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. A TBM encases ~150 people working in close coordination with each other, and can move 1.65 meters an hour, leaving a concretized tunnel in its wake. Miniature model of a TBM
June 2010 Page 11 Building a new landscape Travelog
Hyderabad International Airport 1DAY Preparing for take-off
E met GRK Babu, Chief Financial Officer, Adavi W Joshi, Head, Retail-Commercial and members of the senior management of the airport. Their story of the progress of the airport on its journey to a world-class facility was impressive.
Hyderabad International Airport (HIAL) is developed as a greenfield airport by a consortium led by GMR Infrastructure (63% stake), Airport Authority of India (13%), the government of Andhra Pradesh (13%) and Malaysia Airports Holdings (11%). HIAL commenced commercial operations on 23 March 2008.
AERIAL VIEW OF HYDERABAD AIRPORT
June 2010 Page 12 Hyderabad International Airport Travelog
FRONT VIEW OF HYDERABAD AIRPORT
Operating factors improve, HIAL has large operating leverage During April-May 2010, passenger traffic at HIAL was 1.2m, up 20% YoY indicating a strong recovery. This compares with traffic growth of 4.3% in FY10. FY10 passenger traffic was 6.49m passengers and current capacity is 12m passengers, indicating significant under utilization. Given the operating cost leverage, EBITDA margins are expected to increase to ~65% at passenger traffic of 10m against 55% currently. In FY10, HIAL's interest and depreciation costs were Rs530/passenger against revenue of Rs673/passenger and EBITDA of Rs351/passenger. Given the current under-absorption of interest and depreciation costs, HIAL will enjoy superior leverage with a pick-up in operating factors and increased spend per passenger.
June 2010 Page 13 Hyderabad International Airport Travelog
PASSENGER TRAFFIC (M)
5% YoY CAGR of 6.9 6.2 6.5 33% 5.7 4.0 21% YoY 2.9 2.2 1.0 1.2
FY04 FY05 FY06 FY07 FY08 FY09 FY10 Apr- Apr- May May 2009 2010
Existing capacity to cater to 2x passenger traffic; brownfield expansion to cater to 3x current traffic Phase 1 of HIAL was developed at a capital cost of Rs29.2b (v/s Rs23b for Bangalore airport with passenger handling capacity of 12m). Increased cost for HIAL factors in capex for a 305-room hotel Rs2.5b, a fuel farm Rs1.2b (pipelines with pumping points) and other infrastructure Rs1.1b. Higher capex led to increased variable share in revenue streams from concessionaires. The current passenger handling capacity is 12m a year against FY10 passenger traffic of 6.5m. Besides, expansion of passenger handling until 20m a year will be modular and capex limited at Rs8b, providing superior leverage with increased passenger spending. The eventual handling capacity of the airport is envisaged at 40m passengers, which will entail replicating almost the entire infrastructure, including runways.
June 2010 Page 14 Hyderabad International Airport Travelog
HIAL MASTER DEVELOPMENT PLAN
HIAL subsidiary to manage duty free; HIAL to divest hotel business into subsidiary HIAL has awarded major contracts for non-aero revenue on a revenue sharing and minimum guaranteed revenue basis. Thus, improved passenger spends will lead to a higher share of non-aero revenues for HIAL. For duty free, the initial concessionaire, Nuance Group, has discontinued operations and HIAL will undertake the operations through a 100% subsidiary. HIAL will thus directly control one of the key sources of non-aero revenue at the airport. The new company will take over the operations from 21 June 2010. HIAL will divest its 305 room hotel (currently operated
June 2010 Page 15 Hyderabad International Airport Travelog
by Novotel) into a wholly owned subsidiary. This transfer will lower the project cost by Rs2.5b [equity Rs1.1b and debt Rs1.4b]. This will also enable the company to induct a financial/strategic partner in the business going forward. In FY10, a large part of the non-aero revenue was derived from the fuel farm (Rs600m-620m), rentals (Rs300m), advertising (Rs140m-150m), duty free shopping (Rs100m), cargo (Rs140m) and the car park (Rs100m). Higher operating factors for airlines and improved passenger traffic will give rise to an increased number of ATMs, which will lead to a higher increase in aero-related (fuel farm, in-flight kitchen) and non-aero revenue (duty free, advertisement and F&B).
PARTNERS/TIE-UPS FOR NON-AERO REVENUE STREAMS Area Partner Area Partner Cargo operation Menzies plc, UK Airport advertising Laqshya In-flight kitchens LSG Sky Chefs & F&B HMS Host Sky Gourmet Lounge management Plaza Premium Lounge Fuel farm Reliance industries (3 nos) Ltd (925 Kl/day ) Hospitals Apollo Hospitals (17 beds) Business hotel Accor with Novotel Car parking Tenaga Car Parking (305 rooms) brand (COD Oct 2008) of Malaysia Ground handling Menzies Aviation & Telecom services Tata Teleservices Bobba, Air India & SATs Book stores Landmark, Odyssey Duty-free retail Through 100% Forex counters Weizmann, Travelex (2,525sm) subsidiary (from June 2010) MRO Indian Airlines, Malaysia Airlines
June 2010 Page 16 Hyderabad International Airport Travelog
Initial progress on real estate development Out of 1,500 acres of land available at Hyderabad airport, 250 acres each are earmarked for development of aero and logistics SEZs, respectively. Aero SEZ (250 acres): In the Aero SEZ, HIAL entered into contracts with CFM International to set up an engine training center and with Malaysian Aerospace Engineering to set up a JV for the MRO business. The project cost for the MRO operations is US$65m and the companies invested seed capital of US$2m each. Staff has been selected and is undergoing training in Malaysia. HIAL plans to develop four hangars for MRO checks including a D check, which can accommodate three narrow-bodied and one wide-bodied aircraft or five narrow-bodied aircraft simultaneously. Logistics SEZ (250 acres): HIAL plans to develop a logistics SEZ with amenities to assemble and export, largely as a transshipment hub. Balance development (1,000 acres): Real estate development on 1,000 acres is likely to be centered round three major themes: 1) medical tourism, 2) entertainment, and 3) leisure. HIAL has tied up with Apollo Hospitals to develop a 250-bed hospital on 30 acres of land. Development could include a golf course, convention centre, shopping malls, and gaming and entertainment zones.
