INSTITUTIONAL EQUITY RESEARCH...

INSTITUTIONAL EQUITY RESEARCH

Page | 1 | PHILLIPCAPITAL INDIA RESEARCH Please see penultimate page for additional important disclosures. PhillipCapital (India) Private Limited. (“PHILLIPCAP”) is a foreign broker-dealer unregistered in the USA. PHILLIPCAP research is prepared by research analysts who are not registered in the USA. PHILLIPCAP research is distributed in the USA pursuant to Rule 15a-6 of the Securities Exchange Act of 1934 solely by Rosenblatt Securities Inc, an SEC registered and FINRA-member broker-dealer.

Infrastructure BOT Model – Set to Get a NEW life !

INDIA | INFRASTRUCTURE | Sector Update

5 December 2019

We predicted it in 2015 – to perfection: In 2015, we published a report on the BOT segment (read here), where we had analyzed over 200 BOT projects across the country, and found over 100 of them on the block. We had predicted a heightened level of M&A activity over next 5 years, with sovereign/PE funds likely to acquire projects with long-term predictable cashflows. Four years later, we are happy that the hypothesis has played out to perfection.

Over the last four years, we have seen a spate of MAPE (M&A and PE) activity in the sector. The space has witnessed capital infusion of Rs 394bn – primarily by foreign investors. In 28 ‘deals’, 108 projects with capital outlay of Rs 1.7trillion have exchanged hands – significantly enhancing the balance sheets and the ability of the developers to rotate capital efficiently – paving the way for a repeat of the same exercise. A mammoth opportunity STILL lies on the table: Despite the large number of transactions, we still see a mammoth opportunity ahead. Our analysis of ~200 BOT projects across the country reveals that 84 of the projects are highly likely to witness MAPE activity over the next 5 years. These 84 projects have Rs 835bn investment riding on them – with equity investment of Rs 185bn. Key developers to benefit from this stake sale are ILFS Transport, Ashoka Buildcon, Reliance Infra, PNC Infratech and Essel Infra.

There are also large number of projects owned by developers which are under severe financial stress – that might see ‘distress sale’. Developers like Soma, Gayatri, Ramky and Madhucon are likely beneficiaries in this basket. InvITs have been the bedrock of MAPE deals: As IRB InvIT got listed in May-17, it marked the discovery of a new source of capital in the space (read our detailed InvIT report here). 5 more InvIT transactions took place in the last 3 years – raising Rs 281bn (71% of the total capital raised through MAPE deals). Poor performance of the listed IRB InvIT, has led investors to opt for a more ‘pragmatic’ option of “private InvIT’ – an InvIT limited to few large and well-informed investors. We expect private InvITs to continue attracting investors. HAM projects to offer incremental MAPE opportunities: NHAI’s order pipeline over the last two years has been boosted by HAM projects – with HAMs constituting 54%/46% of the total length awarded by NHAI in FY17/18 (read our detailed HAM report here). Currently, 10 large developers have a portfolio of 70 HAM projects – entailing investments of Rs 775bn. We have already seen 2 PE deals in the HAM segment and expect more activity over the next few years – as NHAI awards more HAM projects and developers look to rotate capital. We expect PNC, Sadbhav, Dilip and Ashoka to be likely beneficiaries.

BOT model set to get a new life: We believe the current environment is PERECT for a revival of the BOT model. A conducive macro environment (low interest rates, traffic growth and WPI bottoming out) and sector dynamics (stronger balance sheets, sector reforms) make the model highly attractive. NHAI too, with its burgeoning debt, lower govt budgetary support and Rs 7trillion expenditure required for the Bharatmala Paryojana, needs the BOT model to be alive, more than ever before.

But the most important factor, making the environment conducive for the revival of the BOT model, is the presence of a robust secondary market. The spate of M&A activity over the last five years assures the developers of being able to sell these projects in future and efficiently rotate capital. We believe few pragmatic steps by NHAI, developers and lenders (recommendations inside) can pump a new life into the BOT model. IRB Infra, Ashoka Buildcon and Sadbhav Engg are likely will be the biggest beneficiaries, of the same.

Companies

IRB Infrastructure BUY CMP, Rs Rs 70 Target Price, Rs Rs 135

PNC Infratech BUY CMP, Rs Rs 199 Target Price, Rs Rs 300

Ashoka Buildcon BUY CMP, Rs Rs 93 Target Price, Rs Rs 165

Sadbhav Engineering NEUTRAL CMP, Rs Rs 126 Target Price, Rs Rs 130

Dilip Buildcon NOT RATED CMP, Rs Rs 390

Vibhor Singhal, Research Analyst (+ 9122 6246 4109) [email protected] Deepika Bhandari, Research Associate (+ 9122 6246 4138) [email protected]

http://backoffice.phillipcapital.in/Backoffice/Researchfiles/PC_-_BOT_Roads_-_March_2015_20150326104012.pdf

http://backoffice.phillipcapital.in/Backoffice/Researchfiles/PC_-_IRB_Infrastructure_-_Apr_2017_20170427162506.pdf

http://backoffice.phillipcapital.in/Backoffice/Researchfiles/PC_-_Infrastructure_Sector_Udpate__-_Mar_2017_20170330125541.pdf

mailto:[email protected]

mailto:[email protected]

Page | 2 | PHILLIPCAPITAL INDIA RESEARCH

INFRASTRUCTURE SECTOR UPDATE

Table of Contents

We predicted in 2015 – to perfection ································································· 3

High level of MAPE activity in last five years ·············································· 4

A mammoth opportunity STILL lies on the table ················································· 5

Supply side – still plenty left on the table ··················································· 5

Demand side – the sector never had it so good ········································· 7

Key potential investment opportunities ····················································· 8

HAMs – A new opportunity for risk averse ························································· 11

HAM projects – more like deferred EPC than BOT ····································· 11

Burgeoning HAM portfolio – only to get bigger ·········································· 14

MAPE activity in the HAM segment has already started ···························· 14

InvITs – a significant success despite bleak optics ·············································· 15

InvITs – a GIANT LEAP for the sector ·························································· 15

IRB InvIT – why has it not been a success? ················································· 17

NHAI TOT – Another ‘contender’ for MAPE activity ············································ 19

BOT model – set to get a NEW life ······································································ 22

NHAI, with its stretched financials, needs the BOT model ························· 22

Perfect environment for the revival of the BOT model ······························ 24

Biggest impediment – current state of the banking system ······················· 26

How can the BOT model be revived ···································································· 27

Recommendations for NHAI ······································································· 27

Recommendations for developers ······························································ 28

Recommendations for lenders ···································································· 28

Valuations and Recommendations ······································································ 29

Appendix ····································································· 30

The Early bids – Already divested ···························· available in hard copy

The Next lot – On the block ····································· available in hard copy

EPC players – Desperate to sell ······························· available in hard copy

The Distressed assets – Unlikely to be sold ············· available in hard copy

HAM Projects – The new opportunity ····················· available in hard copy

Companies Section IRB Infrastructure ······························································································· 32

PNC Infratech ······································································································ 36

Ashoka Buildcon ·································································································· 40

Sadbhav Engineering ··························································································· 44

Dilip Buildcon ······································································································· 48



We predicted it in 2015 – to perfection In 2015, we published a report on the BOT segment of the infrastructure space (roads). In this report, we had analyzed over 200 BOT projects across the country, and found that over 100 of them were on the block. We predicted a heightened level of M&A activity in the sector over the next 5 years with sovereign/PE funds being key investors, looking to acquire projects with long-term predictable cashflows that would yield much higher returns than their cost of capital. In the report we had highlighted that investments in projects worth Rs 2trillion, owned by 21 developers, were at stake – with over 100 projects of Rs 922bn likely to be divested. These 100 projects were spread across private/public BOT/EPC players across the country. On the supply side, the owners of these assets were looking to deleverage their balance sheets to be able to bid for new round of EPC/BOT projects in the coming years. On the demand side, we had found multiple sovereign/PE investors (like Canada Pension Fund, Macquarie group, ADIA, etc.) waiting in the wings, looking to deploy their capital in carefully chosen assets.

In our 2014 report, we had highlighted 200 BOT projects – of which 100 were on the block

Source: Companies, PhillipCapital India Research

We are happy that our hypothesis has played out to perfection. Over the last four years, we have seen a spate of MAPE (M&A and PE) activity in the sector – with very few deals in the BOT space pre-2015, but a flurry of deals post-2015.

Pre-2014, very few MAPE transactions had taken place in the BOT space... Date Investor Company Amount Stake Portfolio size (Rs mn) Implicit Valuation

Rs mn % Project Cost Equity Rs mn P/BV

Investment in portfolios 36,100

3,10,202 67,419

Mar-08 AMP Capital Gayathri Projects 2,000 29.4 77,310 12,564 6,803 0.54

Aug-10 Norwest + Xander Sadbhav Engg 4,000 22.2 69,384 14,451 18,018 1.25

Jul-11 Xander group HCC 2,400 14.5 55,380 11,905 16,552 1.39

Jan-12 3i Group Supreme Infra - 3 projects 3,000 49.0 11,040 2,765 6,122 2.21

Aug-12 SBI Macquarie Ashoka Buildcon 8,000 34.0 76,890 19,202 23,529 1.23

Apr-13 Piramal Ent Navayuga 5,500 NA NA NA NA NA

Asset divestment

May-12 IRB Infra MVR Infra 1,280 74.0 3,076 842 1,280 1.52

Feb-13 SBI Macquarie GMR - Jadcherla 2,060 74.0 5,155 1,620 2,784 1.72

Sep-13 IDFC PE GMR - Ullundurpet 2,220 74.0 8,817 3,440 3,000 0.87

Nov-14 IDFC PE HCC - Nirmal BOT 640 74.0 3,150 630 640 1.02

Total

36,100

3,06,054 67,090 78,728

Source: PhillipCapital India Research

http://backoffice.phillipcapital.in/Backoffice/Researchfiles/PC_-_BOT_Roads_-_March_2015_20150326104012.pdf



The space has seen a capital infusion of Rs 394bn – primarily invested by foreign investors. In these 28 deals, 108 projects with a capital outlay of Rs 1.7 trillion have exchanged hands – significantly enhancing the balance sheets and lightening the portfolio of the existing developers. The deals have enhanced the ability of the developers to rotate capital efficiently – paving the way for a repeat of the same exercise.

But after 2014, there has been a surge in MAPE activity in the BOT space Date Investor Seller Project(s) Amount Stake Portfolio size (Rs mn) Valuation No of

Rs mn % Project Cost Equity P/BV Projects

Investment in portfolios 34,740

5,64,979 1,17,792

Jun-14 Canada Pension Plan L&T IDPL - Asset portfolio 20,000 NA 4,23,340 81,320 NA 12

Aug-16 Goldman Sachs Essel Infra BOT Road Portfolio 14,740 NA 1,41,639 36,472 NA 12

Asset divestment

41,712

1,99,351 33,830

Oct-15 Cube Highway Madhucon Agra-Jaipur 2,480 74.0 3,680 994 2.49 1

Jan-16 Cube Highway NCC Western UP 970 51.0 7,476 2,255 0.84 1

Feb-16 IDFC PE NCC Bangalore Elevated 1,000 38.0 9,903 4,203 0.63 1

Aug-16 Cube Highway ITNL AP Expressway 1,404 100.0 8,629 1,304 1.08 1

Sep-18 Cube Highway HCC Farakka Raiganj 3,720 100.0 17,200 NA NA 1

Dec-18 Cube Highway Ramky NAM Expressway 1,400 100.0 17,614 2,344 0.60 1

Feb-19 Cube Highway KNR 3 HAMs 4,018 100.0 27,971 2,850 1.41 3

May-19 Cube Highway PNC Ghaziabad Aligarh 2,700 35.0 20,190 2,360 1.14 1

Jun-19 Cube Highway R-Infra Delhi Agra 17,000 100.0 29,400 8,500 2.00 1

Sep-19 Cube Highway Dilip Buildcon 5 HAMs 7,020 100.0 57,308 5,680 1.24 5

Stake Consolidation

4,384

29,570 7,475

Feb-15 Gammon Infra Sadbhav Engg Mumbai Nasik 720 20.0 7,020 1,195 3.01 1

Apr-15 Sadbhav Engg HCC Dhule Palasner 2,040 60.0 14,200 3,550 0.96 1

Oct-15 Ashoka Buildcon PNC Jaora Nayagaon 342 8.5 8,350 2,730 1.47 1

Mar-16 Oriental Struct Engg GMR Hungund Hospet 850 36.0 16,509 2,309 1.02 1

Aug-18 ITNL Ramky Infra Jorbat Shillong - NAMEL 432 50.0 NA NA NA 2

Portfolio Buyout

21,630

1,26,144 21,630

Aug-15 Brookfield AMC Gammon Infra 5 BOT assets 5,630 100.0 NA 7,720 0.73 5

Aug-17 Shrem Group Dilip Buildcon 24 road assets 16,000 100.0 1,26,144 15,236 1.05 18

Subsidiary listing

10,250

2,46,330 10,250

Aug-15 NA Sadbhav Engg Sadbhav Infra 4,250# 31.0 1,09,042 21,734* 1.62 12

Sep-17 NA BRNL BRNL 6,000# 35.0 66,858 19,414* 0.87 6

Jun-18 NA Gayatri Projcts Gayatri Highways - 39.0 70,430 6,000* 0.37 8

InvIT/TOTs

2,81,315

5,80,727 1,19,066

May-17 Multiple Investors IRB InvIT 7 BOT assets 50,000 85.0 80,778 21,475 1.20 7

May-18 Multiple Investors L&T IDPL 5 BOT assets 42,000 85.0 52,338 NA 0.80 5

Feb-18 Mcquarie Investment NHAI TOT 9 BOT assets 96,815 100.0 62,580 NA 1.55 9

Jul-19 IndInfravit Sadbhav Infra 9 BOT assets 25,500 100.0 69,928 14,930 1.71 9

Jul-19 GIC (Singapore) IRB Private InvIT 9 BOT assets 44,000 49.0 2,15,900 62,000 1.00 9

Jul-19 Multiple Investors Oriental InvIT 5 BOT assets 23,000 85.0 99,203 20,661 1.11 5

Total

3,94,031

17,47,101 3,48,267

108

Source: PhillipCapital India Research (*Mcap at listing; #Money raised)

We believe the level of MAPE activity has increased in the sector because of the following reasons: 1) Supply side: Desperation of developers to deleverage their balance sheets:

BOT asset owners AND pure EPC developers, were looking to get rid of their BOT projects ASAP – to be able to improve their balance sheets and bid for the mammoth awards pipeline from NHAI that was visible in 2015. This led to a lowering of expectations and more deal culminations.

2) Demand side: New funds entering the space with a long-term horizon: Multiple foreign sovereign/PE funds entered the BOT space during 2015-19, looking for long-term predictable cashflow generating assets – thus increasing the possibility of a deal.

3) Reforms in the sector: Relaxation of exit clause by NHAI and introduction of investor friendly models like InvIT helped ease investor concerns, also enhancing their return profile. This provided a significant boost to the MAPE activity in the sector over 2015-2019.



A mammoth opportunity STILL lies on the table In this report, we analyse the BOT road portfolios of the 21 largest industry players. Our analysis spans 195 road projects, spread over 20 states covering 18,000km, and entailing an investment of ~Rs 2trillion. In our analysis, we have focused on data that would help determine two most important things:

Project specification – length, project cost, financial structure and tenure.

Current project situation – toll collection.

Supply side – still plenty left on the table Over analysis reveals that 72 of these projects have exchanged hands in the last five years – with the original developer exiting the project partially/completely. These projects had an investment of Rs 762bn riding on them – and PE investors put in Rs 222bn to acquire stakes in these projects.

Our database of 195 BOT projects across the country Company Projects Length Portfolio size Debt Equity size Sold Likely Unlikely # kms Rs mn Rs mn Rs mn

IRB Infra 21 2,477 3,76,784 2,37,417 1,18,145 16 - 5 Sadbhav Engg. 12 942 1,09,042 77,401 21,734 9 - 3 Dilip Buildcon 18 1,244 36,619 8,968 27,651 18 - - Gammon Infra 7 405 44,391 33,697 6,787 5 - 2 Orient Engg 8 857 1,23,672 83,533 24,160 5 3 -

L&T IDPL 12 1,321 1,28,593 99,894 26,449 5 7 - ITNL 23 2,588 2,77,245 2,09,382 47,046 1 18 4 Ashoka Buildcon 10 849 85,410 61,100 19,173 - 10 - Reliance Infra 11 967 1,14,200 74,000 32,200 1 10 - PNC Infra 8 954 52,750 39,368 10,943 2 6 - Essel Infra 6 586 79,054 54,421 21,663 - 4 2

Madhucon 5 374 32,328 22,213 6,658 1 3 1 JMC 4 296 23,700 18,000 5,660 - 3 1 Gayatri Projects 8 620 79,571 53,606 11,764 1 4 3 Ramky Infra 4 335 47,456 33,780 6,340 - 3 1 Soma Enterp. 8 909 1,50,184 98,837 42,549 1 6 1 BRNL 6 506 68,269 43,247 22,856 - 6 -

GMR Infra 9 730 82,689 58,247 15,526 3 - 6 IVRCL Ltd 7 521 54,040 34,895 14,070 - - 7 NCC Ltd 4 188 26,935 17,011 8,063 2 - 2 HCC Ltd 4 328 52,830 30,320 14,440 3 1 -

Total 195 17,997 20,45,761 13,89,337 5,03,878 73 84 38


Hereafter, 120 projects still remain under the ownership of the original developers, and will be the likely acquisition targets. We believe that 84 projects in this basket are highly likely to witness MAPE activity over the next five years. These 84 projects have Rs 835bn of investments riding on them – with equity investments of Rs 185bn.

Our database of 195 projects can be classified into three categories

Projects No of

projects Length

(km) Investment

(Rs mn)

Already divested 73 6,677 7,62,700 Likely to be divested 84 8,084 8,35,194 Unlikely to be divested 38 3,236 4,47,868

Total 195 17,997 20,45,761


Key developers that are likely to divest their stake in their BOT projects are L&T, ILFS Transport, Ashoka Buildcon, Reliance Infra, PNC Infratech and Essel Infra. These 6 companies have a ‘divestible’ BOT portfolio of 55 projects – more than half the entire opportunity that we are prospectively looking at – with Rs 500bn investment riding on them (equity investment of Rs 100bn).



Six players constitute bulk of the ‘saleable’ BOT projects Company Projects Length Portfolio size Debt Equity size Sold Likely Unlikely

# kms Rs mn Rs mn Rs mn

L&T IDPL 12 1,321 1,28,593 99,894 26,449 5 7 - ITNL 23 2,588 2,77,245 2,09,382 47,046 1 18 4 Ashoka Buildcon 10 849 85,410 61,100 19,173 - 10 - Reliance Infra 11 967 1,14,200 74,000 32,200 1 10 - PNC Infra 8 954 52,750 39,368 10,943 2 6 - Essel Infra 6 586 79,054 54,421 21,663 - 4 2

Total 70 7,265 7,37,252 5,38,164 1,57,474 9 55 6 Source: Companies, PhillipCapital India Research

There also remain a large number of projects owned by developers that are under severe financial stress (if not already under bankruptcy); these might see ‘distress sales’ as owners try to salvage whatever value they can. Developers like Soma, Gayatri, Ramky and Madhucon are likely to be a part of this basket.

Six players that might also be able to sell ‘few’ of their projects Company Projects Length Portfolio size Debt Equity size Sold Likely Unlikely

# kms Rs mn Rs mn Rs mn

Madhucon 5 374 32,328 22,213 6,658 1 3 1 JMC 4 296 23,700 18,000 5,660 - 3 1 Gayatri Projects 8 620 79,571 53,606 11,764 1 4 3 Ramky Infra 4 335 47,456 33,780 6,340 - 3 1 Soma Enterp. 8 909 1,50,184 98,837 42,549 1 6 1 BRNL 6 506 68,269 43,247 22,856 - 6 -

Total 35 3,040 4,01,507 2,69,684 95,827 3 25 7


Summary – 84 projects could undergo MAPE activity in the next few years


84 projects could undergo MAPE

activity

55 projects are highly likely to be

sold

25 projects MIGHT also get

sold



Demand side – the sector never had it so good The demand side for the BOT MAPE activity has never seen better days. Before 2014, we had a handful of PE players (IDFC, SBI-McQ) acquiring BOT projects from developers – leading to only a few deals materializing. There was a clear mismatch between supply (which was huge) and demand (which was muted). However, over the last five years, we have seen multiple new players entering this segment – significantly increasing activity. Players like Canada Pension plan, ADIA, GIC, Goldman Sachs, Brookfield Investment, and Cube Highways have significantly enhanced the “buyers’ profile” – eliminating the demand-supply mismatch. As a result, we have had a spate of MAPE deals (28 in the last five years), leading to significant capital investments in the space.

Multiple new funds have evinced interest, and already invested in the BOT space Fund Origin Global fund size ($bn) Investment in Invested amount (Rs mn)

CPPIB - Canada Pension Plan Investment Board Canada 400.0 L&T, Sadbhav 20,000

CDPQ - Caisse de dépôt et placement du Québec Canada 325.0 Oriental Infra WIP

Goldman Sachs US 1,600.0 Essel Infra 5,950

Brookfield AMC US 500.0 Gammon Infra 5,630

GIC - Govt of Singapore Investment Corp Singapore 440.0 IRB Infra 44,000

ADIA - Abu Dhabi Investment Authority UAE 700.0 L&T, PNC, IRB NA

SBI-Macquarie Australia 10.0 Ashoka, NHAI TOT 96,815

Cube Highway India NA Multiple deals 40,712

IDFC PE India 1.8 Multiple deals 970

Shrem Group India NA Dilip Buildcon 16,000


One of the key reasons for the entry of these new investors has been the introduction of the InvIT model. While the share price performance of the first InvIT (IRB InvIT) might suggest lack of investor interest, we believe the IRB InvIT paid the price of being the first one to be listed, along with poor investor education about the instrument (more on this in later section). Nevertheless, various InvITs (public and private) have raised over Rs 281bn over the last three years, accounting for over 71% of the total investments in the BOT space over the last five years. We discuss the InvIT model and its benefits in detail later in the report.

