Irrigation Project at Veligonda DAY 3 an Engineering Marvel
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TravelogTravelogthe analyst’s diary INFRASTRUCTURE 2010 Building a new landscape Andhra Pradesh ; Hyderabad Airport ; Ind Barath Power ; GVK ; Nagarjuna Cons. ; IVRCL ; Madhucon Projects ; AP Irrigation ; Vijai Electricals ; BSCPL Infra ; Gayatri Projects ; Coastal Projects Site Visits: ; Ramky Infra 1. Emaar - Boulder Hills ; Rithwik Projects 2. Veligonda Irrigation Project Satyam Agarwal ([email protected]; +91 22 39825410) Nalin Bhatt ([email protected]; Tel: +91 22 39825429) Infrastructure 2010 Travelog Building a new landscape YDERABAD. India’s most populated southern city, H has been called the City of Pearls and the City of Nizams. It is the capital of India’s south eastern state of Andhra Pradesh and boasts of the Charminar and many other tourist delights, which are testimony to its erstwhile rulers’ dreams for it. But now it has been transformed into a city of modern day dreams. Not only has it developed as an IT hub, but we found that technocrats have ambitious plans for it as well. As we approach this sprawling city of 8.8m people, the flavor of Hyderabad fills the senses, quite like the biryani it is so famous for. But take a closer look: plans are afoot to change the very landscape into a city of dreams. We spoke with the managements of 15 companies and discovered the brilliance that is yet to come. From an June 2010 Page 2 Building a new landscape Travelog airport that will match the best in the world to waterworks and energy that will elevate the lifestyles of millions, it’s all happening here in Andhra Pradesh. Our three-day journey in the sweltering heat of June uncovered a passion to excel across the board. Although some projects might not have progressed as quickly as planned, the vision remains. June 2010 Page 3 Building a new landscape Travelog Infrastructure 2010: Travel Itinerary 10 June 2010 DAY 1 We met the managements of Hyderabad Airports (pg 12), GVK Power (pg 20), IVRCL (pg 31), the Andhra Pradesh Irrigation Department (pg 38), and rounded off the day with a visit to Boulder Hills, a township by Emaar, and with discussions with emerging leaders like BSCPL, Coastal Projects, Rithwik and Ramky. 11 June 2010 DAY 2 We met the managements of Ind Barath, Nagarjuna Constructions (pg 49), Madhucon (pg 56), Vijai Electricals (pg 61), Gayatri Projects (pg 65), and also discussed issues such as setting up power projects in Andhra Pradesh, real estate and coal mining in Indonesia. 12 June 2010 DAY 3 We visited the Veligonda Irrigation project (pg 68) in Srisailam district, where two 18.8km tunnels are being bored. The project has Tunnel Boring Machines (TBM) which are among the most expensive engineering tools. The journey has its own story to tell. Read on to discover ... June 2010 Page 4 Building a new landscape Travelog Key takeaways from our tour HE Indian infrastructure sector offers significant Tgrowth opportunities, given the targeted spend of US$1 trillion in the Twelfth Five Year Plan and increased private sector participation. Against this opportune backdrop, we embarked on Construction Travel 2010 to Andhra Pradesh, where we interacted with various infrastructure / construction companies, government / bureaucrats, and visited large projects. Power: ambitious expansion plans We were amazed to note the huge capacity addition plans by a few companies in Hyderabad. None of the company managements we met is recognized in capital markets as frontline power utilities. Despite this, these companies cumulatively have operational power capacity of 1.2GW, intend to commission 6GW by FY14/ 15 and have 9.5GW in the planning stages. These companies contribute 0.8% of India’s installed capacity and would have market share of 8-10% in terms of capacity commissioning in FY14/15. Among the major companies are Ind Barath, GVK, Nagarjuna and Gayatri. In fact, Ind Barath, will have a large portfolio of capacity on merchant basis in FY13/ FY14. June 2010 Page 5 Building a new landscape Travelog With gas availability and allocation round the corner in Andhra Pradesh, we expect this number to increase. We have not considered GVK’s gas-based expansion plans for addition by FY14/15 pending gas allocations, but this scenario could change for the better. AMBITIOUS POWER CAPACITY ADDITION PLANS (MW) Operational Addition by Capacity under Total FY14/15 Planning Stage Portfolio GVK 911 870 3,090 4,871 Ind Barath 291 1,728 1,338 3,357 Gayatri 0 1,320 1,320 2,640 Madhucon 0 600 2,395 2,995 Nagarjuna 0 1,320 1,320 2,640 Coastal Projects 0 171 0 171 Total 1,202 6,009 9,463 16,674 Several BOT projects to become operational in FY11 Several infrastructure projects, on an ownership basis, are expected to become operational in FY11. The companies we met during our trip to Hyderabad will commission 16 NHAI road projects, one thermal power project, one