08_Dec Eredene Research_A

Eredene Capital December 2008

PART 1: INVESTMENT POLICY 2

PART 2: FAIR VALUE 4

PART 3: INDIA 5

PART 4: PORTFOLIO INVESTMENTS 10

THIRD PARTY LOGISTICS 10

LOGISTICS PARKS 16

CONTAINER LOGISTICS 21

OFFICE DEVELOPMENT 31

LOW COST HOUSING 32

APPENDIX 1: EREDENE MANAGEMENT 39

APPENDIX 2: PARTNERS IN INDIA 40

APPENDIX 3: BUILDING METHOD 42

Index: AIM

Sector: Infrastructure

Equity Development Limited is authorised and regulated by The Financial Services Authority

Key points

• Targeting basic infrastructure

and affordable housing in the

fast growing Indian economy

• More than 90% of fund now

invested in nine projects

• The management and

Eredene’s partners in India

bring extensive knowledge

and experience

• With early investments now

producing revenue, fair value

per share set at 37.5p,

versus current 10p level

Eredene Capital

www.equity-development.co.uk

Eredene’s policy targets the fast growing Indian economy, concentrating

on its basic infrastructure (logistics, and distribution and port facilities)

and affordable housing needs.

India will not be immune from the current world economic downturn, but the

areas of business chosen by Eredene will still need investment in a country keen

to modernise.

Eredene has now invested or committed more than 90% of its available funds into

nine individual projects, of which three are revenue producing and a fourth on the

verge of it. Three are follow-on investments with existing partners: the company’s

local partners and connections are key factors.

Third Party Logistics (‘3PL’)

3PL is in its infancy in India. MJ Logistic is building a three centre development to

serve a pressing need in Delhi and the northern region of India.

Logistics Parks

Eredene’s first JV with Apeejay Surrendra serves the new commercial and

industrial hub in Haldia, close to Haldia port and to Kolkata (formerly Calcutta).

Apeejay Surrendra have committed to a similar venture with Eredene in Orissa.

Container logistics

Initially, two smaller container freight station (‘CFS’) projects to serve container

traffic: growth in general cargo is compounded by transfer of cargo to the

container concept. These have been followed on by two larger investments with

the same partners, one a CFS and the other an inland container depot (‘ICD’).

Urban development

Eredene’s planned development of up to 185,000 homes outside Mumbai

addresses a large gap in the market. We estimate value of £45m against a

planned equity investment of only £16.4m. In addition, the company is investing

in high end dedicated IT office space in Bangalore and Chennai.

Fair value

Three of the earliest investments give us sufficient confidence to assign a value

other than cost. The largest and the smallest are the top performers. The largest,

the low income residential project, has a major effect on our fair value calculation,

which we set at 37.5p per share, against the present price of 10.0p.

Figure 1: Price performance

510152025

Nov-07 Feb-08 May-08 Aug-08 Nov-08

pen

ce

ADVFN

Eredene Capital

ERE Date: 03.12.2008

Share price p 10.0

12 month Hi/Lo 20.75p / 9.5p

Ord 25p (m) issued 244.7

Market cap £m 24.5

Fair Value / share

37.5p

Major Shareholders

Shares (m) %

Caledonia & Cayzer Trust combined

60.9 24.9

Ruffer LLP 51.3 21.0

Henderson Global Investors

28.4 11.6

Rebelco S.A. 25.0 10.2

Ornaisons Foundation 20.2 8.3

GLG Partners LP 11.4 4.6

Equity Development contact

Andy Edmond

020 7065 [email protected]

Eredene Capital PLC (‘Eredene’) is an investment company specialising

primarily in infrastructure in India.

Eredene is quoted on AIM

and investors should be

aware that shares traded

on AIM are subject to

lighter due diligence than

shares quoted on the

main market and are

therefore more likely to

carry a higher degree of

risk than main market

companies.

Eredene Capital

2 www.equity-development.co.uk

PART 1: INVESTMENT POLICY

Purpose Eredene was originally admitted to AIM as a cash shell in February 2005, but

began to take shape when it raised a gross £57m in April 2006 for investment in

India.

The company had as its objective the building of a portfolio of real estate

projects, but has since modified this to concentrate on infrastructure investments,

with a particular emphasis on distribution logistics. In the first half of 2007, as

part of this decision, the arrangement with the investment advisors (Saffron

Group) was terminated, Eredene became a self-managed investment company

and the first three real estate developments were sold.

These realised £9.75m against equity invested of £8.17m, resulting in an IRR of

34.0%. Eredene entered H2 2007 with cash of £57.7m and embarked on the

building of its infrastructure portfolio. More than 90% of the fund has now been

committed1. All the investments are in private (unlisted) companies and are

essentially new businesses:

Table 1: Eredene funds invested and committed to date Project Location Date of Invested Committed Total

Investment £m £m £m

MRPL Nr Mumbai July 07 12.7 3.7 16.4

Sattva CFS Vichoor Nr Chennai Aug 07 0.9 0.0 0.9

Contrans Logistic CFS Pipavav Oct 07 2.9 0.0 2.9

Haldia logistics park West Bengal Nov 07 1.9 3.4 5.3

MJ Logistic Delhi region Dec 07 7.9 3.1 11.0

Kalinganagar logistics park Orissa May 08 0.1 2.5 2.6

Baroda ICD Baroda, Gujarat Aug 08 0.6 4.4 5.0

Symcon Bangalore Sept 08 2.1 0.0 2.1

Ennore CFS Ennore Oct 08 2.1 2.9 5.0

31.2 19.9 51.1

Other net assets Sept 2008* 6.5

Book value of fund* 57.6

* Including revaluation surplus

Eredene announcements and ED estimates.

Two of these are urban and office developments, but very different from the kind

of real estate originally targeted by the company: Matheran is a residential

development serving lower income groups in the Mumbai/Pune region, while

Symcon is developing dedicated IT infrastructure offices in the high-tech

Bangalore/Chennai region. Both fit into the concept of basic infrastructure

investments.

Eredene targets a minimum IRR of 20% for each investment.

1 We use the term ‘committed’ to describe future planned investment, rather than that which has been legally contracted.

Eredene Capital

www.equity-development.co.uk 3

New US$400 fund

Eredene may also benefit from a new fund currently being marketed. The

company should receive an annual fee from the fund, as well as participating in its

success as a general partner with a substantial carried interest through its wholly

owned subsidiary.

The interests of Eredene and the new fund are therefore aligned: the new fund

will benefit from the widespread connections, experience and knowledge built up

by Eredene, and Eredene will share in its success. We have not taken any of this

into account when assessing the company.

Corporate structure Eredene is designed to be tax-efficient. The quoted company, Eredene Capital

PLC, is registered in the UK. Its investments, however, are held through holding

companies in Mauritius, which has a double tax agreement with India, and has

become a channel for foreign direct investment into that country.

Each investment is made through a dedicated pair of holding companies (SPVs) in

Mauritius, giving flexible realisation options by allowing the sale of the lower tier

Mauritian company rather than selling the investment directly. Eredene believes

that proceeds of such sales held in Mauritius will not be subject to tax and, if

remitted to the UK, may not be subject to tax there.

India partners As in many other economic environments, direct investment in India would be ill

advised without local partners. Local knowledge and connections are vital.

These partnerships fall into three distinct categories:

Eredene representation on the ground: see below,

Local promoters/entrepreneurs: see Appendix 2, and

The relationship with Apeejay Surrendra (‘Apeejay’): see below.

Eredene representation

Eredene Infrastructure Pvt Ltd (‘EIPL’) has been established in Mumbai to act as

Eredene’s investment advisor in India. EIPL is a company owned by Nikhil Naik2

who, with the support of fellow-director Jose Mathew3 and a small team in

Mumbai, acts in an advisory capacity. Nikhil Naik is also a non-executive director

of Eredene Capital.

EIPL’s remit is actively to monitor investments, for the sourcing, assessment and

transaction of potential investments, and for financial and operating reporting to

Eredene in London. This role is backed up by frequent visits by senior Eredene

management to India. EIPL is funded by fees charged to the relevant Mauritius

holding companies.

The Apeejay Surrendra connection

Investments made with Apeejay Surrendra (Haldia and Kalinganagar logistics

parks) are on a 50/50 basis, with both partners contributing equally to the

financial requirements. Both sides gain operationally from the partnership,

2 See Appendix 1 of this report 3 See Appendix 2 of this report

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Eredene from Apeejay’s position and widespread connections in West Bengal and

the Eastern states of India and Apeejay from Eredene’s expertise and connections

in distribution logistics.

Eredene has the exclusive right of first refusal on projects proposed by Apeejay in

nine states of eastern India.

See Appendix 2 for details of Apeejay Surrendra.

PART 2: FAIR VALUE

Eredene values its investments in accordance with the International Private Equity

and Venture Capital Guidelines. Our approach is less stringent.

