Sector Report 051009 Religare

Infrastructure: Sector Report

The time is right!

October 2009

SECTOR OUTLOOK

POSITIVE

Nimit Shah Hardik Shah

(91-22) 6766 3464 (91-22) 6766 3465

[email protected] [email protected]

1RHH: Winner of LIPPER-STARMINE broker award for “Earnings Estimates in Midcap Research 2008”

“Honourable Mention” in Institutional Investor 2009

RHH Research is also available on Bloomberg FTIS <GO> and Thomson First Call

Contents

Section Page No.

Sector snapshot 1

Valuations still offer room for upside 2

Infrastructure investments in India 5

- Short-term hiccups, long-term intact 5

- Opportunities across segments 8

- Funding a key challenge 10

- PPP – the way forward 13

- Opportunities abound for EPC players 14

- Key risks to our estimates 21

- RHH infrastructure universe: Valuation matrix 22

Sector-wise investment allocation 24

- Roads & Bridges 24

- Electricity 30

- Railways 33

- Irrigation 36

- Water supply and Sanitation 39

- Airports 41

- Ports 44

Companies

- Hindustan Construction Co 46

- IRB Infrastructure 53

- IVRCL Infrastructure 64

- Jaiprakash Associates 70

- Larsen & Toubro 77

- Nagarjuna Construction 84

- Patel Engineering 90

- Punj Lloyd 96

- Simplex Infrastructure 102

- Voltas 108

- Ahluwalia Contracts 113

- Gayatri Projects 118

- Madhucon Projects 120

Infrastructure Sector Report 05 October 2009

1

RHH: Winner of LIPPER-STARMINE broker award for “Earnings Estimates in Midcap Research 2008”

“Honourable Mention” in Institutional Investor 2009

RHH Research is also available on Bloomberg FTIS <GO> and Thomson First Call

Recommendation snapshot Company CMP Target Rating

Ahluwalia Cont 169 190 Buy

HCC 130 141 Hold

IRB Infra* 209 224 Buy

IVRCL 388 434 Buy

JP Associates 239 237 Hold

L&T 1,665 1,781 Buy

NCC 153 166 Hold

Patel Engg. 484 532 Buy

Punj Lloyd* 262 306 Buy

Simplex Infra 510 577 Buy

Voltas* 145 160 Hold

* Consolidated

Profitability and return ratios FY11E P/E (x) ROE (%)

Company FY09-11

PAT CAGR (%) P/E Ex-

sub# FY10E FY11E

Sensex 13.0 16.1 16.1 17.3 18.2

L&T

Standalone 22.1 24.1 21.3 23.8 24.6

Consolidated 22.8 21.5

Ahluwalia Cont 38.8 9.6 9.6 37.2 36.2

HCC 37.8 29.0 11.7 8.4 9.0

IVRCL 27.3 17.2 14.0 13.8 15.0

NCC 25.2 16.2 12.6 10.0 10.6

Patel Engg. 23.7 17.9 12.2 12.3 13.8

Punj Lloyd* 60.4 14.7 13.5 16.4 15.8

Simplex Infra 28.5 12.4 12.4 16.3 18.0

* Consolidated #Excluding subsidiaries

Stock performance

Company CMP 1mth 3mth 6mth YTD

Sensex 17,135 10.2 17.0 73.0 77.6

Cap Goods Index 13,731 6.1 6.4 112.4 98.7

Ahluwalia Cont 169 13.0 94.4 406.6 478.6

HCC 130 22.9 25.1 223.4 156.2

IRB Infra* 209 (0.8) 28.1 138.2 61.5

IVRCL 388 7.5 10.3 202.2 169.9

JP Associates 239 7.8 15.1 180.3 188.6

L&T 1,665 7.4 5.8 147.6 115.2

NCC 153 13.4 11.1 143.3 112.5

Patel Engg* 484 10.5 12.9 244.3 177.0

Punj Lloyd* 262 1.6 22.6 184.5 78.1

Simplex Infra 510 18.6 30.7 213.0 195.6

Voltas 145 (4.0) 17.7 192.0 140.0

* Consolidated

Infrastructure The time is right!

Run-up in valuations but still room for further upside: Over the last six months, our universe of infrastructure and construction stocks has run up by a massive 200% as against returns of 73% from the Sensex and 112% from the Capital Goods Index. The sharp rally has been spurred by hopes that the recently elected, pro-reform government will boost spending on infrastructure, eliminate policy bottlenecks, and simplify procedures for project approvals. The surge in stock prices is also a function of a re-rating in the broader market multiple, led by the restoration of liquidity flows.

Last year, the construction & infrastructure sector suffered a major blow as India’s economic growth slowed from 9% in 2007–08 to below 7% and the global credit crunch starved infrastructure firms of funds. Now, with healthy liquidity conditions, strong project execution, softening commodity prices, lower interest rates, and a healthy political climate, we expect upgrades to consensus earnings estimates in H2FY10, leading to a further re-rating of the sector. High-growth mid cap construction stocks look set to take the lead.

Government spends to invigorate sector: Infrastructure spending of ~US$ 500bn in the 11th Five Year Plan and additional spending through government stimulus packages provide strong revenue visibility for infrastructure players over the next 4–5 years. At the same time, a rebound in economic growth and corporate capex along with improved availability of funds augur well for the sector. Public sector investments will be crucial going forward, with roads, irrigation, power and urban infrastructure likely to attract a bulk of the development funds.

Mid caps at attractive valuations: Mid cap companies with strong revenue visibility are currently trading at a discount of ~40% to L&T and at par to the Sensex. Our mid cap construction universe traded at 18–20x one-year forward earnings during FY04-FY09, which was a period of buoyant growth. The topline of the RHH construction universe increased at ~34% CAGR and bottomline at ~36% over this period.

Although we expect lower revenue growth at ~20% CAGR over the next two years on account of the higher base, we anticipate a healthy bottomline ramp-up of ~26% led by rationalisation of interest costs. With strong earnings growth, we firmly believe that valuations of our mid cap construction universe remain attractive at a P/E of 15.9x FY11E earnings and 12.7x excluding subsidiaries.

Long-term growth drivers: While we expect stock performance to be volatile in the short term, we see opportunities for above-average returns in companies that have a strong track record, a sturdy financial backbone, and robust risk-management systems with the ability to scale up. As mentioned, softening commodity prices and lower interest costs offer potential for earnings upgrades. We remain positive on L&T and Punj Lloyd in the large cap space, IVRCL Infrastructures and Simplex Infrastructure in the mid cap space, and IRB Infrastructure in the developer segment.


2

Valuations still offer room for upside

Over the last six months, infrastructure and construction stocks have witnessed a re-rating and rallied sharply by ~200% on the back of an improving global economic environment and political stability in the country. With significant order inflows, easing fund flows and a stronger government focus on infrastructure, we see opportunities for above-average returns in companies that have a strong track record, a sturdy financial backbone, and robust risk-management systems with the ability to scale up. Softening commodity prices and lower interest costs offer potential for earnings upgrades.

Fig 1 - RHH Construction sector growth trend Particulars (Rs mn)

FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10E FY11E CAGR FY09-11E (%)

CAGR FY04-09 (%)

Sales 117,508 148,520 202,289 239,214 330,731 471,113 646,588 763,366 932,522 20.1 34.2

EBITDA 9,828 11,825 14,776 19,685 32,081 52,038 65,765 80,607 98,528 22.4 40.9

Interest cost 3,302 2,574 3,373 3,933 5,092 8,495 14,811 16,249 17,880 9.9 41.9

PAT 5,238 7,838 9,229 12,209 20,740 31,200 35,915 46,018 56,965 25.9 35.6

Source: Company, RHH

Fig 2 - RHH Construction sector growth trend excluding L&T and Punj Lloyd Particulars (Rs mn)

FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10E FY11E CAGR FY09-11E (%)

CAGR FY04-09 (%)

Sales 23,907 52,020 70,437 91,583 154,589 221,019 307,325 361,480 430,443 18.3 42.7

EBITDA 2,704 6,426 6,691 9,027 14,296 22,459 27,423 35,117 41,968 23.7 33.7

Interest cost 1,050 1,653 2,533 2,627 4,162 7,269 11,309 12,237 13,493 9.2 46.9

PAT 891 1,293 2,400 3,786 4,759 6,207 6,470 8,436 10,548 27.7 38.0


Mid caps trading at attractive valuations (ex-subsidiary valuations) L&T, the infrastructure bellwether, is trading at a premium of 35–40% to the Sensex. Mid cap companies with strong revenue visibility are currently quoting at a discount of ~40% to L&T and at par to the Sensex. Our construction universe is trading at a P/E of 21x FY11E earnings. Excluding subsidiaries, the multiple stands at 17.6x on FY11E which looks fairly valued. However, our mid cap construction universe (excluding L&T and Jaiprakash Associates) is trading at attractive valuations of 15.9x FY11E earnings and 12.7x excluding subsidiaries.

Historically, our mid cap construction universe has traded at 18–20x one-year forward earnings during FY04-FY09, which was a period of buoyant growth. The topline of the RHH construction universe increased at ~34% CAGR and bottomline at ~36% over this period. Although we expect lower revenue growth at ~20% CAGR over the next two years on account of the higher base, we anticipate a healthy bottomline ramp-up of ~26% led by rationalisation of interest costs and operational efficiency.

We remain bullish on the sector due to strong earnings visibility and healthy order flows. We have valued L&T based on its average P/E of the last four years and other companies in our universe at 30–45% discount to L&T depending upon balance sheet strength and future business outlook.

We remain positive on L&T and Punj Lloyd in the large cap space, IVRCL Infrastructures and Simplex Infrastructure in the mid cap space, and IRB Infrastructure in the developer segment.

Expect above-average returns in select

stocks despite sharp run-up

Our mid cap universe is trading at

attractive valuations of12.7x FY11E EPS

(ex-subsidiaries)

Stocks to buy: L&T, Punj Lloyd, IVRCL,

Simplex and IRB


3

Fig 3 - Sector valuation matrix

CMP Target Orderbook

OB / FY10E Sales

CAGR over FY09-11E (%)

P/E (x) P/E ex- sub valuation (x)

ROE (%) Company

(Rs) (Rs)

Reco

(Rs bn) Revenue Earnings FY10E FY11E FY10E FY11E FY09E FY10E FY11E

Ahluwalia Cont 169 190 Buy 28.0 1.9 27.6 38.8 13.3 9.6 13.3 9.6 37.9 37.2 36.2

HCC 130 141 Hold 134.7 3.3 22.0 37.8 37.5 29.0 15.1 11.7 7.6 8.4 9.0

IRB Infra* 209 224 Buy NA NA 93.1 94.0 20.2 15.4 20.2 15.4 7.1 18.1 19.7

IVRCL 388 434 Buy 149.0 2.3 24.9 27.3 20.4 17.2 16.6 14.0 11.0 13.8 15.0

JP Associates*

239 237 Hold NA NA 35.2 33.5 25.5 22.1 17.4 15.1 17.2 21.5 20.5

L&T 1665 1,781 Buy 716.5 1.8 21.7 22.1 29.8 24.1 26.4 21.3 24.6 23.8 24.6

NCC 153 166 Hold 139.0 2.9 17.0 25.2 19.3 16.2 15.0 12.6 9.4 10.0 10.6

Patel Engg 484 532 Buy 73.5 3.3 23.7 23.7 22.7 17.9 15.5 12.2 11.5 12.3 13.8

Punj Lloyd* 262 306 Buy 278.9 2.1 13.9 60.4 17.4 14.7 16.0 13.5 9.0 16.4 15.8

Simplex Infra 510 577 Buy 100.1 1.8 19.0 28.5 15.9 12.4 15.9 12.4 14.9 16.3 18.0

Voltas* 145 160 Hold NA NA 17.2 21.1 17.9 14.5 17.9 14.5 32.9 29.9 29.2

Aggregate 1,619.8 2.1 22.3 29.4 25.7 21.0 21.6 17.6

Source: RHH, Company * Consolidated

Fig 4 - L&T* – Premium/discount to BSE 30 P/E

(%)

(20)

0

20

40

60

80

100

120

Aug-06 Aug-07 Sep-08 Sep-09

Source: RHH * Consolidated

Fig 5 - HCC – Premium/discount to L&T P/E

(%)

(50)

0

50

100

150

200

250

Aug-06 Jun-07 Mar-08 Dec-08 Sep-09

Source: RHH

Fig 6 - IVRCL – Premium/discount to L&T P/E

(%)

(80)(60)(40)(20)

020406080

100


Source: RHH

Fig 7 - NCC – Premium/discount to L&T P/E

(%)

(60)

(40)

(20)

0

20

40

60

80


Source: RHH


4

Fig 8 - Patel Engg – Premium/discount to L&T P/E

(%)

(60)

(40)

(20)

0

20

40

60


Source: RHH

Fig 9 - Punj Lloyd– Premium/discount to L&T P/E

(%)

(60)

(40)

(20)

0

20

40

60


Source: RHH

Fig 10 - Simplex Infra – Premium/discount to L&T P/E

(%)

(80)

(60)

(40)

(20)

0

20

40


Source: RHH

Fig 11 - Price discount from peak

(18)

(52) (49)

(8)

(32)

(51)

(25)

(58)(53) (55)

(26)

(43)

(70)(60)

(50)(40)(30)(20)

(10)0

Sem

sex

Ahl

uwal

ia

HC

C

IRB

IVR

CL

JP A

sso

L&T

NC

C

Pate

l

Punj

Sim

plex

Vol

tas

Source: RHH

(%)


5

Infrastructure investments in India

The formation of a stable government by the incumbent UPA party is a key positive for the infrastructure sector in the long term. Infrastructure investments in the 11th Five Year Plan are expected to more than double to ~US$ 500bn over FY08-FY12 with an emphasis on areas like roads, power, irrigation and water supply. Approximately 70% of this investment would come from government spending, with the Centre contributing ~37% and state governments ~33%. With the slowdown in private capex in the wake of global economic turmoil, government spends would be the key growth driver for the infrastructure sector going forward.

Short-term hiccups, long-term intact

Execution of planned project expenditure in India has proved laggardly so far due to various regulatory and policy issues. The last six months in particular have been a challenging period as decisions on project awards were repeatedly deferred on account of the economic slowdown and the code of conduct applicable to public sector bodies prior to the elections in May ’09.

With a stable government now in place and priority being accorded to infrastructure development, it is expected that government-led capex will increase and new business prospects will fructify in the latter half of this fiscal year. The government aims to increase infrastructure spending in India to over 9% of GDP by 2014 from the current 5.8%. With the private sector expected to invest ~30% of the projected expenditure, the public-private-partnership (PPP) model will gain traction. The recently announced stimulus packages also have the potential to fuel order book growth of EPC players.

Fig 12 - Infrastructure investments

1,230 1,2801,450 1,450 1,440

1,610

2,0402,350

2,700

0

500

1000

1500

2000

2500

3000

FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08

(Rs bn)

Source: Planning Commission, RHH

Fig 13 - Infrastructure investment as a % of GDP

4.0

4.85.1

4.94.5

4.7

5.35.7

6.0

3

4

5

6

7

FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08

Source: Planning Commission, RHH

Fig 14 - Segment-wise infrastructure spending during 10th and 11th Plans

97

6,665

3,1422,584 2,618 2,533

1,437880

310 224 1694868141648

1,1151,1971,0341,449

2,919

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

Elect. Roads andbridges

Telecom. Railways(incl.

MRTS)

Irrigation(incl. WD)

WaterSupply andSanitation

Ports Airports Storage Gas

10th Plan 11th Plan(Rs bn)

Source: Plan Document, Planning Commission

Contract awarding to scale up

substantially across segments


6

Fig 15 - Infrastructure – 11th Plan physical targets

Sector 11th Plan targets

Roads/Highways 6-laning of 6,500km in Golden Quadrilateral (GQ); 4-laning of 6,736km in North South-East West (NS-EW)

corridor; 4-laning of 20,000km; 2-laning of 20,000km; building 1,000km of Expressways

Ports New capacity: 485mmt in major ports; 345mmt in minor ports

Airports Modernise 4 metro and 35 non-metro airports; 3 Greenfield in NER; 7 other Greenfield airports

Railways 8,132km of new railway track; 7,148km gauge conversion; modernise 22 stations; dedicated freight corridors

Power Add 78,577MW; access to all rural households

Irrigation Develop 16mha major and minor works; 10.25mha command area development (CAD); 2.18mha flood control

Telecom/IT Reach 600mn subscribers – 200mn in rural areas; 20mn broadband; 40mn Internet

Source: Plan document

Fig 16 - Breakdown of 11th Plan spending in infrastructure

Sectors (Rs bn) Total 10th Plan

Share (%) 2007-08 2008-09 2009-10 2010-11 2011-12 Total 11th Plan

Share (%)

Electricity (incl. NCE) 2,919 33.5 820 1,016 1,264 1,580 1,986 6,665 32.4

Roads and bridges 1,449 16.6 518 548 592 684 800 3,142 15.3

Telecommunications 1,034 11.9 314 381 486 616 787 2,584 12.6

Railways (incl. MRTS) 1,197 13.7 342 410 495 604 767 2,618 12.7

Irrigation (incl. WD) 1,115 12.8 275 359 472 623 804 2,533 12.3

Water Supply and Sanitation

648 7.4 193 228 273 333 411 1,437 7.0

Ports 141 1.6 124 148 174 200 234 880 4.3

Airports 68 0.8 52 55 59 66 77 310 1.5

Storage 48 0.6 38 41 44 48 52 224 1.1

Gas 97 1.1 27 30 33 37 41 169 0.8

Total Investment (Rs bn) 8,714 100.0 2,703 3,216 3,893 4,791 5,959 20,562 100.0

Total Investment (US $ bn) 217.9 67.6 80.4 97.3 119.8 149.0 514.0

As % of GDP 5.4 6.0 6.5 7.3 8.2 9.3 7.6

Source: Plan document, Planning Commission

China to be a key motivator for India While the infrastructure sector is regarded as one of the major opportunities for the medium to long term in India, the country’s progress pales in comparison to China. In CY08, China spent US$ 101bn on road infrastructure while India spent a paltry US$ 11.5bn. With the most recent RMB 4tn stimulus package in China much of the new focus on infrastructure will be in rural and interior areas.

Over the next few years China’s spending on infrastructure could be exponentially larger than that of India. China has the capital and execution capability to deliver infrastructure spending on a rapid and massive scale. In addition, the Chinese government has been edging towards a fiscal surplus over the last few years, although the deficit will likely reemerge in 2009 with the additional stimulus package.

In China, capital for infrastructure spending is provided by the government and through the banking system, which witnessed strong loan growth in Q1CY09. The combined fiscal deficit at 11–12% of GDP severely impacts the ability of the Indian government to roll out a Chinese-style infrastructure-heavy stimulus package. The Indian government instead focuses on aggressively easing monetary policy and loosening liquidity conditions by providing windows for refinancing debt such as IIFCL.

In CY08, China spent US$ 101bn on

road infrastructure while India spent a

paltry US$ 11.5bn


7

India’s infrastructure spend in 11th plan estimated at US$ 382bn From past experience, we know that government investment targets are usually overly optimistic. We estimate spending of US$ 382bn over the 11th plan period (FY08–FY12) as against US$ 503bn planned. Our estimate stems from challenges being encountered by the private sector in obtaining finance and also from the deceleration in India’s GDP growth.

Fig 17 - Gross capital formation (GCF) in infrastructure based on growth targets (Top-down estimates)

Base Year 11th Plan (Rs bn at 2006-07 prices)

2006-07 2007-08 2008-09 2009-10 2010-11 2011-12

GDP (market prices) 41,458 45,189 49,256 53,689 58,521 63,788

Rate of growth of GDP (%) 9.0 9.0 9.0 9.0 9.0 9.0

GCF in infrastructure as % of GDP 5.0 5.8 6.5 7.3 8.0 9.0

GCF in infrastructure (Rs bn) 2,073 2,598 3,202 3,892 4,682 5,741

GCF in Infrastructure (US$ bn) 52 65 80 97 117 144

11th plan GCF in infrastructure Rs 20,115bn or US$ 502.9bn


Our estimates of investments in infrastructure have been derived using the top-down approach, based on the government’s GDP growth targets and estimates of the likely evolution of the share of gross capital formation in infrastructure as a proportion of GDP consistent with those targets.

Fig 18 - RHH estimates – GCF in infrastructure based on growth targets (Top-down estimates)

Base Year 11th Plan (Rs bn at 2006-07 prices)

2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 Total

RHH assumptions

GDP at market prices 41,458 45,231 47,990 50,629 54,173 58,507 256,530GDP growth rate 9.1% 6.1% 5.5% 7.0% 8.0%

GCF in Infrastructure (As a % of GDP) 5.7% 6.0% 5.8% 6.3% 6.7% 7.0%

GCF in Infrastructure (Rs bn) 2,363 2,714 2,783 3,190 3,630 4,095 16,412

GCF in Infrastructure (US$ bn) (Assumed ex. rate of 43$) 55 63 65 74 84 95 382

Source: RHH

Fig 19 - Projected investment in infrastructure as percentage of GDP (Bottom-up estimates)

Base Year 11th Plan

Years (Rs bn at 2006-07 prices) 2006-07 2007-08 2008-09 2009-10 2010-11 2011-12 Total

GDP 41,458 45,189 49,256 53,689 58,521 63,788 270,445

Public Investment 1,754 1,921 2,273 2,735 3,324 4,112 14,366

Private Investment 499 782 943 1,157 1,468 1,847 6,196

Total investment 2,252 2,703 3,216 3,893 4,791 5,959 20,562

Infrastructure investment as percentage of GDP (%)

Public 4.2 4.3 4.6 5.1 5.7 6.5 5.3

Private 1.2 1.7 1.9 2.2 2.5 2.9 2.3

Total 5.4 6.0 6.5 7.3 8.2 9.3 7.6


We estimate infrastructure spending of

US$ 382bn by FY12 vs. US$ 503bn

planned


8

Opportunities across segments

Infrastructure development in India is expected to garner a total investment of Rs 20,562bn over the 11th plan. We expect roads, power, irrigation and railways to absorb 91.2% of the planned investment and represent 92.8% of the construction opportunity generated by this plan.

Fig 20 - Construction opportunities and key beneficiaries

Value of const. opportunity Particulars (Rs bn) 11th

plan Construction intensity (%) 11th plan 10th plan

Growth over 10th plan (%)

Key beneficiaries

Electricity (incl. NCE) 6,665 31 2,066 905 128.3 L&T, HCC, Patel Engg, NCC

Roads and Bridges 3,142 95 2,984 1,449 106.0 IRB Infra, IVRCL, JP Associates, L&T

Railways (incl. MRTS) 2,618 42 1,100 503 118.6 L&T, Simplex Infra

Irrigation (incl. Watershed) 2,533 65 1,647 669 146.1

Water Supply and Sanitation 1,437 60 862 388 122.3

IVRCL, NCC, Patel Engg, HCC

Total 16,395 8,659 3,914 121.2

Source: Crisil, RHH

Fig 21 - Key opportunities

Sector Key opportunities

Power NTPC to award bulk tenders for super-critical equipment (660MWx11) in the near future

Roads NHAI to invite tenders / award projects worth Rs 600bn–700bn over the next one year

Railways Dedicated Rail Freight Corridor (DRFC) the biggest opportunity in rail; also railway station privatisation, metro rail, signalling, technical upgrades

Irrigation Increased government spending in Andhra Pradesh, Gujarat, Maharashtra, Karnataka, Uttar Pradesh and Madhya Pradesh

Urban infra Higher budgetary allocation for JNNURM and Bharat Nirman programmes

Source: RHH

Fig 22 - Higher budgetary allocations to various infrastructure schemes

Budget allocations (Rs bn) Particulars

FY08 FY09 FY10

Bharat Nirman 246 312 452

JNNURM (Jawaharlal Nehru National Urban Renewal Mission) 55 69 129

NREGS (National Rural Employment Guarantee Scheme ) 120 160 391

NRHM (National Rural Health Mission) 99 121 139

NHDP (National Highway Development Programme) 109 129 159

RGGVY (Rajiv Gandhi Grameen Vidyutikaran Yojana) 39 55 70

APDRP (Accelerated Power Development and Reform Programme) – 8 21

AIPB (Accelerated Irrigation Benefit Programme) 110 200 350

Source: RHH

Roads, power, irrigation and railways to

absorb 91% of planned investment


9

Fig 23 - Thrust areas under 11th Plan

Major thrust areas in 11th Five Year Plan

ELECTRICITY

Lion’s share of planned investment at Rs 6,665bn – 32.4% of 11th plan spend and ~2.3x 10th

plan amount

Private investment to make up ~28%

Targets – Power capacity addition of 78.7GW; we expect additions 60GW. Power minister Sushil Kumar Shinde pegs capacity addition at ~65GW

Demand-supply gap and government thrust to drive growth

Bulk tenders from NTPC a key trigger

ROADS AND BRIDGES

Investment of Rs 3,142bn – 15.3% of 11th plan spend and ~2.2x 10th plan amount

Centre and states to contribute ~66% and private players 34% (vs 5% private sector share in 10th plan)

2009–10 allocation to National Highway Authority of India (NHAI) increased 23% to Rs 159bn

Targets – Addition of 6-lane stretches covering 6,500km in the GQ; 4-laning of the NS–EW corridor across 6,736km; 4-laning of 20,000km; 2-laning of 20,000km; building expressways covering 1,000km

IRRIGATION Investment of Rs 2,533bn – 12.7% of 11th plan spend and 2.3x 10th plan amount

2009–10 allocation for Accelerated Irrigation Benefit Programme (AIBP) hiked 75% from Rs 200bn to Rs 350bn

Allocation for JNNURM upped 90% to Rs 129bn

Government spending to continue in this segment mainly in Andhra Pradesh, Gujarat, Maharashtra, Karnataka, Uttar Pradesh and Madhya Pradesh

Targets – Develop 16mha major and minor works; 10.25mha command area development (CAD); 2.18mha flood control

RAILWAYS


Private investment at ~20% as against nil in 10th plan

2009–10 budgetary allocation to sector increased by 46% to Rs 158bn

Targets – Construction of Dedicated Rail Freight Corridor – the biggest opportunity in the sector

Also, railway station privatisation, metro rail creation, signalling, technical upgrades

Major thrust areas in 11th Five Year Plan

ELECTRICITY

Lion’s share of planned investment at Rs 6,665bn – 32.4% of 11th plan spend and ~2.3x 10th

plan amount

Private investment to make up ~28%

Targets – Power capacity addition of 78.7GW; we expect additions 60GW. Power minister Sushil Kumar Shinde pegs capacity addition at ~65GW

Demand-supply gap and government thrust to drive growth

Bulk tenders from NTPC a key trigger

ROADS AND BRIDGES


Centre and states to contribute ~66% and private players 34% (vs 5% private sector share in 10th plan)

2009–10 allocation to National Highway Authority of India (NHAI) increased 23% to Rs 159bn

Targets – Addition of 6-lane stretches covering 6,500km in the GQ; 4-laning of the NS–EW corridor across 6,736km; 4-laning of 20,000km; 2-laning of 20,000km; building expressways covering 1,000km

IRRIGATION Investment of Rs 2,533bn – 12.7% of 11th plan spend and 2.3x 10th plan amount

2009–10 allocation for Accelerated Irrigation Benefit Programme (AIBP) hiked 75% from Rs 200bn to Rs 350bn

Allocation for JNNURM upped 90% to Rs 129bn

Government spending to continue in this segment mainly in Andhra Pradesh, Gujarat, Maharashtra, Karnataka, Uttar Pradesh and Madhya Pradesh

Targets – Develop 16mha major and minor works; 10.25mha command area development (CAD); 2.18mha flood control

RAILWAYS


Private investment at ~20% as against nil in 10th plan

2009–10 budgetary allocation to sector increased by 46% to Rs 158bn

Targets – Construction of Dedicated Rail Freight Corridor – the biggest opportunity in the sector

Also, railway station privatisation, metro rail creation, signalling, technical upgrades

Source: RHH


10

Funding a key challenge

Infrastructure investments are closely linked to the ability to raise debt to finance projects. The 11th plan investment of Rs 20,562bn is to be shared between the Centre, states and private sector in the proportion of 37.2%, 32.6% and 30.1%. Projects to be awarded on PPP basis would have a debt/equity ratio of 70:30 as against earlier levels of 85:15. The required debt financing has accordingly been estimated at Rs 9,880bn. The Planning Commission estimates the gap between the availability of debt resources and the debt requirement at Rs 1,625bn. This is sought to be bridged through enhanced credit, external commercial borrowings (ECB), pension and insurance funds, and other debt funds.

Fig 24 - Likely sources of debt financing for the 11th Plan (Rs bn at 2006-07 prices) 2007-08 2008-09 2009-10 2010-11 2011-12 Total 11th Plan

Domestic bank credit 498 632 801 1,016 1,289 4,237

Non-Banking Finance Companies (NBFCs) 239 315 416 549 724 2,242

Pension/Insurance companies 91 100 110 121 133 554

External Commercial Borrowings (ECB) 196 218 242 269 299 1,223

Likely Total Debt Resources 1,024 1,264 1,569 1,954 2,444 8,255

Estimated Debt Requirement 1,317 1,557 1,873 2,296 2,837 9,880

– In US$ bn 32.9 38.9 46.8 57.4 70.9 247.0

Gap b/w estimated debt requirement & likely debt resources 293 293 305 341 393 1,625

– In US$ bn 7.3 7.3 7.6 8.5 9.8 40.6


Fig 25 - Deployment of gross bank credit (GBC)

Industry (Rs bn) 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009

Total GBC 1,610 1,790 2,001 2,188 2,295 2,956 3,131 4,231 5,504 6,973 8,719 10,398

Construction 26 26 27 32 40 49 60 83 133 200 283 382

Infrastructure 32 59 72 113 148 263 372 790 1,129 1,430 2,023 2,569

i) Power 7 21 33 52 74 150 197 382 602 728 939 NA

ii) Telecom 20 23 20 36 40 58 84 157 185 194 371 NA

iii) Roads and ports 4 16 20 25 35 55 92 145 197 249 330 NA

Total Infrastructure 58 85 100 145 188 312 432 873 1,262 1,629 2,306 2,951

% of GBC 3.6 4.8 5.0 6.6 8.2 10.6 13.8 20.6 22.9 23.4 26.4 28.4

Source: RBI

Fig 26 - Total infrastructure outstanding as a % of gross bank credit

3.6 4.8 5.06.6

8.210.6

13.8

20.622.9 23.4

26.428.4

0

5

10

15

20

25

30

FY98 FY99 FY00 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09

(%)

Source: RBI

Debt financing totals Rs 9,880bn in 11th

plan; 16% shortfall in corresponding

resources


11

Fig 27 - Projected investment in infrastructure: Source-wise financing (Rs bn at 2006-07 prices) 2007-08 2008-09 2009-10 2010-11 2011-12 Total 11th Plan

Centre 1,126 1,283 1,485 1,721 2,040 7,656

Central Budget 294 335 388 450 533 2,000

Internal Generation (IEBR) 250 284 329 381 452 1,697

Borrowings (IEBR) 582 664 768 890 1,055 3,959

States 795 990 1,250 1,602 2,072 6,709

States Budgets 527 656 828 1,062 1,373 4,447

Internal Generation (IEBR) 80 100 126 162 210 679

Borrowings (IEBR) 188 234 295 378 489 1,584

Private 782 943 1,157 1,468 1,847 6,196

Internal Accruals/Equity 235 283 347 440 554 1,859

Borrowings 547 660 810 1,027 1,293 4,337

Total Projected Investment 2,703 3,216 3,893 4,791 5,959 20,562

Non-Debt 1,386 1,659 2,019 2,495 3,122 10,681

Debt 1,317 1,557 1,873 2,296 2,837 9,880


Liquidity drought in FY09

In FY09, the paucity of funds along with an increased cost of debt (up 300–400bps YoY) hit infrastructure projects hard, affecting project returns and viability. A sharp fall in the global equity markets along with a drop in appetite for Indian papers in the overseas market further exacerbated the funding issue. At the same time, domestic interest rates spiraled as high as 14–15%. At such high rates, infrastructure projects turned unviable and hence private sector participation fell dramatically. Even as policy rates were eased thereafter to sustain growth, the risk perception amongst banks was heightened. Hence, the development of new projects has been subdued.

However, the government stimulus packages announced early this year coupled with RBI monetary measures has alleviated liquidity concerns to a great extent. On the flip side, a ballooning fiscal deficit (6.8% of GDP in FY10) will limit the government’s ability to spend on infrastructure projects in the short term, though disinvestment would help bridge the funding gap.

IIFCL refinance scheme a key positive At present, public sector banks are the main providers of finance to infrastructure projects. Typically, infrastructure loans are for 10 years and above. However, 81% of bank deposits fall in the sub-5-year category. This implies an asset-liability mismatch for banks as they run the risk of financing long-term assets with short-term liabilities.

