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Summary
We expect a pick-up in road-ordering activity
Following the appointment of a new head at the Ministry for Surface Transport, ordering
activity has picked up, and we believe that it is likely to accelerate over the next few months.
The National Highways Authority of India (NHAI) has spent the past nine months (during
which few orders were awarded) acquiring land and preparing for projects. Companies expect
orders for 9,000-11,000km of roads to be given out in FY12, with Rs450-500bn worth of orders
over the next 4-5 months. The NHAI’s funds are also likely to get a boost in FY12, with
Rs100bn of tax-free bonds and Rs90-100bn of fuel cess (a tax levied on all gasoline/diesel
sales).
Efforts to accelerate the bidding process …
The NHAI is trying to simplify the bidding process. Requests for qualification (RFQ) will now be
valid for a full calendar year, so companies will not have to apply for an RFQ for every project.
… but initial bidding is likely to be very aggressive
Companies are seeing very aggressive bidding for projects so far in 2011. This could be due
to: i) efforts to ensure better utilisation of equipment that has been idle for many months now,
and ii) some companies being at the fundraising stage, so they need to shore up their order
books. We believe bidding is likely to improve over the next 2-3 months as visibility over order
pipelines improves.
Most investor queries focused on the macro/sector environment
Investors were concerned primarily about any changes in the macro environment, such as for
order inflows, funding costs and the project-execution environment. Most investors felt valuations
are cheap, but that the macro environment needs to be more supportive for stocks to perform.
We continue to prefer well-funded companies
We maintain our positive longer-term view, and prefer companies with strong revenue- and
earnings-growth visibility and solid balance sheets. Based on those factors, our top picks are
Sadbhav Engineering (SEL) (SADE IN, Rs107, 1) and IRB Infrastructure (IRB) (IRB IN, Rs182, 1).
Highlights of investor conference in Mumbai
We hosted an investor conference in Mumbai with a mix of EPC companies (nine
listed companies and two unlisted companies), and industry experts. We felt the
timing was appropriate, as stocks have been beaten down on multiple concerns, and
we wanted to give investors a first-hand view of the operating environment. In the
following sections, we provide the key takeaways from the major companies
attending.
Sadbhav Engineering (SADE IN, Rs107, 1; target price: Rs163)
SEL’s standalone order book of Rs72.8bn at the end of December 2010 (4x our
FY11 revenue forecast) provides strong visibility, in our view. The company is
targeting a revenue CAGR of 35-40% (parent company) from FY10-12.
The company expects its total toll revenue to increase from Rs800m in FY10 to
Rs8bn in FY14, once all nine of its BOT projects become fully operational.
Toll collections at the Mumbai-Nashik expressway have commenced for 66% of
the project, with daily toll collections currently at Rs1.7m per day. Upon
completion of the project, management expects this to increase to Rs2.5-3m per
day.
Dhule Palasner project: The company expects 75% of the project to be completed
by June 2011, and has a target completion date of February 2012.
Maharashtra border check post: It has completed work at 11 locations, spending
Rs1.2bn out of the total project cost of Rs8.3bn. Sadbhav Infrastructure Private
Limited (Not listed, a 78%-owned subsidiary of SEL) also has a Rs3bn order from
a special-purpose vehicle (SPV), from which it expects to generate Rs800m of cash
flow over the term of the contract (about 3-5 years).
The mining sector accounts for around 10-15% to SEL’s total revenue, and will be
a focus area for SEL in the future. The company is pursuing a strategy of
increasing its excavation capacity from 50m cubic metres currently to 200m cubic
metres per annum over the next 3-5 years. It is targeting long-term contracts (40-45
years) from the government.
BGR Energy (BGRL IN, Rs447, 1; target price: Rs806)
The primary concern of investors in BGR Energy (BGR) is the lack of new orders.
In that regard, the company clarified that it has the following bids in the pipeline:
(1) One 2x660MW plant from Rajasthan State worth Rs60bn. Although Bharat
Heavy Electricals (BHEL) (BHEL IN, Rs1,922, 2) was the lower bidder, tender
conditions mandate that the other party (BGR in this case) can secure one of the
two projects if it matches the lower bid. However, both projects have been
delayed due to a lack of coal linkages and environmental issues. The company
expects some clarity to emerge over the next three months.
(2) An NTPC (NATP IN, Rs 175.5, 3) bulk tender for supercritical boilers, where
the lawsuit filed by Gammon India (Not rated) is in the Supreme Court, and
final price bids will be invited after the court’s decision.
(3) A 600MW engineering, procurement and construction (EPC) project in Tamil
Nadu, where the outcome will only be decided by June.
(4) A 200MW project in Gujarat, where the outcome is likely to be known in 2Q
FY12.