June 2010 Page 17 Hyderabad International Airport Travelog
REAL ESTATE DEVELOPMENT PLAN Acres Usage 250 Aviation SEZ: Aircraft maintenance and manufacturing, assembling or repairing of avionic components, etc. SEZ notification received in October 2009 and subsequently was transferred to 100% subsidiary company, GMR Hyderabad Aviation SEZ Ltd. Tie-up with Malaysian Aerospace Engineering for JV for MRO business, CFM International for engine training centre and other facilities 250 Logistics SEZ: Largely to be developed as a transshipment hub 1,000 Medical, entertainment, leisure
BETTER CONNECTIVITY IS A KEY ADVANTAGE
June 2010 Page 18 Hyderabad International Airport Travelog
GMR's stake in HIAL valued at Rs33b, Rs9/share We expect HIAL to post FY11 net loss of Rs251m, and net profit of Rs513m in FY12 (including profit from RE monetization). We value HIAL at Rs33b (for GMR's stake of 63%), comprising airport operations at Rs15b and real estate at Rs18b. We have considered a 40% discount to the real estate NAV for our SOTP valuations.
HYDERABAD AIRPORT VALUATION (FOR GMR'S 63% STAKE) Particulars Value (Rs m) Rs/sh Core Business 15,315 4 Real Estate 18,120 5 Total NPV 33,434 9
HIAL: SIGNIFICANT OPERATING/FINANCIAL LEVERAGE LIKELY (Rs m) FY09 FY10 FY11E FY12E Passenger (m) 6.2 6.5 7.7 8.7 Net revenue 3,982 4,211 5,516 6,494 Staff, admin cost 2,388 1,923 2,021 2,124 EBIDTA* 1,431 2,288 3,274 4,109 Margin (%) 35.9 54.3 59.4 63.3 Interest 1,592 2,079 2,145 2,145 Depreciation 1,122 1,370 1,444 1,487 PAT (1,211) (1,103) (251) 513 Cash Profit (89) 267 1,193 2,000 Summary (Rs/passenger) Net revenue 641 646 719 748 Staff, admin cost 384 295 264 245 EBITDA 230 351 427 473 Interest 256 319 280 247 Depreciation 180 210 188 171 PAT (195) (169) (33) 59
June 2010 Page 19 Building a new landscape Travelog
GVK Power & Infrastructure 1DAY Powering ahead
E met business heads and members of senior management W from various divisions at GVK Power and Infrastructure and were told about the progress the company is making in various sectors including roads, power and oil and gas.
Road business 1. The Jaipur-Kishangarh Expressway The Jaipur-Kishangarh Expressway (JKEL) toll collections increased to Rs4.7m a day in FY10 from Rs2.2m a day in FY06, its first year of operations. Traffic, measured in terms of passenger car units (PCUs) increased from 45,000 to 62,500 in this period and project revenue increased from Rs980m in FY06 to Rs1.7b in FY10, a robust 14.8% CAGR over FY06-10. This was achieved through 8.6% traffic CAGR and 6.2% toll increase CAGR. 70% of the JKEL traffic comprise commercial vehicles (trucks, multi-axle vehicles), which are dependant on industrial activity. The GVK management stated that in the best year, commercial vehicle traffic grew 18% YoY and in the worst year, it de-grew 0.4%.
June 2010 Page 20 GVK Power & Infrastructure Travelog
TOLL COLLECTION BOOTH AT JKEL
In FY11, toll revenue of Rs2b is expected (up 17.6% YoY). Toll increase from July 2010 is expected at 9.54%, based on the WPI index as at March 2010. Revenue growth going forward is expected at 18-20% a year.
The capacity of the road is 140,000 PCUs and thus at ~8.6% traffic growth (historical average), the road will reach peak capacity in FY19 or FY20. The concession period expires on 17 March 2023. Outstanding debt in the project was Rs2,250m as at March 2010 and will be completely repaid by 2017.
June 2010 Page 21 GVK Power & Infrastructure Travelog
JKEL: REVENUE, PAT (RS M)
Net profit for FY10 was impacted due to periodic maintence capex of 2,100 ~Rs900m; partly offset by revision in depreciation policy. For FY11, the maintenance capex is Rs100m Revenues PAT 1,575
1,050
525
0 FY06 FY07 FY08 FY09 FY10 FY11 FY12
2. Kota-Deoli road project GVK recently bagged the four-laning of the Kota- Deoli road project covering 88km. The project cost is estimated at Rs8b-8.5b. Equity return is expected at 18%. The project is expected to achieve financial closure in 2HFY11. After JKEL (which was among the earliest projects awarded by NHAI), this is only the second project win by GVK in the roads sector.
June 2010 Page 22 GVK Power & Infrastructure Travelog
Power business 1. Gas based expansion of 2.4GW GVK said it would expand its gas-based capacity by 2.4GW, including 1.2GW expansion each at Gautami and JPII. The configuration at Gautami will be three turbines of 400MW each and at JPII will be three turbines of 408MW each. The EPC contract for the Gautami expansion is expected to be signed in June 2010, and EPC contractors are a consortium of Hyundai (Korea) and L&T Chennai. For the JPII expansion, Alstom is the expected EPC contractor. For both project expansion plans the land is in possession and a large part of the water availability has also been tied up. Environment clearance has also been obtained. The company has applied to Powergrid for power evacuation. 35-40% of the capacity will be sold to AP discoms. Financial closure of the initial few sets is targeted by October 2010, after gas allocation by the government. The construction period is 31 months after financial closure, given the shorter gestation period for gas-based power projects.
June 2010 Page 23 GVK Power & Infrastructure Travelog
2. Goindwal Sahib (540MW) Goindwal Sahib achieved financial closure on 2 February 2010 and construction has commenced. Piling foundation for boiler 1 is almost complete and the site will soon be handed over to BHEL for installations. Punj Lloyd has also been mobilized for the BOP work. BHEL has started sending foundation equipment to the site. The project is expected to be completed in 36 months. In Tokisud mines, the company acquired 60% of the land required. Environment clearance and stage 1 forest clearance is also available and the company is expected to sign the mining lease in two months.
3. Alaknanda Hydro Power Project (330MW) Work on Alaknanda Power Project is progressing per schedule and overall physical progress is 50%. The revised project cost is Rs27b (v/s an initial target of Rs20b) due to reclassification of the seismic zone. Project commissioning is expected by December 2011. Design energy for the project is 1,309MUs, translating into PLF of 55%. GVK will get returns based on prior CERC norms of 14% ROE, plus incentives.
June 2010 Page 24 GVK Power & Infrastructure Travelog
DT INTAKE AND COFFERDAM DIVERSION DAM
GANTRY ERECTION AT HEAD RACE POWER CHANNEL TUNNEL
June 2010 ?? Page 25 GVK Power & Infrastructure Travelog
4. Wins Rattle Hydro Power Project in J&K [690MW, 6 X 115MW] GVK recently won 90MW Rattle Hydro Power Project in J&K. This is first hydro power project to be awarded on a competitive based bidding mechanism in India. Other bidders included Tata Power, Lanco and L&T. Scheduled commissioning for the project is 81 months from the date of LoI (received in May 2010) and the concession period is 35 years. In 24 months, the project is expected to receive all approvals. The project DPR was prepared by NHPC in 2007. The GVK management believes there is a fair possibility of completing the project ahead of schedule. Access to the project is easy as it is located near the national highway in Jammu. Free power is 16% comprising of 1% towards local area development and 15% to the state government. Terminal value after 35 years is Rs3.8b, which will be paid by the J&K government for transfer of the project. GVK has quoted a tariff of Rs1.44/unit for 55% of the power to discoms and 45% will be available for sale on a merchant basis. The internal estimate of the project cost is Rs50b and upfront payment in FY10 is expected at Rs350m. Rehabilitation is restricted to only one village, involving less than 50 people.
