Edelweiss Value Scanner 1 Executive Summary Executive Summary India’s road infrastructure woefully inadequate As per the Global Competitiveness Report 2008-09, inadequate infrastructure is the biggest stumbling block in India’s economic growth. While India has the second largest road network in the world, the report ranks it at a dismal 87th spot as far as quality of roads is concerned, way below neighbours China, Pakistan, and Sri Lanka. With the kind of multiplier effect that roads have on economic growth, a quantum increase in investments in roads is paramount to achieve long-term growth targets. Light at the end of the tunnel The National Highway Development Programme (NHDP) is India’s flagship and the world’s largest PPP road development programme. It had hit speed bumps in 2006- 08, primarily due to frequent changes in the regulatory framework and economic slowdown. However, 2009 has come as a breath of fresh air; since December 2008, the National Highway Authority of India (NHAI) has awarded (or is evaluating bids for) 24 projects worth INR 228 bn. NHAI has an ambitious target of awarding 23,000 km of roads during the next two years. It expects to receive bids for 49 projects spread over 5,074 km, worth INR 511 bn by 2009 end. The government has set an ambitious target of building 20 km of road per day. Amidst all this, encouraging signs on credit availability, interest rates and capital markets mean that achieving financial closure (FC) on projects has become considerably easier compared to last year. This infuses us with the confidence that the travails of the past three years are behind us and the project award process is likely to be on the fast track. Size of opportunity at central and state level-humungous The chronic underinvestment in roads over the past 60 years has meant that huge investment is required over the next couple of years to prop up the road infrastructure. At the national level, of the total 54,454 km under the NHDP (including the NHDP Phase IV), 36,926 km of roads are still to be awarded. Overall, the NHAI expects to spend about INR 3,315 bn on completion of the balance part of NHDP. This is in addition to the huge opportunity available for road development at the state level with states like Karnataka (INR 1,770 bn opportunity in 2009-15), Andhra Pradesh, and Gujarat taking steps to improve road infrastructure. Outlook: Good long-term opportunity The government’s seriousness towards road development is evident from the steps taken in the past couple of months to make projects more commercially viable. The major stumbling block now is getting the funding required for the ambitious plans announced- both debt and equity. In our view, cracking the funding code is the key to unlocking the PPP opportunity in the medium term. The sheer scale of government plans means that there are likely to be ample opportunities for every player in the road segment. We initiate coverage on IRB Infrastructure, the leader in the Indian road BOT space, with a ‘BUY’ recommendation. While past has been good, the future promises to be better than ever for the company which has built up an impressive portfolio of lucrative projects. With the focus of this report being on developers, we also feature IVRCL (‘BUY’), Nagarjuna (‘BUY’), GMR (‘REDUCE’), Reliance Infra (‘BUY’), Gammon (‘HOLD’), Sadbhav Engineering (‘NOT RATED’), Madhucon Projects (‘NOT RATED’), and Gayatri Projects (‘NOT RATED’) in this report. 1 Edelweiss Securities Limited Construction Contents At a glance ................................................................................................................. 3 Road infrastructure woefully inadequate ......................................................................... 4 Light at end of tunnel .................................................................................................. 6 Huge opportunity at centre and state levels .................................................................. 18 Time To Think About The Constraints ........................................................................... 26 Foreign Companies in NHDP: Changing Scenario ........................................................... 33 Annexure I: Frequent policy changes and their impact on project award .................... 35 Annexure II: Steps taken to attract more interest for NHDP projects ......................... 