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Media reports discuss draft proposal
from NHAI for restructuring premium payments which we believe would be insufficient to revive stressed assets
Most stressed projects we believe could be cancelled and re-bid
ILFT (OW, TP lowered to INR172 from INR260) is our preferred road asset player. Retain N(V) on IRB (TP raised from INR78 to INR103)
Proposal not sufficient to revive stressed assets. Media reports (The ET: New formula for stressed road projects gets nod, 13 December 2013) suggest that the Rangarajan Panel has proposed to defer scheduled premium payments to National Highway Authority of India (NHAI) at a 10.75% interest rate with all the payments to be completed 3 years before concession ends. Media reports also state that the planning commission has raised objections against the low interest rate and lack of penalties, and hence asked the panel to rethink/ redraft the proposals. However, in our view despite the restructuring, the majority of the stressed assets are unlikely to become profitable as costs since the project award have escalated c10% and traffic growth has fallen by 5-10% making them unviable.
The relief package - a boon in disguise. We believe it is only in the interest of players who have started work on the project to accept the restructuring proposal. For the ones which have not yet started, we dont think lowering the loss will make them viable and banks would still find them difficult to fund. We expect majority of the projects which have not yet started to be returned (with or without penalty) or litigate with the NHAI in terms of delay in approvals/ land acquisition. NHAI may be able to rebid these projects as smaller projects or as EPC contracts, thereby kick-starting the project awards progress.
ILFT is our preferred pick. While we have cut our target price on ILFT by 34% to INR172 (impacted by high interest rates owing to low interest coverage ratio), we believe ILFT still offers a good investment theme of multiple new projects becoming operational over the next 12-18 months. While we like IRBs assets, but we remain cautious until investigations against the promoter group are behind us. ILFT is currently trading at 0.6x FY15e price to book, while IRB is trading at 0.8x. We rate ILFT OW, and we rate IRB N(V).
Industrials Construction & Engineering
India Infrastructure Light at the end of the tunnel
HSBC India road coverage
Company Bbg Ticker
Price (INR)
New Rating
Old rating
New TP (INR)
Old TP (INR)
PotentialReturn*
IRB IRB IN 91.70 N(V) N(V) 103 78 16.7%ILFT ILFT IN 136.10 OW OW 172 260 29.3%Priced as at 30 December 2013 Note: *Potential return equals the percentage difference between the current share price and the target price, plus the forecast dividend yield. We forecast 2014e DY of 4.4% for IRB, and 2.9% for ILFT. N: Neutral, OW: Overweight, V: Volatile Source: HSBC estimates, Bloomberg
3 January 2014 Ashutosh Narkar* Analyst HSBC Securities and Capital Markets(India) Private Limited +91 22 22681474 [email protected]
Shrinidhi Karlekar* Associate Bangalore
View HSBC Global Research at: http://www.research.hsbc.com
*Employed by a non-US affiliate of HSBC Securities (USA) Inc, and is not registered/qualified pursuant to FINRA regulations
Issuer of report: HSBC Securities and Capital Markets (India) Private Limited
Disclaimer & Disclosures This report must be read with the disclosures and the analyst certifications in the Disclosure appendix, and with the Disclaimer, which forms part of it
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Background Since 2009 NHAI awarded 48 road projects with developers required to pay a premium (as a successful bid). This would escalate at 5% p.a. over the life of the asset. However, as economic growth slowed down and liquidity conditions became tight, developers realised that high premium payments would make the projects unviable. Many developers hence delayed on the execution which prompted the Government to review such projects and offer a restructuring package in larger interest of the road sector. In October 2013, the Cabinet committee of Economic Approvals (CCEA) approved restructuring of premium payments for such stressed road projects. It also formed a panel headed by Mr.C. Rangarajan to suggest the draft restructuring regulations and conditions for eligibility. The media (The ET: New formula for stressed road projects gets nod, 13 December
2013) over the past 2 weeks reports that the NHAI Chairman has recently (Dec. 30) wrote a letter to the highway ministry asking to amicably terminate many of these projects and the process of re-bidding should be initiated. The NHAI chairman has also expressed disappointment on the fact that the final formulation has not been out as yet despite in-principle nod from CCEA on draft proposals on premium rescheduling.
Panel recommendations As per the media reports (The ET: New formula for stressed road projects gets nod, 13 December 2013), the panel submitted its draft proposal to the finance ministry and planning commission for approval, which has asked the panel to review some of the suggestions made. Below we discuss the panel proposals as reported by the media (The ET: New formula for stressed road projects gets nod, 13 December 2013).
Relief package - a disguised boon Planned relief package for distressed assets is positive for under
construction assets, though not sufficient for projects which have not yet started, in our view We anticipate that projects which have not yet started are likely to
get cancelled and bought back for rebid as small projects Amongst our coverage, the potential relief, if it materialises, is
likely to be positive for IRB and L&T. ILFT is our preferred road asset player
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NHAI will decide the eligibility of the project for restructuring. There are overall 48 projects (10-12 projects have started construction), which were awarded with a premium payment plan.
Eligible projects will have the option to pay only 25% of the annual premium committed for the first three years of the project (construction phase) and have option to pay only 50% thereafter. But if there is any cash surplus after debt servicing and meeting O&M expenses, then the obligations will be adjusted against the accumulated deficit in premium payment obligations. Developers need to fulfil all their premium obligations three years before the concession expires.
In case of four-laning projects, developers can avail the policy after construction is complete and commercial operations have begun.
In case of six-laning projects, developers can avail the policy during construction, when commercial operations are considered to have begun, but would have to provide a construction milestone-linked bank guarantee for the premium deficit of 75% during this period.
