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abcGlobal Research
Media reports discuss draft proposal
from NHAI for restructuring premium payments which we believe
would be insufficient to revive stressed assets
Most stressed projects we believe could be cancelled and
re-bid
ILFT (OW, TP lowered to INR172 from INR260) is our preferred
road asset player. Retain N(V) on IRB (TP raised from INR78 to
INR103)
Proposal not sufficient to revive stressed assets. Media reports
(The ET: New formula for stressed road projects gets nod, 13
December 2013) suggest that the Rangarajan Panel has proposed to
defer scheduled premium payments to National Highway Authority of
India (NHAI) at a 10.75% interest rate with all the payments to be
completed 3 years before concession ends. Media reports also state
that the planning commission has raised objections against the low
interest rate and lack of penalties, and hence asked the panel to
rethink/ redraft the proposals. However, in our view despite the
restructuring, the majority of the stressed assets are unlikely to
become profitable as costs since the project award have escalated
c10% and traffic growth has fallen by 5-10% making them
unviable.
The relief package - a boon in disguise. We believe it is only
in the interest of players who have started work on the project to
accept the restructuring proposal. For the ones which have not yet
started, we dont think lowering the loss will make them viable and
banks would still find them difficult to fund. We expect majority
of the projects which have not yet started to be returned (with or
without penalty) or litigate with the NHAI in terms of delay in
approvals/ land acquisition. NHAI may be able to rebid these
projects as smaller projects or as EPC contracts, thereby
kick-starting the project awards progress.
ILFT is our preferred pick. While we have cut our target price
on ILFT by 34% to INR172 (impacted by high interest rates owing to
low interest coverage ratio), we believe ILFT still offers a good
investment theme of multiple new projects becoming operational over
the next 12-18 months. While we like IRBs assets, but we remain
cautious until investigations against the promoter group are behind
us. ILFT is currently trading at 0.6x FY15e price to book, while
IRB is trading at 0.8x. We rate ILFT OW, and we rate IRB N(V).
Industrials Construction & Engineering
India Infrastructure Light at the end of the tunnel
HSBC India road coverage
Company Bbg Ticker
Price (INR)
New Rating
Old rating
New TP (INR)
Old TP (INR)
PotentialReturn*
IRB IRB IN 91.70 N(V) N(V) 103 78 16.7%ILFT ILFT IN 136.10 OW OW
172 260 29.3%Priced as at 30 December 2013 Note: *Potential return
equals the percentage difference between the current share price
and the target price, plus the forecast dividend yield. We forecast
2014e DY of 4.4% for IRB, and 2.9% for ILFT. N: Neutral, OW:
Overweight, V: Volatile Source: HSBC estimates, Bloomberg
3 January 2014 Ashutosh Narkar* Analyst HSBC Securities and
Capital Markets(India) Private Limited +91 22 22681474
[email protected]
Shrinidhi Karlekar* Associate Bangalore
View HSBC Global Research at: http://www.research.hsbc.com
*Employed by a non-US affiliate of HSBC Securities (USA) Inc,
and is not registered/qualified pursuant to FINRA regulations
Issuer of report: HSBC Securities and Capital Markets (India)
Private Limited
Disclaimer & Disclosures This report must be read with the
disclosures and the analyst certifications in the Disclosure
appendix, and with the Disclaimer, which forms part of it
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Background Since 2009 NHAI awarded 48 road projects with
developers required to pay a premium (as a successful bid). This
would escalate at 5% p.a. over the life of the asset. However, as
economic growth slowed down and liquidity conditions became tight,
developers realised that high premium payments would make the
projects unviable. Many developers hence delayed on the execution
which prompted the Government to review such projects and offer a
restructuring package in larger interest of the road sector. In
October 2013, the Cabinet committee of Economic Approvals (CCEA)
approved restructuring of premium payments for such stressed road
projects. It also formed a panel headed by Mr.C. Rangarajan to
suggest the draft restructuring regulations and conditions for
eligibility. The media (The ET: New formula for stressed road
projects gets nod, 13 December
2013) over the past 2 weeks reports that the NHAI Chairman has
recently (Dec. 30) wrote a letter to the highway ministry asking to
amicably terminate many of these projects and the process of
re-bidding should be initiated. The NHAI chairman has also
expressed disappointment on the fact that the final formulation has
not been out as yet despite in-principle nod from CCEA on draft
proposals on premium rescheduling.
Panel recommendations As per the media reports (The ET: New
formula for stressed road projects gets nod, 13 December 2013), the
panel submitted its draft proposal to the finance ministry and
planning commission for approval, which has asked the panel to
review some of the suggestions made. Below we discuss the panel
proposals as reported by the media (The ET: New formula for
stressed road projects gets nod, 13 December 2013).
Relief package - a disguised boon Planned relief package for
distressed assets is positive for under
construction assets, though not sufficient for projects which
have not yet started, in our view We anticipate that projects which
have not yet started are likely to
get cancelled and bought back for rebid as small projects
Amongst our coverage, the potential relief, if it materialises,
is
likely to be positive for IRB and L&T. ILFT is our preferred
road asset player
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NHAI will decide the eligibility of the project for
restructuring. There are overall 48 projects (10-12 projects have
started construction), which were awarded with a premium payment
plan.
Eligible projects will have the option to pay only 25% of the
annual premium committed for the first three years of the project
(construction phase) and have option to pay only 50% thereafter.
But if there is any cash surplus after debt servicing and meeting
O&M expenses, then the obligations will be adjusted against the
accumulated deficit in premium payment obligations. Developers need
to fulfil all their premium obligations three years before the
concession expires.
In case of four-laning projects, developers can avail the policy
after construction is complete and commercial operations have
begun.
In case of six-laning projects, developers can avail the policy
during construction, when commercial operations are considered to
have begun, but would have to provide a construction
milestone-linked bank guarantee for the premium deficit of 75%
during this period.