To mitigate the situation, a scheme of refinance by India Infrastructure Finance Company (IIFCL) has been evolved. Under the scheme, refinance would be provided to banks for new commercially viable projects in the roads and port sector where bids have been submitted on or after 31 January 2009. IIFCL will provide refinance up to 60% of the loans provided by banks to these infrastructure projects at an interest rate of 7.85%. Banks will not charge more than 2.5% over and above the rate of refinance.

IIFCL has already raised Rs 100bn till 31 March 2009 by way of tax-free bonds to provide this facility to banks, thereby supplementing resources to finance infrastructure projects. Further, with bank lending rates easing, the interest of private sector players in bidding for new projects has begun to revive.

Paucity of funds in FY09 dented project

returns and viability

IIFCL refinance facility opens up a fresh

avenue for infra project funding


12

Stimulus/budgetary measures eased access to funds Apart from a two-part stimulus package, the newly formed government has announced the following measures to boost the infrastructure sector in the recent budget:

IIFCL has been authorised to raise Rs 400bn in two tranches, thereby supporting projects worth Rs 1,000bn.

Approvals accorded for several projects from August ’08 to January ’09, as follows:

o 37 infrastructure projects worth Rs 700bn

o 54 central infrastructure projects with a cost of Rs 677bn under PPP

o 29 projects amounting to Rs 279bn for viability gap funding (VGF).

NBFCs, which are expected to provide 27% of the total debt financing in the 11th plan, have been permitted to access ECBs from multilateral or bilateral institutions under the approval route of the RBI. The government also plans to launch an SPV aimed at providing liquidity support against investment-grade paper to NBFCs fulfilling certain conditions.

Monetary measures injected liquidity into the banking system Since October ’08, RBI has reduced the cash reserve ratio (CRR) for banks by 400bps to 5% and statutory liquidity ratio (SLR) by 100bps to 24%, thereby injecting liquidity of more than Rs 1,500bn into the system. It also reduced repo rates by 425bps to 4.75%. These aggressive measures led to a significant improvement in the liquidity situation with wholesale rates declining sharply in the last nine months.

World Bank lending plan of ~US$ 14bn In December ’08, the World Bank introduced a lending plan of ~US$ 14bn over three years for India. Of this, US$ 3bn will focus on areas most affected by the global financial crisis, including state-owned and housing banks, small and medium-sized enterprises and infrastructure.

Of the proposed funds, US$ 330mn has been disbursed in August ’09 while four projects worth US$ 4.3bn were recently approved. These projects are designed to support the government’s infrastructure agenda and bolster its economic stimulus programme. The loans (to the banking sector and PowerGrid) from the International Bank for Reconstruction and Development (IBRD) have a 30-year maturity, including a 5-year grace period. The IBRD loan to IIFCL (US$ 1.2bn) has a 28-year maturity including a 7.5-year grace period.

Fig 28 - Summary of the proposed disbursement of US$ 4.3bn

Loan to Amount (US$ bn)

Scope / Purpose

Banking Sector Support Loan

2 To provide budgetary support to the government of India, helping it maintain its broad economic stimulus programme by enhancing the capital of select public sector banks. Will help maintain credit growth levels, support social banking and employment growth, and strengthen economic recovery.

India Infrastructure Finance Company (IIFCL)

1.2 To support its role to catalyse private financing for PPPs in infrastructure – mainly roads, powers, ports & airports – and stimulate the development of a long-term local currency debt financing market.

Power Grid (Power System Development Project)

1

To help address India’s acute deficit of power. The loan will help PowerGrid to strengthen five transmission systems in the northern, western and southern regions of the country. This will facilitate the transfer of power from energy surplus regions to towns and villages in the country’s under-served regions. It will enable PowerGrid to strengthen the existing transmission system and expand the National Grid.

Andhra Pradesh Rural Water Supply and Sanitation Project

0.15 To improve water supply and sanitation services in 2,600 villages across six districts of the state. Aims to provide piped water to 2.1mn people and extend sanitation services to 1mn people.

Total 4.3

Source: World Bank press release

IIFCL authorised to raise Rs 400bn, thus

supporting projects worth Rs 1,000bn

World Bank providing US$ 4.3bn to

support India’s economic stimulus,

infrastructure investments


13

PPP – the way forward

The government plans to raise total investment in infrastructure from an estimated 5.4% of GDP in 2006–07 to over 9% by the 2014. An increase of this magnitude cannot be achieved through public investment alone. The 11th plan therefore proposes a strategy which involves a combined response – an increase in public sector investment in infrastructure as a percentage of GDP along with higher private sector investment through some form of PPP or directly, where feasible.

One-third of planned investment to come from private sector Of the 11th plan investment of Rs 20,562bn, ~30% is expected from private participation as against 20% in the 10th plan. The role of private players is much more prominent in central sector projects. As mentioned, in FY09, the severe liquidity crisis hampered the ability of private players to generate funds required for investments. The power and road segments in particular witnessed a sharp slowdown as a mix of macro and sector-specific constraints induced a sharp deceleration in private participation for new project tenders. Now, however, we expect the process of project awards to be expedited given the following:

A marked improvement in the Indian economy along with reviving global cues

Incentives introduced for the PPP model

A softer interest rate regime leading to easier access to liquidity and a lower cost of debt (a key concern since projects are funded by debt to the extent of 75–80%)

Policy measures initiated to unplug the bottlenecks to project execution (mainly in the roads segment), which have been a principle cause of delays in project awards

Measures to unlock liquidity introduced in the two stimulus packages

Softening of commodity prices.

Private sector share at ~30% of planned

investments


14

Opportunities abound for EPC players

Opportunities in the construction space are estimated at 25–95% of infrastructure spending in each segment. With a total planned outlay of ~US$ 500bn charted out in the 11th plan, investments in construction are set to double over the next five years. The construction business opportunity up to FY12 is estimated at Rs 9,484bn with roads, power, railways and irrigation being the primary growth drivers.

Fig 29 - Construction intensity during 10th and 11th Plans

Particulars (Rs bn) 11th Plan Construction intensity (%)

Value of construction opportunity in 11th Plan

Value of construction opportunity in 10th Plan

Growth over 10th Plan (%)

Electricity (incl. NCE) 6,665 31 2,066.2 905 128.3

Roads and Bridges 3,142 95 2,984.5 1,449 116.8

Railways (incl. MRTS) 2,618 42 1,099.6 503 118.6

Irrigation (incl. Watershed) 2,533 65 1,646.5 669 146.1

Water Supply and Sanitation 1,437 60 862.4 388 122.3

Ports 880 50 440.0 70 528.5

Airports 310 42 130.1 28 364.5

Storage 224 25 55.9 12 366.2

Gas 169 25 42.1 25 68.6

Total excluding Telecom 17,977 9,484 4,049 134.2

Source: Plan document, Planning Commission, Crisil Research, RHH

Fig 30 - Year-wise construction intensity during 11th Plan

Sectors (Rs bn) Const

intensity (%)

2007-08

Const intensity

(%)

2008-09

Const intensity

(%)

2009-10

Const intensity

(%)

2010-11

Const intensity

(%)

2011-12

Const intensity

(%)

Total 11th Plan

Value ofconstr

opportunity

Electricity (incl. NCE)

31 820 254 1,016 315 1,264 392 1,580 490 1,986 616 6,665 2,066

Roads and bridges 95 518 492 548 520 592 562 684 650 800 760 3,142 2,984

Railways (incl. MRTS) 42 342 144 410 172 495 208 604 254 767 322 2,618 1,100

Irrigation (incl. WD)

65 275 179 359 233 472 307 623 405 804 523 2,533 1,646

Water Supply and Sanitation

60 193 116 228 137 273 164 333 200 411 246 1,437 862

Ports 50 124 62 148 74 174 87 200 100 234 117 880 440

Airports 42 52 22 55 23 59 25 66 28 77 32 310 130

Storage 25 38 9 41 10 44 11 48 12 52 13 224 56

Gas 25 27 7 30 8 33 8 37 9 41 10 169 42

Total Investment (Rs bn)

2,389 1,285 2,834 1,493 3,407 1,764 4,175 2,146 5,172 2,639 17,977 9,327

Source: Plan document, Planning Commission, Crisil Research, RHH

Construction contractors, equipment suppliers, lenders, consultants as well as owners of infrastructure assets would benefit from the large opportunity. With increasing project size and complexity, established and large construction contractors would continue to draw market share away from smaller contractors. We expect the government’s spending to hasten capacity expansion by contractors and developers.

Corporate capex – improving trend Construction companies have derived strong order book growth from exposure to corporate capex in the oil & gas, steel and cement industries over the past 2–3 years. However, investments across the board have taken a backseat after the economic downturn and rise in commodity prices. While projects which are under implementation or have achieved financial closure are at low risk, nascent works are likely to witness delays.

Construction opportunity up to FY12

estimated at Rs 9,484bn

Upturn in industrial activity to buoy

corporate capex


15

We expect continued capex in the hydrocarbon space and fertilisers (mainly due to availability of natural gas) in the near term. Also, corporate capex trends in the steel, and cement sectors suggest an improvement as demand picks up. July IIP data clearly reflects the upturn in industrial activity in India. We expect the recovery to accelerate on account of a favorable base effect and renewed consumption demand.

Fig 31 - IIP (YoY change)

11.3

10.6

8.9

8.3

10.9

7.0

12.2

4.9

8.0

6.2

9.5

5.5 6.2

4.4 5.

4 6.4

1.7

6.0

0.1

2.5

1.0

0.2

0.3 1.

1 2.2

8.2

6.8

(0.3

)

(2)

0

2

4

6

8

10

12

14

Apr

-07

Jul-

07

Oct

-07

Jan-

08

Apr

-08

Jul-

08

Oct

-08

Jan-

09

Apr

-09

Jul-

09

(%)

Source: RHH

Fig 32 - IIP – Manufacturing (YoY change)

12.4

11.3

9.7

8.8

10.8

7.4

13.8

4.7

8.6

6.7

9.6

5.7 6.

74.

5 6.1 6.9

1.7

6.2

2.7

1.0

0.2

0.4 2.

17.

86.

8

(0.6

)

(0.6

)

(0.3

)

(2)02468

10121416

Apr

-07

Jul-

07

Oct

-07

Jan-

08

Apr

-08

Jul-

08

Oct

-08

Jan-

09

Apr

-09

Jul-

09

(%)

Source: RHH

Fig 33 - IIP – Electricity (YoY change)

8.7 9.

46.

8 7.5

9.2

4.5

4.2

5.8

3.8

3.7

9.8

3.7

1.4 2.0 2.6

4.5

0.8

4.4

4.4

2.6

1.6

1.8

0.7

6.3 7.

13.

38.

04.

2

0

2

4

6

8

10

12

Apr

-07

Jul-

07

Oct

-07

Jan-

08

Apr

-08

Jul-

08

Oct

-08

Jan-

09

Apr

-09

Jul-

09

(%)

Source: RHH

Fig 34 - IIP – Capital Goods (YoY change)

1122 23

1231

21 2124

183

1120

124

818

121

40

716

12 132

(6)

(3)

(6)

(10)(5)05

101520253035

Apr

-07

Jul-

07

Oct

-07

Jan-

08

Apr

-08

Jul-

08

Oct

-08

Jan-

09

Apr

-09

Jul-

09

(%)

Source: RHH

Sector order book robust, back-ended growth in FY10 The order book of the infrastructure sector remains robust, providing strong revenue growth visibility. Order inflows for Q1FY10 were muted mainly due to the election period. With a new stable alliance in power, government spending would be a key growth driver for the sector. We expect Rs 1,136bn worth of new orders for companies under RHH construction sector in FY10, which would build up towards the latter part of the year and thereafter witness sustained momentum.

Order flows of Rs 1,136bn expected for

the RHH construction sector in FY10


16

Fig 35 - RHH construction universe: Order book to sales analysis

(x) Q1FY08 Q2FY08 Q3FY08 Q4FY08 Q1FY09 Q2FY09 Q3FY10 Q4FY09 Q1FY10 OB / FY10E Sales

FY10E sales (Rs mn)

Ahluwalia Cont - - - - - - 1.9 2.1 2.2 1.9 14,444

HCC 3.0 2.9 2.5 2.7 2.6 2.7 3.0 4.4 4.1 3.3 41,091

IVRCL 3.2 3.3 3.3 3.5 3.2 3.2 3.1 3.0 1.4 2.3 63,465

L&T 2.2 2.2 2.2 2.1 2.1 2.1 2.2 2.1 2.1 1.8 401,887

NCC 2.6 3.0 3.2 3.3 3.3 3.1 2.9 2.9 3.2 2.9 47,326

Patel Engg 4.4 4.6 4.5 4.5 4.3 4.1 4.7 4.0 3.9 3.3 21,951

Punj Lloyd* 2.8 2.3 2.3 2.5 2.2 2.2 2.0 1.7 2.3 2.1 132,234

Simplex Infra 3.6 3.2 3.3 3.2 3.1 2.9 2.4 2.2 2.1 1.8 55,414

Total (Ex-Ahluwalia Cont) 2.5 2.4 2.4 2.5 2.4 2.3 2.3 2.3 2.2 2.1 777,811

Source: Company, RHH *Consolidated

Fig 36 - Order book position at the end of Q1FY10

28135 149

717

13974

279

100

0100200300400500600700800

Ahl

uwal

ia

HC

C

IVR

CL

L&T

NC

C

Pate

l

Punj

Sim

plex

(Rs bn)

Source: RHH

Fig 37 - Order book to sales trend

2.5

2.22.3

2.3

2.42.4 2.52.4

2.3

2.0

2.1

2.2

2.3

2.4

2.5

2.6

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1

FY08 FY09 FY10

(x)

Source: RHH

Fig 38 - Order intake trend

(Rs mn) FY05 FY06 FY07 FY08 FY09 FY10 FY11

Ahluwalia Cont

25,324 18,669 26,393

HCC 28,933 62,780 19,976 22,800 91,520 59,488 71,386

IVRCL 33,400 36,227 46,300 94,477 86,705 86,705 91,040

L&T 307,22

0 420,19

0 517,90

0 647,375 744,481

NCC 32,250 36,226 47,109 74,860 54,250 75,950 83,545

Patel Engg 18,064 20,247 14,994 19,000 30,000 34,500 39,675

Punj Lloyd* 44,791 102,10

7 105,34

9 116,13

7 158,567 181,743

Simplex Infra 17,990 20,940 25,550 66,940 57,680 54,796 60,276

Total 130,637

221,211

563,256

803,616

979,516

1,136,050

1,298,539

Source: Company, RHH * Consolidated

Roads, power, urban infrastructure and

irrigation to contribute to order books

in the near term


17

Fig 39 - Order intake growth*

42.7

18.7 17.113.9

0

10

20

30

40

50

FY08 FY09 FY10E FY11E

(%)

Source: RHH, Company * Ex Ahluwalia Contracts

Fig 40 - Sales growth of RHH construction universe

42.237.2

18.122.4

42.539.0

17.7 19.7

0

10

20

30

40

50

FY08 FY09 FY10E FY11E FY08 FY09 FY10E FY11E

TOTAL EX L&T

(%)

Source: RHH

Softer commodity prices to support stable EBITDA margin The increase in commodity prices at the beginning of FY09 had a significant adverse impact on margins for companies owing to a higher proportion of fixed price contracts. However, with prices cooling off we expect a 50bps improvement in margins for our construction universe in FY10 and a flattish trend thereafter. In our view, margins are at a peak and offer little scope for improvement.

Fig 41 - EBITDA margin trend (%) FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10E FY11E

Ahluwalia Contracts 9.4 10.4 12.1 11.8 12.5 12.4

HCC 17.5 13.7 10.5 9.2 9.2 11.9 13.0 12.5 12.5

IVRCL 9.8 8.1 8.3 9.0 10.1 9.9 8.6 9.3 9.3

L&T 7.6 5.6 6.1 7.2 10.1 11.8 11.3 11.3 11.3

NCC 8.4 7.8 7.8 9.0 9.4 10.4 9.0 9.5 9.5

Patel Engg. 13.7 10.9 10.7 13.9 13.0 15.3 14.5 14.6 14.7

Punj Lloyd 18.3 11.5 11.3 8.0 8.9 7.3 8.5 8.5

Simplex Infra 6.1 6.8 7.0 8.7 9.3 9.4 8.2 9.3 9.3

Average EBITDA margin 8.4 8.0 7.3 8.2 9.7 11.1 10.2 10.6 10.6


Fig 42 - Average EBITDA margin trend

8.28.4

10.610.610.2

11.1

9.7

7.3

8.0

6

7

8

9

10

11

12

FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10E FY11E

(%)

Source: RHH

Lower commodity prices to aid slight

margin improvement

EBITDA margins have peaked and

would sustain at current levels


18

Fig 43 - Cement prices remain firm…

120

140

160

180

200

220

240

260

Apr-04 Feb-05 Jan-06 Nov-06 Oct-07 Sep-08 Jul-09

All India Avg(Rs/Bag)

Source: RHH

Fig 44 - …but steel prices have corrected 35–40% in six months

20,000

30,000

40,000

50,000

60,000

70,000

Mar-04 Feb-05 Jan-06 Dec-06 Nov-07 Oct-08 Sep-09

Indian HRC price Landed HRC price (CIS)(Rs/tonne)

Source: Crisil

Fig 45 - Order book covered by escalation clauses and fixed price contracts

Company Fixed price contracts (%)

WPI Linked (%)

Star rated/Free issue of materials (%)

L&T ~25-30 ~75-70

Punj Lloyd* ~70-75 ~25-30

HCC 4 86 10

IVRCL 7 33 60

NCC 38 15 47

Patel Engg 5-10 ~90-95

Simplex Infra 15 85

Source: RHH *Consolidated

Interest expenses set to come down In FY09, construction companies witnessed spiralling interest costs mainly due to a heated interest rate environment and higher debt requirements (to support working capital needs and investments in subsidiaries). We expect interest cost to settle at manageable levels in FY10 on account of a more benign interest rate regime, lower investments in subsidiaries, resurgence of QIP funds and stable working capital requirements.

Drop in interest rates: Interest cost has declined by 200bps from the peak in October ’08. For most construction companies, this cost constitutes roughly 3–5% of turnover and hence movement in interest rates has a significant impact on earnings. The 10-year benchmark interest rate has declined from 9–9.5% in Q2FY09 to 7% at present. With increased aversion to riskier assets in Q3FY09, the spread on AA rated corporate bonds had increased to 4.5–5%. But an improving macro-economic climate and restoration of liquidity in the banking system helped lower the spread to 2.5%.

Interest cost down 200bps from its peak

in October ’08 – a key positive


19

Fig 46 - 10-year government bonds

5.05.56.06.57.07.58.08.59.09.5

10.0

Apr

-05

Jul-

05

Oct

-05

Jan-

06

Apr

-06

Jul-

06

Oct

-06

Jan-

07

Apr

-07

Jul-

07

Oct

-07

Jan-

08

Apr

-08

Jul-

08

Oct

-08

Jan-

09

Apr

-09

Jul-

09

Oct

-09

(%)

Source: Bloomberg

Fig 47 - Interest cost as a percentage of sales

Companies (%) FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10E FY11E

Ahluwalia Cont 1.0 1.0 1.3 1.3 1.7 1.7

HCC 6.4 3.8 2.8 2.4 3.5 5.1 6.8 5.8 5.2

IVRCL 3.7 2.8 2.7 2.4 2.4 3.2 4.1 3.5 3.5

L&T 2.4 1.0 0.6 0.9 0.5 0.5 1.0 1.0 0.9

NCC 2.5 1.8 1.2 1.7 2.2 3.2 3.9 3.6 3.2

Patel Engg 4.7 2.0 1.4 3.1 2.7 3.9 5.0 4.7 4.4

Punj Lloyd* 3.7 7.4 4.7 2.3 2.3 2.6 2.5 2.3

Simplex Infra 3.9 3.7 2.8 3.2 3.8 3.9 3.2 2.9 2.6

Total 2.8 1.7 1.7 1.6 1.5 1.8 2.3 2.1 1.9


Lower investments in subsidiaries or joint ventures: Most construction companies have diversified from pure EPC to BOT (build, operate, transfer) projects and real estate. Exposure to BOT projects weighs down the balance sheet and return ratios when such works are in the investment phase. From our coverage universe, Nagarjuna Construction (NCC) has the maximum exposure to BOT projects which will lead to pressure on its balance sheet in the near term.

Fig 48 - Investments in subsidiary companies and JVs

(Rs mn) FY08 FY09 FY10E FY11E

HCC 2,832 3,656 4,656 5,856

NCC 5,648 7,403 8,803 9,803

Patel Engg 1,103 2,558 3,557 4,557

IVRCL 3,409 3,893 4,095 4,295

Punj Lloyd* 5,458 6,609 6,609 6,609

L&T 26,396 33,841 44,041 54,041

Source: Company, RHH *Consolidated

QIPs back in action: Given the improved liquidity conditions, qualified institutional placements (QIP) have made a strong comeback. These issues are being used to replace high-cost debt and fund working capital requirements.

Lower capital infusion into subsidiaries

would help contain interest cost

QIPs being used to replace high-cost

debt and fund working capital


20

Fig 49 - Fund raising from capital markets

Particulars (Rs mn)

QIP raised

HCC 4,800

Punj Lloyd 6,800

NCC 3,670

GVK Power & Infra 7,169

Lanco Infratech 7,274

QIP to be raised

Era Infra 10,000

Unity Infra 2,500

Gammon India 10,000

IPO raised

Adani Power 29,400

NHPC 60,400

Pipavav Shipyard 5100

Source: RHH

Earnings CAGR of 25.9% over FY09-FY11 We expect an earnings CAGR of 25.9% from our construction universe over FY09-FY11. Higher earnings growth as against our moderate margin estimates would arise from improved execution based on a strong order backlog and softening interest rate scenario.

Fig 50 - Earnings growth

50.7

15.0

28.324.0

32.6

4.7

26.231.1

0

10

20

30

40

50

60

FY08 FY09 FY10E FY11E FY08 FY09 FY10E FY11E

TOTAL EX L&T & Punj LloydTOTAL

(%)

Source: RHH

Earnings to log CAGR of 25.9% over

FY09-FY11 (27.7% ex-L&T & Punj)


21

Key risks to our estimates

Near-term macro concerns We note that a ballooning fiscal deficit (6.8% of GDP in FY10) will limit the government’s ability to spend on infrastructure projects in the short term.

EPC players Slow growth in order inflows if economic revival takes longer than anticipated

Rising working capital levels

Challenges to raising capital

Infrastructure developers Hurdles related to land acquisition, shifting of utilities, right of way, environmental

and other clearances, and contractor capacity

Inability to achieve financial closure

Execution delays

Risk on IRRs on account of rise in interest rate and, in case of road projects, lower traffic growth

A slower-than-anticipated economic

revival would impede order flows


22

RHH infrastructure universe: Valuation matrix

Fig 51 - Infrastructure sector valuation matrix MCap Sales (Rs mn) Sales Growth (%) EBITDA (Rs mn) PAT (Rs mn) FDEPS (Rs) FDEPS Growth (%)

Company CMP (Rs)

Target (Rs)

Reco (Rs mn) FY09E FY10E FY11E FY09E FY10E FY11E FY09E FY10E FY11E FY09E FY10E FY11E FY09E FY10E FY11E FY09E FY10E FY11E

Ahluwalia Cont 169 190 Buy 10,604 12,087 14,444 19,673 37.3 19.5 36.2 1,429 1,808 2,439 572 796 1,102 9.1 12.7 17.6 10.8 39.2 38.4

HCC 130 141 Hold 39,468 33,137 41,091 49,309 7.5 24.0 20.0 4,314 5,154 6,163 760 1,074 1,443 2.8 3.5 4.5 5.0 25.2 29.4

IRB Infra* 209 224 Buy 69,464 8,834 18,693 32,940 20.6 111.6 76.2 3,289 8,564 11,610 1,197 3,432 4,504 3.6 10.3 13.6 (13.8) 186.7 31.2

IVRCL 388 434 Buy 51,804 48,819 63,465 76,157 33.4 30.0 20.0 4,218 5,873 7,099 1,880 2,564 3,044 13.9 19.0 22.6 0.6 36.4 18.7

JP Associates 239 237 Hold 335,651 57,750 91,167 105,623 44.9 57.9 15.9 16,200 24,804 27,482 8,891 13,746 15,840 7.1 9.4 10.8 45.4 31.6 15.2

L&T 1665 1,781 Buy 978,520 339,264 401,887 502,079 35.7 18.5 24.9 38,342 45,490 56,559 27,097 32,610 40,373 46.4 55.9 69.2 24.1 20.4 23.8

NCC 153 166 Hold 39,206 41,514 47,326 56,791 19.5 14.0 20.0 3,733 4,492 5,391 1,538 1,942 2,412 6.7 7.9 9.4 (10.1) 17.9 18.6

Patel Engg 484 532 Buy 28,860 17,774 21,951 27,220 34.2 23.5 24.0 2,576 3,205 4,001 1,053 1,271 1,612 17.6 21.3 27.0 (2.2) 20.8 26.8

Punj Lloyd* 262 306 Buy 86,927 119,120 132,234 154,470 53.6 11.0 16.8 8,710 11,240 13,130 2,348 4,972 6,044 7.5 15.1 17.8 (33.2) 99.8 18.2

Simplex Infra 510 577 Buy 25,248 46,961 55,414 66,496 67.2 18.0 20.0 3,873 5,153 6,184 1,242 1,585 2,038 25.1 32.0 41.2 23.9 27.7 28.6

Voltas* 145 160 Hold 47,929 43,259 51,289 59,372 35.1 18.6 15.8 2,831 3,642 4,510 2,254 2,677 3,304 6.8 8.1 10.0 28.0 18.8 23.4

Aggregate - - - 1,713,681 768,519 938,960 1,150,130 37 22 22 89,515 119,424 144,569 48,830 66,669 81,714


Fig 52 - Infrastructure sector profitability and return ratios EBITDA Margin (%) PAT Margin (%) ROE (%) ROCE (%) P/E (x) EV/EBITDA (x) P/BV (x)

Company FY09E FY10E FY11E FY09E FY10E FY11E FY09E FY10E FY11E FY09E FY10E FY11E FY09E FY10E FY11E FY09E FY10E FY11E FY09E FY10E FY11E

Ahluwalia Cont 11.8 12.5 12.4 4.7 5.5 5.6 37.9 37.2 36.2 31.4 30.8 29.4 18.5 13.3 9.6 7.0 5.5 4.1 6.0 4.2 3.0

HCC 13.0 12.5 12.5 2.3 2.6 2.9 7.6 8.4 9.0 7.0 7.3 7.6 47.0 37.5 29.0 14.2 11.9 9.9 3.9 2.5 2.4

IRB Infra* 37.2 45.8 35.2 13.5 18.4 13.7 7.1 18.1 19.7 5.9 11.6 11.9 58.0 20.2 15.4 27.4 10.5 7.8 4.0 3.4 2.8

IVRCL 8.6 9.3 9.3 3.9 4.0 4.0 11.0 13.8 15.0 12.0 11.8 12.3 27.9 20.4 17.2 15.4 11.0 9.1 2.9 2.7 2.4

JP Associates 28.1 27.2 26.0 15.4 15.1 15.0 17.2 21.5 20.5 9.0 11.2 11.2 33.5 25.5 22.1 25.4 16.6 15.0 5.8 4.8 4.0

L&T 11.3 11.3 11.3 8.0 8.1 8.0 24.6 23.8 24.6 18.5 17.2 18.2 35.9 29.8 24.1 27.0 22.8 18.3 7.9 6.6 5.5

NCC 9.0 9.5 9.5 3.7 4.1 4.2 9.4 10.0 10.6 9.8 9.9 9.7 22.7 19.3 16.2 13.5 11.2 9.3 2.3 1.8 1.7

Patel Engg 14.5 14.6 14.7 5.9 5.8 5.9 11.5 12.3 13.8 10.3 9.2 9.8 27.4 22.7 17.9 14.6 11.7 9.4 2.9 2.6 2.3

Punj Lloyd* 7.3 8.5 8.5 2.0 3.8 3.9 9.0 16.4 15.8 10.8 11.6 12.2 34.7 17.4 14.7 13.1 10.2 8.7 3.5 2.4 2.1

Simplex Infra 8.2 9.3 9.3 2.6 2.9 3.1 14.9 16.3 18.0 13.9 12.0 8.5 20.3 15.9 12.4 9.4 7.0 5.9 2.8 2.4 2.1

Voltas 6.5 7.1 7.6 5.2 5.2 5.6 32.9 29.9 29.2 28.6 26.3 26.9 21.3 17.9 14.5 16.0 12.4 10.0 6.1 4.8 3.8

Aggregate 11.6 12.7 12.6 6.4 7.1 7.1 35.1 25.7 21.0 21.9 16.4 13.5 5.8 4.7 4.0

Source: RHH, Company


23

Fig 53 - Infrastructure sector valuation matrix (excluding subsidiaries) MCap (Ex

Sub) Sales (Rs mn) Sales Growth (%) EBITDA (Rs mn) PAT (Rs mn) FDEPS (Rs) FDEPS Growth (%)

Company

CMP (Ex-sub) (Rs)

Sub. Val (Rs) Target

(Rs) Reco

(Rs mn) FY09E FY10E FY11E FY09E FY10E FY11E FY09E FY10E FY11E FY09E FY10E FY11E FY09E FY10E FY11E FY09E FY10E FY11E

Ahluwalia Cont

169 - 190 Buy 10604.2 12,087 14,444 19,673 37.3 19.5 36.2 1,429 1,808 2,439 572 796 1,102 9.1 12.7 17.6 10.8 39.2 38.4

HCC 52 78 141 Hold 15906.1 33,137 41,091 49,309 7.5 24.0 20.0 4,314 5,154 6,163 760 1,074 1,443 2.8 3.5 4.5 5.0 25.2 29.4

IRB Infra* 209 - 224 Buy 69464.1 8,834 18,693 32,940 20.6 111.6 76.2 3,289 8,564 11,610 1,197 3,432 4,504 3.6 10.3 13.6 (13.8) 186.7 31.2

IVRCL 315 73 434 Buy 42029.5 48,819 63,465 76,157 33.4 30.0 20.0 4,218 5,873 7,099 1,880 2,564 3,044 13.9 19.0 22.6 0.6 36.4 18.7 JP Associates

163 76 237 Hold 229095.1 57,750 91,167 105,623 44.9 57.9 15.9 16,200 24,804 27,482 8,891 13,746 15,840 7.1 9.4 10.8 45.4 31.6 15.2

L&T 1475 190 1,781 Buy 866722.5 339,264 401,887 502,079 35.7 18.5 24.9 38,342 45,490 56,559 27,097 32,610 40,373 46.4 55.9 69.2 24.1 20.4 23.8

NCC 119 34 166 Hold 30461.9 41,514 47,326 56,791 19.5 14.0 20.0 3,733 4,492 5,391 1,538 1,942 2,412 6.7 7.9 9.4 (10.1) 17.9 18.6

Patel Engg 330 154 532 Buy 19694.7 17,774 21,951 27,220 34.2 23.5 24.0 2,576 3,205 4,001 1,053 1,271 1,612 17.6 21.3 27.0 (2.2) 20.8 26.8

Punj Lloyd* 241 21 306 Buy 80027.2 119,120 132,234 154,470 53.6 11.0 16.8 8,710 11,240 13,130 2,348 4,972 6,044 7.5 15.1 17.8 (33.2) 99.8 18.2 Simplex Infra 510 - 577 Buy 25248.0 46,961 55,414 66,496 67.2 18.0 20.0 3,873 5,153 6,184 1,242 1,585 2,038 25.1 32.0 41.2 23.9 27.7 28.6

Voltas 145 - 160 Hold 47928.7 43,259 51,289 59,372 35.1 18.6 15.8 2,831 3,642 4,510 2,254 2,677 3,304 6.8 8.1 10.0 28.0 18.8 23.4

Aggregate - - - 1,437,182 768,519 938,960 1,150,130 37 22 22 89,515 119,424 144,569 48,830 66,669 81,714


Fig 54 - Infrastructure sector profitability and return ratios (excluding subsidiaries) EBITDA Margin (%) PAT Margin (%) ROE (%) ROCE (%) P/E (x) EV/EBITDA (x) P/BV (x)

Company FY09E FY10E FY11E FY09E FY10E FY11E FY09E FY10E FY11E FY09E FY10E FY11E FY09E FY10E FY11E FY09E FY10E FY11E FY09E FY10E FY11E

Ahluwalia Cont 11.8 12.5 12.4 4.7 5.5 5.6 37.9 37.2 36.2 31.4 30.8 29.4 18.5 13.3 9.6 7.0 5.5 4.1 6.0 4.2 3.0

HCC 13.0 12.5 12.5 2.3 2.6 2.9 7.6 8.4 9.0 7.0 7.3 7.6 18.9 15.1 11.7 8.7 7.3 6.1 1.6 1.0 1.0

IRB Infra* 37.2 45.8 35.2 13.5 18.4 13.7 7.1 18.1 19.7 5.9 11.6 11.9 58.0 20.2 15.4 27.4 10.5 7.8 4.0 3.4 2.8

IVRCL 8.6 9.3 9.3 3.9 4.0 4.0 11.0 13.8 15.0 12.0 11.8 12.3 22.6 16.6 14.0 13.0 9.4 7.7 2.3 2.2 1.9

JP Associates 28.1 27.2 26.0 15.4 15.1 15.0 17.2 21.5 20.5 9.0 11.2 11.2 22.9 17.4 15.1 18.8 12.3 11.1 4.0 3.3 2.7

L&T 11.3 11.3 11.3 8.0 8.1 8.0 24.6 23.8 24.6 18.5 17.2 18.2 31.8 26.4 21.3 24.1 20.3 16.3 7.0 5.8 4.8

NCC 9.0 9.5 9.5 3.7 4.1 4.2 9.4 10.0 10.6 9.8 9.9 9.7 17.7 15.0 12.6 11.1 9.2 7.7 1.8 1.4 1.3

Patel Engg 14.5 14.6 14.7 5.9 5.8 5.9 11.5 12.3 13.8 10.3 9.2 9.8 18.7 15.5 12.2 11.0 8.8 7.1 2.0 1.8 1.6

Punj Lloyd* 7.3 8.5 8.5 2.0 3.8 3.9 9.0 16.4 15.8 10.8 11.6 12.2 32.0 16.0 13.5 12.3 9.6 8.2 3.2 2.2 2.0

Simplex Infra 8.2 9.3 9.3 2.6 2.9 3.1 14.9 16.3 18.0 13.9 12.0 8.5 20.3 15.9 12.4 9.4 7.0 5.9 2.8 2.4 2.1

Voltas* 6.5 7.1 7.6 5.2 5.2 5.6 32.9 29.9 29.2 28.6 26.3 26.9 21.3 17.9 14.5 16.0 12.4 10.0 6.1 4.8 3.8

Aggregate 11.6 12.7 12.6 6.4 7.1 7.1 29.4 21.6 17.6 18.8 14.1 11.6 4.8 3.9 3.3

Source: RHH, Company *Consolidated


24

Sector-wise investment allocation

Infrastructure development is expected to garner a total investment of Rs 20,562bn over the 11th Plan, of which ~30% is likely to come from private participation. The sector-wise investment allocation is outlined below.