SIX InvIT deals have taken place in the last few years, opening up new investment avenues Date Investor Seller Project(s) Amount Stake Portfolio size (Rs mn) Valuation No of








Total

2,81,315

5,80,727 1,19,066

44




Key potential investment opportunities We take a quick dive into the details of the portfolio of some of the developers that are most likely to exchange ownership over the next few years. For investors looking for opportunities, these represent few of the most lucrative portfolios that are currently on the block. PNC Infratech PNC has a portfolio of 6 BOT projects (4 toll, 1 annuity and 1 OMT). The portfolio is fully operational, and is generating enough cash to meet its DSCR requirements. It’s a highly lucrative portfolio, present primarily in states of Uttar Pradesh and Madhya Pradesh. The company has already sold two BOT projects (to Ashoka Buildcon and Cube Highways) over the last two years.

PNC portfolio details (more details in the Appendix) Projects Details

Raibareli Jaunpur Length Jaora Nayagaon 954 Narela Ind area Capex (Rs mn) Kanpur Ayodhya 52,750 Bareilly Almora Equity (Rs mn) Ghaziabad Aligarh 10,943 Kanpur Kabrai Debt (Rs mn) Gwalior Bhind 39,368


PNC, as such, does not have any urgent need to sell its BOT portfolio. The company also has a HAM portfolio of 7 projects, but the equity requirement for those can be easily met through its internal accruals (and the recent arbitration awards). Its standalone balance sheet is quite strong, with a leverage of only 0.1x. Due to this, PNC might be highly selective in selling the projects (individually or collectively), and might drive a hard bargain. Ashoka Buildcon Ashoka Buildcon has a subsidiary ACL (Ashoka Concessionaires Ltd) that owns a portfolio of 7 BOT projects (6 toll and 1 annuity). In 2012, SBI-Macquarie group had agreed to invest Rs 8bn into this portfolio. The group invested the amount over the next three years, leading to it owning 31% stake in ACL (and Ashoka holding the remaining 69%). As per the agreement, Ashoka had to provide SBI-McQ an exit in five years (by 2017) or pay a guaranteed IRR of 12% (till Jul-2019). Its inability to provide an exit has led to Ashoka recognizing SBI-McQ’s investment at value of Rs 15.25bn (as on May-19) as a contingent liability. As of now, Ashoka needs to provide an exit option to SBI-McQ from ACL. The management is in talks with various investors and developers. While we do not see any developer that has the might to acquire the entire portfolio, multiple investors would be keen on the portfolio. Out of the 9 projects in the portfolio, 5 lie on NH-6, which represents a ‘low-beta’ route with limited variations (positive/negative) in traffic growth. All projects are fully operational, and require very little loss funding.

Ashoka portfolio details (more details in the Appendix) Projects Details

Bhandara Length Jarora Nayagaon 849 Belgaum Dharwad Capex (Rs mn) Sambalpur baragarh 85,410 Dhankuni Kharagpur Equity (Rs mn) Chennai ORR 19,173 Mudhol Nipani (KSHIP) Debt (Rs mn) Bagewadi - Saundatti 61,100 Hungund - Talikot




We see ACL’s portfolio as a lucrative opportunity for investors. Given that Ashoka will be keen to provide an exit to SBI-McQ asap, we expect this transaction to close within the next few months. Apart from these 7 BOT projects, Ashoka also owns 2 more Annuity and 8 HAM projects – 7 of which are under construction, and only one awaiting its ‘Appointed Date’. As part of the deal, Ashoka might also be willing/keen to sell all/part of these Annuity/HAM projects. Reliance Infra R-Infra has a BOT portfolio of 10 assets (all toll) – it recently sold 1 project to Cube Highways. All the projects are operational and 4 of them are cash-flow positive. Six projects remain cash negative, and require funding support. R-Infra is currently in a stretched state, with various promoter group companies under distress, and it also has capital requirements for its EPC business. The company has recently taken up large infrastructure projects (like the Rs 70bn Bandra-Versova Sealink, Rs 16bn packages of Mumbai Metro Line 4, etc.) and would like to monetize its road assets to strengthen its balance sheet and arrange capital for the EPC business. The company had also tried to float an InvIT in 2017, but withdrew the offer due to lack of investor interest. Two years hence, from now, a few more of its projects would become cashflow positive and might get the company some favorable investor interest. We believe that if the projects are acquired at a fair value, they have strong traffic growth potential, as most of them are situated in areas with high industrial activity and a high share of commercial-vehicle traffic.

Reliance Infra portfolio details (more details in the Appendix) Projects Details

Namakkal Karur Length Dindigul Samayanallore 967 Trichy Dindigul Capex (Rs mn) Salem Ulunderpet 1,14,200 Gurgaon Faridabad Equity (Rs mn) Jaipur Reengus 32,200 Pune Satara Debt (Rs mn) Hosur Krishnagiri 74,000 Trichy Karur

Kandla Mundra Source: Companies, PhillipCapital India Research

ILFS Transport Networks Ltd. From being the largest toll-road operator in the country, with assets across segments and overseas, to a company under NCLT with malfeasance charges against its senior management – ILFS group’s fall has been spectacular. Currently, as the new board (under the chairmanship of Mr. Uday Kotak) tries to monetize as many assets as possible, ITNL’s portfolio might give it a slight respite. ITNL has a portfolio of 22 BOT road assets in India (we are not taking into account its overseas assets or non-road assets or road assets that have been terminated). As per the preliminary exercise conducted by the newly formed board, which classified all the subsidiaries into red/amber/green:

2 assets were green (able to meet CF requirements)

9 assets were amber (able to meet CF requirements with minor support)

8 assets were red (significantly short of their CF requirements)

3 assets have yet to be classified The new board has already put 10 of these projects into a package (1 green, 5 amber, 4 red) and has invited bids from various investors/developers. As per media reports,



the package has seen good interest, with as many as 19 investors having placed their bids. We expect these projects to be sold within the next few months. Another 8 projects are green/amber, which should also see good investor interest. That would leave 4 red projects, out of which 1 is under construction. These 12 projects (1 green, 7 amber, 4 red), are likely to be monetized by the board, in one/multiple packages, over the next 2-3 quarters. While most of ITNL’s assets aren’t really lucrative (with respect to their cashflow generation and meeting the DSCR requirements), given the desperate state of the company, investors might be able to get them real cheap, and hence create value.

ITNL portfolio details (more details in the Appendix) Package # 1 (bid out) Remaining feasible projects Remaining non-feasible projects

Ranchi Ring Road North Karnataka Expway MP Border check post

Jharkhand Road Projects Trivandrum Road Development (I - III) Khed-Sinnar

Hazaribagh Ranchi East Hyderabad Expway (ring road) Barwa - Adda - Panagarh

Chennani Nashri Tunnelway West Gujarat Expway Kiratpur - Ner chowk

Jorabat Shillong Baewar Gomti

Moradabad Bareilly Warora Chandrapur Ballarpur

Rajasthan Road & Infra - I Ramky Elsamex Hyd ring road

Pune Sholapur Gujarat Rail Bridge

Baleshwar Kharagpur

Sikar Bikaner


Essel Infra Essel Infrastructure is a private infrastructure company, involved in construction of roads, buildings and power projects. It has a road portfolio of 14 BOT road projects. Six of these are very small projects, with capex of less than Rs 3bn. Of the remaining 8 projects, 2 projects were recently terminated by NHAI. Of the remaining 6 projects (spread over 586km and involving capex of Rs 80bn) – 4 are fully operational, while 2 are under construction. In 2016, Goldman Sachs investments had committed US$ 220mn investments in Essel’s BOT portfolio (for an undisclosed stake) and had even released the first tranche of US$ 85mn in August 2016. However, later that year, Essel’s key project –the Sion-Panvel highway – received a setback when the state government banned tolling of passenger vehicles on that stretch (along with other toll projects in Mumbai city). The SPV was assured of being compensated for the loss of toll revenue. However, when it did not receive adequate reimbursement even twelve months later, it decided to terminate its contract in December 2017 (link). Subsequently, Goldman Sachs also withdrew its investment commitment in the portfolio. The Essel group is facing rough weather generally, with significant liabilities on its promoter group. To pare that, its promoters are looking to sell non-core assets owned by various group companies, which presents a lucrative opportunity for investors to snap up projects at attractive valuations. However, here again, we do not find Essel’s assets quite lucrative in terms of their cashflow generation and meeting the DSCR requirements, but given the desperate state of the company, investors might be able to get these real cheap and therefore create value.

Essel Infra portfolio details (more details in the Appendix) Projects Details

Lebad – Jaora Length Ahmedabad Godhra 586 Kundli Manesar Capex (Rs mn) Mukarba Chowk Panipat 79,054 Ludhiana Talwandi Equity (Rs mn) Lucknow-Raibareli 21,663 Gwalior-Shivpuri Debt (Rs mn) Walajapet Poonamallee 54,421


https://economictimes.indiatimes.com/industry/indl-goods/svs/construction/sion-panvel-toll-road-operator-to-quit-over-non-payment-of-dues/articleshow/62291113.cms?from=mdr



HAMs – A new opportunity for the risk averse NHAI’s order pipeline over the last two years has been boosted by the new model of construction – Hybrid Annuity (HAM). As explained in our earlier report here, HAM is more like ‘deferred EPC’, where the NHAI pays 40% of the project cost upfront, and the remaining 60% over the next 15 years. With no traffic/tariff risk, the model has received tremendous response from developers. HAM projects constituted 54% of the total length awarded by NHAI in FY17 (62% in terms of project cost awarded) and 46% in FY18 (63% in terms of project cost awarded).

Increasing share of HAM projects in awards over the last three years

Source: NHAI, PhillipCapital India Research

NHAI has taken great care to ensure that HAM is viewed as a deferred EPC model, rather than a modified BOT model.

40% contribution coming from NHAI, project execution is significantly de-risked.

The amount of annuity is linked via fixed percentages to the project cost, the uncertainty related to revenues (traffic/tariff) has also been eliminated.

Lastly, shorter duration of projects (15 years vs. 20-25 years for a BOT project) ensures that developers are able to unlock capital sooner.

HAM projects – more like deferred EPC than BOT A typical HAM model has 3 streams of cash inflows and 3 streams of cash outflows.

HAM Model – construction and tariff period dynamics

Construction period Tariff period

Revenue streams

40% contribution from

NHAI Fixed semi annuity payments for remaining

60% of project cost Cumulative Rs 600mn (adjusted for inflation)

Rs 400mn

Semi-annual interest payment for unfunded

project cost @ bank rate + 300bps, on the declining O/S balance

Bid project cost

Debt availed

O&M reimbursement As quoted by the developer, indexed to inflation

Rs 1,000mn Rs 400mn

Expense streams

Equity from developer Actual O&M cost incurred

Rs 200mn

Interest payment on the debt availed As per lenders' terms

Principal repayment of the debt availed As per lenders' terms


29

9

56

5

36

-

17

7 3

48

2,3

52

3,3

96

38

9

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19

Len

gth

(km

)

EPC BOT Annuity/HAM

Our detailed HAM report

http://backoffice.phillipcapital.in/Backoffice/Researchfiles/PC_-_Infrastructure_Sector_Udpate__-_HAM_-_July_20180731105157.pdf

http://backoffice.phillipcapital.in/Backoffice/Researchfiles/PC_-_Infrastructure_Sector_Udpate__-_HAM_-_July_20180731105157.pdf



Dynamics of a HAM project

Bidding stage – this is where the maximum effort goes The financial bid for a HAM project comprises of two parameters – ‘Bid Project Cost (BPC)’ and ‘First year O&M cost’. The NHAI ‘model’ then calculates the NPV of these two numbers automatically and their summation becomes the ‘bid parameter’ on which developers compete.

HAM bidding model – input and output parameters Parameter (Rs mn) Quoted Value

Parameter (Rs mn) Determined Value

NPV of bid project cost 860.95 Bid project cost 1,000

NPV of O&M 162.49

First year O&M quote (Annual) 20

Bid NPV 1023.44


After the project is awarded, the bid NPV (combination of BPC and O&M) becomes irrelevant. The BPC and O&M variables determine the amount the developer gets from the NHAI at various stages of the lifecycle of the project. As per our analysis, the maximum IRR that a developer can make in a HAM project, if it quotes its actual EPC and O&M cost, is 11.57%; this is if we assume that the developer has a borrowing cost that is 100bps lower than what NHAI offers on the deferred annuity payments (exhibit 1, page 5). This then necessitates developers to increase the EPC and/or O&M cost, to improve their IRRs. But such moves might lead to their bid becoming uncompetitive and other players winning the project. Hence, the HAM becomes a tightrope walk in balancing the right mix of BPC and O&M cost; the aim is to maximize the project IRR while maintaining the bid’s competitiveness.

Construction stage – Early and late completion The HAM model doesn’t reward or penalize a developer much in case it completes the project before or after the scheduled CoD.

Early completion bonus kicks in if the project is completed more than 30 days in advance. Thereafter, the bonus is awarded at the rate of 0.3% of BPC (0.5% of 60% of BPC) for each month – essentially translating into less than 1% of TPC for completing the project four months in advance.

Late-completion penalty is levied if the project is delayed for more than 90 days (no penalty for delay less than 90 days). Thereafter, a penalty of 1bps (Rs 100 penalty for a Rs 1mn BPC) is levied for each day that the project is delayed.

Essentially, the dynamics of the HAM projects translate into much higher effort during the bidding stage than at the execution stage. With rewards/penalties being limited for early/late completion, developers are incentivized to get the bidding right. Execution delays do not lead to significant penalties, but will continue to impact the overall IRR of the project considerably.

Operational stage – predictable cashflows After the bidding and construction stage, the operational stage is fairly predictable and smooth for a HAM project. During operations, a HAM project has:

3 cash inflow streams: (1) Annuity, (2) interest on outstanding annuities, (3)

quoted O&M costs.

3 cash outflow streams: (1) Actual O&M cost, (2) interest expense and debt

repayment, (3) tax, if any.

This makes the HAM model highly attractive for the developers, with 2-3 years of investment/effort leading to 12-15 years of predictable and smooth sailing.

For a project with BPC of Rs 10bn: Early completion bonus for completing 120 days in advance = Rs 90mn Late completion penalty for completing 120 days late = Rs 30mn



With help from various developers and consultants, we have made an “exclusive simplified representative HAM model”, which can be used to calculate the expected IRR of the project, with various bid parameters serving as inputs. The model also helps in calculating various sensitivities that we have discussed in the report.

Exhibit 1 – HAM model – theoretical case – bid cost same as project cost (O&M expense same as quoted) Project period (year) 1 2 3 4 5 6 7 .... 16 17 18

Tariff period (year)

1 2 3 4 .... 13 14 15

Construction cost 20% 45% 35%

Actual Cost (TPC) 1,000 Expenditure 1,000 200 450 350

Bid Project (BPC) 1.000

Grant 400 80 180 140 Equity 120 24 54 42 Debt 480 96 216 168

Bid project cost 1,000 Annuity payment schedule 60%

2.6% 2.7% 2.9% 3.1% .... 5.1% 5.5% 5.7% Escalation 60 6%

Annuity payments 600 636

27 29 31 33 .... 54 58 60 Closing balance of annuities

636 609 580 549 517 .... 119 60 (0)

Interest earned 10.0%

62 59 56 53 .... 15 9 3 O&M Payment 5.0%

20 21 22 23 .... 36 38 40

Total Cash Inflow

109 109 109 109 .... 105 105 103

O&M Expense 5.0%

20 21 22 23 .... 36 38 40 Interest payments 9.0%

42 38 35 32 .... 2 0 0

Debt repayment

37 37 37 37 .... 37 - - Depreciation

40 40 40 40 .... 40 40 40

PBT

8 10 12 14 .... 27 27 23 Tax 20%

2 2 2 3 .... 5 5 5

Total Cash Outflow

100 98 96 95 .... 80 43 44

FCFE

(24) (54) (42) 9 11 13 15 .... 25 62 59

IRR 11.6%

Exhibit 2 – HAM Model – actual bidding by developers – bid cost higher than project cost (O&M expense same as quoted) Project period (year) 1 2 3 4 5 6 7 .... 16 17 18

Tariff period (year)

1 2 3 4 .... 13 14 15

Construction cost 20% 45% 35%

Actual Cost (TPC) 1,000 Expenditure 1,000 200 450 350

Bid Project C (BPC) 1.050

Grant 420 84 189 147 Equity 116 23 52 41 Debt 464 93 209 162

Bid project cost 1,050 Annuity payment schedule 60%

2.6% 2.7% 2.9% 3.1% .... 5.1% 5.5% 5.7% Escalation 63 6%

Annuity payments 630 668

29 30 32 34 .... 57 61 63 Closing balance of annuities

668 639 609 577 542 .... 125 63 (0)

Interest earned 10.0%

65 62 59 56 .... 15 9 3 O&M Payment 5.0%

20 21 22 23 .... 36 38 40

Total Cash Inflow

114 114 114 113 .... 108 108 106

O&M Expense 5.0%

20 21 22 23 .... 36 38 40 Interest payments 9.0%

40 37 34 31 .... 2 0 0

Debt repayment

36 36 36 36 .... 36 - - Depreciation

39 39 39 39 .... 39 39 39

PBT

15 17 19 21 .... 32 32 28 Tax 20%

3 3 4 4 .... 6 6 6

Total Cash Outflow

99 97 95 94 .... 80 44 45

FCFE

(23) (52) (41) 15 17 18 20 .... 28 64 61

IRR 15.2% Source: PhillipCapital India Research



Burgeoning HAM portfolios – only to get bigger With NHAI looking to defer its capital expenditure as much as possible (owing to lack of adequate government support and its burgeoning debt) we expect it to award as many projects as possible on the BOT/HAM model. Since there has been muted interest in the BOT model over the last few years (though we expect the situation to change over the next few months) NHAI will try to award as many projects as possible on the HAM model.

Leading developers have amassed sizeable HAM portfolios Company # HAM Length TPC Debt Equity Grant

Sadbhav 11 740 1,03,800 49,534 12,750 41,516 Ashoka 8 332 84,975 33,928 12,438 38,609 KNR 5 358 53,464 19,533 5,811 28,120 PNC 7 564 88,970 39,940 8,320 40,710 IRB 1 24 20,430 9,810 2,450 8,170 Dilip 18 1,029 2,07,542 1,03,349 23,332 80,861 MEP 10 504 79,427 36,969 10,691 31,767 Welspun 7 593 86,410 38,518 10,408 37,484 Oriental 3 147 28,644 12,174 5,012 11,458 HG Infra 3 85 21,381 11,354 1,475 8,552

Total 73 4,450 7,74,833 3,54,429 93,156 3,27,247


As per our database and analysis, 10 large developers currently have a portfolio of over 70 HAM projects – entailing a total investment of Rs 775bn (equity investment of Rs 93bn). These projects are at various stages of construction (few awaiting FC/AD), and are ALL likely to become operational over the next three years.

MAPE activity in the HAM segment has already started Despite the HAM model being relatively new (no HAM projects has commenced operations yet), we have already seen MAPE activity in the segment. Two companies – KNR Construction and Dilip Buildcon – have announced deals with various investors, selling their stake in few of their HAM projects.

Though in the nascent stage, HAM projects have already seen their fair share of MAPE deals Date Investor Seller Project(s) Amount Stake Portfolio size (Rs mn) Valuation No of


Feb-19 Cube Highway KNR 3 HAMs 4,018 100.0 27,971 2,850 1.41 3

Sep-19 Cube Highway Dilip Buildcon 5 HAMs 7,020 100.0 57,308 5,680 1.24 5

Total

11,038 100.0 85,279 8,530 1.29 8


These are highly encouraging signs for the segment, with investors looking to buy-out assets even before they are operational. Obviously, the HAM model deserves credit for this interest, as it minimizes dependency on external variables (traffic growth, inflation) and provides assured cashflow streams. We expect more MAPE activity in the HAM segment over the next few years. As NHAI awards more HAM projects, developers will look to sell their existing HAM projects, to unlock value and rotate capital. On the other hand, PE investors get to own assets with assured cashfows for the next 12-15 years. It’s a perfect win-win situation for the industry. We expect PNC Infratech, Sadbhav Engg, Dilip Buildcon and Ashoka Buildcon to be the next likely candidates to announce divestments of some HAM assets.



InvITs – a significant success despite bleak optics On 3

rd May 2017, IRB’s InvIT was listed on the exchanges (the first publicly listed

Infrastructure Investment Trust) and received tremendous response from global investors. It managed to raise Rs 59bn for 6 BOT assets and listed at Rs 104/unit. However, since then it has performed poorly, and is currently trading Rs 53/unit. While we will deep-dive into the reasons for the poor performance of IRB’s InvIT later, we would like to highlight that this InvIT marked the beginning of multiple transactions in the space, leading to as many as five more InvIT transactions in the road space. These transactions have raised Rs 281bn – 71% of the total capital raised through MAPE deals in the last five years. Despite the apparently poor share performance of IRB’s InvIT, the instrument has surely been a raging success.