Our estimate of fair value is shown in the table below:

Table 2: Estimate of fair value Total cost1 Portfolio Fair value Portfolio Per share2

Investment £m % £m % p

MJ Logistic 11.0 21.5% 15.0 16.7% 5.8

Haldia logistics park 5.3 10.3% 5.2 5.8% 2.0

Kalinganagar logistics park 2.6 5.1% 2.6 2.9% 1.0

Sattva CFS Vichoor 0.9 1.7% 2.8 3.1% 1.1

Ennore CFS 5.0 9.8% 5.0 5.6% 1.9

Pipavav CFS 2.9 5.7% 2.9 3.2% 1.1

Baroda CFS 5.0 9.8% 5.0 5.6% 1.9

Symcon 2.1 4.1% 2.0 2.2% 0.8

MRPL 16.4 32.0% 49.5 55.0% 19.2

51.059 100.0% 90.0 100.0% 34.8

Other net assets 6.0 3.0 1.2

Minority interest 0.5 0.5 0.2

Book value/fair value2 57.6 93.5 36.1

Exercise of options 3.5 3.5 1.3

Equity funds2 61.0 97.0 37.5 1 Including funds committed but not yet invested 2 Fully diluted 3 Revaluation surplus excluded from fair value

ED estimates

Assumptions underlying these figures are set out in the coverage in this report of

the individual investments.

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PART 3: INDIA

Figure 2: Investment Locations

Central Intelligence Agency of the USA

Population and culture India has 2.4% of the world’s land area, but accounts for more than 17.5% of its

population (1.15bn people in July 2008)4. The population is largely literate and

well educated, and has a burgeoning middle class with widening aspirations.

The country is diverse in terms of religion – although Hindus account for about

80% of the population, the country supports all major world religions, and many

minor ones.

Equally diverse is language. India’s banknotes list 15 official languages, but in fact

the list extends to 22, not counting the many sub-divisions of Hindi.

At the national level Hindi (spoken by 41% of the population) is the main official

language. English occupies a special position, being the second official language

at the federal level, and the sole one used in the Supreme Court. Its status is

fiercely guarded by non-Hindi speaking states5, and it is more widely spoken than

Hindi.

4 Estimate by the US Central Intelligence Agency 5 An attempt in 1964 to provide for the cessation of the use of English was strongly opposed by non-Hindi speakers, in some cases violently. The Official Languages Act, 1963, was subsequently amended to ensure that the use of English would not be ended until a resolution was passed by each individual non-Hindi state and by both houses of the federal legislature.

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India boasts the largest English speaking population in the world. Of its

1.15bn people, some 50% speak the English language, which is the lingua franca

of the modern business world.

The country is by far the world’s largest democracy.

Economy Using purchasing power exchange rates (‘PPP’), India ranks as the world’s fourth

largest economy after the USA, China and Japan6. The economy has been moving

up the scale from under-developed to developing to developed, with GDP growing

at an average 8.8% pa over the last four years, although slowing slightly to 8.1%

in Q2 20087.

This growth has been led by services (10%+ pa): although manufacturing

industry has held its own at about 8% pa, other sectors, notably agriculture, have

lagged behind. There has thus been a direct shift from agriculture to services,

services going from 46% of GDP in 1990 to 56% in 2003, and agriculture

declining from 32% to 22%8. By now (2008) the service element must be even

higher and agriculture lower.

There is much talk in India of its characteristics as an ‘island economy’, immune

from world events. Wishful thinking! No country or economy can be immune from

the tidal wave which has engulfed the world monetary system with its

recessionary implications.

But will it stop the growth or, worse still, send the economy into reverse? India

will certainly be affected, but perhaps to a lesser extent than China, which is

heavily dependent on export-led manufactured goods and on foreign direct

investment (‘FDI’) – although FDI into India has grown substantially in the last

two years, from US$8.9bn in 2005/06 to US$32.5bn in 2007/089.

What of Eredene’s targeted area of investment?

Infrastructure

India’s economic growth, although impressive, has lagged well behind that of

China. It can be argued, with justification, that a major reason for this has been

chronic lack of investment, particularly in the crucially important infrastructure of

the country.

Distribution problems have been characterised by port congestion and a poor road

network. These problems have been addressed by government action to free up

the port system to private enterprise and foreign investment, and by a major

programme of roadbuilding. The ‘Golden Quadrilateral’, a 6,500km system of

4/6/8 lane highways connecting the cities of Delhi, Mumbai (formerly Bombay),

Chennai (Madras) and Kolkata (Calcutta), is the prime example of this. It is now

largely complete.

6 Source: ‘China and India: the Reality Beyond the Hype’, by Deloitte Research 7 Source: Reuters, 29 August 2008 8 Source: Reserve Bank of India 9 Source: ‘India’s International Trade and Investment’, Export-Import Bank of India

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Figure 3: Golden Quadrilateral

MJLSL

It has been not uncommon for a cargo which has taken six days from Singapore

to Mumbai to sit awaiting unloading for up to 30 days: in many ports there is a

shortage of container freight stations (‘CFS’) to ease this congestion. Equally,

India was slow to move to containerisation.

Major companies have lacked the facilities of modern warehousing and

distribution logistics.

We take the view that continued improvement in infrastructure is essential, and

will continue regardless of the state of the economy.

Logistics

The cost of logistics in India is 13% of GDP, which is high by international

standards and certainly high in comparison with developed countries. The key is

outsourcing, which in India is very low:

Table 3: India logistics v. developed countries Logistics cost Logistics outsourced

% of GDP

India 13.0 Less than 10%

USA 9.9 57%

Europe 10.0 30-40%

Japan 11.4 80%

SSKI Research and Economic Times Intelligence Group

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Table 4: Indian logistics market forecast 2006 2011

US$bn US$bn

India GDP 775 1,139

Logistics expenditure 101 125

Estimated unorganised market share 95 108

Estimated organised market share 6 18

% %

Logistics share of GDP 13.0% 11.0%

Unorganised market share 94.1% 86.4%

Organised market share 5.9% 14.4%

SSKI Research and Economic Times Intelligence Group

Modern logistics expenditure is forecast to treble over five years.

Indian retail/distribution businesses are still highly fragmented. As business

elements coalesce into larger economic groups (already very much on the way),

the highly educated managerial classes, familiar with the benefits of IT solutions,

will seek to modernise further.

Countries vary culturally in whether they outsource or keep facilities in-house.

India, however, is the home of outsourcing and can be expected to grasp that

particular choice, and we would expect substantial growth beyond the period of

the above forecast and Eredene’s current business plan. Securing customers does

not appear to be a problem.

New, modern facilities are kicking against an open door.

The full implementation of uniform VAT in 2009 and the abolition of central sales

tax (removing tax barriers to efficient operations) are key components in the

drive for change. As a consequence, logistics costs as a proportion of GDP should

decline.

The prime target is domestic logistics, and a shift in the emphasis from

distribution to the second layer (distributors) direct to the retail customer. All

existing independent distribution is to the second layer, but this is expected to

change, with ownership of goods transferring directly from the importer (or

domestic manufacturer) to the retailer, and ‘just-in-time’ completion becoming

important. IT control and tracking of goods in transit are vital components in the

services offered in support of this.

Low cost housing

Housing for lower income groups is a major problem in India, and particularly

Mumbai, its largest city and the country’s financial centre. There is a housing

stock shortage in India of about 20m residential units, of which 50% are urban.

Some 70-80% of this is in the lower income segment. About 15% of the

population of Mumbai lives on the streets, a similar proportion in slums.

Two-thirds of the slums were built on land owned by governmental bodies: most

are controlled by private landlords with no interest in maintaining properties or

providing proper infrastructure. Only 15% of these households have drinking

water, electricity and lavatories. With continuing population drift from rural areas

to the cities these problems can be expected to grow rather than diminish.

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Most developments in India are aimed at the middle to upper income brackets –

for example, the DLF Group, one of India’s largest developers, concentrates solely

on these with its housing, hotel and shopping mall developments. Unitech Group

is similar in its objectives.

There are some historic reasons for this. Credit risk for lending institutions is a

major one – lower income people probably have no pay slips or tax returns, and

find it difficult to provide evidence of a regular income source. Government

pressure, however, has led to initiatives by the lenders, and this is not now as

great a problem as it was.

So the banks are eager to lend, but they face another problem, which is finding

enough mortgageable properties. Most property (especially urban) lacks clear

land title.

Eredene Capital


PART 4: PORTFOLIO INVESTMENTS

For the purpose of analysis we have grouped the projects into five areas of

activity, as follows:

Table 5: Eredene investments by type Project type Location Investee company

Third party logistics Northern India (Delhi region) MJ Logistic Services ('MJLSL')

Logistics parks Haldia, West Bengal Apeejay Infralogistics

Kalinganagar, Orissa Apeejay Infralogistics

Container logistics Near Chennai, Tamil Nadu Sattva CFS Vichoor

Ennore, Tamil Nadu Sattva Conware

Pipavav, Gujarat Contrans Logistic

Baroda, Gujarat Contrans Logistic

Office development Bangalore and Chennai Symcon

Low cost housing Matheran (Karjat), near Mumbai Matheran Realty ('MRPL')

Company Data

THIRD PARTY LOGISTICS (‘3PL’)

3PL at its simplest is the provision of warehousing and distribution services.

