liabilities
21,400
29,363
32,751
39,169
1.5
1.8
1.5
1.5
141.5
164.1
183.6
208.9
FY08
FY09
FY10E
FY11E
DPS (Rs)
Cash flow statement
BVPS (Rs)
Financial ratios
Y/E March (Rs mn)
FY08
FY09
FY10E
FY11E
Y/E March
Net income + Depreciation
1,803
2,184
1,806
2,269
Profitability & Return ratios (%)
(34)
(1,440)
(0)
(0)
Changes in working capital
(3,470)
(4,437)
(2,025)
(2,912)
Cash flow from operations
(1,701)
(3,693)
(219)
(644)
Capital expenditure
(1,284)
(790)
(1,069)
(1,200)
Change in investments
(1,137)
(1,436)
(960)
(1,000)
-
-
-
-
Non-cash adjustments
Other investing cash flow Cash flow from investing
EBITDA margin
15.3
14.5
14.6
14.7
EBIT margin
12.8
12.0
12.2
12.3
8.1
5.9
5.8
5.9
ROE
13.9
11.5
12.3
13.8
ROCE
12.3
10.3
9.2
9.8
Net profit margin
Working Capital & Liquidity ratios
(2,422)
(2,226)
(2,028)
(2,200)
86
84
86
86
Issue of equity
(534)
-
-
-
Inventory (days)
196
220
232
227
Issue/repay debt
4,249
5,630
1,500
2,500
Payables (days)
102
110
122
123
(94)
(70)
(105)
(105)
Current ratio (x)
4.2
4.7
4.0
3.8
Other financing cash flow
-
-
-
-
Quick ratio (x)
0.9
0.9
0.9
0.9
Change in cash & cash eq
(502)
(359)
(852)
(448)
Closing cash & cash eq
1,912
1,553
702
253
Gross asset turnover
3.7
3.9
4.0
4.1
Total asset turnover
0.7
0.7
0.7
0.8
Interest coverage ratio
3.3
2.4
2.6
2.8
Adjusted debt/equity
0.8
1.0
1.1
1.1
Dividends paid
Economic Value Added (EVA) analysis Y/E March
FY08
FY09
FY10E
FY11E
WACC (%)
12.7
13.8
13.8
13.8
ROIC (%)
12.2
9.6
7.3
7.8
15,043
22,768
25,690
31,086
EVA (Rs mn)
(78)
(961)
(1,683)
(1,874)
EVA spread (%)
(0.5)
(4.2)
(6.6)
(6.0)
Invested capital (Rs mn)
Receivables (days)
Turnover & Leverage ratios (x)
Valuation ratios (x) EV/Sales
3.0
2.2
1.8
1.5
EV/EBITDA
19.7
15.5
12.4
10.0
P/E
26.8
27.4
22.7
17.9
3.4
2.9
2.6
2.3
P/BV
94
Patel Engineering
Sector Report
05 October 2009
Quarterly trend Particulars
Q1FY09
Q2FY09
Q3FY09
Q4FY09
Q1FY10
Revenue (Rs mn)
3,962
3,092
3,171
7,615
4,763
YoY growth (%)
20.0
31.1
21.0
51.7
20.2
QoQ growth (%)
(21.1)
(22.0)
2.6
140.1
(37.5)
EBITDA (Rs mn)
475
479
567
679
602
EBITDA margin (%)
12.0
15.5
17.9
8.9
12.6
Adj net income (Rs mn)
234
335
351
455
250
YoY growth (%)
(11.3)
3.2
0.2
(15.4)
7.0
QoQ growth (%)
(56.5)
43.2
4.8
29.7
(45.0)
(%)
FY07
FY08
FY09
FY10E
FY11E
Tax burden (Net income/PBT)
70.8
70.5
66.6
68.6
68.3
102.5
90.1
74.0
69.4
70.6
EBIT margin (EBIT/Revenues)
10.6
12.8
12.0
12.2
12.3
Asset turnover (Revenues/Avg TA)
94.1
73.8
70.0
70.7
75.7
258.0
231.9
278.5
299.4
307.1
18.6
13.9
11.5
12.3
13.8
DuPont analysis
Interest burden (PBT/EBIT)
Leverage (Avg TA/Avg equtiy) Return on equity
Shareholding pattern
Company profile Patel Engineering (PEL) is one of India’s oldest and largest
(%)
construction companies, with a strong presence in the hydropower
Promoters
sector. It is one of the few players with pre-qualifications in hydro, irrigation, and other projects. PEL possesses niche technologies (via
Dec-08
Mar-09
Jun-09
53.4
53.8
53.2
7.4
7.1
7.7
FIIs
subsidiaries) such as RCC dam construction, micro tunnelling, and
Banks & FIs
12.3
11.1
11.1
lake water tapping. It has also ventured into the real estate business
Public
26.9
28.1
28.0
and has a developable land bank of ~100mn sq ft in four Indian cities, including Mumbai.
Sell
6-Apr-09
Quarterly Preview
136
155
Hold
25-May-09 Company Update
353
309
Hold
1-Jul-09
Results Review
429
406
Hold
3-Aug-09
Results Review
413
460
Buy
5-Oct-09
Sector Report
484
532
Buy
Hold
●
Buy
Oct-09
155
●
Sep-09
147
Sell
Aug-09
Results Review
●
Jul-09
2-Feb-09
600 500 400 300 200 100 0
Jun-09
Sell
May-09
148
Apr-09
139
Mar-09
18-Nov-08 Initiating Coverage
Feb-09
Reco
Jan-09
Reco price Tgt price
Dec-08
Event
Nov-08
Date
Oct-08
Stock performance
Recommendation history
95
Punj Lloyd
Sector Report
05 October 2009
Punj Lloyd Soaring orders to drive a turnaround
What’s New?
Orders worth Rs 99bn booked in Q1FY10: As on 30 June 2009, Punj Lloyd’s (PLL) order book stood at Rs 278bn, 2.1x its FY10E revenues. The company has booked orders worth Rs 99bn in Q1FY10, which is nearly equivalent to its fullyear inflow of Rs 117bn for FY09. We expect PLL to end the year with Rs 170bn of order inflows. An improved macro scenario and a strong Q1 order book could provide further upsides. Set to stage a turnaround: In FY09, PLL reported a loss of Rs 2.3bn on account of forex headwinds and a provision of Rs 4.3bn towards the disputed SABIC project. We expect the company to report an EPS of Rs 15.1 in FY10 and Rs 17.8 in FY11 (23% earnings growth) due to improved revenue visibility and a 120bps expansion in EBITDA margin to 8.5% in FY10. Raised Rs 6.7bn via QIP: PLL raised US$ 140mn (Rs 6.7bn) in a share sale to institutions at a price of Rs 241/share. These funds will be utilised for the repayment of existing loans and to finance working capital requirements. Lucrative stake in Pipavav Shipyard: Pipavav Shipyard has successfully raised Rs 5.1bn through an initial public offering of 85.5mn shares, taking the company’s value to ~Rs 41bn. In 2007, PLL had bought a 22.3% stake in Pipavav Shipyard for Rs 3.5bn, now valued at Rs 8bn. Adjusting for a 20% holding company discount, the investment is valued at Rs 21/share (Rs 11 assigned in our SOTP target price). Variation claims of US$ 117mn on ONGC Heera project: Cost overruns from the ONGC Heera development project have already been provided for in FY09. PLL has filed variation claims amounting to US$ 117mn which would be settled post completion of the contract, if successfully contested.
Target
Rating
CMP
TARGET
RATING
RISK
Rs 262
Rs 306
BUY
HIGH
BSE
NSE
BLOOMBERG
532693
PUNJLLOYD
PUNJ IN
Company data Market cap (Rs mn / US$ mn)
79,512 / 1,665
Outstanding equity shares (mn)
303
Free float (%)
58.5
Dividend yield (%)
0.1
52-week high/low (Rs)
295 / 66
2-month average daily volume
7,258,253
Stock performance Returns (%)
CMP
Punj Lloyd Sensex
1-mth
Key risks: PLL is exposed to the currency risk as ~75% of its revenues and order book are derived from the international markets. This apart, execution delays could hinder profitability.
Financial highlights (Rs mn)
1.6
22.6
184.5
10.2
17.0
73.0
P/E comparison
(x) 40
P unj Llo yd 34.7
Industry
29.6
24.9
20
14.7
10 0 FY09E
FY10E
FY11E
Valuation matrix (x)
FY08
FY09
FY10E
FY11E
P/E @ CMP
23.2
34.7
17.4
14.7
P/E @ Target
27.1
40.5
20.3
17.2
EV/EBITDA @ CMP
15.1
12.0
9.3
7.9
Profitability and return ratios FY10E
FY11E
77,530
119,120
132,234
154,470
51.2
53.6
11.0
16.8
3,281
2,348
4,972
6,044
Growth (%)
66.9
(28.4)
111.8
21.5
ROE
16.4
FDEPS (Rs)
11.3
7.5
15.1
17.8
ROIC
13.6
Growth (%)
59.0
(33.2)
99.8
18.2
ROCE
12.9
8.3
Adj net income
21.1
17.4
FY09
Growth (%)
6-mth
262
FY08
Revenue
3-mth
17,135
30
Maintain Buy: The stock has been re-rated on the strength of record order inflows in Q1FY10 and the improved macro climate. Currently, it trades at a P/E of 17.4x on FY10E earnings and 14.7x FY11E earnings. Excluding its stake in Pipavav Shipyard, PLL trades at 13.9x on FY11E. We value the core construction business at 16x FY11E earnings (discount of 32% to L&T) and maintain our Buy rating on the stock with a target price of Rs 306.