The interest rate on the delayed premium payment to be set at 10.75%.
The panel has dismissed issue of levying a penalty on the projects if they avail this scheme.
Proposals in our view are insufficient to restart projects Our discussions with road developers and industry experts lead us to conclude that these steps, although they may be beneficial for developers who have started the projects, are likely not sufficient to convince players who have not yet started work. We place our arguments below:
Many of these projects have been delayed more than a year for project clearances (mostly environment). Costs during the delay period have escalated by c10%. NHAI, in our view is unlikely to grant any cost escalation beyond 4-6% (in line with inflation expectations) and that too if it falls with the prescribed rules of the project agreement.
HSBCs economics team have lowered estimates of Indias GDP growth during FY13-16e to 5% CAGR, versus the market expectation of 7-8% at the time of bidding. In addition, the economic slowdown over the past 18 months has hurt traffic growth on many road stretches. Industry meetings suggest that for India overall, traffic growth during FY13 was down 4-5%, while it is expected to be down 2-3% during FY14. This will put pressure on traffic growth, which is the single most influential variable in a road assets valuation (road tariff and growth is known at the time of bidding).
Funding cost has climbed by 150-200bps and willingness of financial institutions to lend to not so viable projects has come down drastically.
Hence just the deferral of premium payment at 10.75% interest (still lower than their cost of capital of 11-13%), is unlikely to convince developers as even if the proposals cut potential negative NPV by 50%, no developer would like to undertake a loss-making project. Developers are likely to believe that they would be better off by paying a penalty and forgoing the development rights.
A boon in disguise During the current fiscal year, NHAI could not find takers for close to 20 projects under the build-operate-transfer toll model. It managed to award only 222km during FY14 as against target of 4,000km (1,113kms in FY13 and 6,491kms in
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FY12). We believe, once the developer tenders back these projects, these are likely to come to NHAIs re-bidding basket and kick-start the projects awards process.
Will there be takers when they come for re-bid? In our view, given the circumstances, NHAI would be unwilling to bid out large size projects again (above 200kms). We believe that they would probably rather break down them into multiple projects and reassess the viability under the toll, annuity or EPC model. We anticipate the current premium restructuring issue to get settled during the next 2 months (before model code of conduct for the general elections is announced), which might be able to kick-start the awards process during FY15e. We forecast 4,000kms of new project awards during FY14e and 5,000kms during FY15e.
Implications for our coverage universe Amongst our coverage universe L&T (LT IN, current price INR1,064, Overweight) has the highest numbers of projects eligible for this relief package. The table below summarises the exposure of the companies we cover to this scheme.
L&T during an analyst meeting recently had stated that they are keen on starting the projects and are waiting to see if they can get any potential benefits along the way. Hence, the restructuring proposal could benefit the company.
IRB has already started construction on both its projects. So accepting the restructuring proposal in our view is likely to be a positive outcome for IRB as it would have in any case controlled the asset irrespective of whether there would have been a restructuring.
ILFT has not yet started construction on its project. However, we note that most of ILFTs projects have been won during a low competitive intensity phase. Hence we would be surprised if the company does not accept the proposal and carry on with the project.
Reliance Infrastructure (RELI IN, current price INR424.55, Neutral (V)) has started construction on its concerned project and hence it would be keen to accept the proposal in our view.
We are waiting for the official press release on this relief package from the Ministry of Highways before we incorporate any potential effect on our estimates.
Likely exposure of companies we cover to the relief package
Developer No of Projects Length (KM) Project Cost (INRm)
Premium(INRm)
Premium as a of TPC
L&T 4 873 85,448 5,670 6.6% IRB 2 216 32,672 4,500 13.8% IL&FS 1 123 16,650 420 2.5% Reliance Infrastructure 1 60 9,250 670 7.2% TPC: total project cost Source: The Hindu Business Line (http://www.thehindubusinessline.com/), company data, HSBC estimates
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Investment summary Market leader IRB is a focused play in Indias road sector and is very well placed for the eventual turnaround in the Indian road sector. The company, which builds and operates toll roads, has the largest portfolio of build-operate-transfer (BOT) toll assets (6,286km across 17 projects). Nine of its assets are operational, which churn out an annual FCF of INR1.9bn, making its business self-reliant to fund new project acquisitions. Consequently, despite the large portfolio of assets, IRBs net debt-to-equity ratio is still comfortable at 2.1x compared to its sector peers. Its EBITDA coverage at 2.7x is also one of the best within the sector, providing sufficient room for new project acquisitions.
According to an IRB press release, the company along with its promoters is being investigated for discrepancies in land acquisitions for the
Mumbai-Pune Expressway. While management has clarified its stance through regular updates, we expect the stock to remain under pressure as investors prefer to await the outcome of the investigation as the persistent negative newsflow impacts share performance.
Cut earnings estimates by 9-19% We have cut our earnings estimates for IRB by 9-19% over FY14e-16e for the following reasons: 1) IRB like for like toll revenue growth for the last two quarters (sub 6%) has been weaker than we had estimated. 2). We factor in a delay in execution for a few projects for e.g. Goa-Kundapur 3). We now factor in 50bps higher interest rates that we had previously estimated.
Our revised earnings estimates are 6% below consensus in FY15e but are 4% ahead on FY16e.