June 2010 Page 26 GVK Power & Infrastructure Travelog
CAPACITY ADDITION BY GVK (MW)
Existing Alakananda HEP Goindwal Sahib Rattle HEP 2,471*
690
540
911 330
FY10 FY12E FY13E FY16E FY17E
* Excluding 2400MW Gas-based power project expansion at JP-II and Gautami projects, pending gas allocation
Oil and gas GVK bid for seven deep-sea blocks, including six in Mumbai High and one in the Kerala-Konkan region. This was through a JV with BHP-Billiton, with GVK having a 74% share. These are largely frontier blocks, on which not much data were available. The commitment was to spend US$60m for exploratory data, which would cover 2D seismic study, and other elements. GVK has spent US$17m so far on oil and gas and the cumulative spend until December 2010 for data acquisition will be US$26m-27m. After that, data processing will commence, which will require US$36m-
June 2010 Page 27 GVK Power & Infrastructure Travelog
39m. The next stage will be drilling exploratory wells, depending on the data analysis.
Equity investment of Rs5.4b in FY11, plus Rs2b-3b if gas based project expansion/NHAI project achieves financial closure For FY11, GVK's equity commitment will be Rs5.4b, largely towards initial contribution for gas based power project expansion (Rs1b), Alaknanda/Goindwal Sahib (Rs3b), oil and gas (Rs300m-400m), Mumbai airport (Rs740m), upfront payment for Rattle Hydro Power (Rs350m). Successful financial closure of 800-1,200MW gas-based project expansion will entail incremental equity investment of Rs1.2b-2.5b; plus Rs700m towards Kota- Deoli NHAI road project. Bangalore airport debt of Rs6.8b (interest rate 9%) needs to be refinanced in January 2011, entailing refinancing requirements of ~Rs7.5b. Part of the fund requirement is intended to be met through private equity in the power business (~US$200m- 250m, in advanced stages) and internal accruals. Private equity funding in the airport business looks challenging due to regulatory uncertainty. GVK also has options to securitize cash flows in operational projects.
June 2010 Page 28 GVK Power & Infrastructure Travelog
Valuations and view We expect GVKPIL to post consolidated net profit of Rs3.2b in FY11 (up 100% YoY) and Rs5b in FY12 (up 56% YoY). At a CMP of Rs45, the stock trades at a PER of 21x FY11E and 14x FY12E. We arrive at an SOTP based target price of Rs54/share, comprising the airports (including Bangalore airport at book value) at Rs25/share, roads at Rs7/share, power portfolio at Rs17/share and investment in other projects, cash at Rs3/share. Maintain Buy.
NET PROFIT (RS M) Summary of SPV wise profitability FY09 FY10 FY11 FY12 Mumbai International Airport Limited 316 517 694 927 Jaipur Kishangarh Expressway 534 591 863 1,089 Jegurupadu Phase I 72 10 256 212 Jegurupadu Phase II - 263 752 1,083 Alakananda Hydro Project - - - 423 Gautami Power Project - 232 676 979 Other Business (Mining, O&M) - - 331 Reported PAT 1,076 1,559 3,240 5,044
June 2010 Page 29 GVK Power & Infrastructure Travelog
GVK POWER AND INFRASTRUCTURE: SOTP VALUATIONS (RS M) Project % Holding Basis WACC % Equity ValueIn % Rs/sh Mumbai Airport 38,836 45 25 Core business operations 37.0 DCF 8.7 13,966 16 9 Real Estate 37.0 DCF, At NAV 12.0 24,870 29 16 Bangalore Airport BV of investment 4,850 6 3 Roads 10,603 12 7 Jaipur Kishangarh Exp 100.0 DCF 9.6 10,603 12 7 Power 27,219 32 17 Jegurupadu Phase I 100.0 DCF 9.4 4,359 5 3 Jegurupadu Phase II 100.0 DCF 9.5 5,416 6 3 Alakananda Hydro project 100.0 DCF 10.0 4,211 5 3 Gautami Power Project 64.0 DCF 9.4 5,574 7 4 Goindwal Sahib Project 100.0 DCF 11.1 5,460 6 3 Coal Mining 74.0 DCF 9.4 2,170 3 1 Goriganga Hydro power project BV of investment 28 0 0 Others Oil & Gas Exploration BV of investment 300 0 0 O&M Business 100.0 DCF 10.5 1,243 1 1 Investment in SEZ Book Value 1,060 1 1 Cash FY10 Book 1,500 2 1 Grand Total 85,612 100 54
June 2010 Page 30 Building a new landscape Travelog
IVRCL 1DAY One for the road
UR meeting with senior management of IVRCL revealed O that the company had ambitious plans of diversifying both geographically and segment-wise. The company's share of water projects in its order book has declined while that of road projects has increased. BTB has increased from 3x in FY09 to 3.9x currently and the target is to increase it to 4.6x by FY11, providing robust growth visibilities.
Attempts at segmental, geographical order book diversification; expect higher BTB ratio IVRCL is in a transition phase, with attempts to diversify its order book, in terms of new verticals and geographies. The share of water projects declined from 70% of the order book at the end of FY09 to 46% at the end of FY10; but the share of roads increased from 5% of the order book to 32%, largely due to group BOT project wins. IVRCL has also identified new business verticals such as: i) marine, including piling and dredging, and ii) mining contracts. IVRCL has also set up initial presence in certain overseas markets, submitted
June 2010 Page 31 IVRCL Travelog
bids for electrical tower projects in Africa, and is planning acquisition of manufacturing units abroad (to complement its strengths in Hindustan Dorr Oliver). The book-to-bill (BTB) ratio increased to 3.9x at the end of FY10, up from 3x at the end of FY09. The increased order intake is driven by projects that entail a longer gestation period [~50% of the intake in FY10 is being driven by in-house road BOT projects]. For FY11 the management has guided for closing its order book at Rs320b and revenues of ~Rs70b; thus implied BTB stands at 4.6x. This will be a meaningful increase.
