CONSTRUCTION Mumbai Metro: Line 2B and 4 Bids Opened

SECTOR UPDATE

CONSTRUCTION Mumbai Metro: Line 2B and 4 bids opened

India Equity Research | Infrastructure - Construction

Media reports indicate that the Mumbai Metropolitan Region Development Authority (MMRDA) has opened the bids for civil construction of Mumbai Metro Lines 2B and 4, spanning ~56km. Of the 9 packages, L&T and Reliance Infra have emerged as the lowest bidders for 2 packages each, while J Kumar (JKIL), NCC, Simplex Infra (Simplex), JMC Projects and Tata Projects are L1 in 1 package each. Post our recent meeting with MMRDA, we had highlighted “Mumbai Metro: Opportunities of windfall” that Mumbai is probably seeing largest and amongst the fastest metro rail expansion programmes in the world currently. Opening of bids for Lines 2B and 4 are expected to boost pace of network development. We expect an investment of ~INR600bn in under-development projects and further ~INR250bn in projects yet to be awarded. Major beneficiaries include NCC, JKIL, Simplex and Texmaco Rail (Texmaco) in EPC space; ABB India and Siemens for systems contracts; and Titagarh Wagons and BEML for rolling stock.

Mumbai Metro: Expanding wings; Line 2B and 4 bids opened As per media reports, MMRDA has opened bids for civil construction for Lines 2B and 4 and the 7 players highlighted above have emerged as the lowest bidders. Interestingly, these companies have quoted at least 20% above the estimated project cost. Our channel checks suggest that this was due to certain modifications incorporated in the project scope (post bid invitation), which are likely to lead to higher construction costs. Overall, bids for the 9 packages at ~INR56bn are ~24% higher than estimated cost of ~INR45bn. We believe this can delay start of work by a few months since the state government will have to rework the funding arrangements in light of higher-than- expected bids by the contractors.

Ordering to remain strong

In past 2 years, bids for civil works for Lines 2A, 2B, 3, 4 and 7 were awarded / opened. The systems & rolling stock contracts for Line 3 (~INR40bn), Lines 2A, 2B & 7 (~INR100bn) and Line 4 (~INR40bn) are expected to be awarded over next year. Apart from these corridors, the Maharashtra government is expected to approve 2 new routes, viz., Line 5 (24km, ~INR84bn) and Line 6 (14km, ~INR67bn soon. In addition, plans to extend some of the existing lines (Lines 4 & 7) are under consideration. Thus, we believe ordering in Mumbai Metro will remain robust over next few years.

Parvez Akhtar Qazi Outlook: Multiple beneficiaries of the metro boom +91-22-4063 5405 [email protected] Rising spend on Metro rail is a key component of our thesis of capex recovery, led by public sector (“Capex recovery: Here it comes!”). Metro rail is a boon for EPC players Rita Tahilramani like L&T (‘BUY/SP’), NCC (BUY), JKIL (BUY), Simplex (BUY) and Texmaco Rail (‘BUY’). +91 22 6623 7440 [email protected] With ~INR180bn systems/rolling stock opportunities over CY17/18 and government’s recent directive to prioritise domestic procurement in metro projects, ABB (‘BUY/SO’), Voltas (‘BUY/SO’) and Siemens (‘HOLD/SP’) for systems contracts and Titagarh Wagons (‘BUY’) and BEML (‘Not Rated’) for rolling stock works, are likely to benefit. August 2, 2017 Edelweiss Research is also available on www.edelresearch.com, 1 Edelweiss Securities Limited Bloomberg EDEL , Thomson First Call, Reuters and Factset. Infrastructure - Construction

Civil construction bids opened for Mumbai Metro Lines 2B and 4 MMRDA had invited bids for civil construction for Lines 2B and 4 in January 2017. There were a total of 9 packages for which bids were invited – 4 in Line 2B and 5 in Line 4. Pre- qualification for these projects had been completed and MMRDA had announced in May 2017 that the following companies had shown interest in bidding for these 2 lines:

 L&T had shown interest in 1 package of Line 2B and 5 packages of Line 4

 Afcons was in the fray for 1 package of Line 2B and 2 packages of Line 4

 GHEC-RCC-JV-China was interested in 1 package of Line 2B

 NCC had applied for 2 packages each of Line 2B and Line 4

 JMC had also applied for 2 packages each of Line 2B and Line 4

 JKIL had applied for 2 packages of Line 2B and 1 package of Line 4

 Simplex was interested in 2 packages of Line 2B

 Reliance-RdE-JV was in the fray for 3 packages each of Line 2B and Line 4

 ITD Cementation had applied for 1 package each of Line 2B and Line 4

 CHECTPL was interested in 2 packages of Line 2B and 3 packages of Line 4

Media reports indicate that these bids have now been opened. Lowest bidders for each of the 9 packages are as given below:

Table 1: Details of civil construction contracts of Line 2B Length Estimated Actual bid Difference Civil construction Civil construction packages Lowest bidder (km) Cost (INR bn) (INR bn) (%) Cost (INR bn/km)

ESIC Nagar - Khira Nagar (viaduct and 5 stations) 6.2 4.7 5.8 24.7 J Kumar 0.9 Saraswat Nagar - ILFS (viaduct and 6 stations) 6.5 5.1 6.3 23.2 Simplex Infra 1.0 MTNL Metro - Chembur (viaduct and 6 stations) 5.9 4.6 5.8 24.8 Reliance Infra 1.0 Diamond Garden - Mandale (viaduct and 5 stations) 5.1 4.0 5.1 27.0 JMC Projects 1.0 Total 23.5 18.4 23.0 24.8 0.8 Source: Media reports, Government documents, Edelweiss research

Table 2: Details of civil construction contracts of Line 4 Length Estimated Actual bid Difference Lowest Civil construction Civil construction packages (km) Cost (INR bn) (INR bn) (%) bidder Cost (INR bn/km) Bhakti Park Metro - Amar Mahal Junction (viaduct 5.4 5.2 6.2 19.6 NCC 1.2 and 6 stations) Garodia Nagar - Vikhroli Metro & Surya Nagar 6.4 5.5 6.9 26.9 Reliance Infra 1.1 (viaduct and 7 stations) Gandhi Nagar - Sonapur (viaduct and 6 stations) 6.7 5.4 6.7 24.3 L&T 1.0 Mulund Fire Station - Majiwada (viaduct and 7 6.1 5.3 6.6 24.3 L&T 1.1 stations) Kapurbawdi - Kasaradavali (viaduct and 6 stations) 6.8 5.5 6.7 23.2 Tata Projects 1.0 Total 31.4 26.8 33.1 23.7 1.1 Source: Media reports, Government documents, Edelweiss research

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Déjà vu: Bids higher than estimated costs All players which have emerged as L1 bidders have quoted at least 20% above the estimated project cost (refer table 1 & 2). Overall, for the 9 packages of Lines 2B and 4, the bids at ~INR56bn, are ~24% higher than the estimated cost of ~INR45bn. Our channel checks suggest that this was due to certain modifications incorporated in the project scope (post bid invitation), which are likely to lead to higher construction costs. Hence, the bidders put bids that reflected the revised project requirements.

Something similar had happened during awards of Mumbai Metro Line 3 when the bids made by various civil contractors at ~INR196bn were way higher than the initial cost estimate of ~INR122bn. As a result, the government had to take an approval from Japan International Cooperation Agency (JICA), which was funding the project, for revision in project cost. Also, there was modification in project scope as well as renegotiation with the bidders; consequently, there was a delay of a couple of quarters in project awards (post opening of bids) and the project was finally awarded with a revised civil construction cost of ~INR181bn.