Roads & Bridges

As per the Economic Survey report 2008–09, out of the total length of national highways, ~30% are single-lane/intermediate-lane, 53% are two-lane and the remaining 17% are four-lanes or more. Though national highways comprise only ~2% of the total length of roads in India, they account for 40% of the aggregate traffic. As of 31 March 2009, work on 11,037km of national highways under the government-led National Highway Development Programme (NHDP) has been completed – a bulk of this comprises the Golden Quadrilateral (GQ) which connects the four metros.

Fig 55 - Status of NHDP phases as on 31 March 2009

Phase NHDP component (km) Total length Completed 4-lane Under implementation

Balance for award ofcivil works

I GQ Phase 5,846 5,721 125 -

I Port connectivity 380 206 168 6

I Other NHs 962 781 161 20

II NS-EW 7,142 3,436 2,915 791

III NHDP –III 12,109 787 1,878 9,444

V NHDP 6,500 106 928 5,470

VII NHDP 700 0 19 681

Total 33,639 11,037 6,194 16,412

Source: Economic Survey Report 2008-09

We recently held a conference call with Dr. Didar Singh, IAS, Member (Finance) – NHAI, to discuss the road sector in India. Outlined below are the key takeaways:

Project awards for 32,000km over next 3–4 years Started in 2001, the government’s NHDP aims to complete 53,000km of road development in India by 2017; of this, 20,000km is being implemented by the Ministry of Road Transport and Highways (MORTH). So far, work on ~11,000km has been completed, while ~7,000km is under implementation. The government aims to put the balance 32,000km of projects out for bidding over the next four years. The overall project cost has been revised from ~Rs 2,200bn estimated in the first financing plan in 2005 to ~Rs 3,300bn; of this, ~Rs 2,000bn worth of investment is expected from the private sector.

Bid placement for 80–100 projects targeted in FY10 The NHAI plans to invite bids for 80–100 projects in FY10 and a similar number of works in FY11. The authority has awarded 13 projects (~1,200km) worth Rs 143.5bn so far in FY10, and has received bids for a further 11 works; these are currently under examination and will be awarded shortly. At present, the Request for Qualification (RFQ) procedure for an additional 50 projects (~4,600km) worth Rs 205bn is underway.

Road contract awards under NHDP

picking up pace


25

Fig 56 - Projected investment in roads and bridges during the 11th Plan

Particulars (Rs bn at 2006-07 prices) 2007-08 2008-09 2009-10 2010-11 2011-12 Total 11th Plan

National Highways 233 247 271 325 383 1,459

NHDP Public 101 105 110 123 152 591

Other NH (Public) 12 13 14 15 16 69

NHDP Private 120 129 147 188 215 798

State Roads (Highways, major District Roads, Others)

215 224 238 270 322 1,270

Public 175 182 189 206 248 1,000

Private 40 43 49 64 74 270

Rural Roads: Bharat Nirman 63 69 73 78 83 366

North East Roads: SARDP 7 8 10 11 12 48

Total (Rs bn) 518 548 592 684 800 3,142

Total (US$ bn) 13.0 13.7 14.8 17.1 20.0 78.5

Source: Planning commission

Fig 57 - Comparative investment projections Roads (Rs bn)

10th Plan (anticipated)

11th Plan Log-linear projection

Working group estimates

Centre 715 1,074 NA NA

State 664 1,000 NA NA

Public 1,379 2,074 2,502 1,218

Private 70 1,068 63 877

Total 1,449 3,142 2,565 2,095

Source: Plan document, Planning Commissio, RHH

Road sector investment pegged at Rs 3,142bn – private share at 34% The investment in roads during the 11th Plan is projected at Rs 3,142bn, which is 2.2 times the targeted 10th Plan investment. Of this, ~66% will be contributed by the Centre and state governments, while 34% is expected from the private sector (as against 5% in the 10th Plan, depicting immense opportunities for private developers).

Approximately Rs 1,459bn (46.4%) would be invested in national highways, Rs 1,270bn (40.4%) in state roads, Rs 366bn (11.6%) in rural roads, and Rs 48bn (1.5%) in roads in the northeast states. For the year 2009–10, allocation to the National Highway Authority of India (NHAI) has been increased by 23% from Rs 129bn to Rs 159bn.

Fig 58 - Financial structure of NHAI

(Rs bn) Cess funds

External assistance Loans Borrowings Budgetary

support Toll

collection Total

1999-00 10 4 - - - - 14

2000-01 18 5 1 6 - - 30

2001-02 21 8 1 8 - - 38

2002-03 20 12 3 56 - 3 94

2003-04 20 12 3 - - 4 38

2004-05 18 12 4 13 - 5 52

2005-06 33 24 6 15 14 8 100

2006-07 64 16 4 15 1 11 111

2007-08 65 18 4 20 2 14 123

2008-09 70 15 4 11 2 18* 119

Total 339 126 29 144 19 62 719

Source: Crisil Research *Crisil Estimates

Planned investment of Rs 3,142bn in

roads


26

FY09 – a slump year The NHAI had planned to allot 60 projects worth Rs 700bn, largely belonging to NHDP phase-III, in FY09. It called bids for ~50 projects, but received a positive response for only 22 works valued at ~Rs 220bn. Of these 22 projects, 7 contracts worth Rs 80bn have been awarded so far. The remaining 15 projects has been referred back to the government for approval since 7 of them are single-company bids, 4 are annuity bids as against the toll bid stipulation, and 4 pertain to phase V of the NHDP where the VGF is higher than 10%.

The balance 38 projects failed to attract any bids since developers perceived the investment as being incommensurate with the expected returns. The NHAI has thus failed to award even a single contract to private players in FY09 for widening of highway stretches on Phase V of the Golden Quadrilateral project. In Q1FY10, the pace of project awards slowed due to the pre-poll embargo, but post the election outcome, the process of project bidding and awards has begun in full earnest.

Slowdown in tenders due to multiple reasons Since January ’08, the pace of contract tenders under the government’s NHDP has slowed considerably. The key reasons behind the delays are as follows:

Meltdown in the financial market and the credit crisis.

High interest costs (increased to ~15% in the third quarter of FY09); projects are funded with debt to the extent of 70–75%.

Disputes relating to finalisation of the new MCA and issues with RFP and RFQ procedures.

Overly high risk perception leading to higher VGF demands by private players.

Delays in terms of land acquisition and environmental clearances. Project cost has increased by 40% from Rs 900bn to Rs 1,300bn due to delays for some projects.

Poor project preparation (including inaccurate assessment of demand), leading to frequent scope for changes.

Absence of a long-term bond market, which hinders financing. Currently 97% of the bond market is through G-secs.

Policy measures to revitalise developer interest In a bid to encourage developer interest in road projects, the NHAI and the government have recently introduced a host of facilitating measures as follows:

The NHAI has decided to restructure future projects (including the 38 remaining works) by reducing ‘capital cost’ and by eliminating ‘over-engineering cost’ in order to make them viable, and then offering the same under the BOT toll model. According to media reports, it has also proposed to reduce the design period from 20 years to 10 or 15 years. Also, some projects will be awarded under the annuity mode if the BOT toll mode fails to generate interest.

Cost escalation of 20% will now be permitted for projects with DPRs (detailed project report) prepared before 2007 and 10% for those based on 2007 prices.

VGF has been raised to 40% of the project cost during the construction period as against the earlier distribution of 20% during the construction period and 20% post the commercial operation date (COD).

The clause limiting the number of bidders to 6 has been deleted for all future NHAI projects. Hence, all future projects except the above 60 would be under the open bidding system.

Slump in FY09 with bids received for

only 22 of 60 projects; of these just 7

awarded

Financial crisis and heavy interest costs

led to waning interest among private

sector developers

NHAI to restructure future road

projects to make them viable


27

Under the government stimulus package, IIFCL has been authorised to raise Rs 400bn (Rs 100bn by FY09 and Rs 300bn in FY10) to finance infrastructure projects. It has successfully raised Rs 100bn through the issue of bonds which will be used to finance projects at an interest of ~10.35%. This will substantially reduce borrowing costs.

The NHAI has launched tax-free bonds on 11 May 2009 to raise up to Rs 40bn in the current fiscal to fund its road projects.

The government has implemented a new toll policy in December ’08 for future projects. It stipulates that the upward revision of annual toll rates would be 3% in addition to 40% of the change in the wholesale price index (WPI). As per the old policy (1997), the revision of toll rates was fixed at 100% of the change in WPI, and as per MCA-2006, applicable in 2008, the percentage was 40%. This policy change will generate greater interest from developers for future projects as it will increase the equity IRR.

The NHAI has recently amended the land acquisition norms for road projects – a key contributor to execution delays in the past. As per the new guidelines, the authority will now issue letters of award to highway developers only after acquiring 80% of the land required for the project (50% previously). The balance 20% would be handed over within 90 days of the project award. If the stipulated timeline is not adhered to, the NHAI will pay damages to the concessionaire.

Government sets aggressive development targets… Road transport and highways minister, Kamal Nath, has stated that the government aims to build at least 20km of highways per day and is also mulling the set up of an Indian Road Finance Corp to mobilise funds for the highways sector. In order to generate easier access to liquidity, Mr Kamal Nath has hosted road-shows to attract the interest of financial institutions. These measures together with the softening interest rate regime should induce a more positive response towards projects that will be placed for bids in the near term.

The government has approved 1,000km of expressways to be developed on BOT basis, at an indicative cost of Rs 166.8bn, scheduled to complete by December ’15. These expressways would be constructed on new alignments. A feasibility study for the Vadodara-Mumbai (400km) expressway has already been awarded and the process of alignment study and award of feasibility studies for another 600km of expressways (Kolkata-Dhanbad, Bangalore-Chennai and Delhi-Meerut) has also been initiated. Recently, Mr Kamal Nath said that the Ministry is examining the possibility of setting up an expressway authority on the lines of the NHAI.

…with steps to bolster liquidity The government’s first stimulus package in December ’08 authorised IIFCL to raise Rs 100bn through tax-free bonds to refinance projects bid on or after 31 January 2009 in the road and port sectors. But IIFCL has been unable to disburse most of the funds as projects take a long time to bid out. For instance, although bids have been invited for nearly 40 highway projects post January ’09, none of these have been awarded so far. The finance ministry is thus considering a proposal to remove the cut-off date criteria, which may bring in the refinance option for projects bid in 2008 as well. IIFCL has disbursed Rs 32bn till March ’09 and has plans to disburse Rs 60bn in this fiscal (excluding disbursement under the refinance scheme).

Road development in terms of kilometres added per day

0.41.0

2.0

4.9 4.6 4.3

0

1

2

3

4

5

6

196

2

199

7

199

2

200

7

200

8

200

9

(Km)


Refinance option may be extended for

projects bid in 2008 as well


28

The 2009–10 Budget authorises IIFCL to participate in take-out financing and to refinance 60% of bank loans given to projects developed via PPP. Under take-out financing, an institution buys out long-term project loans after a few years of disbursal of such loans. Under the existing refinance scheme, IIFCL can refinance up to 60% of loans provided by banks to infrastructure projects in the roads and port sectors at 7.85%. Banks can then charge a spread of up to 250bps above this, i.e., the bank’s lending rate to the developer will not exceed 10.35%. The refinance tenor is 10 years with a reset after 5 years, though this can be extended to 15 years with government approval. The takeout financing scheme, which is also a form of refinance, will draw upon the structure of the existing scheme.

Significant project awards likely in H2FY10 At present, there are 38 projects worth Rs 423.3bn which will be up for bidding in FY10 (ref Fig 60). The tempo of project awards is set to gather speed in H2FY10 as developer interest revives on the back of an improving economic environment, stable governance, softening interest rates and commodity prices, and positive policy shifts as outlined earlier. We believe that IRB Infrastructure, L&T, IVRCL and Hindustan Construction Co would be among the key beneficiaries in the near future.

Fig 59 - PPP projects awarded during FY09 & FY10; bids under process for FY10

SN Name State Length

(km) TPC

(Rs bn) NHDP Phase

No. of bids

received Status

Name of Awardees / L1 bidder

1 Pimpalgaon-Nasik-Gonde Maharashtra 60 9.4 III 3 Awarded L&T-ABL consortium

2 MP/Maharashtraborder-Dhule Maharashtra 97 8.4 III 4 Awarded HCC-John Laing-Sadbhav consortium

3 Pune-Sholapur (pkg-1) Maharashtra 110 11.1 III 2 Awarded Navinya-Buildcon-Atlantia Spa consortium

4 Gujarat/ MH Border-Surat-Hazira Gujarat 133 15.1 III 2 Awarded Isolusx-SOMA consortium

5 Cuddapah-Mydukur-Kumool AP 188 15.9 III 2 Awarded KMC-IVRCL consortium

6 Vadakkancherry-Thrissur Kerala 30 6.2 II 2 Awarded KMC-CR18 consortium

7 Elevated Road from Chennai Port to Muduravoyal

Tamil Nadu 19 13.5 VII 2 Awarded SOMA Enterprises

8 Kishangarh-Beawar Rajasthan 94 8.0 III 4 Awarded Isolusx-SOMA consortium

9 Hyderabad-Vijaywada AP 181 17.4 III 5 Awarded GMR-Punj Lloyd consortium

10 Armur-Adloor Yellareddy AP 60 4.9 II 2 Awarded Navyuga-KPCL consortium

11 Hazaribagh-Ranchi* Jharkhand 71 6.3 III 2 Bids under process

12 Kannur-Kuttipuram -Pkg 1 Kerala 83 13.7 III 2 Bids under process

13 Kannur-Kuttipuram -Pkg 2 Kerala 82 13.1 III 2 Bids under process

14 Amritsar-Pathankot Punjab 102 7.1 III 2 Bids under evaluation

IRB Infra

16 Goa/KNT Border-Panji Goa 65 4.7 III 2 Bids under evaluation L1 - IRB Infra

17 Jaipur-Tonk-Deoli Rajasthan 149 11.8 III 2 Bids under evaluation L1 - IRB Infra

19 Talegaon-Amravati Maharashtra 67 5.7 III 2 Bids under evaluation

L1 - IRB Infra

18 Pune-Sholapur -Pkg 2 Maharashtra 110 8.4 III 3 Bids under evaluation

15 Ghaziabad-Aligarh Uttar Pradesh 126 11.4 III 2 Bids under evaluation

Total 1,827 192

Source: NHAI, RHH * Annuity project

Take-out financing shores up banking

sector resources to fund infra

development

IRB, L&T, IVRCL and HCC to be the key

beneficiaries of new contract awards


29

Fig 60 - PPP projects for which bidding process will be initiated during FY10

Sr. No. Section State NH. No. Length (km) TPC (Rs bn)

1 Hyderabad-Yadgiri Andhra Pradesh 202 36 5.2

2 Parwanoo-Solan Himachal Pradesh 22 41 5.4

3 Bijapur-Hundud Karnataka 13 97 9.1

4 Hungud – Hospet Karnataka 13 98 12.3

5 Muradabad – Bareilly Uttar Pradesh 24 121 14.9

6 Maharashtra/Goa border-Panaji Goa/KNT Border Goa 17 123 20.8

7 Rohtak-Panipat Haryana 71A 81 8.1

8 Bareilly-Sitapur Uttar Pradesh 24 152 10.5

9 Rohtak-Bawal Haryana 71 83 6.7

10 Ahmedabad-Godhra Gujarat 59 118 10.3

11 Godhra-Gujarat/MP Border Gujarat 59 84 7.5

12 Kandla-Mundra Port Gujarat 8A Ext. 71 10.3

13 Muzaffarnagar-Haridwar* Uttar Pradesh/Uttarakhand 58 80 8.0

14 Haridwar-Dehradun Uttarakhand 58/72 37 4.9

15 Barasat-Krishnagar West Bengal 34 84 8.9

16 Krishnagar-Bahrampore West Bengal 34 78 6.9

17 Bahrampore-Farakka West Bengal 34 101 10.0

18 Farakka-Raiganj West Bengal 34 103 11.4

19 Raiganj-Dalkhola West Bengal 34 50 5.6

20 Indore-Gujarat/MP Border Madhya Pradesh 59 155 13.0

21 Belgaum-Goa/KNT Border Karnataka 4A 82 6.6

22 Karnataka/AP Border-Mulgabal Karnataka 4 22 2.6

23 Ranchi-Jamshedpur Jharkhand 33 164 14.4

24 Kishangarh-Udaiapur Rajasthan 76, 79 & 79A 315 25.3

25 Krishnagiri-Walajahpet Tamil Nadu 46 148 12.5

26 Udaipur-Ahmedabad Rajasthan 8 235 17.5

27 Pune-Satara Maharashtra 4 145 17.3

28 Samakhiyali-Gandhidham Gujarat 8A 56 8.1

29 Tumkur-Chitradurga Karnataka 4 114 8.4

30 Satara-Kagal Maharashtra 4 133 11.0

31 Srinagar to Banihal Section Jammu & Kashmir 1A 99 12.0

32 Quazigund – Banihal Jammu & Kashmir 1A 15 19.9

33 Ramban-Banihal Jammu & Kashmir 1A 36 9.9

34 Udhampur-Ramban Jammu & Kashmir 1A 43 9.7

35 Chenani-Nashri Jammu & Kashmir 1A 12 25.8

36 Jammu-Udhampur Jammu & Kashmir 1A 65 17.7

37 Chengapalli-Walayar Tamil Nadu 47 55 8.5

38 Hyderabad-Bangalore (Km 534.72-Km 556.84) Tamil Nadu 7 22 6.8

Total 3,554 423.3

Source: NHAI, RHH *Proposed annuity project


30

Electricity

India is among the world’s largest power producing and consuming nations, with a total generation capacity of 150,323MW as on June ’09. The Ministry of Power has projected an annual growth of 9% in electricity demand over the 11th plan period and has thus set itself a target of augmenting India’s capacity by 78,700MW. Barring the first few five year plans, the actual capacity addition has been dismal – during the 10th plan, only 52% of the targeted additions were met. We anticipate significant incremental demand from the manufacturing sector and from rural electrification, as per the government’s mission of “Power for all” by 2012.

Fig 61 - Cumulative capacity over 6th to 11th plans

0

50

100

150

200

250

6th 7th 8th 9th 10th 11th 0

10

20

30

40

50

60

70Capacity Growth (R)(GW) (%)

Source: CEA

Fig 62 - Target and achievements over last 10 five year plans

05

1015202530354045

1st 2nd 3rd 4th 5th 6th 7th 8th 9th 10th40

50

60

70

80

90

100Target Achieved Achieved (R)(GW) (%)

Source: CEA

Severe demand–supply mismatch India has been facing a demand–supply mismatch not just at peak demand level but also at the base level. With healthy economic growth expected to continue over the next few years, infrastructure augmentation especially in the power sector is imperative.

Fig 63 - Historical energy demand-supply position in India

0

100

200

300

400

500

600

700

800

FY03 FY04 FY05 FY06 FY07 FY08 FY096.0

7.0

8.0

9.0

10.0

11.0

12.0

Energy Demand Energy Met

Energy Deficit

(BUs) (%)

Source: CEA

Fig 64 - Historical peak demand-supply position in India

0

20

40

60

80

100

120

FY03 FY04 FY05 FY06 FY07 FY08 FY0910

11

12

13

14

15

16

17

18

Peak Demand Peak MetPeak Deficit (R)

(GW) (%)

Source: CEA

At 704.2kWh, India has one of the lowest per capita consumption rates of electricity. The government has a target of achieving per capita consumption of 1,000Kwh by 2012. Within the country itself, there is a huge disparity with respect to per capita consumption of power. According to the 2005–06 data, in states like Goa and Delhi, per capita consumption is as high as 1,970.1kWh and 1,766.9kWh respectively while in states like Bihar and Assam this drops to 85.9kWh and 170.7kWh respectively.

India’s total power generation capacity

at 150,323MW

India has one of the lowest per

capita consumption rates of power


31

32% of infra spending earmarked for power sector Power is clearly the focus area of the government with ~32% of budgeted infrastructure spending being earmarked for the sector. The planned outlay for power has been doubled in the 11th plan period to Rs 6,665bn, with the Centre expected to contribute 38.3% and states 33.9%.

Fig 65 - Anticipated public and private investment in electricity (incl. NCE) during the 10th and 11th Plans

Year (Rs bn) Total 10th

Plan (Anticipated)

Share (%) 2007-08 2008-09 2009-10 2010-11 2011-12

Total 11th Plan Share (%)

Centre 1,025 35.1 378 435 500 576 664 2,553 38.3

States 976 33.4 210 297 414 567 770 2,257 33.9

Private 918 31.5 232 284 350 437 552 1,855 27.8

Total 2919 100.0 820 1,016 1,264 1,580 1,986 6,665 100.0

Source: Planning Commission

Fig 66 - Comparative investment projections Electricity (Rs bn)




Centre 1,025 2,553 NA 2,994

State 976 2,257 NA 5,142

Public 2,001 4,810 2,876 8,136

Private 918 1,855 1,729 2,180

Total 2,919 6,665 4,605 10,316

Source: Plan Document, Planning Commission, RHH

Capacity addition rate to outpace past plans India has been slow to augment generation capacity with an average addition rate of 5.6% per year during the past three plan periods. Further, only 51% of the targeted additions have been made during these plans, at 56,618MW against the goal of 111,893MW. The current plan envisages fresh capacity of 78.7GW. We expect the achievement run rate to be higher this time around given that over 80GW of power projects are already under implementation. We peg additions at 60–65GW, which would be the highest during any plan period. The ambitious Ultra Mega Power Projects (UMPP) will mainly contribute towards capacity addition in the 12th plan.

Progress visible in FY10 Power generation capacity at the end of 10th plan stood at 132,329MW. Thereafter, 9,263MW and 3,454MW were added in FY08 and FY09 respectively (57% and 31% of targets). However, during the first four months of FY10, net fresh capacity has been higher at 3,108MW.

T&D to get a concurrent boost To support the increasing generation capacity, the government is also looking to supplement the country’s transmission network from ~20GW to ~38GW. It aims to curb T&D losses across the country and has adopted a revised APDRP to aid this effort.

Fig 67 - Activity-wise investment in electricity during the 11th Plan

Activity (Rs bn) Generation Transmission Distribution Total 11th Plan

Centre 1,440 616 497 2,553

States 915 448 893 2,257

Private 1,418 340 97 1,855

Total 3,773 1,404 1,488 6,665


Power accounts for ~32% of budgeted

infrastructure spending

11th plan spend on power sector to be

2.3x 10th plan spending

Summary of capacity addition in 11th Plan

Particulars MW

Generation capacity at end of 10th Plan

132,329

Capacity added in FY08 9,263

Capacity added in FY09 3,454

Capacity added till July ’09 in FY10

3,108

Capacity addition in 11th Plan (till July ’09)

15,825

Total capacity at end of July ’09 151,073*

Source: CEA, RHH * Includes captive power projects


32

NTPC to award bulk tenders for supercritical equipment (660MWx11) Thermal power capacity addition is set to witness a structural shift from subcritical to supercritical technology. The government is leading this shift with bulk order tenders for 7,260MW (11x660MW) of supercritical sets for NTPC and DVC. In all, this clutch of orders would be worth ~Rs 210bn. Chinese companies have secured 60% of the supercritical unit orders placed so far. In order to reverse this trend, the government has made domestic manufacturing a mandatory qualification for participation in bulk tenders of NTPC. Accordingly, a number of foreign entities have tied up with domestic partners to become eligible for bulk tenders.

Fig 68 - Capacity augmentation in supercritical BTG space

Company / JV Boiler (MW) Turbine (MW)

BHEL 10,000 10,000

L&T / Mitsubishi Heavy Industries 4,000 4,000

Bharat Forge–Alstom - 5,000

JSW – Toshiba - 3,000

GB Engineering – Ansaldo 2,000 -

Total 16,000 22,000

Source: Infraline, RHH

Bulk tenders worth Rs 210bn being

placed by the government


33

Railways

The Indian Railways (IR) holds the distinction of being the world’s second largest rail network under a single management and the principal mode of transportation for bulk freight and long distance passenger traffic, with a total route length of 63,221km. Public investment in the IR is projected at Rs 2,346bn during the 11th Plan. An additional Rs 272bn is likely to be invested in a Mass Rapid Transport System (MRTS – metro rail), of which Rs 72bn would be contributed by the Centre and Rs 100bn each by the states and private sector. The total investment of Rs 2,618bn is twice the anticipated 10th plan expenditure.

Fig 69 - Projected investment in railways during the 11th Plan Particulars (Rs bn at 2006-07 prices)

2007-08 2008-09 2009-10 2010-11 2011-12 Total 11th Plan

Share (%)

Rolling stock* 68 78 90 103 119 457 17.5

Capacity augmentation 66 85 110 143 185 589 22.5

and development - - - - - - -

Safety and other works 139 161 186 216 250 951 36.3

Investment in PSUs 16 17 19 20 22 94 3.6

Dedicated freight corridors 11 20 37 63 123 255 9.7

Metro Rail Projects 43 48 54 59 68 272 10.4

Total 342 410 495 604 767 2,618 100.0

Source: Planning commission * CSO and Ministry of Railways both account for rolling stock in infrastructure

Fig 70 - Comparative investment projections Railways (Including MRTS) (Rs bn)




Centre 1,090 2,015 NA NA

State 104 100 NA NA

Public 1,194 2,115 2,367 2,540

Private 3 504 5 660

Total 1,197 2,619 2,372 3,200

Source: Plan Document, RHH

It is assumed that ~17.2% of railway investment will come through PPPs. Thus, of the total investment of Rs 2,346bn in the IR, ~Rs 1,933bn will be invested by the public sector and Rs 504bn by private players. Including the projected investment of Rs 100bn in metro rail projects, the overall private investment in the sector comes to Rs 504bn (i.e. ~20% of the total).

Fig 71 - Railway opportunities

Source: Working Group Report on Eleventh Five Year Plan (2007-12)

Planned investment of Rs 2,618bn in

railways – 2x 10th plan expenditure

Private investment in railway sector

pegged at Rs 504bn (20%)

Railway development opportunities Particulars (Rs bn)

Construction contracting

Project development

Indian railways 1,600 600

RVNL 70 35

DRFC 250 120

Metro 303 120

Private rail 60 60

Source: Working group report on Eleventh five year plan, Metro Authorities, DMRC, RVNL, DFCCIL, RHH


34

Key opportunities for private players

Freight corridor: The Dedicated Rail Freight Corridor (DRFC) is the biggest opportunity in the sector. The cost for the 1,279km eastern corridor (Ludhiana–Sonnagar) and 1,483km western corridor (Dadri–JNPT) put together is estimated at Rs 500bn. Financing arrangements for the project currently envisage external assistance of Rs 170bn from Japan Bank of International Cooperation (JBIC) and Rs 110bn from World Bank. These would cover about half of the capital cost. The rail ministry is exploring the possibility of attracting private investment in some segments of the project.

Civil engineering works are expected to account for a bulk of the cost (65–70%), while signaling & communications (15–20%) and electrification (10–15%) would comprise the balance. Both corridors are proposed to have double lines and will be based on electric traction. Work on the eastern dedicated freight corridor has already started from February ’09 while construction work on the western corridor will begin later.

Privatisation / modernisation: Railway station privatisation, along the lines of airport privatisation, is another large opportunity. The government has identified 26 stations in metropolitan cities and major tourist centres for development as world class stations through the PPP route. Part of the real estate potential of these stations would be exploited for financing these projects. Preparatory work for the New Delhi and Patna stations is already in the advanced stage.

Logistic parks: Multi-modal logistic parks (MMLPs) are proposed to be built independently at strategic locations or in SEZs, particularly along the DRFC.

Metro projects: Mumbai Metro phases II and III and metro-rail projects in non-metro towns are other PPP opportunities. Construction companies will also vie for the Chennai Metro that is to be undertaken by the government. The Cabinet has cleared this project and funding is in place as follows: 60% loan under the Japanese Cooperation Agreement; 20% state government equity, 15% central government equity, and 5% central government debt.

In a recent development, award of the Hyderabad metro rail project to the Maytas-led consortium has been cancelled due to the latter’s failure to achieve financial closure. Bids for the project will be re-invited from 15 July to 15 November.

Surveys for construction of new lines from Jhargram to Purulia and the new line for extension of the Kolkata Metro, from Dum Dum to Dakshineshwar, have been completed. The West Bengal government has also given its consent to contribute 50% of the cost for extension. Further action is being taken to obtain necessary approvals for these projects. The ministry of railways has also commissioned a feasibility study for introduction of a 60km elevated, fully air-conditioned rail system between Churchgate and Virar stations in Mumbai. The project is proposed to be implemented through PPP on a design, build, finance, operate and transfer basis.

Fig 72 - Key upcoming metro rail projects likely to be awarded under PPP

City/Project Project cost (Rs bn) Status

Mumbai Phase II (Charkop-Mankhurd) 110 Awarded to Reliance Infra-led consortium

Mumbai Phase III (Colaba-Bandra) 120 Project being finalised

Ahmedabad 32 DPR to be resubmitted

Kochi 30 First shortlist of bidders

Hyderabad 121 Awarded to Maytas-led consortium but contract withdrawn; will reopen for bids from 15 July to 15 November

Total 380

Source: News reports, RHH

Rs 500bn Dedicated Rail Freight

Corridor to generate large order flows

Metro projects worth Rs 380bn likely to

be awarded under PPP


35

Expansion and technical upgrades: Heavy investments will be required for enhancing the capacity of rolling stock, technical upgrades and technological advancements necessary to achieve the ambitious targets set for the passenger and freight business segments, in the 11th plan. The railways aim to complete gauge conversion across 4,900km, doubling across 1,800km and laying of 1,100km of new lines, over five years.

Bullet trains: The government has announced plans to conduct feasibility studies for bullet trains on a number of routes: Delhi – Amritsar, Ahmedabad – Mumbai – Pune, Hyderabad – Vijaywada – Chennai, Chennai – Bangalore – Ernakulam, and Howrah – Haldia.

Fig 73 - Indian railways - Financial performance summary

26121

411 429474

545627

717819 800

111

174164183145101534538

0100200300400500600700800900

FY81 FY91 FY03 FY04 FY05 FY06 FY07 FY08 FY09(BE)

FY09A

Gross traffic receipts Net revenues(Rs bn)

Source: Indian railways

Heavy investments anticipated for rail

expansion and technical upgrades


36

Irrigation

India has 2.4% of the world’s total area but 16% of the population and only 4% of the available fresh water. This clearly indicates the need for water resource development, conservation, and optimum use. The gross irrigated area in the country is only 87.2mn hectares (mha).

11th plan irrigation targets The Indian government has taken up irrigation potential creation through public funding and assistance to farmers to create potential on their own farms. Substantial irrigation potential has been created through major and medium irrigation (MMI) schemes. India’s estimated irrigation potential is ~139.9mha. Of the total potential created (102.8mha), however, only 87.2mha is actually utilised at the end of the 10th plan.