ATTEMPTS TO DIVERSIFY ORDER BOOK COMPOSITION (%)
Water Roads Building Power 3 6 10 12 8711 8 5 20 15 17 16 11 20 18 23 33 5 20 19 26 22 8 32
70 70 57 58 56 56 61 51 48
FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10
June 2010 Page 32 IVRCL Travelog
BOOK-TO-BILL RATIO AT 3.9X TTM REVENUE, TARGET 4.6x BY FY11
Order Book (Rs b) Book to Bill (ttm x) 4.0 3.9 3.8 3.7 3.7 3.5 3.5 3.4 3.3 3.3 3.2 3.2 3.1 3.0 2.9 2.8 67 66 72 81 95 96 110 127 124 138 143 145 139 150 173 212 1QFY07 2QFY07 3QFY07 4QFY07 1QFY08 2QFY08 3QFY08 4QFY08 1QFY09 2QFY09 3QFY09 4QFY09 1QFY10 2QFY10 3QFY10 4QFY10
IVR Assets to book 35-40% EPC/construction profits on BOT projects For the order book from IVRCL Assets, IVRCL will get EBITDA margins of ~9% for project construction and IVRCL Assets will retain 3-4% margins on project management and design improvements. Given that a construction contract will cover 65-70% and project management 85-95% of project costs, we understand 60-65% of combined EPC/construction profits will be accounted in IVRCL and 35-40% in IVRCL Assets.
June 2010 Page 33 IVRCL Travelog
Net working capital cycle improves; debtor days deteriorate to 115 in FY10 For IVRCL, net working capital in FY10, excluding advances to subsidiary companies was Rs18.4b. This was largely similar to that in FY09, despite 12.5% revenue growth in FY10. We understand that a large part of this improvement is driven by increased current liabilities (up 46% YoY) driven by higher mobilization advances, which are largely interest bearing. Debtor days have deteriorated from 65 days in FY08 to 84 in FY09 and 115 days in FY10. Thus, increased interest bearing advances led to higher interest costs in 4QFY10 at Rs525m against Rs368m in 3QFY10; despite debt in absolute levels declining to Rs16b from Rs19.4b.
BALANCE SHEET: IMPROVEMENT IN NWC DRIVEN BY INCREASED CURRENT LIABILITIES US$m FY09 FY10 Debt 270 302 Current Assets 791 936 Current Liabilities 314 460 Net Working Capital 477 476
June 2010 Page 34 IVRCL Travelog
DEBTOR DAYS DETERIORATED IN FY10
114 115 106 99 84
65
FY05 FY06 FY07 FY08 FY09 FY10
IVRCL Assets and Holdings: equity investment contingent on fund raising IVRCL Assets and Holdings has a portfolio of 10 projects comprising eight roads, one desalination plant and one tankage facility. Total project cost stands at Rs125b and over one year, the asset size is targeted at Rs220b-230b. We believe this increase is challenging given the funding constraints. Equity investments on the existing portfolio is Rs22b, of which IVRCL's share is Rs19b. Outstanding equity investments by IVRCL stands at Rs15b-16b. While the company has achieved financial sanctions for many projects, financial closure will entail that 25-35% of the equity will have to be invested upfront.
June 2010 Page 35 IVRCL Travelog
The management stated that funding needs would be largely met through: private equity investment in project SPVs at Rs4b-4.5b, structured finance/QIP in IVR Assets Rs5b and real estate monetization Rs4b-5b (over three years). Thus a large part of the equity requirement is contingent on fund raising/asset sale. For IVRCL Assets, revenue in FY11 is expected at Rs10b, including Rs3.5b from toll/annuity revenue. FY12 revenue is expected to be Rs20b, including Rs6b from toll/annuity revenue. Successful fund raising in IVRCL Assets is also important for IVRCL's execution as 15-18% of FY11 revenue are expected to be contributed by in-house projects.
IVRCL ASSETS: BOT PROJECT DETAILS Project name Length Concession Project Equity IVRCL Expected (kms) cost Share (%) Completion Jalandhar - Amritsar Road Project 49 20 years 3,436 641 100 FY11 Salem to Kumarapalayam 53.53 20 years 5,020 800 100 FY11 Kumarapalayam - Chenagmpalli 48.51 20 years 4,215 651 100 FY10 Chennai Desalination 100MLD 25 years 5,679 1,730 75 FY11 Sion - Panvel 25 18.9 years 14,500 3,500 51 FY14 Baramati - Phaltan 77.9 25 years 3,820 690 75 FY14 IOCL Tankage 12 tanks 15 years 30,000 2,250 38 Chengapalli - Walayar 42 27 years 11,250 4,250 100 FY14 Indore - Gujarat 155 27 years 15,237 3,809 100 FY14 Goa - Maharashtra 122.06 23 years 30,000 4,000 100 FY14 Aggregate 123,157 22,321
June 2010 Page 36 IVRCL Travelog
Maintain Neutral We expect IVRCL to report net profit of Rs2.6b in FY11 (up 21.9% YoY) and Rs3.4b in FY12 (up 31.5% YoY). Maintain Neutral, with a price target of Rs184. At a CMP of Rs181, the stock quotes at reported PER of 19.4x FY11E and 14.8x FY12E and adjusted PER of 13.2x FY11E and 10.1x FY12E.
June 2010 Page 37 Building a new landscape Travelog
A P Irrigation Department 1DAY Wealth from water
UR discussions with Shailendra Kumar Joshi, IAS, O Principal Secretary to Government (Projects), Irrigation and Command Area Development Department, revealed the enormity of the Jalayagnam project. The project has hit a few roadblocks but the A P Irrigation Department seems to be doing its best to get things moving. It is, after all, a project that can help to change for the better, the lives of millions.
Jalayagnam: an ambitious project The government of Andhra Pradesh’s ambitious irrigation infrastructure project, Jalayagnam, comprises major, medium and minor ventures. Jalayagnam includes 44 major irrigation projects, 30 medium irrigation projects, eight modernization projects and four flood- bank strengthening projects. Jalayagnam is expected to irrigate 10m acres and was scheduled to be completed by FY14. Since 2004, 12 projects have been completed and 2.2m acres have been irrigated. The project entails land acquisition (0.8m acres), resettlement and rehabilitation (0.13m families).
June 2010 Page 38 A P Irrigation Department Travelog
June 2010 Page 39 A P Irrigation Department Travelog
Project implementation: priority to complete projects with 75%+ physical progress Jalayagnam's 86 projects were approved at a project cost of Rs1,790b. Of this, projects costing Rs1,220b were awarded to contractors. The remaining projects worth ~Rs550b are awaiting clearances of issues such as land acquisition, rehabilitation of families and environment and forest department clearances. Since 2004, Rs530b has been spent on irrigation projects, of which Rs430b has been towards Jalayagnam, and Rs100b on modernization/upgrading of existing projects and on minor irrigation projects. Out of the 86 projects, only 12 were complete by March 2010 and partial benefits have been given on 20 projects. The target is to complete 39 projects by mid-FY12 (including 20 projects for which partial benefits have been given), which would take the number of completed projects to 51. The 39 projects have achieved over 75% physical progress and are on the government's priority list for completion. The estimated remaining cost for completion of the 39 projects is Rs68b.