IRB Infrastructure Ltd IRB offers quality existing portfolio and comfortable leverage
should help in new asset acquisition However, we remain cautious in the absence of clarity on the
outcome of the legal investigation Reiterate N(V) and raise TP to INR103 (up 32% from INR78)
HSBC IRBs earnings estimate summary
_____ New forecasts ____ _____ y-o-y change _____ _____ Change vs old ____ ____ HSBCe vs. cons ___ INRm (except EPS) FY13a FY14e FY15e FY16e FY14e FY15e FY16e FY14e FY15e FY16e FY14e FY15e FY16e
Revenue 36,872 44,669 46,543 55,593 21.1% 4.2% 19.4% -4.3% -7.0% -12.6% 10.7% 7.4% 18.8% EBITDA 16,333 18,629 20,167 23,059 14.1% 8.3% 14.3% -2.8% -4.5% -8.6% 2.0% -1.5% -3.1% EBITDA margin 44.3% 41.7% 43.3% 41.5% -260 160 -180 60 110 180 -360 -390 -940 HSBC PAT 5,567 4,989 4,699 5,096 -10.4% -5.8% 8.4% -5.3% -8.8% -18.9% 3.2% -5.6% 4.2% HSBC PAT margin 15.1% 11.2% 10.1% 9.2% -390 -110 -90 -10 -20 -70 -80 -140 -130 Adj. EPS 16.7 15.0 14.1 15.3 -10.4% -5.8% 8.4% -5.3% -8.8% -18.9% 3.7% -5.2% 11.1% Source: Bloomberg, Company data, HSBC estimates
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Valuation and risks Reiterate N (V) though increase our TP to INR103 (INR78 earlier) The company along with its promoters are being investigated for discrepancies in land acquisitions along the Mumbai-Pune Expressway. While management has clarified its stance through regular updates, we expect the stock to remain under pressure as investors prefer to await the outcome of the investigation, as persistent negative news flow impacts the shares.
We have cut IRB's earnings forecasts by 9-19% over FY14-16 as toll traffic has been lower than expected and due to delays in construction progress in some of its projects. However, the business environment for Industrial stocks has improved on the back of expected new project awards and improving macro data points, which is now reflected in our target price revision (TP at 20% discount to NAV against 40% earlier). However, we refrain from getting more constructive on the stock and valuing it at its NAV until we get more clarity on the ongoing investigation against its promoters.
We continue to value IRB using a sum-of-the-parts (SOTP) approach, comprised of the standalone BOT (Build Operate and Transfer) and in-house construction businesses. We prefer a free cash flow to equity (FCFE based) DCF valuation for IRBs toll assets to capture the benefit of a defined concession period (typically 10-25 years). We have maintained our Cost of Equity (CoE) assumptions for IRB constant. We use a 13% COE for its operational toll assets (Risk free rate of 8.3%, market risk premium of 5.0% and beta of 1.0x). We use a 50bps higher CoE for its under-development assets to factor in the development and traffic risk.
We currently do not accord any value to its EPC business. We believe the stocks valuation will be capped at the value of its subsidiaries (project assets), given that if the outcome of the investigation turns out to be negative, projects could remain quarantined, while the holding company could face issues.
IRB valuation changes
INR/ share New Old
Road Projects 130 130 EPC Business - - Fair Value 130 130 Target project NAV disc 20% 40% Target Price 104 78 Source: HSBC estimates
Under our research model, for stocks with a volatility indicator, the Neutral band is 10ppts above and below the hurdle rate for India stocks of 11%. Our target price implies a potential return of 16.7% (including a forecast dividend yield of 4.4%), which is within the Neutral band; therefore, we are reiterating our Neutral (V) rating. Potential return equals the percentage difference between the current share price and the target price, including the forecast dividend yield when indicated.
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Key downside risks: Sustained negative newsflow on the
investigation against the promoters
Sustained high interest rates
Execution risk impacting project timelines and profitability
Key upside risks: Restart of new project awards from NHAI
An earlier resolution to the investigation against the promoter
IRB one-year forward PE chart IRB one-year forward PB chart
Source: Bloomberg, HSBC Estimates Source: Bloomberg, HSBC Estimates
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Financials & valuation: IRB Infrastructure Ltd Neutral (V) Financial statements
Year to 03/2013a 03/2014e 03/2015e 03/2016e
Profit & loss summary (INRm)
Revenue 36,872 44,669 46,543 55,593EBITDA 16,333 18,629 20,167 23,059Depreciation & amortisation -4,415 -5,229 -5,816 -8,373Operating profit/EBIT 11,918 13,400 14,351 14,686Net interest -6,153 -7,585 -9,141 -8,871PBT 7,066 7,031 7,096 7,992HSBC PBT 7,066 7,031 7,096 7,992Taxation -1,530 -2,079 -2,417 -3,086Net profit 5,567 4,989 4,699 5,096HSBC net profit 5,567 4,989 4,699 5,096
Cash flow summary (INRm)
Cash flow from operations 8,811 5,885 6,678 6,826Capex -28,668 -23,017 -14,448 -23,111Cash flow from investment -27,848 -21,801 -12,562 -20,933Dividends 1,569 1,523 1,569 1,569Change in net debt 20,056 17,703 6,903 14,978FCF equity -19,857 -17,132 -7,771 -16,285
Balance sheet summary (INRm)