hydro power project and one desalination project, largely in FY11. The cumulative project cost of these infrastructure assets is Rs114b and proportionate equity invested is Rs18b. As these projects become operational, operating cash flows will improve. This will also June 2010 Page 6 Building a new landscape Travelog provide financing opportunities through stake sales in these project SPVs, and other means. SIZEABLE PORTFOLIO OF PROJECTS TO BECOME OPERATIONAL IN FY11 (Rs m) Total Project Proportionate Remarks Cost Equity Gayatri 23,345 2,047 5 NHAI road projects Madhucon 36,000 7,830 4 NHAI road project, 1 thermal power project Nagarjuna 32,321 4,545 4 NHAI road project, 1 hydro power project IVRCL 18,350 3,390 2 NHAI road project, 1 desalination project B Sreenaiah 4,081 521 1 NHAI road project Total 114,097 18,333 Funding a key growth constraint Most companies that we met in the course of our travels plan to raise equity funding. This could be a combination of equity dilution in the parent company, equity dilution in the infrastructure holding company and equity dilution in project SPVs. The companies also intend to monetize a part of the operational asset portfolio. Thus, funding and fund raising is becoming critical for growth, for many of the companies. June 2010 Page 7 Building a new landscape Travelog Infrastructure assets: incremental revenue largely flows to bottom-line, operating leverage meaningful For operational infrastructure projects, operating parameters have started improving. During April–May 2010, Hyderabad Airport (HIAL) traffic grew 20% YoY. This compares with FY10 traffic growth of 5.4% YoY. Existing capacity can cater to ~2x passenger traffic and with brownfield expansion, it could cater to 3x current traffic. Given the current under absorption of interest and depreciation costs, HIAL will enjoy superior leverage with pick up in operating factors and increased spend per passenger. [In FY10, interest and depreciation costs for HIAL were Rs530/passenger v/s revenue of Rs673/passenger and EBITDA of Rs351/ passenger.] Similarly, for the Jaipur Kishangarh road project (owned by GVK), FY11 toll revenue is expected at Rs2b (up 17.6% YoY). Project revenue increased by 14.8% CAGR over FY06-10 through 8.6% traffic CAGR and 6.2% toll increase. June 2010 Page 8 Building a new landscape Travelog Founders, senior management of unlisted companies show entrepreneurial spirit As part of our travels, we met several interesting bureaucrats and personalities, who exhibited the entrepreneurial spirit of Andhra Pradesh. At one of the meetings we learned that for Powergrid’s BOOT tenders for power transmission lines, out of 30-33 bids submitted, about half were from Andhra Pradesh. Despite a setback in FY10, Andhra Pradesh Irrigation Department is attempting to put in place a structured mechanism for project implementation. This is commendable, given the current limitations. Cumulative spend over the past five years on irrigation projects in Andhra Pradesh has been Rs530b and projects worth Rs1,220b were contractually awarded in this period. This is one of the largest infrastructure initiatives in India under implementation. Vijai Electricals’ success story is inspiring. Over the years, the company has achieved leadership in India in the distribution transformer segment and is the only organized player in the market. The company is entering the “big boys’ league” and recently added capacities in EHV transformers [current capacity is ~10%]. Very soon, ABB, Siemens, Areva, BHEL and Crompton June 2010 Page 9 Travelog will also have to compete with the entrepreneurial spirit of Andhra Pradesh. Site visit: Veligonda irrigation project We visited Veligonda Tunnel project, executed by Coastal Projects Limited. This project entails drilling two tunnels through mountains, with a length of 18.8km each and diameters of eight and 10 meters. The tunnels are being drilled by Tunnel Boring Machines and the contract value is Rs14b-15b. The project is among the largest ongoing irrigation projects in Andhra Pradesh. An exciting journey to the project site: The 300km journey from Hyderabad to Veligonda took us though i) Rajiv Gandhi Tiger Reserve, ii) Srisailam Dam across the Krishna River, which submerged more than 100 villages when it was built, iii) the famous Mallikarjuna Temple, one of the 12 jyotirlings of Lord Shiva, and iv) the world’s longest bored tunnel, being drilled by Jaiprakash, with a length of ~45km and diameter of The Srisailam Dam across the Krishna River nine meters. June 2010 Page 10 Travelog Giant drills: Tunnel Boring Machines (TBMs) are giant drills that bore through imposing mountains. Each TBM is about 150 meters long and weighs 1,450 tons. Each TBM costs Rs1.2b-1.3b, making it one of the most expensive engineering tools. A railway coach transported us 2.5km into the tunnel to a TBM. Here, at 120 meters underground fresh air must be pumped in.