Estimates
(%)
FY08
FY09
FY10E
FY11E
EBITDA margin
8.9
7.3
8.5
8.5
EBIT margin
7.0
5.8
6.9
6.9
Adj PAT margin
4.2
2.0
3.8
3.9
9.0
16.4
15.8
10.4
11.1
11.3
11.6
12.2
96
Punj Lloyd
Sector Report
05 October 2009
Order book trend Fig 211 - Order book break-up by vertical – Q1FY10
Pipelines 20.3%
Fig 212 - Order book break-up by geography – Q1FY10
Tankages 1.9%
Process palnts,others 22.0%
Europe / Africa 4%
South asia 17%
Infrastructure 55.9%
Source: Company, RHH
Caspian 36%
Middle East 17% SE asia & asia pacific 26%
Source: Company, RHH
Valuation Fig 213 - SOTP valuation summary Sum of the parts
Business
Method
PLL Consolidated
Construction
Pipavav Shipyard
Shipbuilding
P/E on FY11E earnings BV
Real estate
BV
Real estate ventures Total
Multiple (x)
Value (Rs mn)
Per share value (Rs)
16
96,698
285
1.5
5,250
15
1
1800
5
103,748
306
Source: RHH
97
Punj Lloyd
Sector Report
05 October 2009
Stock performance Fig 214 - Absolute performance from Jan ’06 Sensex
Punj Lloyd
Fig 215 - Relative performance from Jan ’06
700 600 500 400 300 200 100 0 Jan-06
Mar-07
Sensex
BSE CG Index
Jun-08
Sep-09
Punj Lloyd
220 200 180 160 140 120 100 80 60 40 Jan-06
Mar-07
BSE CG Index
Jun-08
Sep-09
Source: Bloomberg, RHH
Source: Bloomberg, RHH
Fig 216 - Relative performance from April ’06 to March ’07
Fig 217 - Relative performance from April ’07 to March ’08
Sensex
Punj Lloyd
BSE CG Index
110 100 90 80 70 60 50 Apr-06
Jun-06
Sep-06
Dec-06
Mar-07
Sensex 250 230 210 190 170 150 130 110 90 70 Apr-07
Punj Lloyd
Jul-07
BSE CG Index
Sep-07
Dec-07
Source: Bloomberg, RHH
Source: Bloomberg, RHH
Fig 218 - Relative performance from April ’08 to March ’09
Fig 219 - Relative performance from April ’09
Sensex
Punj Lloyd
BSE CG Index
115
200
105
180
95
Punj Lloyd
BSE CG Index
160
85 75
140
65
120
55
100
45 35 Apr-08
Sensex
Mar-08
Jun-08
Source: Bloomberg, RHH
Sep-08
Dec-08
Mar-09
80 Apr-09 May-09 May-09
Jun-09
Jul-09
Aug-09 Sep-09
Source: Bloomberg, RHH
98
Punj Lloyd
Sector Report
05 October 2009
12-month forward rolling band Fig 220 - P/E band
Fig 221 - P/BV band
(Rs) 700
(Rs) 700 600
600
32x
500
500
4x
400
400 300
16x
200
8x 4x
100 0 Aug-06
Jun-07
Mar-08
Dec-08
Sep-09
300 200
2x
100
1x 0.5x
0 Aug-06
Jun-07
Source: RHH
Source: RHH
Fig 222 - EV/EBITDA band
Fig 223 - EV/Sales band
250,000
20x
200,000
150,000 0.75x
100,000
100,000
6x
50,000
4x Jun-07
Mar-08
Dec-08
Sep-09
0.5x
50,000 0 Aug-06
0.25x Jun-07
Mar-08
Source: RHH
Source: RHH
Fig 224 - Premium/Discount to BSE 30 P/E
Fig 225 - Market Cap/Sales band
(%) 200
(Rs mn) 250,000
150
200,000
100
Dec-08
Sep-09
1.5x
150,000
50
0.75x
100,000
0
0.5x
50,000
(50)
Source: RHH
Sep-09
1.5x
200,000
12x
150,000
(100) Aug-06
Dec-08
(Rs mn) 250,000
(Rs mn) 300,000
0 Aug-06
Mar-08
Jun-07
Mar-08
Dec-08
Sep-09
0 Aug-06
0.25x Jun-07
Mar-08
Dec-08
Sep-09
Source: RHH
99
Punj Lloyd
Sector Report
05 October 2009
Consolidated financials Profit and Loss statement Y/E March (Rs mn) Revenues Growth (%)
Balance sheet FY08
FY09
FY10E
FY11E
77,530
119,120
132,234
154,470
Y/E March (Rs mn)
FY08
FY09
FY10E
FY11E
Cash and cash eq
6,898
8,122
5,066
6,241
51.2
53.6
11.0
16.8
6,922
8,710
11,240
13,130
68.7
25.8
29.0
16.8
Depreciation & amortisation
1,462
1,771
2,111
2,532
EBIT
5,460
6,939
9,129
10,598
79.5
27.1
31.6
16.1
1,806
3,070
3,316
3,476
CWIP
811
5,347
1,190
1,390
Intangible assets
EBITDA Growth (%)
Growth (%) Interest Other income
Accounts receivable
20,901
26,686
38,040
44,437
Inventories
20,592
36,686
36,228
42,321
Other current assets
7,429
11,461
10,506
12,273
Investments
5,458
6,609
6,609
6,609
Gross fixed assets
20,835
26,529
29,328
33,913
Net fixed assets
14,110
18,754
19,492
21,546
2,124
2,973
2,899
2,900
-
-
-
(1,549)
EBT
4,836
13
7,003
8,512
Deferred tax assets, net
(748)
(1,482)
(1,549)
Income taxes
1,235
2,260
2,031
2,469
Other assets
-
-
(608)
(983)
25.5
17,960.3
29.0
29.0
Total assets
76,765
109,810
116,685
133,795
-
-
-
-
Accounts payable
19,284
28,836
32,026
37,411
Other current liabilities
19,764
Effective tax rate (%) Extraordinary items Min into / inc from associates
(18)
(130)
-
-
Reported net income
3,585
(2,254)
4,972
6,044
Adjustments
(304)
4,602
-
-
Adjusted net income
3,281
2,348
4,972
6,044
Growth (%)
12,195
18,263
16,919
Provisions
1,558
1,853
1,953
1,966
Debt funds
16,072
35,592
29,737
33,237
224
446
446
437
Other liabilities
66.9
(28.4)
111.8
21.5
607
607
663
663
303.0
303.0
330.9
330.9
Reserves & surplus
26,826
24,238
34,969
40,335
FDEPS (Rs) (adj)
11.3
7.5
15.1
17.8
Shareholder's funds
27,432
24,845
35,631
40,998
Growth (%)
59.0
(33.2)
99.8
18.2
Total liabilities
76,765
109,810
116,685
133,795
0.4
0.3
0.7
0.8
89.7
82.0
107.7
123.9
FY08
FY09
FY10E
FY11E
Shares outstanding (mn)
DPS (Rs)
Cash flow statement
Equity capital
BVPS (Rs)
Financial ratios
Y/E March (Rs mn)
FY08
FY09
FY10E
FY11E
Y/E March
Net income + Depreciation
5,418
(5,085)
7,083
8,576
Profitability & Return ratios (%)
Non-cash adjustments
(450)
4,932
(0)
-
Changes in working capital
(11,133)
(9,640)
(7,996)
(6,013)
Cash flow from operations
(6,164)
(9,792)
(913)
2,563
Capital expenditure
(4,208)
(6,364)
(2,775)
(4,586)
Change in investments
(3,429)
(1,296)
-
-
(151)
Cash flow from investing
(7,637)
Issue of equity
11,300
Issue/repay debt Dividends paid
EBITDA margin
8.9
7.3
8.5
8.5
EBIT margin
7.0
5.8
6.9
6.9
Net profit margin
4.2
2.0
3.8
3.9
ROE
16.4
9.0
16.4
15.8
-
ROCE
12.9
8.3
11.6
12.2
-
-
Working Capital & Liquidity ratios
(7,810)
(2,775)
(4,586)
78
73
89
97
(365)
6,752
-
Inventory (days)
242
279
296
273
(920)
19,520
(5,855)
3,500
Payables (days)
213
234
247
241
(92)
(107)
(264)
(302)
Current ratio (x)
1.8
1.8
1.8
1.8
Other financing cash flow
-
392
-
-
Quick ratio (x)
0.9
0.7
0.9
0.8
Change in cash & cash eq
(3,512)
1,838
(3,055)
1,175
Turnover & Leverage ratios (x)
6,898
8,122
5,066
6,241
Gross asset turnover
3.9
5.0
4.7
4.9
Total asset turnover
1.1
1.3
1.2
1.2
Interest coverage ratio
3.0
2.3
2.8
3.0
Adjusted debt/equity
0.5
1.2
0.7
0.7
Other investing cash flow
Closing cash & cash eq
Economic Value Added (EVA) analysis Y/E March
FY08
FY09
FY10E
FY11E
WACC (%)
14.8
14.9
14.9
14.9
ROIC (%)
13.6
10.4
11.1
11.3
38,388
54,590
62,675
70,379
EVA (Rs mn)
(477)
(2,426)
(2,405)
(2,521)
EVA spread (%)
(1.2)
(4.4)
(3.8)
(3.6)
Invested capital (Rs mn)
Receivables (days)
Valuation ratios (x) EV/Sales
1.3
0.9
0.8
0.7
EV/EBITDA
15.1
12.0
9.3
7.9
P/E
23.2
34.7
17.4
14.7
2.9
3.2
2.4
2.1
P/BV
100
Punj Lloyd
Sector Report
05 October 2009
Quarterly trend Particulars
Q1FY09
Q2FY09
Q3FY09
Q4FY09
Q1FY10
Revenue (Rs mn)
26,488
29,261
31,200
32,173
29,551
YoY growth (%)
89.9
54.5
47.4
37.1
11.6
QoQ growth (%) EBITDA (Rs mn)
12.9
10.5
6.6
3.1
(8.1)
2,596
3,124
2,389
1,450
2,918
EBITDA margin (%)
9.8
10.7
7.7
4.5
9.9
1,336
1,741
830
(343)
1,272
YoY growth (%)
125
95
35
(129)
(5)
QoQ growth (%)
13
30
(52)
(141)
(471)
Adj net income (Rs mn)
DuPont analysis (%)
FY07
FY08
FY09
FY10E
FY11E
Tax burden (Net income/PBT)
67.8
18,656.5
71.0
71.0
67.8
Interest burden (PBT/EBIT)
88.6
0.2
76.7
80.3
88.6
EBIT margin (EBIT/Revenues)
7.0
5.8
6.9
6.9
7.0
Asset turnover (Revenues/Avg TA)
114.4
127.7
116.8
123.3
114.4
Leverage (Avg TA/Avg equtiy)
337.0
356.9
374.5
326.9
337.0
16.3
9.0
16.4
15.8
16.3
Return on equity
Shareholding pattern
Company profile Punj Lloyd (PLL), a US$ 2bn conglomerate, comprises Punj Lloyd in
(%)
India, Sembawang E&C in Singapore, and Simon Carves in the U.K.