Fig 74 - Ultimate irrigation potential, potential created and potential utilised

Potential created Potential utilised Sector (mha)

Ultimate irrigation potential Till end of 9th

Plan Anticipated in

10th Plan Till end of 9th

Plan Anticipated in

10th Plan

Major & Medium irrigation 58.5 37.1 5.3 31.0 3.4

Minor Irrigation

Surface water 17.4 13.6 0.7 11.4 0.6

Groundwater 64.1 43.3 2.8 38.6 2.3

Subtotal 81.4 56.9 3.5 50.0 2.8

Total 139.9 94.0 8.8 81.0 6.2


The Working Group on water resources for the 11th plan has proposed the creation of irrigation potential of 16mha (9mha from major & medium irrigation – MMI, and 7mha from minor irrigation – MI) during the plan period.

MMI accounts for bulk of planned investment Of the overall 11th plan irrigation investment of Rs 2,533bn, ~Rs 1,740bn is to be invested in MMI, Rs 334bn in minor irrigation (MI), Rs 108bn in command area development (CAD), Rs 82bn in flood control, and Rs 270bn in watershed development.

Fig 75 - Projected investment for the 11th Plan in irrigation (including Watershed)

Year (Rs bn at 2006-07 prices) 2007-08 2008-09 2009-10 2010-11 2011-12 Total 11th

Plan

Centre 34 40 48 57 69 248

Major and Medium 1 1 1 1 1 6

Irrigation 0 0 0 0 0 0

Minor Irrigation 1 1 1 1 1 4

Command Area Development 2 2 2 2 2 10

Flood Control 2 2 2 2 2 9

Watershed Development 28 35 42 51 63 219

States 241 319 424 565 736 2,285

Major and Medium Irrigation 170 232 318 436 577 1,733

Minor Irrigation 39 49 62 79 100 329

Command Area 13 16 19 23 28 98

Development 0 0 0 0 0 0

Flood Control 11 13 14 17 19 73

Watershed Development 9 9 10 11 12 51

Total 275 359 472 623 804 2,533


Rs 1,740bn to be invested in major &

medium irrigation

Overall outlay for the 11th plan

Particulars (Rs bn)

State plan 1,821

State sector schemes, i.e., AIBP and others

470

Central plan 242

Total 2,533

Source: Plan Document


37

With substantial investments planned for the Accelerated Irrigation Benefits and Bharat Nirman programmes, state spending has been assumed to grow annually at ~37% on MMI, at 27% on minor irrigation, at 21% on CAD, and at 15% on flood control. States’ investment in watershed development (WD) programmes is envisaged to grow at the rate of 24% per annum during the plan period.

Fig 76 - Comparative investment projections Irrigation incl Watershed (Rs bn)




Centre 136 248 NA 498

State 979 2,285 NA 1,821

Public 1,115 2,533 1,869 2,318

Private - - - -

Total 1,115 2,533 1,869 2,318


AIBP a key thrust to the sector

The central government initiated the Accelerated Irrigation Benefits Programme (AIBP) from 1996–97 to extend assistance for completion of unfinished irrigation schemes. Allocation for AIBP was raised 75% from Rs 200bn for 2008–09 to Rs 350bn for 2009–10.

Under this programme, all projects which have investment approval from the Planning Commission are eligible for assistance. From being entirely funded by the Centre, the AIBP was modified to have a grant-cum-loan component from 2004–05. Reform measures such as revision of water rates to cover operation and maintenance (O&M) charges have been introduced, but the results were not satisfactory because of the sluggish efforts of state governments to comply with the reform measures. Moreover, the incentive to state governments, that is a 70% loan, was not attractive enough to carry out the reforms.

In 2005–06, the government launched a second irrigation initiative entitled Bharat Nirman where 10mha of additional irrigational potential creation was targeted in a period of four years. To achieve this target, the AIBP guidelines were further modified in December ’06 wherein Central assistance was set as follows: a 25% grant for project cost for non-special category states and 90% for special category states & projects benefiting drought-prone and tribal areas. It was also decided to treat projects in the undivided Koraput, Bolangir, and Kalahandi (KBK) districts of Orissa at par with special category states.

State governments to play a major role As per the Constitution, irrigation is a state subject; hence, a bulk of the investment into the sector will be contributed by state governments with little central allocation. State outlay for the sector is estimated at ~Rs 2,285bn (including state sector schemes) in the 11th Five Year Plan, of which ~70% will come from only six states, i.e., Andhra Pradesh (AP), Gujarat, Maharashtra, Karnataka, Uttar Pradesh and Madhya Pradesh.

Fig 77 - State irrigation outlay for FY09

132.5

47.534.7

59.5

21.8

0204060

80100120140

AP Gujarat Karnataka Maharashtra MP

(Rs bn)

Source: RHH * AP – Andhra Pradesh, MP – Madhya Pradesh

AIBP allocation hiked 75% to

Rs 350bn for 2009–10

11th Plan irrigation outlay in key states

State State outlay (Rs bn)

Andhra Pradesh 343

Gujarat 292

Maharashtra 268

Karnataka 260

Uttar Pradesh 163

Madhya Pradesh 149

Bihar 79

Rajasthan 77

Orissa 65

Chhattisgarh 56

Tamil Nadu 33

Uttarakhand 27

West Bengal 26

Punjab 14

Total 1,852



38

AP irrigation spend to touch Rs 178bn in FY10 The AP government has successfully implemented irrigation projects in the state, as evidenced by a 50% budgetary allocation to these works. The state government’s spend on irrigation has increased at a CAGR of ~40% over FY05-FY09. For FY10, AP plans to expend Rs 178bn for major, medium and minor irrigation works, which is ~34% higher than the FY09 budget. Of the total outflow of Rs 178bn, Rs 50bn will be utilised for ongoing works and the balance for new works.

Jalayagnam programme will play a key role Jalayagnam will continue to be the AP government’s flagship programme for the irrigation sector. Under Jalayagnam, 86 projects have been approved since 2004 with a total cost of Rs 1,760bn, of which Rs 450bn has been spent in the last five years. The programme includes projects such as construction of reservoirs and lift irrigation systems for lifting water from major rivers, particularly from the Godavari, to provide immediate benefits.

Fig 78 - Andhra Pradesh: Summary of annual plans

Sector (Rs bn) A/C 2007-08 RE 2008-09 BE 2009-10

Agriculture & Allied Activities & Rural Development 24.4 56.8 41.1

Irrigation 122.4 132.5 178.0

Power 28 0.02 1.7

Social Services 81.6 141.5 109.1

Transport 16.9 17.1 22.0

Others (Industries, General Economic Services etc) 26.2 14 14.3

Total 275.1 361.9 366.4

Source: Andhra Pradesh Budget document

AP to remain the irrigation hub of India We expect the AP government to continue with its massive irrigation development drive going forward. Accordingly, we anticipate significant contract awards in this segment in the near future, which will benefit players like IVRCL, Hindustan Construction Co, Nagarjuna Construction Co and Patel Engineering.

Fig 79 - Andhra Pradesh: Annual plan 2009–10

Power0.5%

Others3.9%

Transport6.0%

Agri & Rural devp.11.2%

Social services29.8%

Irrigation48.6%

Source: Andhra Pradesh Budget document

Fig 80 - Andhra Pradesh: Fiscal deficit as a % of GSDP

2.5

4.0 4.3 3.9 3.9

2.1

3.2 3.03.5

4.54.9 5.1

0123456

1997

-98

1998

-99

1999

-00

2000

-01

2001

-02

2002

-03

2003

-04

2004

-05

2005

-06

2006

-07

2007

-08

(RE)

2008

-09

(BE)

(%)


AP to spend Rs 178bn for irrigation

works in FY10, 34% higher than FY09

IVRCL, HCC, NCC and Patel Engg will

benefit from AP irrigation contracts


39

Water supply and Sanitation

Increasing urbanisation of the country has led to a renewed focus on addressing the investment backlog in urban water and sanitation infrastructure through the JNNURM. Under the JNNURM, major contributions would be made by the central government in urban water and sanitation through ULBs. In addition, counterpart funding from state governments would result in a significant increase in states’ expenditure.

Investment projected at Rs 1,437bn In view of the low levels of capital formation in the sector in the past and the need to urgently increase coverage in both rural and urban areas, total investment during the 11th plan is projected at Rs 1,437bn, of which Rs 420bn or ~29.2% would be Central spending with Rs 963bn or 67% of total spending by States. The private sector is expected to invest Rs 54bn or 3.8%. Of the total public sector spending in the sector, ~70% is allocated to water supply and 30% to sanitation. The private sector is projected to invest 80% in water supply and 20% in sanitation. Of the total investment, 63% is allocated to rural water supply and sanitation and 37% to urban projects.

Fig 81 - Projected investment in the 11th Plan in water supply and sanitation Year (Rs bn at 2006-07 prices) 2007-08 2008-09 2009-10 2010-11 2011-12 Total 11th Plan

Centre 52 64 80 100 125 420

Water supply 36 45 56 70 87 294

Sanitation 15 19 24 30 37 126

States 135 156 183 220 269 963

Water supply 95 109 128 154 189 674

Sanitation 41 47 55 66 81 289

Private 6 8 10 13 16 54

Water supply 5 6 8 10 13 43

Sanitation 1 2 2 3 3 11

Total 193 228 273 333 411 1,437

Water supply 136 160 192 234 289 1,012

Sanitation 57 68 81 99 122 426


Fig 82 - Projected investment in the 11th Plan in rural and urban water supply and sanitation

Year (Rs bn at 2006-07 prices) 2007-08 2008-09 2009-10 2010-11 2011-12 Total 11th

PlanRural 126 146 172 208 255 907

Urban* 67 82 101 125 155 530

Total 193 228 273 333 411 1,437

Source: Planning Commission * Including investment through ULBs

Fig 83 - Comparative investment projections Water supply and Sanitation (Rs bn)


11th Plan

Log-linear projection

Wrk group estimates

Centre 423 420 NA NA

State 215 963 NA NA

Public 638 1,383 1,341 1,270

Private 10 54 2 NA

Total 648 1,437 1,343 1,270


Fig 84 - Comparative investment in Irrigation and Water supply

275 359 472 623 804

2,533

193 228 273 333 411

1,437

0

500

1,000

1,500

2,000

2,500

3,000

2007-08 2008-09 2009-10 2010-11 2011-12 Total 11thPlan

Irrigation Water supply and sanitation(Rs bn)

Source: Planning document

Water supply and sanitation to attract

investments of Rs 1,437bn


40

JNNURM

Under JNNURM, the government intends to transform 65 cities in India in seven years by improving economic and social infrastructure. Currently, there are ~463 projects sanctioned with cost estimates of Rs 497bn. The projects include investments in roads, flyovers and urban transport systems, which would translate to increased order flows for infrastructure players. JNNURM, which was launched in 2005–06, provides for additional central assistance (ACA) of Rs 500bn for the 7-year period and an equal amount from state governments and urban local bodies (ULB). Allocation to JNNURM has been hiked by 90% to Rs 129bn for 2009–10 as compared to Rs 68bn for 2008–09.

The scheme covers the following project types:

Urban renewal, i.e., redevelopment of inner city areas

Water supply (including desalination plants) and sanitation

Sewerage and solid waste management

Construction and improvement of drains/storm water drains

Urban transport, including roads, highways, expressways, MRTS, metro projects

Parking lots/spaces on PPP basis

Development of heritage areas

Prevention and handling of soil erosion/landslides only in case of special category states where such problems are common

Preservation of water bodies

Power, telecom, health, education and wage employment are excluded from the purview of this scheme.

Fig 85 - Financing of projects under JNNURM

Grant ULB or Para- State Share/Loan from Financial Institutions (%) Category of Cities/Towns/UAs

Centre (%) State (%)

Cities/UAs with 4mn+ population as per 2001 census 35 15 50

Cities/UAs with1mn+ but less than 4mn population as per 2001 census 50 20 30

Cities/towns/UAs in North Eastern States and Jammu & Kashmir 90 10 -

Cities/UAs other than those mentioned above 80 10 10

For setting up desalination plants within 20km from seashore and other

urban areas facing water scarcity 80 10 10

Source: JNNURM amended guidelines

JNNURM aims to improve economic

and social infrastructure in 65 cities

JNNURM allocation hiked by 90%

to Rs 129bn for 2009–10


41

Airports

Air passenger growth in India has been one of the highest in the world and is expected to surpass countries like China, France and Australia in the years to come. India’s civil aviation market has logged a CAGR of 18% and was worth US$ 5.6bn in 2008. The Centre for Asia Pacific Aviation (CAPA) has forecast a market of more than 100mn passengers by 2010. In addition, ~3.4mt of cargo per annum is expected to be handled by 2010.

Investment of Rs 310bn in 11th plan period The government’s strategy for the airport sector, supported by the development of a detailed financing plan, is expected to lead to a quantum jump in capital formation in the sector in the 11th plan. The Financing Plan for Airports has estimated an investment of ~Rs 400bn at 2006–07 prices over 2005–14.

Taking into account an anticipated investment of Rs 48.9bn in 2005–07 and the spillover of ~Rs 38.8bn to the 12th plan, and with suitable re-phasing in light of the government’s subsequent decision to implement modernisation of the Kolkata and Chennai airports mainly through the public sector, an investment of Rs 310bn is projected for the 11th plan period.

Fig 86 - Projected investment in airports during the 11th Plan

Year (Rs bn at 2006-07 prices) 2007-08 2008-09 2009-10 2010-11 2011-12 Total 11th Plan

Metro airports 28 28 27 25 24 131

Non-metro airports 7 7 8 9 10 42

Greenfield airports (including Bangalore & Hyderabad) 14 15 18 25 33 106

NE airports 1 1 1 1 1 5

CNS-ATM and equipment 3 4 5 6 8 26

Total 52 55 59 66 77 310


Fig 87 - Projected public-private investment in airports during the 11th Plan

Total 10th Plan (Anticipated)

2007-08 2008-09 2009-10 2010-11 2011-12 Total 11th

Plan

Public 38.4 12 14 19 22 27 93

Private 29.4* 40 42 40 44 50 216

Total 67.7 52 55 59 66 77 310

Source: Planning commission * Provisional expenditure

Fig 88 - Comparative investment projections Airports (Rs bn)




Centre 38 93 NA NA

State - 1 NA NA

Public 38 94 90 92

Private 29 216 151 NA

Total 67 310 241 92


Air passenger growth in India is one of

the highest in the world


42

Mega development targets During the 11th plan, the Airports Authority of India (AAI) will undertake the development of 35 non-metro airports and 13 other airports; development of Chennai and Kolkata airports; construction of new greenfield airports, including three in the NER; expansion of five airports in NER and other crucial areas; upgrades of technology from ground-based communication, navigation, and surveillance-air traffic management (CNS-ATM) to satellite-based CNS-ATM facilities; installation of new facilities including security equipment at various airports; installation of safety and facilitation equipment; development of airspace capacity enhancement; and development of IT.

New Delhi and Mumbai airport revamp underway: The international airports at New Delhi and Mumbai are being restructured with modernisation and upgradation works being carried out through private participation. According to the Economic Survey report 2008–09, the construction of first phase development works in Delhi started in early 2007 and is likely to be completed by March ’10 at a cost of ~Rs 89.8bn. Construction works for the Mumbai airport started in January ’07. The development works for this project are to cost ~Rs 98bn and are expected to be completed by 2012.

Development of 35 non-metro airports: AAI is upgrading and modernising 35 non-metro airports in the county in a time bound manner. Development of airports in the north-eastern region is being taken up on a priority basis. Architectural design competitions have been held for terminal buildings at 18 airports. These buildings will be modular in design for easy expansion. At Nagpur and Srinagar, the terminals have already been expanded and modified for integrated operations. Terminal building works have been completed in Ahmedabad (domestic), Kullu, Kangra, Porbandar, Udaipur, Gaya, Nagpur, Belgaum, Akola, Calicut, Hubli, Surat, Aurangabad and Trichy airports.

Development works on the airside and city side are likely to be completed by March ’10. The city side development of 24 airports will be undertaken with private sector participation under PPP mode and will cover commercial development of property, car parking and cargo operations.

Fig 89 - City side development via PPP

Airports

Agatti Guwahati Rajkot

Ahmedabad Indore Ranchi

Amritsar Jaipur Thiruvanthapurum

Aurangabad Khajuraho Trichy

Bhopal Lucknow Udaipur

Bhubaneswar Madurai Vadodara

Dehradun Mangalore Varanasi

Dimapur Raipur Vizag


Request for Qualification (RFQ) for Amritsar and Udaipur has already been issued and five interested parties have been short-listed for each of them. An MCA for development of non-metro airports has also been prepared and published.

13 more projects on the cards: Development works at an additional 13 non-metro airports are being undertaken for completion in a similar time frame.

35 non-metro airports and 13 others to

be developed in 11th plan

City side development of 24 airports

will be undertaken via PPP


43

Fig 90 - Non-metro airport development

Airports

Akola Dibrugarh (Mohanbari) Rajahmundry

Behar Gondia Srinagar

Belgaum Hubli Surat

Calicut Kullu (Bhuntar) Vijayawada

Cooch Mysore


10 greenfield airports approved: The policy for greenfield airports was approved by the government in April ’08 to enable their set-up on a PPP basis, with an MCA also put into place. FDI up to 100% is permitted through the automatic approval route. Until December ’08, the central government had approved 10 greenfield airports, i.e., Goa, Navi Mumbai, Kannur, Bijapur, Simoga, Hassan, Gulbarga, Sindhudurg, Dabra and Durgapur.

Fig 91 - Status of greenfield projects up to December ’08 Sr.

No. Name of airport State Status

A Project commissioned

1 Banglore International airport Karnataka Commissioned in May 2008

2 Hydrabad International airport Andhra Pradesh Commissioned in March 2008

B Approval granted by Central Government

3 Mopa airport Goa Planning stage

4 Navi Mumbai International Airport Maharashtra Planning stage

5 Kannur airport Kerala Planning stage

6 Bijapur airport Karnataka Awarded

7 Simoga airport Karnataka Awarded

8 Hassan airport Karnataka Awarded

9 Gulbarga airport Karnataka Awarded

10 Sindhudurg airport Maharashtra In-principle approval awarded

11 Dabra airport, Gwalior Madhya Pradesh In-principle approval awarded

12 Durgapur airport West Bengal In-principle approval awarded

C Proposal under consideration with the Government

13 Greater Noida International airport Uttar Pradesh Under consideration

14 Chakan International airport Maharashtra Under consideration

15 Karaikal airport Pondicherry Under consideration

16 Airport at Jhajjar Haryana Under consideration

17 Airport at Jludhina Punjab Under consideration

18 Airport at Paladi-Ramsinghpur Rajasthan Under consideration

19 Airport at Ankleshwar, Bharuch Gujarat Under consideration

20 Airport at Ramnad, Rameshwaram Tamil Nadu Under consideration


10 greenfield airports being set up on

PPP basis


44

Ports

Close to 95% of the volume and 70% by value of the country’s international trade is conducted through its 12 major and 187 minor/intermediate (non-major) ports. Collectively, the major ports handle ~75% of India’s maritime cargo.

Investment of Rs 880bn over 11th plan Anticipated investment in the 10th plan was Rs 141bn comprising Rs 37bn from public sources and Rs 104bn from the private sector. With the expected higher public investment in major ports, a total investment of Rs 880bn is projected for the 11th plan with Rs 610bn being invested in major ports and Rs 270bn in non-major ports.

Fig 92 - Projected investment in ports during the 11th Plan


Major Ports 88 105 122 137 158 610

Non-Major Ports 36 43 52 63 76 270

All Ports 124 148 174 200 234 880


Fig 93 - Projected investment in ports during the 11th Plan by category


Major Ports 88 105 122 137 158 610

Public 49 57 62 64 67 299

Private 39 48 59 73 91 311

Non-Major Ports 36 43 52 63 76 270

Public 6 7 7 8 9 36

Private 30 36 45 55 68 234

All Ports 124 148 174 200 234 880

Public 55 64 70 71 76 335

Private 69 85 104 128 159 545


Fig 94 - Comparative investment projections

Ports (Rs bn) 10th Plan (anticipated)



Centre 22 299 NA NA

State 15 36 NA NA

Public 37 335 40 185

Private 104 545 474 369

Total 141 880 514 554


The projections assume that ~49% of total investment in major ports and 13% of total investment in non-major ports would come from the public sector. The phasing of investment reflects a CAGR of ~8% in public investment in major ports and ~9% in non-major ports. Private investment in major and non-major ports is assumed to grow at a CAGR of ~23%. Thus, total public investment in ports is projected at Rs 335bn and private investment at Rs 545bn during the 11th plan. The overall ratio of public to private spending on investment in the sector is 38:62.

Rs 610bn to be invested in major ports

and Rs 270bn in smaller ports


45

Companies

HCC Sector Report 05 October 2009

46

Profitability and return ratios

(%) FY08 FY09 FY10E FY11E

EBITDA margin 11.9 13.0 12.5 12.5

EBIT margin 8.8 9.5 9.2 9.3

Adj PAT margin 2.3 2.3 2.6 2.9

ROE 7.6 7.6 8.4 9.0

ROIC 6.6 7.0 7.3 7.6

ROCE 7.8 9.7 7.6 8.0

Financial highlights


Revenue 30,827 33,137 41,091 49,309

Growth (%) 30.8 7.5 24.0 20.0

Adj net income 724 760 1,074 1,443

Growth (%) 17.4 5.0 41.3 34.3

FDEPS (Rs) 2.6 2.8 3.5 4.5

Growth (%) 17.4 5.0 25.2 29.4

HCC Growth across segments

Strong order book of Rs 135bn: At the end of Q1FY10, HCC had an outstanding order book of Rs 134.6bn (excluding Rs 19.4bn under dispute), which is 3.3x FY10E revenues. This apart, the company has L1 orders worth Rs 8bn.

BOT portfolio to expand four-fold to Rs 100bn: Currently, HCC Infrastructure (a 100% subsidiary) has three BOT projects under various stages of construction:

Nirmal BOT, Andhra Pradesh – This is an annuity project (semi-annual instalments of Rs 230mn) that has been completed three months ahead of schedule. HCC is thus eligible for an early-completion bonus and can begin to recognise revenue in the current fiscal, once NHAI awards a completion certificate.

Badarpur Elevated Expressway connecting Delhi and Haryana –Construction work on this project commenced in January. It is 15–20% complete and scheduled to be fully ready by December ’10.

BOT road project on Dhule–Maharashtra/Madhya Pradesh border (37% stake) – Financial closure is scheduled for December ’09.

Over the next four years, the management expects to expand its BOT portfolio four-fold, from Rs 25bn to Rs 100bn. It also intends to bid for six projects in the near future and pegs the equity IRR from the same at 16–17%.

Lavasa Phase I revenue pegged at Rs 36bn: Lavasa, near Pune, is an all-new city in the making with a master plan of 12,500 acres. Dasve, the first town, is slated for completion in FY11. The management estimates revenues of Rs 36bn from Lavasa Phase I as follows: residential sales Rs 21bn, commercial and retail mall sales Rs 8bn, institutional sales Rs 4.5bn, and hospitality Rs 2.5bn. The company has received Rs 2.5bn out of the total pre-sales of Rs 9.4bn in Lavasa. At present, units at Dasve are being sold at an average rate of Rs 3,800psf for villas and Rs 3,200psf for other units.

55% of 247 Park project leased out: HCC has leased out 55% of the total 1.1mn sq ft of its commercial project, christened 247 Park, at an average lease rent of Rs 60–65psf.

Rs 4.8bn via QIP raised: HCC has raised ~Rs 4.8bn via a QIP, by placing 47mn shares at Rs 102.15/share in June ’09. A majority of the funds will be utilised for loan repayment and to meet working capital needs, whereas the balance will be deployed towards infrastructure projects. With this QIP, we expect the company’s debt/equity ratio to decline from 2.5x to 1.5x.

Target of Rs 141 – Hold: We have an SOTP target price of Rs 141 based on a core business P/E multiple of 14x on FY11E earnings. Hold.

What’s New? Target Rating Estimates

CMP TARGET RATING RISK

Rs 130 Rs 141 HOLD MEDIUM

BSE NSE BLOOMBERG

500185 HCC HCC IN

Company data

Market cap (Rs mn / US$ mn) 39,422 / 826

Outstanding equity shares (mn) 303

Free float (%) 52.8

Dividend yield (%) 0.6

52-week high/low (Rs) 137 / 29

2-month average daily volume 5,359,981

Stock performance

Returns (%) CMP 1-mth 3-mth 6-mth

HCC 130 22.9 25.1 223.4

Sensex 17,135 10.2 17.0 73.0

P/E comparison

46.937.5

28.929.6 24.9 21.1

01020304050

FY09A FY10E FY11E

HCC Industry(X)

Valuation matrix

(x) FY08 FY09 FY10E FY11E

P/E @ CMP 49.3 46.9 37.5 28.9

P/E @ Target 53.3 50.7 40.5 31.3

EV/EBITDA @ CMP 16.0 13.6 11.3 9.5


47

Revenue and order book trend

Fig 95 - Order book at Rs 134.6bn (excluding Rs 19.4bn under dispute)

74 77 7182 83 88

102

145135

8 10 6 4 8 1027

47

00

20

40

60

80

100

120

140

160

Q1 Q2 Q3 Q4 Q1A Q2A Q3A Q4A Q1A

FY08 FY09 FY10

Order book Order received(Rs bn)


Fig 96 - Order break-up segment-wise

46 44 4447 47

4339

50 51

1916 14

2219

40

31 32

30 0 0

4 3 2 3 3

27

3430

323736

2721

1521

0

10

20

30

40

50

60

Q1 Q2 Q3 Q4 Q1 Q2 Q3 FY09 Q1

FY08 FY09 FY10

Power Transportation Water & environment Others(%)


Fig 97 - Revenue break-up segment-wise

3946

40 38 40

48

4144 45

1518

48

5 3 2 1 0 1 2

283336

26

383434

2834

20

272625252422

0

10

20

30

40

50

60

Q1 Q2 Q3 Q4 Q1 Q2 Q3 FY09 Q1

FY08 FY09 FY10

Power Transportation Water & envuiorenment Others(%)


Strong order book ensures high revenue

visibility over the medium term

Since Q1FY08, power segment orders

have increased, whereas transportation

orders have steadily declined

Power (40% of revenues) remains the

key revenue driver


48

Fig 98 - Summary of BOT projects

Project (Rs mn) HCC’s stake

(%)

Total cost Equity Debt

HCC’s equity commitment

Equity to be invested till

FY10 Comments

Nirmal BOT 100 3,200 300 2,900 300 300

Project completed 3 months ahead of schedule

Completion certificate awaited from NHAI; then becomes eligible for Bonus and can start recognising revenues in FY10

Badarpur Elevated Expressway

100 5,700 1,700 4,000 1,700 500

Achieved financial closure in FY09

Construction commenced in Jan ’09 and ~15% progress already achieved

15–20% complete and scheduled to be fully ready by December ’10

Dhule - Maharashtra/ MP border Road project

37 14,000 4,000 10,000 1,480 400

Concession agreement signed on 24 June 2009

Financial closure scheduled by the end of December ’09

Total 22,900 6,000 16,900 3,480 1,200


Valuation

Fig 99 - SOTP valuation summary Particulars Business Method Multiple(x) Value(Rs mn) Per share value (Rs)

HCC standalone Construction P/E FY11 14x 17,229 63

Lavasa Real estate NPV (25% discount To NAV) 17,555 64

Vikhroli IT park Real estate Capitalisation method @11% 2,199 8

BOT project Road - annuity Book value FY10E 1.5x 1,800 6

Total 38,782 141

Source: RHH


49

Stock performance

Fig 100 - Absolute performance from April ’04

0

50

100

150

200

250

300

Apr-04 May-05 Jun-06 Jul-07 Aug-08 Sep-09

Sensex HCC BSE CG Index

Source: Bloomberg, RHH

Fig 101 - Relative performance from April ’04

40140240340440540640740840940




Fig 102 - Relative performance from April ’06 to March ’07

40

50

60

70

80

90

100

110

Apr-06 Jul-06 Sep-06 Dec-06 Mar-07




75

100

125

150

175

200

Mar-07 Jun-07 Sep-07 Dec-07 Mar-08




20

40

60

80

100

120





50

75

100

125

150

175

200

225

Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09




50

12-month forward rolling band

Fig 106 - P/E band

0

50

100

150

200

250

300


(Rs)

40x

20x

10x4x

Source: RHH

Fig 107 - P/BV band

0

50

100

150

200

250

300

350

400


(Rs)

6.5x

3x

0.5x

1.5x

Source: RHH

Fig 108 - EV/EBITDA band

0

20,000

40,000

60,000

80,000

100,000

120,000

140,000


21x

15x

10x

5x

(Rs mn)

Source: RHH

Fig 109 - EV/Sales band

0

20,000

40,000

60,000

80,000

100,000


2x

1.4x

0.8x

0.2x

(Rs mn)

Source: RHH

Fig 110 - Premium/Discount to BSE 30 P/E

(%)

(50)

0

50

100

150

200

250

300

Aug-06 May-07 Feb-08 Nov-08 Sep-09

Source: RHH

Fig 111 - Market Cap/Sales band

0

20,000

40,000

60,000

80,000

100,000


2x

1.4x

0.8x

0.2x

(Rs mn)

Source: RHH


51

Standalone financials

Profit and Loss statement Balance sheet Y/E March (Rs mn) FY08 FY09 FY10E FY11E

Revenues 30,827 33,137 41,091 49,309

Growth (%) 30.8 7.5 24.0 20.0

EBITDA 3,666 4,314 5,154 6,163

Growth (%) 69.7 17.7 19.5 19.6

Depreciation & amortisation 962 1,152 1,380 1,569

EBIT 2,704 3,162 3,774 4,594

Growth (%) 98.2 16.9 19.4 21.7

Interest 1,575 2,244 2,383 2,567

Other income 74 233 120 110

EBT 1,203 1,151 1,511 2,137

Income taxes 472 392 512 724

Effective tax rate (%) 39.3 34.1 33.9 33.9

Extraordinary items - - - -

Min into / inc from associates (7) 1 75 30

Reported net income 1,088 1,245 1,074 1,443

Adjustments (364) (485) - -

Adjusted net income 724 760 1,074 1,443

Growth (%) 17.4 5.0 41.3 34.3

Shares outstanding (mn) 256.2 256.2 291.5 303.2

FDEPS (Rs) (adj) 2.6 2.8 3.5 4.5

Growth (%) 17.4 5.0 25.2 29.4

DPS (Rs) 0.8 0.8 0.8 0.8

Y/E March (Rs mn) FY08 FY09 FY10E FY11E

Cash and cash eq 2,648 1,537 2,296 656

Accounts receivable 45 47 113 135

Inventories 21,660 27,766 30,396 37,826

Other current assets 2,753 5,322 5,687 6,833

Investments 2,956 3,656 4,656 5,856

Gross fixed assets 14,097 16,829 19,204 21,579

Net fixed assets 9,536 11,287 12,282 13,088

CWIP 675 464 464 464

Intangible assets - - - -

Deferred tax assets, net (1,133) (1,132) (1,132) (1,132)

Other assets - - - -

Total assets 39,139 48,949 54,762 63,727

Accounts payable 7,655 10,321 11,719 14,692

Other current liabilities 2,519 3,705 4,054 4,834

Provisions 466 1,651 2,062 2,062

Debt funds 18,449 23,218 21,368 25,368

Other liabilities 10 8 76 129

Equity capital 256 256 303 303

Reserves & surplus 9,784 9,789 15,181 16,340

Shareholder's funds 10,041 10,045 15,484 16,643

Total liabilities 39,139 48,949 54,762 63,727

BVPS (Rs) 39.2 39.2 53.1 54.9

Cash flow statement Financial ratios Y/E March (Rs mn) FY08 FY09 FY10E FY11E

Net income + Depreciation 2,050 2,397 2,454 3,011

Non-cash adjustments (227) (388) 34 27

Changes in working capital (1,580) (3,070) (931) (4,845)

Cash flow from operations 243 (1,060) 1,556 (1,807)

Capital expenditure (2,247) (2,521) (2,375) (2,375)

Change in investments (669) (700) (1,000) (1,200)

Other investing cash flow - - - -

Cash flow from investing (2,917) (3,221) (3,375) (3,575)

Issue of equity 202 (300) 4,649 -

Issue/repay debt 3,225 4,769 (1,851) 4,000

Dividends paid (192) (205) (205) (243)

Other financing cash flow 4 (1,094) (16) (16)

Change in cash & cash eq 564 (1,111) 759 (1,640)

Closing cash & cash eq 2,648 1,537 2,296 656

Economic Value Added (EVA) analysis Y/E March FY08 FY09 FY10E FY11E

WACC (%) 11.5 12.1 12.1 12.1

ROIC (%) 6.6 7.0 7.3 7.6

Invested capital (Rs mn) 26,317 33,384 36,692 43,544

EVA (Rs mn) (1,276) (1,708) (1,766) (1,974)

EVA spread (%) (4.8) (5.1) (4.8) (4.5)

Y/E March FY08 FY09 FY10E FY11E

Profitability & Return ratios (%)

EBITDA margin 11.9 13.0 12.5 12.5

EBIT margin 8.8 9.5 9.2 9.3

Net profit margin 2.3 2.3 2.6 2.9

ROE 7.6 7.6 8.4 9.0

ROCE 7.8 9.7 7.6 8.0

Working Capital & Liquidity ratios

Receivables (days) 0 1 1 1

Inventory (days) 309 377 347 348

Payables (days) 114 137 132 135

Current ratio (x) 2.7 2.5 2.4 2.3

Quick ratio (x) 0.0 0.0 0.0 0.0

Turnover & Leverage ratios (x)

Gross asset turnover 2.5 2.1 2.3 2.4

Total asset turnover 0.8 0.8 0.8 0.8

Interest coverage ratio 1.7 1.4 1.6 1.8

Adjusted debt/equity 1.8 2.3 1.4 1.5

Valuation ratios (x)

EV/Sales 1.9 1.8 1.4 1.2

EV/EBITDA 16.0 13.6 11.3 9.5

P/E 49.3 46.9 37.5 28.9

P/BV 3.3 3.3 2.4 2.4


52

Quarterly trend

Particulars Q1FY09 Q2FY09 Q3FY09 Q4FY09 Q1FY10

Revenue (Rs mn) 8,659 6,489 8,194 9,795 8,725

YoY growth (%) 18.8 18.3 9.3 (7.2) 0.8

QoQ growth (%) (17.9) (25.1) 26.3 19.5 (10.9)

EBITDA (Rs mn) 911 834 1,060 1,504 1,115

EBITDA margin (%) 10.5 12.9 12.9 15.4 12.8

Adj net income (Rs mn) 195 (48) 290 308 208

YoY growth (%) 38 (463) 47 (11) 7

QoQ growth (%) (44) (124) (710) 6 (32)

DuPont analysis

(%) FY07 FY08 FY09 FY10E FY11E

Tax burden (Net income/PBT) 81.2 60.2 66.0 71.1 67.5

Interest burden (PBT/EBIT) 55.6 44.5 36.4 40.0 46.5

EBIT margin (EBIT/Revenues) 5.8 8.8 9.5 9.2 9.3

Asset turnover (Revenues/Avg TA) 75.5 84.9 75.2 79.2 83.2

Leverage (Avg TA/Avg equtiy) 348.1 380.5 438.6 406.2 368.8

Return on equity 6.9 7.6 7.6 8.4 9.0

Company profile

Hindustan Construction Co (HCC) is an integrated group with a

focus on construction, real estate, and infrastructure development.