June 2010 Page 40 A P Irrigation Department Travelog
Funding a constraint, but scenario has improved since 2QFY10 Budgetary allocation for the Jalayagnam projects accounted for 40-42% of the government of Andhra Pradesh's Plan Budget, and is thus its flagship project. In FY10, budgeted allocation to the Jalayagnam project was Rs170b and actual spend was Rs120b. In FY11 the budget allocation is Rs150b but actual spending is estimated at Rs120b. Real estate comprises less than 1% of government revenues and is not impacting project execution. As at March 2010, the outstanding liability towards contractors was ~Rs40b. As of date, bill payments have been made for work done until November 2009. For AIBP projects, funding has been cleared until February 2010. Spend in FY11 will include payments of outstanding dues of ~Rs40b to contractors, Rs68b towards 39 projects which are more than 75% completed and balance amount will be used for other projects. Since a large part of the allocation is for clearance of past dues, the allocation to spending on work on the projects will be curtailed.
June 2010 Page 41 A P Irrigation Department Travelog
The government has also revised milestones for project execution/completion from 36/42 months to ~60 months. This will slow execution. The Jalayagnam project was targeted to be completed by FY14 but is expected to take 2-3 years more due to delays.
Escrow mechanism for contractors To partly address funding constraints for contractors, the government has provided comfort to financial institutions and banks through an escrow account. Contractors can take advances against outstanding receivables. The interest cost on the advances must be borne by contractors. The mechanism is largely to address the funding requirements.
Execution challenges The Jalayagnam project entails execution challenges because of its large size, land acquisition issues, resettlement and rehabilitation of families on the land for the project, and delays in obtaining clearances from the environment and forest departments. Irrigation projects also involve inter-state issues because of the use of water from sources that run through other states. Funding is also a constraint.
June 2010 Page 42 A P Irrigation Department Travelog
Central government funding The central government is weighing the possibility of declaring the Polavaram (Rs63b) project a national project. The central government bears 90% of the cost of a national project. A project can be declared a national project if it i) has an ayacut of 250,000 hectares, ii) leads to inter-linking rivers, iii) involves inter-state issues, or iv) involves international border issues. Initial contracts on the Polavaram project were pre- closed and the project tender is expected to be re- awarded soon. The project will be implemented if it receives central government funding.
Huge opportunity cost of scarce water The opportunity cost of scarce water is huge as it leads to losses in industrial development and agricultural production. For instance, the Polavaram project's opportunity loss is Rs20b a year, because it can irrigate 725,000 acres of agricultural land and expedite expansion plans of companies like SAIL and NTPC, which have been impacted by a water shortage.
June 2010 Page 43 A P Irrigation Department Travelog
Andhra Pradesh irrigation projects: Among the largest infrastructure initiatives in India
AMRP INCLUDING SLBC TUNNEL
Cost: Rs56b Irrigation potential (acres): 370,000 Power requirement: 116MW CoD: 2013-14
SRIRAM SAGAR PROJECT (SRSP, STAGE II)
Cost: Rs8.3b Irrigation potential (acres): 440,000 CoD: 2011-12
June 2010 Page 44 A P Irrigation Department Travelog
FLOOD FLOW CANAL FROM SRSP PROJECT
Cost: Rs47b Irrigation potential (acres): 220,000 Power requirement: 48MW CoD: 2012-13
INDIRA SAGAR RUDRAM KOTA LIFT IRRIGATION (LIS)
Cost: Rs18b Irrigation potential (acres): 200,929 Power requirement: 229MW CoD: 2012-13
June 2010 Page 45 A P Irrigation Department Travelog
J. CHOKKA RAO - DEVADULA LIS
Cost: Rs92b Irrigation potential (acres): 621,000 Power requirement: 384MW CoD: 2013-14
INDIRA SAGAR (POLAVARAM) PROJECT
Cost: Rs103b Irrigation potential (acres): 721,000 Power requirement: 960MW CoD: 2012-13
June 2010 Page 46 A P Irrigation Department Travelog
POOLA SUBBAIAH VELIGONDA PROJECT
Cost: Rs52b Irrigation potential (acres): 447,300 Power requirement: 15MW CoD: 2013-14
TELUGU GANGA PROJECT
Cost: Rs44b Irrigation potential (acres): 522,539 CoD: 2010-11
June 2010 Page 47 A P Irrigation Department Travelog
GALERU - NAGARI SUJALA SRAVANTHI
Cost: Rs72b Irrigation potential (acres): 255,000 CoD: 2010-12
June 2010 Page 48 Building a new landscape Travelog
Nagarjuna Construction DAY 2 Consolidation on the cards
UR interaction with the management of Nagarjuna O Construction revealed that the company would consolidate its global business in FY11 and EBITDA margins would be sustained. Most of the BOT projects under construction will be commissioned in FY11, improving operational cash flows. The company also plans to acquire coal mines in Indonesia.
International business: FY11 to be a consolidation year, increased competition During FY11, the management intends to consolidate its international business. According to its FY11 business plan, approved by the board, international operations will contribute revenue of Rs13b, and order intake is expected to be Rs7b. This compares with gross intake of Rs20b in FY10. Over the past four years, the business has grown meaningfully, from revenue of Rs1b in FY07 to Rs11.2b in FY10. The international business order book as at March 2010 was Rs33b (contribution of 21%).
June 2010 Page 49 Nagarjuna Construction Travelog
Competition is now increasing with various Chinese/ Turkish companies entering the market. A slowdown in Dubai has also led to increased competition for projects in places like Abu Dhabi and Muscat. Nagarjuna also intends to enter countries like Kuwait and Qatar. In the international business, Nagarjuna is focused on the transport, water and buildings segments. Since the orders are from government agencies, payment risks are mitigated. EBITDA margins in international projects at the bid level are similar to those of domestic projects. As tax rates in Muscat and Dubai are low (nil in Dubai, 12% in Muscat), PAT margins are better. All international orders are on a fixed-price contract basis and the company benefited from a decline in commodity prices in FY10. The management believes EBITDA margins will be sustained as operational efficiencies have crept in.
