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Infrastructure
India
NHAI: Fits and starts continue at policy level; but remains optimistic. Recent cut in
toll rates for 3-axle vehicles is likely to reduce the NHAI toll collections by about 10%
and may affect viability of future projects leading to higher proportion of annuity/cashbased projects. Ministry of Finance has suggested a limit on the annuity spends of NHAI
which may further delay the road development program. However, NHAI management
remains positive on award of about 5,500-6,000 km of projects by March-2011.
Recent toll rate cut to reduce toll collections by 10%; affect financing plan but only prospective
NHAI management suggested that specific toll reduction on 3-axle vehicles (to Rs2.4 per km from
Rs3.4 per km) would cut the total toll inflow by 10% and that would affect viability of road
projects on toll mode. Some projects may overshoot the maximum limit of 40% viability gap
funding and this may disturb the mix of toll-annuity and EPC projects (65-25-15) as envisaged in
the B. K. Chaturvedi committee report. NHAI suggested that reduction in toll rate would be
applicable only for prospective PPP projects and existing public-funded projects. Thus, existing
contracts that have been awarded to private sector players would not be affected.
Limit of annuity that can be taken by NHAI would also limit progress on road development plan
Ministry of Finance has suggested that NHAI should not take annuity payments in excess of its
annual inflows. We believe that NHAI has taken up annuity payment commitments of about Rs50-
55 bn already and more projects to be awarded in the next few months would exhaust the total
limit of about Rs80-90 bn. This is equivalent to current NHAI receivables on account of cess on
auto fuels (Rs80-90 bn), toll collection (Rs25 bn or so) etc. This would delay the road development
program and accentuate the problem in the point above as NHAI would have to postpone the
bidding process of annuity projects to stay in line with the guidance.
Guidance potentially misses the point that NHAI as an entity can borrow debt based on likely
receivables and repay later. Annuities are payable only for 17 years while NHAI has mandate till
FY2031-32E. Annuity pays for maintenance also while NHAI mandate was primarily development
to start with (so a limit on annuity payments has to take that into thought process).
Remains hopeful that 5,500-6,500 km can be awarded by March-11; highlights steep competition
Despite two setbacks above, NHAI remains very hopeful that 5,500-6,500 km can be awarded by
March-11 or so as the request for qualification process is already on and request for proposal can
be initiated in the Jan-Feb ’11 period. Toll policy is part of RFP so ongoing RFQ process is not
affected. Revised toll policy would need changes to project approval documents that are placed
before PPP-AC but NHAI is hopeful of achieving that in next few weeks.
NHAI management highlighted steep competition in the market with over 100 independent
contractors present. NHAI road development is a highly fragmented market more than 30
developers actively vying for projects.
Reiterate BUY on IRB (TP: Rs270) on strong balance sheet and ability to take on more projects
We reiterate our BUY rating on IRB Infrastructure with an SOTP-based target price of Rs270/share
based on (1) strong operational and development pipeline of projects, (2) ability to win
incremental projects based on strong balance sheet, and (3) likely strong near-term revenue
growth led by construction. Our target price of Rs270/share is based on March ’12-based FCFE of
projects with (1) 6% traffic growth across projects and (2) 12.5% cost of equity. We attribute
Rs20 to incremental projects based on 0.5X incremental P/B on projects of 400 km.
Toll rate cut to reduce toll collections by 10%; may affect NHDP’s financing plan
In order to stop truckers from going on strike, the Ministry of Roads, Transportation and
Highways announced a cut in toll rates applicable to three-axle vehicles. A new slab for
three-axle trucks has been created, which would be charged 10% more than two-axle
trucks and Rs1 per km lower than earlier applicable rate of Rs3.4 per km for multi-axle
vehicles. The toll rates for three-axle trucks have been cut to Rs2.4 per km. Earlier there were
three slabs for toll applicable to trucks, viz. two axle, three-five axle, and six axle and above.
This new rate will be applicable to all PPP projects signed in the future but would be
immediately applicable to all public-funded toll roads.
To impact NHAI toll revenues by about 10%; almost 80% of trucks in multi-axle slab
are three-axle vehicles
Multi-axle vehicles form a majority of the proportion of the traffic on highways; about 44%
of the total vehicle traffic for GVK’s Jaipur-Kishangarh Expressway was from multi-axle
vehicles. Further, three-axle trucks form a majority (about 70-80%) of the trucks falling in
the three-five-axle category. NHAI management believes that the toll reduction on 3-axle
vehicles would result in a 10% reduction in the total toll collections of NHAI.
The new rate would be applicable to all public-funded toll projects on an immediate basis.
Note that public-funded toll plazas recorded a total toll collection of about Rs19 bn in
FY2010.
