Institutional Equities

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IV Institutional Equities

Infrastructure Sector 26 September 2011

Light At The End Of The Tunnel View: Positive The infrastructure sector has witnessed many pitfalls in the last two years which have hurt investor sentiment. We believe the valuation of the sector is Amit Srivastava close to the bottom as the stocks of infrastructure companies have corrected [email protected] between 60%-75% in the period July 2010 to August 2011. Post correction, they +91-22-3926 8116 are trading 33%-47% below their five-year historical average price-to-earnings of

20x-44x. We believe slower order inflow, rising interest rates, regulatory issues Nitin Arora and earnings downgrade have been largely discounted by the market. Although [email protected] we believe the earnings will not improve significantly, concerns over rising +91-22-3926 8169 interest rates, regulatory issues and execution risks are likely to subside in the short term, thereby leading to outperformance by infrastructure stocks.

Sector Sector Fundamentals versus valuation: We believe the infrastructure sector is currently moving from a moderation phase to a slowdown phase, and the slowdown has started One Year Indexed Performance

hurting profitability (as seen from a sharp decline in earnings in 1QFY12 by 97% YoY) 230 which will continue in the short term. However, as the slowdown has already been 210 190 factored in (stock prices have declined by around 60%- 75% between July 2010 170 150 & August 2011), we believe the sector is set for a re-rating as FY13 net profit for 130 our universe of companies is set to grow by 44%. 110 90 Stability in interest rate cycle to aid performance: To curb rising inflation, the 70

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May May bps since January 2011), the 12th hike in the past two years, to 8.25%, which is May 75bps below the peak witnessed in October 2008. As per consensus estimate, the Nifty Infra index repo rate may be hiked further by 25bps and then it may stabilise at that level (not Source: Bloomberg correct sharply as in the previous FY09 cycle). Historically, whenever interest rates peak, the infrastructure stocks outperform. Further earnings downgrade due to rising interest rates unlikely: Between January 2010-September 2011, revenue estimates of our universe of companies (Bloomberg consensus) have been downgraded by 11% for FY12 and 5% for FY13 and PAT estimates cut by 33% and 31% for FY12 and FY13, respectively. As per our analysis, we believe the market has already discounted higher interest rates and further earnings downgrade is unlikely. Uncertainty in order execution in near term, but FY13 to witness strong growth: Despite a strong order book, revenue growth was muted during the past one year due to order execution-related issues. The market believes these issues will continue to impact the growth of the sector. However, we believe the order execution will improve because these issues are more technical (short-term in nature) rather than structural. Coverage universe: We initiate coverage on five companies with a Buy rating on IRB Infrastructure, Reliance Infrastructure, GMR Infrastructure and IVRCL, as we believe they are best placed in terms of execution track record, Balance Sheet strength and valuation parameters. Despite attractive valuation, we assign a Hold rating to HCC as we believe that higher leverage and the Lavasa issue will cap any upside.

Market cap EPS (Rs) P/E (x) RoE (%) CMP Target Up/ Company Rating Rsbn US$ bn (Rs) price Down (%) FY11 FY12E FY13E FY11 FY12E FY13E FY11 FY12E FY13E IRB Infra Buy 54.1 1.1 163 235 44 13.6 14.0 18.0 12.0 11.7 9.1 18.6 16 17.1 Reliance Infra Buy 116 2.3 434 724 67 58.0 60.6 72.6 7.4 7.1 5.9 6.6 6.5 7.3 GMR Infra Buy 110.4 2.2 28 39 39 (0.3) 0.2 1.2 NA 134.4 22.8 NA 1.0 5.8 HCC Hold 17.4 0.38 29 33 14 1.2 0.8 1.5 23.9 33.1 18.7 4.7 3.3 5.7 IVRCL Buy 10 0.20 38 59 55 5.9 5.1 6.7 6.3 7.3 5.6 8.2 6.6 8.1 Source: Company, Nirmal Bang Institutional Equities Research

Institutional Equities

Table of Contents

Cyclical nature of infrastructure sector………………………………………………………………...….03

Stress case valuation level indicating downturn is already priced in...... …………………….……..04

Our mode of valuation………………………………………………………………………….……….….07

RoE trend of BOT projects…………………………………………………………………………………09

Further earnings downgrade due to rising interest rates to be limited………………………..………11

Our estimates versus consensus: Improvement expected in FY13…………………………..………12

Short-term hiccups in order inflow, but long-term growth intact…………………………………….…13

Road segment: Improvement in order inflow, but at a cost………………………………………….…15

Power segment: Capacity up, but operational issues hurt future valuation …………………………19

Key operational issues in power sector and our view ………………………………………….………20

Funding problems for big scale 12th Plan infrastructure spending ………………………….….……22

Project execution uncertainty in near term, but FY13 to witness strong growth…………….………23

Initiating coverage on five infrastructure companies………………………………….……….……….25

Companies

IRB Infra……………………………………………………………………………….…………..….……27

Reliance Infra………………………………………………………………………………...…….….…..41

GMR Infra……………………………………………………………………………………………..……55

HCC. ………………………………………………………………………………...………….……….…67

IVRCL ………………………………………………………………………………...………….……..….79

2 Infrastructure Sector IV Institutional Equities

Cyclical nature of infrastructure sector The infrastructure industry tracks the cyclical nature of the economy, which we have described in phases in Exhibit No. 1, and accordingly the valuation parameters change. During FY10-11, the industry shifted from the growth phase to the moderation phase because of macro factors like monetary tightening, rising interest rates, trimmed gross domestic product (GDP) estimate and slack demand tracking the global slowdown. Lower GDP growth, cancellation of orders, subdued Index of Industrial Production (IIP) growth and declining profitability of companies are indicating that sector fundamentals are moving from the moderation phase to the slowdown phase. We believe it would remain under the slowdown phase in the short term. However, the sector’s valuation has already factored in the slowdown phase, as the stocks of infrastructure companies have corrected between 60%-75% in the past one year (July 2010-August 2011) & trading at 33% to 47% below their five-year historical average PE of 20x-44x and at 0.6x-1.2x their book value of our universe of stocks. Going ahead, even if the companies’ earnings are subdued in the short term, their stock prices will start factoring in the recovery phase expected in FY13. Hence, we believe the stocks are trading at below stress case level valuation and provide a good investment opportunity for investors. Exhibit 1: Fundamentals versus valuation

Fundamentals moving from moderation to slowdown

Current valuation

Source: Nirmal Bang Institutional Equities Research

3 Infrastructure Sector IV Institutional Equities

Stress case valuation level indicating downturn is already priced in During the past one year, the infrastructure sector’s revenues (infrastructure developers and construction companies) have gone up by 17% and earnings by 6.3%. However, given the multiple issues such as slower order inflow, rising interest rates, regulatory issues, delay in project execution and depressed return ratios, the stock prices of infrastructure companies have corrected by around 60% to 75% between July2010-August 2011. Post correction, the stocks are trading at 33% to 47% discount to their five-year historical average PE of 20x-44x and at 0.6-1.2x book value, thereby appearing attractive for investment. The stocks are trading below their historical trough valuation, close to the levels witnessed after the Lehman collapse, which we believe is unjustified (as the companies are better placed in terms of order book-to-bill ratio, leverage and return ratios). If we adjust the embedded value of investments in stock prices of construction companies, they are trading at a PE multiple of 4x-6x on FY13. Hence, we believe the infrastructure stocks are trading below stress case valuation level and have factored in the worst case scenario. Exhibit 2: Stock price returns Stock returns (%)

Companies Revenue (YoY %) PAT (YoY %) 1 month 3 months 6 months 1 year IRB Infrastructure 43.0 17.0 3.8 4.0 (12.8) (42.7) IVRCL 2.6 (25.0) 1.6 (40) (49) (77.8) GMR Infrastructure 26.0 N/A 0.5 (8.2) (11.2) (51.7) HCC 12.3 37.0 2.9 (1.6) (20.6) (51.9) Reliance Infrastructure 2.7 2.1 (3.7) (20.0) (31.9) (59.2) Source: Bloomberg, Nirmal Bang Institutional Equities Research Exhibit 3: Infrastructure stocks versus Nifty performance

330 Over-expectation post Congress- led government in majority

280 Dubai ,Telangana issues

Scams Rising interest 230 rates & earnings cut 180

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Sep Aug Sep May GMR Infra R-Infra IVRCL IRB Infra HCC Nifty Source: Bloomberg, Nirmal Bang Institutional Equities Research Investment comfort based on valuation parameters In FY12, we expect the construction companies to report a decline in return ratios following moderate growth in earnings. However, during FY13, these companies would report robust growth driven by ongoing concerns waning and the low base of FY12, thereby improving the return ratios. We believe the current valuation indicates the risks and concerns have been factored in and investor sentiment towards the sector is at its lowest level. Hence, we expect a re-rating of the sector to take place. Based on the risk- reward structure, the infrastructure sector provides a good investment opportunity. Exhibit 4: Coverage universe Market cap EPS (Rs) P/E (x) RoE (%) CMP Target Up/ Company Rating Rsbn US$ bn (Rs) price Down (%) FY11 FY12E FY13E FY11 FY12E FY13E FY11 FY12E FY13E IRB Infra Buy 54.1 1.1 163 235 44 13.6 14.0 18.0 12.0 11.7 9.1 18.6 16 17.1 Reliance Infra Buy 116 2.3 434 724 67 58.0 60.6 72.6 7.4 7.1 5.9 6.6 6.5 7.3 GMR Infra Buy 110.4 2.2 28 39 39 (0.3) 0.2 1.2 NA 134.4 22.8 NA 1.0 5.8 HCC Hold 17.4 0.38 29 33 14 1.2 0.8 1.5 23.9 33.1 18.7 4.7 3.3 5.7 IVRCL Buy 10 0.20 38 59 55 5.9 5.1 6.7 6.3 7.3 5.6 8.2 6.6 8.1 Source: Company, Nirmal Bang Institutional Equities Research

4 Infrastructure Sector IV Institutional Equities

Exhibit 5: IVRCL – Valuation trend

(x) (x) 25 40 35 20 30

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0 0 Sep-06 Sep-07 Sep-08 Sep-09 Sep-10 Sep-11 Sep-06 Sep-07 Sep-08 Sep-09 Sep-10 Sep-11 EV/EBITDA 5 year avg P/E 5 year avg Source: Bloomberg, Nirmal Bang Institutional Equities Research

Exhibit 6: IRB Infrastructure –Valuation trend

(x) (x) 16 30 14 25 12 20 10 8 15 6 10 4 2 5

0 0 Sep-08 Sep-09 Sep-10 Sep-11 Sep-08 Sep-09 Sep-10 Sep-11 EV/EBITDA 4 year avg P/E 4 year avg Source: Bloomberg, Nirmal Bang Institutional Equities Research

Exhibit 7: HCC-Valuation trend

(x) (x) 25 100 90 20 80 70 15 60 50 10 40 30 5 20 10 0 - Sep-06 Sep-07 Sep-08 Sep-09 Sep-10 Sep-11 Sep-06 Sep-07 Sep-08 Sep-09 Sep-10 Sep-11 EV/EBITDA 5 year avg P/E 5 year avg Source: Bloomberg, Nirmal Bang Institutional Equities Research

Exhibit 8: GMR Infrastructure *–Valuation trend

(x) (x) 60 5.0 4.5 50 4.0 3.5 40 3.0 30 2.5 2.0 20 1.5 1.0 10 0.5 0 0.0 Sep-07 Sep-08 Sep-09 Sep-10 Sep-11 Sep-07 Sep-08 Sep-09 Sep-10 Sep-11 EV /EBITDA 5 year avg P/B 5 year avg Source: Bloomberg, Nirmal Bang Institutional Equities Research Note: *PE chart not given as GMR reported loss for past 2 quarters

5 Infrastructure Sector IV Institutional Equities

Exhibit 9: Reliance Infrastructure – Valuation trend

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20 10 0 0 Sep-07 Sep-08 Sep-09 Sep-10 Sep-11 Sep-07 Sep-08 Sep-09 Sep-10 Sep-11 EV/EBITDA 5 year avg P/E 5 year avg Source: Bloomberg, Nirmal Bang Institutional Equities Research Source: Bloomberg, Nirmal Bang Institutional Equities Research

Stocks trading below book value

Exhibit 10: Reliance Infrastructure P/BV Exhibit 11: IVRCL P/BV

(x) (x) 5.0 5.0 4.5 4.5 4.0 4.0 3.5 3.5 3.0 3.0 2.5 2.5 2.0 2.0 1.5 1.5 1.0 1.0 0.5 0.5 0.0 0.0 Sep-07 Sep-08 Sep-09 Sep-10 Sep-11 Sep-06 Sep-07 Sep-08 Sep-09 Sep-10 Sep-11 P/B 5 year avg P/B 5Y average Source: Bloomberg, Nirmal Bang Institutional Equities Research Source: Bloomberg, Nirmal Bang Institutional Equities Research

Exhibit 12: IRB Infrastructure P/BV Exhibit 13: HCC P/BV

(x) (x) 4.5 4.0 4.0 3.5 3.5 3.0 3.0 2.5 2.5 2.0 2.0 1.5 1.5 1.0 1.0 0.5 0.5 0.0 0.0 Sep-08 Jun-09 Mar-10 Dec-10 Sep-11 Sep-06 Sep-07 Sep-08 Sep-09 Sep-10 Sep-11 P/B value 4 year avg P/B 5 year avg Source: Bloomberg, Nirmal Bang Institutional Equities Research Source: Bloomberg, Nirmal Bang Institutional Equities Research

6 Infrastructure Sector IV Institutional Equities

Our mode of valuation We have used the SOTP method for valuation of infrastructure stocks. We have valued core construction business on a one-year forward PE and assigned the multiple at a discount to five-year historical average based on company fundamentals and financial situation. We have valued the BOT (Build, Own, Transfer) projects (like road, power, airport and metro rail) on either the P/BV method or DCF (discounted cash flow method), depending on project visibility. For DCF valuation, we have taken cost of equity (CoE) of 15% to 17%, depending on the status of the project. We believe DCF is the best method to value infrastructure asset portfolio, given its capital intensive and longer duration predictable cash flow. However, in some cases, we have taken the P/BV valuation. Listed subsidiaries are valued at a 25% to 30% holding discount to their current market prices. Coverage universe We initiate coverage on five companies with a Buy rating on IRB Infrastructure, Reliance Infrastructure, GMR Infrastructure and IVRCL, as we believe they are best placed in terms of execution track record, Balance Sheet strength and valuation parameters. Despite attractive valuation, we assign a Hold rating to HCC as we believe that higher leverage and the Lavasa issue will cap any upside. Exhibit 14: SOTP Valuation CMP Mkt Cap Construction Road Power Metro rail Airport Others Target Rating

Companies Rs Rsbn Rs/share Price (Rs)

IRB infrastructure 163 54.1 84.0 151.0 - - - - 235 Buy Reliance Infrastructure 434 116 121.0 149.0 373.0 27.0 - 54.0 724 Buy GMR Infrastructure 28 110.4 - 2.9 12.0 - 20.0 3.8 39 Buy HCC 29 17.4 11.0 14.0 - - - 8.0 33 Hold IVRCL 38 10 53.0 - - - - 6.0 59 Buy Source: Bloomberg, Nirmal Bang Institutional Equities Research

7 Infrastructure Sector IV Institutional Equities

Exhibit 15: Comparable valuation Sadbhav Patel Simplex Construction Company HCC IVRCL NCC* Engineering* Engineering* Infra* Infrastructure developers

Stock price (Rs) 29 38 133 66 97 230 Market cap (Rsbn) 17.4 10 19.9 16.8 6.7 11.3 Market cap ($ bn) 0.38 0.2 0.42 0.35 0.14 0.24 Revenue

FY12E (Rsbn) 47.4 63.7 27.6 57.1 29.9 54.3 FY13E 55.3 75.0 32.0 66.4 66.4 62.0 EPS (Rs/stock)

FY12E 0.8 5.1 9.6 5.8 14.4 24.3 FY13E 1.5 6.7 11 7.1 14.9 30.5 Book Value (Rs/stock)

FY12E 25.1 76.8 52.2 97.2 216.3 246.3 FY13E 26.8 82.8 61.8 103.3 211.0 275.2 P/E (x)

FY12E 34.2 7.3 13.9 11.3 6.7 9.5 FY13E 19.4 5.6 12.1 9.4 6.5 7.6 P/BV (x)

FY12E 1.1 0.5 2.6 0.7 0.4 0.9 FY13E 1.0 0.4 2.2 0.6 0.5 0.8 EV/EBITDA (x)

FY12E 9.2 5.7 8.0 7.3 6.7 5.2 FY13E 8.8 5 6.8 6.3 6.5 4.5 RoE (%)

FY12E 3.6 6.6 20.8 6.3 6.3 10.4 FY13E 5.7 8.1 20.1 7.1 5.9 11.8

Infrastructure Developers GMR Infra IRB Infra Reliance Infra L&T GVK Power JP Associates Stock price (Rs) 28 163 434 1,451 16.6 67 Market cap (Rs bn) 110.4 54.1 116.5 886.9 26.2 143.0 Market cap ($ bn) 2.2 1.1 2.3 18.8 0.55 3.0 Revenue

FY12E (Rsbn) 71.1 31.9 186.1 633 22 146 FY13E 105.3 45.9 221.9 752.1 27.6 168.2 EPS (Rs/stock)

FY12E 0.2 14.0 60.7 83.1 1.3 4.3 FY13E 1.2 18.0 72.8 98.5 1.6 5.6 Book Value (Rs/stock)

FY12E 24.7 87.2 925.0 436.3 25.5 50.8 FY13E 26.0 105.1 989.4 505.9 27.4 54.5 P/E (x)

FY12E 144 11.7 7.1 17.4 13.0 15.8 FY13E 24.4 9.1 5.9 14.0 10.5 12.1 P/B V (x)

FY12E 1.2 1.9 0.5 3.3 0.7 1.3 FY13E 1.2 1.6 0.4 2.9 0.6 1.2 EV/EBITDA (x)

FY12E 15.6 4.0 5.5 12.2 10.9 9.3 FY13E 9.5 3.2 4.5 10.4 7.2 12.1 RoE (%)

FY12E 1.0 16.0 6.5 19.6 5.0 8.7 FY13E 5.9 17.1 7.3 19.8 5.9 10.4 Note: *Bloomberg consensus Source: Company, Nirmal Bang Institutional Equities Research

8 Infrastructure Sector IV Institutional Equities

RoE trend of BOT projects Infrastructure projects are capital intensive, highly leveraged, have a long gestation period and a low operating cost. Therefore, in the initial phase, post commercial operation capacity charges (depreciation and interest costs) are higher, which suppresses margins and thereby the return ratios. However, infrastructure projects generally have a predictable cash flow, long-term inflation-linked income stream and a low loan default rate and therefore we look at the returns generated by the project in terms of equity IRR and value in terms of DCF. Case study We have analysed here a BOT road project costing Rs12.9bn having a concession period of 15 years. We have assumed traffic growth of 5% and interest rate of 11% per annum. Based on our analysis, we have seen that in the initial five years the company’s returns ratio was low, but the next five years’ returns ratio was high. Hence, earnings-based valuation will not give the right valuation for its assets. We think the DCF model is the best way to value BOT assets, as it takes into account long-term free cash flows after factoring in capex phasing, debt repayment and working capital requirement. BOT projects have a predicable future cash flow and a definite concession period, giving a fixed valuation horizon and also there is no need to assume long- term growth rate. Exhibit 16: ABC expressway Exhibit 17: Project RoE, RoCE trend

(%) ABC Expressway 30 Length of the highway (km) 206 25 Total project cost (Rsmn) 12,920 Equity (Rsmn) 3,230 20 High return ratio11 Debt (Rsmn) 9,690 15

Total 12,920 10 Low return ratio Concession period (Year) 15 5 Traffic growth rate (%) 5% 0 Interest rate on term loans (%) 11% (Yr) 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 Discounting rate for FCFE (%) 15% RoE (%) RoCE (%) Source: Nirmal Bang Institutional Equities Research Source: Nirmal Bang Institutional Equities Research

Exhibit 18: Infrastructure companies’ RoCE trend Exhibit 19: Infrastructure companies’ RoE trend

(%) (%) 16 25 14 20 12 15 10 10 8 5 6 4 0 FY08 FY09 FY10 FY11 FY12E FY13E 2 (5)

0 (10) Loss reported due to higher FY08 FY09 FY10 FY11 FY12E FY13E capacity charges (15) IRB Infra Reliance Infra GMR Infra HCC IVRCL IRB Infra Reliance Infra GMR Infra HCC IVRCL Source: Company, Nirmal Bang Institutional Equities Research Source: Company, Nirmal Bang Institutional Equities Research

9 Infrastructure Sector IV Institutional Equities

Further earnings downgrade due to rising interest rates to be limited Rising interest rates have a two-way impact on infrastructure companies. On the one hand, it increases the interest outflow which impacts profitability and on the other, the rise in cost of equity lowers the intrinsic value of a project. During January 2010 & September 2011, FY12 revenue estimates (Bloomberg consensus) have been downgraded by 11% and FY13 revenue estimates by 5%. PAT estimates have been downgraded by 33% and 31% for FY12 and FY13, respectively. Based on our analysis, a 100bps rise in interest rate impacts the pure EPC players profit by 6% to 7%. Therefore, we believe the higher earnings downgrade than the actual impact of the increase in interest rates was due to expectations of a further hike in rates. We also believe that even in a worst case scenario, when interest rates increase by 50bps, the earnings downgrade will be limited. Exhibit 20: Bloomberg consensus Revenue (Rsmn) EBITDA (Rsmn) EBITDA margin (%) PAT (Rsmn) FY12 E Jan-2010 Sep-2011 YoY(%) Jan-2010 Sep-2011 YoY(%) Jan-2010 Sep-2011 Jan-2010 Sep-2011 YoY(%) GMR Infrastructure 60,432 64,878 7.4 27,066 22,134 (18.2) 44.8 34.1 4,903 375 (92.4) HCC 57,607 46,505 (19.3) 7,564 6,035 (20.2) 13.1 13.0 2,088 416 (80.1) IRB Infrastructure 36,669 32,838 (10.4) 14,079 13,412 (4.7) 38.4 40.8 5,050 4,952 (1.9) IVRCL 88,954 60,719 (31.7) 8,487 5,402 (36.3) 9.5 8.9 4,003 1,315 (67.2) Reliance Infrastructure 203,087 189,703 (6.6) 24,818 27,745 11.8 12.2 14.6 18,868 16,275 (13.7) Total 446,748 394,643 (11.7) 82,014 74,727 (8.9) 18.4 18.9 34,912 23,333 (33.2) FY13E

GMR Infrastructure 89,218 91,958 3.1 42,310 36,915 (12.8) 47.4 40.1 11,691 3,552 (69.6) HCC 66,723 52,972 (20.6) 8,740 6,878 (21.3) 13.1 13.0 2,400 703 (70.7) IRB Infrastructure 34,614 42,961 24.1 16,495 16,097 (2.4) 47.7 37.5 4,557 5,534 21.4 IVRCL 122,396 70,199 (42.6) 11,619 6,481 (44.2) 9.5 9.2 5,108 1,695 (66.8) Reliance Infrastructure 203,693 231,309 13.6 34,928 34,680 (0.7) 17.1 15.0 23,411 21,095 (9.9) Total 516,643 489,399 (5.3) 114,091 101,049 (11.4) 22.1 20.6 47,166 32,579 (30.9) Source: Bloomberg Impact of high interest rates on construction, infrastructure companies As per our analysis, a 100bps hike in interest rates impacts pure EPC (engineering, procurement and construction) profits by 6% to 7% and FCFE by 4% to 5%. Looking at the earnings downgrade and price correction in the past one year, we believe the market has already discounted higher interest rates than the actual rise in rates. Therefore, in case the interest rates increase by 50bps, they will not impact the consensus earnings and the target price. On the other hand, if the interest rates stabilise after rising by 25bps (consensus estimate), the stock prices of infrastructure companies should react positively. Key assumptions common across different asset classes: • Asset portfolio: Debt-equity ratio of 70:30 • Working capital of 30% and asset turnover of 1.5x • Interest rate of 11% per annum • We have kept everything constant except the interest rate. Exhibit 21: Interest impact sensitivity (Rsmn) Construction B/S Interest rate (%) 10 11 12 Asset turnover 1.5x Revenue 100 100 100 Assets 66.7 EBITDA 10 10 10 Debt 33.33 Interest costs 3.3 3.7 4

Depreciation 1.7 1.7 1.7

PBT 5 4.7 4.3

Tax @33% 1.7 1.5 1.4

PAT 3.4 3.1 2.9

Change (%) (6.3) (6.7) (7.1)

Source: Nirmal Bang Institutional Equities Research

10 Infrastructure Sector IV Institutional Equities

Stability in interest rate cycle should lead to gains in stock prices The government gave a clear indication in the Economic Survey-2011 that in the short-term there will be higher growth, higher inflation and higher interest rates. To curb rising inflation, RBI raised the repo rate by 350bps between January 2010 & September 2011, which is 75bps lower than the previous peak witnessed in July 2008. Interest rate is one of the key factors that influence growth in infrastructure investments, especially from the private sector. Consensus estimate expects the interest rates to go up by another 25bps and then stabilise at that level (may not correct sharply as in the previous cycle of FY09). Historically, whenever the interest rates peak, the infrastructure stocks outperform (during FY06, interest rates stabilised and it led to outperformance of these stocks). Hence, we believe that when the interest rates stabilise, the infrastructure sector stocks should outperform. Exhibit 22: Bond yield vs Infrastructure stock prices Exhibit 23: Repo rate trend

320 (%) 10 280 9 240 8 200 7 160 6 120 5 80 4 40 Jan-09 May-09 Sep-09 Jan-10 May-10 Sep-10 Jan-11 May-11 Sep-11 3 Bond yield GMR Infra R-Infra IVRCL IRB Infra HCC Sep-06 Sep-07 Sep-08 Sep-09 Sep-10 Sep-11 Source: Bloomberg, Company, Nirmal Bang Institutional Equities Research Source: Reserve Bank of India

11 Infrastructure Sector IV Institutional Equities

NBIE estimates versus consensus: Improvement expected in FY13 Bloomberg consensus estimate on net profit has been downgraded by 31% for FY13 between January 2010 & September 2011 for our universe of companies, in which net profit for pure EPC players has been downgraded by around 65% to 75% in order to factor in the impact of slowdown in revenue growth and higher interest costs. We believe the expectations have clearly been negative. • Our FY13 earnings estimate for companies in our universe is higher than the consensus, as we are expecting the full benefits of pick-up in order execution. • We believe infrastructure companies would report revenue CAGR of 16% during the period FY11-13 (higher than FY09-11 CAGR of 13%) driven by low base and pick-up in order execution. Exhibit 24: Consensus estimate vs our estimate FY12E FY13E

Revenue (Rsmn) Bloomberg cons. NBIE est. Variance (%) Bloomberg Cons. NBIE est. Variance (%) GMR Infra 64,878 71,096 9.6 91,958 105,284 14.5 HCC 46,505 47,414 2.0 52,972 55,267 4.3 IRB Infra 32,838 31,941 (2.7) 42,961 45,863 6.8 IVRCL 60,719 63,748 5.0 70,199 74,998 6.8 R-Infra 189,703 205,805 8.5 231,309 248,878 7.6 Total 394,643 420,004 6.4 489,399 530,290 8.4 EBITDA (Rsmn) FY12E FY13E GMR Infra 22,134 21,644 (2.2) 36,915 38,014 3.0 HCC 6,035 5,903 (2.2) 6,878 6,936 0.8 IRB Infra 13,412 13,543 1.0 16,097 17,247 7.1 IVRCL 5,402 5,487 1.6 6,481 6,585 1.6 R-Infra 27,745 28,681 3.4 34,680 36,884 6.4 Total 74,727 75,258 0.7 101,049 105,666 4.6 PAT (Rsmn) FY12E FY13E GMR Infra 375 811 116.4 3,552 4,777 34.5 HCC 416 514 23.5 703 907 29.0 IRB Infra 4,952 4,642 (6.3) 5,534 5,967 7.8 IVRCL 1,315 1,350 2.7 1,695 1,777 4.9 R-Infra 16,275 17,140 5.3 21,095 22,678 7.5 Total 23,333 24,457 4.8 32,579 35,323 8.4 Source: Bloomberg, Nirmal Bang Institutional Equities Research

12 Infrastructure Sector IV Institutional Equities

Short-term hiccups in order inflow, but long-term growth intact During FY10-11, concerns over the global macro environment (EU sovereign debt crisis) decelerated the corporate capex cycle, while domestic factors like corruption-related investigations, high fiscal deficit, state assembly elections, rising interest rates and environmental clearance issues postponed the infrastructure investment plans of the government. Infrastructure spending so far has played catch up with the rise in GDP – going up from around 5% of GDP in 2002 to 8.5% in FY10. GDP growth is now seen slowing by nearly 100 bps to around 7.5% in FY12 from 8.5% in FY11. The impact of slowing growth on construction companies is already visible, while on the other hand, effective interest rates have gone up by over 350 bps, thereby impacting the profitability of the sector. This has led to slower growth in incremental order book of infrastructure companies in the past one year. We believe that in the short term, the pressure on incremental order inflow will continue. Exhibit 25: IIP vs repo rate Exhibit 26: Order inflow trend

(%) (%) 16 60

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12 EU sovereign debt concern 40 10

8 30 Impact of credit crisis 6 20 4 Corruption-relatedinvestigations and rise in interest rates 2 10 Pick-up in NHAI orders

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Jun Jun Jun Jun Jun Jun Jun

Mar Mar Mar Mar Mar Mar Mar

Sep Dec Sep Dec Dec Sep Sep Dec Sep Dec Sep Dec Sep IIP Repo rate Dec Source: Reserve Bank of India, MOSPI Source: Company, Nirmal Bang Institutional Equities Research 12th Plan (FY12-17) infrastructure target of US$1trn Based on initial estimates of the Planning Commission, under the 12th Plan, total investment on infrastructure is estimated at US$1,000bn. Even if we consider a slippage of 25%, it is still 100% higher investment opportunity for infrastructure companies over the 11th Plan. Based on our sectoral analysis for expected investment under the 12th Plan, road and power segments would account for around 45% of total investment, showing some improvement in order inflow, but these segments are currently facing a lot of problems. Exhibit 27: 12th Plan infrastructure investment and GDP growth Year 2012-13 2013-14 2014-15 2015-16 2016-17 12th Plan GDP at market prices($bn) 1,720.6 1,875.5 2,044.3 2,228.3 2,428.8 10,297.5 Rate of GDP growth (%) 9.0 9.0 9.0 9.0 9.0 9.0 Infrastructure investment as a % of GDP 9.0 9.5 9.9 10.3 10.7 10.0 Infrastructure investment ($bn)@Rs40/$ 154.9 178.2 202.4 229.5 259.9 1,024.8 Source: Planning Commission

Exhibit 28: Segmental investment allocation Exhibit 29: Infrastructure investment to surge higher

(Rsbn) (%) (US$bn) 16,000 12 1,200 10.7 10.3 10.0 14,000 9.5 9.9 10 9.0 1,000 12,000 8.4 10,000 8 800 8,000 6 600 6,000 4,000 4 400 2,000 2 200 - 0 0 Electricity Roads Telecom Railways Irrigation Water Others &Bridges supply & 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17 12th Plan sanitation 11th Five Year Plan 12th Five Year Plan Infrastructure investment as % of GDP Infrastructure Investment Source: Planning Commission, Nirmal Bang Institutional Equities Research Source: Nirmal Bang Institutional Equities Research

13 Infrastructure Sector IV Institutional Equities

Despite slowdown in order inflow, order book/bill at around3.3x Infrastructure spending has a higher correlation with GDP growth and subsequently, on order inflow. As per Bloomberg consensus estimate, GDP growth is seen slowing by nearly 100bps to around 7.5% in FY12 from 8.5% in FY11 coupled with effective interest rates rising by 350bps over FY10 till date. This has impacted order inflow growth in the past one year. However, due to robust order inflow during FY10 ( around 65% to 75% of order book) and slower project execution, the current order book of the sector stands at around 3.3x, thereby providing comfort on earnings visibility for the next three years. Exhibit 30: FY11 Order book-to-bill ratio

(x) 4.6 5.0 4.2 3.7 3.7 3.7 4.0 3.3 3.1 3.0 3.2 3.0 3.0 2.0 2.0 1.0

0.0

L&T

HCC

IVRCL

IRB InfrastructureIRB

PatelEngineering

AhluwaliaContracts

SadhbavEngineering

SimplexInfrastructure

Infrastructureaverage SupremeInfrastructure NagarjunaConstruction Source: Company,Nirmal Bang Institutional Equities Research Exhibit 31: Order book-to-bill ratio of construction companies

(x)

7.0

6.1

5 5

6.0 .