The HCC group comprises HCC Construction, HCC Infrastructure,

HCC Real Estate, and Lavasa Corporation. The group specialises in

technically complex, new-age construction for infrastructure

projects, as well as EPC, BOT, integrated projects, and townships.

Shareholding pattern

(%) Dec-08 Mar-09 Jun-09

Promoters 47.2 47.2 47.2

FIIs 6.7 8.8 8.7

Banks & FIs 20.4 18.6 16.9

Public 25.7 25.4 27.2

Recommendation history

Date Event Reco price Tgt price Reco

21-Aug-08 RHH Compendium 97 158 Buy

8-Sep-08 Company Update 97 157 Buy

6-Oct-08 Quarterly Preview 71 125 Buy

27-Oct-08 Results Review 37 52 Hold

19-Jan-09 Results Review 44 47 Sell

6-Apr-09 Quarterly Preview 38 47 Hold

25-Apr-09 Results Review 57 55 Hold

24-Jul-09 Results Review 111 120 Hold

05-Oct-09 Sector Report 130 141 Hold

Stock performance

25456585

105125

Jul-

08

Sep-

08

Nov

-08

Jan-

09

Mar

-09

May

-09

Jul-

09

Sep-

09

● Hold ● Sell ● Buy

IRB Infrastructure Sector Report 05 October 2009

53


(%) FY08 FY09E FY10E FY11E

EBITDA margin 56.2 37.2 45.8 35.2

EBIT margin 42.3 24.3 35.4 25.4

Adj PAT margin 15.5 13.5 18.4 13.7

ROE 11.4 7.1 18.1 19.7

ROIC 8.2 4.5 12.1 11.4

ROCE 8.2 5.9 11.6 11.9



Revenue 7,327 8,834 18,693 32,940

Growth (%) 139.7 20.6 111.6 76.2

Adj net income 1,139 1,197 3,432 4,504

Growth (%) 405.1 5.1 186.7 31.2

FDEPS (Rs) 4.2 3.6 10.3 13.6

Growth (%) 357.9 (13.8) 186.7 31.2

IRB Infrastructure Ramp up in road contracts

Portfolio of 12 road projects: IRB Infrastructure (IRB) has a portfolio of 12 BOT road projects, of which 11 are contributing revenues, two are under construction, and one has recently achieved financial closure. These projects, entailing a capitalised cost of Rs 60.7bn, have been funded through a mix of equity (Rs 14.5bn) and debt (Rs 46.2bn).

L1 for four projects worth Rs 43bn; secured one worth Rs 12bn: IRB has emerged as the lowest bidder for four BOT road projects; of these, one Rs 12.5bn contract, for four to six-laning of the 102km-long Pathankot to Amritsar section of NH-15 in Punjab, has been awarded to the company. The remaining three L1 projects are: 1) four-laning of a 65km stretch on NH-4A in Goa (estimated cost Rs 8.3bn), 2) the 148.7km Jaipur to Deoli section in Rajasthan (Rs 15bn), and 3) four-laning of the 67km-long Talegaon to Amravati section in Maharashtra (Rs 8bn). Contract awards may materialise in October ‘09, fuelling the company’s EPC order book from current Rs 56.6bn to Rs 99.6bn. This apart, IRB has recently won a project for development of a Greenfield airport in Sindhudurg, Maharashtra, on a DBFO basis.

Strong in-house construction order book of Rs 56.6bn: IRB’s order book of Rs 56.6bn is bifurcated as follows: a) EPC (Rs 30.9bn) to be executed within three years, and b) O&M (Rs 25.7bn) to be executed within 10–12 years. IRB’s construction arm reports margins of ~18% vis-à-vis the industry average of 10%. This outperformance can be attributed to lower subcontracting expenses, a large fleet of equipment, ownership of aggregate mines, and higher cost assumptions while pricing project bids.

Target price of Rs 224 – Buy: Over FY09-FY11, we anticipate a significant 93.1% CAGR in IRB’s revenues and a 94.0% CAGR in earnings led by its strong BOT road and construction portfolio. At present, the stock is trading at 20.2x FY10E and 15.4x FY11E earnings. We have a revised SOTP target of Rs 224 for IRB as follows:

BOT road projects valued at Rs 119 based on FY11E NPV. This implies a P/BV of 2.6x and 2.2x on FY10E and FY11E respectively.

Core construction business valued at Rs 79 or 12x FY11E earnings. We have increased our target multiple from 11x earlier due increase in broader market multiples.

Real estate valued at Rs 3 (book value).

Provisional NPV valuation of the four new BOT projects at Rs 23.

Key triggers: A softening interest rate scenario and improved traffic growth as economic revival gains momentum would be key triggers for the stock.



Rs 209 Rs 224 BUY MEDIUM

BSE NSE BLOOMBERG

532947 IRB IRB IN

Company data

Market cap (Rs mn / US$ mn) 69,464 / 1,455


Free float (%) 25.6




Stock performance


IRB 209 (0.8) 28.1 138.2

Sensex 17,135 10.2 17.0 73.0

P/E comparison

58.0

20.2 15.429.6 24.9 21.1

0

20

40

60

80

FY09 FY10E FY11E

IRB Cap. Goods(x)

Valuation matrix


P/E @ CMP 50.0 58.0 20.2 15.4

P/E @ Target 53.6 62.1 21.7 16.5

EV/EBITDA @ CMP 23.9 30.0 11.5 8.5


54


Fig 112 - Comparative BOT toll revenue for last three years

Sr. no. Toll Plaza FY07

(Rs mn) FY08

(Rs mn)

YoY Growth

(%)

FY09 (Rs mn)

YoY Growth

(%)

1 Thane Bhivandi Bypass 244 335 36.9 403 20.6

2 Bhiwandi Wada * 25 30 19.5 16 (48.5)

3 Kaman Paygaon 34 36 7.6 36 (0.1)

4 Khambatki Ghat** 110 128 16.2 131 2.2

5 Kharpada Bridge 87 75 (13.7) 71 (5.9)

6 Nagar-Karmala-Tembhurni 89 110 23.5 113 3.1

7 Mohol-Kurul-Mandrup 37 61 62.8 65 7.4

8 Pune-Solapur 120 136 14 127 (6.9)

9 Pune-Nasik 154 160 3.6 164 2.5

10 Mumbai - Pune# 1,725 2,352 36.4 2,880 22.4

11 Thane Ghodbunder 213 270 26.7 265 (1.8)

12 Surat-Dahisar## - - NA 336 NA

Total 2,839 3,693 30.1 4,607 15.6

Source: RHH, Company

* Concession period ended on 22 September 2008. ** Concession period expired during this month. #In FY07 revenue from NH-4 phase is from the date of project commission i.e. from September’’06 to March ’07. ## Revenue from Surat- Dahisar commissioned on 20 February 2009. # Growth calculated without considering revenue from Surat-Dahisar as this project was commissioned on 20 February 2009.

Fig 113 - Order book break-up – Q1FY10

Order book composition Rs mn % of Total

EPC in ongoing BOT projects 28,661 50.6

Funded projects 2,275 4.0

BOT projects in O&M phase 25,670 45.3

Total 56,606 100.0

Source: Company

Fig 114 - Summary of L-1 projects / projects recently awarded

Sr. No.

Road (Rs mn) NHDP Phase

Length (Km)

Project cost

Positive grant

% of Total Cost

Equity Debt Concession period (yrs)

NPV FY11E

1 Goa / Karnataka Border to Panaji - Goa

III 65.1 8,360 1,860 22.2 2,600 3,900 30 3.0

2 Pathankot to Amritsar* III 102 12,500 1,270 10.2 3,930 7,300 20 1.2

3 Jaipur to Deoli Section III 148.8 15,000 3,060 20.4 3,582 8,358 25 10.7

4 Talegaon - Amravati III 66.7 8,000 2,160 27.0 1,752 4,088 25 7.8

Total 382.6 43,860 8,350 19.0 11,864 23,646 22.7

Source: Company, RHH *Awarded


55

Valuation

Fig 115 - SOTP valuation summary

Project Subsidiary NPV per share (Rs)

Thane Bhivandi Bypass IRB

Bhiwandi Wada IRB

Kaman Paygaon IRB Khambatki Ghat IRB

14

Kharpada Bridge IRB Infrastructure Pvt Ltd 2

Nagar-Karmala-Tembhurni

NKT Road & Toll 2

Mohol-Kurul-Mandrup MMK Toll Road 1

Pune-Solapur Aryan Toll Road 3

Pune-Nasik ATR Infrastructure 5

Mumbai-Pune Mhaiskar Infrastructure 42

Thane Ghodbunder Thane Ghodbunder Toll Road 4

Bharuch-Surat IDAA Infrastructure 23

Surat-Dahisar IRB Surat Dahisar Tollway 3

IRDP-Kolhapur IRB Kolhapur Integrated Road Development Co 5

Total FY09E NPV 105

FY10E NPV 119

Construction business Modern Road Makers 79

Real Estate Aryan Infrastructure Investments 3

NPV of Four L1 projects 23

Total value 224

Source: RHH

Note:

We have revised the cost of equity to 12% from 13% earlier only for operational projects.

For the projects referred to in Fig 114, we have considered EPC revenue in our model. However, we await finalisation of the project awarding before considering balance sheet implications.


56

Stock performance

Fig 116 - Absolute performance from Feb ’08

50

90

130

170

210

250

Feb-08 Jun-08 Oct-08 Feb-09 Jun-09 Sep-09

Sensex IRB BSE CG Index


Fig 117 - Relative performance from Feb ’08

40

60

80

100

120

140

Feb-08 Jun-08 Oct-08 Feb-09 Jun-09 Sep-09



Fig 118 - Relative performance from February ’08 to March ’08

90

95

100

105

110

115

120

Feb-08 Mar-08 Mar-08




40

60

80

100

120

140

Apr-08 Jun-08 Sep-08 Dec-08 Mar-09




40

60

80

100

120

140

160

180

Apr-09 Jun-09 Sep-09




57


Fig 121 - P/E band

0

50

100

150

200

250

300

Aug-08 Nov-08 Feb-09 May-09 Aug-09

(Rs)

24x

18x

12x

6x

Source: RHH

Fig 122 - P/BV band

50

100

150

200

250


(Rs)

3.5x

2.5x

1x

1.5x

Source: RHH


30,000

60,000

90,000

120,000


12x

10x

8x

6x

(Rs mn)

Source: RHH


0

20,000

40,000

60,000

80,000

100,000

120,000

140,000


5x

4x

2.5x

1x

(Rs mn)

Source: RHH

Fig 125 - Premium / Discount to BSE 30 P/E

(%)

(50)

0

50

100

150

200


Source: RHH


10,00020,00030,00040,00050,00060,00070,00080,00090,000

100,000


3.5x

2.5x

1.5x

1x

(Rs mn)

Source: RHH


58

FCFE valuation for L1 projects / works recently awarded

Fig 127 - FCFE – Goa / Karnataka Border to Panaji - Goa

FCFE (Rs mn) FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23 FY24 FY25

Revenue - - - 245 546 608 677 753 838 933 1,038 1,156 1,286 1,432 1,593 1,773

EBITDA - - - 147 441 494 554 139 695 778 872 320 1,092 1,221 1,366 1,528

Tax - - - - - (1) (13) - (40) (56) (73) - (112) (134) (159) (186)

Interest - - - (229) (442) (425) (407) (390) (373) (355) (338) (321) (303) (286) (269) (251)

Working capital - 12 13 8 8 13 14 14 15 16 16 17 32 23 20 21

Capex (2,090) (3,344) (2,926) - - - - - - - - - - - - -

Change in debt 975 1,560 1,365 (144) (144) (144) (144) (144) (144) (144) (144) (144) (144) (144) (144) (144)

NHAI Grant 465 744 651 - - - - - - - - - - - - -

FCFE (650) (1,028) (897) (218) (138) (63) 3 (381) 153 239 333 (128) 564 680 814 967

NPV (Rs) 984

Value per share (Rs) 3.0

FCFE (Rs mn) FY26 FY27 FY28 FY29 FY30 FY31 FY32 FY33 FY34 FY35 FY36 FY37 FY38 FY39 FY40

Revenue 1,974 2,197 2,445 2,721 3,029 3,371 3,752 4,176 4,648 5,173 5,758 6,409 7,133 7,939 8,836

EBITDA 746 1,911 2,136 2,388 2,669 1,567 3,332 3,723 4,158 4,644 3,107 5,791 6,466 7,219 8,058

Tax (53) (250) (287) (328) (747) (366) (959) (1,083) (1,221) (1,374) (837) (1,733) (1,943) (2,177) (2,434)

Interest (234) (217) (199) (182) (165) (147) (130) (113) (95) (78) (61) (43) (26) (9) (0)

Working capital 22 23 23 24 25 26 27 28 29 29 30 31 32 32 217

Capex - - - - - - - - - - - - - - -

Change in debt (144) (144) (144) (144) (144) (144) (144) (144) (144) (144) (144) (144) (144) (144) -

NHAI Grant - - - - - - - - - - - - - - -

FCFE 336 1,322 1,529 1,758 1,638 935 2,125 2,410 2,726 3,077 2,095 3,902 4,384 4,921 5,841

Source: RHH


59

Fig 128 - FCFE – Pathankot to Amritsar (recently awarded)

FCFE (Rs mn) FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22 FY23 FY24 FY25 FY26 FY27 FY28 FY29 FY30

Revenue - - - 580 1,288 1,427 1,581 1,751 1,940 2,149 2,380 2,637 2,921 3,236 3,585 3,971 4,399 4,873 5,398 5,979 6,623

EBIDTA - - - 376 1,069 1,190 1,325 719 1,641 1,826 2,032 1,233 2,514 2,797 3,110 3,458 2,336 4,275 4,752 5,282 3,817

Tax - - - - - (19) (44) - (101) (133) (168) (31) (246) (290) (338) (391) (192) (1,023) (1,161) (1,313) (773)

Interest - - - (424) (799) (747) (696) (644) (593) (541) (490) (438) (386) (335) (283) (232) (180) (129) (77) (26) (0)

Working capital 240 12 13 1 (1) 12 12 13 13 13 14 14 15 15 15 16 16 16 17 17 (620)

Capex (3,304) (5,287) (4,626) - - - - - - - - - - - - - - - - - -

Change in debt 1,825 2,920 2,555 (429) (429) (429) (429) (429) (429) (429) (429) (429) (429) (429) (429) (429) (429) (429) (429) (429) -

NHAI Grant 318 508 445 - - - - - - - - - - - - - - - - - -

FCFE (922) (1,847) (1,614) (476) (160) 6 167 (342) 531 736 959 349 1,467 1,757 2,074 2,422 1,550 2,710 3,101 3,531 2,424

NPV (Rs) 409


Source: RHH


60

Fig 129 - FCFE – Jaipur to Deoli

FCFE (Rs mn) FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22

Revenue - - - 576 1,285 1,431 1,592 1,772 1,972 2,195 2,443 2,720 3,027

EBIDTA - - - 483 1,085 1,214 1,359 694 1,700 1,901 2,126 1,252 2,656

Tax - - - - - (22) (50) - (115) (152) (192) (45) (284)

Interest - - - (489) (935) (889) (843) (798) (752) (707) (661) (615) (570)

Working capital 240 12 13 1 (1) 12 12 12 13 13 13 14 29

Capex (3,179) (6,000) (5,821) - - - - - - - - - -

Change in debt 1,672 3,343 3,343 (380) (380) (380) (380) (380) (380) (380) (380) (380) (380)

NHAI Grant 612 1,224 1,224 - - - - - - - - - -

FCFE (655) (1,421) (1,241) (384) (230) (65) 97 (472) 466 676 906 226 1,451

NPV (Rs) 3,545



Revenue 3,369 3,750 4,173 4,645 5,170 5,754 6,404 7,128 7,933 8,830 9,827 10,938 12,174

EBIDTA 2,968 3,317 3,706 2,489 4,625 5,166 5,769 6,442 4,766 8,029 8,963 10,004 11,166

Tax (337) (395) (459) (249) (607) (693) (788) (893) (597) (1,139) (1,282) (1,441) (1,613)

Interest (524) (479) (433) (388) (342) (296) (251) (205) (160) (114) (68) (23) 0

Working capital 19 16 16 16 16 16 17 17 16 16 16 15 15

Capex - - - - - - - - - - - - -

Change in debt (380) (380) (380) (380) (380) (380) (380) (380) (380) (380) (380) (380) -

NHAI Grant - - - - - - - - - - - - -

FCFE 1,746 2,079 2,450 1,489 3,312 3,813 4,366 4,980 3,645 6,413 7,248 8,176 9,567

Source: RHH


61

Fig 130 - FCFE – Talegaon to Amravati


Revenue - - - 323 721 803 894 995 1,107 1,232 1,371 1,526 1,699

EBIDTA - - - 277 621 694 776 497 970 1,084 1,212 850 1,512

Tax - - - - (12) (26) (41) - (77) (97) (119) (58) (170)

Interest - - - (239) (459) (437) (416) (395) (373) (352) (331) (309) (288)

Working capital 240 12 13 6 6 13 13 14 15 15 16 16 31

Capex (2,000) (3,200) (2,800) - - - - - - - - - -

Change in debt 1,022 1,635 1,431 (178) (178) (178) (178) (178) (178) (178) (178) (178) (178)

NHAI Grant 540 864 756 - - - - - - - - - -

FCFE (198) (689) (601) (134) (22) 66 155 (61) 357 473 600 321 908

NPV (Rs) 2,591



Revenue 1,891 2,104 2,342 2,607 2,901 3,229 3,594 4,000 4,452 4,955 5,515 6,138 6,832

EBIDTA 1,689 1,887 2,107 1,612 2,627 2,933 3,275 3,655 2,991 4,553 5,081 5,669 6,325

Tax (200) (232) (268) (182) (351) (400) (453) (1,025) (786) (1,302) (1,464) (1,643) (1,843)

Interest (267) (245) (224) (203) (181) (160) (139) (117) (96) (75) (53) (32) (11)

Working capital 22 19 20 20 21 22 22 23 24 (604) - - -

Capex - - - - - - - - - - - - -

Change in debt (178) (178) (178) (178) (178) (178) (178) (178) (178) (178) (178) (178) (178)

NHAI Grant - - - - - - - - - - - - -

FCFE 1,067 1,251 1,457 1,071 1,938 2,218 2,528 2,358 1,955 2,395 3,386 3,816 4,294

Source: RHH


62

Consolidated financials


Revenues 7,327 8,834 18,693 32,940

Growth (%) 139.7 20.6 111.6 76.2

EBITDA 4,119 3,289 8,564 11,610

Growth (%) 149.0 (20.1) 160.4 35.6

Depreciation & amortisation 1,016 1,143 1,938 3,241

EBIT 3,103 2,146 6,626 8,369

Growth (%) 175.0 (30.8) 208.7 26.3

Interest 1,958 1,304 2,777 3,622

Other income 520 585 521 1,099

EBT 1,666 1,427 4,371 5,846

Income taxes 400 217 839 1,313



Min into / inc from associates - - - -


Adjustments - - - -

Adjusted net income 1,139 1,197 3,432 4,504

Growth (%) 405.1 5.1 186.7 31.2


FDEPS (Rs) (adj) 4.2 3.6 10.3 13.6

Growth (%) 357.9 (13.8) 186.7 31.2

DPS (Rs) 0.0 1.7 1.0 1.0

Y/E March (Rs mn) FY08 FY09E FY10E FY11E

Cash and cash eq 5,222 4,148 5,517 5,231

Accounts receivable 118 130 183 484

Inventories 502 2,054 2,492 3,904


Investments 1,985 1,108 - -


Net fixed assets 18,848 20,161 48,627 57,842

CWIP 8,889 14,545 - -


Deferred tax assets, net (26) (182) - -

Other assets 16 9 8 -

Total assets 39,300 45,968 61,986 78,313

Accounts payable 426 1,303 4,947 8,777

Other current liabilities 623 - - -

Provisions 1,551 1,908 1,589 1,795

Debt funds 20,212 24,859 34,690 42,587


Equity capital 3,324 3,324 3,324 3,324




BVPS (Rs) 48.8 52.1 62.2 75.6

Cash flow statement Financial ratios Y/E March (Rs mn) FY08 FY09E FY10E FY11E


Non-cash adjustments (35) 707 49 40

Changes in working capital (1,586) (1,420) 1,669 (3,370)

Cash flow from operations 662 1,640 7,190 4,444


Change in investments (610) 930 1,108 -

Other investing cash flow 1,802 2 - -


Issue of equity 8,358 208 - -

Issue/repay debt (2,324) 4,581 9,831 7,897

Dividends paid (15) (223) 652 372

Other financing cash flow - - - -

Change in cash & cash eq 908 (146) 2,922 265

Closing cash & cash eq 5,222 4,148 5,517 5,231

Economic Value Added (EVA) analysis Y/E March FY08 FY09E FY10E FY11E

WACC (%) 11.5 11.9 11.9 11.9

ROIC (%) 8.2 4.5 12.1 11.4


EVA (Rs mn) (1,045) (2,846) 110 (331)

EVA spread (%) (3.3) (7.4) 0.2 (0.5)

Y/E March FY08 FY09E FY10E FY11E


EBITDA margin 56.2 37.2 45.8 35.2

EBIT margin 42.3 24.3 35.4 25.4


ROE 11.4 7.1 18.1 19.7

ROCE 8.2 5.9 11.6 11.9




Payables (days) 55 57 113 117

Current ratio (x) 9.1 7.9 2.7 2.3

Quick ratio (x) 0.1 0.1 0.0 0.1







EV/Sales 13.5 11.2 5.3 3.0

EV/EBITDA 23.9 30.0 11.5 8.5

P/E 50.0 58.0 20.2 15.4

P/BV 4.3 4.0 3.4 2.8


63

Quarterly trend


Revenue (Rs mn) 2,301 2,016 2,391 3,211 4,141

YoY growth (%) NA NA NA NA 80.0

QoQ growth (%) NA (12.4) 18.6 34.3 29.0

EBITDA (Rs mn) 1,174 985 1,015 1,205 1,662

EBITDA margin (%) 51.0 48.9 42.5 37.5 40.1

Adj net income (Rs mn) 542 412 382 422 888

YoY growth (%) NA NA NA NA 64

QoQ growth (%) NA (24) (7) 10 110

DuPont analysis

Percentage FY07 FY08 FY09E FY10E FY11E






Return on equity 11.9 11.4 7.1 18.1 19.7

Company profile

IRB Infrastructure is one of India’s leading private road infrastructure

companies operating primarily in two segments, i.e., road BOT and

construction projects. The company has a portfolio of 12 BOT road

projects, of which 10 are operational, one is under construction,

and one is yet to achieve financial closure. Its construction order

book totals Rs 63bn and is bifurcated between EPC (Rs 35bn)

executable within three years, and O&M contracts (Rs 28bn)

executable within 10–12 years.


(%) Dec-08 Mar-09 Jun-09

Promoters 74.4 74.4 73.9

FIIs 16.5 13.0 11.2

Banks & FIs 3.8 4.1 4.6

Public 5.3 8.5 10.3



14-Jan-09 Initiating Coverage 112 130 Hold

30-Jan-09 Results Review 112 126 Hold

27-Mar-09 Company Update 79 122 Buy

25-May-09 Results Review 136 125 Hold

22-Jun-09 Company Update 135 165 Buy

30-Jul-09 Results Review 188 208 Buy

05-Oct-09 Sector Report 209 224 Buy

Stock performance

45

90

135

180

225

Nov

-08

Dec

-08

Jan-

09

Feb-

09

Mar

-09

Apr

-09

May

-09

Jun-

09

Jul-

09

Aug

-09

Sep-

09

● Buy ● Hold

IVRCL Infrastructure Sector Report 05 October 2009

64



Revenue 36,606 48,819 63,465 76,157

Growth (%) 58.8 33.4 30.0 20.0

Adj net income 1,865 1,880 2,564 3,044

Growth (%) 28.4 0.8 36.4 18.7

FDEPS (Rs) 13.8 13.9 19.0 22.6

Growth (%) 13.3 0.6 36.4 18.7



EBITDA margin 9.9 8.6 9.3 9.3

EBIT margin 9.0 7.7 8.3 8.4


ROE 12.7 11.0 13.8 15.0

ROIC 11.6 10.9 10.4 10.9

ROCE 12.1 12.0 11.8 12.3

IVRCL Infrastructure On a firm footing

Healthy order book with plans to diversify globally: IVRCL has an order book of Rs 149bn (including L1 orders of Rs. 10bn) at the end of June ’09, wherein water and environment projects account for the lion’s share of 65%, buildings 20%, power and transmission 10%, and transportation 5%. Post June, the company has bagged orders worth Rs 16.3bn. It is also the lowest bidder (L1) in one road project Sion-Panvel, valued at Rs 15bn respectively.

IVRCL is looking to diversify geographically by entering into the Middle East, mainly in the water and power divisions. It expects to close FY10 with an order book of Rs 170bn–180bn, implying fresh inflows of Rs 90bn–100bn in FY10. About 90–95% of the order book consists of government projects. In terms of geography, Andhra Pradesh contributes 30% to the total book. IVRCL has maintained its topline growth guidance of 30–35% for FY10 with margins at ~9.5%.

Matured BOT portfolio: The company plans to treble its road portfolio from the current Rs 18bn to Rs 60bn over the next 12 months with an average equity IRR of 16%. It expects three ongoing BOT projects to start contributing to revenue over the next 12 months with a daily toll collection of Rs 5mn. It intends to rope in some private equity players for funding or opt for a stake sale. The average cost of debt for BOT projects is ~10–11%.

Jalandhar–Amritsar project cost revised upwards: The Jalandhar–Amritsar Tollways project cost has been revised from Rs 2.4bn to Rs 3.4bn due to a change in scope of work. IVRCL has obtained a loan sanction for Rs 795mn to meet the increase in project cost; the balance will be funded through an equity infusion.

Chennai desalination plant to be completed in Oct: IVRCL holds a 75% stake in the Chennai water desalination project. Owing to the impact of forex fluctuations on imported capital goods and delays in commissioning due to force majeure conditions, the project cost has escalated from Rs 4.9bn to Rs 5.7bn. The completion timeline has been extended from August ’08 to October ’09, mainly on account of consecutive cyclones, abnormal climatic conditions at the site and other unforeseen circumstances.

Target raised to Rs 434: The stock is currently trading at 17.2x FY11E earnings and adjusting the subsidiary value, it trades at 14.0x FY11E earnings. We are revising our target price upward to Rs. 434 from 412 earlier. We maintain our Buy rating on the stock.



Rs 388 Rs 434 BUY HIGH

BSE NSE BLOOMBERG

530773 IVRCLINFRA IVRC IN

Company data



Free float (%) 90.4




Stock performance


IVRCL Infra 388 7.5 10.3 202.2

Sensex 17,135 10.2 17.0 73.0

P/E comparison

27.9 29.624.9 21.117.220.4

0

10

20

30

40

FY09 FY10E FY11E

IVRCL Cap. Goods(x)

Valuation matrix


P/E @ CMP 28.0 27.9 20.4 17.2

P/E @ Target 31.4 31.2 22.8 19.2

EV/EBITDA @ CMP 19.1 16.3 11.7 9.7


65

Order book trend

Fig 131 - Q1FY10 order book at Rs 149bn (incl L1 of Rs 10bn)

8396

110128 124

138 143 145 149

19 12 11242229312420

020406080

100120140160

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1

FY08 FY09 FY10

Order book Order Received(Rs bn)


Fig 132 - Order book position segment-wise – Q1FY10

Power &Transmission

10%Bldg &

Industrial structure

20%

Water and Environment

65%

Transportation5%


Valuation


Sum-of-the-parts Business Method Multiple Value (Rs mn) Per share value (Rs)

IVRCL standalone Construction FY11E earnings 16x 48,709 361

IVR Prime Real estate Market capitalization (20% discount) 3,584 27

Hind Dorr Oliver Market capitalization (20% discount) 2,052 15

BOT Project Road/Water P/BV 1.5x 4,249 31

Total 58,593 434Source: RHH


66

Stock performance


0

100

200

300

400

500

600


Sensex IVRCL BSE CG Index



4090

140190240290340390440490





70

80

90

100

110

120

130

140





45

65

85

105

125

145

165

185





20

40

60

80

100

120





20

70

120

170

220





67


Fig 140 - P/E band

0100200300400500600700800900


(Rs)

40x

20x

10x4x

Source: RHH

Fig 141 - P/BV band

0

200

400

600

800

1,000

1,200


(Rs)

6.5x

3x

0.5x

1.5x

Source: RHH


0

20,000

40,000

60,000

80,000

100,000

120,000

140,000


21x

15x

10x

5x

(Rs mn)

Source: RHH


0

20,000

40,000

60,000

80,000

100,000

120,000

140,000


2x

1.4x

0.8x

0.2x

(Rs mn)

Source: RHH


(%)

(100)

(50)

0

50

100

150

200


Source: RHH


0

20,000

40,000

60,000

80,000

100,000

120,000

140,000

160,000


2x

1.4x

0.8x

0.2x

(Rs mn)

Source: RHH


68



Revenues 36,606 48,819 63,465 76,157

Growth (%) 58.8 33.4 30.0 20.0

EBITDA 3,617 4,218 5,873 7,099

Growth (%) 55.6 16.6 39.2 20.9

Depreciation & amortisation 328 473 588 681

EBIT 3,288 3,745 5,285 6,418

Growth (%) 56.0 13.9 41.1 21.4

Interest 1,165 1,980 2,207 2,674

Other income 730 973 750 800

EBT 2,853 2,738 3,827 4,544

Income taxes 749 478 1,263 1,499







Growth (%) 28.4 0.8 36.4 18.7


FDEPS (Rs) (adj) 13.8 13.9 19.0 22.6

Growth (%) 13.3 0.6 36.4 18.7

DPS (Rs) 1.4 1.4 2.0 2.0


Cash and cash eq 1,772 1,009 715 516

Accounts receivable 6,585 11,430 13,910 16,692

Inventories 1,943 2,093 3,130 3,756


Investments 3,409 3,893 4,095 4,295


Net fixed assets 3,192 5,208 5,640 6,079

CWIP 541 196 400 400


Deferred tax assets, net (103) (117) (148) (184)

Other assets (110) (188) (190) (190)

Total assets 35,756 47,126 56,642 65,573



Provisions 238 247 612 612

Debt funds 10,678 13,980 17,980 20,480

Other liabilities - - - -





BVPS (Rs) 120.6 135.7 142.0 162.4



Non-cash adjustments (313) (439) 31 36

Changes in working capital (6,283) (2,880) (4,173) (4,478)

Cash flow from operations (4,163) (586) (990) (717)


Change in investments (399) (1,057) (450) (550)



Issue of equity 8 - (1,411) -

Issue/repay debt 5,929 3,222 4,000 2,500

Dividends paid (152) (189) (219) (312)

Other financing cash flow (63) - - -

Change in cash & cash eq (466) (763) (294) (199)

Closing cash & cash eq 1,772 1,009 715 516


WACC (%) 12.5 13.1 13.1 13.1

ROIC (%) 11.6 10.9 10.4 10.9


EVA (Rs mn) (221) (664) (981) (921)

EVA spread (%) (0.9) (2.1) (2.7) (2.2)




EBIT margin 9.0 7.7 8.3 8.4


ROE 12.7 11.0 13.8 15.0

ROCE 12.1 12.0 11.8 12.3





Current ratio (x) 3.3 2.6 2.5 2.4

Quick ratio (x) 1.0 0.8 0.8 0.7







EV/Sales 1.9 1.4 1.1 0.9

EV/EBITDA 19.1 16.3 11.7 9.7

P/E 28.0 27.9 20.4 17.2

P/BV 3.2 2.9 2.7 2.4


69

Quarterly trend


Revenue (Rs mn) 9,285 11,366 11,896 16,272 10,807

YoY growth (%) 37.1 65.1 22.0 23.1 16.4

QoQ growth (%) (29.7) 22.4 4.7 36.8 (33.6)

EBITDA (Rs mn) 820 913 1,085 1,419 943

EBITDA margin (%) 8.8 8.0 9.1 8.7 8.7


YoY growth (%) 14.9 62.0 (27.4) 8.8 (19.5)

QoQ growth (%) (40.6) 31.0 (18.5) 71.6 (56.0)

DuPont analysis







Return on equity 16.1 12.7 11.0 13.8 15.0

Company profile

IVRCL Infrastructure (IVRCL) is a leading Hyderabad-based civil

construction company promoted by Mr E Sudhir Reddy. Established

in 1987, the company has created a niche for itself in the water

segment and is one of the largest players with strong pre-

qualifications. It has executed a variety of projects from irrigation to

desalination works. Today, IVRCL has a well-diversified, derisked

business mix with a presence across various sectors – buildings and

industrial structures, transportation, water and environment.