Intangible fixed assets 100,991 117,270 127,216 140,633Tangible fixed assets 3,257 4,765 3,452 4,772Current assets 27,812 25,085 30,271 18,682Cash & others 15,317 7,513 11,201 -3,766Total assets 132,073 147,133 160,952 164,100Operating liabilities 7,296 12,000 12,000 12,000Gross debt 87,761 97,660 108,250 108,261Net debt 72,444 90,147 97,049 112,027Shareholders funds 32,556 35,278 38,538 41,843Invested capital 109,447 127,606 137,738 155,853
Ratio, growth and per share analysis
Year to 03/2013a 03/2014e 03/2015e 03/2016e
Y-o-y % change
Revenue 17.7 21.1 4.2 19.4EBITDA 19.3 14.1 8.3 14.3Operating profit 11.1 12.4 7.1 2.3PBT 8.5 -0.5 0.9 12.6HSBC EPS 12.2 -10.4 -5.8 8.4
Ratios (%)
Revenue/IC (x) 0.4 0.4 0.4 0.4ROIC 9.6 8.0 7.1 6.1ROE 18.2 14.7 12.7 12.7ROA 8.6 7.4 7.0 6.4EBITDA margin 44.3 41.7 43.3 41.5Operating profit margin 32.3 30.0 30.8 26.4EBITDA/net interest (x) 2.7 2.5 2.2 2.6Net debt/equity 215.3 248.4 245.6 264.0Net debt/EBITDA (x) 4.4 4.8 4.8 4.9CF from operations/net debt 12.2 6.5 6.9 6.1
Per share data (INR)
EPS Rep (fully diluted) 16.75 15.01 14.14 15.33HSBC EPS (fully diluted) 16.75 15.01 14.14 15.33DPS 4.00 4.00 4.00 4.00Book value 97.95 106.14 115.95 125.90
Valuation data
Year to 03/2013a 03/2014e 03/2015e 03/2016e
EV/sales 2.8 2.7 2.7 2.6EV/EBITDA 6.3 6.5 6.3 6.2EV/IC 0.9 0.9 0.9 0.9PE* 5.5 6.1 6.5 6.0P/Book value 0.9 0.9 0.8 0.7FCF yield (%) -65.2 -56.2 -25.5 -53.5Dividend yield (%) 4.4 4.4 4.4 4.4Note: * = Based on HSBC EPS (fully diluted) Issuer information
Share price (INR)91.70 Target price (INR)103.00 1
2.3
Reuters (Equity) IRBI.NS Bloomberg (Equity) IRB INMarket cap (USDm) 493 Market cap (INRm) 30,478Free float (%) 26 Enterprise value (INRm) 120611Country India Sector CONSTRUCTION &
ENGINEERINGAnalyst Ashutosh Narkar Contact +91 22 22681474
Price relative
Source: HSBC Note: price at close of 30 Dec 2013
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2011 2012 2013 2014IRB Infrastructure Ltd Rel to BOMBAY SE SENSITIVE INDEX
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Investment summary ILFT is poised to make seven projects operational over next year. Three of these are among ILFTs top four assets (of the 26 road assets). With the delivery of these seven projects, we expect ILFTs average daily cash collection to increase 3x to c. INR60m by FY15e. The beginning of cash collection will likely reduce investors biggest concern regarding the sector delayed cash flow generation limiting developers ability to cut leverage.
High leverage is manageable. ILFTs consolidated net debt to equity (DE) is likely to rise from 3.5x in FY13 to 4.8x by FY16e as it funds new projects. However, the holding companys net DE is still modest at 1.8x (FY13a). Hence, we do not foresee high leverage impacting the pace of project execution. While we expect the projects to return free cash flow to ILFT only by
FY17e, it must close a funding gap of INR11bn of equity required for its under construction projects. Our analysis suggests it can comfortably raise funding of INR4-5bn in its operational assets.
We cut FY15e-16e earnings forecasts by 18-20% Although we cut revenue and EBITDA forecasts for FY15e-16e by only 1-4%, we cut earnings forecasts by 18-20%. This is primarily due to slightly higher interest rates assumptions than we had previously estimated. Due to very high leverage (3.5x), the earnings are sensitive to the interest rate assumptions.
Our revised earnings estimates are 5% below the current consensus in FY15e, but are 5% above in FY16e.
ILFT Transport Expect seven projects becoming operational over next year to act
as share price catalysts Investors concerns surrounding high leverage and equity dilution
seem overdone, in our view Remain OW with a lower TP of INR172 (down from INR260)
HSBC ILFTs earnings estimate summary
_____ New forecasts ____ _____ y-o-y change _____ _____ Change vs old ____ _____ HSBC vs. cons ____ INRm (except EPS) FY13a FY14e FY15e FY16e FY14e FY15e FY16e FY14e FY15e FY16e FY14e FY15e FY15e
Revenue 66,448 79,803 76,469 77,179 20.1% -4.2% 0.9% 12.4% -3.7% -4.3% 14.6% 0.3% -16.7% EBITDA 18,379 23,274 25,165 28,255 26.6% 8.1% 12.3% 7.8% -1.3% -2.3% 9.4% 0.6% -11.0% EBITDA margin 27.7% 29.2% 32.9% 36.6% 150 370 370 -120 80 80 -140 10 230 HSBC PAT 5,202 6,246 5,450 6,744 20.1% -12.7% 23.7% 8.3% -20.2% -17.7% 21.7% -4.8% 4.8% HSBC PAT margin 7.8% 7.8% 7.1% 8.7% 0 -70 160 -30 -150 -150 40 -40 180 Adj. EPS 26.8 32.1 28.1 34.7 20.1% -12.7% 23.7% 8.3% -20.2% -17.7% 21.4% -3.2% 12.4% Source: Bloomberg, Company data, HSBC estimates
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Valuation and risks We continue to value ILFT using a sum of the parts valuation across 2 business segments-road assets and EPC business using a free cash flow to equity (FCFE) discounted cash flow method (DCF).
With varied risk profile we use differential cost of equity for projects which are already operational and under development. The risk profile of an annuity road asset is also lower than a toll asset, which is reflected in our cost of equity assumptions. Below table highlights our cost of equity assumptions. We have not made any changes to our base cost of equity assumptions for an annuity asset (risk free rate of 8.3%, market risk premium of 5.0% and beta of 0.9x). We use a 50bps higher CoE for under development annuity asset to factor the development risk. Similarly we use a 50bps higher CoE (above base annuity CoE) for operational toll asset and an additional 100bps CoE of 14.3% for an under construction toll asset to compensate for the higher traffic risk.