4.9

. 4.6

5.0 4

4.2

4.1

3.8

3 3

4.0 3.5

9 3.3

3.2

3.1

2.9

2 2

3.0 2

. 2 2.0

1.0

0.0 FY07 FY08 FY09 FY10 FY11 HCC IVRCL NCC Patel Engg. Simplex infra Source: Company, Nirmal Bang Institutional Equities Research

14 Infrastructure Sector IV Institutional Equities

Road segment: Improvement in order inflow, but at a cost In the past six months (April 2011 onwards), NHAI (National Highways Authority of India) awarded projects worth Rs164bn (around 1,851km) and gave a clear timeline (with project-wise details) for awarding projects worth nearly Rs483bn during the next six months. However, the delay in order NHAI pick-up in FY11 and lack of momentum in other sectors, coupled with existing projects nearing completion, increased the competition for projects. This is visible in the bidding pattern for nine projects awarded this year (NHAI had estimated aggregate outflow as grants, but on the other hand the developers promised a certain premium in most of the projects). Traction in road segment’s order inflow NHAI is expected to tender road projects of around 24,000km in the next three years, out of which around 8,000km road projects are expected to be awarded in FY12. During the past six months (April 2011 onwards), NHAI awarded projects worth Rs164bn (around 1,851km) and gave a clear timeline (with project-wise details) for awarding projects worth around Rs483bn in the next six months. During FY10-11, NHAI had planned to award around 18,800km, but only 8,450km of road projects (around 50% of planned projects) were awarded due to a variety of reasons like (land acquisition problems, shifting of utilities, inaccurate preparation of detailed plan report (DPR), non-receipt of environmental, forest and railway clearances, cost over-run, delay in commissioning, legal disputes and corruption cases). We believe that most of the issues relating to the project have been resolved after the implementation of the B. K. Chaturvedi report recommendations (refer Exhibit no.36) and NHAI seems better placed to speed up the award of projects and meet its target unhindered. The recent momentum in awarding projects (~25% of planned projects in four months) and newer achievable targets give us more confidence. Exhibit 32: NHAI projects awarded recently NHDP status (as on 30 April 2011) Phase Total I II III IV V VI VII

Total length (km) 7,609 7,300 12,109 14,799 6,500 1,000 700 50,017 Completed till date (km) 7,076 5,683 2,294 0 596 - - 15,649 Completion rate as a % of total 93.0 77.8 18.9 - 9.2 - - 31.3 Completion from 30 April 2010- 31 March 2011 (km) 97 616 645 - 353 - - 1,711 Under implementation (UI) (km) 513 1,038 5,805 765 1,918 0 41 10,080 UI as a % of total 6.7 14.2 47.9 5.2 29.5 0.0 5.9 20.2 Balance length for award (BFA) (km) 20 421 4,010 14,034 3,986 1,000 659 24,130 BFA as a % of total 0.3 5.8 33.1 94.8 61.3 100.0 94.1 48.2 Investments ($bn) 1.26 6.60 9.97 8.85 3.71 3.71 34.09

Source: NHAI, Nirmal Bang Institutional Equities Research

Exhibit 33: State-wise PPP road projects Completed Ongoing Upcoming

Length Project cost Length Project cost Length Project cost Project cost

(km) (Rsmn) (km) (Rsmn) (km) $ bn Rsbn

Rajasthan 416 1,200 352 6,600 1,309 0.4 17.20

Madhya Pradesh 1,629 14,200 974 24,900 914 0.4 17.70

Karnataka 63 1,900 238 5,800 2,650 1.3 56.43

Gujarat 507 32,600 644 29,300 329 0.5 21.30

Maharashtra 403 25,000 2,267 50,500 1,839 1.6 74.20

Andhra Pradesh 45 2,100 655 55,900 2,086 1.4 60.90

Tamil Nadu 113 600 52 15,000 251 - -

Uttar Pradesh - - 1,117 400 2,924 3.9 177.00

Total 3,176 77,600 6,299 1,88,400 12,302 9.4 424.7 Source: NHAI, Nirmal Bang Institutional Equities Research

15 Infrastructure Sector IV Institutional Equities

Exhibit 34: Award of orders per day (km) ( Order awarding Kms/day) 25 21.9 21.9 21.8

20 16.8 14.0 15 13.0 12.3 10.4 9.2 10 7.4 6.6 4.8 5 3.6 3.4 1.0 0.9 1.8

05 07 08 10 03 06

FY02 FY04 FY FY FY FY FY11 FY FY FY09

Jul'10

Mar'11

Aug'

FY FY14E FY15E FY12E

Apr'10 Jul'10 Apr' Source: NHAI, Nirmal Bang Institutional Equities Research

Exhibit 35: Summary of award of contracts (2011-12) Month Number of projects Project cost (Rsbn) April 2011-Aug 2011 (awarded) 10 163 September 2011 7 66 October 2011 7 31 November 2011 12 91 December 2011 5 37 January 2012 5 53 February 2012 7 91 March 2012 4 37 Total (km) 7,994 569 Award of annuity and EPC projects 1,000 - Award of projects - state governments 1,000 - Total contracts awarded in FY12(km) 9,994 - Source: NHAI, Nirmal Bang Institutional Equities Research Exhibit 36: Recent policy reforms 100% FDI under the automatic route is permitted for all road development projects 100% income tax exemption for a period of 10 years NHAI agrees to provide grants/viability gap funding for marginal projects The maximum grant provided will be 20% of the project cost. In case the grant is inadequate for making a project commercially viable, an additional grant of up to a maximum of 20% of the project cost is possible. The time required for construction (typically 24-30 months) is included in the concession period. A concessionaire starts earning revenue from COD, and this gives the concessionaire an incentive for early completion of construction. A time limit of 180 days is set for achieving financial closure by the concessionaire. In the event of failure, the bid security stands forfeited. Source: NHAI, Nirmal Bang Institutional Equities Research NHAI project target achievable in FY12 NHAI has planned month-wise award schedule for BOT (toll) road projects totaling 8,000km for the first 10 months of FY12. These 59 BOT road projects, having aggregate project cost of Rs647bn, would be developed on toll basis. To ensure that the target is met, the government has kept a buffer with an overall pipeline of 10,000km. Importantly, the calendar is front-ended, with 67% of the 8,000km (Rs569bn) BOT road projects scheduled to be awarded by January 2012, which would take care of any delay in the award of projects. Looking at the recent momentum in awarding projects (around 25% of planned) and project pipeline at the bidding stage, we believe the FY12 target will be achieved.

16 Infrastructure Sector IV Institutional Equities

Exhibit 37: Projects to be awarded in FY12 Project Name State Estimated Project Cost (Rsbn) Eastern Peripheral Expressway Uttar Pradesh/Haryana 27.0 Kundapur-Karnataka/Goa Border Karnataka 19.7 Jabalpur-Katani-Rewa Madhya Pradesh 19.1 Vijaywada-Elluru-Gundugolanu Andhra Pradesh 17.4 Barwa Adda-Panagarh West Bengal 16.7 Allahabad Bypass-Varanasi Uttar Pradesh 15.2 Etawah-Chakeri Uttar Pradesh 14.9 Agra-Etawah Bypass Uttar Pradesh 14.9 Chakeri-Allahabad Uttar Pradesh 14.3 Panikoili - Rimuli Orissa 14.1 Varanasi-Sultanpur Uttar Pradesh 13.5 Chnadikhole-Dubari-Talchar Orissa 12.9 Maharashtra/Karnataka Border-Sangareddy Karnataka 12.5 Solapur-Maharashtra/Karnataka Border Maharashtra 12.4 Angul-Sambalpur Orissa 12.2 Raipur-Bilaspur Chhattisgarh 12.2 Vikravandi-Kumbakonam-Thanjavur Tamil Nadu 11.7 Patna-Buxar Bihar 11.3 Cuttack-Angul Orissa 11.2 Madurai-Parmakudi-Ramanathapuram Tamil Nadu 11.0 Amravati-Dhule-Gujarat Border Maharashtra 10.8 Gwalior-Shivpuri Madhya Pradesh 10.6 Hospet-Chitradurga Karnataka 10.5 Aurangabad- Saraipally- Orissa Border Chhattisgarh 10.2 Lucknow-Sultanpur Uttar Pradesh 10.1 Rohtak-Hissar Haryana 9.5 Solapur-Maharashtra/Karnataka Maharashtra 9.5 Source: NHAI, Nirmal Bang Institutional Equities Research Rising competition to impact return We have seen that delay in NHAI order pick-up, lack of momentum in other sectors coupled with existing projects nearing completion have increased the competition for infrastructure projects. This was visible in the bidding pattern for nine projects awarded this year (NHAI had estimated an aggregate outflow as grants, but on the other hand the developers promised a certain premium in most of the projects). We believe the trend of competitive bidding will be over as we have seen a pick-up in order inflow and visibility in the bulk of orders to be awarded by NHAI in FY12 and FY13. Exhibit 38: New projects awarded New projects awarded Total cost (Rsmn) Grant (premium) Rsmn Company name Kota-Jhalawar 5,300 35 Keti Construction Nagpur- Wainganga Bridge 4,841 274 JMC Projects Dhankuni-Kharagpur 14,000 1261 Ashoka Buildcon Ahmedabad-Vadodara 49,200 (3,090.00) IRB Infrastructure Beawar-Pali-Pindwara 26,000 (2,510.00) L&T Kishangarh-Udaipur-Ahmedabad 5,387 (636.00) GMR Infrastructure BarwaAdda-Panagarh 16,700 1060 DS Construction Jabalpur- Lakhnadon 7,800 VGF-370 Gannon Dunkerley Krishnagiri-Tindivanam 6,200 Semi-annual payments of Rs400mn Transstroy-OJSC consortium Shivpuri-Dewas 28,150 1809 GVK Infrastructure Total 163,578 - - Source: Company, Nirmal Bang Institutional Equities Research

17 Infrastructure Sector IV Institutional Equities

Exhibit 39: Competition intensifies Projects Premium (Rsbn) Rsbn L1 L2 L3 Ahmedabad-Vadodra 3.09 1.90 1.40 Beawar-Pali-Pindwara 2.50 2.30 2.10 Kishangarh-Udaipur-Ahmedabad 6.36 5.20 4.30 Shivpuri-Dewas 1.80 1.10 1.00 Source: Company,NHAI, Nirmal Bang Institutional Equities Research Delay in awarding projects NHAI has published the results of its annual pre-qualification exercise for PPP projects in the road segment. The 102 developers pre-qualified through this exercise are not required to submit applications for project- specific qualification. The annual pre-qualification would enable NHAI to reduce the award cycle for new projects and help meet its target of awarding projects totaling 8,000km in FY12. NHAI is trying to further shorten the award cycle by shifting to e-tendering new projects. It has taken up three pilot projects to test the system from August 2011, and going ahead all tenders will be awarded through the e-tendering route.

Exhibit 40: Pre-qualification criteria for companies Exhibit 41: Projects to be awarded on e-tendering basis

Range (Rsbn) No of companies Projects km Bidders 0-10 47 20-10 21 Jowai-Meghalaya/Assam Border 104 29 20-30 11 Hospet-Chitradurga 120 37 30-40 10 40-50 5 Raipur-Bilaspur 125 33 50-60 4 60-70 1 Agra-Etawa 124 33 70-80 1 Etawah-Chakeri 160 24 80-90 1 90-100 1 Rampur-Kathgodam 102 35

Source: NHAI Source: NHAI

18 Infrastructure Sector IV Institutional Equities

Power segment: Capacity up, but operational issues hurt future valuation During the past two years, the power sector witnessed a slowdown in investments due to delay in obtaining environmental clearances, financial closure issues relating to equity contribution, timely supply of critical components for thermal projects, sourcing of fuel linkage and deteriorating SEBs’ financial status leading to low demand. All these factors postponed the investment plans of the government as well as private players. We expect the issues related to land acquisition, obtaining various clearances and fuel security to persist. However, we have analysed the project portfolios which are at development and planning stage on certain landmarks like financial closure, land clearance and equipment order placement. Based on our analysis, we have come to the conclusion that around 76GW of projects are going to be commissioned by FY15 even after considering 20% to 25% of slippage in ongoing projects. This translates into a CAGR of 20% and completion of around 21GW/year of incremental capacity in the first three years of the 12th Plan period. This provides strong visibility of accelerated capacity addition in the next three years. Apart from this, the postponed capacity would give a push to announcement of new projects during FY12-15. Exhibit 42: Achievement ratio of power capacity addition Five Year Plan Target (MW) Deficit (MW) Achievement ratio (x) 7th Plan 22,245 1,193 0.95 8th Plan 30,538 13,808 0.55 9th Plan 40,245 20,994 0.48 10th Plan 41,110 13,827 0.66 FY08 16,335 7,072 0.57 FY09 11,061 7,608 0.31 FY10 14,507 4,922 0.66 FY11 21,441 9,281 0.57 Source: CEA Exhibit 43: Plan-wise capacity addition Break-up (MW) Central sector State sector Pvt sector Total Pvt sector (%) FY04 3,035 798 974 4,807 20% FY05 2,210 1,169 70 3,449 2% FY06 1,420 1,488 661 3,569 19% FY07 4,630 1,671 552 6,853 8% FY08 3,240 5,273 750 9,263 8% FY09 750 1,850 853 3,453 25% FY10 2,180 3,118 4,287 9,585 45% FY11 4,280 2,759 5,121 12,160 42% FY12E 4,750 1,000 6,698 12,448 54% FY13E 7,300 3,500 10,780 21,580 50% FY14E 7,212 3,500 10,450 21,162 49% FY15E 6,600 4,000 10,360 20,960 49% Source: CEA, Nirmal Bang Institutional Equities Research

Exhibit 44: 21 Capacity addition trend

(GW) 25 21.5 21.0 21.0 20

15 12.1 12.5 9.2 9.5 10 6.8 3.9 5 3.0 3.4 3.5 3.4

E E E

03 04 07 11 05 08

13 12 15

FY FY FY06 FY FY09 FY10 FY FY FY

FY FY14E FY FY Source: CEA, Nirmal Bang Institutional Equities Research

19 Infrastructure Sector IV Institutional Equities

Key operational issues in power sector and our view Mounting losses of SEBs denting power demand State electricity boards’ (SEBs) losses have almost doubled from US$6bn to US$12bn in the past three years due to increase in the spread between average cost of supply and average power tariff and T&D (transmission and distribution) losses. This has led to lower demand from SEBs for merchant power at a higher price. Recently, the government passed a resolution to arrest and reverse growing losses of SEBs. As per the resolution, SEB loans will be converted into equity to improve their networth, pass-through of any increase in power purchase costs, state governments to release subsidies to discoms for ‘below cost’ power supply to agriculture and rural households in advance and opening up of discoms for competition through input-based distribution franchisee system. We believe the worst is over for SEBs and going forward, their finances will gradually improve due to increased power availability via long-term contracts, tariff hike and lower T&D losses. Exhibit 45: Yawning gap between ACS, ARR Rs/unit FY07 FY08 FY09 Average cost of supply(ACS) 2.76 2.93 3.4 Average revenue realised(ARR) 2.27 2.39 2.62 Revenue GAP (0.49) (0.54) (0.78) Gap with subsidy 0.25 0.23 0.33 Gap on revenue and subsidy realised basis 0.34 0.35 0.6 Source: PFC, Nirmal Bang Institutional Equities Research

Exhibit 46: SEBs’ losses FY07 FY08 FY09

Power distribution companies (Rsbn)

Total income (excluding subsidy) 1,319 1,495 1,704 Total expenditure 1,599 1,836 2,213 PAT (without subsidy) (279) (342) (506) PAT (with subsidy) (151) (178) (322) Subsidy received 128 165 184 Subsidy as a percentage of revenue (%) 9.7 11.0 10.8 Subsidy booked 136 195 297 Subsidy as a percentage of revenue booked (%) 10.3 13.0 17.4 Genco, transmission and trading P&L A/c (Rsbn)

Total income (excluding subsidy) 812 862 961 Total expenditure 795 833 974 PAT (without subsidy) 11.6 22.0 (20.0) PAT (with subsidy) 11.9 22.0 (20.0) Total SEB losses (Rsbn)

Total income (excluding subsidy) 2,131 2,357 2,665 Total expenditure 2,394 2,669 3,187 PAT (without subsidy) (267) (320) (526) PAT ( with subsidy) (139) (156) (342) Total debt (Rs trn) 1.28 1.54 2.4 Source: PFC, Nirmal Bang Institutional Equities Research Pressure on merchant power tariff to continue Merchant power rates primarily depend on the deficit level (difference between demand and short-term power supply). During 1QFY11, merchant power tariff declined from Rs7-8/unit to Rs3-4/unit (barring assembly election states) due to decline in the deficit level. As significant power generation growth is expected across central and state government utilities and the private sector, we expect the base deficit to decline meaningfully in FY13. Hence, we believe the pressure on merchant rates would continue in future and we have factored in Rs 4.25/unit for FY12 and Rs 4.00/unit FY13 in our model.

20 Infrastructure Sector IV Institutional Equities

Exhibit 47: Merchant power tariff

(Rs/KWh) June - Sep 09 12 Rs5.9KWh June - Sep 10 10 Rs3.2KWh June - Sep 11 8 Rs2.82KWh

10 11

09 10 11

09 10

09 09 09 09 10 10 10 10 11 11

09 10 10 11 11

09 09 10 10 11 11

09 10 11

- -

- - - - -

- - - -

------

- - - - -

------

- - -

Jul Jul Jul

Apr Apr Apr

Oct Oct

Jun Jan Jun Jan Jun

Mar Feb Mar Feb Mar

Nov Dec Nov Dec

Aug Sep Aug Sep Aug Sep

May May May Merchant prices Average Source:IEX Fuel security is critical issue Currently, 65% of India’s installed power capacity (112GW) is coal-based and 80% of coal requirement is met through domestic sources. Going ahead, the commissioning of incremental capacity of 82GW (70% of incremental capacity addition-thermal based) in the next three years would push up incremental coal imports to 124mtpa over FY11-15E. We believe that constrained infrastructure at ports and unavailability of railway wagons to despatch coal to the hinterland would be a major hurdle in the import of coal. Hence, lower coal imports and moderate growth in domestic coal production would compel power plants to operate at a lower PLF (plant load factor). Based on our analysis in respect of capacity addition and fuel requirement, the power plants would operate in the range of 75% to 79% of their capacity. Exhibit 48: Coal demand for power generation FY10 FY11E FY12E FY13E FY14E FY15E

Coal demand (mt) 411 445 484 553 631 719 Generation capacity (mw) 84,198 93,918 102,631 117,737 132,550 147,222 PLF (%) 77.5 76.0 76.0 76.0 77.0 79.0 Operating capacity (mw) 65,254 71,378 78,000 89,480 102,064 116,306 Units produced (mn) 571,623 625,271 683,279 783,848 894,079 1,018,838 Gross calorific value (Kcal/kg) 3,600 3,600 3,600 3,600 3,600 3,600 Heat rate (kWh/ Kcal) 2,588 2,560 2,550 2,542 2,540 2,540 Source: CEA, Energy Statistics, Nirmal Bang Institutional Equities Research

Exhibit 49: Thermal coal import for power generation Exhibit 50: PLF trend (%) Y/E March (mt) FY10 FY11E FY12E FY13E FY14E FY15E 81 Coal demand (for power generation) 411 445 484 553 639 728 79 Coal production (for power generation) 367 385 404 429 454 482 77 75 Incremental coal production - 18 19 24 26 27 73 Thermal coal imports 44 60 80 125 185 246 71

Imports ( adjusted for calorific value) 27 37 49 77 115 153 69

E E E

03 04 05 09 10 11 07

13 14 15

FY02 FY FY FY FY FY FY FY FY08

Incremental imports - 9 12 28 37 38 FY06

FY12E FY FY FY

Source: CEA, Energy Statistics, Nirmal Bang Institutional Equities Research Source: CEA, Nirmal Bang Institutional Equities Research

21 Infrastructure Sector IV Institutional Equities

Funding problems for big scale 12th Plan infrastructure spending The Planning Commission expects the private sector to contribute 50% of 12th Plan infrastructure spending target. Based on our analysis on order inflows in the next two years, road and power segments, in particular, are likely to witness a sharp increase in private sector investment. We have assumed that private sector investment will be 70% debt-funded and 30% equity-funded and 25% slippage in US$1trn infrastructure spending target under the 12th Plan. Based on this approach, the private sector will raise Rs2.4trn of debt and it will be required to pump in Rs1trn as equity per annum. Market has concerns that despite rising bank credit to infrastructure projects, banks are unable to fund such projects to the extent of over 50% of their requirement and thereby delay financial closure. We agree with the market’s concerns that bank credit is unable to fund the projects. However, we believe the recent reforms related to the debt market and financing of infrastructure projects would ease raising debt for funding the projects. Recent reforms which will ease project funding: IIFCL take-out financing is a major development as it addresses the banking sector’s asset-liability duration mismatch in lending to infrastructure companies. Government has announced the setting up of Infrastructure Debt Funds (IDFs) with an initial corpus of US$10bn, which will attract long-term offshore funds at a lower interest rate, Introduced tax-free infrastructure bonds - tax exemption of an additional Rs20,000 for individuals. Government’s proposal to classify loans to the infrastructure sector as secured lending, which will increase the flow of funds towards the sector. IIFCL allows raising Rs400bn through tax-free bonds. Government and IIFCL to refinance 60% of commercial banks’ loans for PPP (public-private partnership) projects over the next 15-18 months RBI has introduced a new category of infrastructure financing company with relaxed borrowing limits and lower risk weight for borrowing from banks. Finance ministry proposes to allow private sector firms to issue long-term infrastructure bonds to raise funds for investment in the infrastructure sector. Infrastructure bonds can be held to maturity and need not be mark-to-market. RBI has changed the classification of build-operate-transfer (BOT) projects to secure from unsecured. Government’s expert committee proposes India Infrastructure Fund to refinance bank lending to infrastructure projects where construction has been completed. RBI allows take-out financing through ECBs for refinancing of rupee loans availed from domestic banks.

Exhibit 51: Bank credit to power, road and port projects (% of total lending to industry)

(x) 25 23.3 19.9 20 18.2 16.9 16.9 14.4 15 11.1 10 8.6 6.5 5.0 5

0 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10

Source: RBI

22 Infrastructure Sector IV Institutional Equities

Project execution uncertainty in near term, but FY13 to witness strong growth Despite strong order book, the revenue growth was muted during the past one year due to project execution- related issues. The market believes the project execution issues would continue to impact the growth of the sector. However, we believe the execution would improve because these issues were more technical (short term) rather than structural in nature. Reasons for slow execution during last four quarters and our view: Companies received the projects, but delays in government-related processes such as formulation of contract structures, environmental clearance and land acquisitions slowed down execution. The government implemented a number of measures over the past one year like award of a project if 80% of land acquisition is completed and one-time technical qualification. We believe these measures would ease pre-execution delay and improve project execution. During FY10, the ratio of new orders in the overall executable order backlog for the year (i.e. order backlog at the beginning of the year plus order inflow during the year) increased. Higher the proportion of new orders in the order backlog, lower will be the blended execution, as the new orders take time to reach maturity in revenue recognition. Other issues like payment issues in Andhra Pradesh, Dubai property crisis and state assembly elections slowed down project execution. During the past one year, infrastructure companies have reduced the exposure of their order book to the Andhra Pradesh region. The Dubai property crisis has shown signs of improvement and state assembly elections are also over now, which will help realty companies. Rising contribution of lower execution cycle projects to improve project execution During the past two years, the order inflow was biased towards the road segment. This has changed the order book composition of most companies and increased the weight of road segment projects in the order backlog. Typically, the execution period for a road project is 24-30 months as against a hydro-power project which has an execution period of 48-60 months. Shift in order book composition towards lower execution cycle projects would improve the conversion ratio in 2HFY12 and FY13. Apart from that, we expect incremental order inflow to be driven by road segment projects, which will keep the growth momentum intact. Exhibit 52: Revenue growth Exhibit 53: EBITDA growth

(%) (%) 80 120

70 100 60 80 50 40 60

30 40 20 20 10 0 0 FY09 FY10 FY11 FY12E FY13E FY09 FY10 FY11 FY12E FY13E (20) IRB infrastructure Reliance Infrastructure GMR Infrastructure HCC IVRCL IRB infra Reliance Infra GMR Infra HCC IVRCL Source: Planning Commission, Nirmal Bang Institutional Equities Research Source: Nirmal Bang Institutional Equities Research Exhibit 54: EBITDA margin trend

(%) 50 45 40 35 30 25 20 15 10 5 0 FY09 FY10 FY11 FY12E FY13E IRB infra Reliance Infra GMR Infra HCC IVRCL Source: Nirmal Bang Institutional Equities Research

23 Infrastructure Sector IV Institutional Equities

Exhibit 55: Recent order inflow trend (April 2011 till date) Apr-11 Companies Rsmn Order description Sadbhav Engineering. 2,362 EPC project work for Sardar Sarovar Narmda Nigam, Gandhinagar, Gujarat

Ahluwalia Contracts 5,350 Construction of residential commercial, institutional buildings

Supreme Infrastructure 3,600 Construction of building complex for Oswal Chemicals

Punj Llyod 1,140 Railway contract

Unity Infrastructure 893 Construction of office building in Hyderabad for IRDA

Pratibha Industries 2,415 Construction and rehabilitation of transmission main for Goa water supply authority

Pratibha Industries 606 Secures contract for construction of residential building

Pratibha Industries 1,010 Secures water supply project

May-11 Companies Rsmn Order description HCC 2,986 Construction work of Limbdi branch canal in Gujarat

Unity Infrastructure 1,980 Construction order

L&T 35,000 Secures gas-based power plant EPC order from PPN Power

L&T 14,500 Gets GSPC contract for offshore process platform in KG basin

Pratibha Industries 2,381 Design and construction of tunnel for Delhi MRTS project

Unity Infrastructure 1,437 Construction of city road in Nagpur, construction of hostel in Pune

IVRCL 2,947 Water supply authority order

5,175 Building construction order

442 Power plant construction order

373 Order from the transportation segment

Valecha engineering 3,214 Order for road construction

Jun-11 Companies Rsmn Order description Punj Llyod 8,900 Onshore oil operations for carrying out EPC in South East, Abu Dhabi.