Would affect viability of toll-based road projects
The reduction in toll rate would also adversely impact the viability of toll-based road projects.
The lower toll rate would have to be compensated by higher viability gap funding. In some
projects the required grant (to make the project viable) may overshoot the 40% limit for
viability gap funding thus making it unviable on toll basis. Such projects are likely to be then
awarded either on an annuity or EPC/Cash basis. This may disturb the mix of toll-annuity and
EPC projects (65-25-15) as envisaged in the B. K. Chaturvedi committee report.
Limit on annuity payments would limit progress on road development plan
Ministry of Finance has suggested that NHAI should not take annuity payments in excess of
its annual inflows. We believe that NHAI has taken up annuity payment commitments of
about Rs50-55 bn already and more projects to be awarded in the next few months would
exhaust the total limit of about Rs80-90 bn. This is equivalent to current NHAI receivables on
account of cess on auto fuels (Rs80-90 bn), toll collection (Rs25 bn or so) etc.
This would delay the road development program and accentuate the problem in the point
above as NHAI would have to postpone the bidding process of annuity projects to stay in
line with the guidance. Further, the toll collections from projects are first handed over to the
Government of India which is then paid back to NHAI based on parliamentary approval. This
results in likely risk of unsteady cash flows and hence securitization of these cash flows
would not be possible.
Guidance potentially misses the point that NHAI as an entity can borrow debt based on likely
receivables and repay later - NHAI currently has outstanding debt of about Rs50 bn.
Annuities are payable only for 17 years while NHAI has mandate till FY2031-32E. Annuity
pays for maintenance also while NHAI mandate was primarily development to start with (so
a limit on annuity payments has to take that into the thought process).
Roads sector: Slowdown in award activity despite attracting large participation
The award activity in the roads sector witnessed a sharp slowdown in the recent past post
some pick-up in FY2010 and 1HFY11. We attribute several reasons for this slowdown
including (1) frequent changes in the bidding norms and model concession agreement, (2)
several controversies such as delays in appointment of a successor to the present Chairman
of NHAI and (3) large vacancies in middle and senior management levels in NHAI. This is
despite the fact that the sector has attracted a large participation with over 30 developers
actively vying for projects. It seems that certain extraneous forces may have contributed to
the slowdown in the award activity
Remains very hopeful that 5,500 -6,500 km can be awarded by March-11 or so
Despite two setbacks above, NHAI remains very hopeful that 5,500-6,500 km can be
awarded by March-11 or so as the request for qualification process is already on and request
for proposal can be initiated in the Jan-Feb ’11 period. Toll policy is part of RFP so ongoing
RFQ process is not affected. Revised toll policy would need changes to project approval
documents that are placed before PPP-AC but NHAI is hopeful of achieving that in the next
few weeks.
But high competition leads to aggressive bids and potentially limited returns
NHAI management highlighted steep competition in the market with over 100 independent
contractors present. NHAI road development is a highly fragmented market with more than
30 developers actively vying for projects. Most players, including the established names such
as ITNL, IVRCL, Sadbhav and HCC, have market share of less than 5% in about 12,600 km
of BOT projects awarded so far. Such high level of competition has led to aggressive bidding
behavior and potentially limited returns from the road assets.
Reiterate BUY on IRB on strong balance sheet, ability to take on more projects
We reiterate our BUY rating and SOTP-based target price of R270/share comprised of (1)
Rs148/share from the BOT road projects based on FCFE valuation of individual assets, (2)
Rs94/share from the construction business based on 6X FY2012E EV/EBITDA multiple, (3)
Rs3/share from book value of the real estate business, (4) Rs10 from net cash at the parent
level, and (5) Rs20/share for the potential to win incremental road projects. Key assumptions
underlying our FCFE valuation of the road projects are (1) 6% traffic growth across projects
and (2) 12.5% cost of equity.
Our BUY rating is based on (1) strong operational and development pipeline of projects -
total project portfolio of 15 road projects of which 9 projects are operational, 5 are under
construction and only one project awaits financial closure, (2) ability to win incremental
projects with a strong balance sheet, (3) likely strong near-term revenue growth led by
construction of projects in the current portfolio - expect strong construction revenue CAGR
of 45% over FY2010-13E, and (4) recent price correction provides opportunity; current stock
price provides a 26% upside to our target price.
Ascribe Rs20/share to potential to win new projects – 400 km projects at P/B of 1.5X
Our SOTP-based target price of Rs300/share comprises of Rs20/share for value from
incremental project wins. We expect IRB to win additional projects to the tune of about 400
km. Assuming an average project cost of about Rs110 mn/km and a debt:equity of 70:30,
these projects would require an equity investment of Rs13-14 bn. We have valued this at
1.5X book value - Rs6.6 bn or Rs20/share.
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