The InvIT model has achieved remarkable success over the last few years, with SIX deals materializing Date Investor Seller Project(s) Amount Stake Portfolio size (Rs mn) Valuation No of








Total

2,81,315

5,80,727 1,19,066

44


Also, currently another private InvIT, consisting of six toll projects owned by Global Infrastructure Partners (GIP) is under progress. Media reports (here) confirm that CDPQ is likely to be the lead investor of this InvIT, which will raise Rs 24-30bn. An important thing to note here is that the assets in this proposed InvIT, were acquired by IDFC PE, from different developers – were then sold to GIP – and are now being sold to another set of investors – making it third round of divestment of the same assets. There cannot be bigger testimony of the vibrancy of the secondary market in BOT segment than this!

InvITs – a GIANT LEAP for the sector We see InvITs as a GIANT LEAP for the infrastructure sector in India. This new mode of offering operational infrastructure assets to investors has the potential to transform the sector’s landscape, and relieve it of its most severe bottleneck – shortage of capital (read our detailed report here). The structure of InvITs as proposed by SEBI is along the lines of various REITs (Real Estate Investment Trusts) listed across the globe. There are over 300 REITs listed in over 14 exchanges across the world that offer investors benefits from the rental yield and price appreciation of a basket of real estate property, without actually owning the property. InvITs offer the same proposition, with the underlying asset being an infrastructure one instead of a real-estate property. As is with REITs, InvITs offer stable cashflows over a long period (25-30 years), their dividend distribution is tax-exempt (making cash yield more attractive), and they minimise the execution risk associated with the development of the asset.

Benefits to stakeholders The InvIT structure is a perfect win-win situation for all stakeholders. Unit holders:

Stable cash flow over a long period

Superior cash flow yield enhanced by tax exemptions

Elimination of execution risk in an infrastructure asset

Assured cash flow with minimum cash distribution floor

Our detailed report on InvITs





Promoter/Developer:

Upfront monetisation of projects with long concession periods

Rotation of capital by utilising the proceeds from ‘selling’ assets to InviTs, for new projects

Better valuation of assets, with a diversified set of investors Government/sector:

Rotation of capital for developers, enabling them to bid for future projects

Diversification of capital deployed from banks

Government (NHAI) can now look to ‘monetise’ its own BOT projects to fund its EPC award pipeline

Government (NHAI) can now look to award more projects on BOT format, reducing its own capital requirement

InvIT regulations – constraints on InvIT and underlying assets

InvIT Assets InvIT

Under construction assets NOT to form over

25% of the portfolio

Minimum 90% of NDCF (Net Distributable Cash flow) to be

distributed as dividends

Operational Assets Gearing to be less than 0.49x

Minimum 3 year tail period

Minimum 1 year of revenue generation

Source: SEBI, PhillipCapital India Research

Incremental incentives by the government Various government bodies (e.g. NHAI) and the regulator (SEBI) provided incremental exemptions to 2014 SEBI regulations to make InvITs more attractive for investors, especially foreign investors looking for robust FCF yield, adjusted for hedging costs.

InvIT regulations – tax treatment of various streams at the hand of various stakeholders Nature of income -> Received by

Interest paid by SPV Dividend on shares of SPV

Capital gains on sale of shares of SPV/sale held by InvIT directly

Other income Capital gains on market transfer of units of InvIT by unit holders /sponsors*

Unit holder InvIT distributing the interest from SPV subject to WHT at 5 % -Non-Residents; 10% for Residents

Exempt Exempt Exempt STCG –15% (held for 36 months or less); LTCG – exempt (held for more than 36 months)

InvIT Exempt Exempt Tax rate applicable depending on period of holding etc.

Tax at 30% NA

SPV (in the form of a company)

Tax break available on interest (subject to conditions), no WHT applicable on interest payment

Exempt as per Recent Amendment

NA NA NA

InvIT tax benefits over a traditional corporate structure ______________Traditional Corporate Structure______________ ______________InvIT Structure______________

SPV SPV

Interest on loan from parent

Dividend distributed Interest on loan from parent

Dividend distributed

Tax benefit DDT @ 17% Tax benefit No DDT

Parent InvIT

Interest income from SPV

Dividend received Interest income from SPV

Dividend received

Taxable @ 30% Tax exempt Tax exempt Tax exempt

Share holder Unit holder

Dividend distributed Income directly distributed

Dividend distributed

DDT @ 17% WHT @ 5/10% No DDT




IRB InvIT – why has it not been a success? Despite all the benefits provided by the MoF and SEBI, and the consistent dividend that IRB InvIT has distributed, IRB InvIT’s unit price has been under constant decline. Listing at Rs 102/unit in May 2017 – it now trades at Rs 53/unit – 48% below its listing price. Over this period, the InvIT has distributed dividend (dividend + income) of Rs 28.3/unit – still taking the total returns to – 28% on the listing price.

IRB InvIT’s price has continuously declined, despite maintaining dividend profile

Source: Company, PhillipCapital India Research

IRB InvIT was formed by transferring six of IRB’s BOT assets into it for a price of Rs 59bn. At 1x P/BV – the deal was considered good for InvIT holders; the initial expectations of a higher P/BV would have left little on the table for the InvIT holders, and would have been beneficial for IRB Infra’s stockholders.

IRB InvIT – constituent projects (initial 6 projects)

Project

Length

(Lane km)

TPC

(Rs mn)

Debt

(Rs mn)

Equity

(Rs mn)

Grant/Share

(Rs mn)

LoA Date CoD Date Concession

Period (yrs)

Residual

Life (yrs)

Toll Revenue

(FY16, Rs mn)

Bharuch-Surat 390 14,700 12,719 1,981 (5,040) Jan 2, 2007 Sep 25, 2009 15 5.3 1,936 Surat-Dahisar 1,434 25,372 17,507 7,865 38% Feb 20, 2009 Feb 20, 2009 12 5.3 6,135 Jaipur - Deoli 585 17,330 9,000 5,270 3,060 Jun 14, 2010 Sep 27, 2013 25 21.0 1,206 Talegaon - Amravati 267 8,880 4,750 1,970 2,160 Sep 3, 2010 Apr 24, 2013 22 20.3 472 Tumkur - Chitradurga 684 11,420 8,310 3,110 (1,404)* Jun 4, 2011 Jun 4, 2011 26 20.7 2,019 MVR 275 3,076 2,234 1,280 22.4% Aug 14, 2006 Aug 6, 2009 20 9.9 749

Total 3,635 80,778 54,520 21,476 12,517


IRB InvIT – dividend and yield profile

Rs mn FY18 FY19 FY20 FY21 FY22 FY23 FY24 ... FY39 FY40 FY41

Dividend - 216 452 1,082 1,614 983 878 ... 6,029 5,910 1,082

Interest Income (from SPVs) 5,363 4,960 4,627 4,397 4,086 3,869 3,812 ... - - 64

Post-tax return on new projects - 73 188 235 482 728 635 ... 3,331 3,568 3,858

Buyback of Units 2,310 2,403 2,369 1,910 1,427 2,019 2,269 ... - - 39,272

Sub-Total 7,673 7,653 7,636 7,625 7,609 7,598 7,596 ... 9,360 9,478 44,276

Less: WHT on Interest payment 268 248 231 220 204 193 191 ... - - 3

Net distribution to Unit Holders 7,405 7,405 7,405 7,405 7,405 7,405 7,405 ... 9,360 9,478 44,273

Yield to Unit holders 8.6% 8.4% 8.5% 9.3% 10.1% 9.1% 8.7% ... 15.8% 16.0% 8.4%

Buyback of Units 3.9% 4.1% 4.0% 3.2% 2.4% 3.4% 3.8% ... 0.0% 0.0% 66.3%

Total Yield 12.5% 12.5% 12.5% 12.5% 12.5% 12.5% 12.5% ... 15.8% 16.0% 74.7%

Enterprise Value 5,924

Buybacks 1.36%

Return to Unit Holders 12.43%

NCDs 1.06%


The InvIT structure had also smartly capitalised the tax exemption on ‘interest income earned from SPVs distributed to the unit holders directly by the InvIT. It replaced the

-

1.0

2.0

3.0

4.0

5.0

50

60

70

80

90

100

May

-17

Jul-

17

Sep

-17

No

v-1

7

Jan

-18

Mar

-18

May

-18

Jul-

18

Sep

-18

No

v-1

8

Jan

-19

Mar

-19

May

-19

Jul-

19

Sep

-19

Dividend Per Unit IRB InvIT Price



external debt on SPVs (Rs 33.5bn) by NCDs of an almost equal proportion (Rs 34bn, @13% coupon) from the InvIT as sub-ordinate debt. This served two benefits:

1) The SPVs receive tax benefit on the high interest rate charged on the NCD 2) The InvIT directly distributes this interest income earned from the SPVs to the

unit holders – which is tax exempt. Overall, the InvIT IRR was sweetened by (1) 1.36% returns from buybacks and (2) 1.06% returns through the InvIT issuing NCDs. Since its listing, IRB InvIT has maintained its ‘promised’ dividend profile – distributing Rs 3/unit as dividend (dividend + income) every quarter for the last 10 quarters (except the last quarter, where the dividend was lowered to Rs 2.5/unit). Despite that, we have seen its unit price fall from Rs 102/unit to Rs 53/unit. We believe there are two primary reasons for that: Drop in traffic/tariff growth expectations Not just IRB InvIT, but almost all asset owners’ BOT assets have seen muted toll collection growth over the last ten quarters, primarily driven by lower traffic growth (due to weak macroeconomic activity) and lower tariff hike (due to low inflation). This has led to concerns over the sustainability of the InvIT’s toll collections, and the expected dividend from it. Poor investor education We believe this to be the primary reason behind the poor performance of the InvIT. The InvIT investors – specially the retail investors – were not apprised about the nature of the instrument they were investing in. The investors, due to lack of proper education, have been disappointed in: 1) No listing gains from the InvIT: Where an instrument such as InvIT is never

invested for listing gains. 2) Lack of growth drivers: An InvIT is supposed to provide stable cashflow yields,

not any significant growth in earnings/cashflow 3) Dividend stripping: Most retail investors believe that the only returns InvIT will

provide, is through dividends, and hence we see a correction almost equal to the dividend distributed after every ex-date.

4) Ill-informed about the terminal scenario: Most retail investors believe that once the lifespan of all the InvIT’s projects is completed, the InvIT will be trading at ZERO, since all its cash would be distributed earlier as dividends. However, IRB InvIT utilizes the NCD route to ensure that it is able to do a buyback of ALL units, at the listing price – making it effectively a bond.

IRB InvIT – the profile resembles a bond, where the investors, at maturity, will get their principal back

Rs mn FY18 FY19 FY20 FY21 FY22 FY23 FY24 ... FY39 FY40 FY41

Dividend - 216 452 1,082 1,614 983 878 ... 6,029 5,910 1,082

Interest Income (from SPVs) 5,363 4,960 4,627 4,397 4,086 3,869 3,812 ... - - 64

Post-tax return on new projects - 73 188 235 482 728 635 ... 3,331 3,568 3,858

Buyback of Units 2,310 2,403 2,369 1,910 1,427 2,019 2,269 ... - - 39,272

Sub-Total 7,673 7,653 7,636 7,625 7,609 7,598 7,596 ... 9,360 9,478 44,276

Less: WHT on Interest payment 268 248 231 220 204 193 191 ... - - 3

Net distribution to Unit Holders 7,405 7,405 7,405 7,405 7,405 7,405 7,405 ... 9,360 9,478 44,273


The above events and reasons leads one to argue that perhaps an InvIT is NOT an instrument for retail investors – or maybe not YET. This led to multiple developers exploring the “private InvIT” option – which meant an InvIT structure whose investment option was limited to few large investors, who were well educated and informed about the nature of the instrument. We have already seen five large transactions in the private InvIT space – L&T (led by CPPB), IRB (by GIC) and others. We believe private InvITs will continue to attract investors into this space – enabling them to benefit from the higher cashflow yields (due to the InvIT structure), and saving them from the price volatility (due to ill-informed retail investors).



NHAI TOT – Another ‘contender’ for MAPE activity NHAI is currently trying to ‘award’ 100 road projects, which are owned and tolled by NHAI, to a set of investors. These ‘investors’ would then own the asset for a specific concession period, and have the right to its cash flows. This TOT (Toll-Operate-Transfer) model that NHAI is contemplating is akin to the InvIT model being proposed for private developers. Both models involve ‘monetisation’ of ‘operational’ BOT projects to investors with an appetite for long-term projects with stable cash flows. Both models will lead to upfront cash accruals, which can be used to fund future projects. We note that over 42% of these NHAI projects are reporting toll collections greater than 10% of the project cost – implying high IRRs. Successful monetisation of these projects by NHAI will not only ease its burden to fund the upcoming pipeline, but will also lend credibility and elicit further interest from global investors in similar instruments, with BOT projects as the underlying asset.

NHAI’s 104 projects proposed to be divested on the TOT model

Source: NHAI



44 of NHAI’s 104 planned projects have toll collections of >10% of project costs S.No Project Length (km) Toll/TPC

S.No Project Length (km) Toll/TPC

1 Kishangarh-Bhilwara 101.0 43%

23 Orai-Bara 66.8 13% 2 Bhilwara-Chittorgarh 82.9 43%

24 Ratanpur-Himatnagar 54.8 13%

3 Kherwara-Ratanpur 40.2 35%

25 Gorhar -Barwa Adda 78.8 13% 4 Ankapalli -Vishakhapatnam 40.7 33%

26 Bommuru-Gondugolanu 107.6 13%

5 Tambaram-Tindivaram (Annuity) 46.5 30%

27 Hapur -Garhmuketeshwar 35.0 13% 6 Udaipur-Kherwara 70.0 28%

28 Budbud-Pulsit 67.8 12%

7 Tambaram-Tindivaram (Annuity) 46.5 25%

29 Fatehpur -Khokharaj 58.0 12% 8 Chittorgarh Bypass 29.6 24%

30 Ghaziabad-Hapur & Hapur Bypass 32.2 11%

9 Rithola-Udaipur (Auctioned) 99.2 23%

31 Aurangabad -Barachatti 60.0 11% 10 Himmatnagar-Chiloda 52.0 21%

32 Chetia-Bhadrak 74.5 11%

11 Garamore -Samakhiyali 52.5 20%

33 Gabbur -Devegiri 64.0 11% 12 Purnea-Dalkhola 62.1 19%

34 Palsit-Dankuni * 63.7 11%

13 Sunakhala -Puintola 57.6 17%

35 Chakeri -Usrania (Thariwan) 81.2 10% 14 Srikakulam -Chilakpalem 48.0 16%

36 Hadadi -Devgiri 80.0 10%

15 Tundla-Makhanpur 50.9 16%

37 Icchapuram-Srikakulam 66.2 10% 16 Visakhapatnam-Champawati 46.3 15%

38 Abu road -Pindwara 31.0 10%

17 Icchapuram-Puintola 57.5 15%

39 Palanpur/ Khemana -Aburoad 45.0 10% 18 Rajamundry-Tuni (Annuity) 84.4 15%

40 Sunakhala -Bhubaneshwar 76.7 10%

19 Jalandhar-Pathankot 59.6 15%

41 Barachatti -Gorahar 80.0 10% 20 Handia-Rajatalab 72.4 15%

42 Bhadrak -Balasore 62.6 10%

21 Nadigama-Icchapuram 63.0 14%

43 Doddasiddanahally -Hadadi 71.0 10% 22 Garhmukteshwar-Moradabad 56.3 13%

44 Gorakhpur-Kasia 41.0 10%


In Feb-2018, NHAI successfully completed the monetization of its first TOT package. A portfolio of nine assets across Andhra Pradesh, Odisha, and Gujarat – the package generates annual toll collection of Rs 5bn. NHAI received tremendous response for the package, with the highest bid at Rs 96.8bn against NHAI’s reserve price of Rs 62.6bn – a whopping 55% premium. The bid led to the belief that NHAI could garner much more than it initially expected from TOT monetization over the next few years – thus paving way for significant upswing in its construction and order award activity.

TOT-1 Package put out for bidding by NHAI Stretch State NH Length Annual toll

km Rs mn

Siddhantham-Gundugolanu AP 5 72.0 379.0 Diwancheruvu-Siddhantham AP 5 49.0 415.0 Annavaram (Tuni)-Diwancheruvu AP 5 71.0 787.0 Ankapalli-Annavaram (Tuni) AP 5 88.5 1,222.0 Ichchapuram-Narasannapeta AP 5 96.7 452.0 Puintola-Ichchapuram AP/ Odisha 5 64.4 389.0 Bamanbore-Garamore Gujarat 8A 71.9 356.0 Garamore-Samakhiali Gujarat 8A 51.5 954.0 Porbandar-Jetpur Gujarat 8B 115.6 180.0

Total

680.6 5,134.0 Source: NHAI, PhillipCapital India Research

Bidding results of TOT-1 package Bidders Bids Premium/Discount (Rs bn) to base price (%) (Rs mn/km)

NHAI’s base price 62.6 91.9 Macquarie Group 96.8 54.7 142.2 Brookfield 75.1 20.0 110.4 IRB-Autostrade 69.3 10.7 101.8 Roadis-NIIF 66.1 5.6 97.1 Source: NHAI, PhillipCapital India Research

But NHAI’s second TOT package drew a muted response; the highest bid it received was 14% discount to the reserve price. NHAI cancelled the bids, intending to re-invite bids for the package later.



TOT-2 Package put out for bidding by NHAI Stretch State NH Length Annual toll

km Rs mn

Chittorgarh-Kota & Chittorgarh Bypass Rajasthan 27 160.5 759.2 Swaroopganj-Pindwara-Udaipur Rajasthan 27 120.0 380.0 Palanpur/Khemana-Abu Road Rajasthan/ Gujarat 27 45.0 555.5 Jetpur Somnath Gujarat 151 102.3 380.2 Dalkhola-Islampur West Bengal 31 52.0 610.1 Purnea-Dalkhola Bihar 31 36.3 324.5 Salsalabari-West Bengal Assam Border West Bengal 31C 26.5 162.4 Islampur-Sonapur-Ghoshpukur West Bengal 31 44.0 461.6

Total

586.6 3,634.0 Source: NHAI, PhillipCapital India Research

Bidding results of TOT-1 package Bidders Bids Premium/Discount (Rs bn) to base price (%) (Rs mn/km)

NHAI’s base price 53.6 - 91.4 Cube Highways 46.1 -14 78.6 Adani Group 36.8 -31.5 62.6 IRB Infra 27.2 -49.3 46.3


Post the mixed response to its TOT packages (one positive, one negative), NHAI is now in the late stages of awarding two more TOT packages in the next few months. The two packages have a reserve price of ~Rs 50bn, and have become highly critical to NHAI’s plan of funding its flagship scheme – Bharatmala – in the light of the inadequate financial support expected from the central govt and its burgeoning debt.

NHAI’s TOT-3 package to be out for bids Projects State Length Annual toll NHAI Value km Rs mn Rs bn

Jhansi-Lalitpur Uttar Pradesh 49.7 Jhansi-Lakhnadon Uttar Pradesh 49.3 Lucknow-Raibareli Uttar Pradesh 70.0 Muzaffarpur Uttar Pradesh 80.0 Hazaribagh-Ranchi incl Ramgarh Bypass Jharkhand 73.8 Madurai-Kanyakumari (four toll plazas) Tamil Nadu 243.1 Total 565.9 3,971.0 50.0


NHAI’s TOT-4 package to be out for bids Projects State Length Annual toll NHAI Value km Rs mn Rs bn

Chennai-Nashri Tamil Nadu 10.9 Jammu Bypass-Udhampur J&K 58.5 Hisar-Dabwali Haryana 57.0 Sangrur bypass-Tapa Punjab 58.7 Patiala bypass-Sangrur Bypass Punjab 60.7 Baran-Shivpuri section Rajasthan 75.3 Reengus-Sikar Rajasthan 43.9 Lakhnadon-Mahgaon Maharashtra 56.9 Pimplegaon-Nashik-Gonde Maharashtra 57.2 Total 479.1 3,107.0 48.0


We believe that NHAI’s TOT could be a significantly strong contender for the MAPE transactions in the BOT space. Coming directly from NHAI, the TOT packages add an incremental layer of comfort to investors’ confidence. For the same return dynamics, investors might just ‘prefer’ NHAI’s TOT packages, in-turn crowding out investment opportunities for the private sector. But given the size of the funds that have evinced interest in the Indian roads BOT space, we do not believe it will be a cause for concern.



BOT model – set to get a NEW life Over FY11-14, NHAI awarded projects primarily on BOT basis (12,767km of the total 14,363km awarded over this four-year period). However, scores of these projects turned economically infeasible due to: 1) Slowdown in the overall economic growth: leading to lower than expected traffic

growth 2) Spiralling interest rates leading to much higher interest expense, and hence

lower cashflow from the projects 3) Delay in execution due to problems in obtaining forest/environmental clearance

and in land acquisition

Decreasing share of BOT projects in awards over the last five years


These problems meant that more than 100 BOT projects were stuck in 2014, with developers either halting construction, or defaulting on their debt servicing. This period also saw the balance sheets of most developers getting stretched, due to higher share of BOT projects awarded over the last four years, eventually rendering them unable to bid for further BOT projects. Pragmatically, the govt decided to shun the BOT model and awarded most of the projects over the next five years on the EPC/HAM model. Over FY14-19, NHAI awarded only 3,304km on BOT out of the total 22,820km awarded.