Dec-08
Mar-09
Jul-09
Promoters
44.3
41.5
41.3
FIIs
18.0
19.0
19.3
strong service provider in the oil & gas, infrastructure, and
Banks & FIs
16.2
12.5
17.7
petrochemical domains.
Public
21.5
27.0
21.7
Besides these, various subsidiaries of the group spread across the world further strengthen its rich international presence, making it a
Stock performance
Hold
29-Oct-08 Results Review
165
208
Hold
11-Dec-08 Company Update
156
166
Sell
25-Jan-09
Results Review
92
93
Sell
6-Apr-09
Quarterly Preview
87
93
Hold
20-May-09 Results Review
161
165
Hold
28-Jul-09
240
292
Buy
262
306
Buy
Results Review
05-Oct-09 Sector Report
350 300 250 200 150 100 50
●
Sell
●
Hold
●
Buy
Sep-09
320
Jul-09
272
May-09
21-Aug-08 RHH Compendium
Mar-09
Reco
Jan-09
Reco price Tgt price
Nov-08
Event
Sep-08
Date
Jul-08
Recommendation history
101
Simplex Infrastructure
Sector Report
05 October 2009
Simplex Infrastructure Healthy prospects
What’s New?
Robust order book of Rs 100bn: Simplex Infrastructure currently holds an order book of Rs 100.1bn (1.8x FY10E revenue), composed largely of domestic (77.4%) and international contracts (22.6%). The order intake was Rs 10.8bn for Q1FY10. This apart, the company is the lowest bidder (L1) for projects worth Rs 18.6bn. Simplex’s Q1FY10 revenue grew by 9% YoY to Rs 11.1bn, lower than our estimate by 9%. The muted growth was on account of the elections which led to an exodus of project labourers to their home states for voting purposes – this had a negative impact on the company’s turnover to the extent of Rs 2.5bn. For the quarter, the industrial segment contributed 22%, piling 13%, roads, railways & bridges 19%, power 16%, urban utilities 10%, building & housing 12% and marine projects 9%. Earnings CAGR of 29% expected through FY11: We expect Simplex to register strong revenue and earnings growth at a CAGR of 19% and 29% respectively over FY09-FY11 on account of its strong order book, improving margins (by an estimated 100bps) and lower debt levels. The reduction in debt will be led by stable working capital requirements and reduced capex. Superior return ratios vis-à-vis peers: The company has better return ratios than its peers due to lower dilution in the past, a focus on the core EPC business and better working capital management. However, FY08 and FY09 ratios are depressed due to the dilution of ~13% following its QIP. Going forward, we expect Simplex to earn an ROE of ~18%. S80IA benefits dropped, return to normal tax: In view of the proposed retrospective change in S80IA, Simplex has not claimed any tax deduction in this quarter. Further, in respect of deductions claimed in earlier years aggregating to Rs 300mn, the company has set aside an equivalent amount to a contingency reserve. This would result in a reduction in net worth but have no impact on cash flows. Maintain Buy: The stock is currently trading at 15.9x FY10E earnings and 12.4x FY11E earnings. We are revising our target P/E multiple to 14x (from 12x earlier) on FY11E earnings. Our target price thus has been revised from Rs 462 to Rs 577. Considering the company’s robust order book and the improving demand environment, we maintain our Buy rating on the stock.
Financial highlights (Rs mn) Revenue
Target
Rating
Estimates
CMP
TARGET
RATING
RISK
Rs 510
Rs 577
BUY
HIGH
BSE
NSE
BLOOMBERG
523838
SIMPLEXINF
SINF IN
Company data Market cap (Rs mn / US$ mn)
25,230 / 528
Outstanding equity shares (mn)
49
Free float (%)
45.9
Dividend yield (%)
0.4
52-week high/low (Rs)
530 / 102
2-month average daily volume
57,993
Stock performance Returns (%)
CMP
1-mth
3-mth
6-mth
510
18.6
30.7
213.0
17,135
10.2
17.0
73.0
Simplex Sensex
P/E comparison (x)
Simplex
40 30
Cap. Go o ds
29.6 20.3
24.9
21.1
15.9
20
12.4
10 0 FY09
FY10E
FY11E
Valuation matrix (x)
FY08
FY09
FY10E
FY11E
P/E @ CMP
25.2
20.3
15.9
12.4
P/E @ Target
28.5
23.0
18.0
14.0
EV/EBITDA @ CMP
14.1
9.6
7.2
6.0
Profitability and return ratios FY08
FY09
FY10E
FY11E
28,081
46,961
55,414
66,496
Growth (%)
64.4
67.2
18.0
20.0
Adj net income
901
1,242
1,585
2,038
(%)
FY08
FY09
FY10E
FY11E
EBITDA margin
9.4
8.2
9.3
9.3
EBIT margin
7.1
5.4
6.5
6.6
Adj PAT margin
3.2
2.6
2.9
3.1
Growth (%)
65.6
47.0
33.1
20.0
ROE
17.5
14.9
16.3
18.0
FDEPS (Rs)
20.3
25.1
32.0
41.2
ROIC
12.1
10.8
11.3
9.6
Growth (%)
61.7
23.9
27.7
28.6
ROCE
14.2
13.9
12.0
8.5
102
Simplex Infrastructure
Sector Report
05 October 2009
Order book trend Fig 226 - Order book mix – Q1FY10 Segments (%)
Domestic
Foreign
Total
Piling & Ground Engg
3.4
0.5
3.9
20.3
3.7
24
5.3
0.7
6
9
8.5
17.5
Roads,, Railways & Bridges
14.9
2.1
17
Urban Utilities
18.2
0
18.2
6.2
7.2
13.4
77.3
22.7
100
Power (Thermal, Hydel & Nuclear) Marine Industrial
Building & Housing Total Source: Company, RHH
Fig 227 - Order book position (Rs bn) 120 100 80 60 40 20 0
Fig 228 - Order book by segment – Q1FY10
Order received
69 69
Closing order book
79
90
100 107 102 101100 Urban Utilities 18%
51 44 45 43 5
4
3
14
24 6
Piling & Ground Engg 4%
Power (Thermal, Hydel & Nuclear) 24%
17 21 20 16 14 11 11
Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 FY07
Building. & Housing 13%
FY08
FY09
FY10
Roads,Railw ays & Bridges 17%
Marine 6%
Industrial 18%
Source: Company, RHH
Source: Company, RHH
Fig 229 - Domestic order book break-up – Q1FY10
Fig 230 - Foreign order book break-up – Q1FY10
Urban Utilities 24%
Building. & Housing 8%
Roads,Railw ays & Bridges 19% Source: Company, RHH
Piling & Ground Engg 4%
Industrial 12%
Power (Thermal, Hydel & Nuclear) 26%
Marine 7%
Building. & Housing 32% Roads,Railw ays & Bridges 9%
Power (Thermal, Hydel & Nuclear) 16%
Piling & Ground Engg 2%
Marine 3%
Industrial 38%
Source: Company, RHH
103
Simplex Infrastructure
Sector Report
05 October 2009
Stock performance Fig 231 - Absolute performance from April ’04 Sensex
Simplex
Fig 232 - Relative performance from April ’04 Sensex
BSE CG Index
800
1640
700
1440
600
1240
500
1040
400 300
840 640
200
440
100
240
0 Apr-04
May-05
Jun-06
Jul-07
Aug-08
Sep-09
40 Apr-04
May-05
Simplex
Jun-06
BSE CG Index
Jul-07
Aug-08
Sep-09
Source: Bloomberg, RHH
Source: Bloomberg, RHH
Fig 233 - Relative performance from April ’06 to March ’07
Fig 234 - Relative performance from April ’07 to March ’08
Sensex
Simplex
BSE CG Index
Sensex
130
185
120
165
110
145
100
125
90
105
80
85
70
65
60 Apr-06
Jul-06
Sep-06
Dec-06
Mar-07
45 Mar-07
Jun-07
Simplex
Sep-07
BSE CG Index
Dec-07
Source: Bloomberg, RHH
Source: Bloomberg, RHH
Fig 235 - Relative performance from April ’08 to March ’09
Fig 236 - Relative performance from April ’09
Sensex
Simplex
BSE CG Index
120 100 80 60 40 20 Mar-08
Jun-08
Source: Bloomberg, RHH
Sep-08
Dec-08
Mar-09
Sensex
Simplex
200 180 160 140 120 100 80 60 40 20 Mar-09 Apr-09 May-09 Jun-09
Mar-08
BSE CG Index
Jul-09
Aug-09 Sep-09
Source: Bloomberg, RHH
104
Simplex Infrastructure
Sector Report
05 October 2009
12-month forward rolling band Fig 237 - P/E band
Fig 238 - P/BV band
(Rs) 1,000
(Rs) 1,000 24x
800
18x
600
4x 800 600
2.5x 1.5x
400
12x
400
200
6x
200
0 Aug-06
Jun-07
Mar-08
Dec-08
Sep-09
0.5x
0 Aug-06
Jun-07
Source: RHH
Source: RHH
Fig 239 - EV/EBITDA band
Fig 240 - EV/Sales band
70,000
12x
60,000
9x
50,000 40,000
6x
30,000 20,000
3x
10,000 Jun-07
Mar-08
Dec-08
Sep-09
50,000 0.7x
40,000 30,000
0.4x
20,000
0.2x
10,000 0 Aug-06
Jun-07
Mar-08
Source: RHH
Fig 241 - Premium/Discount to BSE 30 P/E
Fig 242 - Market Cap/Sales band
(%) 80
(Rs mn) 70,000
60
60,000
40
50,000
20
0.7x 0.4x
20,000
(40)
0.2x
10,000
(60) May-07
Feb-08
Nov-08
Sep-09
0 Aug-06
Sep-09
1x
30,000
(20)
Source: RHH
Dec-08
40,000
0
Sep-09
1x
60,000
Source: RHH
(80) Aug-06
Dec-08
(Rs mn) 70,000
(Rs mn) 80,000
0 Aug-06
Mar-08
Jun-07
Mar-08
Dec-08
Sep-09
Source: RHH
105
Simplex Infrastructure
Sector Report
05 October 2009
Standalone financials Profit and Loss statement Y/E March (Rs mn) Revenues Growth (%)