ARSS Infrastructure 2,075 Two orders from Madhya Pradesh Road Development Corporation for road construction

Punj Llyod 6,780 EPC nuclear power contract from NPCIL

L&T 13,660 Orders from the Gulf for power transmission, constructing sub-station

L&T 26,000 Concession agreement with NHAI

L&T 41,000 Constructing office building, factories

L&T 16,100 Metallurgical and material handling system for Tata Steel, Indiabulls Power

Punj Llyod 8,260 Offshore contract from GSPC

HCC 7,010 Construction of Tehri pumped storage project plant, Uttarakhand

Unity Infrastructure 997 Construction of Harsi high level main canal

Jul-11 Companies Rsmn Order description NCC 8,150 Rs2,150mn order from Rail Vikas Nigam, Rs1,590mn order from CIDCO

Punj Llyod 990 Kolkata West International City contract

L&T 12,100 Construction order from Qatar in the electrical space

Ahluwalia Contracts 4,820 Construction of residential, commercial, institutional buildings

Punj Llyod 2,100 Civil contract for thermal power project of NTPC, Assam

Pratibha Industries 12,490 Order from Delhi Jal Board

Valecha Engineering 1,480 Construction of roads in Madhya Pradesh, Kota

Jaypee Associates 20,790 Secures two contracts from Punatsangchhu-II Hydro-electric Project Authority, Bhutan

Punj Llyod 3,300 To build process facilities for crude oil storage cavern in Mangalore

Aug-11 Companies Rsmn Order description McNally Bharat Engineering 1,093 Order from BECL for design, engineering, commissioning of ash handling system package for 2X 250MW thermal plant

ARSS Infrastructure 2,335 Order for development, O&M of Ropar-Chamkaur Sahib -Neefon-Dorah road on DBFOT basis

Jyoti Structures 4,380 M. P. Vidyut Vitran Companies Limited for feeder separation programme

L&T 40,005 Hydrocarbon order from Abu Dhabi gas industry

Sadbhav Engineering 2,020 Road and irrigation project from Bihar Road State Development

L&T 13,400 Construction of residential and commercial buildings

Sep-11 Companies Rsmn Order description NCC 6,290 Order from Water Resources Division at Raigarh, Chhattisgarh, and MSEDCL, Mumbai, for turnkey contracts

L&T 10,150 Order for construction of office building, factories

L&T 7000 Bagged order from Petroleum Development Oman LLC IVRCL 22289 Construction of road and building ,water transportation project. Source: Company, Nirmal Bang Institutional Equities Research

24 Infrastructure Sector IV Institutional Equities

Management commentary on delay in project execution: IRB Infrastructure Competitive bidding due to slowdown in NHAI project award activity. Land acquisition delayed Goa-Karnataka project. Reliance Infrastructure Not accruing any regulatory asset from the third quarter in Mumbai electric supply operations EPC business reached inflection point and starting 1QFY12, there will be significant increase in the top- line and profits of EPC projects. Three road projects were delayed due to NHAI land clearance issue. GMR Infrastructure Issues regarding determination of aeronautical charges and collection of airport development fee to recover Delhi airport costs. Lower plant load factor due to shortage of natural gas. Realty demand slowdown impacting further monetisation of Delhi land parcel. HCC Environment clearance delay for hydro-power projects hit EPC projects. Irrigation projects in Andhra Pradesh slowed down due to delayed payment. IVRCL Infrastructure Projects delayed due to problems in land clearance. Delayed payment issue in the Andhra Pradesh region. Slower execution during state assembly elections. Projects which witnessed major delays are Goa-Maharashtra and Panvel-Sion road projects, Andhra Pradesh irrigation project, and Hogenakkal and Koyna hydro-power projects. These are the key projects where substantial revenue was lost, amounting to almost Rs25bn.

25 Infrastructure Sector IV Institutional Equities

Initiating coverage on five infrastructure companies

IRB Infrastructure: On The Road To Success IRB Infrastructure, a premier toll road developer and operator with in-house integrated execution capabilities, will be the biggest beneficiary of traction in the road segment. We believe the company is offering a good blend of growth and sustainable cash flow (EPC business to drive revenue CAGR of 37% between FY11-13 and toll revenue will provide sustainable operating cash flow of around Rs12bn to meet the equity commitment of new projects without equity dilution). We assign a Buy rating and a TP of Rs235 to its stock based on SOTP valuation. Reliance Infrastructure: Core earnings to improve Renewal of Mumbai discom licence and the recent tariff hike in Delhi electricity distribution business are likely to eliminate the overhang on Reliance Infrastructure’s valuation with respect to its power distribution business. The EPC segment has an order book of Rs280bn, which would drive revenue growth in coming years. Infrastructure projects are now turning from the development stage to the revenue generation stage with the commissioning of six road projects, Mumbai metro rail phase I and one transmission project in the next six months. However, the stock is currently trading at a P/BV of 0.5x, which we believe is unjustified and below stress case valuation. We assign a Buy rating and a target price of Rs724 to the stock. GMR Infrastructure: On Recovery Path GMR Infrastructure, a leading infrastructure company, has underperformed the Nifty in the past three years by 55% because of multiple issues like Balance Sheet concerns post leveraged buyout of Intergen, funding constraints for mega expansion plan, overhang of regulatory issues and pressure on profitability. Looking at the recent developments like adequate raising of capital for near-term expansion, sale of Intergen stake and expected other positive developments like improvement in profitability and clarity on regulatory issues, we believe the concerns have been largely priced in the CMP of GMR Infrastructure and provides a good investment opportunity for long-term investors. We assign a Buy rating and a target price of Rs39 to the stock based on SOTP valuation. HCC: Downside Risk Limited We assign a Hold rating and a target price of Rs33 to HCC as we believe the company’s sales would grow moderately due to higher working capital requirement and greater leverage. Lavasa, a marquee project, is in trouble due to dispute with the environment ministry, which has given a big jolt to its valuation. We believe the downside risk is limited (as the recent transaction relating to divestment of stake in HCC Concessions is valued equal to the market capitalisation of the parent company), but lack of triggers and the company’s focus on consolidating its business due to higher leverage would cap any upside. IVRCL Infrastructure: Project Execution To Gain Momentum IVRCL Infrastructure, a well established construction company with an order backlog of Rs230bn, which is 3.8x FY11revenue, provides strong revenue visibility. Project execution is poised to pick up from 2HFY12, driven by commencement of billing in three new projects, increase in shorter execution cycle projects in total order book and increase in sub-contracting post stability in interest rates, which will drive 17% yoy revenue growth and 32% yoy earnings growth during FY13. The company is also in advance stage of talks for sale of stake in the special purpose vehicle of IVRCL Assets & Holding (IVRCLAH) and monetisation of real estate, which would ease funding needs. We assign a Buy rating and a target price of Rs59 to the stock based on SOTP valuation.

26 Infrastructure Sector IV Institutional Equities

IRB Infrastructure 26 September 2011

Reuters: IRBI.BO Bloomberg: IRB IN On The Road To Success BUY IRB Infrastructure, a premier toll road developer and operator with in-house Sector: Infrastructure

integrated execution capabilities, will be the biggest beneficiary of traction in the road segment. We believe the company is offering a good blend of growth and CMP: Rs163 sustainable cash flow (EPC business to drive revenue CAGR of 37% between FY11-13 and toll revenue will provide sustainable operating cash flow of around Target Price: Rs235 Rs12bn to meet the equity commitment of new projects without equity dilution). Upside: 44% We assign a Buy rating and a TP of Rs235 to its stock based on SOTP valuation. Amit Srivastava Biggest beneficiary of traction in road segment: NHAI is expected to tender road [email protected] projects of around 24,000km in the next three years and has given a clear timeline +91-22-3926 8116 (with project-wise details) to award projects worth around Rs483bn in the next six months. As India’s largest integrated player in the road space, the company is a natural beneficiary. During the past six months (April 2011 onwards), NHAI has Nitin Arora awarded projects worth Rs 164bn (around 1,851km) in which the company has [email protected] +91-22-3926 8169 secured one mega project worth Rs49bn and is targeting incremental orders worth

Rs25bn to Rs30bn in FY12 which would translate into around 13% of projects awarded Initiating Coverage Initiating by NHAI in FY12. Key Data Strong operating cash flow to drive future growth: IRB Infrastructure has a Current Shares O/S (mn) 332.4 portfolio of 17 projects with a daily gross toll collection of Rs30mn, which is growing at Mkt Cap (Rsbn/US$bn) 54.1/1.1 around 14-16% per annum. The company has witnessed a significant growth in its 52 Wk H / L (Rs) 290/132 operating cash flow, from Rs2.5bn in FY08 to Rs10bn in FY11, which is expected to be in the same range until FY13. On the other hand, for existing projects, the equity Daily Vol. (3M NSE Avg.) 1,772,290 commitment could be in the range of Rs11bn over FY12-13, which could be funded through internal accruals. Thus, existing cash flows are sufficient to meet equity Share holding (%) 3QFY11 4QFY11 1QFY12 funding requirements of its projects without any dilution. However, on completion of Promoter 75.0 74.8 74.8 existing projects, the debt/equity ratio would increase to 1.9x in FY13. FII 13.5 14.3 13.7 EPC order book of Rs117bn to drive robust growth: The company has an order DII 3.4 3.9 4.0 book of Rs117bn, (7x FY11 construction revenue), which is expected to be executed over the next three years. Robust order book coupled with four projects under active Corporate 4.0 2.6 2.7 phase (worth Rs46.8bn and executable by FY13), would drive revenue CAGR of 37% General Public 4.2 4.5 4.9 over FY11-13. However, we expect the net profit to show a CAGR of 11% due to higher interest costs and depreciation charges on completion of BOT assets worth One Year Indexed Stock Performance Rs82bn. SOTP-based target price of Rs235: We assign a Buy rating with a target price of Rs235 to IRB Infrastructure based on SOTP valuation, comprising Rs151 (64% of SOTP, based on FCFE) for BOT assets and Rs84 (36% of SOTP, PE ratio of 8x) for the EPC business. Accordingly, we have arrived at a valuation of Rs235. Y/E Mar (Rsmn) FY09 FY10 FY11 FY12E FY13E Net Sales 9,919 17,049 24,381 31,941 45,863

YoY (%) 35.4 71.9 43.0 31.0 43.6 EBITDA 4,374.0 7,990.2 10,939.3 13,542.7 17,247.3 EBITDA margin (%) 44.1 46.9 44.9 42.4 37.6 Price Performance (%) Net Profit 1,759 3,855 4,524 4,642 5,967 1 M 6 M 1 Yr YoY (%) 54.4 119.2 17.4 2.6 28.5 IRB Infra 3.8 (12.8) (42.7) EPS (Rs) 5.3 11.6 13.6 14.0 18.0 Nifty Index (1.6) (11.2) (18.3) PER (x) 31.0 14.1 12.0 11.7 9.1 Source: Bloomberg P/BV (x) 3.2 2.7 2.2 1.9 1.6 ROCE (%) 6.2 11.8 9.8 8.4 8.9 ROE (%) 10.2 18.9 18.6 16.0 17.1 Source: Company, Nirmal Bang Institutional Reearch

Institutional Equities

SOTP-based target price of Rs235 We assign a Buy rating with a target price of Rs235 to IRB Infrastructure based on SOTP valuation. We have valued the stock via the SOTP route using FCFE methodology for BOT assets and relative valuation (PE ratio) for the EPC business. We believe the FCFE model is the best way to value road assets as BOT projects have a definite concession period and long-term predictable cash flow with a definite capex and debt repayment structure. Accordingly, we have arrived at a value of Rs235, comprising Rs151 (64% of SOTP) for BOT assets and Rs85 (36% of SOTP) for the EPC business. We have not done any valuation for the company’s investment in real estate and airport development, as these projects are still at the planning stage. Exhibit 1: SOTP valuation Rs./share Operational DCF based at CoE of 14% 97 Under development DCF based at CoE of 16% 54 EPC businesst PE ratio (FY13, 8x) 84 Total - 235 Source: Company, Nirmal Bang Institutional Equities Research BOT assets valued at Rs 151/share (64% of SOTP) Our BOT projects model assumes 5-7% of traffic growth and toll rate increase of 5%. We have discounted the FCFE at a COE of 14% for operational projects and 16% for under-development projects. The BOT business of IRB Infrastructure has one of the most lucrative portfolios in the industry, with 11 projects currently earning revenue (construction completed) and six others in the construction phase. Exhibit 2: Project portfolio Project name Project name Stake Equity value (Rsmn) Rs/share Mhaiskar Infrastructure Mumbai - Pune 100% 10,761 32.4 IDAA Infrastructure Bharuch- Surat 100% 5,158 15.5 Aryan Toll Road Pune -Solapur 100% 1,045 3.1 ATR Infrastructure Pune- Nashik 100% 1,955 5.9 IRB Infrastructure Patalganga( Kharpada River Bridge 100% 255 0.8 NKT Road & Toll Ahmednagar-Karmala-Temburni Road 100% 555 1.7 Thane Ghodbunder Toll Road Thane -Ghodbunder Road 100% 2,291 6.9 MMK Toll Road Mohol-Kurul-Kamti-Mandrup Road 100% 408 1.2 Ideal Road Builders Thane- Bhiwandi Bypass 100% 2,942 8.9 IRB Surat Dahisar Tollway Surat Dahisar 90% 4,045 12.2 IRDP Kolhapur IRDP Kolhapur 100% 2,674 8.0 Operational projects - total - 32,089 97 Projects under implementation IRB Amritsar Pathankot Amritsar Pathankot 100% 3,534 10.6 IRB Jaipur Tonk Deoli Jaipur Tonk Deoli 100% 7,271 21.9 IRB Talegaon Amravati Talegaon Amravati 100% 3,293 9.9 IRB Tumkur Chitrudurga Tumkur Chitudurga 100% 3,829 11.5 Total Projects under implementation - 17,927 54.0 Total BOT asset portfolio - 50,016 151 Source: Company, Nirmal Bang Institutional Equities Research Two operational projects (32% of BOT asset value and 48% of toll revenue) The company has a portfolio of 17 BOT assets, of which 11 projects are operational and 6 are under implementation. However, two operational projects - Mumbai-Pune and Bharuch-Surat - contribute around 48% of toll revenue and 32% of the value of BOT assets. Surat-Dahisar project has started tolling and contributes around 34% of toll revenue, but the project would be commissioned in 2HFY12. During 1QFY12, theTumkur-Chitradurga project started toll collection and the project would be completed by the end of FY14. The remaining projects account for only 19% of toll revenue. The three new projects (Jaipur – Deoil, Amritsar – Pathankot, Telegaon – Amravati) will start contributing to revenue from 2HFY13. We expect these projects to account for around 22% of total toll revenue in FY14, which would be the first full year of operations of these projects.

28 IRB

Institutional Equities

Exhibit 3: Project-wise toll revenue trend Net sales (Rsmn) FY09 FY10 FY11 FY12E FY13E FY14E Mumbai-Pune 1 2,882.6 3,062.6 3,215.7 3,916.7 4,112.6 4,318.2 Bharuch-Surat - 662.8 1,396.5 1,586.3 1,796.4 2,016.7 Pune -Solapur 127.1 133.0 147.5 185.4 198.4 219.0 Pune -Nashik 164.0 180.7 228.6 250.1 288.0 314.9 Patalganga (Kharpada) River Bridge 70.5 67.2 68.6 73.4 78.6 84.1 Ahmednagar-Karmala-Temburni Road 113.5 134.6 154.3 165.1 202.2 224.9 Thane-Ghodbunder Road 268.6 277.3 330.1 353.2 377.9 489.3 Mohol-Kurul-Kamti-Mandrup Road 65.5 63.0 68.6 73.4 89.5 99.5 Thane-Bhiwandi Bypass 586.6 567.2 564.1 638.4 683.0 730.6 Surat-Dahisar 208.3 2,069.3 2,261.1 2,503.4 2,678.7 2,866.2 IRDP Kolhapur - - - 302.5 529.1 566.1 Amritsar-Pathankot - - - - - 1,081.0 Jaipur Tonk Deoli - - - - 342.1 1,529.3 Talegaon- Amravati - - - - - 711.3 Tumkur- Chitudurga - - - 223.7 324.6 478.0 Total toll collection 4,487 7,218 8,435 10,272 11,701 15,729 YoY (%) - 61 17 22 14 34 Source: Company, Nirmal Bang Institutional Equities Research Mumbai-Pune project The company secured Mumbai - Pune Expressway and NH-4 projects on BOT basis in August 2004 for a concession period of 15 years. The project involved four-laning and improvement of NH-4 (completed in September 2006), toll collection and operation and maintenance of Mumbai- Pune Expressway. The total cost of the project was Rs13bn, which included an upfront fee of Rs9.2bn to MSRDC (Maharashtra State Road Development Corporation). The project was funded through equity of Rs1.05bn, debt of Rs11.8bn and internal accruals of Rs 152mn. This is the most significant asset in the company’s portfolio, which contributes around 35% of BOT revenue and 21% of BOT value. Exhibit 4: Mumbai-Pune Expressway details (Rsmn) (%) Project cost 12,920 CoE 14 Debt 11,870 Interest rate (Fixed) 10.5 Equity 1,050 Equity IRR 68 Concession period 15Year Traffic growth 5 Equity value 10,761 Toll rate hike 16% (every third year) Source: Company, Nirmal Bang Institutional Equities Research Exhibit 5: Mumbai-Pune Expressway- financials (Rsmn) FY09 FY10 FY11 FY12E FY13E FY14-20E Toll revenue 2,883 3,063 3,216 3,917 4,113 38,194 YoY (%) 23.0 6.2 5.0 21.8 5.0 - EBITDA 2,332 2,551 2,618 3,208 3,368 31,301 PAT 508 611 840 1,293 1,485 20,601 Source: Company, Nirmal Bang Institutional Equities Research Bharuch-Surat project The company got this project in January 2007 to expand and improve NH-8 on BOT basis for a concession period of 15 years. The total project cost was Rs14.6bn, including an upfront fee of Rs5bn to NHAI. The project was funded through equity and internal accruals of Rs1.9bn and debt of Rs12.7bn. The project has started tolling from 15 September 2009, contributing around 12% of BOT revenue and 11% of BOT asset value.

29 IRB

Institutional Equities

Exhibit 6: Bharuch-Surat project details Rsmn (%) Project cost 14,040 COE 14 Debt 12,110 Interest rate 10.75 Equity 1,930 Equity IRR 32 Concession period 15 Years Traffic growth 7 Equity value 5,158.22 Toll rate hike WPI linked Source: Company, Nirmal Bang Institutional Equities Research Exhibit 7: Bharuch-Surat project financials (Rsmn) FY10 FY11 FY12E FY13E FY14-22E Toll revenue 1,396 1,586 1,796 2,017 28,898 YoY (%) 111 14 13 12 - EBITDA 1,191 1,384 1,581 1,449 23,023 PAT (385) 56 192 342 11,287 Source: Company, Nirmal Bang Institutional Equities Research EPC segment valued at 8x on PE ratio The company’s EPC business derives revenue from in-house projects and enjoys a higher margin. For most construction players, road project is a low-margin business where they typically have 8-12% EBITDA margin. However, IRB Infrastructure registers 20-25% margin due to efficiencies it has built up over the years, like mining licence for aggregates, minimal sub-contracting, and its own fleet of construction equipment. We have valued the E&C business of the company at a PE multiple of 8x FY13E earnings (lower end of five year historical range of 8x-16x for EPC players). Exhibit 8: EPC business performance (Rsmn) FY09 FY10 FY11 FY12E FY13E Net sales 5,672 12,124 16,704 20,906 33,322 YoY (%) 113.8 37.8 25 .2 59 .4 EBITDA 1,013 2,746 4,283 4,704 7,331 EBITDA margin (%) 17.9 22.6 25.6 22.5 22.0 PAT 490 1,542 2,243 2,341 3,615 Order book 58,978 89,592 117,412 - - Source: Company, Nirmal Bang Institutional Equities Research Multiples based on consolidated earnings Exhibit 9: P/BV valuation trend Exhibit 10: P/E valuation trend

(x) (x) 4.5 30 4.0 25 3.5 3.0 20 2.5 15 2.0 1.5 10 1.0 5 0.5 0.0 0 Sep-08 Jun-09 Mar-10 Dec-10 Sep-11 Sep-08 Sep-09 Sep-10 Sep-11 P/B value 4 year avg P/E 4 year avg Source: Company, Nirmal Bang Institutional Equities Research Source: Bloomberg, Nirmal Bang Institutional Equities Research

30 IRB

Institutional Equities

Investment Arguments Leading toll road operator with in-house execution facilities IRB infrastructure is a premier toll road developer and operator with in-house integrated project execution capabilities. The company has 17 road projects (11 are operational and 6 under implementation), or around 11% of the Golden Quadrilateral project. The company’s road portfolio, as per lane km, comprises 40% in Maharashtra, 31% in Gujarat, 10% in Karnataka, 9% in Rajasthan, 6% in Punjab and 4% in Goa. It has an in- house construction business which undertakes the construction of road projects and O&M activities, including toll collection, pertaining to BOT projects. This not only captures the entire value chain in-house, but also reduces the company’s dependence on third-party contractors/sub-contractors. Further, this also enables a better control over costs, timelines and quality. Exhibit 11: BOT asset portfolio Project name Toll Length(km) % holding Project cost Project IRR(%) Equity IRR (%) Mumbai - Pune T 206 100% 12,920 21% 68% Bharuch-Surat T 65 100% 14,040 8% 32% Pune -Solapur T 26 100% 630 21% 75% Pune-Nashik T 30 100% 740 30% 221% Patalganga (Kharpada) River Bridge T 1 100% 320 17% 108% Ahmednagar-Karmala Temburni Road T 60 100% 368 27% 61% Thane-Ghodbunder Road T 15 100% 2,485 12% 61% Mohol-Kurul-Kamti-Mandrup Road T 33 100% 180 35% 84% Surat-Dahisar T 240 90% 25,870 6% 30% IRDP Kolhapur T 50 100% 4,300 3% 20% Panaji, Goa T 65 100% - - - Amritsa-Pathankot T 102 100% 14,417 10% 13.0% Jaipur Tonk Deoli T 146 100% 17,057 11% 16.2% Talegaon Amravati T 102 100% 8,851 11% 18.8% Tumkur-Chitradurga T 114 100% 10,800 14% 18% Ahmedabad-Vadodara T 108 100% 49,200 - - Source: Company, Nirmal Bang Institutional Equities Research Exhibit 12: BOT project details Concession Concession Project Revenue share/Fee/Grant Toll rate hike period(yrs) ending Mumbai-Pune Upfront payment to MSRDC of Rs9.2bn 15 Aug-2019 18% every third year Bharuch-Surat Upfront fee to NHAI Rs5bn 15 Jan2022 WPI linked, reset every year(July) Thane Bhiwandi Bypass 18.5 May-2017 5-6% escalation Thane Ghodbunder Upfront fee to MSRDC of Rs1.4 bn 15 Dec-2020 5-6% escalation Pune-Solarpur 16 Mar-2019 5-6% escalation Pune Nashik 18 Sep-2021 5-6% escalation Karmala-Tembhurni 15 Dec-2015 5-6% escalation Kharpada Bridge 17.8 Aug-2015 5-6% escalation Mohol-Mandrup 16 May-2016 5-6% escalation Surat -Dahisar Revenue share of 38% 12 Feb-2021 WPI linked, reset every (September) IRDP Kohlapur Negative grant of Rs270mn 30 Jan-2039 5-6% escalation Tumkur Chitradurga 26 Jun-2037 3% +40% of WPI Under Construction Talegoan-Amravati Grant of Rs2.16bn 22 2031 3% +40% of WPI Jaipur Tonk Deoli Grant of Rs3.06bn 25 2034 3% +40% of WPI Amritsar Pathankot Grant of Rs3.06bn 20 2029 3% +40% of WPI Goa-Panaji 3% +40% of WPI Ahmedabad--Vadodara Premium of Rs 3.09bn 24 3% +40% of WPI Source: Company, Nirmal Bang Institutional Equities Research

31 IRB

Institutional Equities

Exhibit 13: BOT toll revenue trend Exhibit 14: Project- wise toll revenue trend (1QFY12)

(Rsmn) (%) BOT Revenue (%) Pune - Solapur; 1.5 3,000 30 Kharpada; 0.8 Pune - Nashik; 2.0 NKT; 1.3 MMK; 0.7 2,500 25 Thane - Ghodbunder; 2.5 Tumkur-Chitradurg; 4.1 2,000 20 Mumbai - Pune; 35.4 1,500 15 TBB - 4 (Mumbra); 5.6

1,000 10 Bharuch-Surat; 12.1 500 5

- 0 1QFY11 2QFY10 3QFY10 4QFY10 1QFY12 Surat-Dahisar; 33.8 BOT revenue %YoY Source: Company, Nirmal Bang Institutional Equities Research Source: Bloomberg, Nirmal Bang Institutional Equities Research IRB Infrastructure is top beneficiary of traction in road segment NHAI is expected to tender road projects of around 24,000km in the next three years, of which around 6,000km is expected to be awarded in the next six months. During the past six months (April 2011 onwards), NHAI has awarded projects worth Rs164bn (around 1,851km) and has given a clear timeline (with project wise details) to award projects worth around Rs483bn in the next six months. Out of the recently awarded projects, the company has already secured one mega project worth Rs49bn (construction cost Rs36bn) with a concession period of 25 years. The company is targeting incremental orders worth Rs25bn to Rs30bn in FY12, which translates into 13% of projects that will be awarded by NHAI during the year. As one of India’s largest integrated players in the road space, the company would be a natural beneficiary of the multi-fold opportunity in the sector. Exhibit 15: State-wise market share States Maharashtra Gujarat Rajasthan Punjab Karnataka Goa NH/SH NH 3,4,8,9,17,50, SH,141,149 NH 8 , NE-1 NH12 NH15 MH 4 NH 4A Total km 633 390 146 102 114 69 Total lane km 2672 2095 585 410 684 276 Road Portfolio as per lane km (%) 47 19 10 7 12 5 GQ length in km (comprising 11.07% of total GQ length) 246 287 - - 114 - Source: Company, Nirmal Bang Institutional Equities Research Exhibit 16: NHDP project status Phase Total I II III IV V VI VII

Total length (KM) 7,609 7,300 12,109 14,799 6,500 1,000 700 50,017 Completed till date (KM) 7,076 5,683 2,294 0 596 - - 15,649 Completion rate as a % of total 93.0 77.8 18.9 - 9.2 - - 31.3 Completion from 30 April 2010- 31 March 2011 (KM) 97 616 645 - 353 - - 1,711 Under implementation (UI) (KM) 513 1,038 5,805 765 1,918 0 41 10,080 UI as a % of total 6.7 14.2 47.9 5.2 29.5 0.0 5.9 20.2 Balance length for award (BFA) (KM) 20 421 4,010 14,034 3,986 1,000 659 24,130 BFA as a % of total 0.3 5.8 33.1 94.8 61.3 100.0 94.1 48.2 Investments ($ bn) 1.26 6.60 9.97 8.85 3.71 3.71 34.09