NHAI, with its stretched financials, needs the BOT model Awarding higher share of EPC/HAM projects has come with its own set of problems for NHAI. Lower share of the BOT model meant that NHAI had to shoulder the majority of the construction expenditure burden by itself. With limited sources of revenue and inadequate budgetary support, NHAI had to resort to borrowings from the capital markets, to fund its highway expansion plan. At the same time, due to the new land acquisition norms, NHAI’s land acquisition cost also increased significantly – not just in absolute terms, but also in cost per acre. As a result, NHAI’s debt increased from Rs 240bn in FY14 to touch Rs 1.8trillion in FY19. While NHAI is not an ‘independent’ ‘company’ and has the GoI backing its debt obligations, there is a healthy limit to which it would want to stretch its balance sheet. Today, 13% of its expenditure is directed towards debt servicing, and with increasing current debt, there is further stress on future cashflows of the awarding body. Hence NHAI needs to find alternatives to fund its expenditure on road construction. It has tried to monetize the toll projects it owns through the TOT model. However, its entire portfolio of TOT projects can, at best, fetch Rs 500-600bn – which is much lower than its annual expenditure.

1,3

89

82

5

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09

64

3

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83

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58

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80

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91

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34

8

20

9

50

0

-

1,000

2,000

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4,000

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FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19

Len

gth

(km

)

EPC BOT Annuity/HAM



NHAI’s debt has jumped sharply in the last four years


NHAI is currently executing its visionary scheme of Bharatmala Pariyojana that involves construction of 83,677km of highways, with an expenditure of Rs 7trillion over the next five years. As per its own financial planning, it estimates Rs 2.3 trillion of budgetary support and Rs 2.5 trillion of incremental borrowing over the period of the execution of this scheme. Both these numbers appear highly ambitious, and are unlikely to be met in the next five years considering the current economic and fiscal situation.

Bharatmala Pariyojana – the mega plan for the highway sector Component Description Total length

identified (km) Length for

Phase I (km) Phase I outlay

(Rs bn)

Economic Corridor Development Lane expansion, de-congestion of existing National Corridors 13100 9,000 1,200 Inter-corridors and Feeder Roads Connection of economically important production &

consumption centres 26200 6,000 800

National Corridor Efficiency Improvement Inter-connection between economic corridors, first mile & last mile connectivity

15500 5,000 1,000

Border & International Connectivity Roads

Connectivity to border areas and boosting trade with neighbouring countries

5300 2,000 250

Coastal & Port Connectivity Roads Connectivity to coastal areas to enable port-led economic development

4100 2,000 200

Expressways Greenfield expressways 1900 800 400

Sub-total (A) 66,100 24,800 3,850

Balance Road works under NHDP 10,000 10,000 1,500

Sub-total (A+B) 76,100 34,800 5,350

Roads under other existing schemes LWE, SARDP-NE, NHIIP, SetuBharatam, Char Dham 48,877 48,877 1,573

Grand Total 1,24,977 83,677 6,923

Source: MoRTH

How Bharatmala will be funded – the ministry’s plan

Rs bn Bharatmala-I Other Schemes Total

CRF earmarked for NH 1,397 974 2,370

GBS –SARDP-NE, EAP, Counterpart Funds, etc. - 600 600

Expected monetization of NH 340 - 340

PBF –Toll Collections of NHAI 460 - 460

Market Borrowings 2,093 - 2,093

Private Investment (PPP) 1,060 - 1,060

Total 5,350 1,573 6,923

Source: MoRTH

The perfect solution to this could be revival of the BOT model. NHAI’s current financing plan of Bharatmala assumes only Rs 1trillion from the private sector – translating into only 8800km of awards on BOT model – 10% of the total length envisaged. A revival of the model could mean NHAI could get much more from the private sector while also being able to award desired projects, without stretching its balance sheet AND without higher budgetary support from the government.

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FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19

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cqu

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co

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Rs

bn

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t (R

s b

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Debt Land acquisition Cost



Perfect environment for the revival of the BOT model While NHAI “needs” the BOT model to be revived, we believe that the current macro (and micro) environment are PERFECT for it springing back to life. Conducive macro environment On the macro front, we see the following reasons for why it could be an opportune time for the NHAI to push the BOT model: 1) Low interest rate; also, expected to be low in near-medium term: In 201, the

higher interest rate regime (10yr yields at 7.8%) led to scores of BOT projects becoming financially unviable. Today, after multiple rate cuts by the RBI, the 10yr yield stands at 6.5% with expectations of further rate cuts by the RBI over the next few months. Even in the medium term, interest rates are not expected to increase significantly from current levels.

2) WPI bottoming out and can only surprise positively: The BOT projects derive their annual tariff hike from the prevalent WPI, which has been significantly low (1-2% vs 5-7% in 2014). This means the BOT projects, if taken up by developers NOW, would be bid after incorporating these rock-bottom tariff hike assumptions. Any surprise (if at all), is expected to be on the higher side only, making the BOT projects incrementally more profitable for the developers.

3) Traffic growth close to bottoming out, can only go up from here: Due to the overall weak macroeconomic conditions, the traffic growth across the country, has been tepid for the last few quarters. From our exclusive database of 30 BOT projects across the country, we deduce an average toll collection growth of 6% over the last five quarters – which translates into an average traffic growth of 2-4%, adjusted for tariff hike (linked to WPI). This means the BOT projects, if taken up by developers NOW, would be bid after incorporating these rock-bottom traffic growth assumptions, which in turn means things can only look up from here over the medium-long term.

Low interest rates to act as a boost for BOT projects; low WPI and traffic growth means valuations are at the bottom

Toll collection growth has been tepid over the last five quarters* Company 1QFY18 2QFY18 3QFY18 4QFY18 1QFY19 2QFY19 3QFY19 4QFY19 1QFY20

IRB 7,252 6,931 7,701 7,559 7,744 7,251 7,908 7,905 8,291 Sadhbav 2,414 2,386 2,617 2,620 2,750 2,686 2,758 2,811 2,812 Ashoka 1,966 1,945 2,080 2,158 2,181 2,148 2,146 2,177 2,145 ITNL 3,348 3,303 3,573 3,618 - - - - -

Total 14,980 14,565 15,971 15,955 12,675 12,085 12,812 12,893 13,249

YoY Growth (%) 9% 9% 16% 11% -15% -17% -20% -19% 5% Like for Like YoY Growth (%) 6% 9% 16% 11% 9% 7% 3% 5% 5%


(*Representative Toll growth, derived for 29 projects, owned by 3 developers)

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Developers balance sheets capable of supporting BOT projects On the micro side, we see the construction sector in a much more stable state than in 2014. Over the last five years, most developers have repaired their balance sheets (by asset divestment, capital raising, etc.) and are now sitting at average leverage levels of 0.3x (1.4x in FY15). This means that developers today have a much higher ability to be able to take and fund BOT projects as compared to the 2011-14 period.

Balance sheets of most road developers have strengthened significantly in the last five years Leverage (x) FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20E

IRB Infra 2.48 2.70 3.11 2.88 3.23 2.65 2.43 2.63 2.11 Ashoka Buildcon 1.69 0.32 0.24 0.42 0.26 0.12 0.08 0.36 0.33 Sadbhav Engg 0.53 0.81 0.90 0.81 0.82 1.07 0.80 0.78 0.43 PNC Infra 0.55 0.45 0.44 0.49 0.01 0.11 0.09 0.18 0.19 Dilip* 1.97 1.60 1.58 2.59 2.36 1.38 1.20 1.00 1.00

Average 1.44 1.18 1.25 1.44 1.34 1.06 0.92 0.99 0.81


Sector reforms ensure much lower probability of projects getting stuck Over FY14-19, the road ministry and NHAI have implemented a series of reforms, which have addressed some of the key problems that had led to projects getting stuck earlier. With faster environmental clearance to awarding the project only after 90% land is available, NHAI has come a long way from the pre-2014 period, where many projects got stuck mid-way through their construction period (hardly 10% into their concession period) due to regulatory issues. These reforms provide a much more stable and conducive platform for developers to bid for BOT projects.

NHAI – Series of reforms to de-bottleneck the award and execution Step Description Provided respite to Proposal extended to

Easier environmental

clearance norms

Delinking FC and EC; EC not required for linear

brownfield stretches

All projects that were stuck due to

clearances

All projects - 24 stuck projects cleared

due to this

Premium rescheduling Back-ending premium payments to align with the

cashflows

Developers facing low traffic on

operational projects

Extended to 20 projects

Relaxation of exit

clause

100% exit allowed for pre-2009 projects also (earlier

only 76% was allowed)

Helps developers to rotate capital All projects awarded pre-2009

One-time fund

infusion

One-time fund infusion by NHAI, to complete the

project - NHAI to recover by first right on toll

Projects facing significant cost

overruns

Extended to 16 projects - negative

response from banks

Extension of

concession period

For project that faced delays due to no fault of

developers

Projects facing significant time

overruns

34 projects with more than 18-month

delay were identified

Hybrid annuity

projects

New projects - mix of annuity and toll - 40% project

cost to be funded by NHAI

Projects that were not feasible due

to low traffic

Tremendous response – Over 6000km of

HAMs awarded so far

Investment Trust Trusts with a portfolio of operational BOT projects to

float a separately listed entity

Developers stuck with large BOT

portfolios - helps rotation of capital

IRB InvIT got listed in 2017, Five more

private InvITs after that


Much superior and active secondary market As has been the highlight of this report, we now have a much more active secondary market for BOT projects than we have ever had. With 28 transactions in last five years and investment of Rs 394bn and projects worth Rs 1.7 trillion ‘sold’ to PE players, the secondary market for BOT projects is thriving like never before. This provides confidence to developers for being able to turn-around projects post construction and rotate capital.

Multiple deals in last 5 years have opened up the secondary market for BOT projects Type Investors Companies Amount No of Portfolio size (Rs mn) Rs mn deals Proj Cost Equity

Portfolio Investment Canada Pension Fund L&T 34,740 2 5,64,979 1,17,792 Asset divestment Cube Highway, IDFC PE NCC, Dilip, HCC, KNR, PNC 41,712 10 1,99,351 33,830 Stake Consolidation Sadbhav, Gammon Gammon, Sadbhav 4,384 5 29,570 7,475 Portfolio Buyout Brookfield, Shrem Group Gammon, Dilip 21,630 2 1,26,144 22,956 Subsidiary listing NA Sadbhav, BRNL, Gayatri 10,250 3 2,46,330 47,148 InvIT/TOTs GIC, Macquarie, ADIA, CPPIB IRB, L&T, Sadbhav, Oriental 2,81,315 6 5,80,727 1,19,066

Total 3,94,031 28 17,47,101 3,48,267




Biggest impediment – current state of the banking system The biggest impediment to the revival of the BOT model is the current state of banking system. No sooner had the banking system shown signs of coming out of NPA cycle that started in 2011, than the second round started – with cases of ILFS, DHFL, etc. surfacing. With the NPA share rising, the system’s ability to lend to infrastructure sector, especially long gestation BOT/HAM projects, has been impacted severely.

Total NPA in the banking system has jumped sharply in last 4 years

Source: RBI, PhillipCapital India Research

Over the last four years, the banking sector’s exposure to infrastructure has only come down – with no bank willing to do any incremental lending to the sector. Banks have been, at best, willing to finance the working capital needs of the construction players – project financing has literally come to a halt. This was visible in the problems faced by developers in achieving financial closure for their HAM projects in 2018-19 – despite the relative attractiveness of the HAM mode .

Lending to Infrastructure, as % of total lending, has declined in last 4 years

Source: RBI, PhillipCapital India Research

Overall, there remains little hope of a significant revival in lending to the infrastructure sector over the next 6-9 months (according to our banking analyst). More importantly, even if the state of the banking system improves in few months, it is highly unlikely that banks would immediately start long-duration project financing. The BOT model has been one of the biggest contributors of NPAs from the infrastructure sector for the banking system, and it is unlikely that banks would be willing to dive into it just yet.

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Infra Exposure % of Tot Non-Food



How can the BOT model be revived? With a favourable macro/micro environment, a thriving secondary market, and NHAI needing it more than ever before – the stage is set for the revival of the BOT model. But, there are still issues that need to be ironed out and steps that ALL stakeholders can take to pave the way for boosting the BOT model in a significant manner. Based on our years of experience, research and consultation with various stakeholders, we have come-up with a list for recommendations for each of the stakeholders (NHAI, developers, lenders) – which can help revive the BOT model, and make it a win-win situation for all stakeholders. Recommendations for NHAI 1) Fixed annual tariff hike instead of WPI-linked

Currently BOT projects are awarded with tariff hikes linked to WPI (hike = 3% + 40%*WPI). This adds one extra variable to the predictability of cashflows of the project – apart from traffic growth and interest rates. Given that WPI has been fairly stable in the range of 2-4% for the last many quarters, NHAI can fix the annual tariff hike for all projects – any number – say 3%. This would not be too heavy a burden on the toll payers, given that it is close to the current and expected WPI range. Most importantly, it will remove one variable from the cashflow forecasts of a BOT project – making them more predictable and the projects more lucrative for developers and investors.

2) Quick resolution of arbitration claims Currently ~Rs 500bn is stuck with NHAI in the form of various arbitrations won by multiple developers across BOT/EPC projects. NHAI is ‘infamous’ for delaying payments for a long time, eventually leaving developers with no choice but to ‘settle’ for a fraction of the arbitration amount. A time-bound resolution process of claims will help enhance the confidence of developer/investors in the sector. NHAI should also refrain from ‘default’ setting of appealing against any judgement (by appellate tribunal, lower court, high court) in a higher court – and should do this more selectively, thus enhancing investor/developer confidence.

3) Termination clause inline with TOT packages Most developers have been demanding that the “Termination Clause” in BOT projects be modelled along the lines of TOT packages. Currently, in case of BOT termination, the settlement amount is decided by NHAI’s TPC – whereas in TOT termination, it is decided by the NPV of the unexpired concession. The latter provides much more safeguards to the developers, incase the project gets terminated for any reason – and has also found favours with the lenders.

4) Multiple traffic reviews during the concession period Currently NHAI reviews actual traffic versus the forecasted traffic only ONCE in the entire concession period (generally 15-20 years). Also, any changes in the concession period, due to lower/higher actual traffic, are implemented after significant delays. Conducting the traffic review twice/thrice during concession period, and ensuring its timely implementation, will attract more developers.

What NHAI can do – to revive BOT model


•Fixed hike instead of WPI linked

Tariff Hike

•Avoid 'default' setting of going to higher courts

Arbitrations •Based on NPV of

remaining life

•Rather than NHAI TPC

Termination clause

•Multiple traffic reviews instead of single

Traffic review



Recommendations for developers 1) Maintain bid discipline, make realistic forecasts

Developers need to maintain discipline in bidding and avoid aggressive bids just to win more projects and shore up their orderbook. Traffic forecasts should be realistic, made after a detailed study of the arterial roads and the proposed competing transport modes such as DFCC, state highways, etc.

2) Avoid gold-plating to lower equity funding Many developers are guilty of ‘gold-plating’ BOT projects (projecting higher construction costs) for lenders – to get higher debt financing – enabling them to lower their equity funding requirement. What they need to realize is that while the gold plating reduces their actual equity funding amount, it also makes the project less attractive to a future PE buyer because of lower equity IRR – in turn hampering them from rotating capital and growing faster.

3) Ensure timely execution and submit genuine claims Developers need to finish construction on time to maintain the desired IRRs. At the same time, they should submit genuine claims to NHAI so as to foster confidence with NHAI, and ensure timely resolutions of arbitrations.

What developers MUST do – to revive BOT model

Recommendations for lenders 1) Learn from history – do not make it an excuse to stop lending

Having burnt their fingers in financing BOT projects in the last cycle, banks and other financial institutions have literally stopped lending to the sector – esp long term project financing. These institutions are the backbone of the infrastructure formation of the country, and should hence find ways to start lending to the sector again. They should learn from the mistake of the last cycle, and improve upon them – rather than making them an excuse to stop lending.

2) Hire external consultants for due diligence – bill them to the developer Banks and financial institutions should conduct their own traffic assessment studies and feasibility analysis. They MUST hire services of professional third-party consultants for it – for EVERY project they are approached by any developer. The consultant and due-diligence costs can be added into the project cost – thereby ensuring no extra hit for any stakeholder.

What lenders NEED to do – to revive BOT model

•Realistic forecasts

•Avoid aggressive bids

Bid discipline

•Only leads to difficulty in asset sale later

Gold plating

•Timely execution

•Genuine claims

Efficiency

•Learn form it

•Don't make it an excuse to NOT lend

History

•Hire third party consultants to do due diligence

•Add the cost to project finance

Due diligence



Valuations and Recommendations Recommendations Infrastructure sector – Recommendation summary

Company

Mkt Cap

CMP Price

% Upside EPC Target

Multiple EPC Valuation BOT/Others

Valuation CMP implied

FY21 PE (EPC) Rs bn Rating Target

IRB Infra 24.6 70 BUY 135 93% 6.0 113 22 2.6 Ashoka Buildcon 26.1 93 BUY 165 77% 8.0 122 43 3.3 Sadbhav Engg 21.6 126 NEUTRAL 130 3% 7.0 66 64 6.6 NCC 33.6 56 BUY 100 79% 10.0 10 - 5.5 KNR 32.2 229 BUY 320 40% 14.0 265 55 9.1 ITD Cementation 9.8 57 SELL 46 -19% 8.0 46 - 9.7 PNC Infra 51.1 199 BUY 300 51% 14.0 262 38 8.6 Ahluwalia 18.3 273 NEUTRAL 300 10% 12.0 300 - 11.0


Valuations Infrastructure sector – Valuation table Company _____P/E_____ ___EV/EBITDA___ _____ROE_____ _____D/E_____ _____P/BV_____

FY20E FY21E FY20E FY21E FY20E FY21E FY20E FY21E FY20E FY21E

IRB Infra 4.7 18.9 6.0 7.7 6.9 1.5 2.1 2.1 0.3 0.3

Ashoka Buildcon 6.8 6.1 5.3 5.0 14.9 14.3 0.3 0.2 1.0 0.9

Sadbhav Engg 12.3 13.4 7.0 6.3 8.0 6.8 0.4 0.4 1.0 0.9

NCC 7.0 5.5 4.1 3.7 9.3 10.9 0.4 0.3 0.7 0.6

KNR 12.9 12.0 7.5 6.3 15.1 14.0 0.2 0.1 1.9 1.7

ITD Cementation 10.2 9.7 4.7 4.4 8.8 8.5 0.6 0.6 0.9 0.8

PNC Infra 10.7 10.6 7.0 6.5 18.6 15.8 0.2 0.2 2.0 1.7

Ahluwalia 14.9 11.0 7.1 5.7 14.3 16.3 0.0 0.0 2.1 1.8

Company ____Revenue____ ____EBITDA____ _____PAT_____ _____EPS_____ _____Debt_____

FY20E FY21E FY20E FY21E FY20E FY21E FY20E FY21E FY20E FY21E

IRB Infra 74,147 75,766 28,377 24,077 5,233 1,299 14.9 3.7 1,60,576 1,75,786

Ashoka Buildcon 45,944 52,835 6,088 6,604 3,849 4,265 13.7 15.2 6,683 7,283

Sadbhav Engg 36,025 40,348 4,323 4,640 1,764 1,957 10.3 9.4 9,373 9,373

NCC 1,02,678 1,18,080 12,321 13,874 4,776 6,155 8.0 10.2 19,033 19,033

KNR 25,647 32,059 4,616 5,290 2,503 2,691 17.8 19.1 3,641 2,641

ITD Cementation 30,044 34,551 3,130 3,455 964 1,005 5.6 5.9 6,323 6,823

PNC Infra 49,096 60,002 7,815 8,550 4,793 4,807 18.7 18.7 5,247 5,747

Ahluwalia 18,398 22,078 2,254 2,760 1,225 1,665 18.3 24.9 309 309

Company Orderbook* Book- Revenue growth EBITDA Margin Earnings Growth ____WC Days___

Rs bn to-Bill* FY20E FY21E FY20E FY21E FY20E FY21E FY20E FY21E

IRB Infra 66 1.2 11% 2% 38% 32% -38% -75% - -

Ashoka Buildcon 97 2.4 20% 15% 13% 13% 21% 11% 95 91

Sadbhav Engg 79 2.4 1% 12% 12% 12% -6% 11% 223 191

NCC 222 2.1 -15% 15% 12% 12% -15% 29% 165 159

KNR 67 3.1 20% 25% 18% 17% -5% 7% 77 84

ITD Cementation 131 4.9 -5% 15% 10% 10% 16% 4% 107 109

PNC Infra 119 2.8 59% 22% 16% 14% 48% 0% 125 122

Ahluwalia 72 4.4 5% 20% 12% 13% 4% 36% 128 132

Source: PhillipCapital India Research (*Adjusted for New/L1/Stuck projects)



Appendix The appendix section of this report contains the project details of the 195 BOT and 70 HAM road projects in India spread over 18,000km, entailing investment of Rs 2trillion. These projects are owned by 21 developers, which include diversified asset owners, BOT road players, EPC companies, and private road developers. Project details for each of the projects include:

Project specification: o Length (km) o Type (Toll/Annuity) o Lanes (4/6/8) o Stake (%) o Commissioning date (date) o Concession Period (yrs)

Financial structure: o Project Cost (Rs mn) o Debt (Rs mn) o Equity (Rs mn) o Grant/Premium (Rs mn)

Status update: o FY18 Toll Collection (Rs mn)

We believe this section will be extremely helpful in analysing the financial viability, valuation and status of the BOT projects and would serve as a useful compendium for the sector.