Balance sheet FY08
FY09
FY10E
FY11E
28,081
46,961
55,414
66,496
Y/E March (Rs mn)
FY08
FY09E
FY10E
FY11E
Cash and cash eq
1,229
1,178
1,087
1,664
64.4
67.2
18.0
20.0
2,635
3,873
5,153
6,184
Growth (%)
65.6
47.0
33.1
20.0
Depreciation & amortisation
642
1,320
1,571
1,785
Investments
1,993
2,553
3,583
4,399
66.1
28.1
40.3
22.8
1,088
1,512
1,607
1,728
325
690
390
370
EBITDA
EBIT Growth (%) Interest Other income EBT
Accounts receivable
11,497
16,821
20,495
24,595
Inventories
4,741
6,792
8,654
10,384
Other current assets
3,673
4,653
5,314
6,376
99
21
21
21
Gross fixed assets
7,567
12,192
13,510
15,030
Net fixed assets
6,295
10,109
9,842
9,563
243
139
200
200
-
-
-
(639)
CWIP Intangible assets
1,232
1,732
2,366
3,041
Deferred tax assets, net
(371)
(579)
(609)
Income taxes
370
490
781
1,004
Other assets
2
(7)
1
11
Effective tax rate (%)
30.0
28.3
33.0
33.0
Total assets
27,407
39,139
45,017
52,188
-
-
-
-
Accounts payable
-
-
-
-
Other current liabilities
12,267
17,721
21,450
25,704
116
119
116
116
7,493
12,205
13,105
14,105
-
6
5
-
Extraordinary items Min into / inc from associates
40
-
-
-
902
1,242
1,585
2,038
(1)
(1)
-
-
Adjusted net income
901
1,242
1,585
2,038
Growth (%)
67.7
37.8
27.7
28.6
Equity capital
99
99
99
99
Shares outstanding (mn)
49.7
49.5
49.5
49.5
Reserves & surplus
7,432
8,989
10,243
12,165
FDEPS (Rs) (adj)
20.3
25.1
32.0
41.2
Shareholder's funds
7,531
9,088
10,342
12,264
Growth (%)
61.7
23.9
27.7
28.6
Total liabilities
27,407
39,139
45,017
52,188
2.0
2.0
2.0
2.0
151.6
183.7
209.0
247.9
FY08
FY09E
FY10E
FY11E
Reported net income Adjustments
DPS (Rs)
Cash flow statement
Provisions Debt funds Other liabilities
BVPS (Rs)
Financial ratios
Y/E March (Rs mn)
FY08
FY09E
FY10E
FY11E
Y/E March
Net income + Depreciation
1,544
2,031
3,156
3,823
Profitability & Return ratios (%)
262
1,144
30
30
(2,034)
(3,581)
(2,471)
(2,639)
(228)
(405)
714
1,213
(3,157)
(4,069)
(1,377)
(1,520)
(40)
2
-
(465)
(55)
(3,662) 4,161
Issue/repay debt Dividends paid
Non-cash adjustments Changes in working capital Cash flow from operations Capital expenditure Change in investments Other investing cash flow Cash flow from investing Issue of equity
EBITDA margin
9.4
8.2
9.3
9.3
EBIT margin
7.1
5.4
6.5
6.6
Net profit margin
3.2
2.6
2.9
3.1
ROE
17.5
14.9
16.3
18.0
-
ROCE
14.2
13.9
12.0
8.5
-
-
Working Capital & Liquidity ratios
(4,122)
(1,377)
(1,520)
130
110
123
124
6
(213)
-
Inventory (days)
57
51
59
60
621
4,438
900
1,000
Payables (days)
76
67
79
-
(80)
(116)
(116)
(116)
Current ratio (x)
1.7
1.7
1.7
1.7
Quick ratio (x)
1.0
1.0
1.0
1.0
Gross asset turnover
4.7
4.8
4.3
4.7
Total asset turnover
1.3
1.4
1.3
1.4
Interest coverage ratio
1.8
1.7
2.2
2.5
Adjusted debt/equity
1.0
1.3
1.3
2.3
Other financing cash flow
-
-
-
-
Change in cash & cash eq
812
(199)
(91)
578
1,229
1,178
1,087
1,664
Closing cash & cash eq
Economic Value Added (EVA) analysis Y/E March
FY08
FY09E
FY10E
FY11E
WACC (%)
12.7
12.8
12.8
12.8
ROIC (%)
12.1
10.8
11.3
9.6
13,787
20,109
22,352
39,024
EVA (Rs mn)
(80)
(408)
(341)
(1,260)
EVA spread (%)
(0.6)
(2.0)
(1.5)
(3.2)
Invested capital (Rs mn)
Receivables (days)
Turnover & Leverage ratios (x)
Valuation ratios (x) EV/Sales
1.3
0.8
0.7
0.6
EV/EBITDA
14.1
9.6
7.2
6.0
P/E
25.2
20.3
15.9
12.4
3.4
2.8
2.4
2.1
P/BV
106
Simplex Infrastructure
Sector Report
05 October 2009
Quarterly trend Particulars
Q1FY09
Q2FY09
Q3FY09
Q4FY09
Q1FY10
Revenue (Rs mn)
10,181
10,081
12,703
13,876
11,082
YoY growth (%)
71.3
76.5
80.4
44.6
8.9
QoQ growth (%)
6.1
(1.0)
26.0
9.2
(20.1)
1,115
1,019
1,156
1,123
1,103
EBITDA margin (%)
11.0
10.1
9.1
8.1
9.9
Adj net income (Rs mn)
421
303
253
299
257
YoY growth (%)
113.7
58.8
14.6
3.1
(39.0)
QoQ growth (%)
45.3
(27.9)
(16.8)
18.3
(14.1)
(%)
FY07
FY08
FY09E
FY10E
FY11E
Tax burden (Net income/PBT)
79.7
73.1
71.7
67.0
67.0
Interest burden (PBT/EBIT)
56.2
61.8
67.8
66.0
69.1
EBITDA (Rs mn)
DuPont analysis
EBIT margin (EBIT/Revenues)
7.0
7.1
5.4
6.5
6.6
Asset turnover (Revenues/Avg TA)
119.5
125.2
141.1
131.7
136.8
Leverage (Avg TA/Avg equtiy)
561.7
435.9
400.4
433.1
430.0
21.1
17.5
14.9
16.3
18.0
Return on equity
Shareholding pattern
Company profile Simplex Infrastructure is a large, well-established construction
(%)
company with experience in civil and structural construction since
Promoters FIIs
foundations, ground engineering and earth works. Simplex has a
Banks & FIs
presence across various construction verticals – piling, industrial,
Public
1924. The company’s service offerings include design, engineering and construction, fittings and finishing work on structures, piling
Dec-08
Mar-09
Jun-09
49.4
54.1
54.1
17.1
13.7
13.2
13.4
14.6
17.3
20.1
17.6
15.4
power, urban infrastructure, buildings and housing, marine and roads, railways and bridges.
Stock performance
326
Buy
137
186
Buy
150
31-Jan-09
Results Review
137
178
Buy
Company Update
169
178
Hold
Results Review
398
483
Buy
3-Aug-09
Results Review
380
462
Buy
5-Oct-09
Quarterly Preview
510
577
Buy
6-Apr-09 1-Jul-09
50
Sep-09
225
Company Update
Jul-09
Results Review
2-Dec-08
Aug-09
5-Nov-08
350 250
Jun-09
Buy
Apr-09
568
May-09
365
Buy
Mar-09
6-Oct-08
●
Hold
Jan-09
450
Feb-09
Buy
Dec-08
644
Oct-08
479
Quarterly Preview
●
550
21-Aug-08 RHH Compendium
Nov-08
Reco
Sep-08
Event Reco price Tgt price
Jul-08
Date
Aug-08
Recommendation history
107
Voltas
Sector Report
05 October 2009
Voltas Limited upside
What’s New?
MEP order book at Rs 47bn: Order inflows for electro-mechanical projects (MEP) totalled Rs 5.8bn during Q1FY10, taking the outstanding order book for the division to Rs 46.7bn. This is 1.4x FY10E MEP sales. The orders comprise domestic projects worth Rs 12.5bn (~27%) and international orders worth Rs 34.1bn (~73%). All of Voltas’ contracts are on a fixed price basis and the company enters into back-to-back arrangements with vendors to protect margins. The management is confident of reasonable growth in MEP, both in the domestic and international arenas, on the back of its healthy, well-diversified order profile. It has received a number of new business inquiries and anticipates a pick-up in order booking in the near future. Voltas pegs potential order flows from the international division at Rs 10bn in H2FY10. In the domestic market, the company is looking at opportunities in the infrastructure space, which include airports, hotels, hospitals, and electrical works for power plants.
Target
CMP
TARGET
RATING
RISK
Rs 160
HOLD
MEDIUM
BSE
NSE
BLOOMBERG
500575
VOLTAS
VOLT IN
Company data Market cap (Rs mn / US$ mn)
331
Free float (%)
62.3
Acquired a further 16% stake in Rohini Electricals: During the quarter, Voltas acquired an additional 16% stake in Rohini Electricals, a turnkey electrical and instrumentation project provider, for a consideration of Rs 230mn. This takes its total stake in the company to 67%. This acquisition will enable it to prequalify for electrical and instrumental works of power plants.
Returns (%)
Superior return ratios, cash-rich position: At the end of FY09, Voltas had a consolidated cash balance of Rs 4.6bn as against debt of Rs 1.8bn. We expect an ROE of 30% over the next two years.
P/E comparison
Financial highlights (Rs mn) Revenue Growth (%) Adj net income Growth (%) FDEPS (Rs) Growth (%)
47,952 / 1,004
Outstanding equity shares (mn)
Dividend yield (%)
Key risks: The MEP division, which contributed over 60% to the company’s topline in FY09, derives 80% of its order backlog from the Middle East. A reduction in oil prices would lead to lower spending in the Middle East and hence lower order flows. Also, a sharp appreciation of the rupee against the US dollar would affect profitability. However, a majority of the exchange risk is mitigated by the import of materials in the company’s EPS and UCP divisions.