The interest rate on the delayed premium payment to be set at
10.75%.
The panel has dismissed issue of levying a penalty on the
projects if they avail this scheme.
Proposals in our view are insufficient to restart projects Our
discussions with road developers and industry experts lead us to
conclude that these steps, although they may be beneficial for
developers who have started the projects, are likely not sufficient
to convince players who have not yet started work. We place our
arguments below:
Many of these projects have been delayed more than a year for
project clearances (mostly environment). Costs during the delay
period have escalated by c10%. NHAI, in our view is unlikely to
grant any cost escalation beyond 4-6% (in line with inflation
expectations) and that too if it falls with the prescribed rules of
the project agreement.
HSBCs economics team have lowered estimates of Indias GDP growth
during FY13-16e to 5% CAGR, versus the market expectation of 7-8%
at the time of bidding. In addition, the economic slowdown over the
past 18 months has hurt traffic growth on many road stretches.
Industry meetings suggest that for India overall, traffic growth
during FY13 was down 4-5%, while it is expected to be down 2-3%
during FY14. This will put pressure on traffic growth, which is the
single most influential variable in a road assets valuation (road
tariff and growth is known at the time of bidding).
Funding cost has climbed by 150-200bps and willingness of
financial institutions to lend to not so viable projects has come
down drastically.
Hence just the deferral of premium payment at 10.75% interest
(still lower than their cost of capital of 11-13%), is unlikely to
convince developers as even if the proposals cut potential negative
NPV by 50%, no developer would like to undertake a loss-making
project. Developers are likely to believe that they would be better
off by paying a penalty and forgoing the development rights.
A boon in disguise During the current fiscal year, NHAI could
not find takers for close to 20 projects under the
build-operate-transfer toll model. It managed to award only 222km
during FY14 as against target of 4,000km (1,113kms in FY13 and
6,491kms in
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FY12). We believe, once the developer tenders back these
projects, these are likely to come to NHAIs re-bidding basket and
kick-start the projects awards process.
Will there be takers when they come for re-bid? In our view,
given the circumstances, NHAI would be unwilling to bid out large
size projects again (above 200kms). We believe that they would
probably rather break down them into multiple projects and reassess
the viability under the toll, annuity or EPC model. We anticipate
the current premium restructuring issue to get settled during the
next 2 months (before model code of conduct for the general
elections is announced), which might be able to kick-start the
awards process during FY15e. We forecast 4,000kms of new project
awards during FY14e and 5,000kms during FY15e.
Implications for our coverage universe Amongst our coverage
universe L&T (LT IN, current price INR1,064, Overweight) has
the highest numbers of projects eligible for this relief package.
The table below summarises the exposure of the companies we cover
to this scheme.
L&T during an analyst meeting recently had stated that they
are keen on starting the projects and are waiting to see if they
can get any potential benefits along the way. Hence, the
restructuring proposal could benefit the company.
IRB has already started construction on both its projects. So
accepting the restructuring proposal in our view is likely to be a
positive outcome for IRB as it would have in any case controlled
the asset irrespective of whether there would have been a
restructuring.
ILFT has not yet started construction on its project. However,
we note that most of ILFTs projects have been won during a low
competitive intensity phase. Hence we would be surprised if the
company does not accept the proposal and carry on with the
project.
Reliance Infrastructure (RELI IN, current price INR424.55,
Neutral (V)) has started construction on its concerned project and
hence it would be keen to accept the proposal in our view.
We are waiting for the official press release on this relief
package from the Ministry of Highways before we incorporate any
potential effect on our estimates.
Likely exposure of companies we cover to the relief package
Developer No of Projects Length (KM) Project Cost (INRm)
Premium(INRm)
Premium as a of TPC
L&T 4 873 85,448 5,670 6.6% IRB 2 216 32,672 4,500 13.8%
IL&FS 1 123 16,650 420 2.5% Reliance Infrastructure 1 60 9,250
670 7.2% TPC: total project cost Source: The Hindu Business Line
(http://www.thehindubusinessline.com/), company data, HSBC
estimates
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Investment summary Market leader IRB is a focused play in Indias
road sector and is very well placed for the eventual turnaround in
the Indian road sector. The company, which builds and operates toll
roads, has the largest portfolio of build-operate-transfer (BOT)
toll assets (6,286km across 17 projects). Nine of its assets are
operational, which churn out an annual FCF of INR1.9bn, making its
business self-reliant to fund new project acquisitions.
Consequently, despite the large portfolio of assets, IRBs net
debt-to-equity ratio is still comfortable at 2.1x compared to its
sector peers. Its EBITDA coverage at 2.7x is also one of the best
within the sector, providing sufficient room for new project
acquisitions.
According to an IRB press release, the company along with its
promoters is being investigated for discrepancies in land
acquisitions for the
Mumbai-Pune Expressway. While management has clarified its
stance through regular updates, we expect the stock to remain under
pressure as investors prefer to await the outcome of the
investigation as the persistent negative newsflow impacts share
performance.
Cut earnings estimates by 9-19% We have cut our earnings
estimates for IRB by 9-19% over FY14e-16e for the following
reasons: 1) IRB like for like toll revenue growth for the last two
quarters (sub 6%) has been weaker than we had estimated. 2). We
factor in a delay in execution for a few projects for e.g.
Goa-Kundapur 3). We now factor in 50bps higher interest rates that
we had previously estimated.
Our revised earnings estimates are 6% below consensus in FY15e
but are 4% ahead on FY16e.