Available on request, in hard copy format



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IRB Infrastructure (IRB IN)

All set to build its “next” portfolio of assets

INDIA | INFRASTRUCTURE | Company Update

5 December 2019

In July-19, IRB announced the introduction of GIC into 9 of its BOT assets, as a 49% equity partner. With that deal, in one fell swoop, it pacified all the concerns related to the quality of its BOT portfolio. With an earlier divestment of 7 projects into IRB InvIT, IRB has now ‘sold’ 16 of its BOT projects, and is left with only 3 projects in its portfolio. Its balance sheet has significantly strengthened as a result of these transactions, and the company now has a war-chest to start building its “next” portfolio of assets. The only concerns that still stay are of an inferior orderbook, which we expect will be pacified as soon as NHAI orders start picking up. Inexpensive valuations also act as an icing on the cake. Maintain BUY. Industry leader has acted like one and shown the way forward With the listing of the IRB InvIT (the first InvIT in India in May-17) IRB, an industry leader, paved the way for the BOT asset divestment juggernaut to roll. After that transaction, five more InvIT deals have taken place in the sector, raising ~Rs 300bn for industry participants. While we continue to believe that IRB InvIT is paying the price of being the first off the block coupled with poor investor education, its management can very well pat its own back for helping the industry discover its third source of capital – InvITs. InvIT, as we had said, was a small step for IRB, but a giant leap for the sector (read our InvIT report here) InvIT listing and GIC deal transforms the business – boosts balance sheet In May-2017, IRB hived off seven of its BOT projects into the ‘IRB InvIT’, accruing gross cash of Rs 22bn. This led to gross debt reduction of Rs 43bn, reducing leverage to 2.4x (FY18) from 3.2x (FY16) and providing it with growth capital to invest in future projects.

In July-19, IRB announced induction of GIC (Singapore) as 49% equity partner in a private InvIT, comprising 9 of its BOT projects. GIC is to invest Rs 30bn upfront (which will be used to repay debt for these 9 projects) and will further invest Rs 14bn (IRB will match that amount) as pending equity into these projects. The deal achieves the following: (1) reduces IRB’s equity requirement by Rs 14bn; (2) enhances its overall debt profile by a reduction of Rs 30bn in consolidated debt, and (3) makes most of the 9 projects FCF positive.

After these two deals and the decommissioning of Mumbai-Pune in Aug-19, IRB now has a BOT portfolio of only 3 BOT projects (2 of which will decommission over the next three years). With surplus cash from the InvIT deal and reduced equity requirement due to the GIC deal, IRB is now ready to start building its “next” round of asset portfolio. With preliminary discussions of developers with NHAI suggesting that it is considering reviving the BOT model, IRB stands to gain the most based on its ability to work on BOT/HAM/TOT projects. Weak orderbook is a near term concern

IRB’s current orderbook stands at Rs 114bn (2.2x book-to-sales). However, it also includes Rs 18bn O&M work on GIC InvIT projects, and 2 HAM projects in TN (~Rs 30bn), which have high probability of getting cancelled due to land acquisition issues faced by NHAI. Adjusting for them, the orderbook stands at Rs 66bn only (at an extremely weak 1.3x book-to-sales) providing limited growth visibility for the EPC business. This remains one of the near-term concerns for the company, which we believe should be pacified over the next two quarters, as NHAI’s order award activity picks up. Outlook and valuation IRB’s EPC business is currently trading at 3x FY20 P/E (Adjusted for the BOT value) – a significant discount to peers. We continue to value the 9 BOT projects at a 50% discount to the GIC deal valuation, and HAM at 0.7x P/BV. We value the EPC business at 6x FY21 PE (lowest in our coverage universe) on lower growth visibility due to weak orderbook. Valuations remain highly attractive. We maintain BUY with a target of Rs 135.

BUY (Maintain) CMP RS 70 TARGET RS 135 (+93%)

SEBI CATEGORY: SMALL CAP

COMPANY DATA

O/S SHARES (MN) : 351

MARKET CAP (RSBN) : 25

MARKET CAP (USDBN) : 0.3

52 - WK HI/LO (RS) : 169 / 56

LIQUIDITY 3M (USDMN) : 1.6

PAR VALUE (RS) : 10

SHARE HOLDING PATTERN, %

Sep 19 Jun 19 Mar 19

PROMOTERS : 57.5 57.5 57.5

FII / NRI : 21.5 21.2 22.8

FI / MF : 11.1 11.4 12.0

NON PRO : 1.8 2.1 1.6

PUBLIC & OTHERS : 8.0 7.8 6.1

PRICE PERFORMANCE, %

1MTH 3MTH 1YR

ABS -10.7 3.1 -53.0

REL TO BSE -12.1 -8.2 -66.0

PRICE VS. SENSEX

Source: Phillip Capital India Research

KEY FINANCIALS

Rs mn FY19 FY20E FY21E

Net Sales 67,070 74,147 75,766

EBIDTA 29,373 28,377 24,077

Net Profit 8,500 5,233 1,299

EPS, Rs 24.2 14.9 3.7

PER, x 2.9 4.7 18.9

EV/EBIDTA, x 6.0 6.0 7.7

P/BV, x 0.4 0.3 0.3

ROE, % 13.5 6.9 1.5

Debt/Equity (x) 2.6 2.1 2.1

Source: PhillipCapital India Research Est.

0

30

60

90

120

150

180

Apr-16 Apr-17 Apr-18 Apr-19

IRB Infra (LHS) BSE Sensex



IRB INFRASTRUCTURE COMPANY UPDATE

Contours of the GIC deal GIC Deal - 9 projects

Without GIC Rs mn In future Rs mn

Total Equity to be invested 60,000 Equity required by IRB 14,000

Final total debt on projects 1,65,000 Equity required by GIC 14,000

Total EV 2,25,000

Total Investment by GIC 44,000

Equity already invested 32,000 Total Investment by IRB 46,000

Equity to be invested 28,000

Finally

GIC Enters

Debt on all projects 1,35,000

Investment for 49% stake 30,000 Equity in all projects 90,000

Now total equity invested 62,000 Total EV 2,25,000

P/BV 0.98 Source: PhillipCapital India Research

IRB Infra’s transformation by the two InvIT deals


EPC order book provides weak revenue visibility … … as ~ 1/3rd

of the orderbook is yet to start execution


132 122 111 109 114 66

3.5

2.9

2.3 2.2 2.2

1.2

-

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

-

20

40

60

80

100

120

140

2Q

FY1

9

3Q

FY1

9

4Q

FY1

9

1Q

FY2

0

2Q

FY2

0

Excl

Stu

ck

Bo

ok

-to

- s

ales

(x)

Ord

erb

oo

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Orderbook (Rs bn) Book-to-Sales (x) (rhs)

Ongoing BOT/HAM,

58% O&M of InvIT projects, 15%

Stuck HAMs, 26%



Gross toll collection: Project-wise breakup

Rs mn 2QFY19 3QFY19 4QFY19 1QFY20 2QFY20 YoY QoQ

Mumbai - Pune 2,148 2,372 2,354 2,470 939 -56% -62% Vadodara Ahmedabad 982 1,126 1,144 1,135 1,098 12% -3% Agra Etawah 204 231 213 206 191 -6% -7% Other Projects 190 188 197 410 211 11% -49% Kaithal Rajasthan 189 217 224 240 228 21% -5% Solapur Yedeshi 169 167 179 181 150 -11% -17% Yedeshi Aurangabad - - 49 288 253 - -12% 3 Rajasthan Projects 1,199 1,166 1,142 1,066 994 -17% -7% Pune-Solapur / Hapur-Moradabad 58 63 47 132 294 - -

Total 5,139 5,530 5,549 6,128 4,358 -15% -29%

Like for like comparison 2,933 3,095 3,099 3,238 2,872 -2% -11%


SOTP valuation

DCF Valuation Project Cost

(Rs mn)

Length

(kms)

Equity Value

(Rs mn)

Per share

(Rs)

Valuation Methodology

Current BOT/HAM portfolio

3 projects ending by FY21 16,223 140 870 2 DCF @13% CoE Vadodara - Ahmedabad 48,800 196 (20,258) (58) DCF @13% CoE 3 HAM Projects 55,650 119 4,690 13 0.7x P/BV

Total Value to IRB 1,20,673 454 (14,698) (42)

Portfolio with GIC as partner

9 projects 2,25,000 1,200 45,000 128 1x P/BV GIC deal valuation Holding company discount 50% 50% discount

Final Value to IRB 22,500 64

E&C Business

FY21E PAT 6,555 Assumed P/E 6.0 6x FY21 P/E

Total EPC Value of IRB 39,332 112

Total IRB Equity Value 47,134 135


Key assumptions for our estimates GIC deal

We have incorporated the deal parameters into our SoTP and consolidated financials – assuming lower equity commitment from IRB

EPC division

18%/15% topline growth in FY20/21

Margins gradually coming down to 20%, due to execution on HAM projects BOT division

Mumbai Pune going out of portfolio in Aug-19 leads to FY18/19/20/21 o Revenue estimates of Rs9.0bn / Rs9.2bn / Rs3.4bn / Rs0mn o PAT estimates of Rs5.2bn / Rs4.2bn / Rs1.9bn / Rs0mn

FY21 will also have the 3 Rajasthan projects commencing 100% toll collections – leading to starting of premium payment and interest/depreciation – leading to net incremental PAT impact of -Rs5bn yoy.

Break-up of PC estimates

Segmental Break-up (Rs mn) FY18 FY19 FY20E FY21E

EPC Segment

Revenue 39,734 47,098 53,095 60,260

EBITDA 12,544 11,977 11,150 12,052

EBITDA Margins 32% 25% 21% 20%

PAT 6,932 5,384 6,066 6,555

BOT Segment Revenue 18,894 21,929 21,052 15,506

EBITDA 15,937 19,352 17,227 12,025

EBITDA Margins 84% 88% 82% 78%

PAT 2,264 3,116 (2) (5,992)

Source: PhillipCapital India Research Estimates



Financials (Consolidated)

Income Statement Y/E Mar, Rs mn FY18 FY19 FY20E FY21E

Net sales 56,941 67,070 74,147 75,766

Growth, % -3 18 11 2

Total income 56,941 67,070 74,147 75,766

Raw material expenses -23,966 -31,200 -40,215 -46,012

Employee expenses -2,915 -2,862 -3,259 -3,330

Other Operating expenses -3,267 -3,636 -2,297 -2,347

EBITDA (Core) 26,794 29,373 28,377 24,077

Growth, % (12.1) 9.6 (3.4) (15.2)

Margin, % 47.1 43.8 38.3 31.8

Depreciation -5,440 -5,395 -6,078 -7,575

EBIT 21,353 23,978 22,299 16,502

Growth, % (2.7) 12.3 (7.0) (26.0)

Margin, % 37.5 35.8 30.1 21.8

Interest paid -9,667 -11,201 -15,577 -16,629

Other Non-Operating Income 1,267 0 0 0

Pre-tax profit 14,640 14,733 8,351 1,404

Tax provided -5,444 -6,234 -2,287 -841

Profit after tax 9,197 8,500 6,064 563

Others (Minorities, Associates) 0 0 -832 736

Net Profit 9,197 8,500 5,233 1,299

Growth, % 28.5 (7.6) (38.4) (75.2)

Unadj. shares (m) 351 351 351 351

Wtd avg shares (m) 351 351 351 351

Balance Sheet Y/E Mar, Rs mn FY18 FY19 FY20E FY21E

Cash & bank 12,678 15,603 14,656 13,874

Debtors 1,326 1,135 1,016 1,038

Inventory 4,873 4,425 5,485 5,605

Loans & advances 2,267 3,418 4,063 4,152

Other current assets 2,892 4,855 4,855 4,855

Total current assets 24,036 29,436 30,074 29,523

Investments 9,455 6,454 6,454 6,454

Gross fixed assets 3,71,950 3,76,841 3,77,341 3,77,841

Less: Depreciation -4,757 -9,522 -15,599 -23,175

Add: Capital WIP 0 78 47,992 81,959

Net fixed assets 3,67,193 3,67,398 4,09,733 4,36,626

Total assets 4,04,032 4,04,961 4,47,935 4,74,276

Current liabilities 52,897 41,100 40,649 41,602

Non current liabilities 1,38,399 1,66,318 1,60,899 1,76,109

Other Non-current liabilities 1,55,811 1,34,392 1,33,649 1,32,588

Total liabilities 3,47,107 3,41,809 3,35,198 3,50,299

Paid-up capital 3,515 3,515 3,515 3,515

Reserves & surplus 53,411 59,637 72,470 81,289

Shareholders’ equity 56,925 63,152 1,12,737 1,23,978

Total equity & liabilities 4,04,032 4,04,961 4,47,935 4,74,276

Source: Company, PhillipCapital India Research Estimates

Cash Flow Y/E Mar, Rs mn FY18 FY19 FY20E FY21E

Pre-tax profit 14,640 14,733 8,351 1,404

Depreciation 5,440 5,395 6,078 7,575

Chg in working capital 59,242 -35,691 -2,778 -339

Total tax paid -4,794 -4,379 -2,287 -841

Cash flow from operating activities 74,529 -19,942 9,364 7,799

Capital expenditure -60,692 -5,600 -48,414 -34,468

Chg in investments -7,939 3,001 0 0

Cash flow from investing activities -68,631 -2,599 -48,414 -34,468

Free cash flow 5,898 -22,541 -39,050 -26,669

Equity raised/(repaid) -15 -1,214 9,156 9,076

Debt raised/(repaid) -1,309 27,739 -5,419 15,210

Dividend (incl. tax) -1,555 -1,555 -1,555 -1,555

Other financing activities -3,417 496 0 0

Cash flow from financing activities -6,296 25,465 38,102 25,887

Net chg in cash -398 2,925 -947 -781

*Equity raised for FY20-21 represents the grant component of BOT projects

Valuation Ratios

FY18 FY19 FY20E FY21E

Per Share data

EPS (INR) 26.2 24.2 14.9 3.7

Growth, % 28.5 (7.6) (38.4) (75.2)

Book NAV/share (INR) 162.0 179.7 216.2 241.3

FDEPS (INR) 26.2 24.2 14.9 3.7

CEPS (INR) 41.6 39.5 32.2 25.2

CFPS (INR) 203.7 (62.3) 22.0 17.8

DPS (INR) 3.8 3.8 3.8 3.8

Return ratios

Return on assets (%) 3.5 3.8 3.6 2.2

Return on equity (%) 16.2 13.5 6.9 1.5

Return on capital employed (%) 3.8 4.3 4.0 1.5

Turnover ratios

Asset turnover (x) 0.3 0.4 0.3 0.3

Sales/Total assets (x) 0.1 0.2 0.2 0.2

Sales/Net FA (x) 0.2 0.2 0.2 0.2

Working capital/Sales (x) (0.7) (0.4) (0.3) (0.3)

Receivable days 8.5 6.2 5.0 5.0

Inventory days 31.2 24.1 27.0 27.0

Payable days 631.4 389.5 317.2 287.7

Working capital days (266.3) (148.4) (124.2) (125.0)

Liquidity ratios

Current ratio (x) 0.5 0.7 0.7 0.7

Quick ratio (x) 0.4 0.6 0.6 0.6

Interest cover (x) 2.2 2.1 1.4 1.0

Dividend cover (x) 6.9 6.4 3.9 1.0

Total debt/Equity (x) 2.4 2.6 2.1 2.1

Net debt/Equity (x) 2.2 2.4 1.9 1.9

Valuation

PER (x) 2.7 2.9 4.7 18.9

Price/Book (x) 0.4 0.4 0.3 0.3

EV/Net sales (x) 2.6 2.6 2.3 2.5

EV/EBITDA (x) 5.6 6.0 6.0 7.7

EV/EBIT (x) 7.0 7.3 7.6 11.3



PNC Infratech Ltd (PNCL IN)

THE growth story of this cycle …

INDIA | Infrastructure | Company Update

5 December 2019

PNC Infratech is most likely to be the growth story of this cycle. It has a strong balance sheet (leverage of 0.2x), robust orderbook of Rs 119bn (2.8x book-to-sales), and all of its HAM projects are under execution, having achieved FC and AD. The company continues to win road projects from NHAI as well as state road departments. Its BOT portfolio is fully operational and self-sustaining, while its HAM portfolio is well funded through internal accruals and recent asset sale / arbitration win. This places it on a perfect platform to launch itself into the next orbit over the next few years. We expect it to be one of the small local players that successfully transitions into a pan-India player, delivering superior returns along the way. It is our TOP PICK in the infra space.

Strong orderbook to drive growth PNC has a robust orderbook of Rs 119bn at 2.8x book-to-sales, including L1 of Rs 20bn. It had a phenomenal run in FY19, accruing orders of ~Rs 80bn, from NHAI as well as large orders from state governments (UP, Maharashtra). While its order book has a high share of HAM projects (reduced considerably though after it won sections of the Purvanchal and Mumbai-Nagpur expressways), it is one of the few developers with all six of its HAM projects under construction (one recently won HAM awaiting AD). Overall, this ensures that the company doesn’t need to be aggressive in bidding for new projects, having secured enough orders to achieve +20% growth over the next three years.

Strong execution of the last six quarters to continue PNC reported super strong performance in FY19, delivering a whopping 84%/33% topline/earnings growth. The results for H1FY20 have also been strong with 93% yoy growth in topline. We expect strong 55% topline growth in FY20 – followed by moderation, but still industry leading growth in FY21 and beyond.

Fully funded and operational BOT portfolio can provide unexpected benefits PNC has a fully funded and operational BOT portfolio of six projects; capex Rs 24bn, equity Rs 4bn. The projects are reporting decent traffic growth, and do not require any parent support to fulfil its DSCR requirements. Concurrently, its HAM portfolio (capex Rs 90bn; equity Rs 8bn) is continuously growing, adding to the stock’s overall SoTP valuation. While the company is not desperate to sell either its BOT/HAM portfolios, any possible MAPE transaction in these assets could unlock significant value for shareholders while providing growth capital for the company.

One of the few players we expect to cross the ‘chasm’ As highlighted in our earlier reports, construction space is highly fragmented, with very few companies having been able to cross the ‘chasm’ of Rs 50-60bn topline. Multiple companies (like Simplex, HCC, Sadbhav) have been unable to cross this for many years; only NCC and Dilip have managed to do this in the last few years. We attribute this to a mix of being in a comfort zone (segment, geography) and lack of management bandwidth. PNC too has been hitherto primarily a small north-India based road developer with 90% of orderbook in UP/Bihar/MP and 100% in roads. Over the last two years it has expanded its business to new geographies, which will translate into requirements of better equipment and WC management and will test its management bandwidth. We believe PNC to be one of the companies, which is able to cross this ‘chasm’ and graduate to being one of the leading players in the industry.

Outlook and valuation PNC has been a relative outperformer in the infra space (YTD +31%) and is currently trading at 8.5x FY21 P/E (adjusting for BOT/HAM value) – slight premium to its peers. We believe the stock deserves the high multiple with its strong orderbook, huge opportunity, and robust balance sheet. We continue to value the EPC business at 14x FY21 PE and BOT/HAM portfolio at 1.0x/0.7x P-BV. Our price target of Rs 300. We maintain BUY.



