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India Transport Infrastructure
Strong project pipeline; regulatory profile also favourable
Competition intense, especially for smaller projects
14-15% equity IRR possible, but developers must tread carefully
Reiterate BUY on IRB Infrastructure
Meeting takeaways
We hosted meetings with highway developers and industry experts in our
offices. The participants:
IRB Infrastructure (IRB IN; CP: INR220.50; TP: INR301, BUY), IL&FS
Transportation Networks (ITNL IN; Not rated), Ashoka Buildcon (ASBL
IN; Not rated), Sadbhav Engineering (SADE IN; Not rated) and Feedback
Ventures (not listed).
Macro outlook strong, robust bidding pipeline ahead
The consensus view was that the opportunity was huge both from the
state and national highway projects. The NHAI is likely to tender out
7,300kms of projects over the next 12 months. State highways alone
could constitute a INR1,000-1,200km opportunity (led by Maharashtra,
Rajasthan, Gujarat and Karnataka) in the near term. State highway
projects typically offer higher returns but the concessions are not as
transparent as the NHAI’s concessions. Selective bidding is the order of
the day and will likely be the key factor for success in this sector. On the
policy front, bidders now have to submit RFQs only once for the entire
year, which reduces the time of the bidding process significantly.
Additionally, the current NHAI Secretary is also the Chairman of NHAI,
thus accelerating the bidding process.
Competition and impact on profitability
Competition has increased, due to: 1) a hiatus on project awards, and 2)
highway projects are one of the fewer opportunities available in the
current tough environment. Projects worth INR5.0b-15.0b generally have
25-30 bidders; projects over INR15.0b are relatively less competitive (12-
15 bidders). Feedback Ventures said that traffic volume even at 20-30%
of the operational projects has been below estimates; the operational
projects were bid out when the competition was not as intense. Equity
IRR expectations have declined to 14-5%; project selection has become
a key factor. The key reason for lower profitability has been aggressive
traffic estimates. Participants indicated that even a large change in the
EPC cost has no material impact on IRR.
Reiterate BUY on IRB Infrastructure – top sector pick
IRB’s management reiterated that it can add INR50.0b of projects
annually without any equity dilution. IRB secured only one project of
INR15.0b in FY11 and is aiming to recoup the shortfall in FY12. IRB said
it is likely to bid for 10 out of the list of 100 projects disclosed by the NHAI
recently. The current order book of INR90.0b offers revenue visibility.
Construction EBITDA of 18% looks sustainable due to low subcontracting
and backward integration. Competitive advantage: dedicated
traffic team and design capability.
What the other participants said
IL&FS Transportation Networks (ITNL)
ITNL has a strong 10-year track record in the highways sector. It is one of the few
companies that does not do construction in-house. ITNL has a strong network of labour
contractors pan-India, which enables the company to work profitably across the country.
The company has an internal target to bid for 10-15% of projects disclosed in the recent
NHAI list. Competitive advantages: Strong design capability and ability to operate
across the country.
Sadbhav Engineering
Sadbhav has not bid for the Ahmedabad-Vadodara project as it believes the project is
risky. The company plans to shift toll locations on the Ahmedabad Ring Road to capture
traffic from the national highway, which should double toll collections. Management said
that Sadbhav prefers to stay away from the very lucrative projects where competition is
very aggressive; instead, it is identifying stretches which are likely to witness high traffic
intensity in the near future (example, the North-South corridor of Phase II is likely to
come up for expansion). The states of Gujarat, Maharashtra, Karnataka and Rajasthan
have large state highway programmes. The state highway projects should generally
reduce competition, leaving the large NHAI projects for the big players. Strategy is to
remain focused on EPC projects, which is the company’s strength area. Sadbhav’s
current EPC order book is INR75.0b (INR30.0b of which is internal projects). Working
capital position should improve y-y in FY11, according to management.