Source: NHAI, Company, Nirmal Bang Institutional Equities Research

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Institutional Equities

Exhibit 17: Projects likely to be awarded Project cost break up (Rsbn) RFP stage RFQ stage NHAI projects - Phase III 17.4 27.3 Phase IV,IVA & IV B 32.5 135.4 Phase V 51.3 28.4 Phase VI - 11.3 Phase VII - 2.7 Nhai projects - BOT (annuity) - 7 NHAI projects -OMT - 5.4 NE-II - 26.9 Other clients 18.8 51.7 Total 120 296.1 Source: NHAI, Company, Nirmal Bang Institutional Equities Research Strong operating cash flow for financing equity commitment IRB Infrastructure has a portfolio of 17 projects (11 projects are operational and 6 under implementation) with a daily gross toll collection of Rs30mn, which is growing at around 14-16% per annum. On the other hand, for the existing projects, including the recently awarded ultra mega project, the equity commitment could be in the range of Rs11bn over FY12-13, which could be funded through internal accruals. Thus, existing cash flows are sufficient to meet equity funding requirement of its projects without any dilution. Exhibit 18: Operating cash flow trend Y/E March (mn) FY08 FY09 FY10 FY11 FY12E FY13E EBIT 3,623 3,526 6,661 9,331 9,678 12,166 (Inc.)/Dec in working capital (1,586) (1,421) 1,849 1,314 (957) (610) Cash flow from operations 2,038 2,105 8,510 10,645 8,721 11,556 Other income 1,435 1,148 2,009 2,918 761 837 Depreciation 1,016 1,144 1,819 2,254 3,865 5,081 Interest paid (-) (1,958) (1,377) (2,494) (3,572) (4,183) (4,862) Tax paid (-) (412) (405) (812) (1,463) (1,587) (2,115) Dividends paid (-) (15) (223) (429) (753) Net cash from operations 2,104 2,393 8,604 10,027 7,577 10,497 Source: NHAI, Company, Nirmal Bang Institutional Equities Research However, on completion of existing projects, its debt/equity ratio would increase to 1.9x in FY13 (excluding the debt of the recently won Ahmedabad-Vadodara mega project). If we include the debt of the mega project, the debt-equity ratio would increase to 2.3x in FY16, without considering the incremental project. This would restrain growth and may lead to equity dilution. Exhibit 19: Debt/equity ratio

(x) 2.50

1.93 2.00 1.90 1.86

1.44 1.43 1.50

1.00

0.50

- FY09 FY10 FY11 FY12E FY13E

Source: Company, Nirmal Bang Institutional Equities Research

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Institutional Equities

Partially hedged against sharp rise in interest rate During the past one year, Reserve Bank of India raised its key policy rate 12 times to 8.25%. This has increased the interest outflow for construction and infrastructure companies. However, IRB Infrastructure is hedged to some extent from the rise in interest rates. As many as 6 out of its 11 operational projects are debt free and 21% of total debt (Mumbai-Pune Expressway) is fixed at 10.6% for the remaining tenure of the loan. Other projects which are in the construction phase like Surat-Dahisar project (around 10% of total debt) and three new projects, namely Talegaon-Amravati, Amritsar-Pathankot and Panaji-Goa, are fixed at 10.5% for the construction period of 30 months, or the end of construction, whichever is earlier. Exhibit 20: Interest outflow vs average interest rate trend

(Rsmn) (%) 6,000 10

5,000 9 4,000 8 3,000 7 2,000

1,000 6

- 5 FY08 FY09 FY10 FY11 FY12E FY13E

Interest outflow Average interest rate Source: Company, Nirmal Bang Institutional Equities Research Robust EPC order book of Rs117bn to drive revenue growth The company has order book of Rs117bn (EPC order book of Rs96.5bn and O&M order book (operation and maintenance of operational toll based projects) of Rs 20.8bn) to be executed over the next 3-4 years. EPC division’s order backlog stayed flat during 2QFY10-3QFY11, as it managed to win only one project in FY11 (Tumkur-Chitradurga). Ahmedabad-Vadodara project increases the company’s backlog from Rs90bn at the end of 3QFY11 to around Rs119bn, improving revenue visibility. The company registers higher EBITDA margin for the EPC division, in the range of 18-25%, as compared to industry average of 8-12%. This is primarily driven by lower sub-contracting, large fleet of equipment, and stone aggregates from its own mines (40-42% of raw material costs for constructing roads). Exhibit 21: Order book trend –segment wise Exhibit 22: EPC segment financial trend

(Rsmn) (Rsbn) (%) 140 35 30 120 30 33 100 25 80 25 20 60 21

40 15 17 20 20 10 12 0 5

6 FY11

FY10 - 15

Q1FY10 Q2FY10 Q4FY10 1QFY11 3QFY11 4QFY11 2QFY11 1QFY12 Q3FY10 FY09 FY10 FY11 FY12E FY13E EPC Ongoing BOT Project BOT Projects in O&M Phase BOT projects-LOA received (Const yet to commence) Net sales (LHS) EBIDTAM % (RHS) Source: Company, Nirmal Bang Institutional Equities Research Source: Bloomberg, Nirmal Bang Institutional Equities Research

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Exhibit 23: Project- wise order book Exhibit 24: Order book trend

1.3 6.4 (%) Amount (Rsbn) 31.6 Ahmedabad Vododra Ongoing BOT projects 46.87

10.8 Tumkur Chitradurga BOT projects in O&M phase 20.76

Surat Dahisar BOT projects-LOA received, construction yet to commence 44.07 IRDP kohlapur Total 111.7

Panji Goa 9.7 Amritsar Pathankot

Jaipur Tonk Deoli

Talegaon Amravati 6.5 0.3 Sindhudurg Airport 5.5 9.3 Source: Company, Nirmal Bang Institutional Equities Research Source: Bloomberg, Nirmal Bang Institutional Equities Research

Exhibit 25: Company Structure

Source: Company, Nirmal Bang Institutional Equities Research

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1QFY12 performance Reported robust revenue growth of 57% (YoY) driven by the construction business. Construction revenue rose by 81% due to pick-up in project execution. EBITDA margin, at blended level, declined by 760bps to 41% due to higher revenue from the lower margin segment (EPC). Interest costs rose by 77.6% due to increased draw-down of debt for the Surat-Dahisar project. Exhibit 26: Quarterly performance Rsmn 1QFY11 4QFY11 1QFY12 (YoY %) (QoQ %) Net sales 5,120 7,670 8,013 56.5 4.5 Total expenditure 2,627 4,523 4,719 79.6 4.3 EBITDA 2,493 3,147 3,295 32.2 4.7 EBITDA margin (%) 48.7 41.0 41.1 - - Interest costs 661 1,398 1,174 77.6 (16.0) PBDT 1,832 1,749 2,120 15.7 21.2 Depreciation 537 587 602 12.1 2.6 Other income 217 229 282 30.0 23.1 PBT 1,512 1,390 1,800 19.0 29.5 Tax 303 336 443 46.2 31.8 PAT(before minority interest) 1,209 1,055 1,358 (52.0) (41.0) Minority interest 33 27 16 (51.5) (40.7) PAT(after minority interest) 1,176 1,028 1,342 14.1 30.5 Source: Company, Nirmal Bang Institutional Equities Research

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Financial performance Revenue to witness a CAGR of 37% during FY11-13 Out of Rs117bn order book of the EPC segment, Rs46.8bn worth of projects are in active stage of construction and would be completed by FY13, while Rs36bn worth Ahmedabad-Vadodara project would begin construction from 1QFY13, which has improved long-term revenue visibility. Based on this, we expect the EPC segment’s revenue to show a CAGR of 41% between FY11-13. BOT toll revenue is expected to witness a CAGR of 19%, primarily driven by revision in toll rate and completion of projects. Subsequently, we expect net sales to show a CAGR of 37% to Rs31.9bn and Rs45.8bn in FY12 and FY13, respectively. Exhibit 27: Revenue trend segment-wise Exhibit 28: Revenue growth trend

(%) (Rsmn) (%) 120 50,000 80 45,000 100 70 40,000 60 33 33 26 80 44 39 35,000 30,000 50 60 25,000 40 20,000 40 30 67 67 74 15,000 56 61 20 20 10,000 5,000 10 0 - 0 FY09 FY10 FY11 FY12 FY13 FY09 FY10 FY11 FY12E FY13E Construction BOT Toll Revenue Net sales % YoY Source: Company, Nirmal Bang Institutional Equities Research Source: Bloomberg, Nirmal Bang Institutional Equities Research EBITDA to register CAGR of 26% We expect EBITDA to grow at a CAGR of 26% to Rs 13.5bn in FY12 and 17.2bn in FY13 primarily driven by robust growth in revenue. However, EBITDA margin would come down by 700bps to 38% in FY13 from 45% in FY11 due to increase in the contribution of low margin EPC segment’s revenue to total revenue, from 67% in FY11 to 74% in FY13. Exhibit 29: Consolidated EBITDA margin trend Exhibit 30: EBITDA and EBITDA growth

(%) (Rsmn) (%) 50 20,000 48 48 18,000 46 16,000 46 44 14,000 44 42 12,000 40 42 10,000 38 40 8,000 36 38 6,000 4,000 34 36 2,000 32 34 - 30 32 FY09 FY10 FY11 FY12E FY13E FY09 FY10 FY11 FY12E FY13E EBITDA Growth(YoY) Source: Company, Nirmal Bang Institutional Equities Research Source: Bloomberg, Nirmal Bang Institutional Equities Research Net profit to register CAGR of 11% Five BOT projects worth Rs82bn would be operational over FY12 to FY13, which would increase the depreciation and interest costs. Subsequently net profit growth would be subdued and grow at a CAGR of 11% between FY11 to FY13. The decline in profitability and increase in debt post commissioning of BOT assets would depress the return ratios over the same period. We expect the RoE to come down by 160bps to 17.3% and RoCE by 90bps to 8.9% in FY13 over FY11.

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Exhibit 31: Return ratio trend

(%) 20 18 16 14 12 10 8 6 4 FY09 FY10 FY11 FY12E FY13E RoE (%) RoCE (%) Source: Company, Nirmal Bang Institutional Equities Research Appendix Ultra-mega Ahmedabad-Vadodara project – Call on traffic diversion IRB Infrastructure recently won NHAI’s Ahmedabad-Vadodara project worth Rs49bn. The project comprises six-laning of the two-lane Ahmedabad-Vadodara section of NH-8 (102km) and improvement of existing Ahmedabad-Vadodara Expressway (93km). The project would be based on the Design-Build-Finance- Operate-Transfer toll (DBFOT) basis with a concession period of 25 years. The total construction cost of the project is estimated at Rs36bn over a three-year period, starting from 1QFY13. The company’s bid to pay an annual premium of Rs3.1bn (annual increase of 5%) for tolling rights seems to be aggressive when compared with the L2 bidder. Exhibit 32: Project details Category Details Scope of the project Six-laning of Ahmedabad-Vadodara section on NH-8 (102km) and improvement of existing Ahmedabad-Vadodara expressway (93 km) Project cost Total project cost Rs49.2 bn (includes construction cost of Rs35bn) Concession period 25 years ( including construction period of three years) Toll collection rights Toll collection of expressway from April 2012 and from NH-8 on completion of construction. Traffic Management expects 47kPCUs on NH-8 and 37k PCUs on expressway in FY11. Revenue Management expects Rs1.4bn revenue in FY13 (from expressway) and toll collection on the NH-8 of Rs5.5bn in FY16. Premium payable to NHAI Rs3.1bn in FY13, going up by 5% every year. Source: Company, Nirmal Bang Institutional Equities Research IRR of 14% with 30% traffic diversion NH-8 and the Expressway are competing roads. On completion of NH-8 in FY16, projected toll rate will be 50% higher than the Expressway. This could lead to a traffic diversion to the Expressway and could potentially reduce returns due to lower utilisation of NH-8. The company has factored in 20% diversion while bidding and had targeted an IRR of 16%. However, we have factored in 30% of diversion and an IRR of 14%, at Rs 14/share, which we have not included in our valuation. We expect the project to incur losses in the first nine years of its operations. Exhibit 33: Project specifications

Parameter Details Total length of road (km) 195 Six laning of Ahmedabad-Vadodara section of NH-8 102 Improvement of existing Ahmedabad-Vadodara expressway 93 Total project cost (Rsbn) 49.2 Debt(Rsbn) 36.4 Equity (Rsbn) 12.8 Rs/share (based on DCF) 14 Source: Company, Nirmal Bang Institutional Equities Research

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Financials Exhibit 34: Income statement Exhibit 35:Cash flow Y/E March (Rsmn) FY09 FY10 FY11 FY12E FY13E Y/E March (Rsmn) FY09 FY10 FY11 FY12E FY13E Net sales 9,919 17,049 24,381 31,941 45,863 EBIT 3,526 6,661 9,331 9,678 12,166 % growth 35.4 71.9 43.0 31.0 43.6 Inc./(dec) in working capital (1,421) 1,849 1,314 (957) (610) Raw material costs 4,682 7,851 11,812 15,884 24,884 Cash flow from operations 2,105 8,510 10,645 8,721 11,556 Staff costs 425 710 929 1,375 2,120 Other income 1,148 2,009 2,918 761 837 Other expenses 438 497 700 1,140 1,611 Total expenditure 5,545 9,058 13,442 18,398 28,615 Depreciation 1,144 1,819 2,254 3,865 5,081 EBITDA 4,374 7,990 10,939 13,543 17,247 Interest paid (-) (1,377) (2,494) (3,572) (4,183) (4,862) Growth (%) 6.2 82.7 36.9 23.8 27.4 Tax paid (-) (405) (812) (1,463) (1,587) (2,115) EBITDA margin (%) 44.1 46.9 44.9 42.4 37.6 Dividends paid (-) (223) (429) (753) - - Other income 296 490 645 761 837 Net cash from operations 2,393 8,604 10,027 7,577 10,497 Interest 1,377 2,494 3,572 4,183 4,862 Capital expenditure (-) (8,114) (10,604) (17,510) (21,177) (21,377) Gross profit 3,293 5,986 8,012 10,121 13,222 Net cash after capex (5,721) (2,000) (7,483) (13,600) (10,880) Growth (%) 22.8 81.8 33.9 26.3 30.6 Inc./(dec.) in long-term borrowing 2,676 2,574 20,685 9,742 9,017 Depreciation 1,144 1,819 2,254 3,865 5,081 Profit before tax 2,149 4,167 5,759 6,256 8,141 Inc./(dec.) in investments 2,047 381 (6,382) (83) (95) Tax 378 133 1,118 1,587 2,115 Equity issue/(buyback) (96) 0 (4) - - Effective tax rate (%) 17.6 3.2 19.4 25.4 26.0 Cash from financial activities 4,626 2,955 14,380 9,668 8,922 Net profit 1,772 4,034 4,641 4,669 6,025 Change in cash (1,095) 955 6,898 (3,932) (1,958) Growth (%) 40.0 127.7 15.0 0.6 29.1 Opening cash 5,221 4,147 5,102 12,000 8,068 Minority interest 13 179 117 27 58 Closing cash 4,147 5,102 12,000 8,068 6,109 Net profit after MI 1,759 3,855 4,524 4,642 5,967 Growth (%) 54.4 119.2 17.4 2.6 28.5 Source: Company, Nirmal Bang Institutional Equities Research Source: Company, Nirmal Bang Institutional Equities Research Exhibit 36: Balance Sheet Exhibit 37:Key ratios Y/E March (Rsmn) FY09 FY10 FY11 FY12E FY13E Y/E March FY09 FY10 FY11 FY12E FY13E Equity 3,324 3,324 3,324 3,324 3,324 EPS (x) 5.3 11.6 13.6 14.0 18.0 Reserves 13,977 17,075 21,002 25,644 31,611 Valuations Net worth 17,301 20,399 24,326 28,968 34,935 PE ratio (x) 31.0 14.1 12.0 11.7 9.1 Minority Interest 599 779 896 922 981 Price /CEPS (x) 18.8 9.6 8.0 6.4 4.9 Short-term loans 117 117 5,116 7,675 11,512 Price / BV (x) 3.2 2.7 2.2 1.9 1.6 Long-term loans 24,741 29,035 41,139 48,322 53,502 EV /sales (x) 7.5 4.6 3.6 3.2 2.5 Total loans 24,859 29,152 46,255 55,997 65,014 EV /EBITDA (x) 12.5 6.8 5.0 4.0 3.2 Deff. tax liablity (net) 182 267 232 232 232 Margins (%) Total liabilities 42,940 50,597 71,709 86,119 101,161 EBIDTA margin 44.1 46.9 44.9 42.4 37.6 Gross block 24,601 40,185 41,317 62,494 83,870 EBIT margin 32.6 36.2 35.6 30.3 26.5 Depreciation 4,440 5,511 7,695 11,560 16,641 PBT margin 21.7 24.4 23.6 19.6 17.8 Net block 20,161 34,674 33,622 50,934 67,229 Net margin 17.7 22.6 18.6 14.5 13.0 Capital work-in-progress 14,545 8,802 25,085 25,085 25,085 Returns (%) Long-term investments 1,108 451 551 633 728 RoCE 6.2 11.8 9.8 8.4 8.9 Inventories 2,054 1,698 1,638 2,625 3,770 RoNW 10.2 18.9 18.6 16.0 17.1 Debtors 130 297 397 525 754 Working capital T/O days Cash 4,147 5,102 12,000 8,068 6,109 Inventory T/O 75.6 36.3 24.5 30.0 30.0 Other current assets 3,995 4,380 6,349 8,751 12,565 Debtors T/O 4.8 6.4 5.9 6.0 6.0 Total current assets 10,326 11,477 20,383 19,969 23,198 Loans and adv. T/O 147.0 93.8 95.0 100.0 100.0 Creditors 1,303 1,587 4,842 6,126 8,796 Creditors T/O 47.9 34.0 72.5 70.0 70.0 Other current liabilities 1,908 3,229 3,099 4,375 6,283 DuPont method Total current liabilities 3,210 4,816 7,941 10,501 15,078 NPM (PAT/sales) 0.2 0.2 0.2 0.1 0.1 Net current assets 7,116 6,661 12,443 9,468 8,120 Total asset T/O 0.2 0.3 0.3 0.4 0.5 Misc. expenses. 10 9 9 - - Equity multiplier 2.5 2.5 2.9 3.0 2.9 Total assets 42,940 50,597 71,709 86,119 101,161 Gearing ratio Source: Company, Nirmal Bang Institutional Equities Research Net debt/equity (x) 1.1 1.2 1.4 1.6 1.7 Total debt/equity (x) 1.4 1.4 1.9 1.9 1.9 Source: Company, Nirmal Bang Institutional Equities Research

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Reliance Infrastructure 26 September 2011

Reuters: RELIN.BO Bloomberg: RELI IN Core earnings to improve BUY Renewal of Mumbai discom licence and the recent tariff hike in Delhi electricity Sector: Infrastructure

distribution business are likely to eliminate the overhang on Reliance Infrastructure’s valuation with respect to its power distribution business. The CMP: Rs434 EPC segment has an order book of Rs280bn, which would drive revenue growth in coming years. Infrastructure projects are now turning from the development Target Price: Rs724 stage to the revenue generation stage with the commissioning of six road Upside: 67% projects, Mumbai metro rail phase I and one transmission project in the next six months. However, the stock is currently trading at a P/BV of 0.5x, which we Amit K Srivastava believe is unjustified and below stress case valuation. We assign a Buy rating [email protected] and a target price of Rs724 to the stock. +91-22-3926 8116 End of power distribution overhang: MERC has extended the company’s power distribution licence period in suburban Mumbai for the next 25 years, allowed charging Nitin Arora cross-subsidy for migrated customers and also approved recovery of regulatory assets [email protected] +91-22-3926 8169 worth Rs23bn. Cross-subsidy charge will reduce the migration of high-end customers

and recovery of regulated assets will reduce debt and improve cash flow. Recently, Initiating Coverage Initiating DERC hiked the power tariff by 21.7% after six years, which will ease the liquidity Key Data crunch faced by Delhi distribution units.We believe that overall it is a positive Current Shares O/S (mn) 267.4 development that will eliminate the overhang with respect to electricity distribution Mkt Cap (Rsbn/US$bn) 116/2.3 business. 52 Wk H / L (Rs) 1,135/402 EPC business with order book of Rs 280bn: The company’s order book stands at Rs 280bn, which is 7x FY11 EPC revenue. We believe EPC revenue is at inflexion Daily Vol. (3M NSE Avg.) 1,449,998 point and will show a CAGR of 50% between FY12-13. We expect the company to maintain its EBITDA margin of 8% in the EPC segment driven by in-house designing, Share holding (%) 3QFY11 4QFY11 1QFY12 engineering capability and skilled manpower. Promoter 48.1 47.7 47.7 Infrastructure projects’ earnings have started picking up: The company has a FII 17.1 16.8 16.3 strong infrastructure portfolio that consists of eleven road projects, three metro rail DII 21.0 21.3 22.2 lines and five power transmission projects worth Rs346bn. The execution of key infrastructure projects is on track and six road projects, Mumbai metro rail phase I and Corporate 2.7 2.7 3.0 one transmission project will be commissioned during FY12. The company’s General Public 11.0 11.0 10.8 infrastructure portfolio is now turning from the development stage to the revenue generation mode. One Year Indexed Stock Performance Stock trading below stress case valuation: Reliance Infrastructure is currently trading at a P/BV of 0.5x and if we adjust the value of stake in Reliance Power and cash on the books, the market appears to be assigning just 10% value to infrastructure, electricity and EPC projects, which we believe is unjustified and below stress case valuation. We assign a Buy rating and a target price of Rs724 to the stock. Y/E Mar (Rsmn) FY09 FY10 FY11 FY12E FY13E Net Sales 125,781 146,286 151,278 186,080 221,879 YoY (%) 50.7 16.3 3.4 23.0 19.2 EBITDA 6,299 12,264 14,981 30,729 40,056 EBITDA Margin (%) 5.0 8.4 9.9 16.5 18.1 Price Performance (%) Net Profit (Post MI & Associate) 13,532 15,194 15,516 16,201 19,432 1 M 6 M 1 Yr YoY (%) 14.9 12.3 2.1 4.4 19.9 Reliance Infra (3.7) (31.9) (59.2) Adj. EPS 50.6 56.8 58.0 60.6 72.6 Nifty Index (1.6) (11.2) (18.3) PER (X) 8.5 7.5 7.4 7.1 5.9 Source: Bloomberg P/BV (x) 0.7 0.6 0.5 0.5 0.4 ROCE (%) 1.0 2.3 2.5 4.6 5.8 ROE (%) 8.0 7.3 6.6 6.5 7.3 Source: Company, Nirmal Bang Institutional Reearch

Institutional Equities

Assign Buy rating to stock with a target price of Rs724 We assign a Buy rating and a target price of Rs724 to Reliance Infrastructure, implying 58% upside from the CMP, as the company’s business model comprises regulated returns, market driven returns, long gestation projects, and investments that cannot be captured by earnings-based multiple. Hence, we have used SOTP methodology, using a combination of price to book value (P/BV) and discounted cash flow (DCF) approach for the regulated business and infrastructure projects (road and metro rail projects), EV/EBITDA for EPC business and investment in Reliance Power at a 30% discount to the CMP. Our SOTP-based TP comprises: (1) Rs150/share from electricity business (Mumbai discom and Delhi discom), (2) Rs121/share from the EPC business, (3) Rs223/share from 38% stake in Reliance Power (4) Rs191/share as equity value of infrastructure projects (road, metro rail and transmission projects), and (5) Cash and investible surplus in the books at Rs40/share (at 50% discount). Exhibit 1: SOTP valuation Valuation (Rsmn) Stake Method Multiple EBITDA EV Rs/share EPC segment - EV/EBITDA FY13, 5x 6,483.84 32,419 121 Mumbai licence area - DCF-Equity CoE-14% - - 119 R-Power 38% 30% disc. to CMP - - - 223 Delhi distribution 49% DCF -Equity CoE-14% - - 31 Metro rail projects - DCF -Equity CoE-16% - - 27 Road projects - DCF -Equity CoE-16% - - 149 Power transmission projects - DCF -Equity CoE-16% - - 14 Net cash - - - - - 40 Target price - - - - - 724 Source: Company and Nirmal Bang Institutional Equities Research Stock trading below stress case valuation level Reliance Infrastructure has historically traded in the range of 0.7x to 4.5x P/BV, which has come down to 0.5x. Adjusted for the value of stake in Reliance Power and cash in its books; the market appears to be assigning just 10% value to infrastructure, electricity and EPC businesses combined, which we believe is unjustified. We believe the stock will be re-rated on successful commencement of infrastructure projects under development, deployment of cash in profitable infrastructure projects and improvement in execution of EPC order book.

Exhibit 2: PE ratio trend Exhibit 3: P/BV trend

(x) (x) 60 5.0 4.5 50 4.0 40 3.5 3.0 30 2.5 2.0 20 1.5 10 1.0 0.5 0 0.0 Sep-07 Sep-08 Sep-09 Sep-10 Sep-11 Sep-07 Sep-08 Sep-09 Sep-10 Sep-11 P/E 5 year avg P/B 5 year avg Source: Company, Nirmal Bang Institutional Equities Research Source: Bloomberg, Nirmal Bang Institutional Equities Research Electricity business The company’s electricity business includes Mumbai discom (generation, transmission and distribution) and Delhi distribution which earns regulated return on equity. We have used the DCF model to value the electricity business. We have assumed 14% cost of equity and a terminal growth of 3%. Accordingly, we have derived a value of Rs119/share (implying a P/BV of 1.4x) for Mumbai discom and Rs 31/share (implying a P/BV of 0.75x) for Delhi discoms.

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EPC segment valued at EV/EBITDA of 5x We have valued the EPC segment at 5x EV/EBITDA on FY13E earnings, which is 25% below the lower end of the average range for pure construction companies. The company has EPC order book of Rs280bn, which is primarily from Reliance Power. Hence, a 25% discount is justifiable as compared to a pure EPC player. Exhibit 4: EPC segment valuation EBITDA (FY13, Rsmn) 6,483.84 Average EV/EBITDA 6x-8x 25% discount to lower band 5x EV 32,419 Rs/share 121 Source: Company, Nirmal Bang Institutional Equities Research Infrastructure projects valued on P/BV, DCF The company has a portfolio of eleven road projects, three metro rail projects and five power transmission lines. We have valued the operational projects on DCF basis and under-development projects on P/BV basis. Though the infrastructure business contributes about 27% to our target price, we believe that going ahead this segment will be a key driver of valuation and earnings growth and the company best positioned in terms of Balance Sheet strength to support the equity commitment for future projects. Exhibit 5: Infrastructure projects valuation Infrastructure projects Model Rs/share Road projects BOT CoE-16% 149 Metro rail projects BOT CoE-16% 27 Power transmission projects BOT, regulated CoE-16% 14 Total - - 191 Source: Company, Nirmal Bang Institutional Equities Research 38% stake in Reliance Power Reliance Infrastructure has a 38% stake in Reliance Power, which is executing 18,840MW power generation project. We have valued Reliance Power stake at a 30% holding discount to the CMP and arrived at a valuation of Rs 223/share (around 60% CMP of Reliance Infrastructure).

Exhibit 6: Reliance Power valuation Exhibit 7: Reliance Power project portfolio CMP (Rs) 80 Plant name Capacity (MW) Type No. of equity shares (mn) 2,805 Butibori 600 Coal Mkt cap (Rsmn) 224,408 Samalkot 2,400 Gas Holding discount 30% Sasan UMPP 3,960 Coal Stake 38% Krishnapatnam 3,960 Coal Value of equity (Rsmn) 59,693 Chitrangi power project 3,960 Coal Rs/share 223 Tilaya UMPP 3,960 Coal

Source: Company, Nirmal Bang Institutional Equities Research Source: Bloomberg, Nirmal Bang Institutional Equities Research

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Investment Arguments Extension of licence period of Mumbai power distribution company Mumbai discom includes Dahanu power generation (500MW), transmission network from Dahanu to Mumbai area and the distribution network in Mumbai suburbs with regulated equity of Rs22bn. MERC has extended the licence period in suburban Mumbai (which had expired on 15 August 2011) by another 25 years. It was also clarified that new licencees shall have to lay their own distribution network for distributing electricity, as the existing network belongs to the company. We believe this is a positive development which will eliminate the overhang and lead to re-rating of Mumbai discom. We have valued the Mumbai suburbs power distribution business at Rs119/share (implied P/BV of 1.4x and accounting for 16% of our SOTP) at a CoE of 13.5%, given the fix return of 16% on regulated equity. Exhibit 8: Regulated equity Segment Regulated equity (Rsmn) RoE (%) Distribution 14,900 16 Transmission 1,500 15 Generation 5,500 23 Total (Mumbai discom) 21,900 - Delhi discoms (BRPL&BYPL) 22,000 16 Source: Company, Nirmal Bang Institutional Equities Research Cross subsidy charges lead to reduction in subscriber migration MERC has approved cross-subsidy charges to customers who have migrated to Tata Power Company. Cross- subsidy charge would be levied over and above the wheeling charges. This would allow the company to charge a higher tariff to migrated customers in order to subsidise low-end customers. Earlier, Tata Power Company was able to poach high-end customers of Reliance Infrastructure as Tata Power Company’s tariff, even with wheeling charges, were lower. Once cross-subsidy charges are levied, there will not be much difference between Reliance Infrastructure and Tata Power Company’s tariff and hence, the cross-over of customers is expected to reduce.