Modern 3PL operations provide outsourcing facilities for practically any operational

function other than the manufacture and sale of goods. Specifically, they cover

the following spheres of activity:

Storage and refrigeration

Inventory management, packaging and labelling

Delivery tracking, customs clearance, freight forwarding

Distribution and transportation

India is still very underdeveloped in 3PL services: the industry is characterised by

poor facilities and low IT penetration, as shown in the following schematic:

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Figure 4: India's 3PL development

Company, ED

MJ Logistic

Table 6: Eredene investment in MJLSL Investment

INR m £m*

Invested to date 632 7.9

Committed 248 3.1

880 11.0

Ownership Current Ultimate

90.0% 74.0%

Company Data

We visited MJLSL in February and October 2008.

MJLSL is Eredene’s second largest investment commitment. It is a classic private

equity deal: the two principals owned and operated a profitable logistics company,

which lacked capital to take advantage of the opportunity they perceived for the

business. Eredene’s equity injection of £11.0m secures an initial 90% of the

company, reducing to 74% on achievement of targets over a four year period.

The project will be geared: total cost is estimated at INR2,026m (£25.04m), of

which 42% will be in the form of equity and 58% debt. Land acquisition will

account for 18% of this, buildings 16% and cold storage, material and storage

equipment 54%.

Business plan

MJLSL is building on its existing successful business by constructing a complex of

three new logistics centres, designed with the latest handling technologies and IT

systems.

The complex will consist of a ‘hub’ and two ‘spokes’ serving North India, centred

on National Capital Region Delhi (‘NCR Delhi’). Each logistics centre will have two

Eredene Capital


warehouses, one for dry storage and the other for temperature controlled cargoes

(00 to +100). All three sites will offer:

Warehousing/cold rooms equipped with modern material handling and storage

equipment, including heavy duty racks, reach stackers and fork lift trucks for

faster receipt and retrieval of goods

Transportation

Online tracking services

Customer order management

Office infrastructure support

Back office services, such as packing, labelling, debulking and kitting

The hub and spokes provide similar services, but have important differences in

their purpose. Because of this they vary in size, with the hub accounting for about

50% of total capacity.

Cold storage is very significant. With different stacking requirements and higher

value, it is expected to account for about 50% of gross revenue at full operation.

MJLSL should achieve substantial savings for its clients:

Table 7: Comparison of operating costs per annum Customer managed MJLSL managed Saving

Rupees (m) Rupees (m)

Manpower 3.40 2.50 26.5%

Utilities 2.46 1.89 23.2%

Maintenance 0.84 0.75 10.7%

6.70 5.14 23.3%

MJLSL

Site locations

The following map shows the locations of the hub and spokes in Northern India:

Figure 5: Hub and spokes locations

MJLSL

Eredene Capital


The two spokes are located in rapidly developing industrial areas. They will take in

raw materials and finished and part finished goods: some will be distributed back

to the areas from which they came in the first place for further processing: others

will be distributed further into local areas, or sent on to the hub at Faridabad for

storage and distribution further into North India or elsewhere.

The hub at Faridabad is an essential part of the operation, and the key to

widespread distribution – some cargoes from there will go to the spoke, others

into the metropolitan district of New Delhi, some elsewhere in India. Spokes are

basically local: the hub is general.

Hub south of Faridabad, near Palwal

Access to major interconnecting routes is therefore key to the success of the hub.

In addition to established rail routes, the chosen site is favoured by existing and

planned roads, and by its proximity to major manufacturing centres,

demonstrated by the following map:

Figure 6: Hub south of Faridabad

MJLSL

The hub will be built on a 15 acre site located next to the National Highway 2, on

the Golden Quadrilateral Expressway project, which will connect all four regions of

India. It is located south of Faridabad, and is 60km south of Delhi, within a 15km

radius of three CFS/ICD operations: two major automobile manufacturing hubs

are within two hours driving distance; and it will serve NCR Delhi, which is the

largest FMCG and retail market in India.

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Spokes

The spoke at Uttaranchal will be on an eight acre site in the Haridwar Industrial

Area approximately 220km from Delhi: the spoke in Punjab is five acres in area,

but agreement has not yet been reached on its acquisition.

Both sites are in fast growing industrial areas producing processed foods,

pharmaceuticals and cosmetics, general FMCG and also automobile components.

Markets

Existing clients will be offered additional services, moving the business up the

value chain. In addition MJLSL will:

Tap the automobile (tier 1 and tier 2 component manufacturers) and retail

(brand franchisees) markets by offering a single point solution across North

India.

Dealing with the raw material suppliers and finished goods vendors of existing

clients. A pilot scheme has already been started for feeding raw materials to

the ITC plant in Haridwar in Uttaranchal, and returning the finished products to

Delhi.

The spokes in Uttaranchal and Punjab will provide proximity value added

services such as just-in-time and vendor managed inventory.

Timescale

The first part of the project, the hub at Palwal, is well under construction, the

foundations and footings having been completed by the end of October. Other

milestones are:

End-November: completion of pre-engineered building (‘PEB’).

Mid-December: completion of flooring and acquisition of systems.

Mid-January: racking systems completed.

End-January: installation of services completed.

Mid-February: testing completed.

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Figure 7: Progress at Palwal

MJLSL and analyst site visit pictures

There will be three zones, Ambient 1, Ambient 2 and Cold Store. The site is

expected to begin trading towards the end of January on a phased basis, Ambient

1 (220,000 sq ft) to be followed by Ambient 2 and then by Cold Store, with the

whole site up and running within 30-40 days.

Construction of the spoke at Uttaranchal should begin at the end of Q2 2009 and

that at Punjab in Q3.

Revenues and value

We have ignored the current business of the company on the assumption that it is

phased out over the course of the next year – revenue amounts to about

INR100m (£1.2m) – and concentrated on prospects for the new business as set

out in MJLSL’s budget and business plan. Estimates are as follows:

Table 8: MJLSL estimates Year to end March 2009 2010 2011 2012 2013 2014

INRm INRm INRm INRm INRm INRm

Revenue 118.5 497.9 1,214.6 1,412.1 1,426.7 1,467.9

EBITDA (25.6) 216.7 565.5 662.0 659.2 658.4

Profit after tax (25.5) 2.6 114.9 192.5 223.6 255.1

£m £m £m £m £m £m

Revenue 1.60 6.72 16.39 19.05 19.25 19.81

EBITDA (0.05) 2.92 7.63 8.93 8.89 8.88

Profit after tax (0.65) 0.04 1.55 2.60 3.02 3.44

MJLSL and ED estimates

It should be noted that the concept is scalable, in two ways. The MJLSL

management believes that a single hub can support 6-8 spokes; while the concept

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can also be transferred to other major centres within India, e.g. to Mumbai,

Calcutta, Chennai, Bangalore etc. We have not factored this into our view.

Table 9: MJLSL values on different bases Discount rate 10% 12% 14%

NPV 23.2 19.4 16.4

Eredene share (74%) 17.2 14.4 12.1

10x multiple of 2014 earnings* 19.4 17.4 15.7

Eredene share (74%) 14.4 12.9 11.6


Eredene share (74%) 17.3 15.5 13.9


Eredene share (74%) 20.1 18.1 16.2

* On discounted earnings

ED estimates

Our NPV numbers suggest a value of £14.4m for Eredene’s 74% share at a

discount rate of 12%. Applying earnings multiples in current market conditions is

a hazardous exercise, but the table above tends to support our NPV figure.

MJLSL fair value to Eredene: £15m v. cost of £11.0m

LOGISTICS PARKS

A logistics park is normally located in a ‘hub’ area close to road, rail and sea

arteries, and adjacent to or within an industrial area.

It brings together in one place warehousing (and 3PL), cold store, transportation

and office facilities, and may include hotels, retail, light industry and residential

development.

Some of these facilities may be owned and operated by the developer, but at

least a proportion will also normally be leased to third parties. A park should,

however, be managed centrally.

Development of logistics parks in India has only begun in recent years, often

fuelled by FDI. One recent example of this is the Tata project to develop seven

parks at major centres throughout the country in a 50/50 joint venture with the

Dubai based Jafza International. An offshore fund of US$750m is being raised for

the purpose. Tata envisages a second phase of 15-20 similar projects.

Eredene Capital


Haldia Logistics Park

Table 10: Eredene investment in Haldia Investment

INR m £m


Committed* 268 3.4

420 5.3


50.0% 50.0%

Company Data

We visited Haldia in October 2008. Haldia is Eredene’s first co-investment with

Apeejay, now followed by Kalinganagar.

Business plan

Construction has not yet started, but should begin in late Q4 2008, with first

revenues in 2009. The 90 acres of land for the project has already been

specifically zoned for industrial use by the Haldia Development Authority and

lease acquisition is complete.

Gross development cost is estimated at about INR1.99bn (£25m), funded by

equity of £10.5m shared in equal proportion between Eredene and Apeejay

Surrendra, with the remainder by debt. Gearing will be 1.8x.

The park will be developed to provide distribution warehousing and transport

services, as well as ancillary facilities such as commercial offices, hotels, shopping

malls, and light processing workshops.