Cost of equity assumptions
Annuity- Operational 12.8% Annuity- Under development 13.3% BOT- Operational 13.3% BOT- Under development 14.3% BOT: Build Operate Transfer Source: Bloomberg, HSBC estimates
We have cut our target price sharply by 34%. This is owing to a combination of 2 key changes. 1) We have increased our interest cost assumption by 100bps to 11.5%. However due to high net equity of 3.5x and interest coverage of mere 2.0x, the impact on our target price is severe (60% of the target price reduction). 2) We have also adjusted our traffic growth outlook for yet to start projects to factor the weak macro conditions. Lower revenues again have a similar impact on long term cash flows owing to the low interest coverage ratio. Consequently our target price has fallen by 34% to INR172 (refer table below). ILFT valuation change
INR/ share New Old
Projects NPV 204 288 EPC value 66 60 Elsamex 21 21 Additional equity required (54) (38) Net debt (68) (75) Option value for new projects 5 5 Total 172 260
Source: Company data, HSBC
Under our research model, for stocks without volatility indicator, the Neutral band is 5ppts above and below the hurdle rate for India stocks of 11%. Our target price implies a potential return of 29.3% (including a forecast dividend yield of 2.9%), which is above the Neutral band; therefore, we are reiterating our Overweight rating. Potential return equals the percentage difference between the current share price and the target price, including the forecast dividend yield when indicated.
ILFT one-year forward PE chart ILFT one-year forward PB chart
Source: Bloomberg, HSBC Estimates Source: Bloomberg, HSBC Estimates
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Key downside risks: 1) weak macro environment impacting traffic growth and real estate, 2) high interest rates, 3) execution risk, 4) competitive pressures from large players, and 5) regulatory risk impacting new project awards.
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Financials & valuation: IL&FS Transportation Netw Overweight Financial statements
Year to 03/2013a 03/2014e 03/2015e 03/2016e
Profit & loss summary (INRm)
Revenue 66,448 79,803 76,469 77,179EBITDA 18,379 23,274 25,165 28,255Depreciation & amortisation -944 -1,842 -1,881 -2,989Operating profit/EBIT 17,435 21,432 23,284 25,267Net interest -9,750 -12,822 -15,800 -15,894PBT 7,731 8,756 7,330 9,238HSBC PBT 7,731 8,756 7,330 9,238Taxation -2,274 -2,583 -2,021 -2,531Net profit 5,202 6,246 5,450 6,744HSBC net profit 5,202 6,246 5,450 6,744
Cash flow summary (INRm)
Cash flow from operations 19,039 14,842 26,590 44,098Capex -49,388 -52,137 -46,838 -44,658Cash flow from investment -50,554 -52,137 -46,838 -44,658Dividends -907 -909 -909 -2,108Change in net debt 39,618 50,952 37,253 35,355FCF equity -41,073 -50,810 -37,990 -34,914
Balance sheet summary (INRm)
Intangible fixed assets 7,098 7,131 7,131 7,132Tangible fixed assets 96,578 136,672 179,784 218,644Current assets 31,653 43,209 40,792 41,075Cash & others 4,552 5,000 5,000 5,001Total assets 205,903 266,754 307,493 347,646Operating liabilities 17,297 21,864 20,950 21,145Gross debt 143,591 194,991 232,244 267,599Net debt 139,039 189,991 227,244 262,598Shareholders funds 36,398 41,735 46,275 50,912Invested capital 113,479 160,149 201,757 240,705
Ratio, growth and per share analysis
Year to 03/2013a 03/2014e 03/2015e 03/2016e
Y-o-y % change
Revenue 18.5 20.1 -4.2 0.9EBITDA 25.4 26.6 8.1 12.3Operating profit 25.5 22.9 8.6 8.5PBT -1.9 13.3 -16.3 26.0HSBC EPS 4.7 20.1 -12.7 23.7
Ratios (%)
Revenue/IC (x) 0.7 0.6 0.4 0.3ROIC 12.4 11.0 9.3 8.3ROE 16.2 16.0 12.4 13.9ROA 7.5 6.9 6.2 5.9EBITDA margin 27.7 29.2 32.9 36.6Operating profit margin 26.2 26.9 30.4 32.7EBITDA/net interest (x) 1.9 1.8 1.6 1.8Net debt/equity 347.8 420.0 457.8 484.1Net debt/EBITDA (x) 7.6 8.2 9.0 9.3CF from operations/net debt 13.7 7.8 11.7 16.8
Per share data (INR)
EPS Rep (fully diluted) 26.78 32.15 28.05 34.71HSBC EPS (fully diluted) 26.78 32.15 28.05 34.71DPS 4.00 4.00 4.00 5.00Book value 187.36 214.83 238.20 262.07
Valuation data
Year to 03/2013a 03/2014e 03/2015e 03/2016e
EV/sales 2.4 2.6 3.2 3.7EV/EBITDA 8.6 9.0 9.8 10.0EV/IC 1.4 1.3 1.2 1.2PE* 5.1 4.2 4.9 3.9P/Book value 0.7 0.6 0.6 0.5FCF yield (%) -209.9 -259.7 -194.1 -178.4Dividend yield (%) 2.9 2.9 2.9 3.7Note: * = Based on HSBC EPS (fully diluted) Issuer information
Share price (INR)136.10 Target price (INR)172.00 2
6.4
Reuters (Equity) ILFT.NS Bloomberg (Equity) ILFT INMarket cap (USDm) 428 Market cap (INRm) 26,440Free float (%) 29 Enterprise value (INRm) 209559Country India Sector Construction & EngineeringAnalyst Ashutosh Narkar Contact +91 22 22681474
Price relative
Source: HSBC Note: price at close of 30 Dec 2013
75
125
175
225
275
325
75
125
175
225
275
325
2011 2012 2013 2014IL&FS Transportation Netw
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Appendix 1: List of the road projects likely to be considered as stressed