COMPANY DATA




52 - WK HI/LO (RS) : 219 / 125


PAR VALUE (RS) : 2



PROMOTERS : 56.1 56.1 56.1

FII / NRI : 6.9 7.1 6.9

FI / MF : 22.4 21.3 21.4

NON PRO : 0.6 0.5 13.0

PUBLIC & OTHERS : 14.0 15.0 2.7


1MTH 3MTH 1YR

ABS 16.6 13.7 44.2

REL TO BSE 15.2 2.5 31.1

PRICE VS. SENSEX

KEY FINANCIALS


Net Sales 30,969 49,096 60,002

EBIDTA 4,573 7,815 8,550

Net Profit 3,249 4,793 4,807

EPS, Rs 12.7 18.7 18.7

PER, x 15.7 10.7 10.6

EV/EBIDTA, x 11.3 7.0 6.5

PBV, x 2.4 2.0 1.7

ROE, % 16.6 20.4 17.1

Debt/Equity (%) 0.2 0.2 0.2


70

100

130

160

190

220


PNC Infra BSE Sensex


PNC INFRATECH LTD COMPANY UPDATE

A robust orderbook including the L1 projects ... .. diversified across HAM and EPC projects


Execution picked up in FY19… ... while margins have remained stable


Leverage is expected to remain stable ... .... WC cycle too has remained stable (excl. debtor days)


66 61 80 122 110 99 119

3.0

2.4

2.9

3.9

3.0

2.3

2.8

-

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

-

20

40

60

80

100

120

140

1Q

FY1

9

2Q

FY1

9

3Q

FY1

9

4Q

FY1

9

1Q

FY2

0

2Q

FY2

0

Incl

N

ew/L

1

Bo

ok

to S

ales

(x)

Ord

er b

oo

k (R

s. B

n)


HAM/EPC - L1, 17%

HAM UC, 34%

EPC UC, 48%

Non Roads, 1%

16 20 17 19 31 49 60

35% 29%

-16%

10%

67%

59%

22%

-30%

-20%

-10%

0%

10%

20%

30%

40%

50%

60%

70%

80%

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

FY15 FY16 FY17 FY18 FY19 FY20E FY21E

% Y

oY

Gro

wth

- R

HS

Rev

enu

e (R

s. B

n)

Revenue % YoY Growth

2,1

66

2,6

60

2,2

10

3,1

88

4,5

73

7,8

15

8,5

50

14%

13% 13%

17%

15% 16%

14%

0%

2%

4%

6%

8%

10%

12%

14%

16%

18%

20%

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000


OP

M (

%)

- R

HS

EBIT

DA

(Rs

mn

)

EBITDA OPM (%)

3,5

30

11

9

1,6

91

1,6

97

3,7

47

5,2

47

5,7

47

0.5

0.0

0.1 0.1

0.2 0.2 0.2

(0.1)

-

0.1

0.2

0.3

0.4

0.5

0.6

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000


Leve

rage

(x)

- R

HS

Stan

dal

on

e d

ebt

(Rs.

mn

)

Standalone debt Leverage

86 68

136 136

73 75 75

52 43

33 35 48 45 40

101 111

190 180

116 125 122

-

50

100

150

200

250


Day

s

Debtor Inventory Working Capital



PNC’s BOT portfolio – fully funded, operational and self-sufficient portfolio Project Type Stake Length TPC Debt Grant Equity COD Period Authority

% km (Rs mn) (Rs mn) (Rs mn) (Rs mn) years

Raibareli Jaunpur Annuity 100.0 166 8,374 6,978 - 1,396 Apr-16 17 NHAI

Bareilly Almora Toll 100.0 54 6,046 4,600 700 746 Oct-15 25 UPSHA

Kanpur Ayodhya OMT 100.0 217 - - (1,557) - Aug-13 9 NHAI

Kanpur Kabrai Toll 100.0 123 4,590 2,685 1,230 675 May-15 12 NHAI

Gwalior Bhind Toll 100.0 108 3,403 2,350 270 783 Mar-13 14 MPRDC

Narela Ind area Mix 100.0 33 1,750 1,400 - 350 Oct-13 15 DSIIDC

Total

701 24,163 18,013

3,950


PNC’s HAM portfolio – all projects (excl Chalakere) are now under construction Project Length TPC Debt Equity Grant Period AD

km (Rs mn) (Rs mn) (Rs mn) (Rs mn) years

Dausa Lalsot 83 8,200 3,710 660 3,830 17.5 May-17

Chitradurga Devnagree 73 13,380 6,060 1,070 6,250 17.5 Dec-17

Jhansi Khajuraho - I 76 13,420 6,040 1,280 6,100 17.5 May-18

Jhansi Khajuraho - II 85 12,620 5,900 1,040 5,680 17.5 Feb-18

Chakeri Allahabad 145 20,180 8,730 1,920 9,530 17.5 Jan-19

Aligarh Kanpur 45 11,040 5,000 1,250 4,790 17.5 Feb-19

Chalakere Hariyar 56 10,130 4,500 1,100 4,530 17.0 Awaited

Total 564 88,970 39,940 8,320 40,710

Source: Company, PhillipCapital India Research (*FC awaited)

Progress on key orders in the orderbook Projects (Rs mn) 4QFY18 1QFY19 2QFY19 3QFY19 4QFY19 1QFY20 2QFY20

Bhojpur-Buxar 4,770 4,740 4,740 4,670 4,240 3,810 3,660

Koilwar-Bhojpur 4,250 4,070 4,070 3,930 3,720 3,370 3,010

Nagina Kashipur 10,940 10,000 9,490 8,660 8,200 7,500 7,040

Varanasi Gorakhpur 6,540 5,740 5,380 4,450 3,770 3,370 3,060

Aligarh Moradabad 2,615 1,480 1,100 270 80 - -

Dausa Laslot 3,500 2,950 2,400 2,250 1,740 1,430 900

Jhansi-Khajuraho - I 11,620 10,900 10,310 9,540 8,250 7,100 6,300

Jhansi-Khajuraho - II 10,720 9,850 9,390 8,360 6,780 5,810 5,160

Chitradurga Davanagere 11,570 10,730 9,300 8,180 7,680 6,800 5,900

Chakeri Allahabad - - - - 18,660 16,650 14,690

Aligarh Kanpur - - - - 10,330 9,150 7,810

Chalakere Hariyar - - - - - - -

Purvanchal Expway - - - 25,200 23,970 21,720 20,620

Mumbai Nagpur - - - - 19,990 19,090 17,430

Total 66,525 60,460 56,180 75,510 1,17,410 1,05,800 95,580


SoTP valuation

Business division FY21 EPS Equity Investment Multiple Valuation Per share

Rs Rs mn Rs mn Rs

EPC 18.7

14.0 67,293 262

BOT Road Projects

3,950 1.0 3,950 15

HAM Projects

8,320 0.7 5,824 23

Total

77,067 300




Financials (Standalone)


Net sales 18,566 30,969 49,096 60,002

Growth, % 10 67 59 22

Total income 18,566 30,969 49,096 60,002



EBITDA (Core) 3,188 4,573 7,815 8,550

Growth, % 44.3 43.4 70.9 9.4

Margin, % 17.2 14.8 15.9 14.3

Depreciation -772 -922 -1,216 -1,378

EBIT 2,416 3,651 6,599 7,172

Growth, % 44.1 51.1 80.8 8.7

Margin, % 13.0 11.8 13.4 12.0

Interest paid -307 -641 -989 -1,209

Other Non-Operating Income 230 430 425 446

Pre-tax profit 2,339 3,440 6,390 6,409

Tax provided 171 -191 -1,598 -1,602

Profit after tax 2,510 3,249 4,793 4,807

Net Profit 2,510 3,249 4,793 4,807

Growth, % 19.7 29.4 47.5 0.3

Net Profit (adjusted) 2,510 3,249 4,793 4,807

Unadj. shares (m) 257 257 257 257

Wtd avg shares (m) 257 257 257 257

Orderbook Y/E Mar, Rs mn FY18 FY19 FY20E FY21E

Orderbook 73,180 1,22,100 1,43,004 1,58,002

Growth YoY (%) 27% 67% 17% 10%

Book-to-Sales (x) 3.9 3.9 2.9 2.6

Order Inflow 34,236 79,889 70,000 75,000


Cash & bank 1,473 3,094 1,337 1,163

Debtors 6,900 6,154 10,088 12,329

Inventory 1,758 4,036 6,053 6,576

Loans & advances 4,128 6,608 10,088 12,329


Investments 4,948 5,730 6,358 8,858

Gross fixed assets 5,717 8,621 10,121 11,121


Add: Capital WIP 127 82 82 82

Net fixed assets 4,175 6,217 6,501 6,123

Total assets 27,864 37,156 45,743 52,695


Total current liabilities 8,100 12,256 14,701 16,496

Non-current liabilities 1,697 3,747 5,247 5,747

Total liabilities 9,797 16,004 19,948 22,243

Paid-up capital 513 513 513 513


Shareholders’ equity 18,067 21,152 25,795 30,451

Total equity & liabilities 27,864 37,156 45,743 52,695



Pre-tax profit 2,339 3,440 6,390 6,409

Depreciation 772 922 1,216 1,378

Chg in working capital -345 -705 -6,987 -3,209

Total tax paid 173 -176 -1,598 -1,602

Cash flow from operating activities 2,940 3,481 -979 2,976


Chg in investments -272 -782 -628 -2,500


Free cash flow 1,277 -265 -3,107 -524

Equity raised/(repaid) 0 0 0 0

Debt raised/(repaid) 6 2,050 1,500 500

Dividend (incl. tax) -150 -150 -150 -150

Cash flow from financing activities -159 1,886 1,350 350

Net chg in cash 1,118 1,621 -1,757 -174

Valuation Ratios


Per Share data

EPS (INR) 9.8 12.7 18.7 18.7

Growth, % 19.7 29.4 47.5 0.3


FDEPS (INR) 9.8 12.7 18.7 18.7

CEPS (INR) 12.8 16.3 23.4 24.1

CFPS (INR) 10.6 11.9 (6.9) 9.9

Return ratios

Return on assets (%) 10.4 11.2 13.0 11.2

Return on equity (%) 14.9 16.6 20.4 17.1


Turnover ratios



Sales/Net FA (x) 4.8 6.0 7.7 9.5

Working capital/Sales (x) 0.5 0.3 0.3 0.3

Receivable days 135.7 72.5 75.0 75.0

Inventory days 34.6 47.6 45.0 40.0

Payable days 188.1 167.9 128.9 116.2

Working capital days 179.8 116.1 125.2 122.0

Liquidity ratios

Current ratio (x) 2.3 2.1 2.2 2.3

Quick ratio (x) 2.1 1.7 1.8 1.9




Valuation

PER (x) 20.3 15.7 10.7 10.6

PEG (x) - y-o-y growth 1.0 0.5 0.2 36.8

Price/Book (x) 2.8 2.4 2.0 1.7

EV/Net sales (x) 2.8 1.7 1.1 0.9

EV/EBITDA (x) 16.1 11.3 7.0 6.5

EV/EBIT (x) 21.2 14.2 8.3 7.8



Ashoka Buildcon (ASBL IN)

BOT deal to trigger a major rerating …


5 December 2019

Ashoka Buildcon has an admirable business profile – a decent BOT/HAM portfolio and a robust EPC business, along with a strong orderbook and a lean balance sheet. It reported a strong FY19 – we expect it to see healthy earnings growth over the next few years, driven by its EPC + BOT business and the mammoth opportunity in the roads segment. The stock has been under the overhang of the management having to provide exit to SBI-McQ from its ACL business, which might lead to (in the worst case) significant cash outflow. We believe a MAPE deal in its BOT portfolio is just around the corner, which could potentially lead to significant rerating for the stock. Current valuations price these concerns adequately and offer a favourable risk-reward profile. Maintain BUY. Robust performance in FY19; strong orderbook and balance sheet to drive earnings ahead Ashoka has reported strong performance in FY19 – delivering a whopping 56%/21% topline/earnings growth. The results for 1HFY20 have also been strong – with 17% yoy growth in topline. The growth was driven by strong order wins over the last few quarters. With all seven HAMs now under construction, we expect strong performance in FY20 and beyond. Its orderbook at Rs 97.5bn (incl L1) – stands at a decent 2.4x book-to-sales. Despite funding the HAM projects, standalone debt has reduced to Rs 4.6bn – comfortable leverage of 0.3x. All along, the working capital cycle remains in control – providing high level of comfort with the balance sheet. Overhang of SBI-McQ exit from ACL remains – deal could act as a potential trigger Ashoka holds 61% stake in ACL; 39% is held by SBI-McQ, which had invested Rs 8bn in ACL over FY11-14. Under the agreement, Ashoka needs to provide an exit to SBI-McQ, or a guaranteed IRR of 12% (till June-19), which translates into valuations of Rs 15.2bn (as on June-19) for SBI-McQ’s stake in ACL. While the Ashoka management is actively scouting for an investor to provide an exit, investors fear that in the worst case Ashoka might have to ‘pay’ the amount to SBI-McQ or do an asset swap (both parties agreeing). Both options warrant a significant negative impact on the valuations of the company, given the much higher outflow expected compared to ACL’s fair valuation. We expect some MAPE activity in the Ashoka portfolio soon. Decent quality of the BOT portfolio and active talks with multiple interested investors should translate into a deal very shortly. Also, with all its HAM projects already under-construction, we wouldn’t be surprised if the deal also includes some/all of its HAM projects too – in which case, it will be a major boost to its stock valuations. Concerns of ‘increasing business risk’ is pacified for the time being We had downgraded Ashoka in April-17 (read the note here) on its foray into unrelated businesses (city-gas distribution and real-estate projects), which increased the risk associated with its business. We had highlighted that it was THIS very ‘indiscriminate’ nature of investments that led to the downfall of infrastructure companies like IVRCL, Gammon, GMR, GVK, and JP Associates in the last cycle. Much to our and investors’ relief, the project was eventually cancelled. We hope the management will refrain from any such steps in the future; we would keep a keen eye on any such further ‘interests’. Outlook and valuation Ashoka has corrected significantly over the last year (YTD, -25%), and is currently trading at 3.5x FY21 P/E (adjusting for ACL/ABL projects’ valuation) – one of the cheapest in the sector. We believe the stock deserves a higher multiple based on its strong orderbook, huge opportunity, and robust balance sheet. We continue to value the EC business at 8x FY21 PE – still at a discount to peers KNR, PNC, and Ahluwalia. Our target is Rs 165 (BOT Rs 45 + EPC Rs 120). We maintain BUY.



COMPANY DATA




52 - WK HI/LO (RS) : 155 / 90


PAR VALUE (RS) : 5



PROMOTERS : 54.3 54.3 54.3

FII / NRI : 3.9 4.3 4.0

FI / MF : 33.8 31.1 31.6

NON PRO : 4.2 4.2 4.2



1MTH 3MTH 1YR

ABS -7.3 -0.8 -27.4

REL TO BSE -8.7 -12.0 -40.5

PRICE VS. SENSEX


KEY FINANCIALS


Net Sales 38,286 45,944 52,835

EBIDTA 5,232 6,088 6,604

Net Profit 2,920 3,849 4,265

EPS, Rs 11.6 13.7 15.2

PER, x 8.0 6.8 6.1

EV/EBIDTA, x 6.4 5.3 5.0

P/BV, x 1.2 1.0 0.9

ROE, % 14.7 14.9 14.3



50

70

90

110

130

150

170

Apr-16 Apr-17 Apr-18 Apr-19 Ashoka Build BSE Sensex

http://backoffice.phillipcapital.in/Backoffice/Researchfiles/PC_-_Ashoka_Buildcon_Company_Update_-_Apr_2017_20170410153335.pdf


ASHOKA BUILDCON COMPANY UPDATE

Decent orderbook at 2.4x book-to-sales ... now diversifying into power/railways segments

Growth to normalise after strong FY19 … with very stable margin profile

Leverage has remained under control … with WC a bit stretched recently, but normalizing

The portfolio has reported muted toll growth over the last four quarters

Rs mn 1QFY19 2QFY19 3QFY19 4QFY19 1QFY20 2QFY20 YoY

Belgaum Dharwad 230 218 233 235 237 213 -3%

Dhankuni Kharagpur 893 888 867 884 905 915 3%

Bhandara 167 160 168 178 174 168 5%

Durg bypass 195 193 199 207 198 190 -1%

Jarora Nayagaon 516 516 497 490 460 432 -16%

Sambalpur baragarh 180 173 181 184 171 166 -4%

Total toll collection 2,181 2,148 2,146 2,177 2,145 2,085 -3%

Total toll growth 11% 10% 3% 0.8% -2% -3%

Like for like growth 11% 10% 3% 0.8% -2% -3%

58 109 99 95 84 82 75 97

2.4

4.5

3.5

3.0

2.2 2.0 1.8

2.4

-

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

-

20

40

60

80

100

120

4Q

FY1

8

1Q

FY1

9

2Q

FY1

9

3Q

FY1

9

4Q

FY1

9

1Q

FY2

0

2Q

FY2

0

Incl

N

ew/L

1

Bo

ok

-to

- s

ales

(x)

Ord

erb

oo

k (R

s b

n)


Roads - BOT/HAM,

57% Roads - EPC,

27%

Power, 11%

Railways, 6%

20 19 20 24 38 46 53

26%

-1% 4%

22%

56%

20% 15%

-10%

0%

10%

20%

30%

40%

50%

60%

0.0

10.0

20.0

30.0

40.0

50.0

60.0


% Y

oY

Gro

wth

- R

HS

Rev

enu

e (R

s. B

n)


2,4

98

2,4

78

2,4

27

2,9

34

5,2

32

6,0

88

6,6

04

13%

13%

12% 12%

14%

13%

13%

10%

11%

12%

13%

14%

15%

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000


OP

M (

%)

- R

HS

EBIT

DA

(Rs

mn

) EBITDA OPM (%)

4,447 4,338 2,005 1,599 7,883 6,683 7,283

0.4

0.3

0.1 0.1

0.4

0.3 0.2

-

0.2

0.4

0.6

0.8

1.0

-

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000


Leve

rage

(x)

- R

HS

Stan

dal

on

e d

ebt

(Rs.

mn

)


62

99 106

119 122 124

117

85

119

80

17 14 14 15 15

87 102

67 80

95 91

-

20

40

60

80

100

120

140


Day

s




Ashoka has a diversified BOT/Annuity/HAM portfolio

Project (Rs mn) Type Length (km) Stake (%) TPC Debt Project Equity Grant Expected COD Period

ACL Projects Bhandara Toll 94.2 51.0 5,350 3,750 1,500 100 Oct-10 20

Jarora Nayagaon Toll 85.1 62.0 8,350 5,620 2,730 (153) Sep-09 20

Belgaum Dharwad Toll 75.7 100.0 6,940 4,790 1,850 (310) May-11 30

Durg bypass Toll 92.1 51.0 5,870 4,100 1,770 - Feb-12 20

Sambalpur baragarh Toll 101.9 100.0 11,420 8,100 3,320 13 Sep-15 30

Dhankuni Kharagpur Toll 140.1 100.0 22,050 17,400 4,650 (1,261) Apr-12 25

Chennai ORR Annuity 30.5 50.0 14,500 10,800 1,730 1,970 - 20

Total

619

74,480 54,560 17,550

ABL Annuity Projects Type Length (km) Stake (%) TPC Debt Project Equity Grant Expected COD Period

Mudhol Nipani (KSHIP) Annuity 107.9 100.0 4,710 2,570 780 1,360 Dec-16 10

Bagewadi - Saundatti Annuity 63.3 100.0 3,280 1,980 550 750 Oct-18 10

Hungund - Talikot Annuity 58.0 100.0 2,940 1,990 293 657 Oct-18 10

Total

229

10,930 6,540 1,623 2,767

HAM Projects Length BPC Debt Equity Grant Period FC AD

Kharar Ludhiana 82.7 13,880 6,000 1,634 6,246 17.5 15-Mar-17 Mar-17 Anandpuram 75.0 10,400 4,150 1,570 4,680 17.5 Sep-17 Nov-17 Khairatunda - Barwa Adda 39.8 7,117 2,700 977 3,440 17.0 26-Sep-18 Jan-19 Tumkur Shaivamogga - 1 54.0 7,406 2,750 988 3,668 17.0 17-Sep-18 Oct-19 Tumkur Shaivamogga - 2 56.7 10,064 3,850 1,340 4,874 17.0 17-Sep-18 Oct-19 Belgaum Khanapur 30.0 7,457 2,950 1,082 3,425 17.5 17-Sep-18 Mar-19 Vadodara Kim expressway 13.0 14,831 6,000 2,083 6,748 17.5 08-Oct-18 Dec-18 Tumkur Shaivamogga - 4 56.0 13,820 5,528 2,764 5,528 17.0 Awaited Awaited

Total 351.2 84,975 33,928 12,438 38,609


SoTP valuation

Project Equity Value

(Rs mn) Stake (%)

Ashoka Equity Value

(Rs mn) Per Share (Rs) Valuation methodology

ABL BOT Projects

Jarora Nayagaon 7,964 38 3,002 10.7 FCFE @ 13% CoE

KSHIP 1,623 100 1,623 5.8 1.0x Book Value

Two Annuity Projects 3,204 100 2,243 8.0 0.7x Book Value

Five HAM Projects 7,563 100 5,294 18.9 0.7x Book Value

Value to Ashoka Buildcon 20,354

12,162 43.0 ACL BOT Projects

Bhandara 1,031 51 526 1.9 FCFE @ 13% CoE

Jarora Nayagaon 7,964 62 4,961 17.7 FCFE @ 13% CoE

Belgaum Dharwad 2,170 100 2,170 7.7 FCFE @ 13% CoE

Durg bypass 1,442 51 736 2.6 FCFE @ 13% CoE

Sambalpur baragarh 690 100 690 2.5 FCFE @ 13% CoE

Dhankuni Kharagpur 5,219 100 5,219 18.6 FCFE @ 13% CoE

Chennai ORR 1,761 50 880 3.1 FCFE @ 13% CoE

Total 20,277

15,182 54.1 SBI-McQ Stake value in ACL 15,250

Net Value to Ashoka (68) (0.2)

Holding company discount

20% (54) (0.2) Value to Ashoka Buildcon

100.0% (54) (0.2)

ABL EPC Division 8x FY21 P/E

EPC division PAT 4,265 8.0 34,120 121.5 8x FY21 P/E

Value to Ashoka Buildcon

34,120 121.5 Total value of Ashoka Buildcon 46,229 165.0






Net sales 24,483 38,286 45,944 52,835

Growth, % 22 56 20 15

Total income 24,483 38,286 45,944 52,835

Raw material expenses -8,178 -14,817 -17,780 -20,447



EBITDA (Core) 2,934 5,232 6,088 6,604

Growth, % 20.9 78.3 16.4 8.5

Margin, % 12.0 13.7 13.3 12.5

Depreciation -532 -783 -1,066 -1,206

EBIT 2,402 4,449 5,021 5,398

Growth, % 25.2 85.2 12.9 7.5

Margin, % 9.8 11.6 10.9 10.2

Interest paid -485 -909 -1,092 -1,047

Other Non-Operating Income 978 1,157 1,273 1,336

Non-recurring Items 0 -470 0 0

Pre-tax profit 2,894 4,227 5,201 5,687

Tax provided -524 -1,307 -1,352 -1,422

Profit after tax 2,370 2,920 3,849 4,265

Others (Minorities, Associates) 0 0 0 0

Net Profit 2,370 2,920 3,849 4,265

Growth, % 34.6 37.1 18.5 10.8

Unadj. shares (m) 281 281 281 281

Wtd avg shares (m) 281 281 281 281

Orderbook Y/E Mar, Rs mn FY18 FY19 FY20E FY21E

Orderbook 58,489 84,390 98,446 1,20,611

Growth YoY (%) -17% 44% 17% 23%

Book-to-Sales (x) 2.4 2.2 2.1 2.3

Order Inflow 12,924 64,187 60,000 75,000


Cash & bank 1,235 550 465 491

Debtors 10,117 15,513 15,734 18,094

Inventory 1,459 1,527 1,888 2,461

Loans & advances 8,077 13,582 15,105 15,923



Investments 13,182 13,841 16,232 19,129




Net fixed assets 2,324 3,854 3,688 3,282

Total assets 39,269 53,086 57,331 63,598





Paid-up capital 936 1,404 1,404 1,404






Pre-tax profit 2,894 4,227 5,201 5,687

Depreciation 532 783 1,066 1,206

Chg in working capital -393 -7,467 -313 -2,152

Total tax paid -570 -1,477 -1,352 -1,422

Cash flow from operating activities 2,464 -3,934 4,602 3,319

Capital expenditure -1,016 -2,313 -900 -800

Chg in investments -117 -659 -2,391 -2,897


Free cash flow 1,331 -6,906 1,312 -378

Equity raised/(repaid) 1,415 0 0 0

Debt raised/(repaid) -406 6,284 -1,200 600

Other financing activities -1,547 134 0 0

Cash flow from financing activities -734 6,222 -1,397 403

Net chg in cash 597 -685 -85 26

Valuation Ratios


Per Share data

EPS (INR) 8.4 11.6 13.7 15.2

Growth, % 34.6 37.1 18.5 10.8


FDEPS (INR) 8.4 11.6 13.7 15.2

CEPS (INR) 10.3 16.0 17.5 19.5

CFPS (INR) 5.3 (18.1) 11.9 7.1

Return ratios

Return on assets (%) 7.2 7.5 8.2 8.1

Return on equity (%) 12.3 14.7 14.9 14.3


Turnover ratios


Receivable days 150.8 147.9 125.0 125.0

Inventory days 21.8 14.6 15.0 17.0

Payable days 301.6 247.2 221.4 203.5


Liquidity ratios

Current ratio (x) 1.3 1.5 1.5 1.5

Quick ratio (x) 1.2 1.4 1.4 1.4




Valuation

PER (x) 11.0 8.0 6.8 6.1

Price/Book (x) 1.4 1.2 1.0 0.9

EV/Net sales (x) 1.1 0.9 0.7 0.6

EV/EBITDA (x) 9.0 6.4 5.3 5.0

EV/EBIT (x) 11.0 7.5 6.4 6.1



Sadbhav Engineering (SADE IN)

Remains a story of unfulfilled promises …


5 December 2019

We call SEL ‘a story of unfulfilled promises’. Over the last three years, the management had promised a lot – growth in EPC business, sale of BOT assets, and reduction of debt at the standalone and Sadbhav Infra (SIPL) level. It took over three years for the BOT asset sale to materialize while topline growth still eludes it. Its EPC business has reported a CAGR of 3.1% over the last four years, with 1.3% yoy growth in FY19. With zero growth guidance for FY20 and weak orderbook, FY21 too doesn’t appear much promising. We have never been excited by the Sadbhav story, and have preferred other companies over it. Now with the SIPL merger, the company moves from being a pure EPC to EPC+BOT company – a much less attractive business model. Inexpensive valuations will keep the downside limited. Maintain NEUTRAL.