(%) Dec-08 Mar-09 Jun-09

Promoters 9.7 9.7 9.7

FIIs 43.0 48.6 48.4

Banks & FIs 23.1 19.2 19.1

Public 24.2 22.5 22.8





06-Nov-08 Results Review 105 176 Buy

31-Jan-09 Results Review 110 146 Buy

02-Jun-09 Results Review 332 370 Buy




Stock performance

0

100

200

300

400

Aug-

08

Sep-

08

Oct

-08

Nov

-08

Dec

-08

Jan-

09

Feb-

09

Mar

-09

Apr-

09

May

-09

Jun-

09

Jul-0

9

Aug-

09

Sep-

09

● Buy

Jaiprakash Associates Sector Report 05 October 2009

70



EBITDA margin 27.5 28.1 27.2 26.0

EBIT margin 22.4 22.9 22.9 21.5

Adj PAT margin 15.3 15.4 15.1 15.0

ROE 16.3 17.2 21.5 20.5

ROIC 6.9 7.5 9.5 8.7

ROCE 8.3 9.0 11.2 11.2



Revenue 39,851 57,750 91,167 105,623

Growth (%) 14.6 44.9 57.9 15.9

Adj net income 6,097 8,891 13,746 15,840

Growth (%) 16.4 47.7 53.1 10.8

FDEPS (Rs) 4.9 7.1 9.4 10.8

Growth (%) 39.2 45.4 31.6 15.2

Jaiprakash Associates On an expansion spree

Aggressive plans across segments: Jaiprakash Associates (JP Associates) intends to embark on an ambitious plan in pursuit of becoming one of India’s largest cement manufacturers with a capacity of 32mn tonnes (mt) by FY12. It also intends to attain leadership in BOT operations and evolve as a key player in power (10-fold capacity ramp up by 2017) and real estate sectors.

We expect JP Associates to add 3.1mt of cement capacity this year to its existing capacity of 17mt. The company has a power portfolio of 13,470MW with 60% thermal-hydro mix and 40% merchant power. It also has India’s two largest expressway projects: (a) Ganga Expressway – 1,047 km (with real estate development rights of 3.3bn sq ft), and (b) Yamuna Expressway – 165km (with real estate development rights over 6,250 acres). This provides strong revenue visibility, going forward.

Raised Rs 15bn through sale of treasury stock: Recently, JP Associates raised Rs 15bn in two tranches: 1) Rs 11.9bn through sale of treasury shares of 50mn at Rs 238/share, 2) ~Rs 5bn through sale of treasury shares of 25mn at ~Rs 200/share. These funds will be used to repay debt and finance expansions of various businesses. JP Associates plans to invest Rs 15bn in the cement division, Rs 5bn in the power division, and Rs 4bn in the E&C division.

Securitisation of power assets to ease funding concerns: JP Associates has recently mobilised resources through the securitisation of its 400MW Vishnuprayag Hydro Project, resulting in an inflow of Rs 16.5bn. Securitisation of receivables on JHPL-BASPA is also anticipated; the management foresees a net realisation of Rs 11bn from this transaction. In addition, the company has acquired two power generation companies for setting up a 3,300MW plant on BOO basis and is likely to raise funds for these ventures in three tranches this fiscal.

3,300 flats of Jaypee Green sold in 24 hrs: JP Associates has received an overwhelming response for Jaypee Greens Aman, its newly launched residential project, with 3,300 flats sold within 24 hours.

Earnings to grow at 33.5% over FY09-FY11: We expect the company’s revenues and earnings to grow at a CAGR of 35.2% and 33.5% respectively over FY09-FY11, primarily driven by incremental contribution from enhanced cement capacities and strong execution of construction projects.

Maintain Hold: Currently, the stock trades at 22.1x FY11E earnings. We have a revised SOTP target price of Rs 237 from Rs 220 earlier and maintain a Hold rating on the stock. However, we believe the stock has significant embedded value in the long term based on a revival of residential real estate and faster execution of power projects.



Rs 239 Rs 237 HOLD HIGH

BSE NSE BLOOMBERG

532532 JPASSOCIAT JPA IN

Company data


Outstanding equity shares (mn) 1,404

Free float (%) 55




Stock performance


JP Associates 239 7.8 15.1 180.3

Sensex 17,135 10.2 17.0 73.0

P/E comparison

33.525.5 22.1

29.624.9 21.1

0

10

20

30

40

FY09 FY10E FY11E

JP Associates Industry(x)

Valuation matrix


P/E @ CMP 48.7 33.5 25.5 22.1

P/E @ Target 48.4 33.3 25.3 21.9

EV/EBITDA @ CMP 39.4 26.7 17.4 15.7


71

Key developments

Acquires two power companies On 3 July, 2009, Jaiprakash Power Ventures, a subsidiary of JP Associates, acquired Sangam Power Generation Company (2x660MW) and Prayagraj Power Generation Company (3x660 MW) from UP Power Corporation. Through these acquisitions, JP Associates plans to set up 3,300MW of generation capacity on BOO basis. The management is likely to raise funds for the power venture business in 2–3 tranches this year.

Fig 146 - Power portfolio

S.N. Project Fuel Capacity (MW)

Regulated Tariff (MW)

Merchant Power (MW)

VERs/CERs COD

1 Baspa-II Hydro 300 300 - 1.00 Mn VERs 2003

2 Vishnuprayag Hydro 400 400 - 1.32 Mn.VERs 2006

3 Karcham Wangtoo Hydro 1,000 800 200 3.35mn CERs* 2011*

4 Bina Power Thermal 1,250 625* 625* - 2011^

5 Jaypee Nigrie Thermal 1,320 660* 660* CERs expected 2012*

6 Karchana Thermal 1,980 1,320* 660* 1.5mn CERs 2014*

7 Bara Thermal 3,300 1,980* 1,320* 2.5mn CERs 2014*

8 Lower Siang Hydro 2,700 1,350* 1,350* TBD 2015#

9 Hirong Hydro 500 250* 250* TBD 2015*

10 Kynshi Stage -II Hydro 450 225* 225* TBD 2016*

11 Umngot Stage -I Hydro 270 135* 135* TBD 2016*

Total 13,470 8,045 5,425

Source: RHH, Company * Expected ^500MW Phase-I by 2011, # 900MW Phase-I by 2015

Residential business – Jaypee Greens Aman generates overwhelming response JP Associates has received an overwhelming response for Jaypee Greens Aman, its newly launched residential project. The company sold 3,300 flats sold in 24 hours and 301,000 sq ft of residential space under this project in April’09.

Fig 147 - Real estate development plans

Sr. No. Project Proposed Development (mn sq ft)

1 Jaypee Greens 8

2 Yamuna Expressway 400

3 Ganga Expressway 3300

Source: Company

Fig 148 - Real estate realisations

Project Sold till Apr ’09 (mn sq ft) Collections (Rs mn) Avg realisation (Rs/sq ft)

Jaypee Greens 2.9 9,930 5,500

Yamuna Expressway 5.45 10,670 5,024

Source: Company

3,300MW capacity to be set up through

newly acquired power companies

3,300 flats booked in Jaypee Green Aman within 24 hours


72

Valuation

We have valued the stock on SOTP basis and revised our target price upwards to Rs 237 from Rs 220 earlier.


Particulars Method Holding Multiple Rs mn No of

Shares (mn)

Value per share (Rs)

Construction EV/EBITDA 9x 105,710 1,464 72

Cement Ev/tonne $ 95 115,425 1,464 79

Real estate including Yamuna

66,833 1,464 46

Ganga Expressway BV of investments in FY09

915 1,464 1

Jaypee Greens 6,951 1,464 5

Jaypee hydro (merged entity)

M cap (20% holding)

76.55% 104,825 1,464 72

Jaypee hotels P/E 74.78% 6x 1,007 1,464 1

Treasury shares M cap (30% holding) 34,560 1,464 24

Total 436,226 1,464 298

Less Net debt 88,751 1,464 61

Total 347,475 1,464 237

Source: RHH


73

Stock performance

Fig 150 - Absolute performance from June ’04

0

100

200

300

400

500

Jun-04 Jul-05 Jul-06 Aug-07 Sep-08 Sep-09

Sensex JP Associates BSE CG Index


Fig 151 - Relative performance from June ’04

40

140

240

340

440

540

Jun-04 Jul-05 Jul-06 Aug-07 Sep-08 Sep-09




75

85

95

105

115

125

135





65

115

165

215

265

315





40

50

60

70

80

90

100

110

120





80

100

120

140

160

180

200





74


Fig 156 - P/E band

0

100

200

300

400

500

600

700

800

Aug-04 Aug-05 Aug-06 Aug-07 Aug-08 Aug-09

(Rs)

70x

50x

25x

10x

Source: RHH

Fig 157 - P/BV band

0

100

200

300

400

500

600


(Rs)

10x

6x

1x

3x

Source: RHH


0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000


45x

30x

15x

5x

(Rs mn)

Source: RHH


0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000


12x

8x

4x

1.5x

(Rs mn)

Source: RHH


(%)

(50)

0

50

100

150

200


Source: RHH


0

200,000

400,000

600,000

800,000

1,000,000

1,200,000


11.5x

8x

4x

0.5x

(Rs mn)

Source: RHH


75



Revenues 39,851 57,750 91,167 105,623

Growth (%) 14.6 44.9 57.9 15.9

EBITDA 10,970 16,200 24,804 27,482

Growth (%) 16.4 47.7 53.1 10.8


EBIT 8,937 13,243 20,873 22,684

Growth (%) 14.6 48.2 57.6 8.7

Interest 3,391 5,023 6,528 7,240

Other income 2,888 4,147 5,014 6,866

EBT 8,434 12,367 19,360 22,309

Income taxes 2,337 3,477 5,614 6,470





Adjustments - - - -


Growth (%) 46.9 45.8 54.6 15.2

Shares outstanding (mn) 1,171.5 1,183.8 1,403.7 1,403.7

FDEPS (Rs) (adj) 4.9 7.1 9.4 10.8

Growth (%) 39.2 45.4 31.6 15.2

DPS (Rs) 1.0 1.0 0.8 0.8


Cash and cash eq 18,155 19,160 6,739 10,272


Inventories 13,075 19,777 31,222 37,619


Investments 32,248 40,448 47,948 54,948


Net fixed assets 37,115 64,214 80,284 94,985

CWIP 42,190 25,000 25,000 20,000


Deferred tax assets, net (5,597) (5,663) (5,723) (5,760)

Other assets 1 1 1 1

Total assets 165,587 196,308 231,956 263,589



Provisions 3,061 4,088 5,836 6,573

Debt funds 83,056 95,431 103,931 113,931


Equity capital 2,343 2,368 2,372 2,372




BVPS (Rs) 41.2 50.7 51.6 61.9



Non-cash adjustments 3,818 (724) 1,748 737

Changes in working capital 332 (5,115) (11,569) (4,955)

Cash flow from operations 12,319 6,009 7,855 16,421


Change in investments (14,461) (8,200) (7,500) (7,000)

Other investing cash flow 1,035 - - -


Issue of equity 8,517 3,950 90 -

Issue/repay debt 28,125 13,146 8,500 10,000

Dividends paid (1,204) (1,341) (1,385) (1,387)


Change in cash & cash eq 3,856 754 (12,440) 3,533



WACC (%) 12.1 12.6 12.7 12.9

ROIC (%) 6.9 7.5 9.5 8.7


EVA (Rs mn) (5,997) (7,027) (5,701) (8,206)

EVA spread (%) (5.2) (5.1) (3.3) (4.2)



EBITDA margin 27.5 28.1 27.2 26.0

EBIT margin 22.4 22.9 22.9 21.5


ROE 16.3 17.2 21.5 20.5

ROCE 8.3 9.0 11.2 11.2





Current ratio (x) 1.8 1.9 1.6 1.7

Quick ratio (x) 0.7 0.2 0.3 0.3







EV/Sales 10.9 7.5 4.7 4.1

EV/EBITDA 39.4 26.7 17.4 15.7

P/E 48.7 33.5 25.5 22.1

P/BV 5.8 4.7 4.6 3.9


76

Quarterly trend


Revenue (Rs mn) 11,591 11,826 13,217 20,846 20,671

YoY growth (%) 23.0 37.1 46.9 62.8 78.3

QoQ growth (%) (9.5) 2.0 11.8 57.7 (0.8)

EBITDA (Rs mn) 3,200 3,478 2,473 7,050 5,417

EBITDA margin (%) 27.6 29.4 18.7 33.8 26.2

Adj net income (Rs mn) 1,252 2,031 1,655 3,853 2,181

YoY growth (%) (10) 96 6 83 74

QoQ growth (%) (41) 62 (19) 133 (43)

DuPont analysis

(%) FY07 FY08 FY09E FY10E FY11E






Return on equity 14.9 16.3 17.2 21.5 20.5

Company profile

The Jaiprakash group is a well-diversified infrastructure-oriented

conglomerate with a formidable presence in engineering &

construction and cement. The group also has interests in the power

and hospitality sectors and has recently entered real estate and

expressway businesses. The group has a total cement capacity of

9mn tonnes and intends to expand this to 32mn tonnes by FY12.


(%) Dec-08 Mar-09 Jul-09

Promoters 45.3 45.2 50.1

FIIs 23.8 25.0 24.5

Banks & FIs 12.7 11.8 10.4

Public 18.2 18.0 15.0



25-Mar-09 Initiating Coverage 84 69 Sell

29-Apr-09 Results Review 130 120 Hold

8-Jul-09 Company Update 194 193 Hold



Stock performance

50

100

150

200

250

300

Feb-

09

Mar

-09

Apr

-09

May

-09

Jun-

09

Jul-

09

Aug

-09

Sep-

09

● Hold ● Sell

Larsen & Toubro Sector Report 05 October 2009

77



EBITDA margin 11.8 11.3 11.3 11.3

EBIT margin 11.0 10.5 10.5 10.5


ROE 28.3 24.6 23.8 24.6

ROIC 22.9 20.1 16.7 17.5

ROCE 21.5 18.5 17.2 18.2



Revenue 250,094 339,264 401,887 502,079

Growth (%) 42.0 35.7 18.5 24.9

Adj net income 21,713 27,097 32,610 56,559

Growth (%) 54.9 24.8 20.3 24.3

FDEPS (Rs) 37.4 46.4 55.9 69.2

Growth (%) 54.4 24.1 20.4 23.8

Larsen & Toubro Going strong!

Concerns on order inflows alleviated: Although Larsen & Toubro (L&T) registered a 21.5% YoY decline in order booking in Q1FY10 (Rs 96bn), the pace has picked up substantially since then with order wins worth Rs 140bn post Q1. We expect order inflows to reach Rs 650bn in FY10 (25% growth: lower end of the management guidance) which will provide strong revenue visibility.

Power business gains traction: L&T intends to aggressively enter the power business in order to tap the sector’s immense potential and capitalise on the limited competition in this space (BHEL enjoys a monopoly at present). The company has already made a headway in the power equipment market by securing orders from APGENCO (Rs 15.5bn), JP Group (Rs 40bn) and GMR Infrastructure (Rs 20bn). It is also amongst the strongest contenders for securing orders worth Rs 350bn–400bn from NTPC’s bulk tenders by Q1FY11 and orders of Rs 90bn from the JP Group.

Earnings to grow by 22.1% over FY09-FY11: We expect L&T’s standalone and consolidated earnings to increase at a 22.1% CAGR and 22.8% CAGR respectively over FY09-FY11, led by strong execution and order booking.

Maintain Buy: The stock is currently trading at 24.1x on FY11E standalone earnings and 21.5x on FY11E consolidated earnings. It has traded at an average premium of 35% to the Sensex over the last three years. We expect the stock to maintain this premium over the next few years, given the robust outlook for the sector and L&T’s strong positioning.

We have valued L&T’s core business at 23x FY11E earnings and subsidiaries at Rs 190 (11% of SOTP target). We reiterate a Buy on the stock; our recommendation is based on the expected earnings growth over FY09-FY11 and strong incremental contribution from new business verticals like power, nuclear and defence projects.



Rs 1,665 Rs 1,781 BUY MEDIUM

BSE NSE BLOOMBERG

500510 LT LT IN

Company data



Free float (%) 86


52-week high/low (Rs) 1,800 / 556


Stock performance


L&T 1,665 7.4 5.8 147.6

BSE Sector 13,731 6.1 6.4 112.4

Sensex 17,135 10.2 17.0 73.0

P/E comparison

35.9

26.621.5

29.624.9

21.1

0

10

20

30

40

FY09 FY10E FY11E

L&T* Industry(X)

* Consolidated

Valuation matrix


P/E @ CMP 44.5 35.9 29.8 24.1

P/E @ Target 47.6 38.4 31.9 25.8

EV/EBITDA @ CMP 35.2 27.2 22.9 18.4


78


Fig 162 - Trend in order book & order inflows

287 307357 369

416 440496 527

582630

688 703 717

96125146125122116130719977956175

0100200300400500600700800

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1

FY07 FY08 FY09 FY10

Order Book Order Booking(Rs bn)


Fig 163 - Sector wise break-up of order book – Q1FY10

9

16

12

12

30

24

38

39

11

9

0 20 40 60 80 100

Order inflows

Order book

Process Hydrocarbons Power Infrastructure others

(%)


Fig 164 - Geographical break-up – Q1FY10

86

94

79

8

3

15

6

3

6

0 20 40 60 80 100 120

Order book

Order inflow

Net sales

Domestic Middle East Other exports

(%)


Fig 165 - Order book (customer-wise)

55

43

2

51

36

13

0

10

20

30

40

50

60

Public Private Developmentprojects (L&T)

Q1FY09 Q1FY10(%)


Fig 166 - Order inflows (customer-wise)

4351

6

59

28

13

0

10

20

30

40

50

60

70

Public Private Developmentprojects (L&T)

Q1FY09 Q1FY10(%)



79

Fig 167 - E&C segment: Sales and order book trend

E&C (Rs bn) Q1FY08 Q2FY08 Q3FY08 Q4FY08 FY08 Q1FY09 Q2FY09 Q3FY09 Q4FY09 FY09 Q1FY10

Order book 396.9 420.3 476.1 509.3 509.3 563.4 609.3 670.3 687.5 687.5 699.5

order inflow 82.2 59.1 114.6 98.1 353.9 105.2 104.3 133.8 112.9 456.2 83.7

YoY (%) 30.4 27.5 40.3 60.2 40.3 28.0 76.7 16.7 15.1 28.9 (20.4)

Sales 33.2 41.1 48.9 66.2 189.5 55.8 59.4 73.4 91.7 279.8 65.7

YoY (%) 28.7 59.1 89.5 156.5 44.4 67.8 44.6 50.0 38.5 47.7 17.9

EBIT Margins (%) 9.6 11.7 12.1 15.7 12.8 9.7 11.5 11.4 16.5 12.9 10.6


Fig 168 - E&E segment: Sales and margin trend

E&E (Rs bn) Q1FY08 Q2FY08 Q3FY08 Q4FY08 FY08 Q1FY09 Q2FY09 Q3FY09 Q4FY09 FY09 Q1FY10

Sales 5.0 6.2 5.7 7.2 24.2 5.8 7.0 5.9 6.9 25.1 5.8

YoY (%) 31.7 43.4 29.5 23.8 31.8 14.9 12.2 3.2 (3.3) 3.6 (0.3)

EBIT Margins (%) 16.7 18.4 17.5 15.7 15.7 11.8 12.9 12.2 14.1 13.2 11.8


Fig 169 - MIP segment: Sales and margin trend

MIP (Rs bn) Q1FY08 Q2FY08 Q3FY08 Q4FY08 FY08 Q1FY09 Q2FY09 Q3FY09 Q4FY09 FY09 Q1FY10

Sales 4.1 5.6 5.7 7.8 23.3 6.4 6.6 5.1 6.1 24.0 4.4

YoY (%) 28.1 33.3 41.8 21.9 30.8 55.1 18.2 (9.3) (22.2) 3.0 (31.3)

EBIT Margins (%) 22.4 15.9 21.0 18.2 18.9 23.2 21.1 13.6 19.9 20.1 21.8


Valuation


Particulars Basis Per share value (Rs)

L&T Standalone 23x FY11 EPS 1,591.0

L&T Infotech 12x FY11 EPS 66.7

L&T IDPL Based on PE deal 44.5

L&T Finance 1.1x FY11 book value 14.9

L&TIFC 1.1x FY11 book value 21.8

Manufacturing JVs 10x FY11 EPS 16.6

International Subsidiaries 10x FY11 EPS 25.7

Total 1,781

Source: RHH


80

Stock performance


0

500

1,000

1,500

2,000

2,500


Sensex L&T BSE CG Index



40

90

140

190

240

290

340

390





60

70

80

90

100

110

120





85

105

125

145

165

185

205





50

60

70

80

90

100

110

120





60

80

100

120

140

160

180

Mar-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09




81


Fig 177 - P/E band

0

500

1,000

1,500

2,000

2,500

3,000


(Rs)

40x

20x

10x

4x

Source: RHH

Fig 178 - P/BV band

0

500

1,000

1,500

2,000

2,500


(Rs)

8x

6x

2x

4x

Source: RHH


0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

1,400,000

1,600,000


25x

20x

15x

10x

(Rs mn)

Source: RHH


0200,000400,000600,000800,000

1,000,0001,200,0001,400,0001,600,0001,800,000


3.5x

2.5x

1.5x

0.8x

(Rs mn)

Source: RHH


(%)

0

50

100

150

200


Source: RHH


0200,000400,000600,000800,000

1,000,0001,200,0001,400,0001,600,0001,800,000


3.5x

2.5x

1.5x

0.8x

(Rs mn)

Source: RHH


82



Revenues 250,094 339,264 401,887 502,079

Growth (%) 42.0 35.7 18.5 24.9

EBITDA 29,579 38,342 45,490 56,559

Growth (%) 66.3 29.6 18.6 24.3


EBIT 27,556 35,513 42,195 52,764

Growth (%) 71.1 28.9 18.8 25.0

Interest 1,227 3,502 4,013 4,387

Other income 5,203 15,122 8,403 9,299

EBT 31,533 47,134 46,585 57,676

Income taxes 9,821 12,312 13,976 17,303





Adjustments - (7,725) - -


Growth (%) 54.9 24.8 20.3 23.8


FDEPS (Rs) (adj) 37.4 46.4 55.9 69.2

Growth (%) 54.4 24.1 20.4 23.8

DPS (Rs) 9.8 15.5 14.5 18.0

Consol FDEPS (Rs) 42.1 51.1 62.6 77.1


Cash and cash eq 9,644 7,727 10,022 11,348


Inventories 43,059 58,051 66,944 83,634


Investments 69,223 82,637 92,837 102,837


Net fixed assets 29,192 41,174 47,879 54,083

CWIP 7,293 10,803 12,000 11,000



Other assets - (28) 923 3,645

Total assets 269,162 368,581 412,011 493,245



Provisions 20,354 30,665 28,953 36,198

Debt funds 35,840 65,560 72,960 76,968


Equity capital 585 1,171 1,171 1,171




BVPS (Rs) 163.7 213.4 255.7 306.9



Non-cash adjustments (389) (22,314) - -


Cash flow from operations 21,056 (2,565) 25,346 24,796


Change in investments (37,886) 5,930 (10,200) (10,000)

Other investing cash flow (664) (6,236) - -


Issue of equity 17,016 230 - -

Issue/repay debt 16,740 25,576 7,400 4,008

Dividends paid (1,335) (4,388) (9,054) (8,478)

Other financing cash flow (5) (667) - -

Change in cash & cash eq (1,300) (1,917) 2,295 1,325



WACC (%) 14.3 14.2 14.2 13.8

ROIC (%) 22.9 20.1 16.7 17.5


EVA (Rs mn) 8,485 9,606 4,814 8,500

EVA spread (%) 8.6 5.9 2.5 3.7



EBITDA margin 11.8 11.3 11.3 11.3

EBIT margin 11.0 10.5 10.5 10.5


ROE 28.3 24.6 23.8 24.6

ROCE 21.5 18.5 17.2 18.2





Current ratio (x) 1.4 1.6 1.6 1.6

Quick ratio (x) 0.7 0.7 0.8 0.8







EV/Sales 4.2 3.1 2.6 2.1

EV/EBITDA 35.2 27.2 22.9 18.4

P/E 44.5 35.9 29.8 24.1

P/BV 10.2 7.8 6.5 5.4


83

Quarterly trend


Revenue (Rs mn) 69,014 76,822 86,156 104,690 73,627

YoY growth (%) 53.1 39.7 34.9 23.6 6.7

QoQ growth (%) (18.5) 11.3 12.1 21.5 (29.7)

EBITDA (Rs mn) 6,695 7,317 7,799 14,509 7,863

EBITDA margin (%) 9.7 9.5 9.1 13.9 10.7

Adj net income (Rs mn) 5,024 4,603 6,041 11,424 5,783

YoY growth (%) 33 32 25.4 17.6 15.1

QoQ growth (%) (48) (8) 31.2 89.1 (49.4)

DuPont analysis

Percentage FY07 FY08 FY09 FY10E FY11E






Return on equity 26.9 28.3 24.6 23.8 24.6

Company profile

L&T is one of the largest technology, engineering, construction and

manufacturing companies in India. Seven decades of a strong,

customer-focused approach and the continuous quest for world-

class quality have enabled it to attain and sustain leadership in all

its major lines of business.


(%) Sep-08 Dec-08 Mar-09

Promoters - - -

FIIs 19.3 18.1 15.8

Banks & FIs 37.5 37.4 38.4

Public 43.2 44.5 45.8



6-Oct-08 Quarterly Preview 1,158 1,398 Hold


10-Dec-08 Company Update 730 790 Hold


30-Mar-09 Company Update 680 770 Hold

29-May-09 Results Review 1,341 1,498 Buy

2-Jul-09 Quarterly Preview 1,591 1,498 Hold

16-Jul-09 Results Review 1,378 1,527 Buy

5-Oct-09 Sector Report 1,665 1,781 Buy

Stock performance

500700900

1,1001,3001,5001,7001,900

Sep-

08

Oct

-08

Nov

-08

Dec

-08

Jan-

09

Feb-

09

Mar

-09

Apr

-09

May

-09

Jun-

09

Jul-

09

Aug

-09

Sep-

09

Oct

-09

● Buy ● Hold

Nagarjuna Construction Sector Report 05 October 2009

84




EBIT margin 9.0 7.7 8.2 8.3


ROE 12.5 9.4 10.0 10.6

ROIC 11.4 8.6 8.8 8.7

ROCE 11.7 9.8 9.9 9.7



Revenue 34,729 41,514 47,326 56,791

Growth (%) 21.0 19.5 14.0 20.0

Adj net income 1,636 1,538 1,942 2,412

Growth (%) 33.1 3.7 20.3 20.0

FDEPS (Rs) 7.5 6.7 7.9 9.4

Growth (%) 14.7 (10.1) 17.9 18.6

Nagarjuna Construction Buoyant order traction

Strong order wins to boost revenue growth in FY11: Nagarjuna Construction Co (NCC) has bagged orders worth Rs 43bn to date, which is roughly 65% of the full-year management guidance of Rs 65bn in new orders for FY10. We expect order flows to total Rs 76bn for FY10 which will provide strong revenue visibility for subsequent years. The company ended the first quarter with an order book of Rs 139bn, which is 2.9x FY10E revenues. International business contributes roughly 22% to the current order book.

Raised Rs 4.8bn through QIP and stake sale: NCC raised Rs 3.7bn via a QIP at a price of Rs 133/share which has led to a dilution of 12%. The funds raised would be utilised for investments in various BOT projects and to meet working capital requirements. Following the QIP, NCC’s debt/equity ratio has reduced from 0.8x to 0.5x in FY10. In a bid to raise further funds, the company recently sold a 9.5% stake in Gautami Power to the GVK group for a consideration of Rs 1.1bn. It anticipates a capital gain of Rs 500mn from this sale.

Building its BOT portfolio: NCC has a portfolio of five road BOT projects (one operational), three power projects apart from Gautami Power and two airport works. The total equity commitment for the above portfolio is Rs 4.8bn (excluding power projects worth Rs 10.5bn which are long term in nature and currently at a nascent stage). Of this sum, the company has already invested Rs 2.9bn till FY09.

Target price raised, maintain Hold: The stock is currently trading at a P/E of 16.3x on FY11E earnings. Excluding subsidiaries, it trades at 12.7x FY11E earnings. We are increasing our earnings estimates for FY11 by 12% mainly due to upward revision in our sales and margin estimates based on strong order inflows. We are also increasing our target multiple from 12x to 14x and BOT valuation to 1.5x FY10E BV as against 1x FY10 BV. Our target price thus rises from Rs 138 to Rs 166 – we maintain our Hold rating on the stock.