IRB Infrastructure Ltd IRB offers quality existing portfolio and
comfortable leverage
should help in new asset acquisition However, we remain cautious
in the absence of clarity on the
outcome of the legal investigation Reiterate N(V) and raise TP
to INR103 (up 32% from INR78)
HSBC IRBs earnings estimate summary
_____ New forecasts ____ _____ y-o-y change _____ _____ Change
vs old ____ ____ HSBCe vs. cons ___ INRm (except EPS) FY13a FY14e
FY15e FY16e FY14e FY15e FY16e FY14e FY15e FY16e FY14e FY15e
FY16e
Revenue 36,872 44,669 46,543 55,593 21.1% 4.2% 19.4% -4.3% -7.0%
-12.6% 10.7% 7.4% 18.8% EBITDA 16,333 18,629 20,167 23,059 14.1%
8.3% 14.3% -2.8% -4.5% -8.6% 2.0% -1.5% -3.1% EBITDA margin 44.3%
41.7% 43.3% 41.5% -260 160 -180 60 110 180 -360 -390 -940 HSBC PAT
5,567 4,989 4,699 5,096 -10.4% -5.8% 8.4% -5.3% -8.8% -18.9% 3.2%
-5.6% 4.2% HSBC PAT margin 15.1% 11.2% 10.1% 9.2% -390 -110 -90 -10
-20 -70 -80 -140 -130 Adj. EPS 16.7 15.0 14.1 15.3 -10.4% -5.8%
8.4% -5.3% -8.8% -18.9% 3.7% -5.2% 11.1% Source: Bloomberg, Company
data, HSBC estimates
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Valuation and risks Reiterate N (V) though increase our TP to
INR103 (INR78 earlier) The company along with its promoters are
being investigated for discrepancies in land acquisitions along the
Mumbai-Pune Expressway. While management has clarified its stance
through regular updates, we expect the stock to remain under
pressure as investors prefer to await the outcome of the
investigation, as persistent negative news flow impacts the
shares.
We have cut IRB's earnings forecasts by 9-19% over FY14-16 as
toll traffic has been lower than expected and due to delays in
construction progress in some of its projects. However, the
business environment for Industrial stocks has improved on the back
of expected new project awards and improving macro data points,
which is now reflected in our target price revision (TP at 20%
discount to NAV against 40% earlier). However, we refrain from
getting more constructive on the stock and valuing it at its NAV
until we get more clarity on the ongoing investigation against its
promoters.
We continue to value IRB using a sum-of-the-parts (SOTP)
approach, comprised of the standalone BOT (Build Operate and
Transfer) and in-house construction businesses. We prefer a free
cash flow to equity (FCFE based) DCF valuation for IRBs toll assets
to capture the benefit of a defined concession period (typically
10-25 years). We have maintained our Cost of Equity (CoE)
assumptions for IRB constant. We use a 13% COE for its operational
toll assets (Risk free rate of 8.3%, market risk premium of 5.0%
and beta of 1.0x). We use a 50bps higher CoE for its
under-development assets to factor in the development and traffic
risk.
We currently do not accord any value to its EPC business. We
believe the stocks valuation will be capped at the value of its
subsidiaries (project assets), given that if the outcome of the
investigation turns out to be negative, projects could remain
quarantined, while the holding company could face issues.
IRB valuation changes
INR/ share New Old
Road Projects 130 130 EPC Business - - Fair Value 130 130 Target
project NAV disc 20% 40% Target Price 104 78 Source: HSBC
estimates
Under our research model, for stocks with a volatility
indicator, the Neutral band is 10ppts above and below the hurdle
rate for India stocks of 11%. Our target price implies a potential
return of 16.7% (including a forecast dividend yield of 4.4%),
which is within the Neutral band; therefore, we are reiterating our
Neutral (V) rating. Potential return equals the percentage
difference between the current share price and the target price,
including the forecast dividend yield when indicated.
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Key downside risks: Sustained negative newsflow on the
investigation against the promoters
Sustained high interest rates
Execution risk impacting project timelines and profitability
Key upside risks: Restart of new project awards from NHAI
An earlier resolution to the investigation against the
promoter
IRB one-year forward PE chart IRB one-year forward PB chart
Source: Bloomberg, HSBC Estimates Source: Bloomberg, HSBC
Estimates
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25x
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Financials & valuation: IRB Infrastructure Ltd Neutral (V)
Financial statements
Year to 03/2013a 03/2014e 03/2015e 03/2016e
Profit & loss summary (INRm)
Revenue 36,872 44,669 46,543 55,593EBITDA 16,333 18,629 20,167
23,059Depreciation & amortisation -4,415 -5,229 -5,816
-8,373Operating profit/EBIT 11,918 13,400 14,351 14,686Net interest
-6,153 -7,585 -9,141 -8,871PBT 7,066 7,031 7,096 7,992HSBC PBT
7,066 7,031 7,096 7,992Taxation -1,530 -2,079 -2,417 -3,086Net
profit 5,567 4,989 4,699 5,096HSBC net profit 5,567 4,989 4,699
5,096
Cash flow summary (INRm)
Cash flow from operations 8,811 5,885 6,678 6,826Capex -28,668