The plan envisages a total of about 2m sq ft, of which 70-75% will be developed,

owned and operated by the JV, Apeejay Infralogistics, and the remainder

(principally hotels) by third parties:

Table 11: Haldia planned land usage Category JV Third party Total

000 sq ft % 000 sq ft % 000 sq ft %

Retail space 104 7.5% 0 0.0% 104 5.4%

Commercial offices 243 17.5% 0 0.0% 243 12.6%

Hotels 0 0.0% 327 60.9% 327 17.0%

Industrial 0 0.0% 0 0.0% 0 0.0%

Warehouse & storage 520 37.5% 93 17.4% 613 31.9%

Transport & logistics 520 37.5% 117 21.7% 637 33.1%

1,386 100.0% 537 100.0% 1,923 100.0%

Apeejay Infralogistics

The site will be developed in three phases:

Eredene Capital


Table 12: Haldia development phases Phase 1 Phase 2 Phase 3 Total

INR m £m INR m £m INR m £m INR m £m

Land acquisition 288.0 3.9 288.0 3.9

Infrastructure 127.3 1.7 140.4 1.9 154.8 2.1 422.5 5.7

Construction

Retail 54.6 0.7 24.1 0.3 26.6 0.4 105.3 1.4

Offices 54.7 0.7 96.4 1.3 106.3 1.4 257.4 3.5

Warehousing & storage 218.1 2.9 241.0 3.3 265.7 3.6 724.8 9.8

Transport & logistics 8.2 0.1 9.0 0.1 10.0 0.1 27.2 0.4

Common/public facilities 50.2 0.7 55.4 0.7 61.1 0.8 166.7 2.2

385.7 5.2 426.0 5.7 469.6 6.3 1,281.4 17.3

Total capex 801.1 10.8 566.4 7.6 624.4 8.4 1,991.9 26.9

Apeejay Infralogistics

Site location

The site is about 7km from the port of Haldia. Haldia itself is located 90 km

downstream from Kolkata (Calcutta) where the Haldi and Hooghly rivers meet.

Haldia is the fifth largest port in India. It is also a major petrochemicals centre

with an oil refinery, fertiliser facilities, manufacturing plants and various light

industries, with companies such as Indian Oil Corporation, Tata Chemicals, Haldia

Petrochemicals and Mitsubishi Chemical Corporation.

The West Bengal Industrial Development Corporation (“WBIDC”) and the Haldia

Authority are keen to promote investment. The WBIDC and Tata Steel have

formed a JV to build a coking plant for the production of 800,000 tonnes of coke

per annum, and the WBIDC has also recently proposed a ‘Mega Chemical

Industrial Estate’ on a 10,000 acre site in Haldia.

Figure 8: Analyst site visit pictures

ED

The logistics park will be located 6km from the NH41, which provides a link to the

NH6 part of the Golden Quadrilateral. The NH41 is planned to be widened soon

from two lanes to four.

Also planned is a bridge over the Hooghly river, which would provide a more

direct connection with Kolkata.

Eredene Capital


Markets

The new site will be surrounded by industry.

Anecdotal evidence gathered from meetings with some of the large companies in

the immediate vicinity suggests that there is indeed a pent-up demand for the

kind of facilities to be provided by the park.

Inland distribution is a key area of concern for some of the large companies,

which are short on warehousing facilities. Although export business may well be in

bulk, inland distribution frequently is not, because of the fragmentation of Indian

industry and commerce: individual orders are very often of a low ticket nature.

It is also a feature of Indian businesses that most business is concluded around

the end of the month, resulting in a marked ‘bunching’ of orders. This is a

problem for large suppliers, who have to build up stocks throughout the month

and execute delivery in a short timeframe after that. They need external

warehousing and logistics.

Timescale

Phase 1 will begin in late Q4 2008, and should be ready to start trading in Q3

2009. Phase 2 will follow two years after that, and Phase 3 in a further two years.

Revenues and value

Table 13: Haldia estimates Year to end March 2009 2010 2011 2012 2013 2014


Revenue 11.0 63.0 150.5 332.4 448.3 616.9

EBITDA (1.0) 33.3 112.5 281.8 389.7 552.2

Profit after tax (1.0) (71.8) 4.9 64.0 138.9 193.3

£m £m £m £m £m £m

Revenue 0.15 0.85 2.03 4.49 6.05 8.32

EBITDA (0.01) 0.45 1.52 3.80 5.26 7.45

Profit after tax (0.01) (0.97) 0.07 0.86 1.87 2.61

Apeejay Infralogistics and ED estimates

These figures are almost certainly conservative, and do not fully reflect the

potential of the project. For the present, we think fair value should be set at

investment cost.

Haldia fair value to Eredene: investment cost of £5.2m

Kalinganagar Logistics Park

Table 14: Eredene investment in Kalinganagar Investment

INR m £m


Committed* 200 2.5

208 2.6


50.0% 50.0%

Company Data

Eredene Capital


Site acquisition is still under way. We have not visited the site, but we had the

opportunity to discuss it with Eredene’s co-investing principals.

This is the second co-investment with Apeejay Surrendra. The logistics park will

be owned and operated by the same JV as Haldia.

Total investment will be INR672m (£8.4m) funded by equity of INR336m (£4.2m)

provided equally by the two partners, and debt of the same amount.

Business plan

The 30 acre park will be the first fully purpose-built transport and warehouse

facility to serve the Kalinganagar region in the state of Orissa in East India.

The park will target inbound and outbound cargo centred around the steel

industry.

Site location

The site is in the village of Khurunti, 129km from the major port of Paradip and

86km from Dhamra, where a new port is due to be ready for commercial

operation in March 2010.

It is close to the 13,000 acre Kalinganagar industrial complex

Markets

Kalinganagar is becoming one of the largest steel clusters in India. Steel projects

in the area include:

Tata Steel – 6m tonnes plant

Posco (South Korea) – 12m tonnes

ArcelorMittal – 12m tonnes, in Keonjhar nearby.

Other iron and steel producers include Jindal Stainless Steel, Mesco Steel.

The new port at Dhamra will be the deepest in India with a draft of 18m, capable

of berthing super cape size vessels of up to 180,000 DWT. There will be thirteen

berths with an annual capacity of 83m tonnes pa dry bulk, liquid bulk, break bulk

and containerised cargo.

Timescale

Construction has begun and will be in three phases, as in the case of Haldia. The

first phase will be available in 2009 and the final phase completed in 2012/13.

Eredene Capital


Revenues and value

Table 15: Kalinganagar estimates Year to end March 2009 2010 2011 2012 2013 2014


Revenue 22.7 33.0 33.1 66.4 86.7 127.3

EBITDA 20.3 32.1 31.1 106.4 125.7 133.6

Profit after tax 4.1 2.5 1.8 25.9 39.6 46.1

£m £m £m £m £m £m

Revenue 0.31 0.45 0.45 0.90 1.17 1.72

EBITDA 0.27 0.43 0.42 1.44 1.70 1.80

Profit after tax 0.05 0.03 0.02 0.35 0.53 0.62

Apeejay Infralogistics and ED estimates

As in the case of Haldia, these figures are almost certainly conservative. For the

present, we think fair value should be set at investment cost.

Kalinganagar fair value to Eredene: investment cost of £2.6m

CONTAINER LOGISTICS

Eredene has completed two investments in container freight stations (‘CFS’), has

committed to a third, and also to an investment in an inland container depot

(‘ICD’):

Sattva CFS, near Chennai (Madras), Tamil Nadu

Contrans Logistic in Pipavav, Gujarat

A CFS near Ennore, Tamil Nadu

An ICD at Baroda, Gujarat

It is notable that the two last are follow-on investments with existing partners.

CFS

A CFS, as distinct from an ICD, is generally an off-dock facility close to a port,

helping to de-congest the port by shifting cargo and customs related activities

outside the port itself. It provides facilities for cross-border trade in the close

vicinity of production/consumption centres in its hinterland, with linkages to

gateway ports, shown in the following diagram:

Eredene Capital


Figure 9: CFS diagram

Eredene presentation

Facilities include warehousing, short and long term storage, stuffing and

unloading etc.

ICD

An ICD performs essentially the same functions as a CFS, except that it is located

inland. Whereas a CFS deals with imports and exports at the point of entry/exit to

or from the country, an ICD will mostly deal with internal traffic, and will normally

be located close to a major distribution hub with access to road and rail arterial

systems.

Container traffic

Indian container traffic exhibits strong growth, growth in cargo being compounded

by an increasing share of the total cargo market:

Table 16: Indian container traffic Year 2004/05 2005/06 2006/07

TEU (m) 4.52 4.99 5.40

% of total cargo 14.30% 14.37% 15.14%

% of general cargo 48.20% 49.49% 50.00%

Note: the standard unit of measurement in the container business is a Twenty-foot Equivalent Unit (‘TEU’)

World Bank

Using 2002/03 as a base, the World Bank has forecast an acceleration in this rate

of growth, estimating a compound annual growth rate of 18.3% from the

3.36m TEU shipped in 2002/03 to 20.95m TEU in 2013/14.