Rs 153 Rs 166 HOLD HIGH

BSE NSE BLOOMBERG

500294 NAGARCONST NJCC IN

Company data



Free float (%) 75.6




Stock performance


Nagarjuna 153 13.4 11.1 143.3

Sensex 17,135 10.2 17.0 73.0

P/E comparison

22.8 19.3 16.3

29.624.9

21.1

0

10

20

30

40

FY09 FY10E FY11E

Nagarjuna Const. Cap Goods(x)

Valuation matrix


P/E @ CMP 20.5 22.8 19.3 16.3

P/E @ Target 22.2 24.6 20.9 17.6

EV/EBITDA @ CMP 12.4 11.9 9.9 8.3


85

Order book trend Fig 183 - Quarterly order book and order inflows

7890 98

114 122 124 124 122139

12 19 1529

17 14 12 1029

0

2040

6080

100

120140

160

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1

FY08 FY09 FY10

Order book Order received(Rs bn)


Valuation

Fig 184 - SOTP valuation summary Sum-of-the-parts Business Method Multiple (x) Value (Rs mn) Per share value (Rs)

NCC standalone Construction P/E 1 year forward 14 33,768 132

NCC Urban Infra (80% stake) Real estate NAV 1 1,497 6

Jubliee Hills Real estate BV 1 453 2

HUDA Real estate BV 1 825 3

NCC Vizag Urban Real estate BV 1 499 2

Gautami Power Power P/BV 1 522 2

BOT Project Road/Power/ Port P/BV 1.5 4,946 19

Total 42,509 166

Source: RHH


86

Stock performance


0

50

100

150

200

250

300

350

400


Sensex NCC BSE CG Index



40

140

240

340

440

540

640

740





55

65

75

85

95

105





85

95

105

115

125

135

145

155

165





20

40

60

80

100

120





60

80

100

120

140

160





87


Fig 191 - P/E band

050

100150200250300350400450


(Rs)

45x

30x

16x

8x

Source: RHH

Fig 192 - P/BV band

0

100

200

300

400

500


(Rs)

5x

3x

0.5x

1.5x

Source: RHH


0

20,000

40,000

60,000

80,000

100,000

120,000


21x

15x

10x

5x

(Rs mn)

Source: RHH


0

20,000

40,000

60,000

80,000

100,000

120,000


2x

1.4x

0.8x

0.2x

(Rs mn)

Source: RHH


(%)

(100)

(50)

0

50

100

150

200


Source: RHH


0

20,000

40,000

60,000

80,000

100,000

120,000


2x

1.4x

0.8x

0.2x

(Rs mn)

Source: RHH


88



Revenues 34,729 41,514 47,326 56,791

Growth (%) 21.0 19.5 14.0 20.0

EBITDA 3,598 3,733 4,492 5,391

Growth (%) 33.1 3.7 20.3 20.0


EBIT 3,116 3,200 3,904 4,694

Growth (%) 29.6 2.7 22.0 20.2

Interest 1,116 1,621 1,686 1,844

Other income 444 697 680 750

EBT 2,444 2,278 2,898 3,600

Income taxes 811 743 956 1,188


Extraordinary items (8) (3) - -



Adjustments 16 (3) - -


Growth (%) 21.2 (6.0) 26.3 24.2


FDEPS (Rs) (adj) 7.5 6.7 7.9 9.4

Growth (%) 14.7 (10.1) 17.9 18.6

DPS (Rs) 1.3 1.4 1.4 2.1


Cash and cash eq 2,329 1,346 1,365 722


Inventories 5,493 7,495 8,298 9,958


Investments 5,648 7,403 8,803 9,803


Net fixed assets 5,186 4,592 5,300 6,168

CWIP 143 281 100 100

Intangible assets 13 - - -


Other assets (2) (27) 203 201

Total assets 41,106 45,702 52,249 59,711



Provisions 880 867 1,377 1,818

Debt funds 8,938 12,439 10,939 13,439






BVPS (Rs) 68.7 73.7 85.5 92.5



Non-cash adjustments (212) (592) (686) 232


Cash flow from operations (2,803) (2,482) 637 (160)

Capital expenditure (1,588) (75) (1,099) (1,565)

Change in investments (2,104) (1,290) (1,398) (998)

Other investing cash flow 1 (819) - -


Issue of equity 4,049 - 3,673 -

Issue/repay debt 2,569 4,025 (1,500) 2,500

Dividends paid (229) (348) (295) (420)


Change in cash & cash eq (105) (989) 19 (643)

Closing cash & cash eq 2,329 1,346 1,365 722


WACC (%) 11.9 11.8 11.8 11.8

ROIC (%) 11.4 8.6 8.8 8.7


EVA (Rs mn) (118) (904) (948) (1,266)

EVA spread (%) (0.5) (3.2) (3.0) (3.1)




EBIT margin 9.0 7.7 8.2 8.3


ROE 12.5 9.4 10.0 10.6

ROCE 11.7 9.8 9.9 9.7





Current ratio (x) 1.9 2.2 2.1 2.1

Quick ratio (x) 0.6 0.7 0.6 0.7







EV/Sales 1.3 1.1 0.9 0.8

EV/EBITDA 12.4 11.9 9.9 8.3

P/E 20.5 22.8 19.3 16.3

P/BV 2.2 2.1 1.8 1.7


89

Quarterly trend


Revenue (Rs mn) 9,709 10,558 10,266 10,981 10,004

YoY growth (%) 27.4 55.9 31.7 (12.4) 3.0

QoQ growth (%) (22.6) 8.7 (2.8) 7.0 (8.9)

EBITDA (Rs mn) 774 935 780 715 905

EBITDA margin (%) 8.0 8.9 7.6 6.5 9.0


YoY growth (%) 3 26 (9) (27) 3

QoQ growth (%) 9,709 10,558 10,266 10,981 10,004

DuPont analysis







Return on equity 13.6 12.5 9.4 10.0 10.6

Company profile

Nagarjuna Construction (NCC) is a leading Hyderabad-based civil

construction company promoted by Mr A V S Raju. Established in

1980, the company has transformed itself from a subcontractor in

residential and industrial construction to a diversified infrastructure

conglomerate with BOT and real estate projects. Today, it has a

well-diversified, de-risked business mix with a presence across

various sectors – buildings and housing, transportation, water and

environment, electrical, irrigation, hydropower, oil & gas pipelines

and EPC capabilities in metals and power sector.


(%) Dec-08 Mar-09 Jun-09

Promoters 24.4 24.4 24.4

FIIs 27.4 28.0 24.9

Banks & FIs 25.2 22.3 26.0

Public 23.1 25.3 24.7









3-Aug-09 Results Review 143 138 Hold


Stock performance

30507090

110130150170

Jul-

08

Sep-

08

Nov

-08

Jan-

09

Mar

-09

May

-09

Jul-

09

Sep-

09

● Buy ● Hold

Patel Engineering Sector Report 05 October 2009

90



EBITDA margin 15.3 14.5 14.6 14.7

EBIT margin 12.8 12.0 12.2 12.3


ROE 13.9 11.5 12.3 13.8

ROIC 12.2 9.6 7.3 7.8

ROCE 12.3 10.3 9.2 9.8



Revenue 13,245 17,774 21,951 27,220

Growth (%) 21.6 34.2 23.5 24.0

Adj net income 1,076 1,053 1,271 1,612

Growth (%) 28.6 (2.2) 20.8 26.8

FDEPS (Rs) 18.0 17.6 21.3 27.0

Growth (%) 28.6 (2.2) 20.8 26.8

Patel Engineering Power, real estate to drive value

Order book at Rs 73.5bn: As on 30 June 2009, Patel Engineering’s (PEL) order book stood at Rs 73.5bn, 2.6x its FY10E consolidated revenues. The order book is split between the standalone entity (Rs 65.7bn), US operations (Rs 3.8bn) and Michigan operations (Rs 4bn). The company has secured orders worth Rs 7bn in Q1FY10, which include a Rs 5.5bn order from Vidarbha Irrigation Development and a Rs 1.5bn contract from the Himachal Pradesh Power Corporation. In addition, PEL has L1 orders worth Rs 30bn. Hydro and irrigation projects contribute ~44% each to the order book, while urban infrastructure accounts for the balance 12%.

Gradually building its power portfolio: PEL plans to develop a 1,200MW thermal power plant in four phases of 300MW each. Land for the same has been acquired in Tamil Nadu. The company has an equity commitment of Rs 1.8bn over the next four years for its power portfolio for Phase 1. To ease the pressure on its balance sheet, PEL plans to dilute a 49% stake in its power assets to the equipment supplier or opt for private equity funding. Apart from the thermal plant, the company also intends to develop a 120MW hydro-based plant in Arunachal Pradesh for which a DPR is under preparation.

Real estate back in the limelight: PEL’s land bank of 1,027 acres is spread across India’s four major cities: Hyderabad, Chennai, Bangalore, and Mumbai. This features in PEL’s books and the company has given development rights to its subsidiary, Patel Realty India. In this manner, the potential upside from this business has been retained with PEL, thereby benefiting its existing shareholders.

S80IA benefits dropped; normal tax rate to be effective: In view of the proposed retrospective change in S80IA, PEL has not claimed any tax benefit this quarter. Deductions claimed under the said section in earlier years would impact the company’s net worth by ~Rs 1.6bn and result in cash outflows of ~Rs 400mn.

Maintain Buy: We anticipate an earnings growth at a CAGR of 23.7% over FY09-FY11. The stock currently trades at a P/E of 17.9x FY11E earnings and adjusting subsidiary value, it trades at 12.2x FY11E earnings. Valuing the stock on an SOTP basis, we arrive at a target price of Rs 532 from Rs 460 earlier. We maintain our Buy rating on the stock.




BSE NSE BLOOMBERG

531120 PATELENG PEC IN

Company data



Free float (%)



2-month average daily volume 283,322

Stock performance


Patel Engg. 484 10.5 12.9 244.3

Sensex 17,135 10.2 17.0 73.0

P/E comparison

27.422.7

17.9

29.624.9 21.1

0

10

20

30

40

FY09 FY10E FY11E

Patel Engg. Cap. Goods(x)

Valuation matrix


P/E @ CMP 26.8 27.4 22.7 17.9

P/E @ Target 29.5 30.1 25.0 19.7

EV/EBITDA @ CMP 19.7 15.5 12.4 10.0


91

Order book trend

Fig 197 - Order book trend

5054 55

60 60 60

71 72 74

14 11 11 10 1017

2828 30 31 35 35 31

912 13 15 15 12 11 11 9

32323132

29

0

10

20

30

40

50

60

70

80

Q1FY08 Q2FY08 Q3FY08 Q4FY08 Q1FY09 Q2FY09 Q3FY09 Q4FY09 Q1FY10

Closng order book Hydro Irrigartion Transport(Rs bn)


Fig 198 - Order book break-up – Q1FY10

Hydro44%

Irrigartion44%

Transport12%


Valuation


Particulars Business Multiple Value (Rs mn) Per share value (Rs)

PEL Standalone Core construction business 14x 22,565 378

Real estate Real estate NAV 3,496 58

Land bank value (Hyd+Bangalore) Real estate BV 2,000 34

BOT Projects Roads NAV 1,100 18

Value of Subsidiares Core construction business 8x 1,790 30

Power projects Power BV 800 13

Total 31,751 532

Source: RHH


92

Stock performance


0100200300400500600700800900

1,000


Sensex Patel Engg. BSE CG Index



40

240

440

640

840

1,040

1,240

1,440





60

70

80

90

100

110

120

130





85

105

125

145

165

185

205





20

40

60

80

100

120





20

70

120

170

220

270

320

Mar-09 Apr-09 May-09 Jun-09 Jul-09 Aug-09




93


Fig 205 - P/E band

0

200

400

600

800

1,000

1,200


(Rs)

40x

20x

10x4x

Source: RHH

Fig 206 - P/BV band

0

200

400

600

800

1,000

1,200

1,400


(Rs)

6.5x

3x

0.5x

1.5x

Source: RHH


0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000


21x

15x

10x

5x

(Rs mn)

Source: RHH


0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000


2x

1.4x

0.8x

0.2x

(Rs mn)

Source: RHH


(%)

(50)

0

50

100

150


Source: RHH


0

10,000

20,000

30,000

40,000

50,000

60,000

70,000


2x

1.4x

0.8x

0.2x

(Rs mn)

Source: RHH


94



Revenues 13,245 17,774 21,951 27,220

Growth (%) 21.6 34.2 23.5 24.0

EBITDA 2,021 2,576 3,205 4,001

Growth (%) 43.1 27.4 24.4 24.8


EBIT 1,694 2,135 2,670 3,344

Growth (%) 46.8 26.1 25.0 25.3

Interest 519 886 1,038 1,204

Other income 352 184 220 220

EBT 1,527 1,580 1,852 2,361

Income taxes 106 233 626 794


Extraordinary items - 330 - -

Min into / inc from associates 56 66 45 45




Growth (%) 28.6 (2.2) 20.8 26.8


FDEPS (Rs) (adj) 18.0 17.6 21.3 27.0

Growth (%) 28.6 (2.2) 20.8 26.8

DPS (Rs) 1.5 1.8 1.5 1.5


Cash and cash eq 1,912 1,553 702 253


Inventories 6,952 9,832 11,727 14,393


Investments 1,443 2,898 3,857 4,857


Net fixed assets 2,897 3,168 3,833 4,376

CWIP 94 231 100 100



Other assets - (1) 19 39

Total assets 21,400 29,363 32,751 39,169


Other current liabilities 636 - - -

Provisions 23 78 45 45

Debt funds 6,579 10,205 11,705 14,205

Other liabilities 2,274 4,328 3,732 4,627





BVPS (Rs) 141.5 164.1 183.6 208.9



Non-cash adjustments (34) (1,440) (0) (0)


Cash flow from operations (1,701) (3,693) (219) (644)

Capital expenditure (1,284) (790) (1,069) (1,200)

Change in investments (1,137) (1,436) (960) (1,000)



Issue of equity (534) - - -

Issue/repay debt 4,249 5,630 1,500 2,500

Dividends paid (94) (70) (105) (105)


Change in cash & cash eq (502) (359) (852) (448)

Closing cash & cash eq 1,912 1,553 702 253


WACC (%) 12.7 13.8 13.8 13.8

ROIC (%) 12.2 9.6 7.3 7.8


EVA (Rs mn) (78) (961) (1,683) (1,874)

EVA spread (%) (0.5) (4.2) (6.6) (6.0)



EBITDA margin 15.3 14.5 14.6 14.7

EBIT margin 12.8 12.0 12.2 12.3


ROE 13.9 11.5 12.3 13.8

ROCE 12.3 10.3 9.2 9.8




Payables (days) 102 110 122 123

Current ratio (x) 4.2 4.7 4.0 3.8

Quick ratio (x) 0.9 0.9 0.9 0.9







EV/Sales 3.0 2.2 1.8 1.5

EV/EBITDA 19.7 15.5 12.4 10.0

P/E 26.8 27.4 22.7 17.9

P/BV 3.4 2.9 2.6 2.3


95

Quarterly trend


Revenue (Rs mn) 3,962 3,092 3,171 7,615 4,763

YoY growth (%) 20.0 31.1 21.0 51.7 20.2

QoQ growth (%) (21.1) (22.0) 2.6 140.1 (37.5)

EBITDA (Rs mn) 475 479 567 679 602

EBITDA margin (%) 12.0 15.5 17.9 8.9 12.6


YoY growth (%) (11.3) 3.2 0.2 (15.4) 7.0

QoQ growth (%) (56.5) 43.2 4.8 29.7 (45.0)

DuPont analysis







Return on equity 18.6 13.9 11.5 12.3 13.8

Company profile

Patel Engineering (PEL) is one of India’s oldest and largest

construction companies, with a strong presence in the hydropower

sector. It is one of the few players with pre-qualifications in hydro,

irrigation, and other projects. PEL possesses niche technologies (via

subsidiaries) such as RCC dam construction, micro tunnelling, and

lake water tapping. It has also ventured into the real estate business

and has a developable land bank of ~100mn sq ft in four Indian

cities, including Mumbai.


(%) Dec-08 Mar-09 Jun-09

Promoters 53.4 53.8 53.2

FIIs 7.4 7.1 7.7

Banks & FIs 12.3 11.1 11.1

Public 26.9 28.1 28.0



18-Nov-08 Initiating Coverage 139 148 Sell

2-Feb-09 Results Review 147 155 Sell


25-May-09 Company Update 353 309 Hold


3-Aug-09 Results Review 413 460 Buy


Stock performance

0100200300400500600

Oct

-08

Nov

-08

Dec

-08

Jan-

09

Feb-

09

Mar

-09

Apr

-09

May

-09

Jun-

09

Jul-

09

Aug

-09

Sep-

09

Oct

-09

● Buy ● Hold ● Sell

Punj Lloyd Sector Report 05 October 2009

96




EBIT margin 7.0 5.8 6.9 6.9


ROE 16.4 9.0 16.4 15.8

ROIC 13.6 10.4 11.1 11.3

ROCE 12.9 8.3 11.6 12.2



Revenue 77,530 119,120 132,234 154,470

Growth (%) 51.2 53.6 11.0 16.8

Adj net income 3,281 2,348 4,972 6,044

Growth (%) 66.9 (28.4) 111.8 21.5

FDEPS (Rs) 11.3 7.5 15.1 17.8

Growth (%) 59.0 (33.2) 99.8 18.2

Punj Lloyd Soaring orders to drive a turnaround

Orders worth Rs 99bn booked in Q1FY10: As on 30 June 2009, Punj Lloyd’s (PLL) order book stood at Rs 278bn, 2.1x its FY10E revenues. The company has booked orders worth Rs 99bn in Q1FY10, which is nearly equivalent to its full-year inflow of Rs 117bn for FY09. We expect PLL to end the year with Rs 170bn of order inflows. An improved macro scenario and a strong Q1 order book could provide further upsides.

Set to stage a turnaround: In FY09, PLL reported a loss of Rs 2.3bn on account of forex headwinds and a provision of Rs 4.3bn towards the disputed SABIC project. We expect the company to report an EPS of Rs 15.1 in FY10 and Rs 17.8 in FY11 (23% earnings growth) due to improved revenue visibility and a 120bps expansion in EBITDA margin to 8.5% in FY10.

Raised Rs 6.7bn via QIP: PLL raised US$ 140mn (Rs 6.7bn) in a share sale to institutions at a price of Rs 241/share. These funds will be utilised for the repayment of existing loans and to finance working capital requirements.

Lucrative stake in Pipavav Shipyard: Pipavav Shipyard has successfully raised Rs 5.1bn through an initial public offering of 85.5mn shares, taking the company’s value to ~Rs 41bn. In 2007, PLL had bought a 22.3% stake in Pipavav Shipyard for Rs 3.5bn, now valued at Rs 8bn. Adjusting for a 20% holding company discount, the investment is valued at Rs 21/share (Rs 11 assigned in our SOTP target price).

Variation claims of US$ 117mn on ONGC Heera project: Cost overruns from the ONGC Heera development project have already been provided for in FY09. PLL has filed variation claims amounting to US$ 117mn which would be settled post completion of the contract, if successfully contested.

Maintain Buy: The stock has been re-rated on the strength of record order inflows in Q1FY10 and the improved macro climate. Currently, it trades at a P/E of 17.4x on FY10E earnings and 14.7x FY11E earnings. Excluding its stake in Pipavav Shipyard, PLL trades at 13.9x on FY11E. We value the core construction business at 16x FY11E earnings (discount of 32% to L&T) and maintain our Buy rating on the stock with a target price of Rs 306.

Key risks: PLL is exposed to the currency risk as ~75% of its revenues and order book are derived from the international markets. This apart, execution delays could hinder profitability.




BSE NSE BLOOMBERG

532693 PUNJLLOYD PUNJ IN

Company data



Free float (%) 58.5




Stock performance


Punj Lloyd 262 1.6 22.6 184.5

Sensex 17,135 10.2 17.0 73.0

P/E comparison

34.7

17.4 14.7

29.624.9

21.1

0

10

20

30

40

FY09E FY10E FY11E

Punj Lloyd Industry(x)

Valuation matrix


P/E @ CMP 23.2 34.7 17.4 14.7

P/E @ Target 27.1 40.5 20.3 17.2

EV/EBITDA @ CMP 15.1 12.0 9.3 7.9


97

Order book trend

Fig 211 - Order book break-up by vertical – Q1FY10

Tankages1.9%Pipelines

20.3%

Process palnts,others

22.0%

Infrastructure55.9%


Fig 212 - Order book break-up by geography – Q1FY10

Europe / Africa4%

Caspian36%

SE asia & asia pacific

26%

Middle East17%

South asia17%


Valuation


Sum of the parts Business Method Multiple (x) Value (Rs mn) Per share value (Rs)

PLL Consolidated Construction P/E on FY11E earnings

16 96,698 285

Pipavav Shipyard Shipbuilding BV 1.5 5,250 15

Real estate ventures Real estate BV 1 1800 5

Total 103,748 306

Source: RHH


98

Stock performance

Fig 214 - Absolute performance from Jan ’06

0

100

200

300

400

500

600

700

Jan-06 Mar-07 Jun-08 Sep-09

Sensex Punj Lloyd BSE CG Index


Fig 215 - Relative performance from Jan ’06

406080

100120140160180200220

Jan-06 Mar-07 Jun-08 Sep-09




50

60

70

80

90

100

110





7090

110130150170190210230250





35

45

55

65

75

85

95

105

115





80

100

120

140

160

180

200

Apr-09 May-09 May-09 Jun-09 Jul-09 Aug-09 Sep-09




99


Fig 220 - P/E band

0

100

200

300

400

500

600

700


(Rs)

32x

16x

8x4x

Source: RHH

Fig 221 - P/BV band

0

100

200

300

400

500

600

700


(Rs)

4x

2x

0.5x1x

Source: RHH


0

50,000

100,000

150,000

200,000

250,000

300,000


20x

12x

6x

4x

(Rs mn)

Source: RHH


0

50,000

100,000

150,000

200,000

250,000


1.5x

0.75x

0.5x

0.25x

(Rs mn)

Source: RHH


(%)

(100)

(50)

0

50

100

150

200


Source: RHH


0

50,000

100,000

150,000

200,000

250,000


1.5x

0.75x

0.5x

0.25x

(Rs mn)

Source: RHH


100



Revenues 77,530 119,120 132,234 154,470

Growth (%) 51.2 53.6 11.0 16.8

EBITDA 6,922 8,710 11,240 13,130

Growth (%) 68.7 25.8 29.0 16.8


EBIT 5,460 6,939 9,129 10,598

Growth (%) 79.5 27.1 31.6 16.1

Interest 1,806 3,070 3,316 3,476

Other income 811 5,347 1,190 1,390

EBT 4,836 13 7,003 8,512

Income taxes 1,235 2,260 2,031 2,469

Effective tax rate (%) 25.5 17,960.3 29.0 29.0


Min into / inc from associates (18) (130) - -

Reported net income 3,585 (2,254) 4,972 6,044

Adjustments (304) 4,602 - -


Growth (%) 66.9 (28.4) 111.8 21.5


FDEPS (Rs) (adj) 11.3 7.5 15.1 17.8

Growth (%) 59.0 (33.2) 99.8 18.2

DPS (Rs) 0.4 0.3 0.7 0.8


Cash and cash eq 6,898 8,122 5,066 6,241


Inventories 20,592 36,686 36,228 42,321


Investments 5,458 6,609 6,609 6,609


Net fixed assets 14,110 18,754 19,492 21,546

CWIP 2,124 2,973 2,899 2,900


Deferred tax assets, net (748) (1,482) (1,549) (1,549)

Other assets - - (608) (983)

Total assets 76,765 109,810 116,685 133,795



Provisions 1,558 1,853 1,953 1,966

Debt funds 16,072 35,592 29,737 33,237






BVPS (Rs) 89.7 82.0 107.7 123.9


Net income + Depreciation 5,418 (5,085) 7,083 8,576

Non-cash adjustments (450) 4,932 (0) -


Cash flow from operations (6,164) (9,792) (913) 2,563


Change in investments (3,429) (1,296) - -

Other investing cash flow - (151) - -


Issue of equity 11,300 (365) 6,752 -

Issue/repay debt (920) 19,520 (5,855) 3,500

Dividends paid (92) (107) (264) (302)

Other financing cash flow - 392 - -

Change in cash & cash eq (3,512) 1,838 (3,055) 1,175



WACC (%) 14.8 14.9 14.9 14.9

ROIC (%) 13.6 10.4 11.1 11.3


EVA (Rs mn) (477) (2,426) (2,405) (2,521)

EVA spread (%) (1.2) (4.4) (3.8) (3.6)




EBIT margin 7.0 5.8 6.9 6.9


ROE 16.4 9.0 16.4 15.8

ROCE 12.9 8.3 11.6 12.2




Payables (days) 213 234 247 241

Current ratio (x) 1.8 1.8 1.8 1.8

Quick ratio (x) 0.9 0.7 0.9 0.8







EV/Sales 1.3 0.9 0.8 0.7

EV/EBITDA 15.1 12.0 9.3 7.9

P/E 23.2 34.7 17.4 14.7

P/BV 2.9 3.2 2.4 2.1


101

Quarterly trend


Revenue (Rs mn) 26,488 29,261 31,200 32,173 29,551

YoY growth (%) 89.9 54.5 47.4 37.1 11.6

QoQ growth (%) 12.9 10.5 6.6 3.1 (8.1)

EBITDA (Rs mn) 2,596 3,124 2,389 1,450 2,918

EBITDA margin (%) 9.8 10.7 7.7 4.5 9.9

Adj net income (Rs mn) 1,336 1,741 830 (343) 1,272

YoY growth (%) 125 95 35 (129) (5)

QoQ growth (%) 13 30 (52) (141) (471)

DuPont analysis


Tax burden (Net income/PBT) 67.8 18,656.5 71.0 71.0 67.8





Return on equity 16.3 9.0 16.4 15.8 16.3

Company profile

Punj Lloyd (PLL), a US$ 2bn conglomerate, comprises Punj Lloyd in

India, Sembawang E&C in Singapore, and Simon Carves in the U.K.

Besides these, various subsidiaries of the group spread across the

world further strengthen its rich international presence, making it a

strong service provider in the oil & gas, infrastructure, and

petrochemical domains.


(%) Dec-08 Mar-09 Jul-09

Promoters 44.3 41.5 41.3

FIIs 18.0 19.0 19.3

Banks & FIs 16.2 12.5 17.7

Public 21.5 27.0 21.7



21-Aug-08 RHH Compendium 272 320 Hold


11-Dec-08 Company Update 156 166 Sell

25-Jan-09 Results Review 92 93 Sell





Stock performance

50100150200250300350

Jul-

08

Sep-

08

Nov

-08

Jan-

09

Mar

-09

May

-09

Jul-

09

Sep-

09

● Buy ● Hold ● Sell

Simplex Infrastructure Sector Report 05 October 2009

102




EBIT margin 7.1 5.4 6.5 6.6


ROE 17.5 14.9 16.3 18.0

ROIC 12.1 10.8 11.3 9.6

ROCE 14.2 13.9 12.0 8.5



Revenue 28,081 46,961 55,414 66,496

Growth (%) 64.4 67.2 18.0 20.0

Adj net income 901 1,242 1,585 2,038

Growth (%) 65.6 47.0 33.1 20.0

FDEPS (Rs) 20.3 25.1 32.0 41.2

Growth (%) 61.7 23.9 27.7 28.6

Simplex Infrastructure Healthy prospects

Robust order book of Rs 100bn: Simplex Infrastructure currently holds an order book of Rs 100.1bn (1.8x FY10E revenue), composed largely of domestic (77.4%) and international contracts (22.6%). The order intake was Rs 10.8bn for Q1FY10. This apart, the company is the lowest bidder (L1) for projects worth Rs 18.6bn.

Simplex’s Q1FY10 revenue grew by 9% YoY to Rs 11.1bn, lower than our estimate by 9%. The muted growth was on account of the elections which led to an exodus of project labourers to their home states for voting purposes – this had a negative impact on the company’s turnover to the extent of Rs 2.5bn. For the quarter, the industrial segment contributed 22%, piling 13%, roads, railways & bridges 19%, power 16%, urban utilities 10%, building & housing 12% and marine projects 9%.

Earnings CAGR of 29% expected through FY11: We expect Simplex to register strong revenue and earnings growth at a CAGR of 19% and 29% respectively over FY09-FY11 on account of its strong order book, improving margins (by an estimated 100bps) and lower debt levels. The reduction in debt will be led by stable working capital requirements and reduced capex.

Superior return ratios vis-à-vis peers: The company has better return ratios than its peers due to lower dilution in the past, a focus on the core EPC business and better working capital management. However, FY08 and FY09 ratios are depressed due to the dilution of ~13% following its QIP. Going forward, we expect Simplex to earn an ROE of ~18%.

S80IA benefits dropped, return to normal tax: In view of the proposed retrospective change in S80IA, Simplex has not claimed any tax deduction in this quarter. Further, in respect of deductions claimed in earlier years aggregating to Rs 300mn, the company has set aside an equivalent amount to a contingency reserve. This would result in a reduction in net worth but have no impact on cash flows.

Maintain Buy: The stock is currently trading at 15.9x FY10E earnings and 12.4x FY11E earnings. We are revising our target P/E multiple to 14x (from 12x earlier) on FY11E earnings. Our target price thus has been revised from Rs 462 to Rs 577. Considering the company’s robust order book and the improving demand environment, we maintain our Buy rating on the stock.




BSE NSE BLOOMBERG

523838 SIMPLEXINF SINF IN

Company data



Free float (%) 45.9




Stock performance


Simplex 510 18.6 30.7 213.0

Sensex 17,135 10.2 17.0 73.0

P/E comparison

20.315.9 12.4

29.624.9

21.1

0

1020

30

40

FY09 FY10E FY11E

Simplex Cap. Goods(x)

Valuation matrix


P/E @ CMP 25.2 20.3 15.9 12.4

P/E @ Target 28.5 23.0 18.0 14.0

EV/EBITDA @ CMP 14.1 9.6 7.2 6.0


103

Order book trend

Fig 226 - Order book mix – Q1FY10

Segments (%) Domestic Foreign Total

Piling & Ground Engg 3.4 0.5 3.9

Power (Thermal, Hydel & Nuclear) 20.3 3.7 24

Marine 5.3 0.7 6

Industrial 9 8.5 17.5

Roads,, Railways & Bridges 14.9 2.1 17

Urban Utilities 18.2 0 18.2

Building & Housing 6.2 7.2 13.4

Total 77.3 22.7 100


Fig 227 - Order book position

5 4 314

246

17 21 20 16 14 11 11

44 45 43 5169 69

7990

100 107 102 101100

020406080

100120

Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1

FY07 FY08 FY09 FY10

Order received Closing order book(Rs bn)


Fig 228 - Order book by segment – Q1FY10

Urban Utilities

18%

Roads,Railw

ays & Bridges

17%

Industrial 18%

Marine 6%

Power (Thermal, Hydel & Nuclear)

24%

Piling & Ground

Engg 4%

Building. & Housing

13%


Fig 229 - Domestic order book break-up – Q1FY10

Urban Utilities

24%

Roads,Railw

ays & Bridges

19%

Industrial 12%

Marine 7%


26%

Piling & Ground

Engg 4%

Building. & Housing

8%


Fig 230 - Foreign order book break-up – Q1FY10

Building. & Housing

32%

Roads,Railw

ays & Bridges

9% Industrial 38%

Marine 3%


16%

Piling & Ground

Engg 2%



104

Stock performance


0

100

200

300400

500

600

700

800


Sensex Simplex BSE CG Index



40

240

440

640840

1040

1240

1440

1640





60

70

80

90

100

110

120

130





45

65

85

105

125

145

165

185





20

40

60

80

100

120





20406080

100120140160180200





105


Fig 237 - P/E band

0

200

400

600

800

1,000


(Rs)

24x

18x

12x

6x

Source: RHH

Fig 238 - P/BV band

0

200

400

600

800

1,000


(Rs)

4x

2.5x

0.5x

1.5x

Source: RHH


0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000


12x

9x

6x

3x

(Rs mn)

Source: RHH


0

10,000

20,000

30,000

40,000

50,000

60,000

70,000


1x

0.7x

0.4x

0.2x

(Rs mn)

Source: RHH


(%)

(80)

(60)

(40)

(20)

0

20

40

60

80


Source: RHH


0

10,000

20,000

30,000

40,000

50,000

60,000

70,000


1x

0.7x

0.4x

0.2x

(Rs mn)

Source: RHH


106



Revenues 28,081 46,961 55,414 66,496

Growth (%) 64.4 67.2 18.0 20.0

EBITDA 2,635 3,873 5,153 6,184

Growth (%) 65.6 47.0 33.1 20.0

Depreciation & amortisation 642 1,320 1,571 1,785

EBIT 1,993 2,553 3,583 4,399

Growth (%) 66.1 28.1 40.3 22.8

Interest 1,088 1,512 1,607 1,728

Other income 325 690 390 370

EBT 1,232 1,732 2,366 3,041

Income taxes 370 490 781 1,004



Min into / inc from associates 40 - - -

Reported net income 902 1,242 1,585 2,038


Adjusted net income 901 1,242 1,585 2,038

Growth (%) 67.7 37.8 27.7 28.6


FDEPS (Rs) (adj) 20.3 25.1 32.0 41.2

Growth (%) 61.7 23.9 27.7 28.6

DPS (Rs) 2.0 2.0 2.0 2.0


Cash and cash eq 1,229 1,178 1,087 1,664


Inventories 4,741 6,792 8,654 10,384


Investments 99 21 21 21


Net fixed assets 6,295 10,109 9,842 9,563

CWIP 243 139 200 200



Other assets 2 (7) 1 11

Total assets 27,407 39,139 45,017 52,188

Accounts payable - - - -


Provisions 116 119 116 116

Debt funds 7,493 12,205 13,105 14,105

Other liabilities - 6 5 -





BVPS (Rs) 151.6 183.7 209.0 247.9



Non-cash adjustments 262 1,144 30 30


Cash flow from operations (228) (405) 714 1,213


Change in investments (40) 2 - -

Other investing cash flow (465) (55) - -


Issue of equity 4,161 6 (213) -

Issue/repay debt 621 4,438 900 1,000

Dividends paid (80) (116) (116) (116)


Change in cash & cash eq 812 (199) (91) 578



WACC (%) 12.7 12.8 12.8 12.8

ROIC (%) 12.1 10.8 11.3 9.6


EVA (Rs mn) (80) (408) (341) (1,260)

EVA spread (%) (0.6) (2.0) (1.5) (3.2)




EBIT margin 7.1 5.4 6.5 6.6


ROE 17.5 14.9 16.3 18.0

ROCE 14.2 13.9 12.0 8.5




Payables (days) 76 67 79 -

Current ratio (x) 1.7 1.7 1.7 1.7

Quick ratio (x) 1.0 1.0 1.0 1.0







EV/Sales 1.3 0.8 0.7 0.6

EV/EBITDA 14.1 9.6 7.2 6.0

P/E 25.2 20.3 15.9 12.4

P/BV 3.4 2.8 2.4 2.1


107

Quarterly trend


Revenue (Rs mn) 10,181 10,081 12,703 13,876 11,082

YoY growth (%) 71.3 76.5 80.4 44.6 8.9

QoQ growth (%) 6.1 (1.0) 26.0 9.2 (20.1)

EBITDA (Rs mn) 1,115 1,019 1,156 1,123 1,103

EBITDA margin (%) 11.0 10.1 9.1 8.1 9.9


YoY growth (%) 113.7 58.8 14.6 3.1 (39.0)

QoQ growth (%) 45.3 (27.9) (16.8) 18.3 (14.1)

DuPont analysis







Return on equity 21.1 17.5 14.9 16.3 18.0

Company profile

Simplex Infrastructure is a large, well-established construction

company with experience in civil and structural construction since

1924. The company’s service offerings include design, engineering

and construction, fittings and finishing work on structures, piling

foundations, ground engineering and earth works. Simplex has a

presence across various construction verticals – piling, industrial,

power, urban infrastructure, buildings and housing, marine and

roads, railways and bridges.