Chart 1: Likely funding structure of Line 2B (INR110bn) Chart 2: …of Line 4 (INR145bn)

State Govt AIIB State Govt 23% 27% 25%

ADB 43%

MMRDA MMRDA 34% 48%

Source: Government documents, Media articles, Edelweiss research Note: ADB: Asian Development Bank; AIIB: Asian Infrastructure Investment Bank

It remains to be seen what the future course of action will be of the Maharashtra Government regarding Lines 2B and 4 as to whether it will modify the project scope or renegotiate with bidders (with the bids substantially higher than estimates). This may lead to some delays in formal award of the projects.

However, we believe even if there is a delay, it will be lower than that witnessed during Line 3 awarding since the extra funding required for Lines 2B and 4 (~INR11bn) is much lower than it was for Line 3 (~INR59bn) and the state government/MMRDA can definitely fund this on their own. Hence, we expect work on the project to start by CY17 end.

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Substantial awarding opportunity remains in Mumbai Metro The Mumbai Metro master plan, as it stands today, is given below:

Table 3: Current master plan of Mumbai Metro Line Route Length (km) Cost (INR bn) Mode Status Line 1 Versova – Andheri – Ghatkopar 11 43 Elevated Operational Line 2A Dahisar – DN Nagar 19 64 Elevated Under Construction Line 2B DN Nagar – Mankhurd 24 110 Elevated Bids opened Line 3 Colaba – Bandra – SEEPZ 34 231 Underground Under Construction Line 4 Wadala–Ghatkopar-Mulund–Teen Hath 32 145 Elevated Bids opened Naka–Kasarvadavali Line 5 Thane – Bhiwandi – Kalyan 24 84 Elevated Planning stage Line 6 Lokhandwala – Jogeshwari – Kanjurmarg 15 67 Elevated Planning stage Line 7 Andheri (E) – Dahisar (E) 16 62 Elevated Under Construction Other E.g. Dahisar – Mira Road – Bhayandar, 27 Concept stage lines Wadala – GPO etc Total 200 Source: Government documents, Edelweiss research

Currently, only Line 1 is operational. In CY16, civil construction work for the following 3 lines was awarded:

 Line 2A: Civil construction work was awarded towards mid 2016. Work on the line began in November 2016, and is targeted to be completed in 2019.  Line 3: Civil construction contracts for 7 packages worth ~INR181bn were awarded in July 2016.  Line 7: MMRDA had awarded the civil construction contracts for 3 packages worth ~INR9.6bn in May 2016. Work on the project began in August 2016 and is targeted to be completed by 2019.

Post finalisation of civil construction bids for Lines 2B and 4, systems and rolling stock contracts for the following lines are likely to be awarded:

 Lines 2A, 2B and 7: The systems and rolling stock contracts for Lines 2A and 2B will be awarded along with Line 7. Total cost of the systems and rolling stock contracts is estimated to be ~INR100bn. MMRDA has already started the bidding process and expects to award these contracts over next 2-3 quarters.  Line 4: Total cost of the systems and rolling stock contracts for Line 4 is estimated to be ~INR40bn. We expect this to be awarded over next couple of years.  Line 3: The process of awarding the systems and rolling stock contracts is already underway. While the rolling stock contract (comprising 210 coaches) is estimated at ~INR18-20bn, the system contract amounts to ~INR20bn. These contracts are expected to be awarded by Q1CY18.

The contract for rolling stock involves procurement of 31 cars of 8 coaches each, or 248 coaches in total, in first phase. News reports indicate that 6 consortia have already submitted pre-qualification bids for this contract. They include Alstom Transport India- Alstom Transport France; CRRC Nanjing-CRRC Changchun-CRRC International Corp of China, Kawasaki Heavy Industries of Japan; CAF of Spain, Hitachi from Japan, and a consortium of BHEL-Mitsubishi Corp

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Fig. 1: Map of Mumbai Metro network

Source: Government documents, Edelweiss research

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Apart from this, many other corridors are also being planned. Prominent among them being:

 Line 5: This is a proposed elevated line spanning the Thane-Bhiwandi-Kalyan corridor. This is expected to be ~24km long stretch and will cost ~INR84bn. Tenders for carrying out detailed survey and preparation of site plans have already been invited. The project is currently awaiting the state government’s approval post which the bidding process will begin.