With regards to the joint ventures with Hitachi (6501 JP, ¥404, 1), the land
acquisition is almost complete, and equipment orders are likely to be placed over
the next quarter.
IRB Infrastructure (IRB IN, Rs182, 1; target price: Rs279)
Competition for road projects seems to have been very high recently, due mainly to
the slow rollout of projects by the NHAI. IRB continues to bid rationally for new
projects, as it has enough already at the construction stage.
Currently, work is in full swing at five BOT projects: Surat Dahisar, Kolhapur,
Jaipur-Deoli, Talegaon-Amravati and Pathankot Amritsar. Work on Surat Dahisar
is scheduled to be completed by August 2011. The company also achieved the
financial closure recently for Tumkur Chitradurga, by securing financing of
Rs8.3bn, with IDFC Ltd. (IDFC IN, Rs145, 1) as the lead banker.
There are no plans for equity dilution in the near future, as the pending equity
commitment can be met by cash on hand and internal accruals. In addition, new
project wins of Rs40-45bn in FY12 can be funded without raising additional equity.
Rising interest rates have less of an impact on IRB than its peers, as five of its
projects are at the construction phase where the cost of debt is fixed, and Mumbai
Pune (25% of the company’s existing debt) has a fixed cost for the remaining
tenure of the project. For the projects that IRB hopes to secure in the near future,
however, it would be affected by rising interest costs.
The company is prequalified for projects worth Rs500bn, and bids for these are
likely to be decided by the NHAI in FY12.
Simplex Infra (SINF IN, Rs320, 2; target price: Rs525)
The Middle East accounts for 15% of the company’s order book, but this is
restricted to Oman and Qatar where the business outlook remains comfortable.
The company’s order book stood at Rs139bn at the end of December 2010, and it
had lowest-bidder status (L1) for projects worth Rs19bn and a bid pipeline of
Rs420bn. The projects have an execution timeline of 24-30 months.
Order inflows appear quite robust, with Rs62bn worth of orders received in 9M
FY11, compared with Rs60bn for the whole of FY10. The company also expects to
receive orders worth Rs25bn in 4Q FY11. With strong order inflows, the company
expects revenue growth of 15-20% YoY for FY12, after muted growth over the
past two years.
The company’s working-capital days increased to 121 at the end of December 2010,
from 100 at the end of FY10, and it believes they are likely to remain at this level
in March 2011.
Ashoka Buildcon (Not rated)
Ashoka Buildcon (ABL) is an emerging player in the India BOT roads segment,
with 18 operational projects and five under development. ABL has in-house
construction expertise that also facilitates the execution of external projects.
The NHAI recently awarded six lanes of the Dhankuni-Kharagpur section in the State
of West Bengal under NHDP Phase V to the company, at a project cost of Rs20bn.
ABL’s total equity commitment to BOT projects stands at Rs9bn currently,
including the recent award. The company expects these to be financed through
internal accruals, releveraging some of the BOT projects, and diluting its stakes at
the project level.
The company recorded Rs1.4bn of toll revenue for the first nine months of FY11. It
expects this to increase to Rs6bn in FY14 once all of its projects in hand are
operational.
For the construction business, the company has an order book of Rs51bn, including
the recent award. It expects construction revenue to double over the next two years,
from Rs9bn in FY11 to Rs18-20bn in FY13
Gayatri Projects (GAYP IN, Rs220, Not rated)
The company’s order backlog as at 31 December 2010 stood at Rs70bn, comprised
52% irrigation projects, 35% road projects and 13% industrial projects. Of the
Rs37bn irrigation order backlog, almost 95% is from Andhra Pradesh, and this is
moving ahead slowly. Of its Rs25bn road projects, Rs19bn are internal BOT, while
Rs6bn are external.
Road BOT Assets: Gayatri, through its 70%-owned subsidiary, Gayatri Infra
Ventures (GIVL) (not listed), has a portfolio of seven road BOT projects,
comprised of four annuity and three toll-road projects with a total project cost of
Rs51.3bn. Of these, five have achieved financial closure and the remaining two are
likely to do so shortly. To date, Gayatri has made a Rs2bn equity commitment to
its BOT project, out of its total equity commitment of Rs3.8bn
Power: The company is also developing a 1,320MW thermal-power plant as part
of a joint venture with the SembCorp group of Singapore. The power project is
progressing as planned, with all clearances obtained and financial closure achieved
recently. The plant is held by a 51%-owned subsidiary of Gayatri, with the
remaining stake held by SembCorp. The power project is being executed at a total
cost of Rs69bn, which is to be financed through Rs52bn of debt and Rs17bn of
equity. According to the joint-venture agreement SembCorp will invest Rs11bn for
a 49% stake, and the balance of Rs6bn would be invested by Gayatri, of which it
has already invested Rs2.5bn.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Summary
We expect a pick-up in road-ordering activity
Following the appointment of a new head at the Ministry for Surface Transport, ordering
activity has picked up, and we believe that it is likely to accelerate over the next few months.