Eredene Capital


Sattva CFS Vichoor

Table 17: Eredene investment in Sattva Investment

INR m £m


Committed* 0 0.0

68 0.9


49.0% 49.0%

Company Data

We visited Sattva CFS Vichoor in February 2008, but not in October.

This is Eredene’s smallest investment, but its most successful to date. Sattva has

now been trading for more than a year, and is well ahead of budget. It is revenue

producing, and profitable.

Business plan

The project was proposed by the Sattva Business Group, which had acquired an

initial 15 acre site at Vichoor, near Chennai (formerly Madras). The site is now 24

acres, with plans to expand this to 30 acres. For information on the Sattva

Business Group, see Appendix 2.

Although Sattva CFS is a relatively small investment for Eredene, the purpose was

to establish a foothold in the Chennai region with an established partner. It is

significant that, after a ‘getting to know’ period, the Sattva Business Group has

committed to another and larger JV with Eredene near Ennore.

Total development cost at Vichoor is INR23m (£5.3m), financed by equity of

INR141m (£1.76m) and debt of INR282m (£3.54m), a gearing ratio of 2.0x.

Site location

The new CFS is situated at Vichoor, which is about 17km from Chennai and just

12km from Ennore.

It is therefore well placed to attract business from both ports: Chennai is well

established, and is the second largest container port in India after Jawaharlal

Nehru Port Trust (‘JNPT’) in Mumbai. The container terminal is owned and

operated by Dubai Ports World (the former P&O Ports India), handling 800,000

TEUs in 2006.

Markets

Ennore is currently developing its own container terminal, which is expected to

come on line in 2010. The two-berth terminal will be able to handle up to 6m

TEUs pa, which are expected to be incremental to the growing business at

Chennai. Against this, Sattva’s target capacity of 120,000 TEUs by 2015 does not

look ambitious.

Timescale

Development will take place in three phases as container traffic grows. Capacity is

planned to reach 120,000 TEUs by 2015:

Eredene Capital


Table 18: Sattva development phases Time period Capacity added

TEU

April 2007 to March 2010 40,000

April 2010 to March 2012 40,000

2012 to 2015 40,000

Total capacity 120,000

Eredene

The first phase is already complete. The CFS became operational in October 2007,

but Eredene’s investment did not begin to have an impact until H1 2008/09.

There are two warehouses of 15,000 sq ft each, running at full capacity, while a

third warehouse of 30,000 sq ft recently became operational. A fourth warehouse

is leased. The owned space is more or less equally divided between dedicated

import and export warehouses and a bonded warehouse.

Figure 10: Typical Usage

*Removed from containers and assembled in the yard by Sattva, an added value service.

Source: analyst site visit pictures

In addition there is a fully laid stacking yard of 40,000 sq ft, and an

administration building of 3,118 sq ft, as well as a compound wall, a weighbridge

of 80 tons capacity, a 40 ton reach stacker and two 3 ton forklifts.

Revenues and value

Sattva was well ahead of budget in H1 2008/09. Operating expenses and

overheads were as budgeted, but both volume (+9% v. budget) and income per

TEU (+13%) were higher than expected.

This resulted in an improvement in EBITDA of 93%, with profit before tax some

14 times greater than budget.

Eredene Capital


The second half will benefit from additional capacity. Our estimates are as follows:

Table 19: Sattva estimates Year to end March 2009 2010 2011 2012 2013 2014


Revenue 85.3 135.8 225.8 300.8 360.8 360.8

EBITDA 39.6 62.5 103.6 137.8 165.2 165.2

Profit after tax 16.7 46.5 70.4 89.7 106.1 104.3

£m £m £m £m £m £m

Revenue 1.15 1.83 3.05 4.06 4.87 4.87

EBITDA 0.53 0.84 1.40 1.86 2.23 2.23

Profit after tax 0.23 0.28 0.60 0.86 1.12 1.13

ED estimates

Table 20: Sattva values on different bases Discount rate 10% 12% 14%

NPV 8.2 6.9 5.8

Eredene share (49%) 4.0 3.4 2.9


Eredene share (49%) 2.5 2.2 2.0


Eredene share (49%) 3.1 2.8 2.5


Eredene share (49%) 3.8 3.4 3.0


ED estimates

The earnings multiple basis is supported by our NPV calculation, and by strong

evidence of trading.

Sattva fair value to Eredene: £2.8m v. cost of £0.9m

Ennore CFS

Table 21: Eredene investment in Ennore CFS Investment

INR m £m


Committed* 232 2.9

400 5.0


85.0% 74.0%

Company Data

This is Eredene’s most recent investment, announced 30 October 2008. It is the

second co-investment with the Sattva Business Group.

The JV plans to develop an initial 35 acres, to be expanded later to 60 acres.

Eredene Capital


Business plan

The site will be operated at first as a general warehousing facility to satisfy

existing demand in the Ennore/Chennai area, but will be fully developed as a CFS

in time for the new Ennore Container Terminal, which is scheduled for 2011.

Site location

The site is 18km north of Ennore on a state highway.

Ennore is a new port, which began operations in 2001, designed to ease

congestion at Chennai. The region is the centre of India’s automobile industry,

and is a centre for manufacturing and light industry. Major international car

companies include BMW, General Motors, Hyundai, Ford and Renault – Renault in

association with Nissan is developing a facility to assemble 200,000 cars pa for

export through Ennore port.

Eredene holds 22% of a consortium bidding for the new Ennore Container

Terminal project for a 1,000m terminal. The consortium is one of six selected in a

tender process to submit a formal bid.

The new terminal will have a capacity of 1.5m TEU pa.

Revenues and value

It is too early put any numbers on the CFS. The investment rationale is clearly of

a longer term nature than Sattva.

Ennore fair value to Eredene: investment cost of £5.0m

Contrans Logistic

Table 22: Eredene investment in Contrans Investment

INR m £m


Committed* 0 0.0

232 2.9


49.0% 44.0%

Company Data

We visited Contrans in February and October 2008. On both occasions we also

visited the Port of Pipavav and interviewed its senior management.

Contrans is promoted by Captains Niroola and Grewal, who (in a model similar to

that at Sattva) operate a CFS at the port of Mundra, also in Gujarat state. It has

been trading since January 2008 (before completion of most of the site facilities).

Business plan

When property purchases are completed, total land will be 182 acres, of which 72

acres will be used by the CFS and 110 acres developed as a Free Trade

Warehousing Zone (‘FTWZ’).

Contrans had 32 acres of land when the investment was made, representing the

promoters’ contribution to equity. Eredene’s total investment of INR233m

(£2.9m) funds further acquisitions of land and development of the CFS, with a

Eredene Capital


total project cost of INR395m (£4.9m): this will require debt of INR162m

(£2.0m), with a gearing ratio of 0.41x.

The first phase of investment has been completed, with the construction of two

warehouses, an office building etc:

Figure 11: Cotton for export

Analyst site visit pictures

Warehouse capacity will be up to 1.4m sq ft, which at current rates should bring

in INR360m pa (£4.5m).

No further equity investment in the CFS will be required. However, development

of the intended Free Trade Warehousing Zone (‘FTWZ’) will require further

funding, as yet undetermined. The possibility of developing an FTWZ is very

interesting.

If and when developed, the FTWZ will have up to 800,000 sq ft capacity. Current

rental rates should bring in INR35m pa (£0.44m): this implies total potential

revenues to the FTWZ of IR350m pa (£4.4m), about doubling the returns to

Contrans.

An FTWZ is deemed to be foreign territory, all traffic of goods to and from being

considered to be imports/exports. Free foreign exchange transactions are

permitted. In addition, it carries major tax advantages:

Ten year exemption from income tax at the corporate rate of 33.99%. A

company has the choice of years in which this exemption applies, the only

proviso being that the choice must be in a ‘block’ of ten years.

Exemption from service tax. Service tax is essentially a tax on turnover, at a

rate of 12.5%, and exemption confers a significant competitive advantage.

No customs duty on imported capital equipment.

Site location

The CFS is in a prime position just 700m from the Pipavav port gates.

Pipavav is the first privately owned port in India, and is of recent vintage, having

begun cargo handling operations in 1996.

Eredene Capital


Figure 12: Pipavav port

Analyst site visit picture and Port of Pipavav web site

Port Pipavav is located in the Saurashtra region of the state of Gujarat at a

distance of about 135 kms south-west of Bhavnagar. It is recognized as one of

the principal gateways on the west coast of India. To date it has handled more

than 22m tons of cargo, and more than INR7bn (£87.5m) has been invested in

the development of the port.

The port is well served by rail connections to North and West India, and is well

connected for internal Indian traffic.

The port has undertaken a massive expansion project involving development of a

new liquid cargo berth and expansion of the container terminal. On completion of

the expansion project, Port Pipavav will offer container handling capacity in

excess of 1m TEU. This compares with Contrans’ planned capacity of 84,000 TEU

pa at the end of Phase 1, and 150,000 at the end of Phase 2.