Estimates
Rs 145
Earnings CAGR of 21% over FY09-FY11: We expect Voltas to record a healthy earnings CAGR of 21% over FY09-FY11. While the MEP and unitary cooling product (UCP) divisions would lead growth in the near term, engineering products & services (EPS) is set to witness a moderate uptick as demand for material handling and construction equipment revives.
Target price of Rs 160 – Hold: The stock is currently trading at 17.9x FY10E and 14.5x FY11E earnings. We have valued Voltas at 16x FY11E earnings based on its superior ROE, strong earnings outlook and relatively modest capex plans (Rs 1bn in FY10-FY11). However, due to the limited upside from current levels, we are changing our rating from Buy to Hold, while maintaining our target at Rs 160.
Rating
1.1
52-week high/low (Rs)
165 / 31
2-month average daily volume
2,364,858
Stock performance Voltas
CMP
1-mth
3-mth
6-mth
145
(4.0)
17.7
192.0
Cap. Goods
13,731
6.1
6.4
112.4
Sensex
17,135
10.2
17.0
73.0
Vo ltas
(x) 40 30
Industry
29.6 21.3
24.9
21.1
17.9
20
14.5
10 0 FY09
FY10E
FY11E
Valuation matrix (x)
FY08
FY09
FY10E
FY11E
P/E @ CMP
27.2
21.3
17.9
14.5
P/E @ Target
30.0
23.5
19.8
16.0
EV/EBITDA @ CMP
18.1
16.2
12.6
10.2
Profitability and return ratios FY08
FY09
FY10E
FY11E
32,029
43,259
51,289
59,372
26.8
35.1
18.6
15.8
1,761
2,254
2,677
3,304
33.5
28.0
18.8
23.4
5.3
6.8
8.1
10.0
33.5
28.0
18.8
23.4
(%)
FY08
FY09E
FY10E
FY11E
EBITDA margin
7.9
6.5
7.1
7.6
EBIT margin
7.4
6.1
6.6
7.1
Adj PAT margin
5.5
5.2
5.2
5.6
ROE
35.2
32.9
29.9
29.2
ROIC
29.3
25.9
24.8
24.1
ROCE
30.7
28.6
26.3
26.9
108
Voltas
Sector Report
05 October 2009
Order book trend Fig 243 - MEP order book Particulars (Rs mn)
Q1FY08
Q2FY08
Q3FY08
Q4FY08
Q1FY09
Q2FY09
Q3FY09
Q4FY09
Q1 FY10
YoY growth (%)
QoQ growth (%)
Opening order book
21,852
20,000
27,000
35,000
45,952
56,703
55,703
53,293
47,133
2.6
(11.6)
1,883
11,208
11,737
15,683
15,382
4,874
3,848
2,541
5,805
(62.3)
128.5
Order inflows Sales Closing order book
3,735
4,208
3,737
4,731
4,632
5,874
6,258
8,701
6,272
35.4
(27.9)
20,000
27,000
35,000
45,952
56,703
55,703
53,293
47,133
46,666
(17.7)
(1.0)
Source: Company, RHH
Stock performance Fig 244 - Absolute performance from April ’04 300
Sensex
VOLTAS
Fig 245 - Relative performance from April ’04
BSE CG Index
Sensex
VOLTAS
BSE CG Index
640
250
540
200
440
150
340
100
240
50 0 Apr-04
740
140 May-05
Jun-06
Jul-07
Aug-08
Sep-09
40 Apr-04
May-05
Jun-06
Jul-07
Aug-08
Sep-09
Source: Bloomberg, RHH
Source: Bloomberg, RHH
Fig 246 - Relative performance from April ’06 to March ’07
Fig 247 - Relative performance from April ’07 to March ’08
115
Sensex
VOLTAS
BSE CG Index
225
Sensex
VOLTAS
BSE CG Index
200
105
175
95
150 85
125
75 65 Apr-06
100 Jul-06
Sep-06
Dec-06
Mar-07
75 Mar-07
Jun-07
Sep-07
Dec-07
Source: Bloomberg, RHH
Source: Bloomberg, RHH
Fig 248 - Relative performance from April ’08 to March ’09
Fig 249 - Relative performance from April ’09
Sensex
VOLTAS
BSE CG Index
Sensex
VOLTAS
Mar-08
BSE CG Index
220
120 100
170
80 120 60 70
40 20 Mar-08
Jun-08
Source: Bloomberg, RHH
Sep-08
Dec-08
Mar-09
20 Mar-09
Apr-09 May-09
Jun-09
Jul-09
Aug-09
Sep-09
Source: Bloomberg, RHH
109
Voltas
Sector Report
05 October 2009
12-month forward rolling band Fig 250 - P/E band
Fig 251 - P/BV band
(Rs)
(Rs) 300
400 350
40x
300
6.5x
200
250 200
20x
150 100
10x
50 0 Aug-06
250
4x Aug-07
Aug-08
Aug-09
150
4.5x
100
2.5x
50
1x
0 Aug-06
Aug-07
Source: RHH
Source: RHH
Fig 252 - EV/EBITDA band
Fig 253 - EV/Sales band
(Rs mn) 90,000 80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 Aug-06
21x
2x
100,000 15x
80,000
10x
60,000
5x
Aug-07
Aug-08
Aug-09
1.4x
40,000
0.8x
20,000
0.2x
0 Aug-06
Aug-07
Source: RHH
Fig 254 - Premium / Discount to BSE 30 P/E
Fig 255 - Market Cap/Sales band
(%) 200
(Rs mn) 120,000
150
100,000
100
80,000
50
60,000
0
40,000
(50)
20,000
Source: RHH
Aug-09
(Rs mn) 120,000
Source: RHH
(100) Aug-06
Aug-08
Aug-07
Aug-08
Aug-09
0 Jan-06
Aug-08
Aug-09
2x 1.4x
0.8x 0.2x Oct-06
Jun-07
Mar-08
Dec-08
Sep-09
Source: RHH
110
Voltas
Sector Report
05 October 2009
Consolidated financials Profit and Loss statement Y/E March (Rs mn)
Balance sheet Y/E March (Rs mn)
FY08
FY09E
FY10E
Cash and cash eq
3,001
4,570
3,672
3,513
Accounts receivable
5,703
9,521
10,539
12,200
Inventories
6,398
11,194
11,944
13,826
2,203
2,810
3,253
1,562
2,487
2,697
3,986
4,586
5,186
1,702
2,148
2,483
2,770
197
132
120
140
-
-
-
-
189
224
(20)
(40)
684
484
734
FY08
FY09
FY10E
FY11E
32,029
43,259
51,289
59,372
26.8
35.1
18.6
15.8
2,531
2,831
3,642
4,510
Growth (%)
97.4
11.9
28.6
23.9
Other current assets
1,528
Depreciation & amortisation
166
209
265
313
Investments
2,585
EBIT
2,364
2,622
3,377
4,198
Gross fixed assets
3,163
Growth (%)
109.9
10.9
28.8
24.3
Net fixed assets
Revenues Growth (%) EBITDA
Interest Other income EBT Income taxes
90
110
166
130
CWIP
479
742
800
868
Intangible assets
2,753
3,254
4,010
4,935
Deferred tax assets, net
997
1,172
1,303
1,599
Other assets
8
Total assets
Effective tax rate (%)
36.2
36.0
32.5
32.4
Extraordinary items
(316)
(261)
-
-
3
26
30
32
2,077
2,515
2,677
3,304
Min into / inc from associates Reported net income
FY11E
21,311
32,239
34,519
39,094
Accounts payable
6,397
11,754
12,225
12,955
Other current liabilities
6,222
7,961
8,196
9,485
Provisions
2,169
2,645
2,423
2,673
737
1,814
1,514
1,088
5
159
189
221
331
331
331
331
Adjustments
(316)
(261)
-
-
Adjusted net income
1,761
2,254
2,677
3,304
33.5
28.0
18.8
23.4
330.7
330.7
330.7
330.7
Reserves & surplus
5,449
7,575
9,641
12,342
5.3
6.8
8.1
10.0
Shareholder's funds
5,780
7,906
9,972
12,672
33.5
28.0
18.8
23.4
Total liabilities
21,311
32,239
34,519
39,094
1.4
1.6
1.6
1.6
17.5
23.9
30.2
38.3
Y/E March (Rs mn)
FY08
FY09E
FY10E
FY11E
Y/E March
FY08
FY09E
FY10E
FY11E
Net income + Depreciation
2,244
2,724
2,942
3,617
Profitability & Return ratios (%)
Growth (%) Shares outstanding (mn) FDEPS (Rs) (adj) Growth (%) DPS (Rs)
Cash flow statement
Non-cash adjustments
Debt funds Other liabilities Equity capital
BVPS (Rs)
Financial ratios
110
162
(40)
(22)
Changes in working capital
1,279
(1,760)
(1,459)
(1,967)
Cash flow from operations
3,632
1,126
1,443
1,628
Net profit margin
5.5
5.2
5.2
5.6
Capital expenditure
(287)
(367)
(588)
(620)
ROE
35.2
32.9
29.9
29.2
(1,311)
1,076
(924)
(210)
ROCE
30.7
28.6
26.3
26.9
73
(314)
-
-
(1,525)
395
(1,512)
(830)
Receivables (days)
60
64
71
70
0
0
-
-
Inventory (days)
90
101
114
109
Change in investments Other investing cash flow Cash flow from investing Issue of equity
EBITDA margin
7.9
6.5
7.1
7.6
EBIT margin
7.4
6.1
6.6
7.1
Working Capital & Liquidity ratios
Issue/repay debt
(378)
577
(300)
(427)
Payables (days)
92
105
118
107
Dividends paid
(388)
(520)
(529)
(529)
Current ratio (x)
1.3
1.4
1.4
1.5
Quick ratio (x)
0.7
0.7
0.7
0.7
10.7
12.1
12.0
12.2
Other financing cash flow
(1)
(11)
-
-
Change in cash & cash eq
1,340
1,569
(898)
(158)
Turnover & Leverage ratios (x)
Closing cash & cash eq
3,001
4,570
3,672
3,513
Gross asset turnover
Economic Value Added (EVA) analysis
Total asset turnover
Y/E March
FY08
FY09E
FY10E
FY11E
WACC (%)
14.5
12.1
12.1
12.1
ROIC (%)
29.3
25.9
24.8
24.1
5,550
7,955
10,426
13,141
EVA (Rs mn)
822
1,096
1,324
1,574
EVA spread (%)
14.8
13.8
12.7
12.0
Invested capital (Rs mn)
Interest coverage ratio Adjusted debt/equity
1.7
1.6
1.5
1.6
26.3
23.9
20.3
32.3
0.1
0.2
0.2
0.1
Valuation ratios (x) EV/Sales
1.4
1.1
0.9
0.8
EV/EBITDA
18.1
16.2
12.6
10.2
P/E
27.2
21.3
17.9
14.5
8.3
6.1
4.8
3.8
P/BV
111
Voltas
Sector Report
05 October 2009
Quarterly trend* Particulars
Q1FY09
Q2FY09
Q3FY09
Q4FY09
Q1FY10
Revenue (Rs mn)
10,163
9,285
8,660
12,531
11,789
YoY growth (%)
21.9
29.7
30.0
49.1
16.0
QoQ growth (%)
20.9
(8.6)
(6.7)
44.7
(5.9)
EBITDA (Rs mn)
872
808
495
774
1,007
EBITDA margin (%)
8.6
8.7
5.7
6.2
8.5
Adj net income (Rs mn)
619
591
426
370
709
YoY growth (%)
20.5
38.2
11.0
(19.6)
14.5
QoQ growth (%)
34.7
(4.5)
(28.0)
(13.2)
91.8
FY07
FY08
FY09E
FY10E
FY11E
* Standalone
DuPont analysis (%) Tax burden (Net income/PBT) Interest burden (PBT/EBIT)
76.3
64.0
69.3
66.8
66.9
153.4
116.5
124.1
118.8
117.6
EBIT margin (EBIT/Revenues)
4.5
7.4
6.1
6.6
7.1
Asset turnover (Revenues/Avg TA)
174.2
169.3
161.6
153.7
161.3
Leverage (Avg TA/Avg equtiy)
417.3
377.8
391.3
373.4
325.1
38.0
35.2
32.9
29.9
29.2
Return on equity
Shareholding pattern
Company profile Voltas offers engineering solutions for a wide spectrum of industries
(%)
Dec-08
Mar-09
Jun-09
in areas such as heating, ventilation and air conditioning (HVAC),
Promoters
27.6
27.7
27.7
FIIs
16.4
12.7
11.7
handling, water management, building management systems,
Banks & FIs
26.5
27.2
29.9
indoor air quality and chemicals.