 Line 6 – This is a proposed elevated line spanning the Lokhandwala-Jogeshwari-Vikhroli- Kanjurmarg corridor. This ~14.5km long line will cost ~INR67bn. Like Line 5, this project is also currently awaiting state government approval, post which the bidding process will commence.

 Extension of existing projects: Apart from the 2 lines mentioned above, MMRDA is also contemplating extension of existing lines. For instance, Line 7, which would connect Dahisar to Andheri may be extended to Mumbai International Airport (Terminal 2) at one end and Mira Road-Bhayander at the other. The 13km extension to Mira-Bhayander, which may be called Line 9, is estimated to cost ~INR65bn. Similarly, Line 4, which ends at Wadala currently, may also get extended to GPO (to connect Thane to South Mumbai).

We believe MMRDA will take up these extensions once it is through with the lines which have already been approved. Consequently, we expect work on these projects, spanning ~65km to start over next couple of years.

Outlook: Ample opportunities We believe Mumbai Metro network expansion will continue to provide substantial opportunities over next couple of years. We expect an investment of ~INR600bn in under- development projects and a further ~INR250bn in projects yet to be awarded. The opportunities available in various sub-segments are mentioned here below.

 Civil construction: Civil construction contracts worth ~INR204bn were awarded in 2016 for Lines 2A, 3 and 7. We expect EPC contracts for Lines 2B and 4 to be finalised soon, while a further ~INR55-60bn worth of orders can potentially come in future when MMRDA starts work on the ~65km lines, few years down the line.

We believe this will benefit EPC companies with proven expertise in the metro rail space like L&T (‘BUY/SO’), NCC (‘BUY’), JKIL (‘BUY’) and Simplex (‘BUY’). Texmaco Rail (‘BUY’), through its EPC division (erstwhile Kalindee Rail) also undertakes turnkey/EPC jobs in signaling and electrification, track work, optic fibre communication, etc. The company has also ventured into metro rail and has expertise in automatic fare collection systems.

 Systems work: Apart from civil construction, the other major component in the development of a metro network is the systems work which includes signalling and communication systems, power transmission, track laying, baggage handling system, automation control systems, fare collection systems, etc.

For projects which saw award of EPC contracts in 2016 (like Lines 2, 3 and 7), the process of awarding systems contracts is currently underway. This will benefit the engineering and capital goods companies.

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Table 4: Beneficiaries in engineering and capital goods space Companies Segment Railway work profile Turnkey solution L&T Turnkey EPC (complete civil infra, track L&T has garnered sizeable business (INR380 bn in last 3 yrs) laying, electrification, signaling etc.) from DFCC/Metro rail segment in the domestic market. With capex in Metro rail sector likely to stay robust, L&T will remain one of the largest beneficiaries in value terms. Electrical Mechanical ABB India Propulsion system/traction motors, Major order intake to be driven from orders for traction control & protection transformers, propulsion converters, motors, surge arresters, etc. Also, traction substations for AV and DC and power and distribution transformers could be additional opportunity for the company. Siemens India Signaling equipment, propulsion Planned capex for metro rail to be major growth drivers for systems, rail electrification, the company. automation, etc.

Crompton Greaves Signaling, motors The company will benefit from demand for motors and from signaling capex. Air conditioning Voltas AC ventilation Installation of HVAC system

Source: Companies, Edelweiss research

 Rolling stock: Rolling stock contracts (like systems contracts) are generally awarded 6-12 months after the civil construction starts. Hence, we expect rolling stock awards for Lines 2, 3 and 7 to be awarded over next 1 year.

Major beneficiaries of rolling stock opportunities will be companies like Titagarh Wagons (‘BUY’), BEML, Bombardier, Siemens, Alstom etc.

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