Exhibit 9: Customer base Exhibit 10: Electricity units sold

Source: Company, Nirmal Bang Institutional Equities Research Source: Bloomberg, Nirmal Bang Institutional Equities Research Approval for regulated assets worth Rs 23bn should lead to reduction in debt The company’s accumulated regulatory assets (the gap between power cost and tariff to consumers) of Rs 23bn has increased its debt by the same amount. MERC has approved regulatory assets of Rs 23bn, which will be recovered over a period of time. Apart from this, the company is now levying charges based on the cost of electricity and as result no regulatory assets are getting built.

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Exhibit 11: Regulatory assets Approved Revenue gap (Rsbn) Remarks Regulatory assets (FY05-FY09) 7.32 Already approved in past tariff orders but recovery was deferred Incremental revenue gap of FY09 0.96 - Incremental revenue Gap of FY10& 11 13.74 Impact of tariff stay and subsidy Impact of ATE order 0.91 ATE allowed carrying cost at SBI PLR(against 6% considered by MERC) Capitalisation 0.23 Recognising past year’s capitalisation Total gap 23.16 - Source: Company, Nirmal Bang Institutional Equities Research Exhibit 12: Power procurement plan Medium-term

Source Duration Capacity(MW) Levelised tariff (Rs/Unit) KSK Energy FY12-14(3 years) 260 4.85 Abhijeet FY12-14(3 years ) 55 4.8 R-Power (Butibori) FY13-14(3 years) 135 4.8 DTPS Till FY17 500 Regulated Total - 950 - Source: Company, Nirmal Bang Institutional Equities Research Exhibit 13: Power cost break-up

2.81 3.76 4.26 5.43 7.40 6.59 6.40

1.16 1.28 1.11 1.11 1.53 1.64 1.1

4.36 6.12 2.72 3.22 5.06 4.76 1.76

FY05 FY06 FY07 FY08 FY09 FY10 FY11 Power purchase Distribution cost Source: Company, Nirmal Bang Institutional Equities Research Delhi discoms area tariff hike by 21.7% to ease liquidity crunch The company has a combined 49% stake in BSES Rajdhani Power Limited (BRPL) and BSES Yamuna Power Limited (BYPL) units of Delhi power distribution business, which have regulated equity of around Rs22bn. Recently, DERC hiked the tariff by 21.7% after six years (last tariff hike of 6.6% was witnessed in 2005-06), which comes as a big respite for Delhi power distribution units (BRPL and BYPL) as they were facing a severe liquidity crunch due to rising gap between power cost and tariff charged to consumers. There was also a steep increase in debt level in order to fund capex and power procurement cost. We believe this move (the tariff hike) is a major positive towards improving the deteriorated financials of Delhi discoms and we expect further tariff hikes to happen, in tranches, in order to recover accumulated revenue deficit and ease the company’s liquidity position. We have valued Delhi power distribution business at Rs31/share (implied P/BV of 0.75x ) at a CoE of 13.5%, given the fixed return of 16% on regulated equity.

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EPC business order book at Rs 280bn The company has order book of Rs280bn in respect of its EPC arm, which is 7x FY11 EPC revenue. The order book is primarily driven by in-house orders of Reliance Power and construction work of infrastructure projects (seven power projects aggregating 9,900MW, one power transmission project of 3,285 circuit km and six road projects totaling 570km). We believe the EPC revenue is at inflexion point of growth and would show a CAGR of 50% over FY12-13. Some of the fast moving projects which would drive robust revenue growth are Samalkot and Butibori power projects, WRSS transmission project and road projects like Gurgaon-Faridabad, Jaipur-Reengus and Delhi-Agra. We expect the company to maintain its EBITDA margin of 8% in the EPC segment, driven by in-house designing, engineering capability and skilled manpower. We believe the company is currently going for in-house power and BOT projects. Going ahead, it would scale up the EPC segment by bidding for outside projects. We have valued the EPC business at 5x EV/EBITDA, which implies a valuation of Rs121/ share. Exhibit 14: EPC order book details EPC upcoming projects MW Remarks Internal projects 80% engineering work completed, 90% of 220KV switchyard erection work completed All packages awarded and boiler drum lifting for both 600MW Butibori TPP 600 the units completed 2,400MW Samalkot power 2,400 Major orders for gas and steam turbine, 90% packages awarded project 6 x 660MW Sasan ultra mega 3,960 60% engineering work completed, further work stalled due to Indonesia coal price regime. Also, 20% of progress achieved in civil work power project Western Region strengthening Solapur-Karad line in Maharashtra operational since February 2011. Limdi Vadavi line in Gujarat is operational since May 2011. Entire 3,285 project(ckm) project to be commissioned in FY12 External power projects Overall progress is 70% despite land acquisition delay. Boiler structure erection completed for both units of,400 KV. Switchyard in 1,200MW Raghunathpur TPP 1,200 advanced stage of completion 1,200MW Rajiv Gandhi TPP* at 1,200 Trial run of both units completed and are under HPGCL commercial operations. Hisar 500MW Parichha TPP* BOP 500 90% progress achieved package Source: Company, Nirmal Bang Institutional Equities Research Infrastructure projects’ earnings to start gaining momentum The company has a strong infrastructure portfolio that consists of eleven road projects, three metro rail lines and five transmission projects worth Rs346bn. The execution of key infrastructure projects is on track. In the road portfolio, nine projects would be in revenue generation mode during FY12. In the metro rail portfolio, the Delhi metro is operational and Mumbai metro phase - I is likely to be commissioned by 4QFY12. In the power transmission portfolio, two lines of WRSS project have been commissioned and the full project is expected to be commissioned in FY12. We believe the company’s infrastructure portfolio is now turning from development stage to revenue generation stage. Exhibit 15: Infrastructure project portfolio Business Projects Cost (Rsbn) Road 11 120 Metro rail 3 160 Transmission 5 66 Total 19 346 Source: Company, Nirmal Bang Institutional Equities Research Road projects: Six additional projects in revenue generation mode in FY12 The company is developing eleven road projects worth about Rs120bn, of which three projects have started generating revenue and another six projects would do so in FY12. The company reported healthy revenue from toll collection of Rs1.16bn in 1QFY12 from its four road projects. We expect the revenue from road portfolio to start ramping up once heavy traffic toll projects like Delhi-Agra and Gurgaon-Faridabad get operational in FY12, followed by the four other road projects. The company also remains a beneficiary of upcoming NHAI projects, as it has achieved financial closure for all road projects. The contribution from road projects to our SOTP stands at Rs149/share. We have used the FCFE methodology to value Reliance Infrastructure’s portfolio of toll roads with a CoE of 14-16% and assuming traffic growth of 5-7%.

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Exhibit 16: Road project portfolio Length Concession period Project cost Debt Grant/(Premium) Equity Revenue Road projects (kms) (yrs) (Rsbn) (Rsbn) (Rsbn) (Rsbn) start Namakkal Karur 44 20 3.45 2.46 0.24 0.45 Operational Dindigul Samyanallore 53 20 4.15 3.32 0.31 0.52 Operational Trichy Karur 80 30 7.3 5.1 1.5 0.7 FY12 Trichy Dindigul 88 30 5.37 3.22 1.07 1.08 FY12 Salem Ulenderpet 136 25 10.61 6.37 2.12 2.12 FY12 Gurgaon Faridabad 66 17 7.79 5.84 (1.5) 1.95 FY12 Jaipur Reengus 52 18 5.56 3.89 1.03 0.64 FY12 Pune Satara 140 24 19.85 10.9 (0.91) 8.9 Operational Kandla Mundra 71 25 11.28 7.9 (0.42) 3.38 Q4FY13 Hosur Krishnagiri 60 24 9.24 6.47 (0.67) 2.77 FY12 Delhi Agra 180 26 29.44 20.61 1.8 7.03 FY12 Total 970 - 119.04 76.08 - 29.54 - Source: Company, Nirmal Bang Institutional Equities Research Metro rail projects execution on track The company has a portfolio of three projects, of which Delhi Metro rail project was commissioned in February 2011, Mumbai metro line phase– I is expected to be operational by 4QFY12 and Mumbai metro line phase -II by FY16. Delhi metro rail reported heavy traffic in June 2011 of 12,000 passengers/day (initially estimated as FY12 traffic target) and leased out 25% of land parcels at New Delhi and Shivaji stations at Rs425/sq. ft. We have assumed passenger traffic of 28,000 in FY12 and average leasing rate of Rs325 /sq. ft. at a majority of real estate parcels in Dwarka. We have valued Delhi metro rail project based on FCFE methodology with a CoE of 16%, which accounts for Rs 18/share in our SOTP valuation. Exhibit 17: Metro rail projects Length Project cost Debt Grant Equity COD/Rev Concession Metro rail projects Stake (%) (km) (Rsbn) (Rsbn) (Rsbn) (Rsbn) start period (years) Delhi 23 24.5 17.15 7.35 Feb-11 30 95 Mumbai - Phase 1 11 25 12.75 6.75 5.5 Q4FY12 35 69 Mumbai - Phase II 32 110 70.4 23.1 16.5 Within 5 year 35* 48 Source: Company, Nirmal Bang Institutional Equities Research *could be extended for further 10 yrs Largest private player in power transmission projects The company is developing five power transmission projects worth about Rs66bn, which includes WRSS, Parabati-Koldam, Mumbai transmission, North Karanpura and Talcher II. The company has commissioned two lines of WRSS project, i.e. Solapur-Karad and Limbdi-Vadavi, and expects the entire project to be commissioned in FY12. We have valued the transmission business (WRSS project) at Rs14/share by assuming CoE at 16%. Exhibit 18: Power transmission projects Transmission Project cost Tariff Stake Remarks projects (Rsbn) structure (%) WRSS 13.8 Competitive 100 Commissioned two lines ,i.e Solapur Karad and Limbdi - Vadavi Parabati-Koldam 10.7 Regulated 74 Signed financing agreement with PFC and REC for debt amount of Rs7.7bn Obtained approval from MOP for commencement of work Construction activity has commenced at project site Mumbai transmission 18 Regulated 100 All major equipment orders such as for GIS, transformers, cables placed Three receiving stations already charged in FY11 North Karanpura 15.5 Competitive 100 Acquisition process completed Transmission licence received and project execution commenced Talcher II 8.2 Competitive 100 Acquisition process completed Transmission license received and project execution commenced Total 66.2 - - - Source: Company, Nirmal Bang Institutional Equities Research

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Other businesses at development stage Airport business Reliance Infrastructure, through Reliance Airport Developers (RAD), has won lease rights to develop and operate five brownfield airports in Maharashtra - at Nanded, Latur, Baramati, Yavatmal and Osmanabad – for a period of 95 years, for which an upfront premium of Rs630mn has been paid. Nanded and Latur airports have obtained aerodrome licence from the Directorate General of Civil Aviation (DGCA). At Baramati airport, the terminal building has been refurbished along with a VIP room facility. Osmanabad airport terminal building is under construction. Re-carpeting and widening of the runway at Yavatmal airport has been completed and operations by non- scheduled aircraft have commenced. Exhibit 19: Airport portfolio Airports Runway length Land area Opportunities on anvil (mtrs) (hectare)

Cargo and logistics hub Nanded 2,300 105 Air connectivity – Pune, Hyderabad, Amritsar and Tirupati. Pilgrims visiting ‘Sachkhand Gurudwara’ Warehousing and food storage hub Latur 2,420 145 Air logistics hub Aviation Engg. Institute and aviation theme film studio Air connectivity - Mumbai, Nagpur and Delhi Yavatmal 2,100 113 Emerging power and cement manufacturing hub Aircraft recycling zone Aircraft parking plaza Baramati 2,350 182 MRO hub Textile , leather SEZs of Italian government Osmanabad 1,200 55 Aviation and aeronautical engineering institute Total 600 Source: Company, Nirmal Bang Institutional Equities Research Cement projects Reliance Cementation, a wholly-owned subsidiary of Reliance Infrastructure, has achieved certain milestones in setting up two cement plants of 5mt capacity each at Maihar, Madhya Pradesh and at Mukutban, Maharashtra, with a project cost of Rs47bn. Exhibit 20: Milestones at Madhya Pradesh, Maharashtra cement project sites Madhya Pradesh project Maharashtra project Land acquisition completed Land acquisition completed Environment clearance received Environment clearance received Mining lease secured for limestone resource Limestone resources at advanced stage of approval Orders placed for major plant and machinery Orders placed for major plant and machinery Source: Company, Nirmal Bang Institutional Equities Research

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Company background Reliance Infrastructure is involved in the complete chain of power generation, transmission and distribution business. In the infrastructure space, it is developing 11 road projects, 3 metro rail projects and 5 transmission lines on BOT basis. The EPC division has an order book of over Rs 280bn, primarily in-house projects in the power and infrastructure space. The company generates 940MW of electricity through its power stations located in Maharashtra, Andhra Pradesh, Kerala, Karnataka and Goa. The company holds a 38% stake in Reliance Power, which plans to have a portfolio of 32GW of generating assets. Exhibit 21: Corporate structure

Source: Company

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1QFY12 performance Rise in the execution rate in construction segment and write-back of depreciation helped the company to register earnings growth in the standalone business. EPC income surged by 295% YoY and margin stood at 14.6%, up 220bps. Revenue from infrastructure projects jumped 121% sequentially on commencement of tolling by Hosur- Krishnagiri road project and full quarter contribution from Delhi metro rail project. Interest costs jumped on commissioning of Delhi metro rail project.

Exhibit 22: 1QFY12 performance Y/E March (Rsmn) Q1FY11 Q4FY11 Q1FY12 YoY (%) QoQ (%) Net sales 38,256 37,980 51,910 35.7 36.7 Total expenditure 34,157 34,646 44,022 28.9 27.1 EBITDA 4,080 3,334 7,890 93.4 136.7 EBITDAM (%) 10.7 8.8 15.2 - - Depreciation 1,196 1,115 1,024 (14.4) (8.2) EBIT 2,884 2,219 6,866 138.1 209.4 Interest cost 1,372 1,893 2,168 58.0 14.5 Other income 2,020 2,530 1,283 (36.5) (49.3) PBT 3,531 2,856 5,981 69.4 109.4 Tax expense 664 (578) 2,713 308.6 - Net profit 2,867 3,434 3,268 14.0 (4.8) Net Profit (Post MI & Associates) 3,753 4,114 4,057 8.1 (1.4) Source: Company, Nirmal Bang Institutional Equities Research

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Financial performance Revenue to show a CAGR of 21%

During FY11, net sales increased by only 3.4% to Rs151bn on lower energy sales because of migration of high-end customers to Tata Power Company. We expect the migration to reduce in the coming quarters due to levy of subsidy and the company’s medium-term power procurement plan to reduce power costs. The EPC segment is expected to show a CAGR of 50% over FY12-13. Based on this, net sales would show a CAGR of 21% in FY12 and FY13 to Rs186bn and Rs221.8bn, respectively. Exhibit 23: Revenue trend

(Rsbn) (%) 250 60 222

200 186 50

146 151 40 150 126 30 100 20

50 10

- - FY09 FY10 FY11 FY12E FY13E Net sales (Rsbn) % YoY Source: Company, Nirmal Bang Institutional Equities Research EBITDA to show CAGR of 64%

During FY11, EBITDA rose 22% to Rs14.9bn and EBITDA margin improved 150bps to 9.9%. We expect EBITDA to show a CAGR of 64% to Rs30.7bn and Rs40bn for FY12 and FY13, respectively, driven by robust growth in EPC segment, rising contribution of high margin infrastructure projects and revision in power tariff. However, net profit is expected to be subdued and show a CAGR of 12% over FY12/13 due to increase in interest costs and lower other income.

Exhibit 24: EBITDA, EBITDA margin trends Exhibit 25: Net profit trend

(Rsbn) (%) (Rsbn) (%) 25 25 45 40.1 20 40 18 19.5 16 20 20 35 30.7 15.5 16.2 30 14 15.2 12 15 13.5 15 25 10 20 15.0 8 10 10 12.3 15 6 10 6.3 4 5 5 5 2 0 0 0 - FY09 FY10 FY11 FY12E FY13E FY09 FY10 FY11 FY12E FY13E EBIDTA (Rsbn) EBIDTAM% RPAT (Rsbn) % YoY Source: Company, Nirmal Bang Institutional Equities Research Source: Bloomberg, Nirmal Bang Institutional Equities Research

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Core earning changing the return ratio trend

The company’s earnings scene is now shifting from the stress on other income to core earnings over the period. This is reflected in the return ratios, where RoCE is showing an improving trend as cash is getting deployed in infrastructure projects which are driving up operating income and reducing other income, thereby suppressing the RoE. We expect the RoCE to improve by 120bps to 5.8% and the RoE by 80bps to 7.3% in FY13. Exhibit 26: Return ratios trend

(%) 12

0 FY09 FY10 FY11 FY12E FY13E

ROE (%) ROCE (%) Source: Company, Nirmal Bang Institutional Equities Research The company had announced buy-back of shares worth Rs10bn at a maximum price of Rs 725/share. It has already bought around 3mn shares at an average price of Rs575/share.

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Financials

Exhibit 27: Income statement Exhibit 28:Cash flow Y/E March (Rsmn) FY09 FY10 FY11 FY12E FY13E Y/E March (Rsmn) FY09 FY10 FY11 FY12E FY13E Net sales 125,781 146,286 151,278 186,080 221,879 EBIT 2,995 7,539 10,156 22,768 30,904 Growth (%) 50.7 16.3 3.4 23.0 19.2 Inc./(dec.) in working capital (2,530) (13,265) (13,401) 12,985 (1,912) Total expenditure 119,482 134,022 136,297 155,351 181,822 Cash flow from operations 464 (5,726) (3,245) 35,753 28,992 EBITDA 6,299 12,264 14,981 30,729 40,056 Other income 11,877 8,341 10,895 17,065 16,764 Growth (%) 18.4 94.7 22.2 105.1 30.4 EBITDA margin (%) 5.0 8.4 9.9 16.5 18.1 Depreciation 3,304 4,724 4,825 7,961 9,152 Depreciation 3,304 4,724 4,825 7,961 9,152 Interest paid (-) (4,394) (5,251) (6,350) (11,378) (13,314) Interest costs 4,394 5,251 6,350 11,378 13,314 Tax paid (-) (2,072) (404) 326 (4,106) (5,161) Other income 14,774 11,188 9,752 5,687 3,450 Dividends paid (-) (1,701) (2,005) (1,849) (2,245) (2,245) Profit before Tax 13,375 13,476 13,558 17,077 21,041 Net cash from operations 7,478 (321) 4,602 43,051 34,188 PBTM (%) 10.6 9.2 9.0 9.2 9.5 Capital expenditure (-) (24,948) (22,047) (78,701) (45,000) (38,661) Tax 783 1,498 1,268 4,106 5,161 Net cash after capex (17,470) (22,369) (74,098) (1,949) (4,473) Reported PAT 12,591 11,978 12,290 12,971 15,879 Inc./(dec.) in borrowing 16,459 12,918 55,025 3,422 3,016 Growth (%) 10.4 (4.9) 2.6 5.5 22.4 RPAT (post minority share) 13,532 15,194 15,516 16,201 19,432 (Inc./(dec. in investments 3,837 9,329 20,272 5,645 2,653 Source: Company, Nirmal Bang Institutional Equities Research Equity issue/(buyback) 603 33 665 - - Cash from financial activities 20,899 22,280 75,961 9,067 5,669 Change in cash 3,429 (88) 1,863 7,117 1,196 Opening cash 1,154 4,583 4,494 6,357 13,475 Closing cash 4,583 4,494 6,357 13,475 14,671

Source: Company, Nirmal Bang Institutional Equities Research Exhibit 29: Balance Sheet Exhibit 30:Key ratios Y/E March (Rsmn) FY09 FY10 FY11 FY12E FY13E Y/E March FY09 FY10 FY11 FY12E FY13E 2260.7 2449.2 2674.7 2674.7 2674.7 Equity capital EPS 51 57 58 61 73 7834.9 5410.8 - - - Share warrants Cash EPS 63 74 76 90 107 158,880 199,181 233,401 247,357 264,544 Reserves & surplus Valuations 168,976 207,041 236,076 250,032 267,219 Net worth PE ratio (x) 8.5 7.5 7.4 7.1 5.9 1116 1146.8 1876.4 1876.4 1876.4 Minority interest Price/sales (x) 0.8 0.7 0.8 0.6 0.5 Long -term loans 46,215 57,490 94,695 98,116 101,132 Price /CEPS (x) 6.8 5.7 5.6 4.7 4.0 Short-term loans 54838.5 28349 28356.7 28356.7 28356.7 Price /BV (x) 0.7 0.6 0.5 0.5 0.4 Total loans 101,054 85,839 123,052 126,473 129,489 EV/sales (x) 0.3 0.8 1.0 0.9 0.8 Deferred tax (liability) /assets 2113.4 1569.4 987.9 987.9 987.9 EV/EBITDA (x) 5.4 9.3 10.5 5.5 4.5 273,259 295,596 361,992 379,369 399,572 Total liabilities EV/EBIT (x) 11.3 15.2 15.5 7.4 5.9 101,074 117,482 143,967 211,770 242,681 Gross block Margins (%) 46,380 51,683 56,508 64,469 73,621 Less: Depreciation EBITDA margin 5.0 8.4 9.9 16.5 18.1 54,694 65,799 87,459 147,301 169,060 Net block EBIT margin 2.4 5.2 6.7 12.2 13.9 35,582 46,387 100,301 77,498 85,248 Capital WIP PBT margin 10.6 9.2 9.0 9.2 9.5 159364.1 136591.4 137939 124145.1 111730.59 Investments Net margin 10.8 10.4 10.3 8.7 8.8 95,695 132,399 182,150 197,132 225,686 Current assets Returns (%) 5,606 3,898 4,255 5,098 6,079 Inventories RoCE 1.0 2.3 2.5 4.6 5.8 Sundry debtors 19,278 22,496 73,000 63,726 75,986 RoNW 8.0 7.3 6.6 6.5 7.3 Cash and bank balances 4,583 4,494 6,357 13,475 14,671 Efficiency ratios Other current assets 10,775 15,605 18,653 20,518 22,570 Asset T/O 0.5 0.5 0.4 0.5 0.6 Loans and advances 55,453 85,906 79,885 94,315 106,380 Fixed asset T/O 1.2 1.2 1.1 0.9 0.9 72,077 85,580 145,857 166,707 192,153 Current liabilities and provisions Dupont 59,129 70,421 132,381 152,943 176,287 Current liabilities NPM (PAT/sales) 0.11 0.10 0.10 0.09 0.09 12,949 15,159 13,476 13,765 15,866 Provisions Total asset T/O 0.46 0.49 0.42 0.49 0.56 23,618 46,819 36,292 30,424 33,533 Net current assets Equity multiplier 1.62 1.43 1.53 1.52 1.50 273,259 295,596 361,992 379,369 399,572 Total assets Gearing ratios Source: Company, Nirmal Bang Institutional Equities Research Net debt/equity (x) (0.4) 0.05 0.2 0.2 0.3 Total debt/equity (x) 0.6 0.4 0.5 0.5 0.5 Debt / EBITDA (x) 16.0 7.0 8.2 4.1 3.2 Source: Company, Nirmal Bang Institutional Equities Research

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GMR Infrastructure 26 September 2011

Reuters: GMRI.BO; Bloomberg: GMRI IN On Recovery Path BUY GMR Infrastructure, a leading infrastructure company, has underperformed the Sector: Infrastructure

Nifty in the past three years by 55% because of multiple issues like Balance Sheet concerns post leveraged buyout of Intergen, funding constraints for mega CMP: Rs28 expansion plan, overhang of regulatory issues and pressure on profitability. Looking at the recent developments like adequate raising of capital for near-term Target Price: Rs39 expansion, sale of Intergen stake and expected other positive developments like Upside: 39% improvement in profitability and clarity on regulatory issues, we believe the concerns have been largely priced in the CMP of GMR Infrastructure and Amit Srivastava provides a good investment opportunity for long-term investors. We assign a [email protected] Buy rating and a target price of Rs39 to the stock based on SOTP valuation. +91-22-3926 8116 Blend of improvement in profitability and growth: Post commercial operations of projects like Delhi airport, Turkey airport and shifting of Barge mount power plant, the Nitin Arora company has started incurring losses due to higher capacity charges. We believe [email protected] +91-22-3926 8169 robust growth in traffic coupled with cost-cutting measures will improve profitability and

loss-making projects will turn FCF positive in FY12, staging a turnaround in the next Initiating Coverage Initiating two years (favourable tariff outcome at Delhi airport to expedite the process). Three Key Data thermal power projects of 2.7GW are in advanced stage of construction and slated for Current Shares O/S (mn) 3,892.4 commercial operations in FY12-13, which will drive growth. Mkt Cap (Rsbn/US$bn) 110.4/2.2 Projects under construction well funded: The company has divested stake and 52 Wk H / L (Rs) 61/26 booked all losses pertaining to Intergen in 4QFY11, which has released equity capital of Rs 9.58bn and eased rising leverage concerns. Apart from this, the company has Daily Vol. (3M NSE Avg.) 4,080,979 raised around $950mn (for power and airport subsidiary), which is sufficient to meet the near-term funding requirements of the project pipeline. Share holding (%) 3QFY11 4QFY11 1QFY12 Clarity expected on regulatory issues: The company continues to face a lot of Promoter 70.7 71.2 71.4 regulatory issues like enhanced project costs, renewal of suspended ADF and FII 13.2 12.8 12.6 incremental ADF of Rs17bn, rate of return on regulated base and gas/coal availability DII 8.3 8.2 8.1 for power projects under construction. We believe the current market price seems to be factoring in most of these uncertainties and our earnings model is based on a worst Corporate 1.4 1.2 1.2 case scenario. Hence, clarity on these issues, which is expected in the next two-three General Public 6.4 6.7 6.8 months, will be positive for the stock. Valuation: We assign a Buy rating and a SOTP-based target price of Rs39 to GMR One Year Indexed Stock Performance Infrastructure. In our target price, 75% is contributed by operational projects and the remaining 25% from projects at various stages of development. Key contributors to our TP of Rs39 comprise Rs20 from airports business (including real estate), Rs14 from power generation and coal mining, and Rs3 from the road segment.