Public
29.5
32.4
30.7
refrigeration,
electro-mechanical
projects,
textile
machinery,
machine tools, mining and construction equipment, material
Recommendation history
Stock performance
Date
Event
Reco price Tgt price
Reco
3-Jul-09
Initiating Coverage
125
170
160
Buy
31-Jul-09
Results Review
150
137
160
Buy
5-Oct-09
Sector Report
130
145
160
Hold
110 90
●
70 50 Apr-09
May-09
Jun-09
Buy
Jul-09
●
Aug-09
Hold
Sep-09
112
Ahluwalia Contracts
Sector Report
05 October 2009
Ahluwalia Contracts Strong revenue visibility
What’s New?
Healthy order book: ACL currently has a gross order book of Rs 45bn, with unbilled orders worth Rs 28bn which are to be executed over a period of 24 months. The orders are well diversified geographically, covering 14 states and split between government and private clients in a ratio of 33:67. About 85% of the projects are covered by cost escalation clauses. The company’s real estate exposure stands at 60% including orders for the 2010 Commonwealth Games in New Delhi (45% excluding these contracts). Management sees order inflows of Rs 25bn in FY10: Order inflows totalled Rs 20bn in FY09 and the management expects a 25% incremental intake during FY10. The company has already bagged Rs 4bn of orders in Q1FY10. In addition, ACL is the lowest bidder (L1) for projects worth Rs 3bn and has placed further bids worth Rs 12bn. Emaar receivables under control: With the Delhi Development Authority (DDA) bailing out the Emaar MGF project, the company’s outstanding debtor position on this deal has reduced from Rs 750mn as on 31 March 2009 to Rs 350mn. Work on the project is 45–50% complete and payments are being received on time. To date, Rs 3bn has been billed, with Rs 4bn to be billed in FY10. Tighter working capital cycle: ACL’s working capital cycle peaked at 120 days in March ’09, but has now tapered down to 60–75 days. The company has witnessed the cancellation of orders for SEZ projects and a retail outlet for Reliance, but there have been no bad debts on these accounts. Capex of Rs 750mn over the next two years: ACL has incurred capex of Rs 750mn in FY09 and is likely expend a similar sum for each of the next two years. The cost of scaffolding which constituted Rs 350mn of the Rs 750mn capex in FY09 has been fully written-off during the year. The life of scaffolding items is close to five years. Since the write-off led to high depreciation, the company has deferred tax assets on its books.
TARGET
RATING
RISK
Rs 169
Rs 190
BUY
HIGH
BSE
NSE
BLOOMBERG
532811
-
AHLU IN
Market cap (Rs mn / US$ mn)
FY08
FY09
FY10E
FY11E
Revenue
8,801
12,087
14,444
19,673
31.5
37.3
19.5
36.2
Adj net income
516
572
796
1,102
Growth (%)
65.6
10.8
39.2
38.4
8.2
9.1
12.7
17.6
65.6
10.8
39.2
38.4
FDEPS (Rs) Growth (%)
10,607 / 222
Outstanding equity shares (mn)
63
Free float (%)
25.5
Dividend yield (%)
0.4
52-week high/low (Rs)
177 / 25
2-month average daily volume
277,518
Stock performance Returns (%) Ahluwalia Cont. Sensex
CMP
1-mth
3-mth
6-mth
169
13.0
94.4
406.6
17,135
10.2
17.0
73.0
P/E comparison (x)
A hluwalia co ntracts
Industry
40 30 20
29.6 24.9
18.5
21.1
13.3
9.6
10 0 FY09
FY10E
FY11E
Valuation matrix (x)
FY08
FY09
FY10E
P/E @ CMP
20.5
18.5
13.3
FY11E 9.6
P/E @ Target
23.1
20.9
15.0
10.8
9.1
6.8
5.4
4.0
Profitability and return ratios
(Rs mn) Growth (%)
Estimates
CMP
EV/EBITDA @ CMP
Financial highlights
Rating
Company data
No dilution on the cards: The management is not looking to raise equity in the near term, though this possibility may arise in future if it opts to undertake BOT projects or achieve inorganic growth. We anticipate EPS of Rs 12.7 and Rs 17.6 in FY10 and in FY11 respectively. Upgrade target, maintain Buy: With the improving economic environment, the construction industry has witnessed a re-rating. Accordingly, we have revised our target P/E multiple for ACL from 12x to 15x on FY10E, giving us a price target of Rs 190 from Rs 152 earlier. We maintain our Buy rating on the stock.
Target
(%)
FY08
FY09
FY10E
FY11E
EBITDA margin
12.1
12.1
11.8
12.5
9.5
9.5
7.9
8.8
EBIT margin
5.9
5.9
4.7
5.5
ROE
50.5
50.5
37.9
37.2
ROIC
75.8
75.8
58.2
48.9
ROCE
36.8
36.8
31.4
30.8
Adj PAT margin
113
Ahluwalia Contracts
Sector Report
05 October 2009
Stock performance Fig 256 - Absolute performance from Feb ’07 400
Sensex
Ahluwalia
Fig 257 - Relative performance from Feb ’07
BSE CG Index
350 300 250 200 150 100 50 0 Feb-07
Aug-07
Mar-08
Sep-08
Mar-09
Sep-09
Sensex 220 200 180 160 140 120 100 80 60 40 20 Feb-07 Aug-07
Ahluwalia
Mar-08
BSE CG Index
Sep-08
Mar-09
Sep-09
Source: Bloomberg, RHH
Source: Bloomberg, RHH
Fig 258 - Relative performance from Feb ’07 to March ’07
Fig 259 - Relative performance from April ’07 to March ’08
Sensex
Ahluwalia
BSE CG Index
105
260
100
220
95
Sensex
Ahluwalia
BSE CG Index
180
90
140
85 80
100
75 Feb-07
Mar-07
Mar-07
Mar-07
60 Apr-07
Jul-07
Sep-07
Dec-07
Source: Bloomberg, RHH
Source: Bloomberg, RHH
Fig 260 - Relative performance from April ’08 to March ’09
Fig 261 - Relative performance from April ’09
110 100 90
Sensex
Ahluwalia
BSE CG Index
Sensex
Ahluwalia
BSE CG Index
270 220
80 70 60 50 40 30 20 Apr-08
320
Mar-08
170 120 70 Jun-08
Source: Bloomberg, RHH
Sep-08
Dec-08
Mar-09
20 Apr-09
May-09
Jun-09
Aug-09
Sep-09
Source: Bloomberg, RHH
114
Ahluwalia Contracts
Sector Report
05 October 2009
12-month forward rolling band Fig 262 - P/E band
Fig 263 - P/BV band
(Rs) 700 600
40x
500 400 300 15x
200
10x 5x
100 0 Feb-07
Oct-07
Jun-08
Jan-09
Sep-09
(Rs) 450 400 350 300 250 200 150 100 50 0 Feb-07
8x
4x 2x 1x Oct-07
Source: RHH
Source: RHH
Fig 264 - EV/EBITDA band
Fig 265 - EV/Sales band
(Rs mn) 50,000
21x
40,000 15x
30,000
10x
20,000
5x
10,000 0 Feb-07
Oct-07
Jun-08
Jan-09
Sep-09
Jun-08
1.8x
30,000 25,000 20,000
1.2x
15,000
0.8x
10,000
0.4x
5,000 0 Feb-07
Oct-07
Jun-08
Source: RHH
Fig 266 - Premium/Discount to BSE 30 P/E
Fig 267 - Market Cap/Sales band
Jan-09
Sep-09
(Rs mn)
(%) 100
35,000 1.8x
30,000
50
25,000
0
20,000
(50)
15,000
1.2x 0.8x
10,000
(100)
Source: RHH
Sep-09
(Rs mn) 35,000
Source: RHH
(150) Feb-07
Jan-09
0.4x
5,000 Sep-07
May-08
Jan-09
Sep-09
0 Feb-07
Oct-07
Jun-08
Jan-09
Sep-09
Source: RHH
115
Ahluwalia Contracts
Sector Report
05 October 2009
Standalone financials Profit and Loss statement
Balance sheet Y/E March (Rs mn)
FY08
FY09
FY10E
FY11E
Cash and cash eq
1,165
1,365
2,154
3,258
Accounts receivable
2,261
3,200
3,600
4,400
Inventories
755
907
1,300
1,620
35.0
Other current assets
330
773
887
1,018
Investments
Y/E March (Rs mn)
FY08
FY09
FY10E
FY11E
Revenues
8,801
12,087
14,444
19,673
31.5
37.3
19.5
36.2
1,063
1,429
1,808
2,439
52.8
34.5
26.5
Growth (%) EBITDA Growth (%) Depreciation & amortisation
228
479
540
650
EBIT
835
950
1,268
1,789
Growth (%)
68.1
13.8
33.4
Interest
118
159
250
Other income EBT
42
42
42
42
Gross fixed assets
1,808