INTERNATIONAL BUSINESS: FY11 TO BE A YEAR OF CONSOLIDATION (Rs M) FY08 FY09 FY10E FY11E Order Book 24,240 33,030 32,920 25,750 Revenues 1,466 5,753 9,342 13,450 Net Profit 63 260 448 673 In % 4.3 4.5 4.8 5.0
June 2010 Page 50 Nagarjuna Construction Travelog
Investments in RE/BOT projects of Rs11.8b, new BOT road project win after 3-4 years Nagarjuna has so far invested Rs11.8b in real estate and on road BOT projects (including advances of Rs2.4b). The outstanding equity commitment is Rs600m-700m, including cost overruns, of which a large part will be invested in 1QFY11. Most of the BOT projects under construction are expected to be operational by end FY11, which should improve the operational cash flows. Nagarjuna was recently awarded an NHAI road project, at a cost of Rs15b in West Bengal. This win is the first of its kind after 3-4 years. Nagarjuna has capped further equity investment on real estate. It plans to recover investments through project launches as the real estate market improves. The company has commenced apartment sales in the National Games Village in Ranchi: 250 apartments of the 1,000 apartments constructed and attributable to Nagarjuna have been sold. Nagarjuna Urban will have revenue of Rs2.7b in FY11, up from Rs1.1b in FY10.
June 2010 Page 51 Nagarjuna Construction Travelog
SIX BOT PROJECTS TO BE OPERATIONAL BY END FY11 Project Equity NCC Status Type Cost Invested Stake (Rs m) (Rs m)* (%) Transport Bangalore-Maddur (Brindavan) Annuity 2,475 150 33 Operational Orai-Bhognipur, UP Annuity 5,840 936 68 July 2010 Bangalore-Hosur Elevated Road Toll based 8,520 1,149 40 Jan 2010 Merrut-Muzzafarnagar, UP Toll based 6,349 1,170 43 July 2010 Pondicherry Road 3,150 330 48 Sept 2010 Power Himachal Sorang (100MW) Hydropower 5,987 810 67 Mar 2011 Total 32,321 4,545 * Nagarjuna share
Thermal power: case 1 bids of 400MW signed, plans to acquire coal mines in Indonesia Nagarjuna plans to set up a 1,320MW thermal power plant in Andhra Pradesh, for which most of the clearances and coal linkages have been received and land acquisition (1,800 acres) completed. Project EPC will be executed by Nagarjuna, and BTG will be awarded to Chinese companies. Nagarjuna is expected to make EBITDA margins of 11-12% and PBT margins of 7-8%. The company has participated in a case 1 bid and signed PPA with Karnataka to supply 400MW at Rs3.89/ unit for 25 years. Nagarjuna intends to have 80% on long term PPAs and 20% on a merchant basis.
June 2010 Page 52 Nagarjuna Construction Travelog
The project is expected to achieve financial closure by the end of June 2010. Nagarjuna has 100% stake in the project and plans to induct a financial investor (maximum 49% dilution). The project cost is Rs65.7b, which will be financed as debt of Rs51.6b and equity of Rs17.2b. The company has spent Rs650m-700m on the project so far. Financial closure will entail upfront equity investment of Rs5.8b. 70% linkage has been obtained from Mahanadi coal fields and landed cost is expected at Rs1300/ton. 30% of the coal will be met through imports. Nagarjuna intends to acquire coal mines in Indonesia with reserves of ~30mt reserves and negotiations are underway. FOB price is expected at US$35/t and CIF including local transport will be US$55/ton. Generation cost is expected at Rs2.4/unit. The project also entails phase-2 expansion of 1,320MW for which most clearances are in place.
Dubai real estate: trigger point for customer payment should indicate cancellations So far, Nagarjuna Urban Infra has invested Rs3.4b in the project including through client advances, borrowings and equity investment. Nagarjuna plans to complete construction of Tower 1 up to the tenth floor (cost Rs500m), which will be the next trigger
June 2010 Page 53 Nagarjuna Construction Travelog
point for further payment by customers and should indicate the quantum of cancellations. We believe there is a fair possibility of cancellations in the project, which will entail blockage of funds by Nagarjuna until economic conditions improve in Dubai. The sale value of Tower 1 is Rs5.5b and the construction cost is Rs4b (excluding land cost). Thus, after factoring in the proportional cost of land and interest during construction, Tower 1 is expected to only break even.
NAGARJUNA: BUSINESS PLAN FY11 (RS M) Build Trans- Water Elec- Irri- Metals Power Others Inter- Total ings port trical gation national Op. O/ Book 36,890 11,790 24,250 7,100 15,750 4,940 10,650 9,460 32,950 153,780 (Mar-10) Order Intake 32,000 20,000 15,000 6,000 6,000 5,900 50,000 9,000 6,250 150,150 Revenue 18,150 5,060 14,000 4,230 3,600 4,170 3,510 3,520 13,450 69,690 Cl. O/ Book 50,740 26,730 25,250 8,870 18,150 6,670 57,140 14,940 25,750 234,240 (Mar-11)
June 2010 Page 54 Nagarjuna Construction Travelog
BOOK-TO-BILL RATIO AT 2.7X TTM REVENUE
Order Book (Rs b) Book to Bill - x (ttm) 3.3 3.3 3.2 3.1 3.1 3.0 2.8 2.8 2.8 2.7 2.7 2.7 2.7 2.6 2.6 2.6 63 67 70 73 78 90 98 114 122 124 124 122 139 143 148 154 1QFY07 2QFY07 3QFY07 4QFY07 1QFY08 2QFY08 3QFY08 4QFY08 1QFY09 2QFY09 3QFY09 4QFY09 1QFY10 2QFY10 3QFY10 4QFY10
Maintain Buy We expect Nagarjuna to post net profit (from the construction business, including overseas companies) of Rs3b in FY11 (up 26.7% YoY) and Rs3.7b in FY12 (up 22.5% YoY). Maintain Buy, with a price target of Rs204/ sh. At a CMP of Rs190, the stock quotes at a reported PER of 16.2x FY11E and 13.3x FY12E, and adjusted PER of 13.1x FY11E and 10.7x FY12E.
June 2010 Page 55 Building a new landscape Travelog
Madhucon Projects DAY 2 SPVs commence operations E met S Vaikuntanathan, Director Finance, and S W Jagannadham, Executive Director, of Madhucon Projects. By end FY11, the company will have an operational portfolio of four NHAI projects (317km), Thermal Power (300 MW) and coal mining in Indonesia (250mt). Funding is a challenge.
Contracting order book Rs57b, in-house orders 60% Madhucon Project's current order book is Rs57b and its book-to-bill ratio is 4.4x FY10 revenue. Order composition is: power (42%), irrigation (24%), roads (24%), buildings (7%). The share of in-house projects in the order book is Rs36b, comprising roads (Rs7.5b), power (Rs24b) & buildings (Rs4b). In-house orders contribute 60% to the order book. Within irrigation, a large number of the projects is from Andhra Pradesh, which entails that the execution on this order book will be limited in FY11. The management has guided for FY11 revenue of Rs20b (v/s Rs13.1b in FY10) and PAT margins of 4.8% (v/s 3.3% in FY10). We believe that given the order book composition, the guidance is challenging.