-23,017 -14,448 -23,111Cash flow from investment -27,848 -21,801
-12,562 -20,933Dividends 1,569 1,523 1,569 1,569Change in net debt
20,056 17,703 6,903 14,978FCF equity -19,857 -17,132 -7,771
-16,285
Balance sheet summary (INRm)
Intangible fixed assets 100,991 117,270 127,216 140,633Tangible
fixed assets 3,257 4,765 3,452 4,772Current assets 27,812 25,085
30,271 18,682Cash & others 15,317 7,513 11,201 -3,766Total
assets 132,073 147,133 160,952 164,100Operating liabilities 7,296
12,000 12,000 12,000Gross debt 87,761 97,660 108,250 108,261Net
debt 72,444 90,147 97,049 112,027Shareholders funds 32,556 35,278
38,538 41,843Invested capital 109,447 127,606 137,738 155,853
Ratio, growth and per share analysis
Year to 03/2013a 03/2014e 03/2015e 03/2016e
Y-o-y % change
Revenue 17.7 21.1 4.2 19.4EBITDA 19.3 14.1 8.3 14.3Operating
profit 11.1 12.4 7.1 2.3PBT 8.5 -0.5 0.9 12.6HSBC EPS 12.2 -10.4
-5.8 8.4
Ratios (%)
Revenue/IC (x) 0.4 0.4 0.4 0.4ROIC 9.6 8.0 7.1 6.1ROE 18.2 14.7
12.7 12.7ROA 8.6 7.4 7.0 6.4EBITDA margin 44.3 41.7 43.3
41.5Operating profit margin 32.3 30.0 30.8 26.4EBITDA/net interest
(x) 2.7 2.5 2.2 2.6Net debt/equity 215.3 248.4 245.6 264.0Net
debt/EBITDA (x) 4.4 4.8 4.8 4.9CF from operations/net debt 12.2 6.5
6.9 6.1
Per share data (INR)
EPS Rep (fully diluted) 16.75 15.01 14.14 15.33HSBC EPS (fully
diluted) 16.75 15.01 14.14 15.33DPS 4.00 4.00 4.00 4.00Book value
97.95 106.14 115.95 125.90
Valuation data
Year to 03/2013a 03/2014e 03/2015e 03/2016e
EV/sales 2.8 2.7 2.7 2.6EV/EBITDA 6.3 6.5 6.3 6.2EV/IC 0.9 0.9
0.9 0.9PE* 5.5 6.1 6.5 6.0P/Book value 0.9 0.9 0.8 0.7FCF yield (%)
-65.2 -56.2 -25.5 -53.5Dividend yield (%) 4.4 4.4 4.4 4.4Note: * =
Based on HSBC EPS (fully diluted) Issuer information
Share price (INR)91.70 Target price (INR)103.00 1
2.3
Reuters (Equity) IRBI.NS Bloomberg (Equity) IRB INMarket cap
(USDm) 493 Market cap (INRm) 30,478Free float (%) 26 Enterprise
value (INRm) 120611Country India Sector CONSTRUCTION &
ENGINEERINGAnalyst Ashutosh Narkar Contact +91 22 22681474
Price relative
Source: HSBC Note: price at close of 30 Dec 2013
31
81
131
181
231
281
31
81
131
181
231
281
2011 2012 2013 2014IRB Infrastructure Ltd Rel to BOMBAY SE
SENSITIVE INDEX
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Investment summary ILFT is poised to make seven projects
operational over next year. Three of these are among ILFTs top four
assets (of the 26 road assets). With the delivery of these seven
projects, we expect ILFTs average daily cash collection to increase
3x to c. INR60m by FY15e. The beginning of cash collection will
likely reduce investors biggest concern regarding the sector
delayed cash flow generation limiting developers ability to cut
leverage.
High leverage is manageable. ILFTs consolidated net debt to
equity (DE) is likely to rise from 3.5x in FY13 to 4.8x by FY16e as
it funds new projects. However, the holding companys net DE is
still modest at 1.8x (FY13a). Hence, we do not foresee high
leverage impacting the pace of project execution. While we expect
the projects to return free cash flow to ILFT only by
FY17e, it must close a funding gap of INR11bn of equity required
for its under construction projects. Our analysis suggests it can
comfortably raise funding of INR4-5bn in its operational
assets.
We cut FY15e-16e earnings forecasts by 18-20% Although we cut
revenue and EBITDA forecasts for FY15e-16e by only 1-4%, we cut
earnings forecasts by 18-20%. This is primarily due to slightly
higher interest rates assumptions than we had previously estimated.
Due to very high leverage (3.5x), the earnings are sensitive to the
interest rate assumptions.
Our revised earnings estimates are 5% below the current
consensus in FY15e, but are 5% above in FY16e.
ILFT Transport Expect seven projects becoming operational over
next year to act
as share price catalysts Investors concerns surrounding high
leverage and equity dilution
seem overdone, in our view Remain OW with a lower TP of INR172
(down from INR260)
HSBC ILFTs earnings estimate summary
_____ New forecasts ____ _____ y-o-y change _____ _____ Change
vs old ____ _____ HSBC vs. cons ____ INRm (except EPS) FY13a FY14e
FY15e FY16e FY14e FY15e FY16e FY14e FY15e FY16e FY14e FY15e
FY15e
Revenue 66,448 79,803 76,469 77,179 20.1% -4.2% 0.9% 12.4% -3.7%
-4.3% 14.6% 0.3% -16.7% EBITDA 18,379 23,274 25,165 28,255 26.6%
8.1% 12.3% 7.8% -1.3% -2.3% 9.4% 0.6% -11.0% EBITDA margin 27.7%
29.2% 32.9% 36.6% 150 370 370 -120 80 80 -140 10 230 HSBC PAT 5,202
6,246 5,450 6,744 20.1% -12.7% 23.7% 8.3% -20.2% -17.7% 21.7% -4.8%
4.8% HSBC PAT margin 7.8% 7.8% 7.1% 8.7% 0 -70 160 -30 -150 -150 40
-40 180 Adj. EPS 26.8 32.1 28.1 34.7 20.1% -12.7% 23.7% 8.3% -20.2%
-17.7% 21.4% -3.2% 12.4% Source: Bloomberg, Company data, HSBC
estimates
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Valuation and risks We continue to value ILFT using a sum of the
parts valuation across 2 business segments-road assets and EPC
business using a free cash flow to equity (FCFE) discounted cash
flow method (DCF).