2,112
2,862
3,612
41.2
Net fixed assets
1,102
927
1,137
1,237
330
CWIP
104
400
400
400
Intangible assets
65
88
150
160
781
880
1,168
1,619
Deferred tax assets, net
2
1
1
0
38
32
35
35
Income taxes
265
308
371
518
Other assets
-
-
-
-
Effective tax rate (%)
33.9
35.0
31.8
32.0
Total assets
5,799
7,647
9,555
12,011
Extraordinary items
-
-
-
-
Accounts payable
1,139
1,300
1,500
1,600
Min into / inc from associates
-
-
-
-
Other current liabilities
2,733
3,500
3,846
4,600
516
572
796
1,102
Provisions
113
355
443
594
Debt funds
565
721
1,251
1,651
-
-
-
-
126
126
126
126
1,124
1,645
2,390
3,440
Reported net income Adjustments
-
-
-
-
Adjusted net income
516
572
796
1,102
Growth (%)
65.6
10.8
39.2
38.4
Equity capital
Shares outstanding (mn)
62.8
62.8
62.8
62.8
Reserves & surplus
FDEPS (Rs) (adj) Growth (%) DPS (Rs)
8.2
9.1
12.7
17.6
Shareholder's funds
1,250
1,771
2,516
3,566
65.6
10.8
39.2
38.4
Total liabilities
5,799
7,647
9,555
12,011
0.7
0.7
0.7
0.7
21.9
30.2
42.1
58.8
FY08
FY09
FY10E
FY11E
Cash flow statement Y/E March (Rs mn)
Other liabilities
BVPS (Rs)
Financial ratios FY08
FY09
FY10E
FY11E
Y/E March
Net income + Depreciation
744
1,051
1,336
1,752
Profitability & Return ratios (%)
Non-cash adjustments
(32)
270
85
151
12.1
11.8
12.5
12.4
Changes in working capital
447
(627)
(361)
(397)
EBIT margin
9.5
7.9
8.8
9.1
Cash flow from operations
1,159
694
1,060
1,506
Net profit margin
5.9
4.7
5.5
5.6
Capital expenditure
(668)
(599)
(749)
(750)
ROE
50.5
37.9
37.2
36.2
Change in investments
0
-
-
-
ROCE
36.8
31.4
30.8
29.4
Other investing cash flow
7
-
-
-
Working Capital & Liquidity ratios
(662)
(599)
(749)
(750)
Receivables (days)
74
82
86
74
-
0
0
0
Inventory (days)
32
34
34
33
Issue/repay debt
(27)
156
530
385
Payables (days)
51
50
43
35
Dividends paid
(22)
(52)
(52)
(36)
Current ratio (x)
1.2
1.3
1.5
1.7
Other financing cash flow
-
-
-
-
Quick ratio (x)
0.9
0.7
0.7
0.7
Change in cash & cash eq
448
200
789
1,105
Turnover & Leverage ratios (x)
1,165
1,365
2,154
3,258
Gross asset turnover
5.8
6.2
5.8
6.1
Total asset turnover
1.9
1.8
1.7
1.8
Cash flow from investing Issue of equity
Closing cash & cash eq
Economic Value Added (EVA) analysis
EBITDA margin
Interest coverage ratio
7.1
6.0
5.1
5.4
Adjusted debt/equity
0.5
0.4
0.5
0.5
1.1
0.8
0.7
0.5
Y/E March
FY08
FY09
FY10E
FY11E
WACC (%)
13.9
16.3
16.3
16.3
ROIC (%)
75.8
58.2
48.9
52.8
Invested capital (Rs mn)
736
1,482
2,056
2,553
EVA (Rs mn)
456
622
670
933
P/E
EVA spread (%)
61.9
42.0
32.6
36.6
P/BV
Valuation ratios (x) EV/Sales EV/EBITDA
9.1
6.8
5.4
4.0
20.5
18.5
13.3
9.6
7.7
5.6
4.0
2.9
116
Ahluwalia Contracts
Sector Report
05 October 2009
Quarterly trend Particulars
Q1FY09
Q2FY09
Q3FY09
Q4FY09
Q1FY10
Revenue (Rs mn)
2,540
3,017
2,963
3,567
3,046
YoY growth (%)
48.9
60.5
33.3
19.2
19.9
(15.1)
18.8
(1.8)
20.4
(14.6)
199
235
228
289
304
QoQ growth (%) EBITDA (Rs mn) EBITDA margin (%)
7.8
7.8
7.7
8.1
10.0
Adj net income (Rs mn)
129
145
128
170
184
YoY growth (%)
52.2
18.9
16.7
(15.0)
43.3
(35.7)
12.8
(11.8)
33.0
8.3
(%)
FY07
FY08
FY09
FY10E
FY11E
Tax burden (Net income/PBT)
64.4
66.1
65.0
68.2
68.0
Interest burden (PBT/EBIT)
97.5
93.6
92.6
92.1
90.5
7.4
9.5
7.9
8.8
9.1
Asset turnover (Revenues/Avg TA)
228.8
186.8
179.8
167.9
182.4
Leverage (Avg TA/Avg equtiy)
443.7
460.5
445.1
401.3
354.6
47.3
50.5
37.9
37.2
36.2
QoQ growth (%)
DuPont analysis
EBIT margin (EBIT/Revenues)
Return on equity
Shareholding pattern
Company profile Set up in 1979, Ahluwalia Contracts India (ACL) is an engineering-
(%)
procurement-construction (EPC) company engaged in the civil
Promoters
construction business, which includes retail malls, residential complexes, offices, hotels, IT parks and hospitals.
Dec-08
Mar-09
Jun-09
74.5
74.5
74.5
5.6
5.0
2.9
16.3
16.0
17.1
3.6
4.5
5.5
FIIs Banks & FIs Public
Stock performance 200
21-Aug-08 RHH Compendium
96
140
Buy
6-Oct-08
Quarterly Preview
79
112
Buy
2-Jan-09
Quarterly Preview
31
42
Hold
31-Jan-09
Results Review
37
42
Hold
50
16-Feb-09 Company Update
32
42
Hold
0
20-Jul-09
Company Update
97
127
Buy
4-Aug-09
Results Review
126
152
Buy
5-Oct-09
Sector Report
169
190
Buy
●
●
Hold
Buy
150
Oct-09
Aug-09
Jun-09
100
Apr-09
Reco
Feb-09
Reco price Tgt price
Dec-08
Event
Oct-08
Date
Aug-08
Recommendation history
117
Gayatri Projects
Sector Report
05 October 2009
Gayatri Projects Robust BOT portfolio
What’s New?
Gayatri Projects (GPL) has two business verticals, i.e., construction and BOT roads. The BOT projects are being executed by Gayatri Infra Ventures (GIVL), its 70% subsidiary. Construction order book of Rs 58bn: GPL’s outstanding order book in the construction segment stands at Rs 57.7bn (~5.7x FY09 revenue), to be executed over 3–4 years. Of this, contracts worth Rs 4.2bn are in-house BOT road construction works. The irrigation segment, which derives ~90% of its orders from the Andhra Pradesh government, contributes 66% to the order book, while the road and industrial building segments contribute 30% and 4% respectively. For FY10 (standalone), the management expects a topline growth of 25–30% to Rs 12.5bn–13bn with an EBITDA margin of 11–11.5% and earnings growth of 20–25% to Rs 50/share. Large BOT portfolio: Subsidiary company GIVL has a portfolio of five BOT projects comprising one toll contract and four annuity-based works. All the projects are under construction, and entail a cumulative equity commitment of ~Rs 1.7bn from the company. Of this, GIVL has invested Rs 1.3bn so far and expects to bring in the balance by the end of this fiscal. Apart from its ongoing works, GIVL has emerged as the lowest bidder for Karim Nagar – a Hyderabad BOT toll project that has an estimated cost of Rs 22bn with a positive grant of Rs 5.3bn. The company holds a 26% stake in the SPV. Dilution in GIVL, stake placement by GPL: In August ’08, GIVL diluted 30% equity to AMP Capital Finance Mauritius for a consideration of Rs 1bn. This values GIVL at Rs 3.4bn. This apart, GPL recently placed a 9.9% stake (1mn equity shares) with Reliance Capital Trustee Co – Reliance Infrastructure Fund – at Rs 185/share. The board is also considering the allotment of 1mn warrants convertible into equity shares of Rs 10 each at a premium of Rs 132.5/share on preferential basis to the promoters.
Target
Rating
Estimates
CMP
TARGET
RATING
RISK
Rs 305
NA
NA
NA
BSE
NSE
BLOOMBERG
531497
NA
GAYP IN
Company data Market cap (Rs mn / US$ mn)
3,081 / 65
Outstanding equity shares (mn)
10.1
Free float (%)
39.8
Dividend yield (%)
-
52-week high/low (Rs)
318 / 42
2-month average daily volume
64,981
Stock performance Returns (%)
CMP
1-mth
3-mth
6-mth
Gayatri
305
3.8
57.5
347.8
Sensex
17,135
10.8
16.9
65.6
Valuation: The company is trading at 7.5x FY09 reported earnings, which looks attractive considering its healthy BOT portfolio. We do not have a rating on the stock.