Y/E Mar (Rsmn) FY09 FY10 FY11 FY12E FY13E Net Sales 40,192 45,665 57,738 71,096 105,284 YoY (%) 75.1 13.6 26.4 23.1 48.1

EBIDTA 10,668 13,643 15,553 21,644 38,014 EBIDTAM (%) 26.5 29.9 26.9 30.4 36.1 Adj. Net Profit 2,794 1,581 (1,313) 811 4,777 Price Performance (%) EPS Growth (%) 33.0 (43.4) (183.0) 161.8 489.2 1 M 6 M 1 Yr Adj. EPS 0.7 0.4 (0.3) 0.2 1.2 GMR Infra 0.5 (24.1) (51.7) P/BV (x) 0.8 1.7 1.2 1.2 1.2 Nifty Index (1.6) (11.2) 18.3 PER (X) 41.8 73.9 NA 144.0 24.4 Source: Bloomberg EV/EBIDTA 18.7 19.2 19.0 15.6 9.5 ROE (%) 4.3 2.4 NA 1.0 5.8 ROCE (%) 5.2 4.6 4.3 5.7 9.4 Source: Company, Nirmal Bang Institutional Equities Research

Institutional Equities

SOTP -based target price of Rs39 We assign a Buy rating and a target price of Rs39 to GMR Infrastructure. We have valued the stock via the SOTP route using DCF methodology, as most projects are long term in nature and have a fixed concession period with a strong and predictable cash flow. We have used varied cost of equity across projects to factor in the different businesses and execution risks. For instance, the cost of equity has been assumed at 14-15% for airport projects (a mix of assured and market-driven returns) and 17% for realty projects. For power projects, the cost of equity has been considered in the range of 14-16%, depending on factors such as proportion of merchant power, fuel supply arrangement and the stage of development. For road projects, the cost of equity has been assumed at 14% for annuity-based projects and 16% for toll-based projects. Accordingly, we have arrived at a valuation of Rs39 comprising Rs20 (54% of SOTP) for airport projects (including real estate), Rs14 (35% of SOTP) for power and coal mining projects, Rs3 (8% of SOTP) for road projects and the balance represents cash. In our SOTP valuation, we have not factored in projects which are still at the planning stage. In our TP, 75% is contributed by operational projects and the remaining 25% by projects that are at various stages of development. Exhibit 1: SOTP valuation Airports Asset value GMR stake Value of stake Project cost Value/share DIALcore 30,032 54% 16,218 12,760 4.2 DIAL real estate - - 38,155 - 10 HIALcore 34,998 63% 22,049 29,200 5.7 HIAL real estate - - 9,900 - - SGHIA 8,320 40% 3,328 29,315 0.9 Total 73,351 89,649 - 20 Power MW Equity value GMR stake Value of stake Rs/share GMR Energy 220 5,739 100% 5,739 1.47 GMR Power Corporation 200 6,781 51% 3,458 1.74 Vemagiri Power Generation 389 6,677 100% 6,677 1.72 GMR Kamalanga Energy 1,400 22,588 80% 18,070 4.64 Rajahmundry 768 7,306 100% 7,306 1.88 Emco Energy 600 5,818 100% 5,818 1.49 Total 5,417 54,910 - 47,070 12 Valuation- mining assets Mining reserves(mt) Equity value (Rsmn) Stake (%) Value of stake Equity value/ share (Rs) PT Barasentosa Lestari, Indonesia 110 5,875 100% 5,875 1.5 Homeland Energy Group 270 3,620 56% 2,027 0.6 Mining assets value/share (Rs ) 2.1 Project name Route length (km) Value (Rsmn) Stake (%) Value of GMR stake Rs/share Tambaram-Tindivanam 93 2,041 61% 1,245 0.3 Tuni - Anakapalli 59 2,711 61% 1,694 0.4 Adloor-Gunla-Pochanpalli 103 2,543 100% 2,543 0.7 Ambala-Chandigarh 35 (175) 100% (174) (0.0) Faruknagar-Thondapalli-Jadcherla 58 4,206 100% 4,206 1.1 Tindivanam-Ulundurpet 73 1,324 100% 1,324 0.3 Total 421 - - 10,838 2.8 Net cash - - - - 2.0 Price target - - - - 39

Source: Company, Nirmal Bang Institutional Equities Research Exhibit 2: GMR Infrastructure –Valuation trend

(x) (x) 60 5.0 4.5 50 4.0 3.5 40 3.0 30 2.5 2.0 20 1.5 1.0 10 0.5 0 0.0 Sep-07 Sep-08 Sep-09 Sep-10 Sep-11 Sep-07 Sep-08 Sep-09 Sep-10 Sep-11 EV /EBITDA 5 year avg P/B 5 year avg Source: Bloomberg, Nirmal Bang Institutional Equities Research Source: Bloomberg, Nirmal Bang Institutional Equities Research

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Investment Arguments Airport portfolio - Focus on profitability (54% of SOTP value) GMR Infrastructure currently has a portfolio of four airport assets, two of which are domestic (New Delhi and Hyderabad) and two international projects which include Sabiha Gokcen International Airport (SGIA), Istanbul, and Male International Airport, Maldives. The Hyderabad airport is a greenfield project while Delhi, Sabiha Gokcen and Male airports are brownfield projects. We have valued the airports' core business at Rs41bn based on FCFE valuation method, given the steady and recurring cash flow during the concession period. Airports' core assets contribute 22.5% to our SOTP valuation. If we include the value of real estate development, the airport assets account for 54% of our SOTP. Exhibit 3: Airport portfolio Stake Capex (Rsbn) Project status Passenger traffic (mn) Development rights Delhi airport 54% 12.7 Operational 30.0 250-acre land H’bad airport 63% 29.2 Operational 7.59 1,500-acre land Sabiha 40% 29.3 Operational 12.20 N/A Male airport 77% 13.9 Brownfield-U/I 2.50 N/A Source: Company, Nirmal Bang Institutional Equities Research Exhibit 4: Airport valuation Airports (Rsmn) Asset value GMR stake Value of stake Project cost Value/share CoE DIALCore 30,032 54% 16,218 12,760 4.2 15% DIAL Real estate - - 38,155 - 10 - HIALCore 34,998 63% 22,049 29,200 5.7 16% HIAL Real estate - - 9,900 - - - SGHIA 8,320 40% 3,328 29,315 0.9 15% Total 73,351 - 89,649 - 20 - Source: Company, Nirmal Bang Institutional Equities Research Airport assets: Focus on profitability Airport assets, which are capital intensive in nature, have higher capacity charges and are loss-making in the initial two-three years. The company has completed two brownfield expansions (DIAL and SGIA) and one greenfield expansion (GHIAL) in the past three years. The company has recently bagged the brownfield expansion project at Male airport, which is profitable and has operating cash flow, and it would be funded through internal accruals. Hyderabad airport has turned profit-making in 4QFY11 and started having operating cash flow. Delhi airport and Sabiha Gokcen airport projects were completed in the past one year and due to higher capacity charges have reported losses, which led consolidated financials to show losses. SGIA is witnessing robust traffic growth and is expected to turn around in the next three quarters. Profitability of Delhi airport will be based on clarity by the Airports Economic Regulatory Authority (AERA) on tariff determination for airports and the rate of return on regulated asset base as well as renewal of suspended ADF and incremental ADF of Rs17bn. Based on the current tariff, with a hybrid model; we expect the Delhi airport to turn around in FY14, registering cash profit and turning FCF positive in FY12.

Exhibit 5: Passenger traffic trend (Delhi airport) (Hyderabad airport)

(mn Pax) (%) (mn Pax) (%) 8 80 1.8 30

7 60 1.6 20 6 1.4 10 40 1.2 0 5 20 1 (10) 4 0 0.8 (20) 3 0.6 (30) (20) 2 0.4 (40) 1 (40) 0.2 (50) 0 (60) 0 (60) Q1FY10 Q2FY10 Q3FY10 Q4FY10 Q1FY11 Q2FY11 Q3FY11 Q4FY11 Q1FY12 Q1FY10 Q2FY10 Q3FY10 Q4FY10 Q1FY11 Q2FY11 Q3FY11 Q4FY11 Q1FY12 Domestic (Pax Traffic) International (Pax Traffic) % Growth % Growth Domestic (Pax Traffic) International (Pax Traffic) % Growth % Growth Source: Company, Nirmal Bang Institutional Equities Research Source: Bloomberg, Nirmal Bang Institutional Equities Research

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Road portfolio scaling high GMR Infrastructure has a operational road portfolio of six operational BOT projects, three based on toll collection and three on annuity, aggregating Rs22.7bn. During FY11, the company achieved financial closure for three more road projects which are under construction, namely the Hyderabad- Vijayawada toll highway, the Chennai Outer Ring annuity road project and the Hungund-Hospet toll highway which are expected to achieve CoD (commercial date ) during FY13. This translates into a road length of nearly 421km operational and 310km under construction. The company has now shifted its focus from normal road projects to expressways, highways of longer stretch, mega projects, etc to leverage on its financial qualification and project execution capability. The company has already been short-listed for one mega expressway project worth Rs 60bn ($1.3bn). Exhibit 6: Road project portfolio Road Projects GTAEPL GTTEPL GPEPL GACEPL GJEPL GUEPL Location Tuni-Anakapalli Tambaram-Tindivanam GMR Pochanpalli GMR Ambala-Chandigarh Faruknagar-jadcherla Tindivanam-Ulundurpet Stake (%) 61 61 100 100 100 100 Length km 59 93 103 35 58 73 Project cost (Rsmn) 2,950 3,620 7,043 4,993 5,155 8,817 Scope of work 2 to 4 lanes 2 to 4 lanes 2 to 4 lanes 2 to 4 lanes 2 to 4 lanes 2 to 4 lanes CoD Dec-2004 Oct-2004 Mar-2009 Nov-2008 Feb-2009 Jul-2009 Concession period 17.5 years from Jun-2002 17.5 years from Jun-2002 20 years from Sep-2006 20 years from May-2006 20 years from Aug-2006 20 years from Oct -2006 Concession type Annuity Annuity Annuity Toll Toll Toll

Under construction

GHVEPL GCORRPL GHHEPL

Location Hyderabad-Vijayawada Chennai outer ring road Hungund-Hospet Stake (%) 74 90 51 Length (km) 181 29 99 Project cost (Rsmn) 21,934 11,668 16509 Scope of work 2 to 4/6 6 lanes& 2 service lanes 2 to 4 lanes CoD Jul-2012 Jul-2012 Dec-2012 Concession period 25 years from Apr-2010 20 years from Jun-2010 19 years from Sep-2010 Concession Type Toll Annuity Toll Source: Company, Nirmal Bang Institutional Equities Research

We have considered a combined value of Rs11.7bn for six road projects in our SOTP valuation using the FCFE methodology. Three annuity road projects contribute Rs6bn and three toll road projects constitute Rs5.7bn, resulting in a valuation of Rs2.90 per share. We have not included the valuation of the projects that are under construction. Exhibit 7: Road project valuation Project name Route length (km) Value (Rsmn) Stake Value of GMR stake Rs/share Tambaram-Tindivanam 93 2,041 61% 1,245.1 0.3 Tuni - Anakapalli 59 2,711 61% 1,694.2 0.4 Adloor-Gunla-Pochanpalli 103 2,543 100% 2,543.1 0.7 Ambala-Chandigarh 35 (175) 100% (174.9) (0.0) Faruknagar-Thondapalli-Jadcherla 58 4,206 100% 4,206.5 1.1 Tindivanam-Ulundurpet 73 1,324 100% 1,324.1 0.3 Total 421 - - 10,838.2 2.8 Source: Company, Nirmal Bang Institutional Equities Research

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Commissioning of power projects (4x of existing) to drive next leg of growth GMR Infrastructure has three operational power generation plants in India having a total capacity of 839MW, which are expected to increase by 2,768MW over FY12-13. This is due to (a) Brownfield expansion at Rajmundry to 768MW during 1QFY13E; (b) Commissioning of first coal-fired plant at Kamalanga of 1,400MW during 2HFY13 (c) Commissioning of 600MW Emco plant in Maharashtra during 2HFY13E. All the above mentioned projects are in advanced stage of construction. Hence, we believe the projects would be completed on time. Apart from this, around 5.7GW of installed capacity, which we have not considered in our valuation, is at different stages of planning and development and would be commissioned over FY14-17. We believe the gradual completion of the projects would keep the growth momentum intact, with the contribution of power segment increasing from 35% in FY11 to 52% of revenue by FY14. Exhibit 8: Upcoming Power Projects Project Capacity (MW) Total Project Cost Remarks Rajamundry 768MW Rs32.5bn Incurred project cost of Rs24.5bn till June 2011 85% of the project completed, expected COD in 1QFY13

Kamalanga 1,050MW Rs64bn Incurred project cost of Rs25.2bn till June 2011 56% of the project completed, ,expected COD in 2HFY13

EPC contract awarded to SEPCO, China

Emco Energy 600 MW Rs34.8bn Incurred project cost of Rs11.2bn till June 2011 67% of the project completed, expected COD in 2HFY13

Chhattisgarh 1,320 MW Rs82.9bn Incurred project cost of Rs13bn till June 2011 94.8% of engineering activity, order placement of BOP package completed

Construction work started, may be operational in 4QFY14

GMR Energy Singapore 800 MW SG$1.12bn Financial closure achieved Expected COD in 3QFY14

Source: Company, Nirmal Bang Institutional Equities Research Exhibit 9: Power project portfolio Projects under development Fuel Capacity (MW) COD Kamalanga,Orissa Coal 1,400 Mar-12 Emco,Warora, Maharashtra Coal 600 Jun-12 Raikhera,Chhattisgarh Coal 1,370 Feb-14 SJK Power, Shahdol, Madhya Pradesh Coal 1,370 Dec-14 Total Coal 4,740

Rajamundry Energy, Andhra Pradesh Gas 768 Mar-12 Island Power, Singapore Gas 800 Nov-13 Total Gas 1,568

Alaknanda ,Uttarakhand Hydro-power 300 Mar-15 Upper Karnali Hydro-power 900 Dec-15 Talong, Arunachal Pradesh Hydro-power 160 Jun-16 Bajoli Holi, Himacahal Pradesh Hydro-power 180 Jul-16 Upper Marsyangdi, Nepal Hydro-power 600 Oct-16 Total - 2,140 - Source: Company, Nirmal Bang Institutional Equities Research Exhibit 10: Planned power generation capacity addition Planned power generation capacity addition (MW) Year FY10 FY11 FY12E FY13E FY14E 3,540

2,768 Gradual capacity addition - expected from FY12-13 16

16 Total 823 839 839 3,607 7,147 Source: Company, Nirmal Bang Institutional Equities Research

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Coal mines in Indonesia and South Africa are natural hedge GMR Infrastructure has bought 100% stake in PT Barasentoso Lestari, Indonesia, an undeveloped mine in Indonesia for a consideration of $100mn and recently increased the stake in HEG to 55%, a step to mitigate coal-availability issues and fluctuating coal-price risks. We believe owning mining assets abroad is a big positive for the company, considering the visible shortage of coal in India. The company is estimated to have 3 power plants of 3.37GW by FY14 based on coal. The total extractable coal reserve of the mine is 110mt. At full production capacity, it will have an output of 5mtpa.The valuation on the basis of US$1.5/tn translates into a mine value of $160mn and equity value of Rs1.5/share. Homeland Energy has a 74% stake in two mine assets which has reserves of around 270mt. The company expects initial production of 5.5mtpa, which would be ramped up to 16mtpa. The valuation on the basis of US$1/tn translates into a mine value of US$85m, resulting in a contribution of Rs0.6/share. Regulatory issues overdone and clarity expected During the past three years, GMR Infrastructure has underperformed by around 55% versus Nifty due to multiple issues related to airport and power sectors like 1) Regulatory uncertainty on tariff determination for airports, 2) Treatment for real estate and monetisation in Delhi airport by AERA, 3) Gas allocation and coal availability for upcoming and existing power projects, 4) Single-till approach for Hyderabad airport, 5) Renewal of ADF (temporarily suspended by Supreme Court until further clarity from the regulatory authority), and 6) Enhanced capex and incremental ADF. We believe the current market price seems to be factoring in most of these uncertainties and our earnings model is based on the worst case scenario in respect of these issues. Hence, clarity on some of the issues, which is expected in the next two-three months would be positive for the stock. Exhibit 11: Concerns related to projects Verticals Concerns Delhi airport No clarity on time frame for land monetisation of 205 acre in near future. Regulatory uncertainty on tariff determination for airports Renewal of ADF (temporarily suspended by Supreme Court until further clarity from the regulatory authority), Enhanced capex, incremental ADF Hyderabad airport AERA in favour of reduction in the value of real estate from regulated asset base (that is used for determining airport changed) AERA in favour of a single till model for tariff setting. Power sector Project execution delay Pressure on merchant tariff Lower PLF for projects Issue regarding coal availability Issue regarding gas availability No PPAs for under-construction projects Source: Company, Nirmal Bang Institutional Equities Research

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Favorable outcome expected for ADF (Airport Development Fee) Based on our interaction with the company’s management on this issue, we believe the regulator has recognised the ADF requirement for project viability and may allow continuation of ADF for remaining amount out of Rs18.3bn. Apart from that, the enhanced capital cost Rs127.6bn (as against Rs128.6bn spent) has been approved for Delhi International Airport (DIAL) and we expect ADF approval for an incremental Rs17bn to bridge the funding gap in coming months. The tenure of the ADF levy has been worked out as 51 and 62 months, respectively, as against earlier approved of 36 months from March 2009. Exhibit 12: Funding plan for DIAL Source Value (Rsbn) Equity 25.0 Rupee term loan 36.5 External commercial borrowing 16.2 Interest-free lease/trade deposits 14.7 ADF -Approved earlier by MOCA 18.3 Collected Rs11bn until March 2011 (i.e. In 25 months).Temporarily suspended ADF-Additional 17.0 Project cost approved 127.6 Cost disallowed 1 Total project cost 128.6 Source: AERA, Company, Nirmal Bang Institutional Equities Research Adequately funds for projects under construction The company has raised Rs 13.6bn through preference shares in power subsidiary and Rs 14.7bn compulsorily convertible preference shares (CCPS) in the airports vertical which would be used for general corporate purpose. Apart from that the company has got the released equity capital of Rs 9.58bn by divestment of equity stake in Intergen. We believe this is sufficient for near-term equity commitments of around Rs25bn for the project pipeline over FY12-13. The investments in the energy vertical would be used to fund the expansion plans of projects like: (a) Brownfield expansion at Vemagiri to 768MW, (b) 1,400MW power plant at Kamalanga in Orissa, (c) 600MW Emco plant in Maharashtra, and (d) 1,370MW power plant in Chhattisgarh. In the airports vertical, the company already has three operating airports and only one is under construction (Male airport), which will be funded through internal accruals.

Exhibit 13: Fund raising through convertible instruments GMR Energy -Holding company Date Security issued Amount (Rsmn)

9 April 2010 Compulsorily convertible into equity shares 9,000 Tamesak holdings, 3 June 2010 Convertible instrument 4,650 IDFC, Argonaut Ventures and Ascent

GMR Airport holdings(Holding company of airport assets) Macquarie SBI Infrastructure investments Standard Chartered private equity, 31 March 2011 Compulsorily convertible preference shares 8,932 JM financial-old lane india corporate 6 July 2011 Compulsorily convertible preference shares 5,846 - Source: Company, Nirmal Bang Institutional Equities Research

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Sustainable and growing asset portfolio GMR Infrastructure is India's leading infrastructure asset owner managing four airports (two operating airports in India at New Delhi and Hyderabad and the airports at Istanbul, Turkey, and Male, Maldives. It also has three operational power plants totaling 839MW and an under-construction portfolio of 8.4GW. In the road segment, the company has six operational projects totaling 421km and three under-construction projects totaling 310km with a project cost of Rs 30bn. Exhibit 14: Company structure GMR Holdings

GMR Infrastructure

GMR Energy GMR Highways holding GMR Airports holding Others

Operating Companies: Operating companies: Operating companies: GMR Krishnagari SEZ (100%) GMR Energy (100%) GMR Tambaram Tindivanam (61%) GMR Hyderabad Int’l. Airport (63%) GMR Aviation (GAPL) (100%) GMR Power Corporation (51%) GMR Tuni Anakapalli (61%) Delhi International Airport (54%)

Vemagiri Power Generation (100%) GMR Pochanpalli (100%) Sabiha Gokcen Int’l Airport (40%)

GMR Ambala Chandigarh (100%) GMR Male Int’l Airport (77%)

Assets under development: GMR Jadcherla (100%) Rajahmundry (100%) GMR Ulundurpet (100%) GMR Kamalanga Energy (80%)

GMR Chhattisgarh Energy (100%) Assets under development: Emco Energy (100%) GMR Hyderabad Vijayawada (74%) Talong Hydro Power (100%) Chennai Outer Ring Road (90%) Holi Bajoli Hydro Power (100%) Hungund-Hospeth (51%) Himtal Hydro power Co. (80%)

GMR Upper Karnali (73%) GMR Badrinath Hydro Power(100%)

GMR Coastal Energy (100%)

Island Power Singapore (100%) Coal assets: Indonesia (100%) HEG, South Africa (56%)

Source: Company Exhibit 15: Growth path

Source: Company, Nirmal Bang Institutional Equities Research

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1QFY12 performance Revenue grew by 51% due to consolidation of Male airport, improvement in gas availability and also project execution improved in the EPC segment. Traffic at Delhi and Hyderabad airports increased by 22% and 15% YoY, respectively, driving strong operating performance of these airports Reported a loss of Rs667mn, mainly due to higher interest costs and depreciation charges due to commissioning of T3 terminal at Delhi airport. Interest expenses climbed higher by 56%YoY due to short-term loans taken for DIAL. Management expects tariff charges to be fixed by the airport regulator by the end of CY11.Also expects SGIA airport to turn around in the next 3-4 quarters. Losses in road projects contracted, and the management expect a turnaround by the year-end.

Exhibit 16: Quarterly performance Y/E March (Rsmn) 1QFY11 4QFY11 1QFY12 YoY (%) QoQ (%) Net sales 12,313 19,620 18,635 51.3 (5.0) Total Expenses 8,539 15,214 13,656 59.9 (10.2) EBITDA 3,775 4,405 4,980 31.9 13.1 EBITDA margin (%) 30.7 22.5 26.7 - - Other income 673 611 812 20.7 32.9 Depreciation 1,648 2,612 2,758 67.4 (6.3) Interest 2,383 2,945 3,724 56.3 (137.8) Exceptional item - (9,839) - - - PBT 416 (9,930) (691) - - Tax 98 764 655 568.4 (106.1) Reported PAT 318 (10,693) (1,346) - - Minority interest 34 624 679 - - Adj PAT 284 (10,069) (667) - - Source: Company, Nirmal Bang Institutional Equities Research

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Financial analysis Near-term revenue growth to be led by airports Net sales are likely to show a CAGR of 35% to Rs71bn and Rs105bn in FY12E and FY13E, respectively. The airports segment has started contributing significantly to the revenue from 3QFY11, considering robust growth in passenger traffic and completion of the DIAL phase-I. The contribution from power projects is likely to start rising from FY13 onwards, as a major portion of the expanded capacity would start contributing to revenue. Exhibit 17: Net sales Exhibit 18: Segment-wise revenue break-up

(Rsbn) 105 (%) Revenue break up (% of total) 60

48 47 47 50 44 71 40 40 37 39 58 40 34 32 46 40 30 20 21 19 17 23 20 15 17 10

- FY07 FY08 FY09 FY10 FY11 FY12E FY13E FY09 FY10 FY11 FY12E FY13E CAGR 34.4% Power Projects Road and other Projects Airports Source: Company, Nirmal Bang Institutional Equities Research Source: Bloomberg, Nirmal Bang Institutional Equities Research

Turnaround in profitability We expect GMR Infrastructure’s EBITDA margin to expand from 24.2% in FY11 to 36% in FY13 on the back of improving margins from DIAL and HIAL airports. We expect profitability to be under pressure during FY12 due to higher depreciation and interest costs post-commercialization of DIAL. Thereafter, in our view, the reported profit is likely to show a CAGR of 312% over FY11-13, largely driven by operating leverage of high-margin assets such as HIAL and DIAL and negative base in FY11. Exhibit 19: EBIDTA margin trend Exhibit 20: Net profit growth trend

(%) (Rsbn) 21 40 36 35 30 30 30 12 26 27 27 25 8 7 7 20

10 FY09 FY10 FY11 FY12E FY13E FY08 FY09 FY10 FY11 FY12E FY13E CAGR 33% Source: Company, Nirmal Bang Institutional Equities Research Source: Bloomberg, Nirmal Bang Institutional% Equities Research

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Financials Exhibit 21: Income statement Exhibit 22:Cash flow Y/E March (Rsmn) FY09 FY10 FY11 FY12E FY13E Y/E March (Rsmn) FY09 FY10 FY11 FY12E FY13E Total revenue 44,762 51,234 64,250 82,766 118,681 EBIT 6,770 7,521 (10,230) 10,857 22,110 Growth (%) 65.9 14.5 25.4 28.8 43.4 Inc./(dec) in working capital (5,474) 187 31,004 (13,178) 3,270 Less: Annual fee to AAI 4,570 5,569 6,513 11,670 13,397 Cash flow from operations 1,295 7,708 20,774 (2,321) 25,380 Net revenue 40,192 45,665 57,738 71,096 105,284 Other income (450) (916) 16,711 650 646 % YoY 75.1 13.6 26.4 23.1 48.1 Total expenditure 29,524 32,022 42,185 49,452 67,269 Depreciation 3,898 6,122 8,609 10,787 15,905 EBITDA 10,668 13,643 15,553 21,644 38,014 Interest paid (-) (3,417) (7,620) (14,485) (12,613) (17,640) EBITDA margin (%) 26.5 29.9 26.9 30.4 36.1 Tax paid (-) (998) (511) (2,434) (343) (367) Depreciation 3,898 6,122 8,609 10,787 15,905 Dividends paid (-) - - (87) - - EBIT 6,770 7,521 6,944 10,857 22,110 Net cash from operations 328 4,784 29,088 (3,840) 23,924 EBIT (%) 15.1 14.7 10.8 13.1 18.6 Capital expenditure (-) (30,388) (98,733) (77,920) (37,566) (47,311) Interest and finance charges 3,682 8,503 12,301 12,613 17,640 Net cash after capex (30,059) (93,949) (48,832) (41,407) (23,387) Other income 214 - 1,573 650 646 Inc./(dec.) in borrowings 38,663 85,582 26,243 20,585 20,841 Profit before tax 3,301 1,932 (2,244) (1,106) 5,116 Taxes 530 (322) 239 343 367 Inc./(dec.) in investments 139 (1,860) 13,530 (595) (607) Issue of common stock in Adj PAT before minority interest 2,771 2,254 (2,483) (1,449) 4,749 6,981 839 22,745 - - consolidated entities MinorityiInterest 23 (673) 1,170 2,260 29 Equity issue/(buyback) - - 14,000 - - Reported PAT after minority interest 2,794 1,581 (1,313) 811 4,777 Cash from financial activities 45,783 84,562 76,518 19,990 20,234 Growth (%) 33.0 (43.4) (183.0) (161.8) 489.2 Reported PAT 2,794 1,581 (9,298) 811 4,777 Change in cash 15,724 (9,387) 27,686 (21,416) (3,153) % YoY 33.0 (43.4) (688.3) 108.7 489.2 Opening cash 8,942 24,665 16,827 33,730 12,314 Closing cash 24,665 16,827 33,730 12,314 9,161 Source: Company, Nirmal Bang Institutional Equities Research Source: Company, Nirmal Bang Institutional Equities Research Exhibit 23: Balance Sheet Exhibit 24 :Key Ratios Y/E March (Rsmn) FY09 FY10 FY11 FY12E FY13E Y/E March FY09 FY10 FY11 FY12E FY13E Equity share capital 3,641 3,667 3,892 3,892 3,892 Adj. EPS (Rs/share) 0.7 0.4 (0.3) 0.2 1.2 Reserves and surplus 61,070 63,003 73,442 74,253 79,030 Cash EPS (Rs/share) 1.7 2.0 (0.2) 3.0 5.3 Net worth 64,711 66,670 77,334 78,145 82,922 Valuation ratios Long term loans 106,602 162,294 189,107 226,078 244,000 PE ratio (x) 41.8 73.9 (89.0) 144.0 24.4 Short term loans 13,636 46,080 53,189 36,803 39,721 Price/sales (x) 2.6 2.3 1.8 1.4 1.0 Total debt 120,238 208,374 242,296 262,881 283,721 Price /BV (x) 0.8 1.7 1.2 1.2 1.2 Minority Interest 18,061 17,902 19,981 17,721 17,692 EV /sales (x) 4.5 5.1 4.6 4.1 3.0 Deferred tax liabilities 192 2,535 764 100 100 EV /EBITDA (x) 18.7 19.2 19.0 15.6 9.5 Foreign currency monetised item 69 - (74) - - Margins (%) Total liabilities 203,271 297,480 358,450 376,996 402,585 EBITDA margin 26.5 29.9 26.9 30.4 36.1 Gross block 114,326 148,896 243,702 271,779 308,651 EBIT margin 15.1 14.7 10.8 13.1 18.6 Less: Depreciation 17,810 23,416 31,503 42,290 58,195 Returns (%) Capital work in progress 54,639 103,830 94,898 104,388 114,827 RoCE 6.0 5.4 4.7 5.9 9.7 Expen. during construction period 13,271 - - - - RoNW 4.4 2.4 N/A 1.0 5.9 Net block 164,426 229,310 307,098 333,877 365,283 Gearing ratios Investments 13,109 46,411 29,741 30,336 30,943 Net debt/ equity (x) 1.5 2.9 2.7 3.2 3.3 Inventories 1,319 1,159 1,846 2,225 3,026 Total debt/equity (x) 1.9 3.1 3.1 3.4 3.4 Sundry debtors 6,609 8,649 13,199 13,972 20,036 Turnover days Cash and bank balances 24,665 16,827 33,730 12,314 9,161 Inventory turnover 21.1 16.4 16.4 16.4 16.4 Loans and advances 12,612 13,156 18,516 20,408 29,264 Debtors turnover 53.9 61.6 61.6 61.6 61.6 Total current assets 45,383 41,408 74,921 56,547 69,115 CA turnover 104.3 105.2 40.0 90.0 90.0 Total current liabilities 19,647 19,653 53,898 43,764 62,755 Creditors turnover 160.2 140.0 193.0 193.0 193.0 Net current assets 25,736 21,755 21,023 12,783 6,360 Asset turnover 2.6 2.9 3.8 3.3 2.6 Total assets 203,271 297,480 358,450 376,996 402,585 Source: Company, Nirmal Bang Institutional Equities Research Source: Company, Nirmal Bang Institutional Equities Research

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HCC 26 September 2011

Reuters: HCNS.BO Bloomberg: HCC IN Downside Risk Limited HOLD We assign a Hold rating and a target price of Rs33 to HCC as we believe the Sector: Infrastructure

company’s sales would grow moderately due to higher working capital requirement and greater leverage. Lavasa, a marquee project, is in trouble due CMP: Rs29 to dispute with the environment ministry, which has given a big jolt to its valuation. We believe the downside risk is limited (as the recent transaction Target Price: Rs33 relating to divestment of stake in HCC Concessions is valued equal to the Upside: 14% market capitalisation of the parent company), but lack of triggers and the company’s focus on consolidating its business due to higher leverage would Amit Srivastava cap any upside. [email protected] +91-22-3926 8116 Despite order inflow slowdown, order book-to-bill ratio at comfortable level: In FY11, HCC’s order backlog declined 4% YoY to Rs170bn. However, its current order book-to-bill ratio stands at 4.1x FY11 revenue (excluding the slow moving Sawalkot Nitin Arora hydro-power project of Rs17bn), which is in line with the five-year average. Hence, we [email protected] +91-22-3926 8169 believe the order book is at a comfortable level and augurs well for revenue visibility.