With varied risk profile we use differential cost of equity for
projects which are already operational and under development. The
risk profile of an annuity road asset is also lower than a toll
asset, which is reflected in our cost of equity assumptions. Below
table highlights our cost of equity assumptions. We have not made
any changes to our base cost of equity assumptions for an annuity
asset (risk free rate of 8.3%, market risk premium of 5.0% and beta
of 0.9x). We use a 50bps higher CoE for under development annuity
asset to factor the development risk. Similarly we use a 50bps
higher CoE (above base annuity CoE) for operational toll asset and
an additional 100bps CoE of 14.3% for an under construction toll
asset to compensate for the higher traffic risk.
Cost of equity assumptions
Annuity- Operational 12.8% Annuity- Under development 13.3% BOT-
Operational 13.3% BOT- Under development 14.3% BOT: Build Operate
Transfer Source: Bloomberg, HSBC estimates
We have cut our target price sharply by 34%. This is owing to a
combination of 2 key changes. 1) We have increased our interest
cost assumption by 100bps to 11.5%. However due to high net equity
of 3.5x and interest coverage of mere 2.0x, the impact on our
target price is severe (60% of the target price reduction). 2) We
have also adjusted our traffic growth outlook for yet to start
projects to factor the weak macro conditions. Lower revenues again
have a similar impact on long term cash flows owing to the low
interest coverage ratio. Consequently our target price has fallen
by 34% to INR172 (refer table below). ILFT valuation change
INR/ share New Old
Projects NPV 204 288 EPC value 66 60 Elsamex 21 21 Additional
equity required (54) (38) Net debt (68) (75) Option value for new
projects 5 5 Total 172 260
Source: Company data, HSBC
Under our research model, for stocks without volatility
indicator, the Neutral band is 5ppts above and below the hurdle
rate for India stocks of 11%. Our target price implies a potential
return of 29.3% (including a forecast dividend yield of 2.9%),
which is above the Neutral band; therefore, we are reiterating our
Overweight rating. Potential return equals the percentage
difference between the current share price and the target price,
including the forecast dividend yield when indicated.
ILFT one-year forward PE chart ILFT one-year forward PB
chart
Source: Bloomberg, HSBC Estimates Source: Bloomberg, HSBC
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1De
c-11
Mar-1
2Ju
n-12
Sep-1
2De
c-12
Mar-1
3Ju
n-13
Sep-1
3De
c-13
12mth FWD P/B Mean-1 Std Dev -1.5 Std Dev+1 Std Dev +2 Std
Dev.
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Industrials Construction & Engineering 3 January 2014
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Key downside risks: 1) weak macro environment impacting traffic
growth and real estate, 2) high interest rates, 3) execution risk,
4) competitive pressures from large players, and 5) regulatory risk
impacting new project awards.
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Industrials Construction & Engineering 3 January 2014
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Financials & valuation: IL&FS Transportation Netw
Overweight Financial statements
Year to 03/2013a 03/2014e 03/2015e 03/2016e
Profit & loss summary (INRm)
Revenue 66,448 79,803 76,469 77,179EBITDA 18,379 23,274 25,165
28,255Depreciation & amortisation -944 -1,842 -1,881
-2,989Operating profit/EBIT 17,435 21,432 23,284 25,267Net interest
-9,750 -12,822 -15,800 -15,894PBT 7,731 8,756 7,330 9,238HSBC PBT
7,731 8,756 7,330 9,238Taxation -2,274 -2,583 -2,021 -2,531Net
profit 5,202 6,246 5,450 6,744HSBC net profit 5,202 6,246 5,450
6,744
Cash flow summary (INRm)
Cash flow from operations 19,039 14,842 26,590 44,098Capex
-49,388 -52,137 -46,838 -44,658Cash flow from investment -50,554
-52,137 -46,838 -44,658Dividends -907 -909 -909 -2,108Change in net
debt 39,618 50,952 37,253 35,355FCF equity -41,073 -50,810 -37,990
-34,914
Balance sheet summary (INRm)
Intangible fixed assets 7,098 7,131 7,131 7,132Tangible fixed
assets 96,578 136,672 179,784 218,644Current assets 31,653 43,209
40,792 41,075Cash & others 4,552 5,000 5,000 5,001Total assets
205,903 266,754 307,493 347,646Operating liabilities 17,297 21,864
20,950 21,145Gross debt 143,591 194,991 232,244 267,599Net debt
139,039 189,991 227,244 262,598Shareholders funds 36,398 41,735
46,275 50,912Invested capital 113,479 160,149 201,757 240,705
Ratio, growth and per share analysis
Year to 03/2013a 03/2014e 03/2015e 03/2016e
Y-o-y % change
Revenue 18.5 20.1 -4.2 0.9EBITDA 25.4 26.6 8.1 12.3Operating
profit 25.5 22.9 8.6 8.5PBT -1.9 13.3 -16.3 26.0HSBC EPS 4.7 20.1
-12.7 23.7
Ratios (%)
Revenue/IC (x) 0.7 0.6 0.4 0.3ROIC 12.4 11.0 9.3 8.3ROE 16.2
16.0 12.4 13.9ROA 7.5 6.9 6.2 5.9EBITDA margin 27.7 29.2 32.9
36.6Operating profit margin 26.2 26.9 30.4 32.7EBITDA/net interest
(x) 1.9 1.8 1.6 1.8Net debt/equity 347.8 420.0 457.8 484.1Net
debt/EBITDA (x) 7.6 8.2 9.0 9.3CF from operations/net debt 13.7 7.8
11.7 16.8
Per share data (INR)
EPS Rep (fully diluted) 26.78 32.15 28.05 34.71HSBC EPS (fully
diluted) 26.78 32.15 28.05 34.71DPS 4.00 4.00 4.00 5.00Book value
187.36 214.83 238.20 262.07
Valuation data
Year to 03/2013a 03/2014e 03/2015e 03/2016e
EV/sales 2.4 2.6 3.2 3.7EV/EBITDA 8.6 9.0 9.8 10.0EV/IC 1.4 1.3
1.2 1.2PE* 5.1 4.2 4.9 3.9P/Book value 0.7 0.6 0.6 0.5FCF yield (%)