Road projects of coverage companies Project Name Developer Length (KM) Project Cost (INRm) Barwa Adda- Panagarh IL&FS Transportation 123 24,199Tumkur- Chitradurga IRB Infrastructure 114 11,420Ahmedabad- Vadodara IRB Infrastructure 196 48,800Hosur- Krishnagiri Reliance Infrastructure 60 9,250Maharashtra/Karnataka Border-Sangareddy L&T 145 12,730Jalgaon-Gujarat/ Maharashtra Border L&T 209 23,000Amravati- Jalgaon (four laning) L&T 275 25,380Beawar- Pali- Pindwara L&T 244 27,720Road projects of non-coverage companies Project Name Developer Project Detail DeveloperBelgaum- Dharwad Ashoka Buildcon Raipur-Bilaspur IVRCLCuttack-Angul Ashoka Buildcon Rajahmundry- Gundugolanu IVRCLDankuni- Kharagpur Ashoka Buildcon Nagpur- Wainganga Bridge JMCSambalpur- Bargarh Ashoka Buildcon Kota-Jhalawar Keti Construction Odisha border- Aurnag- Saraipalli BSCPL Aurangabad- Barwa Adda KMC Construction Solapur-Maharashtra/ Karnataka Border Coastal- Srei Rohtak- Jind NKGIndore- Dewas DLF- Gayatri Etawah- Chakeri Oriental Structures
Engineers Rampur-Kathgodam Era Infra Hospet-Bellary-Karnataka/A.P. Border PNC Betul construction Lucknow-Sultanpur Essar- Atlanta Agra- Etawah Bypass (Six laning) Ramky Infrastructure Gwalior- Shivpuri Essel Infra Hospet-Chitradurga Ramky Infrastructure Ludhiana- Talwandi Essel Infra Gomti ka chauraha- Udaipur Sadbhav Engineering Walajapet- Poonamallee Essel Infra Solapur-Bijapur Sadbhav Engineering Vijayawada-Eluru-Gundugolanu Gammon Solapur-Maharashtra/ Karnataka
Border Sadbhav Engineering
Kishangarh-Udaipur-Ahmedabad GMR Infrastructure Panvel- Indapur SupremeDeoli- Kota GVK Anandapuram- Visakhapatnam-
Anakapalli Transtroy- OJSC
Shivpuri-Dewas GVK Obedullaganj-Betul Transtroy- OJSC Vadodara- Surat section HCC Jind- Punjab/ Haryana Border Unity Infra Projects Jetpur- Somnath IDFC- Plus Coimbatore- Mettupalayam --
Source: The Hindu Business Line (http://www.thehindubusinessline.com/), company data, HSBC estimates
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Disclosure appendix Analyst Certification The following analyst(s), economist(s), and/or strategist(s) who is(are) primarily responsible for this report, certifies(y) that the opinion(s) on the subject security(ies) or issuer(s) and/or any other views or forecasts expressed herein accurately reflect their personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific recommendation(s) or views contained in this research report: Ashutosh Narkar
Important disclosures Equities: Stock ratings and basis for financial analysis HSBC believes that investors utilise various disciplines and investment horizons when making investment decisions, which depend largely on individual circumstances such as the investor's existing holdings, risk tolerance and other considerations. Given these differences, HSBC has two principal aims in its equity research: 1) to identify long-term investment opportunities based on particular themes or ideas that may affect the future earnings or cash flows of companies on a 12 month time horizon; and 2) from time to time to identify short-term investment opportunities that are derived from fundamental, quantitative, technical or event-driven techniques on a 0-3 month time horizon and which may differ from our long-term investment rating. HSBC has assigned ratings for its long-term investment opportunities as described below.
This report addresses only the long-term investment opportunities of the companies referred to in the report. As and when HSBC publishes a short-term trading idea the stocks to which these relate are identified on the website at www.hsbcnet.com/research. Details of these short-term investment opportunities can be found under the Reports section of this website.
HSBC believes an investor's decision to buy or sell a stock should depend on individual circumstances such as the investor's existing holdings and other considerations. Different securities firms use a variety of ratings terms as well as different rating systems to describe their recommendations. Investors should carefully read the definitions of the ratings used in each research report. In addition, because research reports contain more complete information concerning the analysts' views, investors should carefully read the entire research report and should not infer its contents from the rating. In any case, ratings should not be used or relied on in isolation as investment advice.
Rating definitions for long-term investment opportunities Stock ratings HSBC assigns ratings to its stocks in this sector on the following basis:
For each stock we set a required rate of return calculated from the cost of equity for that stocks domestic or, as appropriate, regional market established by our strategy team. The price target for a stock represents the value the analyst expects the stock to reach over our performance horizon. The performance horizon is 12 months. For a stock to be classified as Overweight, the potential return, which equals the percentage difference between the current share price and the target price, including the forecast dividend yield when indicated, must exceed the required return by at least 5 percentage points over the next 12 months (or 10 percentage points for a stock classified as Volatile*). For a stock to be classified as Underweight, the stock must be expected to underperform its required return by at least 5 percentage points over the next 12 months (or 10 percentage points for a stock classified as Volatile*). Stocks between these bands are classified as Neutral.