The National Highways Authority of India (NHAI) has spent the past nine months (during
which few orders were awarded) acquiring land and preparing for projects. Companies expect
orders for 9,000-11,000km of roads to be given out in FY12, with Rs450-500bn worth of orders
over the next 4-5 months. The NHAI’s funds are also likely to get a boost in FY12, with
Rs100bn of tax-free bonds and Rs90-100bn of fuel cess (a tax levied on all gasoline/diesel
sales).
Efforts to accelerate the bidding process …
The NHAI is trying to simplify the bidding process. Requests for qualification (RFQ) will now be
valid for a full calendar year, so companies will not have to apply for an RFQ for every project.
… but initial bidding is likely to be very aggressive
Companies are seeing very aggressive bidding for projects so far in 2011. This could be due
to: i) efforts to ensure better utilisation of equipment that has been idle for many months now,
and ii) some companies being at the fundraising stage, so they need to shore up their order
books. We believe bidding is likely to improve over the next 2-3 months as visibility over order
pipelines improves.
Most investor queries focused on the macro/sector environment
Investors were concerned primarily about any changes in the macro environment, such as for
order inflows, funding costs and the project-execution environment. Most investors felt valuations
are cheap, but that the macro environment needs to be more supportive for stocks to perform.
We continue to prefer well-funded companies
We maintain our positive longer-term view, and prefer companies with strong revenue- and
earnings-growth visibility and solid balance sheets. Based on those factors, our top picks are
Sadbhav Engineering (SEL) (SADE IN, Rs107, 1) and IRB Infrastructure (IRB) (IRB IN, Rs182, 1).
Highlights of investor conference in Mumbai
We hosted an investor conference in Mumbai with a mix of EPC companies (nine
listed companies and two unlisted companies), and industry experts. We felt the
timing was appropriate, as stocks have been beaten down on multiple concerns, and
we wanted to give investors a first-hand view of the operating environment. In the
following sections, we provide the key takeaways from the major companies
attending.
Sadbhav Engineering (SADE IN, Rs107, 1; target price: Rs163)
SEL’s standalone order book of Rs72.8bn at the end of December 2010 (4x our
FY11 revenue forecast) provides strong visibility, in our view. The company is
targeting a revenue CAGR of 35-40% (parent company) from FY10-12.
The company expects its total toll revenue to increase from Rs800m in FY10 to
Rs8bn in FY14, once all nine of its BOT projects become fully operational.
Toll collections at the Mumbai-Nashik expressway have commenced for 66% of
the project, with daily toll collections currently at Rs1.7m per day. Upon
completion of the project, management expects this to increase to Rs2.5-3m per
day.
Dhule Palasner project: The company expects 75% of the project to be completed
by June 2011, and has a target completion date of February 2012.
Maharashtra border check post: It has completed work at 11 locations, spending
Rs1.2bn out of the total project cost of Rs8.3bn. Sadbhav Infrastructure Private
Limited (Not listed, a 78%-owned subsidiary of SEL) also has a Rs3bn order from
a special-purpose vehicle (SPV), from which it expects to generate Rs800m of cash
flow over the term of the contract (about 3-5 years).
The mining sector accounts for around 10-15% to SEL’s total revenue, and will be
a focus area for SEL in the future. The company is pursuing a strategy of
increasing its excavation capacity from 50m cubic metres currently to 200m cubic
metres per annum over the next 3-5 years. It is targeting long-term contracts (40-45
years) from the government.
BGR Energy (BGRL IN, Rs447, 1; target price: Rs806)
The primary concern of investors in BGR Energy (BGR) is the lack of new orders.
In that regard, the company clarified that it has the following bids in the pipeline:
(1) One 2x660MW plant from Rajasthan State worth Rs60bn. Although Bharat
Heavy Electricals (BHEL) (BHEL IN, Rs1,922, 2) was the lower bidder, tender
conditions mandate that the other party (BGR in this case) can secure one of the
two projects if it matches the lower bid. However, both projects have been
delayed due to a lack of coal linkages and environmental issues. The company
expects some clarity to emerge over the next three months.
(2) An NTPC (NATP IN, Rs 175.5, 3) bulk tender for supercritical boilers, where
the lawsuit filed by Gammon India (Not rated) is in the Supreme Court, and
final price bids will be invited after the court’s decision.
(3) A 600MW engineering, procurement and construction (EPC) project in Tamil
Nadu, where the outcome will only be decided by June.
(4) A 200MW project in Gujarat, where the outcome is likely to be known in 2Q
FY12.