Markets

The market at present is mostly for agricultural products for export, other export

products (e.g. stone) having dried up over the last few months. There has been

very little import traffic. CFS operators at the port of Mundra have also seen lower

volumes, although this appears principally to be due to over-expansion by the

operators: traffic there has continued to grow.

The future for the Contrans CFS at Pipavav depends on development of the port

itself, which has suffered some delays due to weather and other factors. However,

dredging is now due to complete by the end of 2009, with a deepening of the port

from 11.5m to 14.5m. This will enable ships to use the port which are currently

subject to long delays due to severe congestion at JNPT.

Timescale

Phase 1 complete. Further development is subject to a decision on the FTWZ,

which will depend on the timing of port growth.

Revenues and value

Trading in H1 2008/09 has been disappointing, with Contrans incurring a small

loss, although this was in line with our assumptions after we visited the company

in February 2008.

Eredene Capital


Table 23: Contrans estimates Year to end March 2009 2010 2011 2012 2013 2014


Revenue 45.7 180.0 300.0 400.0 400.0 400.0

EBITDA (12.5) 105.0 175.0 233.3 233.3 233.3

Profit after tax (37.0) 66.3 131.3 184.7 184.7 184.7

£m £m £m £m £m £m

Revenue 0.62 2.43 4.05 5.40 5.40 5.40

EBITDA (0.17) 1.42 2.36 3.15 3.15 3.15

Profit after tax (0.33) 0.59 1.17 1.64 1.64 1.64

Contrans and ED estimates

These figures should be treated with caution. Contrans at present earns INR4,000

per TEU, compared with INR3,000 earned by Sattva Vichoor. It is certainly valid

to assume a differential between Tamil Nadu in the south-east and Gujarat in the

north-west. We are doubtful if such a large differential can, however, be

maintained in the longer term, although it is true that expansion of Pipavav Port

will leave the area under-supplied with CFS facilities. The argument for differential

rates might have more force when applied to the new ICD at Baroda.

Table 24: Contrans values on different bases Discount rate 10% 12% 14%

NPV 13.3 11.4 9.9

Eredene share (44%) 5.8 5.0 4.3

8x multiple of 2014 earnings 7.4 6.7 6.0

Eredene share (44%) 3.3 2.9 2.6


Eredene share (44%) 4.1 3.7 3.3


Eredene share (44%) 4.9 4.4 4.0


ED estimates

There are a number of reasons for the disappointing performance to date,

including a late monsoon in 2008, which hindered agricultural exports.

Port expansion should bring improvement at the CFS in its wake, while the

development of the FTWZ could add significant value. For the moment we value

Contrans at investment cost.

Contrans fair value to Eredene: investment cost of £2.9m.

Eredene Capital


Baroda ICD

Table 25: Eredene investment in Baroda ICD Investment

INR m £m


Committed* 352 4.4

400 5.0


49.0% 44.0%

Company Data

Site acquisition is still under way. As this process is sensitive, we have not visited

the site, but we had the opportunity to discuss it with Eredene’s co-investing

principals.

The Baroda ICD is a follow-on investment with Eredene’s existing partners in

Contrans.

Business plan

The ICD will feed off the ports of Mundra, Pipavav and JNPT (the largest container

port in India), as well as from its position straddling the arterial connections from

North India and the western parts of the country (Mumbai et al).

It will provide all the functions associated with an ICD.

Site location

Eredene’s partner has already acquired 49 acres of land, and is in negotiation for

a further substantial acreage to bring the total up to 105 acres. Completion of

land buying is expected by March 2009. The site is located near Indore in East

Gujarat.

The area to be occupied by the ICD is long and relatively narrow - 800m wide -

bounded on one side by the NH8 part of the Golden Quadrilateral highway, and on

the other by the main rail route between Delhi and Mumbai, which already carries

the highest freight traffic in India. India Railways plans to develop a dedicated

freight line, to which the ICD should have access.

The side immediately next to the railway line is 2,000m long, which is sufficient to

berth a full length freight train. With access on the other side to the NH8, it will

connect immediately with the two main commercial arterial routes and, we have

been told, will be the only ICD in Eastern Gujarat.

Markets

As above.

Timescale

Development is two years away. First revenues are expected in late 2010, with

the venture moving into profit in 2014.

The ICD will have capacity to handle 100,000 TEU by year five, with plans to raise

this to 180,000 by year ten and 280,000 by year 15. The investment is of a long

term nature.

Eredene Capital


Revenues and value

Table 26: Baroda ICD estimates Year to end March 2009 2010 2011 2012 2013 2014


Revenue 0.0 61.1 165.8 266.1 409.9 496.9

EBITDA 0.0 20.3 63.4 112.1 207.2 250.3

Profit after tax 0.0 (89.9) (37.3) 20.1 66.1 116.3

£m £m £m £m £m £m

Revenue 0.00 0.82 2.24 3.59 5.53 6.70

EBITDA 0.00 0.27 0.86 1.51 2.80 3.38

Profit after tax 0.00 (1.21) (0.50) 0.27 0.89 1.57

Contrans

Table 27: Baroda ICD values on different bases Discount rate 10% 12% 14%

NPV 23.5 18.2 14.2

Eredene share (44%) 10.3 8.0 6.3


Eredene share (44%) 0.4 2.8 2.5


Eredene share (44%) 3.9 3.5 3.1


Eredene share (44%) 4.7 4.2 3.8


Contrans and ED estimates

It is too early to place a value on this investment other than cost.

Baroda ICD fair value to Eredene: investment cost of £5.0m.

OFFICE DEVELOPMENT

Symcon

Table 28: Symcon Investment

INR m £m


Committed* 0 0.0

168 2.1


36.5% 36.5%

Company Data

Symcon plans to develop up to 140,000 sq ft of high end dedicated IT office space

in Bangalore and 130,000 in Chennai. Construction is already under way on the

first 70,000 sq ft office tower in Bangalore.

Eredene Capital


Figure 13: Symcon office space

Company Data

Total development cost is estimated to be INR920m (£11.5m), 50% of which will

be provided by debt.

Bangalore is the centre of the IT industry in India. The planned office space is

aimed at that market, in which Eredene’s investment partner is heavily involved.

SGT is a US-based company with headquarters in Houston and additional offices

in Boston, Detroit, and multiple offices in Bangalore and Chennai. It is a global

provider of IT, business process outsourcing, call centre and engineering services.

The company has more than 350 employees.

More than 50% of the space in Bangalore has been pre-let to Symcon’s sister

companies in India. Although this gives some comfort in the first phase of

development, we have yet to see the effect of the global economic downturn on

the Indian IT industry and on the outsourcing phenomenon (call centres etc). We

assume a value equal to the investment cost.

Symcon fair value to Eredene: investment cost of £2.1m

LOW COST HOUSING

Matheran Realty

Table 29: Eredene investment in Matheran Investment

INR m £m

Invested to date 1,016 12.7

Committed 296 3.7

1,312 16.4


see text

Company Data

Site visited in February and October 2008.

Eredene’s partner in the project is Joe Silva (Silvex and Sterling Construction) –

see Appendices 1 and 2.

Eredene Capital


The project

The development planned by Matheran Realty Pvt Ltd (‘MRPL’) in the Matheran

Hills outside Mumbai is Eredene’s single biggest investment commitment to date,

with a planned project investment of INR2.5bn (£31.5m), of which up to

INR1.3bn (£16.4m) will be provided by Eredene’s equity investment and the

remainder by debt.

The project in its entirety is very large indeed. We estimate that, if carried

through to completion, the project should generate total revenues of INR117bn

(£1.5bn) and free cash flows of INR53.3bn (£700m).

MRPL plans to build 185,000 homes over an eight year timescale, the prime

target market being the seven million lower middle class occupants of the Mumbai

(Bombay) region, who at present live in slums – and their numbers are

increasing. The development could in time house up to one million of these.

Ownership

Ownership of the project is complex. Eredene owns 45% of MRPL and 43.5% of

Alibante which itself owns 42.06% of MRPL. Eredene also separately owns

32.25% of the MRPL subsidiary Gopi Resorts. Gopi Resorts owns and is the

vehicle for development of the first 100 acres to be developed, at Karjat Central.

Eredene therefore owns an effective 63.3% of MRPL, falling to 45% as various

milestones are met. This makes analysis difficult. We have, however, looked at

the project in its entirety, and more particularly at the first phase.

Site location and advantages

The first phase of development will be in Karjat Central, with further phases in

Karjat township and in Khardi further to the north.

The following map of the Mumbai Metropolitan region places the locations in

relation to Greater Mumbai and Navi Mumbai (New Bombay):

Figure 14: Mumbai Metropolitan region

Company Data

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It can be seen that both sites are within easy reach of Mumbai – they are also

within reach of the city of Pune (formerly Poona) to the south-east. Indian

infrastructure is notoriously poor, but is now the subject of major investment. Of

critical importance to both sites is road improvement and the recent extension of

the Mumbai rail system to both Karjat and Khardi, as shown in the following rail

map:

Figure 15: Mumbai rail system

Company data

No housing unit will be more than 5km from a railway station, and most will be

less than 2km. Of greater importance, travel time to Mumbai has now been

reduced typically to 1¼ hours, a critical time period for commuting.