Our ratings are re-calibrated against these bands at the time of any 'material change' (initiation of coverage, change of volatility status or change in price target). Notwithstanding this, and although ratings are subject to ongoing management review, expected returns will be permitted to move outside the bands as a result of normal share price fluctuations without necessarily triggering a rating change.
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*A stock will be classified as volatile if its historical volatility has exceeded 40%, if the stock has been listed for less than 12 months (unless it is in an industry or sector where volatility is low) or if the analyst expects significant volatility. However, stocks which we do not consider volatile may in fact also behave in such a way. Historical volatility is defined as the past month's average of the daily 365-day moving average volatilities. In order to avoid misleadingly frequent changes in rating, however, volatility has to move 2.5 percentage points past the 40% benchmark in either direction for a stock's status to change.
Rating distribution for long-term investment opportunities As of 31 December 2013, the distribution of all ratings published is as follows: Overweight (Buy) 45% (34% of these provided with Investment Banking Services)
Neutral (Hold) 37% (33% of these provided with Investment Banking Services)
Underweight (Sell) 18% (28% of these provided with Investment Banking Services)
Share price and rating changes for long-term investment opportunities IL&FS Transportation Netw (ILFT.NS) Share Price performance INR Vs HSBC
rating history Recommendation & price target history
From To Date N/A Overweight 08 February 2012 Target Price Value Date Price 1 267.00 08 February 2012 Price 2 231.00 01 November 2012 Price 3 265.00 08 January 2013 Price 4 260.00 03 July 2013 Source: HSBC
Source: HSBC IRB Infrastructure Ltd (IRBI.NS) Share Price performance INR Vs HSBC rating
history Recommendation & price target history
From To Date Overweight (V) Neutral (V) 26 November 2012 Target Price Value Date Price 1 309.00 28 January 2011 Price 2 281.00 11 July 2011 Price 3 235.00 10 November 2011 Price 4 139.00 26 November 2012 Price 5 109.00 03 July 2013 Price 6 78.00 11 August 2013 Source: HSBC
Source: HSBC
100
150
200
250
300
350
Dec-0
8
Dec-0
9
Dec-1
0
Dec-1
1
Dec-1
2
Dec-1
3
54
104
154
204
254
304
Dec-0
8
Dec-0
9
Dec-1
0
Dec-1
1
Dec-1
2
Dec-1
3
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HSBC & Analyst disclosures Disclosure checklist
Company Ticker Recent price Price Date Disclosure
IL&FS TRANSPORTATION NETWORKS ILFT.NS 136.10 30-Dec-2013 2, 6, 7IRB INFRASTRUCTURE LTD IRBI.NS 91.70 30-Dec-2013 4Source: HSBC
1 HSBC has managed or co-managed a public offering of securities for this company within the past 12 months. 2 HSBC expects to receive or intends to seek compensation for investment banking services from this company in the next
3 months. 3 At the time of publication of this report, HSBC Securities (USA) Inc. is a Market Maker in securities issued by this
company. 4 As of 30 November 2013 HSBC beneficially owned 1% or more of a class of common equity securities of this company. 5 As of 30 November 2013, this company was a client of HSBC or had during the preceding 12 month period been a client
of and/or paid compensation to HSBC in respect of investment banking services. 6 As of 30 November 2013, this company was a client of HSBC or had during the preceding 12 month period been a client
of and/or paid compensation to HSBC in respect of non-investment banking securities-related services. 7 As of 30 November 2013, this company was a client of HSBC or had during the preceding 12 month period been a client
of and/or paid compensation to HSBC in respect of non-securities services. 8 A covering analyst/s has received compensation from this company in the past 12 months. 9 A covering analyst/s or a member of his/her household has a financial interest in the securities of this company, as
detailed below. 10 A covering analyst/s or a member of his/her household is an officer, director or supervisory board member of this
company, as detailed below. 11 At the time of publication of this report, HSBC is a non-US Market Maker in securities issued by this company and/or in
securities in respect of this company HSBC and its affiliates will from time to time sell to and buy from customers the securities/instruments (including derivatives) of companies covered in HSBC Research on a principal or agency basis.
Analysts, economists, and strategists are paid in part by reference to the profitability of HSBC which includes investment banking revenues.
For disclosures in respect of any company mentioned in this report, please see the most recently published report on that company available at www.hsbcnet.com/research.
Additional disclosures 1 This report is dated as at 03 January 2014. 2 All market data included in this report are dated as at close 30 December 2013, unless otherwise indicated in the report. 3 HSBC has procedures in place to identify and manage any potential conflicts of interest that arise in connection with its
Research business. HSBC's analysts and its other staff who are involved in the preparation and dissemination of Research operate and have a management reporting line independent of HSBC's Investment Banking business. Information Barrier procedures are in place between the Investment Banking and Research businesses to ensure that any confidential and/or price sensitive information is handled in an appropriate manner.