BOT assets sale and SIPL merger have destroyed more value than created In Jul-19, Sadbhav management announced the sale of 9 BOT assets to IndInfravit Trust (sponsored by L&T IDPL). The deal had tested investors’ patience (was in the pipeline for over two years) and eventually took place at decent 1.7x P/BV. It will lead to Rs 19bn cash inflow for SIPL and Rs 6.5bn worth of units in IndInfravit. Following this, the company also announced the merger of SEL and SIPL (remaining businesses) at a share swap ratio of 1:3.

While the BOT asset sale has released cash for the company, helping it achieve funding visibility for its current and future HAM/BOT portfolios, the SEL-SIPL merger has destroyed more value than it has created. Both SIPL (-62%) and SEL (-38%) stocks have corrected significantly after the deal announcement – on fears of SEL becoming a much less attractive business ahead. With all assets now to be housed under SEL, its balance sheet stands the risk of being leveraged again to fund the equity requirement of the current/future HAM/BOT assets that the company wins.

With a HAM portfolio of 12 assets (capex Rs 104bn, equity Rs 13bn), any MAPE activity could be a positive trigger for the stock. We have already seen 2 MAPE deals in the HAM space, and SEL remains one of the prime candidates for the next transaction(s).

Continuous disappointment in the EPC business; future doesn’t appear much better Over the last four years, SEL has reported a CAGR of 3.1% in revenues – with 1.3% yoy growth in FY19 – much below the +15% guided at the beginning of the year. FY20 growth will be tepid due to delay in receiving ADs for HAM projects. With already weak H1FY20 (-12% yoy) results – the company will achieve (AT BEST) zero growth in FY20 as guided by the management too. NHAI order awarding in FY20 also appears lacklustre, leading to muted growth expectations in FY21 and beyond. The current orderbook of Rs 95bn (2.8x book-to-sales) appears decent, but adjusted for the 27% awaiting execution, it stands at a weak 2.4x book-to-sales. We expect SEL to continue disappointing on the EPC execution front over the next two years.

Perfect example of EPC companies stuck in the ‘chasm’ As highlighted in our earlier reports, the construction space is highly fragmented with very few companies (NCC, Dilip) having been able to cross the ‘chasm’ of Rs 50-60bn topline. SEL, along with others (Simplex, HCC) are perfect examples of companies stuck at almost the same topline for many years. We attribute this to a mix of being in a comfort zone (segment, geography) and lack of management bandwidth. We believe SEL will need to make a significant effort in terms of execution and strategy to be able to cross this ‘chasm’. For now, this appears unlikely for the next two years.

Outlook and valuation For SEL’s stock to rerate from here, it would need to report strong revenue/earnings growth in the EPC business – which appears unlikely, given its current orderbook and the overall macro environment. We continue to value SEL’s EPC business at 7x FY21 PE and SIPL using the IndInfravit deal metrics (see inside). Our target is Rs 130. Maintain NEUTRAL.

NEUTRAL (Maintain) CMP Rs 126 TARGET Rs 130 (+3%)


COMPANY DATA




52 - WK HI/LO (RS) : 274 / 105


PAR VALUE (RS) : 1



PROMOTERS : 46.6 46.6 46.6

FII / NRI : 13.6 14.3 15.3

FI / MF : 32.6 24.6 23.6

NON PRO : 1.0 0.6 0.6

PUBLIC & OTHERS : 6.3 14.0 14.0


1MTH 3MTH 1YR

ABS -7.7 -8.2 -39.6

REL TO BSE -9.0 -19.4 -52.7

PRICE VS. SENSEX


KEY FINANCIALS


Net Sales 35,492 36,025 40,348

EBIDTA 4,279 4,323 4,640

Net Profit 1,861 1,764 1,957

EPS, Rs 10.8 10.3 9.4

PER, x 11.6 12.3 13.4

EV/EBIDTA, x 8.6 7.0 7.3

P/BV, x 1.1 1.0 1.1

ROE, % 9.2 8.0 8.2



0

30

60

90

120

150

180


Sadbhav BSE Sensex


SADHBHAV ENGINEERING COMPANY UPDATE

EPC order book looks weak excluding stuck projects… … and is dominated by the recently won HAM projects

Muted growth trend to continue in FY20 … … while margins have remained stable

Leverage should come down post the SIPL deal … working capital has got a bit stretched recently


137 137 129 112 108 95 79

3.9 3.9 3.5

3.2 3.1 2.8

2.4

-

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

-

20

40

60

80

100

120

140

160

1Q

FY1

9

2Q

FY1

9

3Q

FY1

9

4Q

FY1

9

1Q

FY2

0

2Q

FY2

0

Excl

Stu

ck

Bo

ok

-to

- s

ales

(x)

Ord

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oo

k (R

s b

n)


Stuck HAMs, 27%

Roads - BOT/HAM -

UC, 15% Roads - EPC -

UC, 31%

Irrigation, 4%

Mining, 22%

30 32 33

35 35 36

40

26%

7%

4% 6%

1% 1%

12%

0%

5%

10%

15%

20%

25%

30%

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.0

40.0

45.0


% Y

oY

Gro

wth

- R

HS

Rev

enu

e (R

s. B

n)


3,0

02

3,3

48

3,5

56

4,1

51

4,2

79

4,3

23

4,6

40

10%

11% 11%

12% 12% 12%

12%

9.0%

9.5%

10.0%

10.5%

11.0%

11.5%

12.0%

12.5%

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

4,500

5,000


OP

M (

%)

- R

HS

EBIT

DA

(Rs

mn

)

EBITDA OPM (%)

10

,98

4

12

,20

7

17

,77

1

14

,84

7

15

,87

3

9,3

73

9,3

73

0.8 0.8

1.1

0.8 0.8

0.4 0.4

-

0.2

0.4

0.6

0.8

1.0

1.2

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

20,000


Leve

rage

(x)

- R

HS

Stan

dal

on

e d

ebt

(Rs.

mn

)


101 111

151

173 168 171 158

23 20 15 15 18 19 19

138

169

211 233 236 223

191

-

50

100

150

200

250


Day

s




SIPL has sold 9 BOT assets to IndInfravit

SADE (Rs mn)

Length

(km) Type Stake

Project

cost

Project

Debt

Project

Equity

Grant/

Premium

Aurangabad Jalna 69.0 T 100% 2,770 1,960 810 -

Ahmedabad ring road* 76.2 T 100% 5,214 4,693 521 360

Nagpur Seoni 27.7 A 100% 2,780 2,050 730 -

Dhule Palasner 96.5 T 100% 14,200 10,650 3,550 -

Hyderabad Yadgiri 36.0 T 100% 5,131 3,802 1,329 -

Bijapur Hungund 97.0 T 77% 13,226 8,465 2,025 2,736

Sreenathji - Udaipur 79.0 T 100% 11,515 8,400 3,115 (216)

Rajsamand Bhilwara 87.0 T 100% 7,200 3,206 1,330 2,664

Mysore Bellary 193.3 A 74% 7,893 3,980 1,521 2,392

Total 761.8

69,928 47,206 14,930


SEL will now directly own a portfolio of 11 HAM projects (2 awaiting AD)

HAM Portfolio (Rs mn)

Length

(km)

Project

cost

Project

Debt

Project

Equity Grant Period AD

Rampur - Kathgodam - I 43.0 7,400 3,500 940 2,960 15.0 Mar-17

Rampur - Kathgodam - II 50.0 6,600 3,200 760 2,640 15.0 Oct-17

Bhavnagar – Talaja 48.0 8,190 3,931 983 3,276 15.0 Feb-17

Una – Kodinar 51.0 6,230 2,990 748 2,492 15.0 Feb-17

BRT Tiger Reserve - Blore 170.0 10,080 4,840 1,208 4,032 15.0 Aug-17

Waranga Mahagaon 66.8 10,710 5,140 1,290 4,280 15.0 May-18

Udaipur Bypass 23.8 8,910 4,270 1,076 3,564 15.0 Nov-17

Jodhpur Ring Road 74.6 11,610 5,309 1,657 4,644 15.0 Dec-18

Vadodara Kim expressway 24.3 14,040 6,739 1,685 5,616 15.0 Nov-19

Tumlur Shivamogga 48.5 10,080 4,838 1,210 4,032 15.0 Awaited

KSHIP (Gadag ‐ Honnali) 140.0 9,950 4,776 1,194 3,980 7.5 Awaited

Total 740.0 1,03,800 49,534 12,750 41,516


Deal appears handsomely valued at 1.7x P/BV..... SEL+SIPL merger will lead to ~20% dilution for shareholders SIPL IndInfravit Deal

SEL + SIPL Merger

Particulars Rs mn Particulars SEL SIPL SADE + SIPL

Deal Enterprise Value 66,112 Shares (mn) 171.6 352.2 207.9

O/S Net Debt 40,612 CMP (Rs) 139 44

Sale Equity Value 25,500 Mcap (Rs mn) 23,848 15,498

P/BV 1.7 Promoter stake (%) 46.55 69.63 38.74

Deal structure

Cash 19,000

InviT Units 6,500

Source: Company, PhillipCapital India Research (at closing price of 18-Oct-2019)

Deal metric makes little impact to SIPL valuations SIPL Valuation (Rs mn) Value Multiple Value to SIPL

Cash inflow from the deal 19,000 1.0 19,000

Outflow to other partners (1,700) 1.0 (1,700)

Debt at SIPL holdco (14,500) 1.0 (14,500)

Value of units in InvIT 6,500 0.5 3,250

3 remaining BOT projects 8,464 0.5 4,232

Equity invested in HAMs 4,310 0.7 3,017

Total Value of SIPL 22,074

13,299

SADE valuation

Division FY21 EPS

(Rs) Equity Value

(Rs mn) Multiple Equity Value

(Rs mn) Value per share (Rs)

EPC business 9.4

7.0 13,702 66

SIPL business (from above)

13,299 100.0% 13,299 64

Total

27,001 130


We take into account the new diluted share count for valuation





Net sales 35,051 35,492 36,025 40,348

Growth, % 6 1 1 12

Total income 35,051 35,492 36,025 40,348



EBITDA (Core) 4,151 4,279 4,323 4,640

Growth, % 16.7 3.1 1.0 7.3

Margin, % 11.8 12.1 12.0 11.5

Depreciation -979 -958 -1,102 -1,186

EBIT 3,172 3,321 3,221 3,454

Growth, % 24.1 4.7 (3.0) 7.2

Margin, % 9.1 9.4 8.9 8.6

Interest paid -1,907 -1,103 -1,136 -1,125


Pre-tax profit 2,163 2,583 2,353 2,610

Tax provided 44 -714 -588 -652

Net Profit 2,207 1,869 1,764 1,957

Growth, % 17.5 (15.7) (5.2) 10.9

Unadj. shares (m) 172 172 172 208

Wtd avg shares (m) 172 172 172 208

Orderbook Y/E Mar, Rs bn FY18 FY19 FY20E FY21E

Orderbook 132.5 112.3 116.3 125.9

Growth YoY (%) 72% -15% 4% 8%

Book-to-Sales (x) 3.8 3.2 3.2 3.1

Order Inflow 90.7 15.3 40.0 50.0


Cash & bank 127 604 900 1,796

Debtors 16,280 16,416 17,272 17,687

Inventory 1,643 1,792 1,974 2,211

Loans & advances 10,953 10,948 5,344 6,632



Investments 5,775 6,094 6,094 6,094




Net fixed assets 5,028 4,972 4,370 3,934

Total assets 43,706 45,977 41,106 43,506





Paid-up capital 172 172 172 172






Pre-tax profit 2,163 2,583 2,353 2,610

Depreciation 979 958 1,102 1,186

Chg in working capital 1,160 -1,955 4,529 -1,391

Total tax paid -474 -714 -588 -652

Cash flow from operating activities 3,828 871 7,395 1,752

Capital expenditure -771 -905 -500 -750

Chg in investments -80 -319 0 0

Cash flow from investing activities -851 -1,224 -500 -750

Free cash flow 2,977 -353 6,895 1,002

Equity raised/(repaid) 0 243 7 0

Debt raised/(repaid) -2,924 1,026 -6,500 0


Other financing activities -49 -334 0 0

Cash flow from financing activities -3,079 830 -6,599 -105

Net chg in cash -103 477 296 897

Valuation Ratios


Per Share data

EPS (INR) 12.9 10.8 10.3 9.4

Growth, % 17.5 (15.7) (5.2) (8.5)


FDEPS (INR) 12.9 10.8 10.3 9.4

CEPS (INR) 18.6 16.4 16.7 15.1

CFPS (INR) 17.1 3.0 41.5 7.1

DPS (INR) 0.5 0.5 0.5 0.4

Return ratios

Return on assets (%) 8.1 5.7 5.6 6.2

Return on equity (%) 11.8 9.2 8.0 8.2


Turnover ratios


Receivable days 169.5 168.8 175.0 160.0

Inventory days 17.1 18.4 20.0 20.0

Payable days 120.1 113.9 112.0 105.1


Liquidity ratios

Current ratio (x) 3.1 3.5 3.0 3.2

Quick ratio (x) 3.0 3.3 2.8 2.9


Dividend cover (x) 24.5 20.6 19.6 21.7



Valuation

PER (x) 9.8 11.6 12.3 13.4

Price/Book (x) 1.2 1.1 1.0 1.1

EV/Net sales (x) 1.0 1.0 0.8 0.8

EV/EBITDA (x) 8.8 8.6 7.0 7.3

EV/EBIT (x) 11.5 11.1 9.3 9.8



Dilip Buildcon (DBL IN)

A perpetual cash guzzling machine …


5 December 2019

DBL’s fall from grace (stock price fell from Rs 1,200 to Rs 400 in 8 months) has been as spectacular as its rise (from a listing price of 240 to Rs 1,200 in less than two years).The company remains famous for an integrated business model with a large equipment base and early completion bonuses, and infamous for poor disclosure norms. A company which, earlier wanted to keep growing rapidly, is now talking of consolidation and sustainable growth. We were always perplexed about why the company seemed to want wanted to grow so much, so fast. While it has resolved some of its balance sheet concerns with the recent HAM deal with Cube Highways, we continue to NOT like the stock for its capital intensive business model and inferior business profile.

Capital intensive model in an already capital-intensive industry DBL’s “unique” model of trying to mechanize/automate the construction process in a country where labour is (and will be for the foreseeable future) easily available, amplifies the capital requirement of an already capital-intensive industry. Over FY13-18, DBL spent Rs 23bn to buy mining and other road equipment, which led to a ballooning of debt; Rs 10bn in FY14 swelled to Rs 27bn in FY18. Also, to ensure efficient utilization of its equipment base, DBL keeps a higher inventory level – 90 days in FY18 vs. industry average of 60.

Over the next few years, as DBL grows, it will face the double whammy of lower topline growth (large base effect) and lower margins (limited scope of early completion bonus and expanding beyond its home territory). This, coupled with an already leveraged balance sheet, equity requirement for HAM projects, and high WC requirements, we expect DBL’s balance sheet to keep worsening.

The real test of the business model is over the next few years We believe DBL was able to sustain its cash-guzzling business model over the last few years, because it was executing projects in its comfort zone – roads and Madhya Pradesh. Geographical and segmental familiarity helped it execute ahead-of-schedule and grab early completion on many projects (Rs 2.2bn in the last three years). This helped finance its high WC and capex requirements.

As DBL grows (FY19 topline of Rs 91bn) it will have to expand beyond MP and roads. We see early signs of this already happening. Its margins have already fallen from 22% (FY15) to 17.5% (FY19) as the share of MP orders has fallen to 13% from 98%. If the company is not able to maintain margins – it will lead to a domino effect – reducing PAT margins and OCF – leading to higher debt and leverage – in-turn leading to higher interest expense – eventually leading to still lower PAT margins and OCF. A vicious loop!

Highly stretched balance sheet; Cube Highways deal pacifies for the time being DBL’s current debt of Rs 35bn translates into a leverage of 1.1x (industry average of 0.4x) – one of the highest in the industry. Debt has increased over the last year, despite Rs 2bn of cash infusion from the BOT stake sale. Its HAM portfolio of 12 projects (non-Shrem portfolio) requires Rs 16bn of equity infusion – Rs 7.5bn/4.5bn over FY20/21.

Just in time to prevent the debt ballooning due to its HAM equity funding, DBL announced the sale of 5 of its HAM assets for Rs 7bn (1.2x P/BV). Adjusting for the equity required in these projects, DBL will receive net cash of Rs 4.2bn for these projects, pacifying HAM equity concerns for the time being. But with the high capex requirement and NHAI looking to award more HAM/BOT projects over next three years, we believe it will be a matter of time before DBL requires another equity infusion or asset sale. It is like a company with a perpetual need for raising cash every few quarters.

Outlook and valuation Adjusted for the HAM value, DBL is currently trading at 8x FY21 PE (consensus estimates). We find the business model of the company (operational + financial) highly precarious.

NOT RATED CMP RS 390 COMPANY DATA




52 - WK HI/LO (RS) : 734 / 312


PAR VALUE (RS) : 10



PROMOTERS : 75.0 75.6 75.6

FII / NRI : 10.1 9.6 9.7

FI / MF : 5.6 5.0 6.4

NON PRO : 1.9 2.3 2.1



1MTH 3MTH 1YR

ABS -11.6 11.1 -15.0

REL TO BSE -13.0 -0.1 -28.0

PRICE VS. SENSEX


KEY FINANCIALS

Rs mn FY17 FY18 FY19

Net Sales 50,976 77,459 91,182

EBIDTA 9,923 14,028 16,044

Net Profit 3,609 6,203 7,649

EPS, Rs 26.4 45.4 55.9

PER, x 14.8 8.6 7.0

EV/EBIDTA, x 7.9 5.8 5.2

P/BV, x 2.9 2.2 1.7

ROE, % 24.8 28.8 27.0



50

150

250

350

450

550

Aug-16 Aug-17 Aug-18 Aug-19

Dilip Buildcon BSE Sensex


DILIP BUILDCON COMPANY UPDATE

Orderbook is moderate, providing limited revenue visibility... ... diversified across country, and now into mining/metros

Source: Company, Phillip Capital India Research

The company appears to be growing too fast, to soon ... ... and margins have steadily come down


While leverage has come down, it still remains high (vs. peers), and working capital cycle remains high (esp inventory)


241 239 231 212 190 203

2.8 2.8 2.5

2.3 2.1 2.2

-

0.5

1.0

1.5

2.0

2.5

3.0

-

50

100

150

200

250

300

1Q

FY1

9

2Q

FY1

9

3Q

FY1

9

4Q

FY1

9

1Q

FY2

0

2Q

FY2

0

Bo

ok

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(x)

Ord

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oo

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s b

n)


MP, 13%

Chhatisgarh, 0%

Maharashtra, 24%

UP, 9%

AP, 5% Telangana, 4%

Goa, 4%

Others, 42%

Roads, 70%

Mining, 21% Metro, 2%

Others, 7%

State

Segment

23 26 41 51 77 91

21% 13%

56%

25%

52%

18%

0%

10%

20%

30%

40%

50%

60%

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0

100.0

FY14 FY15 FY16 FY17 FY18 FY19

% Y

oY

Gro

wth

- R

HS

Rev

enu

e (R

s. B

n)


4,7

00

5,6

55

7,9

92

9,9

23

14

,02

8

16

,04

4

20%

22%

20% 19%

18% 18%

15%

16%

17%

18%

19%

20%

21%

22%

23%

24%

25%

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000


OP

M (

%)

- R

HS

EBIT

DA

(Rs

mn

)

EBITDA OPM (%)

11

,63

1

21

,83

8

25

,11

4

25

,63

4

29

,54

9

32

,01

2

1.6

2.6

2.4

1.4 1.2

1.0

-

0.5

1.0

1.5

2.0

2.5

3.0

-

5,000

10,000

15,000

20,000

25,000

30,000

35,000


Leve

rage

(x)

- R

HS

Stan

dal

on

e d

ebt

(Rs.

mn

)


136

152

91

69 62 60

70

102

113 116

87 91

132

164

132 125

105 108

40

60

80

100

120

140

160

180


Day

s




In Aug-17, DBL divested its entire BOT portfolio (18 BOT and 6 HAM projects – 14 operational) to Shrem Group of Companies (Chhatwal Group Trust) for Rs 16bn – 1.05x BV. The transaction is expected to lead to net cash accrual of Rs 7.6bn for the company (over FY18-20). The transaction was an interesting one as: 1. Shrem Group had no prior investment in the infrastructure space and invested

an amount as high as Rs 16bn as its first investment in the space. 2. It is the first transaction in the BOT space, where a buyer has bought under-

construction projects.