The locality is served by a broad gauge single track line with passing way stops:

Figure 16: Rail linking Karjat with Mumbai

Company Data

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All long and short distance trains halt at Karjat. Most of the locations are close to

the new Mumbai-Pune expressway, and the growth hubs of Navi Mumbai. The

planned trans-harbour link between Sewri, Mumbai and Navi Mumbai will cut the

distance between the two cities further and offer faster connectivity.

Of great importance is the construction of the new international airport at Panvel,

which is only 15km away from Karjat and the enormous development of the two

Reliance SEZs of Navi Mumbai and Maha Mumbai. These will all generate blue-

collar jobs; and the workers will need homes.

Karjat is a town of more than 200,000 people. New housing policies have

removed many procedural hurdles, facilitating urbanisation. Karjat has

engineering, pharmacy, medical, management, advertising, hospitality colleges,

the Asian Institute of Communication and Research (‘AICAR’) affiliated to the All

India Council for Technical Education (‘AICTE’) and the University of Mumbai, and

also a few other graduation colleges and Oxford Schools (private schools).

Karjat is surrounded by the Matheran Hills, a national park, and is close to

Matheran, a hill station renowned for its mild climate and its walks. The town of

Matheran itself is a traffic free zone. The following pictures give some idea of the

site and its surroundings:

Figure 17: Matheran


Market and marketing

Housing units will be affordable to lower income groups, at a typical cost to the

buyer of about INR560,000 (£7,000), with a target market of a household income

of about INR8,500 per month (£1,250 pa). Some units may go to those earning

up to R30,000 (£4,500 pa).

A major advantage is that MRPL will be able to deliver clear land title on its

housing units. Lending banks are keen to market the development to their

customers, and have personnel sitting in the Silvex office ready to offer 20-year

mortgages.

The first phase of 100 acres has been named Tanaji Malusare City (‘TMC’).

The initial marketing by Silvex took place in August 2008, off plan. People were

invited to register their interest by filling in a lengthy form requiring all their

personal details, at a cost to them of INR100 (about £1.25, a not inconsiderable

sum in India). They then went into a ballot to go on a waiting list of the first

5,000.

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65,000 people applied. The ballot chose 5,000, who were then invited to

proceed to the next stage, which involved paying a deposit of 15% of the

purchase price. 1,050 have done so, a response rate of more than 10%.

The details gathered from the 65,000 applicants is being used to market the

commercial part of the development, which will be a significant part of continuing

revenue and value – about 40% of the total.

Building

TMC is being built to a masterplan produced by SKM (shown below):

Figure 18: Karajat Centre - Site Layout

Company Data

Using the Sterling method of construction with James Hardie fibre cement boards

(see Appendix 3) it is expected that each block of 57 flats will take three months

from start to being fully fitted out. Very fast.

Figure 19: Work on the first block well under way


Building will be on an industrial scale. MRPL estimates that by end March 2009 it

will have between 60 and 70 blocks under construction at any one time – in other

Eredene Capital


words, 3,500+ flats. We think this is optimistic, but we have worked out our

numbers on this basis.

This highlights our principal concern about the project as a whole. Silvex and

Sterling Construction appear highly competent, but an operation on such a scale

requires significant organisational and management structure and skills. We are

not yet convinced that there is sufficient management depth to ensure timely and

controlled delivery.

Timescale

MRPL expects the first phase to be complete within 24 months from start.

Further phases depend on completion of land purchases on reasonable terms. The

business plan assumes that land only accounts for about 10% of the ultimate

selling price per unit – but massive inflation could affect the economics of the

project.

Acquisition of 137 acres in Karjat township is virtually complete, with 284 acres at

Khardi under negotiation and a further 200 acres possibly available on the same

terms. In addition, there are two parcels of 1,000 acres each, which would bring

MRPL close to its stated target of 2,900 acres.

Revenues and value

The Matheran numbers are potentially very large, if the full plan is realised. Our

estimates for the first few years are as follows:

Table 30: MRPL estimates Year to end March 2009 2010 2011 2012 2013

INRm INRm INRm INRm INRm

Revenue 109 2,622 5,561 10,738 15,817

Profit after tax 11 1,742 3,617 7,598 9,251

£m £m £m £m £m

Revenue 1.5 35.4 75.0 144.9 213.4

Profit after tax 0.1 23.5 48.8 102.5 124.8

ED estimates

These numbers must, however, be considered very speculative. They depend on:

The ability of the management not only to control large scale building, but also

to gear up the rate of production on a constant basis.

Control of costs, including the cost of land acquisition.

Sustained demand at MRPL’s selling prices.

Continuing acquisition of large parcels of land for development.

Our figures suggest an NPV to Eredene of £18m for the first 100 acres at a

discount rate of 12%, which is greater than the total planned investment and the

money already invested (£12.7m to date): further investment depends on land

acquisition.

To accept this figure, however, would be to ignore the substantial returns to be

earned on full development of 2,900 acres – but the NPV figures we have

generated for this are too high to be taken seriously at this stage. We need

further evidence that the model is working first.

Eredene Capital


We think MRPL is likely to be Eredene’s first divestment, perhaps through a trade

sale, full or partial flotation on AIM or through some form of demerger. It is more

reasonable to view the company as a continuing business rather than as a single

project, and look at a multiple of earnings as a basis of value.

So, we have conservatively taken an average of our estimates of earnings in the

financial years ending in March 2010 and 2011, discounted at 12% over three

years, and applied a multiple of 3.5x. This gives us a total value of £90m, which is

£49.5m to Eredene, or 19.2p per share.

MRPL fair value to Eredene: £49.5m v. cost of £16.4m

APPENDIX 1: EREDENE MANAGEMENT

The following details are taken from the Eredene web site:

Chairman (non-executive)

David Coltman has over 40 years of international experience in major and

complex logistics projects, including recently in India. After 14 years at British

Airways (BA), David moved to British Caledonian where he became Chief

Executive. After its acquisition by BA he moved to United Airlines, where from

1995 to 2001 he was Chief Marketing Officer and Executive Officer of the UAL

Corporation, based in Chicago. David is the Chairman of Edinburgh Worldwide

Investment Trust PLC, and the Senior Independent Director of John Menzies PLC,

a leading international logistics company with significant interests in India. David

read Chemical Technology at Edinburgh University.

Chief executive

Alastair King qualified as a solicitor and practised in London and Central Asia

with Baker & McKenzie. From 1999 to 2002, he held several senior positions

within NewMedia SPARK PLC, an early stage technology venture capital investor.

From February 2002, he was Managing Director of Galahad Capital PLC, then an

AIM-quoted cash shell, which completed the acquisition of Shambhala Gold

Limited in December 2003 and changed its name to Galahad Gold PLC. Alastair

King left the board of Galahad Gold in December 2004. He holds an MSc in finance

from London Business School and founded Eredene Capital plc in January 2005.

Alastair King is a part of the executive team and a board member with main

responsibilities including management of the company's investment strategy,

capital raising, and investor relations.

Executive director

Gary Varley is a Chartered Accountant with board level experience in sectors

including private equity and real estate development. He joined

PricewaterhouseCoopers in 1994, where he practised in the firm's audit,

management consultancy and forensic accounting divisions. As well as a number

of board level commercial roles, he was previously a Principal with the AIM quoted

venture capital investor NewMedia SPARK PLC where he sat on the fund's

investment committee. Mr Varley was most recently Finance Director of Nicholas

King Homes PLC, a UK residential property developer. Gary Varley is the Finance

Director and a core member of the executive team with responsibilities including

investment analysis, structuring and execution

Eredene Capital


Non-executive directors

Sir Christopher Benson has been involved in real estate investment and

development throughout his career. He gained significant development experience

when with Arndale, which was followed by his appointment as Managing Director

of MEPC. He has previously been Chairman of MEPC, Royal and Sun Alliance,

Boots the Chemist, Costain and Albright & Wilson. He was also Chairman of the

London Docklands Development Corporation. Sir Christopher Benson sits on the

audit and remuneration committees.

Charles Cayzer is an Executive Director of Caledonia Investments plc, one of the

largest Investment Trusts listed on the London Stock Exchange. Having gained

experience of merchant banking, commercial banking and corporate and project

finance with Baring Brothers, Cayzer Irvine & Co and Cayzer Ltd, Charles was

appointed a director of Caledonia in 1985, where he has responsibility for

Caledonia's real estate investments. He is also a director of The Varun Shipping

Company Limited in India and several private companies.

Nikhil Naik was until March 2006 Regional Director of P&O in India and has a

successful record in sourcing and managing large infrastructure projects

throughout South Asia. An Indian national, Nikhil led P&O's activities in South Asia

for two years. He was an employee of P&O for 10 years during which he held a

number of senior positions, including that of CEO of Mundra International

Container Terminal at Mundra Port, a substantial port operator in Western India.

Nikhil is a core member of the executive team and heads Eredene Capital PLC's

investment analysis and execution advisory teams in India.

Nikhil Naik is not allowed to vote on any investment proposal that he and his

team put forward to the Eredene Board.