Financial highlights
Profitability and return ratios
(Rs mn)
FY06
FY07
FY08
FY09
Revenue
3,712
5,021
7,524
10,046
23
35
50
34
Adj net income
177
236
393
413
Growth (%)
102
33
67
5
19.65
24.7
39.1
40.9
19.7
24.8
34.0
32.6
Growth (%)
FDEPS (Rs) Growth (%)
(%)
FY06
FY07
FY08
FY09
EBITDA margin
17.6
15.0
14.1
11.3
EBIT margin
17.6
12.5
11.9
9.3
4.8
4.7
5.2
4.1
ROE
19.7
21.7
24.6
20.9
ROCE
19.2
11.7
13.5
12.3
Adj PAT margin
118
Gayatri Projects
Sector Report
05 October 2009
Fig 268 - GIVL – BOT project portfolio SN
Name
Length (km)
Concession period (yrs)
78.5
20
Holding (%)
Total Cost (Rs mn)
Equity (Rs mn)
Debt (Rs mn)
NHAI grant (Rs mn)
SemiAnnuity (Rs mn)
Under construction
49%
5,340
940
3,850
560
NA*
Status
1
Western UP Tollway
2
Gayatri Lalitpur Roadways
50
20
Under construction
51%
3,126
600
2.526
0
239.5
3
Gayatri Jhansi Roadways
50
20
Under construction
51%
4,210
800
3,420
0
299.5
4
Hyderabad Expressways
13
15
Under construction
50%
4,310
682
2.900
719
304.9
5
Cyberabad Expressways
11.7
15
Under construction
50%
5,018
447
3,763
810
395
22,004
3,469
16,459
2,089
Total Source: Company
*BOT Toll project
119
Madhucon Projects
Sector Report
05 October 2009
Madhucon Projects Listing of infra subsidiary a potential trigger
What’s New?
Strong order book of Rs 46bn: MPL has a current order backlog of ~Rs 46bn which is 4.6x FY09 revenues. The order book is composed of in-house contracts worth Rs 16bn (roads Rs 2.5bn, power Rs 9.6bn and hotels & office complexes Rs 3.9bn) and external projects worth Rs 30bn. Margins for in-house works are in the range of 9–10% except for power projects where a higher subcontracting component caps margins at ~5%. For FY10, MPL pegs topline growth at 30% with a margin of 11% and bottomline growth of 20%, translating to an EPS of ~Rs 16. BOT portfolio of four projects: The company’s 100% subsidiary, Madhucon Infrastructure, has a portfolio of four toll roads. Toll collections have begun on one stretch, while another project will deliver from the end of September. The company will commence operations on the remaining two toll roads by end-FY10. It expects toll revenue of Rs 5mn–5.5mn per day once all its BOT projects are commissioned. Power portfolio totals 540MW: MPL is executing power projects in two phases of 270MW each, besides signing an MOU with the Jharkhand government for a 1,000MW thermal plant. Phase I of its power project entails a cost of Rs 13.4bn and has achieved financial closure with an equity component of Rs 3.3bn and debt of Rs 10bn. The company has invested Rs 1.2bn and will invest the balance equity before FY11. It holds a 76% stake in the project while the promoters hold the balance. MPL has signed a 25-year MOU with PTC for sale of 70% of the power generated at Rs 1.25/unit. PTC will supply coal for power generation. The balance 30% will be sold to Reliance at Rs 4.5/unit for three years. For the second phase, the company has already acquired 700 acres of land at a cost of Rs 400,000/acre and applied for another 220 acres. This phase is proposed to be expanded from 270MW to 1,330MW. Indonesian coal mines: MPL has invested Rs 1.2bn in coal mines in Indonesia, of which equity investments total Rs 200mn. It plans to invest further Rs 2.5bn in FY11. The management expects to sell 0.5mt of coal in FY10 and 1.5mt in FY11.
Target
Rating
Estimates
CMP
TARGET
RATING
RISK
Rs 262
NA
NA
NA
BSE
NSE
BLOOMBERG
531497
MADHUCON
MDHPJ IN
Company data Market cap (Rs mn / US$ mn)
9,689 / 202
Outstanding equity shares (mn)
36.9
Free float (%)
42.2
Dividend yield (%)
-
52-week high/low (Rs)
275 / 41
2-month average daily volume
312,131
Stock performance Returns (%)
CMP
1-mth
3-mth
6-mth
262
10.5
52.5
322.9
17,135
10.8
16.9
65.6
Madhucon Sensex
Subsidiary listing a potential trigger for the stock: So far, MPL has infused equity of Rs 4.6bn in roads (Rs 3.2bn), power (Rs 1.2bn) and coal mines (Rs 200mn). It intends to invest a further Rs 3.9bn by FY11 (phase I power and coal mines). The management is targeting an EPS of Rs 16 for FY10. The stock is currently trading at a P/E of 15.7x FY10E consensus earnings. Excluding the book value of investments in roads, power and coal mining, the stock trades at 9.8x FY10E consensus earnings. MPL plans to transfer all its infrastructure assets to its subsidiary, Madhucon Infrastructure, and may list the same by January ’10 to raise ~Rs 5bn. This would be a key trigger for the stock. We do not have a rating on MPL at present.
Financial highlights
Profitability and return ratios
(Rs mn)
FY06
FY07
FY08
FY09
(%)
FY06
FY07
FY08
FY09
Revenue
3,421
5,100
7,380
9,719
EBITDA margin
18.3
15.0
14.5
12.1
12
49
45
32
EBIT margin
12.7
10.0
9.9
7.7
Adj net income
333
416
472
493
Growth (%)
105
25
14
4
9.7
8.1
6.4
5.1
FDEPS (Rs)
11.8
11.3
12.8
13.4
ROE
13.0
9.7
10.0
9.5
(60.6)
(4.6)
13.7
4.4
ROCE
13.7
8.9
8.7
7.6
Growth (%)
Growth (%)
Adj PAT margin
120
Madhucon Projects
Sector Report
05 October 2009
Fig 269 - Road BOT business summary (Rs mn) Madhucon Agra– Jaipur Expressways
Length
Concession years
57
25
Avg. toll collection per day
Total Cost
Equity
Debt
NHAI positive grant
Toll collection started in May ’09
0.7
3,554
610
1,984
960
460
12.5
1.15
3,847
747
2,240
860
747
20.2
Status
Equity P/BV - 1x invested (Rs/share)
TN (DK) Expressways
68
20
Expects completion certificate by Sept ’09 end
Trichy – Tanjavur Expressways
56
20
Completion in Jan ’10
1.4
4,041
647
2,610
784
647
17.5
Madurai – Tuticorin Expressways
128
20
Completion in Feb ’10
2.4
9,204
1,780
5,980
1,444
1350
36.6
Total
309
5.7
20,646
3,784
12,814
4,048
3,204
86.8
Source: Company, RHH
121
Coverage Profile By recommendation (%) 60 50 40 30 20 10 0
By market cap (US$) (%) 60 50 40 30 20 10 0
59
31 10 Buy
Hold
Sell
57 33 10 > $1bn
$200mn - $1bn
< $200mn
Recommendation interpretation Recommendation
Expected absolute returns (%) over 12 months
Buy
More than 15%
Hold
Between 15% and –5%
Sell
Less than –5% Recommendation structure changed with effect from March 1, 2009
Expected absolute returns are based on share price at market close unless otherwise stated. Stock recommendations are based on absolute upside (downside) and have a 12-month horizon. Our target price represents the fair value of the stock based upon the analyst’s discretion. We note that future price fluctuations could lead to a temporary mismatch between upside/downside for a stock and our recommendation.
Religare Capital Markets Ltd th
4 Floor, GYS Infinity, Paranjpe ‘B’ Scheme, Subhash Road, Vile Parle (E), Mumbai 400 057.
Disclaimer This document is NOT addressed to or intended for distribution to retail clients (as defined by the FSA). This document is issued by Religare Hichens, Harrison & Co Plc (“Hichens”) in the UK, which is authorised and regulated by the Financial Services Authority in connection with its UK distribution. Hichens is a member of the London Stock Exchange. This material should not be construed as an offer or recommendation to buy or sell or solicitation of any offer to buy any security or other financial instrument, nor shall it, or the fact of its distribution, form the basis of, or be relied upon in connection with, any contract relating to such action or any other matter. The material in this report is based on information that we consider reliable and accurate at, and share prices are given as at close of business on, the date of this report but we do not warrant or represent (expressly or impliedly) that it is accurate, complete, not misleading or as to its fitness for the purpose intended and it should not be relied upon as such. Any opinion expressed (including estimates and forecasts) is given as of the date of this report and may be subject to change without notice. Hichens, and any of its connected or affiliated companies or their directors or employees, may have a position in any of the securities or may have provided corporate finance advice, other investment services in relation to any of the securities or related investments referred to in this document. Our asset management area, our proprietary trading desks and investing businesses may make investment decisions that are inconsistent with the recommendations or views expressed in this briefing note. Hichens accepts no liability whatsoever for any direct, indirect or consequential loss or damage of any kind arising out of the use of or reliance upon all or any of this material howsoever arising. Investors should make their own investment decisions based upon their own financial objectives and financial resources and it should be noted that investment involves risk, including the risk of capital loss. This document is confidential and is supplied to you for information purposes only. It may not (directly or indirectly) be reproduced, further distributed to any person or published, in whole or in part, for any purpose whatsoever. Neither this document, nor any copy of it, may be taken or transmitted into the United States, Canada, Australia, Ireland, South Africa or Japan or into any jurisdiction where it would be unlawful to do so. Any failure to comply with this restriction may constitute a violation of relevant local securities laws. If you have received this document in error please telephone Nicholas Malins-Smith on +44 (0) 20 7382 4479.
“Religare Enterprises Limited proposes, subject to receipt of requisite approvals, market conditions and other considerations, to make a rights issue of its equity shares to its existing shareholders and has filed a draft letter of offer (“DLOF”) with the Securities and Exchange Board of India (“SEBI”). The DLOF is available on the website of SEBI at www.sebi.gov.in as well as on the websites of the lead manager at www.enam.com. Investment in equity shares involves a high degree of risk and for details relating to the same, please refer to the section titled “Risk Factors” of the DLOF.”
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