-209.9 -259.7 -194.1 -178.4Dividend yield (%) 2.9 2.9 2.9 3.7Note:
* = Based on HSBC EPS (fully diluted) Issuer information
Share price (INR)136.10 Target price (INR)172.00 2
6.4
Reuters (Equity) ILFT.NS Bloomberg (Equity) ILFT INMarket cap
(USDm) 428 Market cap (INRm) 26,440Free float (%) 29 Enterprise
value (INRm) 209559Country India Sector Construction &
EngineeringAnalyst Ashutosh Narkar Contact +91 22 22681474
Price relative
Source: HSBC Note: price at close of 30 Dec 2013
75
125
175
225
275
325
75
125
175
225
275
325
2011 2012 2013 2014IL&FS Transportation Netw
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Industrials Construction & Engineering 3 January 2014
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Appendix 1: List of the road projects likely to be considered as
stressed
Road projects of coverage companies Project Name Developer
Length (KM) Project Cost (INRm) Barwa Adda- Panagarh IL&FS
Transportation 123 24,199Tumkur- Chitradurga IRB Infrastructure 114
11,420Ahmedabad- Vadodara IRB Infrastructure 196 48,800Hosur-
Krishnagiri Reliance Infrastructure 60 9,250Maharashtra/Karnataka
Border-Sangareddy L&T 145 12,730Jalgaon-Gujarat/ Maharashtra
Border L&T 209 23,000Amravati- Jalgaon (four laning) L&T
275 25,380Beawar- Pali- Pindwara L&T 244 27,720Road projects of
non-coverage companies Project Name Developer Project Detail
DeveloperBelgaum- Dharwad Ashoka Buildcon Raipur-Bilaspur
IVRCLCuttack-Angul Ashoka Buildcon Rajahmundry- Gundugolanu
IVRCLDankuni- Kharagpur Ashoka Buildcon Nagpur- Wainganga Bridge
JMCSambalpur- Bargarh Ashoka Buildcon Kota-Jhalawar Keti
Construction Odisha border- Aurnag- Saraipalli BSCPL Aurangabad-
Barwa Adda KMC Construction Solapur-Maharashtra/ Karnataka Border
Coastal- Srei Rohtak- Jind NKGIndore- Dewas DLF- Gayatri Etawah-
Chakeri Oriental Structures
Engineers Rampur-Kathgodam Era Infra
Hospet-Bellary-Karnataka/A.P. Border PNC Betul construction
Lucknow-Sultanpur Essar- Atlanta Agra- Etawah Bypass (Six laning)
Ramky Infrastructure Gwalior- Shivpuri Essel Infra
Hospet-Chitradurga Ramky Infrastructure Ludhiana- Talwandi Essel
Infra Gomti ka chauraha- Udaipur Sadbhav Engineering Walajapet-
Poonamallee Essel Infra Solapur-Bijapur Sadbhav Engineering
Vijayawada-Eluru-Gundugolanu Gammon Solapur-Maharashtra/
Karnataka
Border Sadbhav Engineering
Kishangarh-Udaipur-Ahmedabad GMR Infrastructure Panvel- Indapur
SupremeDeoli- Kota GVK Anandapuram- Visakhapatnam-
Anakapalli Transtroy- OJSC
Shivpuri-Dewas GVK Obedullaganj-Betul Transtroy- OJSC Vadodara-
Surat section HCC Jind- Punjab/ Haryana Border Unity Infra Projects
Jetpur- Somnath IDFC- Plus Coimbatore- Mettupalayam --
Source: The Hindu Business Line
(http://www.thehindubusinessline.com/), company data, HSBC
estimates
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Industrials Construction & Engineering 3 January 2014
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Disclosure appendix Analyst Certification The following
analyst(s), economist(s), and/or strategist(s) who is(are)
primarily responsible for this report, certifies(y) that the
opinion(s) on the subject security(ies) or issuer(s) and/or any
other views or forecasts expressed herein accurately reflect their
personal view(s) and that no part of their compensation was, is or
will be directly or indirectly related to the specific
recommendation(s) or views contained in this research report:
Ashutosh Narkar
Important disclosures Equities: Stock ratings and basis for
financial analysis HSBC believes that investors utilise various
disciplines and investment horizons when making investment
decisions, which depend largely on individual circumstances such as
the investor's existing holdings, risk tolerance and other
considerations. Given these differences, HSBC has two principal
aims in its equity research: 1) to identify long-term investment
opportunities based on particular themes or ideas that may affect
the future earnings or cash flows of companies on a 12 month time
horizon; and 2) from time to time to identify short-term investment
opportunities that are derived from fundamental, quantitative,
technical or event-driven techniques on a 0-3 month time horizon
and which may differ from our long-term investment rating. HSBC has
assigned ratings for its long-term investment opportunities as
described below.
This report addresses only the long-term investment
opportunities of the companies referred to in the report. As and
when HSBC publishes a short-term trading idea the stocks to which
these relate are identified on the website at
www.hsbcnet.com/research. Details of these short-term investment
opportunities can be found under the Reports section of this
website.
HSBC believes an investor's decision to buy or sell a stock
should depend on individual circumstances such as the investor's
existing holdings and other considerations. Different securities
firms use a variety of ratings terms as well as different rating
systems to describe their recommendations. Investors should
carefully read the definitions of the ratings used in each research
report. In addition, because research reports contain more complete
information concerning the analysts' views, investors should
carefully read the entire research report and should not infer its
contents from the rating. In any case, ratings should not be used
or relied on in isolation as investment advice.