Principal

Ranveer Sharma has been with Eredene since 2005 and is a member of the

Investment Committee with investment analysis, execution and monitoring

responsibilities. He has more than ten years experience in Consulting and

Investment roles. Previously, Ranveer worked with Citicorp in New York, Los

Angeles and Mumbai at various Citigroup entities including Citibank and Citigroup

Private Bank on development and implementation of financial services software

solutions. Prior to this, Ranveer worked at ING's Indian arm, ING Vysya Bank,

where his role mainly focused on managing and implementing of bank's IT

platform. Ranveer holds an MBA in Private Equity and Corporate Finance from

London Business School and an MS in Computer Science from Jiwaji University,

Gwalior, India.

APPENDIX 2: PARTNERS IN INDIA

Eredene Infrastructure

Nikhil Naik – see Appendix 1.

Jose Mathew has spent much of his career building ports, container terminals,

and port infrastructure. Prior to joining Eredene he was Director responsible for

the Indian sub-continent at DP World (formerly Dubai Ports which, in 2006,

acquired P&O).

Eredene Capital


A Construction Engineer, Jose had key responsibilities during the building of

India’s premier port, Jawaharlal Nehru Port in Mumbai, and in the development of

the greenfield port at Kakinada in Andhra Pradesh and of a number of jetties on

the west coast of India.

As the Civil Engineer responsible for P&O Ports South Asia and Middle East

Region, Jose also built container terminals at Nhava Sheva, Chennai and Mundra

and directed P&O projects in Pakistan and Iran. He managed a number of

prestigious projects while working with leading consultancy and construction firms

such as Howe (India), Bovis, and Larsen & Toubro Limited (L&T).

Apeejay Surrendra – Haldia and Kalinganagar logistics parks

Apeejay Surrendra is one of India’s largest and most profitable privately owned

family businesses, founded in 1910. Its influence within India spreads beyond

Calcutta to West Bengal and the whole of the east of India. Its activities include:

Real Estate and Hospitality: real estate development in the retail and

hospitality sectors. Developed and manages the Park boutique hotels, located

in Bangalore, Chennai, Navi Mumbai, New Delhi, Kolkata, and Visakhapatnam

Shipping: Apeejay Shipping Limited is India's largest privately owned

shipping company, with a fleet of modern dry bulk carriers operating

worldwide & in the Indian coastal trade. Total DWT capacity is 0.363m tonnes

with the average age of the fleet under 14 years

Tea: Apeejay Tea is among the largest producers in India with a workforce of

over 40,000 and 17 estates producing over 21m kilograms of tea from a

plantation area of more than 30,000 acres. In 2005 Typhoo Tea was acquired

from Premier Foods plc for £80m

Financial Services: Apeejay Insurance Broking Services caters to corporate

and retail segments. The stockbroking and retail finance businesses were sold

to ILFS Investmart India and Société Générale, France in 2006 and 2007

respectively.

MJ Logistic

Anil Arora, founder and MD, transformed his family’s traditional warehousing

business from a landlord-tenant model into a third party logistics (‘3PL’) company.

He built and managed the warehousing and distribution business over the past

twelve years.

Sugato Chandra has 25 years of experience in multinational companies (Philips,

Semcorp Logistics and TAKE Solutions – a Level 5 supply chain solutions

company), with 15 years in different aspects of the supply chain, and has

designed and implemented logistics centre projects in India.

Sarvjit Singh (President) is a past chairman of Central Warehousing Corporation,

the leading public sector warehousing company in India, and has been Advisor to

the India Trade Promotion Organisation of the Ministry of Commerce.

Contrans Logistic and Gujarat ICD

Both Captain Niroola and Captain Grewal are former sea captains, with more

than 40 years of combined experience in the industry. They have a successful

track record in the CFS and shipping sectors and have been operating a CFS at

the Port of Mundra in the North of Gujarat State since 2003.

Eredene Capital


Sattva CFS Vichoor and Ennore CFS

Sattva Business Group is a family owned group with diversified trading

interests ranging from the processing and export of cashew nuts to construction,

IT services and courier services. It is active in logistics, embracing warehousing,

shipping services, Inland Container Depots (‘ICD’) and container freight stations.

The company’s first CFS in Chennai is ranked third in the Chennai region by traffic

handled.

Matheran Realty

Joe Silva is an entrepreneur with a background in Telecoms (as a main

contractor for the construction of telecom towers: in Cal Tiger, the first large scale

ISP in India); and in food manufacture and processing. In the latter capacity he

has built up relationships with the farming communities around Mumbai - through

his company Silvex he has more than 25 years of land and property development

experience in the Mumbai market and is a key agent in the acquisition of the land

MRPL needs for its development.

Mark Taylor (British) has a background in the oil and gas industry, building

refineries and offshore facilities etc. He is chairman of Sterling Construction

Services and developed the proprietary method of construction with James Hardie

fibre cement boards which is used in the Matheran development.

APPENDIX 3: BUILDING METHOD

Sterling Construction uses James Hardie fibre cement boards (and owns the

worldwide rights to the technology used in their installation), particularly suited to

developing country environments. The technology was successfully used in a

similar large-scale residential development in the Philippines and has recently

been used for the first time in India in a residential development close to where

MRPL has begun to build its first units.

Figure 20: Completed development in Philippines

Company Data

The advantages of using James Hardie fibre cement boards are claimed to be:

The buildings come in kit form, with 2½ and 4 inch thick panels delivered to

site. They can be cut to any shape or size.

Buildings are cheap and fast to construct, an essential element in completing a

project of the size of Matheran. Essential also is that buildings and groups of

building can be constructed in a modular style, easing construction planning

problems.

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Construction is claimed to be twice as fast as by conventional methods.

Panels are slotted together on site and, after ducting and wiring, are grouted

with ready-mix cement.

Finishing is very easy: there is no need for plaster, either exterior or interior,

with normal drying and cracking problems – paint can be applied immediately,

saving time.

The walls are durable and require little maintenance. Not only that, they have

been tested to withstand repeated hammer blows from 14 lb sledgehammers,

and can withstand bullets (tested by police marksmen using M16s and other

weapons).

Buildings constructed by this method are very robust: they can be used to

construct buildings four or five storeys high, and are structured to withstand

the typhoons and Pacific Rim earthquakes experienced in the Philippines.

We are told by Mark Taylor that James Hardie approve the construction method –

the first time they have ever done so – and that they are now promoting it

worldwide.

Eredene Capital


I certify that this report represents my own opinions

Conor Fahy, Consultant

020 7065 2690

[email protected]

This document has been provided to you solely for your information and may not be reproduced or redistributed, in whole or in part to any other person. The information contained in this document has not been approved for the purposes of Section 21(2) of the Financial Services & Markets Act 2000 of the United Kingdom (FSMA’). As such this document is being distributed only to and is directed only at persons falling within the categories of exempt person described in the Financial Services and Markets Act 2000 (Financial Promotion) Order 2001 as amended, (the Order) or pursuant to any applicable exemption under FSMA (together ‘relevant persons”). Any person who is not a relevant person should not act or rely on this document or any of its contents.

This report is intended for intermediate clients, market makers, Self-certified High Net Worth or Self-certified sophisticated investors only. Self certification can be completed free of charge at www.fisma.org

This document may not be distributed in or into, directly or indirectly to any persons with addresses in Australia, Canada, Japan, The Republic of Ireland, The Republic of South Africa or the United States (or any of its territories or possessions).

This report is being provided to relevant persons by Equity Development Limited (“ED”) to provide background information about the corporate client. ED are regulated by the Financial Services Authority, and are retained to act as financial adviser for various clients, some or all of whom may now or in the future have an interest in the contents of this document and/or in the Company,

In the preparation of this report, ED has had access to publicly available information, the Company’s management and other sources believed to be reliable. Whilst all reasonable care has been taken to ensure that the facts stated herein are accurate and that the forecasts opinions and expectations contained herein are fair and reasonable, neither the author nor ED has verified the information contained herein and accordingly none of the author, ED nor any of their respective directors, officers or employees makes any representation or warranty, express or implied as to the accuracy or completeness of the information or opinions contained herein and shall not be in any way responsible or liable for the contents hereof and no reliance should be placed on the accuracy, fairness or completeness of the information contained in this document. No person accepts any liability whatsoever for any loss howsoever arising from any use of this document or its contents or otherwise arising in connection therewith. Nothing in this paragraph shall exclude liability for any representations or warranties made fraudulently.

Any opinions, forecasts or estimates herein constitute a judgment as at the date of this report. There can be no assurance that future results or events will be consistent with any such opinions, forecasts or estimates. This information is subject to change without notice. It may be incomplete or condensed and it may not contain all material information concerning the Company.

This document does not constitute or form part of and should not be construed as any offer for sale or purchase of (or solicitation of or invitation to make any offer to buy or sell) any securities nor shall it or any part of it form the basis of or be relied on in connection with any contract or commitment whatsoever.

ED may In the future or may have in the past have provided investment banking services to the Company.

ED or its directors or officers may in the future or in the past have had a material investment in the Company.

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