36 Annexure III: Work plan (for Aug-09 – Jul 10) for ministry of roads .......................... 37 Annexure IV: National highway opportunity (phase wise) ......................................... 38 BOT Projects Snapshot ............................................................................................... 39 Companies IRB Infrastructure ............................................................................................... 41 Gammon India .................................................................................................... 63 Gayatri Projects .................................................................................................. 71 GMR Infrastructure .............................................................................................. 77 IVRCL Infrastructure ............................................................................................ 83 Madhucon Projects .............................................................................................. 89 Nagarjuna Construction ....................................................................................... 95 Reliance Infrastructure ...................................................................................... 101 Sadbhav Engineering ......................................................................................... 107 2 Edelweiss Securities Limited At aGlance Financials (INR mn) Growth (%) Valuations (x) Price Shares O/S Mkt cap (INR Annualised Annualised EV / Company Reco Revenues EBITDA Net profit Revenues EBITDA Net profit P/E (INR) (mn nos) mn) EPS EPS EBITDA IRB Infra 209 332.4 69,331 Buy FY07 (P) 5,251 2,811 804 2.5 19.5 55.2 58.2 (4.8) 26.0 83.2 FY08 7,327 4,119 1,266 3.4 39.5 46.5 57.5 36.7 20.5 60.9 FY09 9,919 4,374 1,772 5.3 35.4 6.2 40.0 54.4 20.6 39.4 FY10E 19,050 8,039 3,469 10.1 92.1 83.8 95.8 90.0 12.0 20.7 FY11E 30,442 11,139 4,165 12.3 59.8 38.6 20.0 22.2 10.1 17.0 Gammon India 196 107.0 20,977 Hold FY07 18,647 1,852 444 11.3 57.0 19.8 (23.5) (23.5) 10.7 17.3 FY08 23,296 2,092 861 10.9 24.9 13.0 (4.2) (4.2) 9.7 18.1 FY09 36,538 3,304 1,404 9.0 56.8 57.9 1.9 (17.4) 9.1 21.9 FY10E 40,910 3,888 944 8.8 12.0 17.7 (1.6) (1.6) 8.1 22.2 FY11E 46,770 4,481 1,075 8.7 14.3 15.3 13.9 (0.9) 8.1 22.4 IVRCL Infra 387 133.5 51,661 Buy FY07 23,059 2,318 1,415 10.9 54.2 72.6 52.2 25.6 23.1 35.5 FY08 36,606 3,615 2,104 15.8 58.7 56.0 48.8 44.5 16.8 24.5 FY09 48,819 4,218 2,260 16.9 33.4 16.7 7.4 7.4 15.3 22.9 FY10E 62,957 5,777 2,536 18.8 29.0 37.0 12.2 11.0 11.7 20.6 FY11E 77,125 7,232 3,210 23.8 22.5 25.2 26.6 26.6 9.7 16.3 Nagarjuna Const. 153 256.6 39,178 Buy FY07 28,710 2,697 1,156 6.0 56.0 64.4 20.9 19.4 13.3 25.4 FY08 34,729 3,598 1,619 7.2 21.0 33.4 30.7 19.1 11.5 21.3 FY09 41,514 3,737 1,539 6.7 19.5 3.9 (6.2) (6.2) 12.3 22.7 FY10E 47,545 4,564 2,207 7.3 14.5 22.1 21.7 8.5 10.4 20.9 FY11E 56,234 5,511 2,455 9.6 18.3 20.7 31.2 31.2 8.7 16.0 Madhucon Proj. 262 37.0 9,698 Not Rated FY07 5,100 765 415 11.2 49.1 22.0 24.7 24.7 13.5 23.4 FY08 7,380 1,073 473 12.8 44.7 40.2 13.8 13.8 9.9 20.5 FY09 10,254 1,240 469 12.7 38.9 15.5 (0.7) (0.7) 9.7 20.7 FY10E * 13,111 1,658 614 16.6 27.9 33.8 31.0 31.3 7.4 15.7 FY11E * 16,233 1,889 777 21.0 23.8 13.9 26.5 26.2 6.6 12.5 Sadbhav Engg. 850 12.5 10,625 Not Rated FY07 4,901 590 264 24.2 68.2 68.6 90.3 90.3 16.5 35.1 FY08 8,721 964 524 37.1 77.9 63.3 98.7 53.6 12.5 22.9 FY09 10,625 1,083 633 50.6 21.8 12.4 20.8 36.4 11.7 16.8 FY10E * 13,215 1,537 669 53.5 24.4 41.9 5.7 5.7 8.2 15.9 FY11E * 16,069 1,960 821 65.1 21.6 27.5 22.7 21.7 6.7 13.1 Reliance Infra. 1206 225.3 271,598 Buy FY07 57,100 4,975 6,691 29.3 42.3 (31.5) (4.1) (7.0) 57.7 41.2 FY08 63,642 5,471 7,691 32.6 11.5 10.0 14.9 14.9 46.9 36.9 FY09 96,965 5,065 13,432 59.4 52.4 (7.4) 74.6 82.7 43.8 20.3 FY10E 118,068 13,748 14,800 65.7 21.8 171.4 10.2 10.2 15.2 18.4 FY11E 146,493 15,495 15,063 66.9 24.1 12.7 1.8 1.8 13.0 18.0 Edelweiss Securities Limited 3 GMR 143 1822.4 260,599 Reduce FY07 16,967 5,437 2,418 1.1 59.8 21.4 158.2 108.2 46.2 128.7 FY08 22,948 5,985 2,627 1.2 35.2 10.1 8.6 10.9 46.2 116.1 FY09 40,192 10,670 2,771 1.5 75.1 78.3 5.5 24.6 33.2 93.2 FY10E 53,670 14,270 1,796 1.3 33.5 33.7 (35.2) (17.1) 28.6 112.4 Construction FY11E 58,582 20,193 1,198 1.1 9.2 41.5 66.7 (0.2) 21.1 132.4 Gayatri Proj.