Rating definitions for long-term investment opportunities Stock
ratings HSBC assigns ratings to its stocks in this sector on the
following basis:
For each stock we set a required rate of return calculated from
the cost of equity for that stocks domestic or, as appropriate,
regional market established by our strategy team. The price target
for a stock represents the value the analyst expects the stock to
reach over our performance horizon. The performance horizon is 12
months. For a stock to be classified as Overweight, the potential
return, which equals the percentage difference between the current
share price and the target price, including the forecast dividend
yield when indicated, must exceed the required return by at least 5
percentage points over the next 12 months (or 10 percentage points
for a stock classified as Volatile*). For a stock to be classified
as Underweight, the stock must be expected to underperform its
required return by at least 5 percentage points over the next 12
months (or 10 percentage points for a stock classified as
Volatile*). Stocks between these bands are classified as
Neutral.
Our ratings are re-calibrated against these bands at the time of
any 'material change' (initiation of coverage, change of volatility
status or change in price target). Notwithstanding this, and
although ratings are subject to ongoing management review, expected
returns will be permitted to move outside the bands as a result of
normal share price fluctuations without necessarily triggering a
rating change.
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Industrials Construction & Engineering 3 January 2014
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*A stock will be classified as volatile if its historical
volatility has exceeded 40%, if the stock has been listed for less
than 12 months (unless it is in an industry or sector where
volatility is low) or if the analyst expects significant
volatility. However, stocks which we do not consider volatile may
in fact also behave in such a way. Historical volatility is defined
as the past month's average of the daily 365-day moving average
volatilities. In order to avoid misleadingly frequent changes in
rating, however, volatility has to move 2.5 percentage points past
the 40% benchmark in either direction for a stock's status to
change.
Rating distribution for long-term investment opportunities As of
31 December 2013, the distribution of all ratings published is as
follows: Overweight (Buy) 45% (34% of these provided with
Investment Banking Services)
Neutral (Hold) 37% (33% of these provided with Investment
Banking Services)
Underweight (Sell) 18% (28% of these provided with Investment
Banking Services)
Share price and rating changes for long-term investment
opportunities IL&FS Transportation Netw (ILFT.NS) Share Price
performance INR Vs HSBC
rating history Recommendation & price target history
From To Date N/A Overweight 08 February 2012 Target Price Value
Date Price 1 267.00 08 February 2012 Price 2 231.00 01 November
2012 Price 3 265.00 08 January 2013 Price 4 260.00 03 July 2013
Source: HSBC
Source: HSBC IRB Infrastructure Ltd (IRBI.NS) Share Price
performance INR Vs HSBC rating
history Recommendation & price target history
From To Date Overweight (V) Neutral (V) 26 November 2012 Target
Price Value Date Price 1 309.00 28 January 2011 Price 2 281.00 11
July 2011 Price 3 235.00 10 November 2011 Price 4 139.00 26
November 2012 Price 5 109.00 03 July 2013 Price 6 78.00 11 August
2013 Source: HSBC
Source: HSBC
100
150
200
250
300
350
Dec-0
8
Dec-0
9
Dec-1
0
Dec-1
1
Dec-1
2
Dec-1
3
54
104
154
204
254
304
Dec-0
8
Dec-0
9
Dec-1
0
Dec-1
1
Dec-1
2
Dec-1
3
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Industrials Construction & Engineering 3 January 2014
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HSBC & Analyst disclosures Disclosure checklist
Company Ticker Recent price Price Date Disclosure
IL&FS TRANSPORTATION NETWORKS ILFT.NS 136.10 30-Dec-2013 2,
6, 7IRB INFRASTRUCTURE LTD IRBI.NS 91.70 30-Dec-2013 4Source:
HSBC
1 HSBC has managed or co-managed a public offering of securities
for this company within the past 12 months. 2 HSBC expects to
receive or intends to seek compensation for investment banking
services from this company in the next
3 months. 3 At the time of publication of this report, HSBC
Securities (USA) Inc. is a Market Maker in securities issued by
this
company. 4 As of 30 November 2013 HSBC beneficially owned 1% or
more of a class of common equity securities of this company. 5 As
of 30 November 2013, this company was a client of HSBC or had
during the preceding 12 month period been a client
of and/or paid compensation to HSBC in respect of investment
banking services. 6 As of 30 November 2013, this company was a
client of HSBC or had during the preceding 12 month period been a
client
of and/or paid compensation to HSBC in respect of non-investment
banking securities-related services. 7 As of 30 November 2013, this
company was a client of HSBC or had during the preceding 12 month
period been a client
of and/or paid compensation to HSBC in respect of non-securities
services. 8 A covering analyst/s has received compensation from
this company in the past 12 months. 9 A covering analyst/s or a
member of his/her household has a financial interest in the
securities of this company, as
detailed below. 10 A covering analyst/s or a member of his/her
household is an officer, director or supervisory board member of
this
company, as detailed below. 11 At the time of publication of
this report, HSBC is a non-US Market Maker in securities issued by
this company and/or in
securities in respect of this company HSBC and its affiliates
will from time to time sell to and buy from customers the
securities/instruments (including derivatives) of companies covered
in HSBC Research on a principal or agency basis.
Analysts, economists, and strategists are paid in part by
reference to the profitability of HSBC which includes investment
banking revenues.
For disclosures in respect of any company mentioned in this
report, please see the most recently published report on that
company available at www.hsbcnet.com/research.
Additional disclosures 1 This report is dated as at 03 January
2014. 2 All market data included in this report are dated as at
close 30 December 2013, unless otherwise indicated in the report. 3
HSBC has procedures in place to identify and manage any potential
conflicts of interest that arise in connection with its
Research business. HSBC's analysts and its other staff who are
involved in the preparation and dissemination of Research operate
and have a management reporting line independent of HSBC's
Investment Banking business. Information Barrier procedures are in
place between the Investment Banking and Research businesses to
ensure that any confidential and/or price sensitive information is
handled in an appropriate manner.