(%) Dec-08 Mar-09 Jun-09

Promoters 49.4 54.1 54.1

FIIs 17.1 13.7 13.2

Banks & FIs 13.4 14.6 17.3

Public 20.1 17.6 15.4





5-Nov-08 Results Review 225 326 Buy

2-Dec-08 Company Update 137 186 Buy

31-Jan-09 Results Review 137 178 Buy

6-Apr-09 Company Update 169 178 Hold




Stock performance

50

150

250350

450

550

Jul-

08

Aug

-08

Sep-

08

Oct

-08

Nov

-08

Dec

-08

Jan-

09

Feb-

09

Mar

-09

Apr

-09

May

-09

Jun-

09

Jul-

09

Aug

-09

Sep-

09

● Hold ● Buy

Voltas Sector Report 05 October 2009

108




EBIT margin 7.4 6.1 6.6 7.1


ROE 35.2 32.9 29.9 29.2

ROIC 29.3 25.9 24.8 24.1

ROCE 30.7 28.6 26.3 26.9



Revenue 32,029 43,259 51,289 59,372

Growth (%) 26.8 35.1 18.6 15.8

Adj net income 1,761 2,254 2,677 3,304

Growth (%) 33.5 28.0 18.8 23.4

FDEPS (Rs) 5.3 6.8 8.1 10.0

Growth (%) 33.5 28.0 18.8 23.4

Voltas Limited upside

MEP order book at Rs 47bn: Order inflows for electro-mechanical projects (MEP) totalled Rs 5.8bn during Q1FY10, taking the outstanding order book for the division to Rs 46.7bn. This is 1.4x FY10E MEP sales. The orders comprise domestic projects worth Rs 12.5bn (~27%) and international orders worth Rs 34.1bn (~73%). All of Voltas’ contracts are on a fixed price basis and the company enters into back-to-back arrangements with vendors to protect margins.

The management is confident of reasonable growth in MEP, both in the domestic and international arenas, on the back of its healthy, well-diversified order profile. It has received a number of new business inquiries and anticipates a pick-up in order booking in the near future. Voltas pegs potential order flows from the international division at Rs 10bn in H2FY10. In the domestic market, the company is looking at opportunities in the infrastructure space, which include airports, hotels, hospitals, and electrical works for power plants.

Earnings CAGR of 21% over FY09-FY11: We expect Voltas to record a healthy earnings CAGR of 21% over FY09-FY11. While the MEP and unitary cooling product (UCP) divisions would lead growth in the near term, engineering products & services (EPS) is set to witness a moderate uptick as demand for material handling and construction equipment revives.

Acquired a further 16% stake in Rohini Electricals: During the quarter, Voltas acquired an additional 16% stake in Rohini Electricals, a turnkey electrical and instrumentation project provider, for a consideration of Rs 230mn. This takes its total stake in the company to 67%. This acquisition will enable it to prequalify for electrical and instrumental works of power plants.

Superior return ratios, cash-rich position: At the end of FY09, Voltas had a consolidated cash balance of Rs 4.6bn as against debt of Rs 1.8bn. We expect an ROE of 30% over the next two years.

Target price of Rs 160 – Hold: The stock is currently trading at 17.9x FY10E and 14.5x FY11E earnings. We have valued Voltas at 16x FY11E earnings based on its superior ROE, strong earnings outlook and relatively modest capex plans (Rs 1bn in FY10-FY11). However, due to the limited upside from current levels, we are changing our rating from Buy to Hold, while maintaining our target at Rs 160.

Key risks: The MEP division, which contributed over 60% to the company’s topline in FY09, derives 80% of its order backlog from the Middle East. A reduction in oil prices would lead to lower spending in the Middle East and hence lower order flows. Also, a sharp appreciation of the rupee against the US dollar would affect profitability. However, a majority of the exchange risk is mitigated by the import of materials in the company’s EPS and UCP divisions.



Rs 145 Rs 160 HOLD MEDIUM

BSE NSE BLOOMBERG

500575 VOLTAS VOLT IN

Company data



Free float (%) 62.3




Stock performance


Voltas 145 (4.0) 17.7 192.0

Cap. Goods 13,731 6.1 6.4 112.4

Sensex 17,135 10.2 17.0 73.0

P/E comparison

21.3 17.914.5

29.624.9 21.1

0

10

20

30

40

FY09 FY10E FY11E

Voltas Industry(x)

Valuation matrix


P/E @ CMP 27.2 21.3 17.9 14.5

P/E @ Target 30.0 23.5 19.8 16.0

EV/EBITDA @ CMP 18.1 16.2 12.6 10.2


109

Order book trend

Fig 243 - MEP order book

Particulars (Rs mn) Q1FY08 Q2FY08 Q3FY08 Q4FY08 Q1FY09 Q2FY09 Q3FY09 Q4FY09 Q1 FY10 YoY

growth (%)

QoQ growth

(%)

Opening order book 21,852 20,000 27,000 35,000 45,952 56,703 55,703 53,293 47,133 2.6 (11.6)

Order inflows 1,883 11,208 11,737 15,683 15,382 4,874 3,848 2,541 5,805 (62.3) 128.5

Sales 3,735 4,208 3,737 4,731 4,632 5,874 6,258 8,701 6,272 35.4 (27.9)

Closing order book 20,000 27,000 35,000 45,952 56,703 55,703 53,293 47,133 46,666 (17.7) (1.0)


Stock performance


0

50

100

150

200

250

300


Sensex VOLTAS BSE CG Index



40

140

240

340

440

540

640

740





65

75

85

95

105

115





75

100

125

150

175

200

225





20

40

60

80

100

120





20

70

120

170

220





110


Fig 250 - P/E band

0

50

100

150

200

250

300

350

400

Aug-06 Aug-07 Aug-08 Aug-09

(Rs)

40x

20x

10x

4x

Source: RHH

Fig 251 - P/BV band

0

50

100

150

200

250

300


(Rs)

6.5x

4.5x

1x

2.5x

Source: RHH


010,00020,00030,00040,00050,00060,00070,00080,00090,000


21x

15x

10x

5x

(Rs mn)

Source: RHH


0

20,000

40,000

60,000

80,000

100,000

120,000


2x

1.4x

0.8x

0.2x

(Rs mn)

Source: RHH


(%)

(100)

(50)

0

50

100

150

200


Source: RHH


0

20,000

40,000

60,000

80,000

100,000

120,000

Jan-06 Oct-06 Jun-07 Mar-08 Dec-08 Sep-09

2x

1.4x

0.8x

0.2x

(Rs mn)

Source: RHH


111



Revenues 32,029 43,259 51,289 59,372

Growth (%) 26.8 35.1 18.6 15.8

EBITDA 2,531 2,831 3,642 4,510

Growth (%) 97.4 11.9 28.6 23.9


EBIT 2,364 2,622 3,377 4,198

Growth (%) 109.9 10.9 28.8 24.3

Interest 90 110 166 130

Other income 479 742 800 868

EBT 2,753 3,254 4,010 4,935

Income taxes 997 1,172 1,303 1,599


Extraordinary items (316) (261) - -

Min into / inc from associates 3 26 30 32




Growth (%) 33.5 28.0 18.8 23.4


FDEPS (Rs) (adj) 5.3 6.8 8.1 10.0

Growth (%) 33.5 28.0 18.8 23.4

DPS (Rs) 1.4 1.6 1.6 1.6


Cash and cash eq 3,001 4,570 3,672 3,513


Inventories 6,398 11,194 11,944 13,826


Investments 2,585 1,562 2,487 2,697


Net fixed assets 1,702 2,148 2,483 2,770

CWIP 197 132 120 140


Deferred tax assets, net 189 224 (20) (40)

Other assets 8 684 484 734

Total assets 21,311 32,239 34,519 39,094



Provisions 2,169 2,645 2,423 2,673

Debt funds 737 1,814 1,514 1,088






BVPS (Rs) 17.5 23.9 30.2 38.3



Non-cash adjustments 110 162 (40) (22)

Changes in working capital 1,279 (1,760) (1,459) (1,967)

Cash flow from operations 3,632 1,126 1,443 1,628

Capital expenditure (287) (367) (588) (620)

Change in investments (1,311) 1,076 (924) (210)

Other investing cash flow 73 (314) - -

Cash flow from investing (1,525) 395 (1,512) (830)

Issue of equity 0 0 - -

Issue/repay debt (378) 577 (300) (427)

Dividends paid (388) (520) (529) (529)

Other financing cash flow (1) (11) - -

Change in cash & cash eq 1,340 1,569 (898) (158)



WACC (%) 14.5 12.1 12.1 12.1

ROIC (%) 29.3 25.9 24.8 24.1


EVA (Rs mn) 822 1,096 1,324 1,574

EVA spread (%) 14.8 13.8 12.7 12.0




EBIT margin 7.4 6.1 6.6 7.1


ROE 35.2 32.9 29.9 29.2

ROCE 30.7 28.6 26.3 26.9





Current ratio (x) 1.3 1.4 1.4 1.5

Quick ratio (x) 0.7 0.7 0.7 0.7







EV/Sales 1.4 1.1 0.9 0.8

EV/EBITDA 18.1 16.2 12.6 10.2

P/E 27.2 21.3 17.9 14.5

P/BV 8.3 6.1 4.8 3.8


112

Quarterly trend*


Revenue (Rs mn) 10,163 9,285 8,660 12,531 11,789

YoY growth (%) 21.9 29.7 30.0 49.1 16.0

QoQ growth (%) 20.9 (8.6) (6.7) 44.7 (5.9)

EBITDA (Rs mn) 872 808 495 774 1,007

EBITDA margin (%) 8.6 8.7 5.7 6.2 8.5


YoY growth (%) 20.5 38.2 11.0 (19.6) 14.5

QoQ growth (%) 34.7 (4.5) (28.0) (13.2) 91.8 * Standalone

DuPont analysis







Return on equity 38.0 35.2 32.9 29.9 29.2

Company profile

Voltas offers engineering solutions for a wide spectrum of industries

in areas such as heating, ventilation and air conditioning (HVAC),

refrigeration, electro-mechanical projects, textile machinery,

machine tools, mining and construction equipment, material

handling, water management, building management systems,

indoor air quality and chemicals.


(%) Dec-08 Mar-09 Jun-09

Promoters 27.6 27.7 27.7

FIIs 16.4 12.7 11.7

Banks & FIs 26.5 27.2 29.9

Public 29.5 32.4 30.7



3-Jul-09 Initiating Coverage 125 160 Buy



Stock performance

50

70

90

110

130

150

170


● Hold ● Buy

Ahluwalia Contracts Sector Report 05 October 2009

113



Revenue 8,801 12,087 14,444 19,673

Growth (%) 31.5 37.3 19.5 36.2

Adj net income 516 572 796 1,102

Growth (%) 65.6 10.8 39.2 38.4

FDEPS (Rs) 8.2 9.1 12.7 17.6

Growth (%) 65.6 10.8 39.2 38.4



EBITDA margin 12.1 12.1 11.8 12.5

EBIT margin 9.5 9.5 7.9 8.8


ROE 50.5 50.5 37.9 37.2

ROIC 75.8 75.8 58.2 48.9

ROCE 36.8 36.8 31.4 30.8

Ahluwalia Contracts Strong revenue visibility

Healthy order book: ACL currently has a gross order book of Rs 45bn, with unbilled orders worth Rs 28bn which are to be executed over a period of 24 months. The orders are well diversified geographically, covering 14 states and split between government and private clients in a ratio of 33:67. About 85% of the projects are covered by cost escalation clauses. The company’s real estate exposure stands at 60% including orders for the 2010 Commonwealth Games in New Delhi (45% excluding these contracts).

Management sees order inflows of Rs 25bn in FY10: Order inflows totalled Rs 20bn in FY09 and the management expects a 25% incremental intake during FY10. The company has already bagged Rs 4bn of orders in Q1FY10. In addition, ACL is the lowest bidder (L1) for projects worth Rs 3bn and has placed further bids worth Rs 12bn.

Emaar receivables under control: With the Delhi Development Authority (DDA) bailing out the Emaar MGF project, the company’s outstanding debtor position on this deal has reduced from Rs 750mn as on 31 March 2009 to Rs 350mn. Work on the project is 45–50% complete and payments are being received on time. To date, Rs 3bn has been billed, with Rs 4bn to be billed in FY10.

Tighter working capital cycle: ACL’s working capital cycle peaked at 120 days in March ’09, but has now tapered down to 60–75 days. The company has witnessed the cancellation of orders for SEZ projects and a retail outlet for Reliance, but there have been no bad debts on these accounts.

Capex of Rs 750mn over the next two years: ACL has incurred capex of Rs 750mn in FY09 and is likely expend a similar sum for each of the next two years. The cost of scaffolding which constituted Rs 350mn of the Rs 750mn capex in FY09 has been fully written-off during the year. The life of scaffolding items is close to five years. Since the write-off led to high depreciation, the company has deferred tax assets on its books.

No dilution on the cards: The management is not looking to raise equity in the near term, though this possibility may arise in future if it opts to undertake BOT projects or achieve inorganic growth. We anticipate EPS of Rs 12.7 and Rs 17.6 in FY10 and in FY11 respectively.

Upgrade target, maintain Buy: With the improving economic environment, the construction industry has witnessed a re-rating. Accordingly, we have revised our target P/E multiple for ACL from 12x to 15x on FY10E, giving us a price target of Rs 190 from Rs 152 earlier. We maintain our Buy rating on the stock.




BSE NSE BLOOMBERG

532811 - AHLU IN

Company data



Free float (%) 25.5




Stock performance


Ahluwalia Cont. 169 13.0 94.4 406.6

Sensex 17,135 10.2 17.0 73.0

P/E comparison

18.513.3

9.6

21.124.929.6

0

10

20

30

40

FY09 FY10E FY11E

Ahluwalia contracts Industry(x)

Valuation matrix


P/E @ CMP 20.5 18.5 13.3 9.6

P/E @ Target 23.1 20.9 15.0 10.8

EV/EBITDA @ CMP 9.1 6.8 5.4 4.0


114

Stock performance

Fig 256 - Absolute performance from Feb ’07

0

50

100

150

200

250

300

350

400

Feb-07 Aug-07 Mar-08 Sep-08 Mar-09 Sep-09

Sensex Ahluwalia BSE CG Index


Fig 257 - Relative performance from Feb ’07

20406080

100120140160180200220

Feb-07 Aug-07 Mar-08 Sep-08 Mar-09 Sep-09



Fig 258 - Relative performance from Feb ’07 to March ’07

75

80

85

90

95

100

105

Feb-07 Mar-07 Mar-07 Mar-07




60

100

140

180

220

260





203040

50607080

90100110





20

70

120

170

220

270

320

Apr-09 May-09 Jun-09 Aug-09 Sep-09




115


Fig 262 - P/E band

0

100

200

300

400

500

600

700

Feb-07 Oct-07 Jun-08 Jan-09 Sep-09

(Rs)

40x

15x

10x5x

Source: RHH

Fig 263 - P/BV band

050

100150200250300350400450


(Rs)

8x

4x

1x2x

Source: RHH


0

10,000

20,000

30,000

40,000

50,000


21x

15x

10x

5x

(Rs mn)

Source: RHH


0

5,000

10,000

15,000

20,000

25,000

30,000

35,000


1.8x

1.2x

0.8x

0.4x

(Rs mn)

Source: RHH


(%)

(150)

(100)

(50)

0

50

100

Feb-07 Sep-07 May-08 Jan-09 Sep-09

Source: RHH


0

5,000

10,000

15,000

20,000

25,000

30,000

35,000


1.8x

1.2x

0.8x

0.4x

(Rs mn)

Source: RHH


116



Revenues 8,801 12,087 14,444 19,673

Growth (%) 31.5 37.3 19.5 36.2

EBITDA 1,063 1,429 1,808 2,439

Growth (%) 52.8 34.5 26.5 35.0


EBIT 835 950 1,268 1,789

Growth (%) 68.1 13.8 33.4 41.2

Interest 118 159 250 330

Other income 65 88 150 160

EBT 781 880 1,168 1,619

Income taxes 265 308 371 518




Reported net income 516 572 796 1,102

Adjustments - - - -

Adjusted net income 516 572 796 1,102

Growth (%) 65.6 10.8 39.2 38.4


FDEPS (Rs) (adj) 8.2 9.1 12.7 17.6

Growth (%) 65.6 10.8 39.2 38.4

DPS (Rs) 0.7 0.7 0.7 0.7


Cash and cash eq 1,165 1,365 2,154 3,258


Inventories 755 907 1,300 1,620

Other current assets 330 773 887 1,018

Investments 42 42 42 42


Net fixed assets 1,102 927 1,137 1,237

CWIP 104 400 400 400

Intangible assets 2 1 1 0

Deferred tax assets, net 38 32 35 35

Other assets - - - -

Total assets 5,799 7,647 9,555 12,011



Provisions 113 355 443 594

Debt funds 565 721 1,251 1,651






BVPS (Rs) 21.9 30.2 42.1 58.8


Net income + Depreciation 744 1,051 1,336 1,752

Non-cash adjustments (32) 270 85 151

Changes in working capital 447 (627) (361) (397)

Cash flow from operations 1,159 694 1,060 1,506

Capital expenditure (668) (599) (749) (750)

Change in investments 0 - - -

Other investing cash flow 7 - - -

Cash flow from investing (662) (599) (749) (750)

Issue of equity - 0 0 0

Issue/repay debt (27) 156 530 385

Dividends paid (22) (52) (52) (36)


Change in cash & cash eq 448 200 789 1,105



WACC (%) 13.9 16.3 16.3 16.3

ROIC (%) 75.8 58.2 48.9 52.8

Invested capital (Rs mn) 736 1,482 2,056 2,553

EVA (Rs mn) 456 622 670 933

EVA spread (%) 61.9 42.0 32.6 36.6



EBITDA margin 12.1 11.8 12.5 12.4

EBIT margin 9.5 7.9 8.8 9.1


ROE 50.5 37.9 37.2 36.2

ROCE 36.8 31.4 30.8 29.4





Current ratio (x) 1.2 1.3 1.5 1.7

Quick ratio (x) 0.9 0.7 0.7 0.7







EV/Sales 1.1 0.8 0.7 0.5

EV/EBITDA 9.1 6.8 5.4 4.0

P/E 20.5 18.5 13.3 9.6

P/BV 7.7 5.6 4.0 2.9


117

Quarterly trend


Revenue (Rs mn) 2,540 3,017 2,963 3,567 3,046

YoY growth (%) 48.9 60.5 33.3 19.2 19.9

QoQ growth (%) (15.1) 18.8 (1.8) 20.4 (14.6)

EBITDA (Rs mn) 199 235 228 289 304

EBITDA margin (%) 7.8 7.8 7.7 8.1 10.0


YoY growth (%) 52.2 18.9 16.7 (15.0) 43.3

QoQ growth (%) (35.7) 12.8 (11.8) 33.0 8.3

DuPont analysis







Return on equity 47.3 50.5 37.9 37.2 36.2

Company profile

Set up in 1979, Ahluwalia Contracts India (ACL) is an engineering-

procurement-construction (EPC) company engaged in the civil

construction business, which includes retail malls, residential

complexes, offices, hotels, IT parks and hospitals.


(%) Dec-08 Mar-09 Jun-09

Promoters 74.5 74.5 74.5

FIIs 5.6 5.0 2.9

Banks & FIs 16.3 16.0 17.1

Public 3.6 4.5 5.5





2-Jan-09 Quarterly Preview 31 42 Hold


16-Feb-09 Company Update 32 42 Hold

20-Jul-09 Company Update 97 127 Buy



Stock performance

0

50

100

150

200

Aug

-08

Oct

-08

Dec

-08

Feb-

09

Apr

-09

Jun-

09

Aug

-09

Oct

-09

● Hold ● Buy

Gayatri Projects Sector Report 05 October 2009

118


(Rs mn) FY06 FY07 FY08 FY09

Revenue 3,712 5,021 7,524 10,046

Growth (%) 23 35 50 34

Adj net income 177 236 393 413

Growth (%) 102 33 67 5

FDEPS (Rs) 19.65 24.7 39.1 40.9

Growth (%) 19.7 24.8 34.0 32.6


(%) FY06 FY07 FY08 FY09

EBITDA margin 17.6 15.0 14.1 11.3

EBIT margin 17.6 12.5 11.9 9.3


ROE 19.7 21.7 24.6 20.9

ROCE 19.2 11.7 13.5 12.3

Gayatri Projects Robust BOT portfolio

Gayatri Projects (GPL) has two business verticals, i.e., construction and BOT roads. The BOT projects are being executed by Gayatri Infra Ventures (GIVL), its 70% subsidiary.

Construction order book of Rs 58bn: GPL’s outstanding order book in the construction segment stands at Rs 57.7bn (~5.7x FY09 revenue), to be executed over 3–4 years. Of this, contracts worth Rs 4.2bn are in-house BOT road construction works. The irrigation segment, which derives ~90% of its orders from the Andhra Pradesh government, contributes 66% to the order book, while the road and industrial building segments contribute 30% and 4% respectively. For FY10 (standalone), the management expects a topline growth of 25–30% to Rs 12.5bn–13bn with an EBITDA margin of 11–11.5% and earnings growth of 20–25% to Rs 50/share.

Large BOT portfolio: Subsidiary company GIVL has a portfolio of five BOT projects comprising one toll contract and four annuity-based works. All the projects are under construction, and entail a cumulative equity commitment of ~Rs 1.7bn from the company. Of this, GIVL has invested Rs 1.3bn so far and expects to bring in the balance by the end of this fiscal. Apart from its ongoing works, GIVL has emerged as the lowest bidder for Karim Nagar – a Hyderabad BOT toll project that has an estimated cost of Rs 22bn with a positive grant of Rs 5.3bn. The company holds a 26% stake in the SPV.

Dilution in GIVL, stake placement by GPL: In August ’08, GIVL diluted 30% equity to AMP Capital Finance Mauritius for a consideration of Rs 1bn. This values GIVL at Rs 3.4bn. This apart, GPL recently placed a 9.9% stake (1mn equity shares) with Reliance Capital Trustee Co – Reliance Infrastructure Fund – at Rs 185/share. The board is also considering the allotment of 1mn warrants convertible into equity shares of Rs 10 each at a premium of Rs 132.5/share on preferential basis to the promoters.

Valuation: The company is trading at 7.5x FY09 reported earnings, which looks attractive considering its healthy BOT portfolio. We do not have a rating on the stock.



Rs 305 NA NA NA

BSE NSE BLOOMBERG

531497 NA GAYP IN

Company data


Outstanding equity shares (mn) 10.1

Free float (%) 39.8

Dividend yield (%) -



Stock performance


Gayatri 305 3.8 57.5 347.8

Sensex 17,135 10.8 16.9 65.6

Gayatri Projects Sector Report 05 October 2009

119

Fig 268 - GIVL – BOT project portfolio

SN Name Length (km)

Concession period (yrs) Status

Holding (%)

Total Cost

(Rs mn)

Equity (Rs mn)

Debt (Rs mn)

NHAI grant

(Rs mn)

Semi-Annuity (Rs mn)

1 Western UP Tollway 78.5 20 Under construction 49% 5,340 940 3,850 560 NA*

2 Gayatri Lalitpur Roadways

50 20 Under construction 51% 3,126 600 2.526 0 239.5

3 Gayatri Jhansi Roadways

50 20 Under construction 51% 4,210 800 3,420 0 299.5

4 Hyderabad Expressways

13 15 Under construction 50% 4,310 682 2.900 719 304.9

5 Cyberabad Expressways

11.7 15 Under construction 50% 5,018 447 3,763 810 395

Total 22,004 3,469 16,459 2,089

Source: Company *BOT Toll project

Madhucon Projects Sector Report 05 October 2009

120


(Rs mn) FY06 FY07 FY08 FY09

Revenue 3,421 5,100 7,380 9,719

Growth (%) 12 49 45 32

Adj net income 333 416 472 493

Growth (%) 105 25 14 4

FDEPS (Rs) 11.8 11.3 12.8 13.4

Growth (%) (60.6) (4.6) 13.7 4.4


(%) FY06 FY07 FY08 FY09

EBITDA margin 18.3 15.0 14.5 12.1

EBIT margin 12.7 10.0 9.9 7.7


ROE 13.0 9.7 10.0 9.5

ROCE 13.7 8.9 8.7 7.6

Madhucon Projects Listing of infra subsidiary a potential trigger

Strong order book of Rs 46bn: MPL has a current order backlog of ~Rs 46bn which is 4.6x FY09 revenues. The order book is composed of in-house contracts worth Rs 16bn (roads Rs 2.5bn, power Rs 9.6bn and hotels & office complexes Rs 3.9bn) and external projects worth Rs 30bn. Margins for in-house works are in the range of 9–10% except for power projects where a higher subcontracting component caps margins at ~5%. For FY10, MPL pegs topline growth at 30% with a margin of 11% and bottomline growth of 20%, translating to an EPS of ~Rs 16.

BOT portfolio of four projects: The company’s 100% subsidiary, Madhucon Infrastructure, has a portfolio of four toll roads. Toll collections have begun on one stretch, while another project will deliver from the end of September. The company will commence operations on the remaining two toll roads by end-FY10. It expects toll revenue of Rs 5mn–5.5mn per day once all its BOT projects are commissioned.

Power portfolio totals 540MW: MPL is executing power projects in two phases of 270MW each, besides signing an MOU with the Jharkhand government for a 1,000MW thermal plant. Phase I of its power project entails a cost of Rs 13.4bn and has achieved financial closure with an equity component of Rs 3.3bn and debt of Rs 10bn. The company has invested Rs 1.2bn and will invest the balance equity before FY11. It holds a 76% stake in the project while the promoters hold the balance. MPL has signed a 25-year MOU with PTC for sale of 70% of the power generated at Rs 1.25/unit. PTC will supply coal for power generation. The balance 30% will be sold to Reliance at Rs 4.5/unit for three years.

For the second phase, the company has already acquired 700 acres of land at a cost of Rs 400,000/acre and applied for another 220 acres. This phase is proposed to be expanded from 270MW to 1,330MW.

Indonesian coal mines: MPL has invested Rs 1.2bn in coal mines in Indonesia, of which equity investments total Rs 200mn. It plans to invest further Rs 2.5bn in FY11. The management expects to sell 0.5mt of coal in FY10 and 1.5mt in FY11.

Subsidiary listing a potential trigger for the stock: So far, MPL has infused equity of Rs 4.6bn in roads (Rs 3.2bn), power (Rs 1.2bn) and coal mines (Rs 200mn). It intends to invest a further Rs 3.9bn by FY11 (phase I power and coal mines). The management is targeting an EPS of Rs 16 for FY10. The stock is currently trading at a P/E of 15.7x FY10E consensus earnings. Excluding the book value of investments in roads, power and coal mining, the stock trades at 9.8x FY10E consensus earnings. MPL plans to transfer all its infrastructure assets to its subsidiary, Madhucon Infrastructure, and may list the same by January ’10 to raise ~Rs 5bn. This would be a key trigger for the stock. We do not have a rating on MPL at present.



Rs 262 NA NA NA

BSE NSE BLOOMBERG

531497 MADHUCON MDHPJ IN

Company data


Outstanding equity shares (mn) 36.9

Free float (%) 42.2

Dividend yield (%) -



Stock performance


Madhucon 262 10.5 52.5 322.9

Sensex 17,135 10.8 16.9 65.6

Madhucon Projects Sector Report 05 October 2009

121

Fig 269 - Road BOT business summary

(Rs mn) Length Concession

years Status Avg. toll

collection per day

Total Cost Equity Debt

NHAI positive

grant

Equity invested

P/BV - 1x (Rs/share)

Madhucon Agra–Jaipur Expressways

57 25 Toll collection started in May ’09

0.7 3,554 610 1,984 960 460 12.5

TN (DK) Expressways 68 20

Expects completion certificate by Sept ’09 end

1.15 3,847 747 2,240 860 747 20.2

Trichy – Tanjavur Expressways

56 20 Completion in Jan ’10

1.4 4,041 647 2,610 784 647 17.5

Madurai – Tuticorin Expressways

128 20 Completion in Feb ’10

2.4 9,204 1,780 5,980 1,444 1350 36.6

Total 309 5.7 20,646 3,784 12,814 4,048 3,204 86.8


Coverage Profile

By recommendation By market cap (US$)

59

31

10

0102030405060

Buy Hold Sell

(%)

57

10

33

0102030405060

> $1bn $200mn - $1bn < $200mn

(%)

Recommendation interpretation

Recommendation Expected absolute returns (%) over 12 months

Buy More than 15%

Hold Between 15% and –5%

Sell Less than –5%

Recommendation structure changed with effect from March 1, 2009

Expected absolute returns are based on share price at market close unless otherwise stated. Stock recommendations are based on absolute upside (downside) and have a 12-month horizon. Our target price represents the fair value of the stock based upon the analyst’s discretion. We note that future price fluctuations could lead to a temporary

mismatch between upside/downside for a stock and our recommendation.

Religare Capital Markets Ltd

4th Floor, GYS Infinity, Paranjpe ‘B’ Scheme, Subhash Road, Vile Parle (E), Mumbai 400 057.

Disclaimer

This document is NOT addressed to or intended for distribution to retail clients (as defined by the FSA). This document is issued by Religare Hichens, Harrison & Co Plc (“Hichens”) in the UK, which is authorised and regulated by the Financial Services Authority in connection with its UK distribution. Hichens is a member of the London Stock Exchange.

This material should not be construed as an offer or recommendation to buy or sell or solicitation of any offer to buy any security or other financial instrument, nor shall it, or the fact of its distribution, form the basis of, or be relied upon in connection with, any contract relating to such action or any other matter. The material in this report is based on information that we consider reliable and accurate at, and share prices are given as at close of business on, the date of this report but we do not warrant or represent (expressly or impliedly) that it is accurate, complete, not misleading or as to its fitness for the purpose intended and it should not be relied upon as such. Any opinion expressed (including estimates and forecasts) is given as of the date of this report and may be subject to change without notice.

Hichens, and any of its connected or affiliated companies or their directors or employees, may have a position in any of the securities or may have provided corporate finance advice, other investment services in relation to any of the securities or related investments referred to in this document. Our asset management area, our proprietary trading desks and investing businesses may make investment decisions that are inconsistent with the recommendations or views expressed in this briefing note.

Hichens accepts no liability whatsoever for any direct, indirect or consequential loss or damage of any kind arising out of the use of or reliance upon all or any of this material howsoever arising. Investors should make their own investment decisions based upon their own financial objectives and financial resources and it should be noted that investment involves risk, including the risk of capital loss.

This document is confidential and is supplied to you for information purposes only. It may not (directly or indirectly) be reproduced, further distributed to any person or published, in whole or in part, for any purpose whatsoever. Neither this document, nor any copy of it, may be taken or transmitted into the United States, Canada, Australia, Ireland, South Africa or Japan or into any jurisdiction where it would be unlawful to do so. Any failure to comply with this restriction may constitute a violation of relevant local securities laws. If you have received this document in error please telephone Nicholas Malins-Smith on +44 (0) 20 7382 4479.

“Religare Enterprises Limited proposes, subject to receipt of requisite approvals, market conditions and other considerations, to make a rights issue of its equity shares to its existing shareholders and has filed a draft letter of offer (“DLOF”) with the Securities and Exchange Board of India (“SEBI”). The DLOF is available on the website of SEBI at www.sebi.gov.in as well as on the websites of the lead manager at www.enam.com. Investment in equity shares involves a high degree of risk and for details relating to the same, please refer to the section titled “Risk Factors” of the DLOF.”

Sector Report 051009 Religare

Documents