With regards to the joint ventures with Hitachi (6501 JP, ¥404, 1), the land
acquisition is almost complete, and equipment orders are likely to be placed over
the next quarter.
IRB Infrastructure (IRB IN, Rs182, 1; target price: Rs279)
Competition for road projects seems to have been very high recently, due mainly to
the slow rollout of projects by the NHAI. IRB continues to bid rationally for new
projects, as it has enough already at the construction stage.
Currently, work is in full swing at five BOT projects: Surat Dahisar, Kolhapur,
Jaipur-Deoli, Talegaon-Amravati and Pathankot Amritsar. Work on Surat Dahisar
is scheduled to be completed by August 2011. The company also achieved the
financial closure recently for Tumkur Chitradurga, by securing financing of
Rs8.3bn, with IDFC Ltd. (IDFC IN, Rs145, 1) as the lead banker.
There are no plans for equity dilution in the near future, as the pending equity
commitment can be met by cash on hand and internal accruals. In addition, new
project wins of Rs40-45bn in FY12 can be funded without raising additional equity.
Rising interest rates have less of an impact on IRB than its peers, as five of its
projects are at the construction phase where the cost of debt is fixed, and Mumbai
Pune (25% of the company’s existing debt) has a fixed cost for the remaining
tenure of the project. For the projects that IRB hopes to secure in the near future,
however, it would be affected by rising interest costs.
The company is prequalified for projects worth Rs500bn, and bids for these are
likely to be decided by the NHAI in FY12.
Simplex Infra (SINF IN, Rs320, 2; target price: Rs525)
The Middle East accounts for 15% of the company’s order book, but this is
restricted to Oman and Qatar where the business outlook remains comfortable.
The company’s order book stood at Rs139bn at the end of December 2010, and it
had lowest-bidder status (L1) for projects worth Rs19bn and a bid pipeline of
Rs420bn. The projects have an execution timeline of 24-30 months.
Order inflows appear quite robust, with Rs62bn worth of orders received in 9M
FY11, compared with Rs60bn for the whole of FY10. The company also expects to
receive orders worth Rs25bn in 4Q FY11. With strong order inflows, the company
expects revenue growth of 15-20% YoY for FY12, after muted growth over the
past two years.
The company’s working-capital days increased to 121 at the end of December 2010,
from 100 at the end of FY10, and it believes they are likely to remain at this level
in March 2011.
Ashoka Buildcon (Not rated)
Ashoka Buildcon (ABL) is an emerging player in the India BOT roads segment,
with 18 operational projects and five under development. ABL has in-house
construction expertise that also facilitates the execution of external projects.
The NHAI recently awarded six lanes of the Dhankuni-Kharagpur section in the State
of West Bengal under NHDP Phase V to the company, at a project cost of Rs20bn.
ABL’s total equity commitment to BOT projects stands at Rs9bn currently,
including the recent award. The company expects these to be financed through
internal accruals, releveraging some of the BOT projects, and diluting its stakes at
the project level.
The company recorded Rs1.4bn of toll revenue for the first nine months of FY11. It
expects this to increase to Rs6bn in FY14 once all of its projects in hand are
operational.
For the construction business, the company has an order book of Rs51bn, including
the recent award. It expects construction revenue to double over the next two years,
from Rs9bn in FY11 to Rs18-20bn in FY13
Gayatri Projects (GAYP IN, Rs220, Not rated)
The company’s order backlog as at 31 December 2010 stood at Rs70bn, comprised
52% irrigation projects, 35% road projects and 13% industrial projects. Of the
Rs37bn irrigation order backlog, almost 95% is from Andhra Pradesh, and this is
moving ahead slowly. Of its Rs25bn road projects, Rs19bn are internal BOT, while
Rs6bn are external.
Road BOT Assets: Gayatri, through its 70%-owned subsidiary, Gayatri Infra
Ventures (GIVL) (not listed), has a portfolio of seven road BOT projects,
comprised of four annuity and three toll-road projects with a total project cost of
Rs51.3bn. Of these, five have achieved financial closure and the remaining two are
likely to do so shortly. To date, Gayatri has made a Rs2bn equity commitment to
its BOT project, out of its total equity commitment of Rs3.8bn
Power: The company is also developing a 1,320MW thermal-power plant as part
of a joint venture with the SembCorp group of Singapore. The power project is
progressing as planned, with all clearances obtained and financial closure achieved
recently. The plant is held by a 51%-owned subsidiary of Gayatri, with the
remaining stake held by SembCorp. The power project is being executed at a total
cost of Rs69bn, which is to be financed through Rs52bn of debt and Rs17bn of
equity. According to the joint-venture agreement SembCorp will invest Rs11bn for
a 49% stake, and the balance of Rs6bn would be invested by Gayatri, of which it
has already invested Rs2.5bn.
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