Ashoka Buildcon
Ashoka’s core competence is EPC and is likely to be its key focus area as there is
demand for EPC expertise. Management expects to secure INR20.0b worth of projects
annually. For funding, management indicated that the company does not require equity
at this point. In case it needs funding, management said there are other options
available. Ashoka can securitise project cash flow (typically at 50bp below market
rates), dilute stake at the SPV level or create holding company of all SPVs and dilute
stake at the holding company level. The Bhandara project is the only one where traffic
volume is 10-15% below estimates. The company is not very keen to bid for the state
highway projects as they require political clout. Competitive advantages: Traffic
estimation and EPC capability.
Feedback Ventures
Feedback Ventures, an industry expert, believes that design capability is a key
differentiating factor now that projects are awarded on a design, build, finance, operate
and transfer (DBFOT) basis. On profitability, several operational projects have been
unable to achieve the projected profitability. Unrealistic traffic growth estimation has
been the biggest reason resulting in poor profitability of some of the operational
stretches. The secondary market for distressed assets is likely to pick up; several
developers are already in the market to get rid of projects with low profitability.
Key projects in the near term
Ahmedabad Baroda (102kms, INR21.3b)
Concessionaire will be awarded the development from two-to-six lanes of the NH-8
stretch and the (competing) expressway that connects the two cities. After
development, toll rates on the national highway are likely to exceed the expressway
tolls, resulting in a shift of traffic to the expressway. Consequently, the expressway may
need capacity augmentation if the technical capacity is exceeded. Risk exists in the
form of ambiguities: 1) whether only the incremental or total capex is guaranteed 16%
IRR, and 2) If capacity of the national highway will also have to be augmented when
only the expressway exceeds technical capacity. Opinion was divided about whether
this is a positive or a negative. IRB and ITNL have bid for the project whereas Ashoka
and Sadbhav have not.
Beawar Pali Pindwara (244kms, INR22.9b)
The project has 19 bidders primarily because the current traffic levels are attractive.
Additionally, participants mentioned that the leakage would be low for this project. This
stretch has a locational advantage as it is situated in an industrial area where traffic
growth is likely to be strong.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
India Transport Infrastructure
Strong project pipeline; regulatory profile also favourable
Competition intense, especially for smaller projects
14-15% equity IRR possible, but developers must tread carefully
Reiterate BUY on IRB Infrastructure
Meeting takeaways
We hosted meetings with highway developers and industry experts in our
offices. The participants:
IRB Infrastructure (IRB IN; CP: INR220.50; TP: INR301, BUY), IL&FS
Transportation Networks (ITNL IN; Not rated), Ashoka Buildcon (ASBL
IN; Not rated), Sadbhav Engineering (SADE IN; Not rated) and Feedback
Ventures (not listed).
Macro outlook strong, robust bidding pipeline ahead
The consensus view was that the opportunity was huge both from the
state and national highway projects. The NHAI is likely to tender out
7,300kms of projects over the next 12 months. State highways alone
could constitute a INR1,000-1,200km opportunity (led by Maharashtra,
Rajasthan, Gujarat and Karnataka) in the near term. State highway
projects typically offer higher returns but the concessions are not as
transparent as the NHAI’s concessions. Selective bidding is the order of
the day and will likely be the key factor for success in this sector. On the
policy front, bidders now have to submit RFQs only once for the entire
year, which reduces the time of the bidding process significantly.
Additionally, the current NHAI Secretary is also the Chairman of NHAI,
thus accelerating the bidding process.
Competition and impact on profitability
Competition has increased, due to: 1) a hiatus on project awards, and 2)
highway projects are one of the fewer opportunities available in the
current tough environment. Projects worth INR5.0b-15.0b generally have
25-30 bidders; projects over INR15.0b are relatively less competitive (12-
15 bidders). Feedback Ventures said that traffic volume even at 20-30%
of the operational projects has been below estimates; the operational
projects were bid out when the competition was not as intense. Equity
IRR expectations have declined to 14-5%; project selection has become
a key factor. The key reason for lower profitability has been aggressive
traffic estimates. Participants indicated that even a large change in the
EPC cost has no material impact on IRR.