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Industrials Construction & Engineering 3 January 2014
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Disclaimer * Legal entities as at 8 August 2012 UAE HSBC Bank
Middle East Limited, Dubai; HK The Hongkong and Shanghai Banking
Corporation Limited, Hong Kong; TW HSBC Securities (Taiwan)
Corporation Limited; 'CA' HSBC Bank Canada, Toronto; HSBC Bank,
Paris Branch; HSBC France; DE HSBC Trinkaus & Burkhardt AG,
Dsseldorf; 000 HSBC Bank (RR), Moscow; IN HSBC Securities and
Capital Markets (India) Private Limited, Mumbai; JP HSBC Securities
(Japan) Limited, Tokyo; EG HSBC Securities Egypt SAE, Cairo; CN
HSBC Investment Bank Asia Limited, Beijing Representative Office;
The Hongkong and Shanghai Banking Corporation Limited, Singapore
Branch; The Hongkong and Shanghai Banking Corporation Limited,
Seoul Securities Branch; The Hongkong and Shanghai Banking
Corporation Limited, Seoul Branch; HSBC Securities (South Africa)
(Pty) Ltd, Johannesburg; HSBC Bank plc, London, Madrid, Milan,
Stockholm, Tel Aviv; US HSBC Securities (USA) Inc, New York; HSBC
Yatirim Menkul Degerler AS, Istanbul; HSBC Mxico, SA, Institucin de
Banca Mltiple, Grupo Financiero HSBC; HSBC Bank Brasil SA Banco
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Saudi Arabia Limited; The Hongkong and Shanghai Banking Corporation
Limited, New Zealand Branch incorporated in Hong Kong SAR
Issuer of report HSBC Securities and Capital Markets (India)
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1983 Website: www.research.hsbc.com
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Industrials Colin Gibson Global Sector Head, Industrials +44 20
7991 6592 [email protected]
Sean McLoughlin Analyst +44 20 7991 3464
[email protected]
Michael Hagmann Analyst +44 20 7991 2405
[email protected]
Mark Webb Analyst +852 2996 6574 [email protected]
Parash Jain Analyst +852 2996 6717 [email protected]
Shishir Singh Analyst +852 2822 4292
[email protected]
Walden Shing Analyst +852 2996 6751 [email protected]
Stephen Wan Analyst +852 2996 6566 [email protected]
Thomas Zhu, CFA Analyst +852 2822 4325 [email protected]
Carrie Liu Analyst + 8862 6631 2864 [email protected]
Julie Wang Associate +8862 6631 2870 [email protected]
Brian Cho Head of Research, Korea +822 3706 8750
[email protected]
Paul Choi Analyst +822 3706 8758 [email protected]
Yeon Lee Analyst +822 3706 8778 [email protected]
Jena Han Analyst +822 3706 8772 [email protected]
Thilan Wickramasinghe Analyst +65 6658 0609
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Carson Ng Analyst +852 2822 4397 [email protected]
Yogesh Aggarwal Analyst +91 22 2268 1246
[email protected] Transportation Andrew Lobbenberg Analyst
+44 20 7991 6816 [email protected]
Julia Winarso Analyst +44 20 7991 2168
[email protected]
Joe Thomas Analyst +44 20 7992 3618 [email protected]
Wei Sim Analyst +852 2996 6602 [email protected]
Luciano T Campos +55 11 3371 8192
[email protected]
Shishir Singh +852 2822 4292 [email protected]
Achal Kumar Analyst +91 80 3001 3722 [email protected]
Rajani Khetan Analyst +852 3941 0830
[email protected]
Jingyuan Zhai Associate +852 3941 7009
[email protected]
Construction & Engineering Neel Sinha Head of Equity
Research, South East Asia +65 6658 0606 [email protected]
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[email protected]
Tarun Bhatnagar Analyst +65 6658 0614
[email protected]
John Fraser-Andrews Analyst +44 20 7991 6732
[email protected]
Jeffrey Davis Analyst +44 207 991 6837
[email protected]
Claudia Navarrete Analyst +52 55 5721 2422
[email protected]
Anderson Chow Analyst +852 2996 6669
[email protected]
Lesley Liu Analyst +852 2822 4524 [email protected]
Raj Sinha Analyst + 971 4423 6932 [email protected]
Levent Bayar Analyst +90 212 376 46 17
[email protected]
Ashutosh Narkar Analyst +91 22 2268 1474
[email protected]
Tobias Loskamp Analyst +49 211 910 2828
[email protected]
Specialist Sales Rod Turnbull +44 20 7991 5363
[email protected]
Oliver Magis +49 21 1910 4402 [email protected]
Billal Ismail +44 20 7991 5362 [email protected]
Global Industrials Research Team
Front Page (Page View)India InfrastructureRelief package - a
disguised boonBackgroundPanel recommendationsProposals in our view
are insufficient to restart projectsA boon in disguiseWill there be
takers when they come for re-bid?Implications for our coverage
universe
IRB Infrastructure LtdInvestment summaryCut earnings estimates
by 9-19%
Valuation and risksReiterate N (V) though increase our TP to
INR103 (INR78 earlier)Key downside risks:Key upside risks:
Financials & valuation:
ILFT TransportInvestment summaryWe cut FY15e-16e earnings
forecasts by 18-20%
Financials & valuation:
Disclosure appendixAnalyst CertificationImportant
disclosuresEquities: Stock ratings and basis for financial
analysis
Rating definitions for long-term investment opportunitiesStock
ratings
Rating distribution for long-term investment opportunitiesAs of
31 December 2013, the distribution of all ratings published is as
follows:
Share price and rating changes for long-term investment
opportunitiesHSBC & Analyst disclosuresAdditional
disclosures
Disclaimer
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/PDFXNoTrimBoxError true /PDFXTrimBoxToMediaBoxOffset [ 0.00000
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