Initiating Coverage Initiating Higher working capital to restrain project execution: Despite the order backlog persisting at 4.1x, we expect project execution to improve moderately due to a sharp Key Data rise in working capital requirement. The company may consider increasing sub- Current Shares O/S (mn) 606.6 contracting to expedite project execution, but it would impact the margins. Mkt Cap (Rsbn/US$bn) 17.4/0.38 BOT asset portfolio valued at Rs16.5bn: HCC Concessions (a 100% subsidiary of 52 Wk H / L (Rs) 68/25 HCC) has a portfolio of six BOT assets at a total project cost of Rs55bn, five based on Daily Vol. (3M NSE Avg.) 3,834,104 toll collection and one based on annuity. Recently the company diluted its 14.5% stake in HCC Concessions to the Xander Group, for Rs2.4bn which has valued HCC Concessions at Rs16.5bn (equivalent to market capitalisation of the parent company). Share holding (%) 3QFY11 4QFY11 1QFY12 Key value driver Lavasa under dispute: A dispute between the environment ministry Promoter 39.9 39.9 39.9 and Lavasa on project clearance has delayed the development process and fund FII 24.6 24.9 23.8 raising plans through an initial public offer (IPO). We believe the company will get the DII 10.7 5.0 4.8 clearance in coming months (with some pre-conditions) considering the developments Corporate 6.4 7.9 7.2 that are skewed towards Lavasa. However, losses due to stoppage of construction, cost over-run and pre-conditions that will be attached to the project will hurt the General Public 18.5 22.3 24.4 valuation and delay the IPO process. One Year Indexed Stock Performance Valuation: We assign a Hold rating and a TP of Rs33 to HCC based on SOTP valuation (core construction PE ratio of 8x, real estate business is valued at 1x P/BV and BOT assets at a 40% discount to the recent deal). We are conservative on the valuation front. Yet, we believe the downside risk is limited, but lack of positive triggers and the focus on business consolidation will cap any upside. Y/E Mar (Rsmn) FY09 FY10 FY11 FY12E FY13E Net Sales 33,137 36,442 40,932 47,414 55,267 7.5 10.0 12.3 15.8 16.6 YoY (%) EBITDA 4,314 4,429 5,398 5,903 6,936

EBITDA Margin (%) 17.6 2.7 21.9 9.4 17.5 Price Performance (%) Adj. net profit 1,254 815 710 514 907 YoY (%) 15.2 (35.0) (12.9) (27.6) 76.5 1 M 6 M 1 Yr Adj. EPS 2.1 1.3 1.2 0.8 1.5 HCC 2.9 (20.6) (51.9) PER (X) 14.0 33.9 24.8 34.2 19.4 Nifty Index (1.6) (11.2) (18.3) P/BV (x) 1.8 1.2 1.2 1.1 1.1 Source: Bloomberg ROCE (%) 13.5 11.6 11.6 10.8 11.3 ROE (%) 12.5 4.1 4.7 3.3 5.7 Source: Company, Nirmal Bang Institutional Equities Reearch

Institutional Equities

Initiate coverage with a Hold rating We initiate coverage on HCC with a Hold rating and a target price of Rs33 based on SOTP valuation. The core construction business, valued at a PE ratio of 8x (lower end of historical range of PE ratio of 8x-18x for pure EPC players), contributes 32% (Rs11/share) to our target price. Real estate business is valued on the basis of 1x P/BV due to uncertainty and regulatory issues related to development of Lavasa, a marquee project of the company. BOT assets are valued at a 40% discount to a recent deal, which implies a P/BV of 1.3x. We have not included any contribution from real estate projects that are in early stage of development. At the current market price of Rs29, the stock is trading at a PE multiple of 18.7x and EV/EBITDA multiple of 8.8x based on FY13E earnings. If we adjust the value of other businesses (BOT projects and Lavasa project) in the current market price, the stock is trading at a PE ratio of 4x FY13E diluted earnings. Hence, we believe the downside is limited, but lack of positive triggers and the focus on consolidating its businesses (higher leverage) will cap any upside. Exhibit 1: SOTP valuation SOTP valuation Basis Multiple (x) Value per share (Rs) Construction business FY13E, PE (x) 8.0 11 BOT projects 40% disc. to recent deal 1.3 14 Lavasa projects P/BV 1 8 Total fair value - - 33 Source: Company, Nirmal Bang Institutional Equities Research BOT assets valued at 40% discount to recent deal and implied P/BV of 1.3x HCC Concessions, a wholly-owned subsidiary of HCC, divested 14.5% stake to Xander group at Rs2.4bn for BOT assets portfolio. This transaction has valued the BOT assets portfolio at Rs16.5bn (Rs 28/share) and the remaining stake (85.5%) at Rs14.1bn (Rs 23/share). We have valued the BOT assets portfolio at a 40% discount to the recent deal, which implies a P/BV (based on equity invested till date) of 1.3x. Exhibit 2: Valuation of HCC Concessions Stake Rsbn HCC Concessions (Recent deal) 15% 2,400 BOT asset valuation 100% 16,552 HCC's stake valuation 86% 14,152 Discount 40% 8,491 Rs/share - 14 Equity investment (till date) - 6,530 Implied P/BV (of invested equity) - 1.3 Total equity investment - 10,440 Implied P/BV (total equity investment) - 0.8 Source: Company, Nirmal Bang Institutional Equities Research Lavasa valued at P/BV of 1x on regulatory concerns Based on NPV method for Lavasa Phase I, the remaining land bank at realisable value contributes Rs17/share. However, looking at the uncertainty on regulatory issues related to environmental clearance, pre- conditions and delay in IPO of Lavasa and de-rating of the project; we have valued the project based on P/BV of 1x, which contributes Rs 8/share to our target price. Financial institutions have invested around Rs10.5bn through DDCD and CCPS with a valuation of around Rs100bn to Rs 200bn for the project. Our valuation stands at just 5% of the lower end of valuation done by financial institutions. We have not assigned any valuation for other real estate projects due to lack of development in these projects. Exhibit 3: Lavasa project details Lavasa details Phase I NAV 12,159 HCC's stake 65% Area (acre) 1,739 Less: Net debt 7,000 Total area of the hill station (acre) 25,000 FSI 0.3 NAV 5,159 Lavasa master plan (acres) 12,500 Developable area 22.7 NRV for other land bank 15,522 FSI 0.3 Realisation 2,800 Total value 20,681 Total saleable area (mn sq ft) 150 Development cost 1,400 Discount rate 25% Initial infrastructure cost 7,000 Discount 5,170 Tax rate 33% NAV (post discount) 15,511 Discount rate 18% Company's stake 10,082 Value/share 17 Source: Company, Nirmal Bang Institutional Equities Research

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Core business valued at implied PE ratio of 4x (adjusted for other business) HCC's core construction net profit growth would be under stress during FY12 due to higher leverage and increased working capital. However we expect net profit to grow 76.5% in FY13 on low base. Hence, we believe it is fair to value the core business of the company at 8x PE (lower end of historical range of PE ratio of 8x-18x for pure EPC players). Historically the stock has traded in a wide range of 11x-75x of one-year forward earnings. It is currently trading at PE ratio of 18.7x, which is 60% lower than five year average PE ratio of 44x. If we adjust the value of other businesses (BOT projects and Lavasa project) in the current market price, the stock is trading at PE ratio of 4x FY13E diluted earnings. Exhibit 4: PE ratio Exhibit 5: P/BV trend

(x) (x) 100 4.0 90 3.5 80 3.0 70 60 2.5 50 2.0 40 1.5 30 1.0 20 0.5 10 - 0.0 Sep-06 Sep-07 Sep-08 Sep-09 Sep-10 Sep-11 Sep-06 Sep-07 Sep-08 Sep-09 Sep-10 Sep-11 P/E 5 year avg P/B 5 year avg Source: Bloomberg, Nirmal Bang Institutional Equities Research Source: Bloomberg, Nirmal Bang Institutional Equities Research

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Investment Arguments Despite order inflow slowdown, order book-to-bill ratio at comfortable level During FY05-11, the order book witnessed a CAGR of 39%, the order book-to-bill ratio was in the range of 3.6x-5.2x and the average was at 4.2x. During 1QFY12, the order backlog declined 4% YoY to Rs170bn. However, the company’s current order book-to-bill ratio stands at 4.1x FY11revenue (excluding the slow moving Sawalkot hydro-power project worth Rs17bn). Hence, we believe the order book is at a comfortable level and augurs well for revenue visibility. Based on the pre-qualification of Rs190bn worth of projects and visibility on some key projects, we believe the company would maintain the order book-to-bill ratio in the same range during FY12-13.

Exhibit 6: Order book trend Exhibit 7: Order book-to-bill ratio

(Rsbn) (%) 250 6.0 5.2 194 4.9 4.9 200 188 181 185 5.0 4.4 164 3.9 3.8 3.9 150 4.0

97 102 96 93 3.0 3.6 3.5 100 3.3 63 61 64 54 51 40 39 2.0 50 29 34 20 20 1.0 - FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY13E - Closing order Order intake FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY13E Source: Company, Nirmal Bang Institutional Equities Research Source: Company, Nirmal Bang Institutional Equities Research Order backlog highlights: The company has some slow-moving projects in its order kitty, which includes 1,200MW Sawalkote hydro-power project (Rs19bn), 300MW Alaknanda hydro-power project (Rs3.3bn) and Pranahita Lift Irrigation project (Rs12.50bn) due to delay in getting environmental clearance and also delayed payment by the asset owner. Some key projects where the probability of securing them is higher for the company include Hyderabad metro rail project from L&T, Worli-Haji Ali sea link project, port projects and also orders from Nuclear Power Corporation of India. Exhibit 8: Segment-wise order book

Source: Company, Nirmal Bang Institutional Equities Research

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Exhibit 9: Order inflow trend

(Rsbn) (%) 250 200

200 143 117 150 150 100 97 100 50 42 50 50 25 0 0 (37) FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY13E (50) (68) (50) (44) (100) (100) Closing order (LHS) Order intake (LHS) % growth (RHS) Source: Company, Nirmal Bang Institutional Equities Research Higher working capital requirement to restrain project execution During FY08-11, there was a significant jump in working capital requirement, at 0.5x FY11 sales (adjusted for loans and advances given to subsidiaries) and working capital days increased to 300 days in 1QFY12. We believe the working capital requirement has reached an alarming level which cannot support the robust growth in project execution. Hence, we believe that despite order-backlog/bill ratio persisting at 4.1x; the company’s revenue would show a CAGR of 16% over FY11-13E. The company may consider increasing sub-contracting to expedite project execution, but it would impact the margins. Exhibit 10: Revenue growth trend

(Rsbn) (%) 60 55.3 45 40 50 47.4 40.9 35 40 36.4 33.1 30 30.8 30 25 23.6 19.9 20 20 14.9 15 10 10 - 5 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY13E Revenue (Rsbn) Growth (%) (RHS) Source: Company, Nirmal Bang Institutional Equities Research BOT asset portfolio valued at Rs16.5bn (equivalent to market cap of parent company) HCC Concessions (a 100% subsidiary of HCC) has a portfolio of six BOT assets having total project cost of Rs55bn, five based on toll collection and one based on annuity. Two road projects are operational, one project is in advanced stage of construction and three projects are expected to be completed by 3QFY13. Total equity requirement for the six projects would be Rs12bn, in which the company has already invested Rs6.53bn. Looking at the recent momentum in NHAI orders, we believe the company would achieve the target of asset ownership of Rs150bn by FY15. Recently, the company diluted its 14.5% stake in HCC Concessions to the Xander Group for Rs2.4bn, which has valued HCC Concessions at Rs16.5bn (equivalent to market cap of the parent company).

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Exhibit 11: HCC Concessions structure

Source: Company Key highlights of projects Nirmal annuity project: The project is for four-laning of 33km road on the Hyderabad-Nagpur route at a cost of Rs3.15bn. The project got operational 100 days prior to schedule in July 2009. The project is based on annuity of Rs238mn (semi- annual) with a concession period of 20 years and the debt is financed at fixed rate of 9.38% for 17 years. Badarpur-Faridabad elevated expressway: The project is to develop 4.4 km elevated highway connecting Delhi and Haryana at a cost of Rs5.72bn and equity investment of Rs1.72bn.The project, completed in November 2010, reduced travel time by over 45 minutes. Dhule-Palesner highway: The company got this project worth Rs14.2bn in a consortium with Sadbhav Engineering. The project involves four-laning of the road from the Maharashtra-Madhya Pradesh border to Dhule, connecting Mumbai and Agra, which will largely cater to industrial traffic. The project, which is around 75% complete, is expected to be completed by 3QFY12 (six months ahead of schedule). West-Bengal project: The project scope involves four-laning of 256km road from Baharampore to Dalkhola at a cost of Rs32.3bn in three concessions. The project is on track and is expected to be completed by 3QFY13. Exhibit 12: HCC Infrastructure portfolio HCC's Infrastructure Equity Debt Concession Place Grant COD Status Portfolio Km (Rsmn) (Rsmn) period Nirmal BOT(Annuity) 33 Andhra Pradesh (NH-7) 630 2,520 Jul-09 20 Operational

Badarpur- Faridabad 4.4 Delhi 1,720 4,000 Nov-10 20 Operational

Dhule-Palesner/MP order 89 MP border 3,550 10,650 Jun-12 18 Under construction

Baharampore-Farakka 103 West Bengal 2,146 3,934 5,612 Sep-12 25 Under construction Farakka-Raiganj 103 West Bengal 2,471 4,145 7,168 Sep-12 30 Under construction Raiganj-Dalkhola 50 West Bengal 1,372 2,255 3,216 Sep-12 30 Under construction Total 382.4 - 11,889 - 33,166 - - - Source: Company, Nirmal Bang Institutional Equities Research Lavasa - Key value driver HCC holds a 65% stake in Lavasa Corporation (a township of over 12,500 acres under development in Maharashtra) with an equity investment of Rs4.7bn, while the other major shareholders are Avantha group (15%) and Venkateshwara Hatcheries (12.5%). Lavasa Corporation has planned to develop the project in four stages. In the first phase, the company is developing 3,200 acres at Dasve and Mugaon. The first town under the project Dasve was supposed to be operational by FY11. The company had filed the DRHP (draft red herring prospectus) for its IPO on 14 September 2010 to raise around Rs20bn. On 25 November 2010, the environment ministry served a show-cause notice to Lavasa seeking clarification on whether it has violated environmental regulations along with directions to stop construction work. All this has delayed the development process and fund raising plans through the IPO.

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Exhibit 13: Lavasa project -series of events Date Development on Lavasa 25.11.2010 Ministry of Environment & Forests (MoEF) issues show-cause notice with status quo ante 28.11.2010 Lavasa replies to show-cause notice to MoEF 30.11.2010 Lavasa files writ petition in Bombay High Court 07.12.2010 Bombay High Court directs MoEF to give a hearing to Lavasa 09.12.2010 MoEF gives a hearing to Lavasa 14.12.2010 MoEF passes an order to continue status quo until final order 22.12.2010 Bombay High Court admits writ petition and directs MoEF to visit Lavasa project 5 -7 January 2011 Expert committee of MoEF and Maharashtra state officials visit Lavasa project 17.01.2011 MoEF passes its final order directing Lavasa to maintain status quo 25.01.2011 Lavasa addresses a letter to MoEF for finding an amicable solution 28.01.2011 MoEF is prepared to consider the matter of giving clearance to Phase-I (2,000 ha) 14.02.2011 Lavasa makes presentation before Expert Committee 31.05.2011 EAC Committee recommended to the MoEF to grant clearance to Lavasa project with certain pre-conditions 27.06.2011 MoEF issues a letter to Lavasa stating the five conditions recommended by EAC 12.07.2011 Lavasa writes a letter to MoEF not accepting the pre-conditions. Source: Company, Nirmal Bang Institutional Equities Research We believe the company would get the clearance in coming months (with some pre-conditions) considering the developments that are skewed towards Lavasa. However, losses due to stoppage of construction and the pre-conditions that will be attached to project would dent the valuation the company was targeting. Impact of dispute Lavasa project incurred a loss of Rs580mn in 1QFY12, of which Rs380mn is interest cost. The company planned to raise around Rs20bn through the equity route which got delayed. We believe IPO of Lavasa in near future is least likely. Issues like pre-conditions, cost over-run and concerns related to future development of the project would dent the valuation of the project. Lavasa valued at P/BV of 1x on regulatory concerns Based on NPV method for Lavasa Phase I and remaining land bank at realisable value contributes Rs 17/share. However, looking at the uncertainty on regulatory issues related to environmental clearance, pre- conditions delay in IPO of Lavasa and de-rating of valuation of the project; we have valued the project based on a P/BV of 1x, which is contributing Rs 9/share to our target price. Financial institutions have invested around Rs10.5bn through DDCD and CCPS with a valuation of around Rs100bn to Rs 200bn for the project. Our valuation stands at just 5% of the valuation done by financial institutions.

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Exhibit 14: Company structure

Source: Company, Nirmal Bang Institutional Equities Research Quarterly performance (1QFY12) Net sales rose 6.3% YoY to Rs10.5bn whereas profit slipped 89.7% YoY to Rs29mn due to fall in other income and lower revenue growth. EBITDA increased 9.5% to Rs1.37bn and EBITDA margin improved by 40 bps YoY. Order book as on 1QFY12 stands at Rs170bn, excluding orders worth Rs19.4bn which the company has received through its joint venture. During the quarter, the company diluted its 14.5% stake in HCC Concessions to the Xander Group for Rs 2.4bn, which valued HCC Concessions at Rs16.5bn (equivalent to market capitalisation of the parent company). Exhibit 15: Quarterly performance Y/E March (Rsmn) Q1FY11 Q4FY11 Q1FY12 YoY (%) QoQ (%) Net sales 9,954 12,026 10,577 6.3 (12.0) Total expenses 8,696 10,359 9,200 5.8 (11.0) EBITDA 1,258 1,667 1,377 9.5 (17.0) EBITDA margin (%) 12.6 13.9 13 3.0 (6.0) Other income 31 134 7 (76.6) (95.0) Interest costs 577 903 933 61.5 3.0 Depreciation 349 440 392 12.4 (11.0) PBT 362 459 60 (83.6) (87.0) Tax 81 228 33 (59.5) (86.0) Adjusted PAT 281 231 27 (90.5) (88.0) Reported PAT 281 231 29 (89.7) (87.0) Source: Company, Nirmal Bang Institutional Equities Research

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Institutional Equities

Financial snapshot Revenue growth CAGR at 16% During FY05-08, the company’s revenue showed a CAGR of 23%, driven by timely execution of projects, robust order inflow and easy source of finance. Despite robust order book, during FY09-11 net sales witnessed a CAGR of 7% due to slower execution of orders, delay in payments, higher working capital and regulatory issues. We believe the growth would improve from a CAGR of 7% over FY09-11 to 16% over FY11- 13, driven by traction in two large projects - West Bengal road project and Kishanganga HEP. However, the growth momentum is getting restrained due to working capital requirement at an alarming level.

Exhibit 16: Projects in active execution Exhibit 17: Revenue growth trend

Rsmn (Rsbn) (%) 60 55.3 45 Hindalco Packages 7,060 40 50 47.4 RAPP-7&8 8,880 40.9 35 40 36.4 Mumbai Metro - VAG Corridor 1,450 33.1 30 30.8 30 25 DGNP Dry Dock 6,080 23.6 19.9 20 Padur Rock Cavern 3,750 20 14.9 15 Sainj HEP 4,310 10 10 NH-34 Road Packages 28,600 - 5 Kishanganga HEP 27,250 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY13E Total 87,380 Revenue (Rsbn) Growth (%) (RHS)

Source: Company, Nirmal Bang Institutional Equities Research Source: Bloomberg, Nirmal Bang Institutional Equities Research Slight pressure on EBITDA margin During FY11, the company reported EBITDA margin of 13.2% on account of higher contribution from the power sector in revenue. Going ahead, we expect EBITDA margin to be marginally under pressure due to rising contribution of lower margin road projects in revenue and increase in sub-contracting to boost revenue growth. We expect the company to report EBITDA margin of 12.5% and 12.6% for FY12 and FY13, respectively. Exhibit 18: EBITDA margin trend

(%) 15 13.6 14 13.0 13.2 12.6 13 12.5 11.9 12.2 12 11 10.5 10 9.2 9.1 9 8 7 6 5 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY13E

Source: Company, Nirmal Bang Institutional Equities Research

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Focus on reduction of debt, working capital During FY08-11, there has been a significant jump in working capital requirement to 0.5x FY11sales and the working capital days increased to 300 days in 1QFY12. The debt-equity ratio increased from1.7x in FY10 to 2.2x in FY11 due to investment in BOT portfolio, real estate, acquisition of KSAG overseas and is expected to further increase to 2.9x in FY13. Hence, the company has set up a strategic team to recover claims outstanding with various government agencies, which is around Rs10bn, and thereby reduce the leverage. The management expects to recover Rs4bn in FY12, which we have not factored in our model. Exhibit 19: Net debt/equity (x)

(%) 3.0

2.5

2.0

1.5

1.0

0.5

0.0 FY03 FY04 FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY13E

Source: Company, Nirmal Bang Institutional Equities Research

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Financials

Exhibit 20: Income statement Exhibit 21:Cash flow Y/E March (Rsmn) FY09 FY10 FY11 FY12E FY13E Y/E March (Rsmn) FY09 FY10 FY11 FY12E FY13E Net sales 33,137 36,442 40,932 47,414 55,267 EBIT 3,889 3,481 4,371 4,420 5,332 Growth (%) 7.5 10.0 12.3 15.8 16.6 (Inc.)/dec in working capital (3,071) (3,608) (3,635) (2,767) (5,606) Total expenditure 28,823 32,013 35,534 41,511 48,330 Cash flow from operations 818 (128) 736 1,652 (275) EBITDA 4,314 4,429 5,398 5,903 6,936 Other income (587) (32) (441) (197) (229) Growth (%) 17.6 2.7 21.9 9.4 17.5 EBITDA margin (%) 13.0 12.2 13.2 12.5 12.6 Depreciation 1,152 1,139 1,527 1,681 1,834 Depreciation 1,152 1,139 1,527 1,681 1,834 Interest paid (-) (2,084) (2,027) (2,911) (3,686) (4,036) Interest costs 2,105 2,052 2,899 3,686 4,036 Tax paid (-) (338) (411) (819) (220) (389) Other income 588 130 170 197 229 Dividends paid (-) (199) (204) (283) (243) (121) Profit before tax 1,646 1,219 1,117 734 1,295 Net cash from operations (1,237) (1,662) (2,191) (1,013) (3,216) PBTM (% ) 5.0 3.3 2.7 1.5 2.3 Capital expenditure (-) (2,215) (2,574) (2,336) (2,000) (1,999) Tax 392 404 407 220 389 Net cash after capex (3,452) (4,237) (4,527) (3,013) (5,215) Adj. PAT before E/O items 1,254 815 710 514 907 Inc./(dec.) in borrowings 4,781 1,939 9,567 6,041 5,766 Growth (%) 15.2 (35.0) (12.9) (27.6) 76.5 Inc./(dec.) in investments (993) (1,773) (4,989) (2,000) (1,500) Source: Company, Nirmal Bang Institutional Equities Research Equity issue/(buyback) - 4,679 - - - Exhibit 2: Balance Sheet Cash from financial activities (2,434) 2,643 (4,987) (1,806) (1,295) Y/E March (Rsmn) FY09 FY10 FY11 FY12E FY13E Others - - - - - Equity capital 256 303 607 607 607 Change in cash (1,105) 345 53 1,222 (744) Reserves & surplus 9,640 14,868 14,615 14,866 15,651 Opening cash 2,644 1,539 1,884 1,937 3,160 Net worth 10,048 15,172 15,222 15,472 16,258 Closing cash 1,539 1,884 1,937 3,160 2,415 Long term loan 9,041 8,880 14,603 16,969 17,267 Source: Company, Nirmal Bang Institutional Equities Research FCCBs 5,000 4,353 - - - Exhibit 23: Key Ratios Short-term loan 9,177 11,914 20,111 23,786 29,254 Y/E March FY09 FY10 FY11 FY12E FY13E Total loans 23,218 25,147 34,714 40,755 46,520 Adj. EPS (Rs/share) 2.1 1.3 1.2 0.8 1.5 Deferred tax (liability)/assets 1,132 1,426 1,665 1,665 1,665 Operating ratios (%) Total liabilities 34,398 41,745 51,601 57,892 64,443 NWC / total assets 0.6 0.6 0.7 0.7 0.7 Gross block 16,828 18,142 19,875 21,875 23,874 Asset turnover 1.0 1.0 0.9 0.9 0.9 Less: Depreciation 5,546 6,645 8,032 9,713 11,547 Fixed asset turnover 2.1 2.1 2.1 2.2 2.3 Net block 11,282 11,497 11,843 12,162 12,327 Turnover days Capital WIP 464 349 257 257 257 Inventory turnover 338.5 366.1 401.2 400.0 381.0 Investments 3,655 4,087 5,313 7,313 8,813 Loans advances turnover 0.5 0.3 0.2 0.5 0.5 Inventories 30,731 36,548 44,991 51,961 57,689 Creditors 88.9 114.8 124.4 125.0 125.0 Debtors 47 27 27 67 79 Working capital cycle 236.0 241.9 238.7 256.4 238.6 Cash & bank balance 1,539 1,884 1,937 3,160 2,415 Valuation ratios Loans & advances 8,072 11,460 13,948 16,238 18,927 PE ratio (x) 14.0 33.9 24.8 34.2 19.4 Other current assets 38 48 58 55 64 Price/sales (x) 0.2 0.2 0.4 0.4 0.3 Total current assets 40,426 49,965 60,960 71,480 79,173 Price / BV (x) 1.8 1.2 1.2 1.1 1.1 Creditors 19,778 22,241 26,066 32,596 35,427 EV/sales (x) 0.8 0.8 1.2 1.2 1.1 Provisions 1,651 1,910 706 706 706 EV/EBITDA (x) 6.7 7.2 9.3 9.3 8.9 Total current liabilities 21,429 24,150 26,772 33,302 36,133 Margins (%) Net current assets 18,997 25,815 34,188 38,178 43,040 EBITDA margin 13.0 12.2 13.2 12.5 12.6 Total assets 34,398 41,745 51,601 57,892 64,443 PBT margin 5.0 3.3 2.7 1.5 2.3 Source: Company, Nirmal Bang Institutional Equities Research Net margin 3.7 2.2 1.7 1.1 1.6 Returns (%) RoCE 13.5 11.6 11.6 10.8 11.3 RoNW 12.5 4.1 4.7 3.3 5.7 Gearing ratios Net debt/ equity (x) 2.2 1.5 2.2 2.4 2.7 Total debt/equity (x) 2.3 1.7 2.3 2.6 2.9 Source: Company, Nirmal Bang Institutional Equities Research

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IVRCL Infrastructure 26 September 2011

Reuters: IVRC.BO Bloomberg: IVRC IN Project Execution To Gain Momentum BUY IVRCL Infrastructure, a well established construction company with an order Sector: Infrastructure

backlog of Rs230bn, which is 3.8x FY11revenue, provides strong revenue visibility. Project execution is poised to pick up from 2HFY12, driven by CMP: Rs38 commencement of billing in three new projects, increase in shorter execution cycle projects in total order book and increase in sub-contracting post stability Target Price: Rs59 in interest rates, which will drive 17% yoy revenue growth and 32% yoy earnings Upside: 55% growth during FY13. The company is also in advance stage of talks for sale of stake in the special purpose vehicle of IVRCL Assets & Holding (IVRCLAH) and Amit Srivastava monetisation of real estate, which would ease funding needs. We assign a Buy [email protected] rating and a target price of Rs59 to the stock based on SOTP valuation. +91-22-3926 8116 Order backlog at 3.8x; strong revenue visibility: Despite decline in order inflow by 45% during FY11, the company has diversified order book of Rs230bn comprising Nitin Arora 38% water and irrigation projects, 22% building projects, 29% road projects and 11% [email protected] oil and power projects. This works out to 3.8x of order book-to-bill (BTB) ratio on FY11 +91-22-3926 8169 revenue, which provides strong revenue visibility for next three years. Based on pre- Initiating Coverage Initiating qualification and a track record in order inflow, the order backlog is estimated to show Key Data a CAGR of 17% in the next two years to Rs 296bn by the end of FY13. Current Shares O/S (mn) 267.0 Execution rate poised to improve: We expect project execution to pick up from Mkt Cap (Rsbn/USbn) 10.0/0.20 2HFY12, driven by commencement of billing in three new projects, increase in shorter 52 Wk H / L (Rs) 174/31 execution cycle projects and the rise in sub-contracting post stability to interest rates, which will drive revenue up 17%yoy and earnings 32% yoy during FY13. Daily Vol. (3M NSE Avg.) 5,195,842 Stake sale of SPV or land monetisation to ease liquidity: BOT projects under construction require cumulative equity contribution of around Rs10bn by IVRCLAH over the next two-three years. The company is in advanced stage of talks for Share holding (%) 3QFY11 4QFY11 1QFY12 monetisation of land assets and dilution of stake at the SPV level to meet the equity Promoter 9.5 9.5 935 requirement. We believe this would ease the company’s liquidity situation. FII 57.9 51.2 49.3 Attractive valuation: We assign a Buy rating and a target price of Rs59 to the stock DII 5.3 5.6 4.0 based on SOTP valuation. During the past one year, the stock has corrected by Corporate 15.6 18.8 20.8 around 78% and is currently trading at a one-year forward PE ratio of 6x and a P/BV of 0.5x, near its historical low touched during the Lehman crisis, which is not justified. General Public 11.7 14.9 16.5 We have valued the core construction business at a PE multiple of 8x, which is on the lower side of historical PE multiple, contributing Rs52 to our TP. The company has two One Year Indexed Stock Performance subsidiaries, IVRCLAH and Hindustan Dorr Oliver (HDO), which are valued at a 25% discount to their market price.