Reiterate BUY on IRB Infrastructure – top sector pick
IRB’s management reiterated that it can add INR50.0b of projects
annually without any equity dilution. IRB secured only one project of
INR15.0b in FY11 and is aiming to recoup the shortfall in FY12. IRB said
it is likely to bid for 10 out of the list of 100 projects disclosed by the NHAI
recently. The current order book of INR90.0b offers revenue visibility.
Construction EBITDA of 18% looks sustainable due to low subcontracting
and backward integration. Competitive advantage: dedicated
traffic team and design capability.
What the other participants said
IL&FS Transportation Networks (ITNL)
ITNL has a strong 10-year track record in the highways sector. It is one of the few
companies that does not do construction in-house. ITNL has a strong network of labour
contractors pan-India, which enables the company to work profitably across the country.
The company has an internal target to bid for 10-15% of projects disclosed in the recent
NHAI list. Competitive advantages: Strong design capability and ability to operate
across the country.
Sadbhav Engineering
Sadbhav has not bid for the Ahmedabad-Vadodara project as it believes the project is
risky. The company plans to shift toll locations on the Ahmedabad Ring Road to capture
traffic from the national highway, which should double toll collections. Management said
that Sadbhav prefers to stay away from the very lucrative projects where competition is
very aggressive; instead, it is identifying stretches which are likely to witness high traffic
intensity in the near future (example, the North-South corridor of Phase II is likely to
come up for expansion). The states of Gujarat, Maharashtra, Karnataka and Rajasthan
have large state highway programmes. The state highway projects should generally
reduce competition, leaving the large NHAI projects for the big players. Strategy is to
remain focused on EPC projects, which is the company’s strength area. Sadbhav’s
current EPC order book is INR75.0b (INR30.0b of which is internal projects). Working
capital position should improve y-y in FY11, according to management.
Ashoka Buildcon
Ashoka’s core competence is EPC and is likely to be its key focus area as there is
demand for EPC expertise. Management expects to secure INR20.0b worth of projects
annually. For funding, management indicated that the company does not require equity
at this point. In case it needs funding, management said there are other options
available. Ashoka can securitise project cash flow (typically at 50bp below market
rates), dilute stake at the SPV level or create holding company of all SPVs and dilute
stake at the holding company level. The Bhandara project is the only one where traffic
volume is 10-15% below estimates. The company is not very keen to bid for the state
highway projects as they require political clout. Competitive advantages: Traffic
estimation and EPC capability.
Feedback Ventures
Feedback Ventures, an industry expert, believes that design capability is a key
differentiating factor now that projects are awarded on a design, build, finance, operate
and transfer (DBFOT) basis. On profitability, several operational projects have been
unable to achieve the projected profitability. Unrealistic traffic growth estimation has
been the biggest reason resulting in poor profitability of some of the operational
stretches. The secondary market for distressed assets is likely to pick up; several
developers are already in the market to get rid of projects with low profitability.
Key projects in the near term
Ahmedabad Baroda (102kms, INR21.3b)
Concessionaire will be awarded the development from two-to-six lanes of the NH-8
stretch and the (competing) expressway that connects the two cities. After
development, toll rates on the national highway are likely to exceed the expressway
tolls, resulting in a shift of traffic to the expressway. Consequently, the expressway may
need capacity augmentation if the technical capacity is exceeded. Risk exists in the
form of ambiguities: 1) whether only the incremental or total capex is guaranteed 16%
IRR, and 2) If capacity of the national highway will also have to be augmented when
only the expressway exceeds technical capacity. Opinion was divided about whether
this is a positive or a negative. IRB and ITNL have bid for the project whereas Ashoka
and Sadbhav have not.
Beawar Pali Pindwara (244kms, INR22.9b)
The project has 19 bidders primarily because the current traffic levels are attractive.
Additionally, participants mentioned that the leakage would be low for this project. This
stretch has a locational advantage as it is situated in an industrial area where traffic
growth is likely to be strong.
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