DBL divested its entire BOT portfolio of 24 projects to Shrem Group

Projects Equity Invested (Rs mn) Equity to be invested (Rs mn) No of Projects

Operational BOTs 4,537 126 14

Under Construction BOTs 2,219 960 4

Under Construction HAMs 64 7,331 6

Total 6,820 8,416 24

Total Portfolio Equity 15,236

Sale value 16,000

P/BV 1.05

Net cash accrual for DBL 7,584


Recently, in Sep-19, DBL again divested its 5 HAM projects to Cube Highways for Rs 7bn – 1.2x BV. Subject to fulfilment of certain milestones, Cube has also agreed to invest 49% of the equity in the projects (as part of the total deal amount). The transaction has helped DBL: 1. Pacifies invetsors’ concern of DBL balance sheet getting stretched to fund HAM

equity requirement 2. Only the second MAP transaction in the HAM space, establishes DBL’s credibility

DBL recently divested 5 HAM projects to Cube Highways

Projects Equity Invested (Rs mn) Equity to be invested (Rs mn) No of Projects

Under Construction HAMs 2,780 2,900 5

Total 2,780 2,900 5

Total Portfolio Equity

5,680 Sale value

7,020

P/BV

1.24


DBL has amassed a huge HAM portfolio, with large equity requirement

HAMs after divestment

(Rs mn)

Length

(kms)

BPC Debt Equity Grant AD

Chandikhole Bhadrak 74.5 12,613 6,346 1,222 5,045 Dec-18 Mangloor Tel/Maha border 49.0 7,251 3,609 658 2,984 Apr-19 Sangli Solapur (Pckg - 4) 56.5 9,480 4,162 1,526 3,792 May-19 Sangli Solapur (Pckg - 2) 52.0 8,448 3,843 1,226 3,379 Apr-19 Sangli Solapur (Pckg - 1) 41.4 8,768 4,209 1,052 3,507 May-19 Gorhar Khairatunda 40.2 7,644 3,848 738 3,058 Jul-19 Nidagatta Mysore 61.1 20,926 10,272 2,284 8,370 May-19 Bangalore Nidagatta 56.2 20,048 9,839 2,190 8,019 Awaited Byrapura Challakere 50.0 6,708 3,213 812 2,683 Dec-18 Anandapuram Anakapalli 50.8 17,717 8,428 2,202 7,087 Jan-19 Churhat Bypass 15.4 8,152 3,985 906 3,261 Dec-18 Bellary Byrapura 55.0 11,076 5,466 1,180 4,430 Oct-19

Total 602 1,38,831 67,219 15,996 55,616


View the profile of the Shrem group here

View the profile of the Shrem group here

http://www.shrem.in/

http://www.shrem.in/



Financials (Standalone) Income Statement Y/E Mar, Rs mn FY16 FY17 FY18 FY19

Net sales 40,853 50,976 77,459 91,182

Growth, % 56 25 52 18

Total income 40,853 50,976 77,459 91,182

Employee expenses -873 -1,025 -1,524 -1,774


EBITDA (Core) 7,992 9,923 14,028 16,044

Growth, % 41.3 24.1 41.4 14.4

Margin, % 19.6 19.5 18.1 17.6

Depreciation -1,835 -2,274 -2,750 -3,202

EBIT 6,158 7,649 11,278 12,842

Growth, % 37.6 24.2 47.5 13.9

Margin, % 15.1 15.0 14.6 14.1

Interest paid -3,814 -4,162 -4,644 -5,299


Pre-tax profit 2,501 3,601 6,637 8,050

Tax provided -293 9 -434 -400

Profit after tax 2,208 3,609 6,203 7,649

Net Profit 2,208 3,609 6,203 7,649

Growth, % 60.8 63.5 71.9 23.3

Net Profit (adjusted) 2,208 3,609 6,203 7,649

Unadj. shares (m) 117 137 137 137

Wtd avg shares (m) 117 137 137 137

Orderbook Y/E Mar, Rs mn FY16 FY17 FY18 FY19

Orderbook 1,07,787 1,75,683 2,38,881 2,11,718

Growth YoY (%) 44% 63% 36% -11%

Book-to-Sales (x) 2.6 3.4 3.1 2.3

Order Inflow 73,893 1,18,872 1,40,657 64,019

Balance Sheet Y/E Mar, Rs mn FY16 FY17 FY18 FY19

Cash & bank 1,059 1,137 1,613 1,888

Debtors 9,119 10,165 16,040 14,093

Inventory 15,803 16,639 20,262 25,038

Loans & advances 886 2,113 5,599 7,778


Investments 2,898 4,695 2,415 5,238




Net fixed assets 14,204 16,825 18,319 20,822

Total assets 52,837 66,493 93,477 1,09,067





Paid-up capital 1,171 1,368 1,368 1,368



Total equity & liabilities 52,837 66,493 93,477 1,09,067


Cash Flow Y/E Mar, Rs mn FY16 FY17 FY18 FY19

Pre-tax profit 2,501 3,601 6,637 8,050

Depreciation 1,835 2,274 2,750 3,202

Chg in working capital -4,547 -3,916 -10,574 -3,441

Total tax paid -80 -7 -126 -1,296

Cash flow from operating activities -291 1,951 -1,313 6,514


Chg in investments -109 -1,797 2,280 -2,823


Free cash flow -4,548 -4,741 -3,277 -2,013

Equity raised/(repaid) 0 4,300 1,500 -172

Debt raised/(repaid) 3,276 520 3,914 2,464


Cash flow from financing activities 3,266 4,818 3,753 2,289

Net chg in cash -1,283 78 476 275

Valuation Ratios

FY16 FY17 FY18 FY19

Per Share data

EPS (INR) 18.9 26.4 45.4 55.9

Growth, % 60.8 40.0 71.9 23.3


FDEPS (INR) 18.9 26.4 45.4 55.9

CEPS (INR) 34.5 43.0 65.5 79.3

CFPS (INR) (6.0) 29.7 14.8 58.0

Return ratios Return on assets (%) 9.5 10.4 11.4 10.7

Return on equity (%) 23.2 24.8 28.8 27.0


Turnover ratios Asset turnover (x) 1.6 1.6 2.0 2.0


Sales/Net FA (x) 3.1 3.3 4.4 4.7

Working capital/Sales (x) 0.4 0.3 0.3 0.3

Receivable days 81.5 72.8 75.6 56.4

Inventory days 141.2 119.1 95.5 100.2

Payable days 179.1 189.1 216.1 213.1


Liquidity ratios

Current ratio (x) 2.0 1.8 1.7 1.6

Quick ratio (x) 1.0 1.1 1.2 1.1




Valuation

PER (x) 20.7 14.8 8.6 7.0

PEG (x) - y-o-y growth 0.3 0.4 0.1 0.3

Price/Book (x) 4.3 2.9 2.2 1.7

EV/Net sales (x) 1.7 1.5 1.1 0.9

EV/EBITDA (x) 8.7 7.9 5.8 5.2

EV/EBIT (x) 11.3 10.2 7.2 6.5



Stock Price, Price Target and Rating History (PNC Infra)

Stock Price, Price Target and Rating History (IRB Infra)

Stock Price, Price Target and Rating History (Ashoka Buildcon)

B (TP 140)

B (TP 160) B (TP 160)

B (TP 190) B (TP 200)

B (TP 205) B (TP 200)

B (TP 190) B (TP 190)

B (TP 250) B (TP 285)

B (TP 300)

0

50

100

150

200

250

S-16 O-16 D-16 J-17 M-17 A-17 J-17 J-17 A-17 O-17 N-17 J-18 F-18 A-18 M-18 J-18 A-18 O-18 N-18 D-18 F-19 M-19 M-19 J-19 A-19 S-19 N-19

B (TP 280)

B (TP 280)

J-17

B (TP 290)

B (TP 290) B (TP 290)

N (TP 255) N (TP 225)

N (TP 250)

N (TP 220)

N (TP 140) N (TP 155) N (TP 140)

B (TP 190) B (TP 135)

0

50

100

150

200

250

300

N-16 D-16 F-17 M-17 M-17 J-17 A-17 S-17 N-17 D-17 J-18 M-18 A-18 J-18 J-18 S-18 O-18 D-18 J-19 F-19 A-19 M-19 J-19 A-19 O-19

B (TP 205)

B (TP 205)

N (TP 205)

N (TP 205) B (TP 210)

B (TP 250)

B (TP 292)

B (TP 320)

B (TP 200)

B (TP 170) B (TP 170)

B (TP 200)

B (TP 185)

B (TP 165)

0

20

40

60

80

100

120

140

160

180

200

N-16 J-17 F-17 N (TP 205)

M-17 J-17 A-17 O-17 N-17 J-18 F-18 A-18 M-18 J-18 A-18 O-18 N-18 J-19 F-19 A-19 M-19 J-19 A-19 O-19



Stock Price, Price Target and Rating History (Sadbhav Engineering)

Rating Methodology We rate stock on absolute return basis. Our target price for the stocks has an investment horizon of one year. We have different threshold for large market capitalisation stock and Mid/small market capitalisation stock. The categorisation of stock based on market capitalisation is as per the SEBI requirement.

Large cap stocks Rating Criteria Definition

BUY >= +10% Target price is equal to or more than 10% of current market price

NEUTRAL -10% > to < +10% Target price is less than +10% but more than -10%

SELL <= -10% Target price is less than or equal to -10%.

Mid cap and Small cap stocks Rating Criteria Definition

BUY >= +15% Target price is equal to or more than 15% of current market price

NEUTRAL -15% > to < +15% Target price is less than +15% but more than -15%

SELL <= -15% Target price is less than or equal to -15%.

Disclosures and Disclaimers PhillipCapital (India) Pvt. Ltd. has three independent equity research groups: Institutional Equities, Institutional Equity Derivatives, and Private Client Group. This report has been prepared by Institutional Equities Group. The views and opinions expressed in this document may, may not match, or may be contrary at times with the views, estimates, rating, and target price of the other equity research groups of PhillipCapital (India) Pvt. Ltd.

This report is issued by PhillipCapital (India) Pvt. Ltd., which is regulated by the SEBI. PhillipCapital (India) Pvt. Ltd. is a subsidiary of Phillip (Mauritius) Pvt. Ltd. References to "PCIPL" in this report shall mean PhillipCapital (India) Pvt. Ltd unless otherwise stated. This report is prepared and distributed by PCIPL for information purposes only, and neither the information contained herein, nor any opinion expressed should be construed or deemed to be construed as solicitation or as offering advice for the purposes of the purchase or sale of any security, investment, or derivatives. The information and opinions contained in the report were considered by PCIPL to be valid when published. The report also contains information provided to PCIPL by third parties. The source of such information will usually be disclosed in the report. Whilst PCIPL has taken all reasonable steps to ensure that this information is correct, PCIPL does not offer any warranty as to the accuracy or completeness of such information. Any person placing reliance on the report to undertake trading does so entirely at his or her own risk and PCIPL does not accept any liability as a result. Securities and Derivatives markets may be subject to rapid and unexpected price movements and past performance is not necessarily an indication of future performance.

This report does not regard the specific investment objectives, financial situation, and the particular needs of any specific person who may receive this report. Investors must undertake independent analysis with their own legal, tax, and financial advisors and reach their own conclusions regarding the appropriateness of investing in any securities or investment strategies discussed or recommended in this report and should understand that statements regarding future prospects may not be realised. Under no circumstances can it be used or considered as an offer to sell or as a solicitation of any offer to buy or sell the securities mentioned within it. The information contained in the research reports may have been taken from trade and statistical services and other sources, which PCIL believe is reliable. PhillipCapital (India) Pvt. Ltd. or any of its group/associate/affiliate companies do not guarantee that such information is accurate or complete and it should not be relied upon as such. Any opinions expressed reflect judgments at this date and are subject to change without notice.

Important: These disclosures and disclaimers must be read in conjunction with the research report of which it forms part. Receipt and use of the research report is subject to all aspects of these disclosures and disclaimers. Additional information about the issuers and securities discussed in this research report is available on request.

N (TP 300)

N (TP 300)

N (TP 310)

N (TP 385)

N (TP 370)

B (TP 360)

B (TP 270)

B (TP 230)

B (TP 300)

N (TP 145) N (TP 145) N (TP 130)

100

150

200

250

300

350

400

450

J-17 F-17 M-17 M-17 J-17 A-17 S-17 N-17 D-17 F-18 M-18 M-18 J-18 J-18 S-18 O-18 D-18 J-19 M-19 A-19 J-19 J-19 S-19 N (TP 145)



Certifications: The research analyst(s) who prepared this research report hereby certifies that the views expressed in this research report accurately reflect the research analyst’s personal views about all of the subject issuers and/or securities, that the analyst(s) have no known conflict of interest and no part of the research analyst’s compensation was, is, or will be, directly or indirectly, related to the specific views or recommendations contained in this research report.

Additional Disclosures of Interest: Unless specifically mentioned in Point No. 9 below: 1. The Research Analyst(s), PCIL, or its associates or relatives of the Research Analyst does not have any financial interest in the company(ies) covered in

this report. 2. The Research Analyst, PCIL or its associates or relatives of the Research Analyst affiliates collectively do not hold more than 1% of the securities of the

company (ies)covered in this report as of the end of the month immediately preceding the distribution of the research report. 3. The Research Analyst, his/her associate, his/her relative, and PCIL, do not have any other material conflict of interest at the time of publication of this

research report. 4. The Research Analyst, PCIL, and its associates have not received compensation for investment banking or merchant banking or brokerage services or for

any other products or services from the company(ies) covered in this report, in the past twelve months. 5. The Research Analyst, PCIL or its associates have not managed or co-managed in the previous twelve months, a private or public offering of securities for

the company (ies) covered in this report. 6. PCIL or its associates have not received compensation or other benefits from the company(ies) covered in this report or from any third party, in

connection with the research report. 7. The Research Analyst has not served as an Officer, Director, or employee of the company (ies) covered in the Research report. 8. The Research Analyst and PCIL has not been engaged in market making activity for the company(ies) covered in the Research report. 9. Details of PCIL, Research Analyst and its associates pertaining to the companies covered in the Research report:

Sr. no. Particulars Yes/No

1 Whether compensation has been received from the company(ies) covered in the Research report in the past 12 months for investment banking transaction by PCIL

No

2 Whether Research Analyst, PCIL or its associates or relatives of the Research Analyst affiliates collectively hold more than 1% of the company(ies) covered in the Research report

No

3 Whether compensation has been received by PCIL or its associates from the company(ies) covered in the Research report No

4 PCIL or its affiliates have managed or co-managed in the previous twelve months a private or public offering of securities for the company(ies) covered in the Research report

No

5 Research Analyst, his associate, PCIL or its associates have received compensation for investment banking or merchant banking or brokerage services or for any other products or services from the company(ies) covered in the Research report, in the last twelve months

No

Independence: PhillipCapital (India) Pvt. Ltd. has not had an investment banking relationship with, and has not received any compensation for investment banking services from, the subject issuers in the past twelve (12) months, and PhillipCapital (India) Pvt. Ltd does not anticipate receiving or intend to seek compensation for investment banking services from the subject issuers in the next three (3) months. PhillipCapital (India) Pvt. Ltd is not a market maker in the securities mentioned in this research report, although it, or its affiliates/employees, may have positions in, purchase or sell, or be materially interested in any of the securities covered in the report.

Suitability and Risks: This research report is for informational purposes only and is not tailored to the specific investment objectives, financial situation or particular requirements of any individual recipient hereof. Certain securities may give rise to substantial risks and may not be suitable for certain investors. Each investor must make its own determination as to the appropriateness of any securities referred to in this research report based upon the legal, tax and accounting considerations applicable to such investor and its own investment objectives or strategy, its financial situation and its investing experience. The value of any security may be positively or adversely affected by changes in foreign exchange or interest rates, as well as by other financial, economic, or political factors. Past performance is not necessarily indicative of future performance or results.

Sources, Completeness and Accuracy: The material herein is based upon information obtained from sources that PCIPL and the research analyst believe to be reliable, but neither PCIPL nor the research analyst represents or guarantees that the information contained herein is accurate or complete and it should not be relied upon as such. Opinions expressed herein are current opinions as of the date appearing on this material, and are subject to change without notice. Furthermore, PCIPL is under no obligation to update or keep the information current. Without limiting any of the foregoing, in no event shall PCIL, any of its affiliates/employees or any third party involved in, or related to computing or compiling the information have any liability for any damages of any kind including but not limited to any direct or consequential loss or damage, however arising, from the use of this document.

Copyright: The copyright in this research report belongs exclusively to PCIPL. All rights are reserved. Any unauthorised use or disclosure is prohibited. No reprinting or reproduction, in whole or in part, is permitted without the PCIPL’s prior consent, except that a recipient may reprint it for internal circulation only and only if it is reprinted in its entirety.

Caution: Risk of loss in trading/investment can be substantial and even more than the amount / margin given by you. Investment in securities market are subject to market risks, you are requested to read all the related documents carefully before investing. You should carefully consider whether trading/investment is appropriate for you in light of your experience, objectives, financial resources and other relevant circumstances. PhillipCapital and any of its employees, directors, associates, group entities, or affiliates shall not be liable for losses, if any, incurred by you. You are further cautioned that trading/investments in financial markets are subject to market risks and are advised to seek independent third party trading/investment advice outside PhillipCapital/group/associates/affiliates/directors/employees before and during your trading/investment. There is no guarantee/assurance as to returns or profits or capital protection or appreciation. PhillipCapital and any of its employees, directors, associates, and/or employees, directors, associates of PhillipCapital’s group entities or affiliates is not inducing you for trading/investing in the financial market(s). Trading/Investment decision is your sole responsibility. You must also read the Risk Disclosure Document and Do’s and Don’ts before investing.

Kindly note that past performance is not necessarily a guide to future performance.

For Detailed Disclaimer: Please visit our website www.phillipcapital.in IMPORTANT DISCLOSURES FOR U.S. PERSONS This research report is a product of PhillipCapital (India) Pvt. Ltd. which is the employer of the research analyst(s) who has prepared the research report. PhillipCapital (India) Pvt Ltd. is authorized to engage in securities activities in India. PHILLIPCAP is not a registered broker-dealer in the United States and, therefore, is not subject to U.S. rules regarding the preparation of research reports and the independence of research analysts. This research report is provided for distribution to “major U.S. institutional investors” in reliance on the exemption from registration provided by Rule 15a-6 of the U.S. Securities Exchange Act

http://www.phillipcapital.in/



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Any U.S. recipient of this research report wishing to effect any transaction to buy or sell securities or related financial instruments based on the information provided in this research report should do so only through Rosenblatt Securities Inc, 40 Wall Street 59th Floor, New York NY 10005, a registered broker dealer in the United States. Under no circumstances should any recipient of this research report effect any transaction to buy or sell securities or related financial instruments through PHILLIPCAP. Rosenblatt Securities Inc. accepts responsibility for the contents of this research report, subject to the terms set out below, to the extent that it is delivered to a U.S. person other than a major U.S. institutional investor.

The analyst whose name appears in this research report is not registered or qualified as a research analyst with the Financial Industry Regulatory Authority (“FINRA”) and may not be an associated person of Rosenblatt Securities Inc. and, therefore, may not be subject to applicable restrictions under FINRA Rules on communications with a subject company, public appearances and trading securities held by a research analyst account. Ownership and Material Conflicts of Interest Rosenblatt Securities Inc. or its affiliates does not ‘beneficially own,’ as determined in accordance with Section 13(d) of the Exchange Act, 1% or more of any of the equity securities mentioned in the report. Rosenblatt Securities Inc, its affiliates and/or their respective officers, directors or employees may have interests, or long or short positions, and may at any time make purchases or sales as a principal or agent of the securities referred to herein. Rosenblatt Securities Inc. is not aware of any material conflict of interest as of the date of this publication Compensation and Investment Banking Activities Rosenblatt Securities Inc. or any affiliate has not managed or co-managed a public offering of securities for the subject company in the past 12 months, nor received compensation for investment banking services from the subject company in the past 12 months, neither does it or any affiliate expect to receive, or intends to seek compensation for investment banking services from the subject company in the next 3 months. Additional Disclosures This research report is for distribution only under such circumstances as may be permitted by applicable law. This research report has no regard to the specific investment objectives, financial situation or particular needs of any specific recipient, even if sent only to a single recipient. This research report is not guaranteed to be a complete statement or summary of any securities, markets, reports or developments referred to in this research report. Neither PHILLIPCAP nor any of its directors, officers, employees or agents shall have any liability, however arising, for any error, inaccuracy or incompleteness of fact or opinion in this research report or lack of care in this research report’s preparation or publication, or any losses or damages which may arise from the use of this research report.

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