June 2010 Page 56 Madhucon Projects Travelog
CONTRACTING BUSINESS: FINANCIAL (RS M) FY05 FY06 FY07 FY08 FY09 FY10 Revenues 3,106 3,495 5,315 7,506 10,445 13,076 EBIDTA % 14.4 20.1 18.4 16.0 13.7 10.6 PAT % 5.2 9.5 7.8 6.3 4.5 3.3 PAT 162 333 416 473 469 432
Four operational road BOT projects by end-FY11 Madhucon is executing four road BOT projects with a total length of 320km (project cost Rs20b and equity of Rs3.8b). A large part of the equity has already been invested. Currently two road projects are operational and the remaining two projects will start partial tolling in July 2010. These four projects will generate toll revenue of Rs1.7b a year. Recently Madhucon was awarded the Chhapra-Hajipur four-laning road project by NHAI in Bihar on an annuity basis. The project size is 64km and project cost is Rs8.2b. Target DER is 75:25 and annuity payments are Rs634m payable semi-annually. The concession period is 15 years, including 2.5 years of construction.
June 2010 Page 57 Madhucon Projects Travelog
BOT PORTFOLIO: FOUR OPERATIONAL PROJECTS BY END AUG 2010 (RS M) Equity (%) Length (km) COD Project Cost Grant Bharatpur - Mahwa 85 58 May-09 3,380 960 Karur - Dindigul 98 73 Nov-09 3,730 860 Trichy - Thanjavur 100 57 July / Aug 2010 3,900 780 Madurai - Tuticorin 85 129 July / Aug 2010 9,200 1,440 Chhapra - Hajipur 100 64 2014 8,200 - Total 28,410 4,040
Power: 300MW to start operations end-FY11, 3.7GW in various stages of completion Krishnapatnam Phase 1 project capacity has been increased to 300MW (2 units of 150MW each), v/s initially 270MW (2 units of 135MW each). Project capex is Rs16b, which will be funded on a DER of 75:25. As at March 2010, the company incurred capex of Rs7b and the rest will be spent in FY11. Equity invested is Rs2.2b. During the first phase, 200MW capacity was tied up with PTC, which will supply the coal, and the rest of the power will be sold on a merchant basis. Phase 2 will comprise two units of 150MW each to be set up at a project cost of Rs16b. Financial sanctions have been received and the project is expected to achieve financial closure shortly. Equity investment expected in FY11 for Phase 2 is Rs2b.
June 2010 Page 58 Madhucon Projects Travelog
The company plans to set up 1,320MW at Krishnapatnam in Phase 3, it has signed an MOU with the government of Jharkhand to set up a 1GW thermal project and was awarded hydro power projects of 75MW by the Uttarakhand govewrnment. Construction for the hydro power projects is expected to commence by the end of FY11.
Indonesian coal mines to start production in FY11 Madhucon's 95% subsidiary, PT Madhucon, Indonesia has started excavation at the East Kalimantan mines in Indonesia, which as per a geological survey, has reserves of 250mt spread over 3,188 hectares. The jetty to export the coal from this mine is expected to be completed by the end of August 2010. Production is expected as follows: 0.5m-0.6mt in FY11, 1.5mt in FY12 and 2.5mt in FY13. For production beyond 1.5mt, incremental capex will be required for the mining infrastructure. The company also received another license to prospect coal from 10,000 hectares of land in and around Sumatra, Indonesia and the expected mineable reserves are 900mt. Geological studies are being conducted. The management says it takes 6-7 years to start mining in Indonesia, which is a long gestation period.
June 2010 Page 59 Madhucon Projects Travelog
Real estate Madhucon has nine acres of land in Kukatpally, Hyderabad, which it acquired at an auction from the Hyderabad Urban Development Authority (HUDA) for Rs45m an acre in 2005. The company plans to develop about 2.1msf for mixed use development, including a four-star hotel, commercial complex and retail mall.
June 2010 Page 60 Building a new landscape Travelog
Vijai Electricals DAY 2 Powering ahead
E met D Jai Ramesh, chairman and managing director W of Vijai Electricals and discovered a fascinating corporate journey.
An inspiring story Vijai Electricals was promoted as a proprietary concern by DJ Ramesh, in 1973, incorporated as a private limited company in 1980 and converted into a public limited company in 1992. Over the years, the company has achieved a leadership position in India in the distribution transformer segment, and is the only organized player in the market. The company has diversified into other segments such as power transformers, switchgear products and projects. Vijai now has five business units. The company has also diversified geographically through setting up manufacturing plants in countries like Mexico and Brazil. Many of the business segments are in the initial stages of a production ramp-up and present a meaningful growth opportunity in the future.
June 2010 Page 61 Vijai Electricals Travelog
Revenue growth over the six years to 2008 was ~50% CAGR. FY10 revenue was Rs16b-18b, and in FY11, the company expects revenue growth of ~50%. Between 2004 and 2008 Vijai incurred capex of Rs6b to set up manufacturing facilities. Now, the company has capability to generate revenues of 3x current size without a meaningful incremental capex.
Only organized player in distribution transformers In distribution transformers, Vijai has a market share of 25% and capacity share is 30%. The distribution market (33kV) is dominated by small unorganized players and there is no other large organized player. The company's backward integration and investment in technology, which helped it to compete with the unorganized sector, is the main reason for its success. Vijai makes its own conductors, insulators, lamination and tank fabrication, which provides cost benefits. The company developed amorphous metal transformer technology, which leads to power saving. While the domestic market for this product is improving, countries like Brazil and the US offer good opportunities.
June 2010 Page 62 Vijai Electricals Travelog
Entering the big boys’ league Vijai entered the design, manufacture, testing and supply of EHV power transformers up to 500MVA, 500kV in technical collaboration with Daihen Corporation, Japan. The company has a capacity of ~12,000MVA for EHV transformers, which is in a similar range as many MNCs like ABB, Areva and Siemens. Vijai is also preparing to supply 1,200kV transformers, as the market for them opens in India. Vijai's capacity share in EHV transformers is ~10%. Vijai will gain from backward integration into conductors, lamination, tank fabrication, radiators and insulators even in making power transformers, providing it with cost benefits. Vijai is scheduling the manufacture of gas-insulated switchgears of up to 420kV in India and will perhaps be the only company to do so.
Chinese/Koreans competition not structural, pricing pressure probably reaching trough Chinese and Korean competition in 765kV products was given stringent pre-qualification norms by Powergrid. The products were required to be supplied from a plant with a two-year track record of manufacturing 765kV transformers.