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Disclaimer * Legal entities as at 8 August 2012 UAE HSBC Bank Middle East Limited, Dubai; HK The Hongkong and Shanghai Banking Corporation Limited, Hong Kong; TW HSBC Securities (Taiwan) Corporation Limited; 'CA' HSBC Bank Canada, Toronto; HSBC Bank, Paris Branch; HSBC France; DE HSBC Trinkaus & Burkhardt AG, Dsseldorf; 000 HSBC Bank (RR), Moscow; IN HSBC Securities and Capital Markets (India) Private Limited, Mumbai; JP HSBC Securities (Japan) Limited, Tokyo; EG HSBC Securities Egypt SAE, Cairo; CN HSBC Investment Bank Asia Limited, Beijing Representative Office; The Hongkong and Shanghai Banking Corporation Limited, Singapore Branch; The Hongkong and Shanghai Banking Corporation Limited, Seoul Securities Branch; The Hongkong and Shanghai Banking Corporation Limited, Seoul Branch; HSBC Securities (South Africa) (Pty) Ltd, Johannesburg; HSBC Bank plc, London, Madrid, Milan, Stockholm, Tel Aviv; US HSBC Securities (USA) Inc, New York; HSBC Yatirim Menkul Degerler AS, Istanbul; HSBC Mxico, SA, Institucin de Banca Mltiple, Grupo Financiero HSBC; HSBC Bank Brasil SA Banco Mltiplo; HSBC Bank Australia Limited; HSBC Bank Argentina SA; HSBC Saudi Arabia Limited; The Hongkong and Shanghai Banking Corporation Limited, New Zealand Branch incorporated in Hong Kong SAR
Issuer of report HSBC Securities and Capital Markets (India) Private Limited Registered Office 52/60 Mahatma Gandhi Road Fort, Mumbai 400 001, India Telephone: +91 22 2267 4921 Fax: +91 22 2263 1983 Website: www.research.hsbc.com
This document has been issued by HSBC Securities and Capital Markets (India) Private Limited ("HSBC") for the information of its customers only. HSBC Securities and Capital Markets (India) Private Limited is regulated by the Securities and Exchange Board of India. If it is received by a customer of an affiliate of HSBC, its provision to the recipient is subject to the terms of business in place between the recipient and such affiliate. This document is not and should not be construed as an offer to sell or the solicitation of an offer to purchase or subscribe for any investment. HSBC has based this document on information obtained from sources it believes to be reliable but which it has not independently verified; HSBC makes no guarantee, representation or warranty and accepts no responsibility or liability as to its accuracy or completeness. Expressions of opinion are those of the Research Division of HSBC only and are subject to change without notice. HSBC and its affiliates and/or theirofficers, directors and employees may have positions in any securities mentioned in this document (or in any related investment) and may from time to time add to or dispose of any such securities (or investment). HSBC and its affiliates may act as market maker or have assumed an underwriting commitment in the securities of companies discussed in this document (or in related investments), may sell them to or buy them from customers on a principal basis and may also perform or seek to perform investment banking or underwriting services for or relating to those companies and may also be represented in the supervisory board or any other committee of those companies. The information and opinions contained within the research reports are based upon publicly available information and rates of taxation applicable at the time of publication which are subject to change from time to time. Past performance is not necessarily a guide to future performance. The value of any investment or income may go down as well as up and you may not get back the full amount invested. Where an investment is denominated in a currency other than the local currency of the recipient of the research report, changes in the exchange rates may have an adverse effect on the value, price or income of that investment. In case of investments for which there is no recognised market it may be difficult for investors to sell their investments or to obtain reliable information about its value or the extent of the risk to which it is exposed. HSBC Securities (USA) Inc. accepts responsibility for the content of this research report prepared by its non-US foreign affiliate. All U.S. persons receiving and/or accessing this report and wishing to effect transactions in any security discussed herein should do so with HSBC Securities (USA) Inc. in the United States and not with its non-US foreign affiliate, the issuer of this report. In the UK this report may only be distributed to persons of a kind described in Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005. The protections afforded by the UK regulatory regime are available only to those dealing with a representative of HSBC Bank plc in the UK. In Singapore, this publication is distributed by The Hongkong and Shanghai Banking Corporation Limited, Singapore Branch for the general information of institutional investors or other persons specified in Sections 274 and 304 of the Securities and Futures Act (Chapter 289) (SFA) and accredited investors and other persons in accordance with the conditions specified in Sections 275 and 305 of the SFA. This publication is not a prospectus as defined in the SFA. It may not be further distributed in whole or in part for any purpose. The Hongkong and Shanghai Banking Corporation Limited Singapore Branch is regulated by the Monetary Authority of Singapore. Recipients in Singapore should contact a "Hongkong and Shanghai Banking Corporation Limited, Singapore Branch" representative in respect of any matters arising from, or in connection with this report. In Australia, this publication has been distributed by The Hongkong and Shanghai Banking Corporation Limited (ABN 65 117 925 970, AFSL 301737) for the general information of its wholesale customers (as defined in the Corporations Act 2001). Where distributed to retail customers, this research is distributed by HSBC Bank Australia Limited (AFSL No. 232595). These respective entities make no representations that the products or services mentioned in this document are available to persons in Australia or are necessarily suitable for any particular person or appropriate in accordance with local law. No consideration has been given to the particular investment objectives, financial situation or particular needs of any recipient. 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Industrials Colin Gibson Global Sector Head, Industrials +44 20 7991 6592 [email protected]
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Global Industrials Research Team
Front Page (Page View)India InfrastructureRelief package - a disguised boonBackgroundPanel recommendationsProposals in our view are insufficient to restart projectsA boon in disguiseWill there be takers when they come for re-bid?Implications for our coverage universe
IRB Infrastructure LtdInvestment summaryCut earnings estimates by 9-19%
Valuation and risksReiterate N (V) though increase our TP to INR103 (INR78 earlier)Key downside risks:Key upside risks:
Financials & valuation:
ILFT TransportInvestment summaryWe cut FY15e-16e earnings forecasts by 18-20%
Financials & valuation:
Disclosure appendixAnalyst CertificationImportant disclosuresEquities: Stock ratings and basis for financial analysis
Rating definitions for long-term investment opportunitiesStock ratings
Rating distribution for long-term investment opportunitiesAs of 31 December 2013, the distribution of all ratings published is as follows:
Share price and rating changes for long-term investment opportunitiesHSBC & Analyst disclosuresAdditional disclosures
Disclaimer
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