Y/E Mar (Rsmn) FY09 FY10 FY11 FY12E FY13E Net sales 48,819 54,929 56,515 63,748 74,998 YoY (%) 33.4 12.5 2.9 12.8 17.6 EBITDA 4,218 5,319 5,146 5,487 6,585 EBITDA margin (%) 8.6 9.7 9.1 8.6 8.8

Net profit 2,260 2,111 1,579 1,350 1,777 YoY (%) 7.4 (6.6) (25.2) (14.5) 31.6 EPS (Rs) 8.7 7.9 5.9 5.1 6.7 Price Performance (%) PE ratio (x) 4.2 4.7 6.3 7.3 5.6 1 M 6 M 1 Yr P/BV (x) 0.5 0.5 0.5 0.5 0.4 RoCE (%) 10.5 11.8 9.6 9.0 9.9 IVRCL 1.6 (49.3) (77.8) RoE (%) 13.7 11.5 8.2 6.6 8.1 Nifty Index (1.6) (11.2) (18.3) Source: Company, Nirmal Bang Institutional Equities Research Source: Bloomberg

Institutional Equities

Valuation at historical bottom We assign a Buy rating and a target price of Rs59 to the stock based on SOTP valuation. The core construction business is valued at a PE ratio of 8x, which is at the lower side of historical PE multiple and contributes Rs53 to our target price. IVRCL Infrastructure has two subsidiaries - IVRCLAH and Hindustan Dorr Oliver (HDO) - valued at a 25% holding discount to their market price. At the current market price of Rs.38, IVRCL Infrastructure is trading at a PE multiple of 6x and EV/EBITDA multiple of 5x FY13 earnings. We believe the stock is providing a good investment opportunity for investors. Exhibit 1: SOTP valuation Segment Basis Multiple (x) Value (Rsmn) Value per share (Rs) Core construction FY13E, PE (x) 8.0 13,861 53 IVR prime CMP 25% 1,321 3 HDO CMP 25% 627 3 Total fair value - - - 59 Source: Company, Nirmal Bang Institutional Equities Research Trading at near historical low P/B, PE Historically, IVRCL Infra has traded at a five year average PE of 22x and P/BV of 2.2x. During the past one year, the stock has corrected by around 78% on concerns over rising interest rates, lack of order inflow and decline in profitability. It is currently trading at a one-year forward PE of 6x and P/BV of 0.5x on FY13 earnings, near its historical low touched during the Lehman crisis, which is not justified. Hence, we have valued the core business at 8x, which is in the lower range of its EPC construction business. Exhibit 2: P/BV trend Exhibit 3: PE ratio trend

(x) (x) 5.0 40 4.5 35 4.0 30 3.5 3.0 25 2.5 20 2.0 15 1.5 1.0 10 0.5 5

0.0 0 Sep-06 Sep-07 Sep-08 Sep-09 Sep-10 Sep-11 Sep-06 Sep-07 Sep-08 Sep-09 Sep-10 Sep-11 P/B 5Y average P/E 5 year avg Source: Bloomberg, Nirmal Bang Institutional Equities Research Source: Bloomberg, Nirmal Bang Institutional Equities Research

Exhibit 4: EV/EBITDA trend

(x) 25

0 Sep-06 Sep-07 Sep-08 Sep-09 Sep-10 Sep-11 EV/EBITDA 5 year avg Source: Bloomberg, Nirmal Bang Institutional Equities Research

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Investment Arguments Order book/bill at 3.8x; strong revenue visibility IVRCL Infrastructure has an order book of Rs230bn (including L1 orders of Rs23bn and adjusted for cancellation of Rs19bn order from Saudi Arabia due to no work progress), which comprises 38% water and irrigation projects, 22% building projects, 29% transportation projects and 11% power and oil projects. This works out to 3.8x of its order book-to-bill (BTB) ratio on FY11 revenue, which provides strong revenue visibility for the next three years. During FY04-11, the order book showed a CAGR of 45%, but looking at macro factors and short-term hiccups in the award of projects; we expect the order backlog to show a CAGR of 17% in the next two years, to Rs296bn by FY13 (primarily focusing on EPC and BOT segments of road and water projects in Tamil Nadu and overseas projects). Exhibit 5: Order inflow trend (Rsbn) (%) 350 160

300 140 120 250 100 200 80 150 60 40 100 20 50 - - (20) FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY13E Closing order book (Rsbn) Order inflow (Rsbn) Growth (YoY %) Source: Company, Nirmal Bang Institutional Equities Research

Key highlights of order book The company has order backlog of Rs230bn, of which around Rs45bn worth of orders are captive. This gives certainty to a large extent regarding project execution on time. The company is pre-qualified for Rs200bn of orders and is expecting pre-qualification for incremental around Rs100bn of orders. Saudi Arabia order worth Rs19bn has been deleted from the order backlog due to delay in progress of the project. Andhra Pradesh contributes around Rs28bn to the order book, where execution of the project has improved (execution was slow in the past due to delay in payment). Order book mix biased toward shorter execution cycle projects During FY02-09, the order-book mix was biased toward the water segment, which was in the range of 57-69%. At the end of FY10, around 45% of order inflow was from the road segment, which has increased the transportation segment’s contribution from 5% in FY09 to 31% in FY10, while the water segment’s contribution fell to 45% from 69%. During FY11, the contribution of water segment further declined to 38%, transportation segment slightly declined to 29%. Transportation segment orders are primarily captive orders where payment delay risk is lower and execution cycle is shorter. Historically, whenever there is a significant increase in the transportation segment’s order book, revenue growth follows with a lag of one year. Hence, we believe project execution will pick up during 2HFY12, driven by increased contribution from shorter execution cycle orders.

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Exhibit 6: Segment-wise order book trend Exhibit 7: Revenue vs order book of transportation segment

(%) (%) (%) 35 33 80 80 31 69 70 69 70 30 29 70 61 60 27 60 57 56 60 25 22 50 46 45 50 18 38 20 40 40 33 31 30 29 15 27 30 30 22 22 22 22 18 18 9 9 15 18 10 20 12 20 10 10 9 1111 9 9 11 5 10 6 5 5 6 5 10 3 1 2 3 0 0 0 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 Water & Enviornment Buildings & Ind Structures Power Transportation Transportation (% of OB) Revenue (%YoY) (RHS) Source: Company, Nirmal Bang Institutional Equities Research Source: Company, Nirmal Bang Institutional Equities Research Historically, revenue growth has higher correlation with book-to-bill ratio During FY04, the BTB ratio fell from 3.4x in FY03 to 2.1x in FY04, which resulted in a sharp decline in revenue growth from 74% in FY04 to 37% in FY05. The BTB ratio was in the range of 3.5x-3.8x during FY05-08 and revenue growth was in a rising mode until FY08. The BTB ratio fell to 2.8x and revenue growth declined from 59% in FY08 to 33% in FY09. Hence, we believe that historically the BTB ratio has shown a higher correlation with revenue growth. However, during FY10-11, the BTB ratio increased in the range of 3.8x-4.4x, but revenue growth did not pick up. Hence, we believe the project execution will pick up during 2HFY12-13 and revenue growth will also gain momentum. Exhibit 8: Order book to bill vs revenue growth

(x) (%) 4.5 4.4 80

4.0 4.0 70 4.0 3.8 3.8 3.7 60 3.5 3.6 3.5 3.4 50 40 3.0 2.8 30 20 2.5 2.1 10 2.0 0 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY13E Order book to bill Revenue growth (%) Source: Company, Nirmal Bang Institutional Equities Research Exhibit 9: Order book growth, revenue growth trend Exhibit 10: Revenue growth vs order inflow growth

(%) (%) 160 290 140 240 120 100 190

80 140 60 90 40 40 20 - (10) FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY13E (20) FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12E FY13E (60) Revenue growth (%) Orderbook growth (%) Revenue growth (%) Order inflow growth (%) Source: Company, Nirmal Bang Institutional Equities Research Source: Company, Nirmal Bang Institutional Equities Research

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Higher interest rates impacting near-term project execution To curb rising inflation, the Reserve Bank of India raised repo rate by 350bps during January ’2010-September 2011, which is 75bps lower than its previous peak of October 2008. This has adversely impacted the execution of large projects, as the small sub-contractors are not getting bank credit. This led to slippage of revenue by around 20%. As per consensus estimate, the interest rates would go up by another 25bps and then will stabilise at that level (may not correct sharply as in the previous cycle of FY09). Given the fact that interest rates are going to stabilise, subcontracting is likely to increase in coming quarters which will improve project execution. Exhibit 11: Sub-contracting revenue declining

(bn) 25 20.5 20 18.9

14.1 15 12.5 11.8 10.8 11.1 10.5 11.2 10 4.4 5 3.1 3.6 1.6 2.6 1.9 1.7 1.9 1.8

10 10 11 11 11 12 10 10 11

QFY QFY QFY QFY QFY QFY QFY QFY QFY

2 3 1 2 3 1 1 4 4 Revenue Subcontracting revenue Source: Company, Nirmal Bang Institutional Equities Research BOT assets IVRCL Infrastructure has a portfolio of 11 BOT projects, of which four are operational. Three operational road projects contributed toll revenue of Rs2.4mn/day, which is below the initial estimate of the management. From September 2011, the company will enforce the toll hike which is linked to WPI and this will spur revenue growth in the coming quarters. Chennai desalination project had a revenue of Rs4.4mn/day during 1QFY12. Overall, the three road projects and Chennai desalination project contributed Rs620mn for the quarter. Apart from that, the company has three projects under construction- Baramati Phalthan (30% complete), Chengaplli project (10% complete), and Indore-Gujarat project (50% complete). Sion-Panvel and Chandrapur projects have achieved financial closure and the construction will start in coming quarters. Goa-Karnataka project has not yet achieved financial closure and it will take another six months to start construction. Exhibit 12: BOT portfolio operational status Projects Jalandhar-Amritsar Salem-Kumarapalayam Kumarapalaym- Chenagmpalli Chennai water Baramati-Phaltan Stake(%) 100 100 100 75 75 Project type Toll Toll Toll Two-part tariff Toll Concession 17.5 years 20 20 - 25 Construction period 2.5 years 2 3 - - Grant structure Postive grant -Rs394mn - - - Positive grant of Rs1,220 mn Project status operational operational operational operational 35% construction completed Maharashtra/Goa Karanji-Wani-Ghuggus- Projects Chengapalli-walayar Indore-Gujarat Sion-Panvel epressway border Chandrapur Stake (%) 100 100 51 100 100 Other partners - - Kakade infra - - Project type Toll Toll Toll Toll Toll Conession 25 27 18 years and 9 months 23 years 30 years Construction period - - - -3 years 2 years Positive grant of Grant structure Rs360mn revenue share Rs230 mn revenue share No grant Rs2318.4 mn VGF Rs6647.2 mn Concession 20% construction 55% construction Financial closure achieved , Concession agreement to Project status agreement signed, completed completed initial work started be signed financial closure soon Source: Company, Nirmal Bang Institutional Equities Research

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Stake sale in SPV and monetisation of real estate to meet equity commitment We expect BOT projects under construction and at planning stage to require cumulative equity contribution of around Rs10bn over the next 2-3years, of which around Rs1.8bn is required in FY12. The company is looking to raise funds on its own via monetisation of land assets, securitisation of receivables from operating projects and dilution at the project SPV level to meet this equity requirement. The management has given an indication that it is already in advanced stage of talks with investors for the same. Exhibit 13: BOT asset portfolio Project (Rsmn) Project cost Stake (%) Equity Equity cont CoD Concession period Chennai desalination 5,679 75% 1729.8 1,297 Operational 25 years Jalandhar-Amritsar 3,431 100% 671 671 Operational 20 yrs Kumarapalayam–Chengalpalli 4,215 100% 650 650 Operational 20 yrs Salem -Kumarapalayam 5,020 100% 800 800 Operational 20 yrs Baramati to Phaltan 3,820 75% 690 518 FY14 25 Years Indore-Gujarat border 15,237 100% 3,809 3,809 FY14 25 yrs Chengapalli-Wallayar 11,230 100% 3,260 3,260 FY14 27 yrs Goa-Karnataka 31,000 100% 7,200 7,200 FY15 23 yrs Sion-Panvel 14,500 51% 3,000 1,530 FY14 17.5 yrs IOC tank 30,000 38% 3,940 1,497 - 15 Years Karanji - Ghuggus -Chandrapur 7,500 100% 1,300.0 1,300 FY15 30Years Total 131,631 - 25,750 21,232 - - Source: Company, Nirmal Bang Institutional Equities Research

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Hindustan Dorr Oliver: Synergy improves scope of work Hindustan Dorr Oliver, a subsidiary of IVRCL Infrastructure (55% stake), is engaged in the business of providing EPC, manufacturing and engineering services, to various industry segments like mineral processing and beneficiation, pulp and paper processing, fertiliser and environmental management. In order to increase its product portfolio and to gain international presence, HDO, in 4QFY10, acquired Davy Markham, the Sheffield, UK-based heavy engineering company which designs, manufactures and assembles large equipment used for mining, nuclear, power generation, oil and gas exploration and tunnel boring. IVRCL Infrastructure was able to get synergies post acquisition of HDO due to its expertise in designing and installing equipment, which helped the company to improve margins and to bid for higher qualification engineering work. HDO stock corrected by 80% on bleak order book The company’s order book in 1QFY12 stood at Rs16bn (1.7x FY11 revenue.), dominated by the mineral division (50%) followed by water and manufacturing divisions. The company witnessed a fall in revenue in 1QFY12 by 41% and profit also took a hit, declining by 64%, due to delay in billing as it did not get the design and engineering clearances for projects of clients like GAIL (India) and Bharat Petroleum Corporation. During the quarter, a positive factor was that the company won a project worth Rs3.8bn from Konkola Copper Mines in Zambia and also bid for few other clients like Hutti Gold Mines and Uranium Corporation. Going forward, we believe the pace of order inflow and increase in execution of lumpy orders would be the main triggers, as in the last three-four quarters we have not seen any major pick-up in revenue and order book despite repeated assurances given by the management.

Exhibit 14: Financial summary Y/E March (Rsmn) FY08 FY09 FY10 FY11 Net sales 3,042 5,153 8,631 9,445 EBITDA 331 511 1,009 904 EBITDA margin (%) 10.9 9.9 11.7 9.6 PAT 226 302 555 538 Source: Company, Nirmal Bang Institutional Equities Research Company background IVRCL Infrastructures & Projects is one of the leading civil construction companies in India having a strong presence in water, transportation and building projects business, industrial structures and also power transmission projects. The company has created a niche for itself in project execution skills across the segment and has a presence in most of the states in India. It has a well-diversified and de-risked business mix, with a presence across various sectors and regions. The company has shown a 39% CAGR in terms of revenue and 30% in terms of earnings over the past five years.

Source: Company, Nirmal Bang Institutional Equities Research

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Exhibit 15: Company structure

Source: Company, Nirmal Bang Institutional Equities Research

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1QFY12 performance Revenue growth was flat due to lower sub-contracting of large projects (sub-contractors are not getting sufficient funds from banks). Project execution rate declined by 5-10%, implying loss of revenue worth Rs 2bn. EBITDA margin slipped by 170bps to 7.4% due to slower project execution, sharp increase in raw material costs and non-billing of some water segment projects, where billing of cost escalation is allowed only after 24 months. Net profit declined by 85% to Rs42mn due to lower EBITDA margin and higher interest costs. Current order book at Rs230bn (includes L1 orders worth Rs23 bn and removal of Saudi Arabia project worth Rs19 bn), is down 9.8% YoY. Water and irrigation projects accounted for 38% of the order book, followed by 22% share of building projects and 29% of transportation projects. Exhibit 16: Quarterly performance Y/E March (Rsmn) 1QFY11 4QFY11 1QFY12 YoY (%) QoQ (%) Net sales 11,061 20,516 11,219 1.4 (45.3) Other Income 11.4 55.4 72.31 - 30.5 Total Income 11,072 20,571 11,291 2.0 (45.1) Total expenditure 10,056 18,741 10,387 3.3 (44.6) EBITDA 1,005 1,775 832 (17.2) (53.1) EBITDAM (%) 9.1 8.7 7.4 - - Depreciation 157 217 227 44.6 4.6 Interest 452 656 628 38.9 (4.3) PBT 406 956 49 (87.9) (94.9) Tax 159 308 6.7 (95.8) (97.8) Reported PAT after tax 281 649 42 (85.1) (93.5) Source: Company, Nirmal Bang Institutional Equities Research Financial analysis Revenue growth to pick up in FY13 During FY11, net sales rose by just 3% to Rs56.4bn (showing a CAGR of 39% over FY04-10) due to project delay (land clearance and payment issues), slower execution during state assembly elections and lower sub- contracting due to non-availability of credit from banks. We expect project execution to pick up from 2HFY12, driven by start of billing in three new projects, increase in shorter execution cycle projects and increase in sub- contracting post stability to interest rates. Based on all this, net sales would show a CAGR of 15 % between FY12 and FY13 to Rs 63.7bn and 74.9bn, respectively. Exhibit 17: Segment-wise revenue Exhibit 18: Revenue growth trend

FY11 (%) (%) 5.4 80 75.0

70 63.7 16.0 60 54.9 56.5 48.8 50 40 36.6 44.5 30 23.1 20 15.0 10.4 7.6 10 4.4

22.2 0 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 Water & Enviornment Buildings & Ind Structures Power Transportation Revenue (Rs bn) YoY (%) Source: Company, Nirmal Bang Institutional Equities Research Source: Company, Nirmal Bang Institutional Equities Research

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Operating margin under pressure The company reported EBITDA margin in the range of 9-10% and EBITDA showed a CAGR of 31% over FY06-11. We expect EBITDA margin to be under pressure due to rising contribution of low margin projects and two projects where cost escalation can’t be passed on for two years. EBITDA margin is estimated to decline by 50bps to 8.6% in FY12 and then improve by 20bps to 8.8% in FY13. EBITDA is expected to show a CAGR of 13% to Rs 5.5bn in FY12 and Rs6.6bn in FY13, respectively. Net profit is expected to decline in FY12 by 14% due to lower operating margin and higher interest rates but grow by 32% in FY13. Exhibit 19: EBITDA margin trend Exhibit 20: EBITDA trend

(%) 10.5 10.0 9.5 9.0 8.5 8.0 7.5 7.0 6.5

6.0

FY FY

FY FY FY FY FY FY FY FY FY FY

12 13

02 03 04 06 08 09 10 11 05 07 E E Source: Company, Nirmal Bang Institutional Equities Research Source: Company, Nirmal Bang Institutional Equities Research Improvement in return ratios During FY07-11, the company's return ratios were in declining mode due to equity dilution and withdrawal of Section 80A tax benefit. We expect the RoE to decline by 150bps to 6.7% in FY12 due to fall in operating margin and higher interest rates. In FY13, the RoE is likely to improve by 150bps to 8.1% based on 32% growth expected in PAT and assumption of no equity dilution. Exhibit 21: Return ratio trend

(%) 15

5 FY09 FY10 FY11 FY12E FY13E ROCE (%) ROE (%)

Source: Company, Nirmal Bang Institutional Equities Research

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Financials

Exhibit 22: Income statement Exhibit 23:Cash flow Y/E March (Rsmn) FY09 FY10 FY11 FY12E FY13E Y/E March (Rsmn) FY09 FY10 FY11 FY12E FY13E Net sales 48,819 54,929 56,515 63,748 74,998 EBIT 3,971 4,925 4,508 4,601 5,559 Growth (%) 33.4 12.5 2.9 12.8 17.6 Inc./(dec.) in working capital (2,878) (2,481) (1,659) (1,401) (1,739) Consumption of materials 16,578 20,211 19,897 23,002 26,343 Cash flow from operations 1,093 2,443 2,848 3,200 3,820 Construction expenses 25,194 26,070 27,299 31,119 37,155 Other income (745) (165) (97) 196 228 Employee costs 1,953 2,026 2,623 2,546 3,040 Other expenditure 876 1,303 1,471 1,594 1,875 Depreciation 473 543 758 886 1,026 Total expenditure 44,601 49,610 51,369 58,261 68,413 Interest paid (-) (1,233) (1,637) (2,182) (2,782) (3,135) EBITDA 4,218 5,319 5,146 5,487 6,585 Tax paid (-) (1,018) (1,293) (1,651) (665) (875) Growth (%) 16.6 26.1 (3.2) 6.6 20.0 Dividends paid (-) (189) (215) (246) (126) (166) EBITDA margin (%) 8.6 9.6 9.1 8.6 8.7 Net cash from operations (1,620) (323) (569) 709 898 Interest costs 1,233 1,637 2,182 2,782 3,135 Capital expenditure (-) (1,306) (720) (1,571) (2,000) (2,000) Depreciation 473 543 758 886 1,026 Net cash after capex (2,926) (1,043) (2,139) (1,291) (1,102) Other income 299 149 120 196 228 Inc./(dec.) in borrowings 3,221 1,150 4,791 2,096 3,458 Profit before tax 2,811 3,288 2,326 2,015 2,652 PBTM (%) 5.8 6.0 4.1 3.2 3.5 Inc./(dec.) in investments (1,058) (522) (2,714) (635) (698) Tax 478 1,177 747 665 875 Equity issue/(buyback) 0 1,050 (150) - - RPAT (before E.O. item) 2,333 2,111 1,579 1,350 1,777 Others - - - - - E/O items (73) - - - - Cash from financial activities 2,163 1,677 1,927 1,461 2,760 Adj. PAT 2,260 2,111 1,579 1,350 1,777 Change in cash (763) 635 (212) 170 1,658 Growth (%) 7.3 (6.6) (25.2) (14.5) 31.6 Opening cash 1,771 1,009 1,643 1,432 1,601 Source: Company, Nirmal Bang Institutional Equities Research Closing cash 1,009 1,643 1,432 1,601 3,260 Source: Company, Nirmal Bang Institutional Equities Research Exhibit 24: Balance Sheet Exhibit 25:Key Ratios Y/E March (Rsmn) FY09 FY10 FY11 FY12E FY13E Y/E March FY09 FY10 FY11 FY12E FY13E Equity share capital 267 534 534 534 534 EPS (x) 8.7 7.9 5.9 5.1 6.7 Reserves & surplus 17,839 17,999 19,340 20,563 22,174 Valuation Net worth 18,106 18,533 19,874 21,097 22,708 PE ratio (x) 4.2 4.7 6.3 7.3 5.6 Long-term debt 10,185 12,688 16,295 22,813 25,550 Price /CEPS (x) 1.8 3.7 4.2 4.4 3.5 Short- term debt 3,410 3,445 4,663 241 962 Price /BV (x) 0.5 0.5 0.5 0.5 0.4 FCCBs 385 - - - - EV /sales (x) 0.5 0.4 0.5 0.5 0.4 Total debt 13,980 16,133 20,958 23,054 26,512 EV /EBITDA (x) 5.4 4.6 5.7 5.7 5.0 Deferred tax (liability) / assets 117 125 87 87 87 Margins (%) Sources of funds 32,203 34,791 40,918 44,237 49,306 Operating margin 8.6 9.7 9.1 8.6 8.8 Gross block 6,624 7,502 9,242 11,242 13,242 EBIT margin 8.3 9.0 8.0 7.5 7.7 Less: Depreciation 1,417 1,838 2,324 3,210 4,237 PBT margin 5.8 6.0 4.1 3.2 3.5 Net block 5,207 5,664 6,918 8,032 9,006 Net margin 4.8 3.8 2.8 2.1 2.4 Investments 3,892 6,138 6,347 6,982 7,680 Returns (%) Inventories 8,892 2,447 2,732 10,479 11,918 RoCE 10.5 11.8 9.6 9.0 9.9 Debtors 11,430 19,464 19,298 16,769 19,556 RoNW 13.7 11.5 8.2 6.6 8.1 Cash & bank balance 1,009 1,643 1,432 1,601 3,260 Efficiency ratio Loans & advances 16,804 23,451 31,062 21,517 21,262 Asset T/O 1.5 1.6 1.4 1.4 1.5 Current assets 38,135 47,005 54,523 50,367 55,994 Turnover ratio Current liabilities 14,787 23,924 26,727 21,059 23,249 Debtors T/O 85.5 129.3 99.4 96.0 95.2 Provisions 440 445 403 344 384 Creditors T/O 30.3 43.6 34.0 33.0 31.0 Current liabilities 15,226 24,369 27,130 21,403 23,633 Inventory T/O 66.5 16.3 17.6 60.0 58.0 Net current assets 22,909 22,635 27,393 28,964 32,361 DuPont Application of funds 32,203 34,791 40,918 44,237 49,306 NPM (PAT/sales) 4.78 3.84 2.79 2.12 2.37 Source: Company, Nirmal Bang Institutional Equities Research Total asset T/O 1.52 1.58 1.38 1.44 1.52 Equity multiplier 1.78 1.88 2.06 2.10 2.17 Gearing ratios Net debt/ equity (x) 0.5 0.5 0.7 0.7 0.7 Total debt/equity (x) 0.8 0.9 1.1 1.1 1.2 Source: Company, Nirmal Bang Institutional Equities Research

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Disclaimer

Stock Ratings Absolute Returns

BUY > 15%

HOLD 0-15%

SELL < 0%

This report is published by Nirmal Bang’s Institutional Equities Research desk. Nirmal Bang has other business units with independent research teams separated by Chinese walls, and therefore may, at times, have different or contrary views on stocks and markets. This report is for the personal information of the authorised recipient and is not for public distribution. This should not be reproduced or redistributed to any other person or in any form. This report is for the general information for the clients of Nirmal Bang Equities Pvt. Ltd., a division of Nirmal Bang, and should not be construed as an offer or solicitation of an offer to buy/sell any securities.

We have exercised due diligence in checking the correctness and authenticity of the information contained herein, so far as it relates to current and historical information, but do not guarantee its accuracy or completeness. The opinions expressed are our current opinions as of the date appearing in the material and may be subject to change from time to time without notice.

Nirmal Bang or any persons connected with it do not accept any liability arising from the use of this document or the information contained therein. The recipients of this material should rely on their own judgment and take their own professional advice before acting on this information. Nirmal Bang or any of its connected persons including its directors or subsidiaries or associates or employees or agents shall not be in any way responsible for any loss or damage that may arise to any person/s from any inadvertent error in the information contained, views and opinions expressed in this publication.

Institutional Equities

Team Details:

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Rahul Arora CEO [email protected] +91 22 3926 8098 / 99

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Nirmal Bang Equities Pvt. Ltd.

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