June 2010 Page 63 Vijai Electricals Travelog
Over the past 18 months the pre-qualification norms have been eased, which has helped some companies in India to gain pre-qualification for their Indian manufacturing units. Prices two years ago were better than what they are today. Today's prices are 7-8% lower than prices a year earlier. Prices are probably touching the lowest point. Vijai is focusing on efficiency improvement and increased capacity utilization for power transformers, switchgears and other products, which are new product segments. Its plants in Mexico and Brazil can contribute meaningfully to revenues going forward.
June 2010 Page 64 Building a new landscape Travelog
Gayatri Projects DAY 2 Steady progress
T Gayatri Projects, we met KG Naidu, VP Finance, A who gave us a fair idea of the company's road, irrigation and power projects.
Order book of Rs71b, irrigation projects contribute 52% to order book Gayatri Projects' order book is Rs71b (5.6x FY10 revenue). Order book composition is as follows: transport (34%), irrigation (52%) and others, including industrials (14%). The management expects FY11 revenue contribution from irrigation projects of Rs2b against an initial estimate of Rs10b. This slowdown will also impact margins on irrigation projects due to poor cost absorption.
Gayatri Infra Ventures (70% stake) Gayatri Infra Ventures has a portfolio of seven BOT projects, comprising four annuity and three tolls with a project cost of Rs23b. Of these, four annuity and one toll project are expected to become operational in FY11. The projects were expected to become operational between September
June 2010 Page 65 Gayatri Projects Travelog
2008 and December 2009. Equity invested so far by Gayatri Infra Ventures in BOT projects is Rs2.1b, including Rs1b received from AMP Capital. The two toll projects were recently awarded and will achieve financial closure in the next few months. The share of equity investment in the projects by Gayatri Infra Ventures is Rs3b. In March 2008, AMP Capital infused Rs1b in Gayatri Infra Ventures for a 29.4% stake, valuing the company at Rs3.4b. AMP also has the option to invest Rs1b more in the company as equity commitment towards future BOT projects.
FIVE BOT PROJECTS TO BECOME OPERATIONAL IN FY11 Type Cost Gayatri Infra Equity Equity infusion (Rs m) ( stake, %) (Rs m) (FY10, Rs m) Gayatri Lalitpur Annuity 3,126 51 306 306 Gayatri Jhansi Annuity 4,210 51 408 408 Merrut-Muzzafarnagar, UP Toll 6,681 49 768 768 Hyderdabad outer ring road 1 Annuity 4,310 50 341 341 Hyderdabad outer ring road 2 Annuity 5,018 50 224 224 Hyderabad Karimnagar Ramagundam Toll 22000 50 1,480 - Indore Dewas Toll 6,016 100 1,504 - Total 5,030 2,046
June 2010 Page 66 Gayatri Projects Travelog
Gayatri Energy Ventures Gayatri Energy Ventures, a subsidiary of Gayatri Projects, is developing a 1,320MW (2*660MW) thermal power plant under Phase-I at Krishnapatnam, Andhra Pradesh through its subsidiary, Thermal Powertech Corporation India Limited (TPCIL). The company plans to expand its capacity in the same location by 1,320MW in Phase-II, thus taking the total capacity to 2,640MW. Land has been acquired (1408 acres), environment clearance received, coal linkage from Mahanadi Coalfields for 70% of requirements has been obtained.. Land for Phase-II of the 1,320MW project is also in its possession. The Phase-I project cost is Rs68.7b, which will be funded as debt of Rs51.5b and equity of Rs17.2b. Financial closure for Phase-I is targeted by the end of June 2010. In May 2010, the company entered into a JV agreement with Sembcorp Utilities to invest Rs11b in TPCIL for 49.7% stake. Gayatri Energy Ventures has so far invested equity of Rs2b and will invest the remaining Rs4.2b going forward.
June 2010 Page 67 Building a new landscape Travelog
Irrigation project at Veligonda DAY 3 An engineering marvel
E visited Veligonda Tunnel project, about 300km W from Hyderabad, executed by Coastal Projects Ltd. This project entails the drilling of 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, which bore through the mountains like earthworms. With a contract value of Rs14b-15b, these are easily among the largest ongoing irrigation projects in Andhra Pradesh.
An exciting journey The journey from Hyderabad to the Veligonda site took us through (i) Rajiv Gandhi Tiger Reserve, (ii) Srisailam Dam across the Krishna River, which submerged more than 100 villages when it was constructed, (iii) the Mallikarjuna Temple, which is one of the 12 jyotirlingas of Lord Shiva, (iv) the world's longest bored tunnel being drilled by Jaiprakash with a length of ~45km and diameter of over nine meters.
June 2010 Page 68 Irrigation project at Veligonda Travelog
Hyderabad
Veligonda Site
June 2010 Page 69 Irrigation project at Veligonda Travelog
Rajiv Gandhi Tiger Reserve is spread over 3,568sq km and has 75 tigers
The Srisailam Dam across the Krishna River had resulted in the submerging of over 100 villages when it was built
June 2010 Page 70 Irrigation project at Veligonda Travelog
The left bank hydro electric power station generates 6 × 150MW of power and the right bank generates 7 × 110MW of power
Jaiprakash Associates is drilling what is probably the world's longest bored tunnel, the Srisailam Left Bank Canal. The project contract value was about Rs20b
June 2010 Page 71 Irrigation project at Veligonda Travelog
Project site an engineering marvel 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. A TBM encases ~150 people working in close coordination with each other. At optimum rates, a TBM can move 1.65 meters an hour, leaving a concretized tunnel in its wake.
Miniature model of a TBM
June 2010 Page 72 Irrigation project at Veligonda Travelog
Entering the mouth of the tunnel in a railway coach [notice that fresh air is being pumped in]
Heavy duty cranes to load concrete liners on railway wagons; conveyor belts transporting cut rocks from inside the tunnel
June 2010 Page 73 Irrigation project at Veligonda Travelog
Entering the tunnel: soon it will become completely dark as we move deeper inside
Railway carriage inside the TBM, where we get down
June 2010 Page 74 Irrigation project at Veligonda Travelog
Cement being pumped inside the liners (across the tunnel), to close any gaps
Concrete liners being affixed on the tunnel. As the TBM moves ahead, a concretized tunnel is left behind
June 2010 Page 75 Irrigation project at Veligonda Travelog
Concrete liners on the top of the tunnel. Seven liners are required to complete a ring
Workshop to manufacture concrete liners... the workshop consumes ~10 tons of steel and 50-70 tons of cement a day
June 2010 Page 76 Irrigation project at Veligonda Travelog
The first stage in making concrete liners for the tunnel is cutting and fabrication of steel...
Concrete is then poured into a structure to make concrete liners
June 2010 Page 77 Building a new landscape Travelog
NOTES
June 2010 Page 78 Building a new landscape Travelog
NOTES
June 2010 Page 79 TravelogTravelogthe analyst’s diary
INFRASTRUCTURE 2010
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