india construction sector overweight nifty/sensex:...

Anand Rathi Financial Services, its affiliates and subsidiaries, do and seek to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Disclosures and analyst certifications are located in Appendix 1. Anand Rathi Research India Equities

India I Equities Construction

Sector Report

Jaspreet Singh Arora+9122 6626 6727

[email protected]

Manish Valecha +9122 6626 6552

[email protected]

15 December 2009

India Construction Sector

Order, order, order! Time for a scale change

Overweight

Nifty/Sensex: 5117/17119

Anand Rathi Financial Services, its affiliates and subsidiaries, do and seek to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Disclosures and analyst certifications are located in Appendix 1. Anand Rathi Research India Equities

India I Equities Construction

Sector Report


[email protected]


[email protected]

15 December 2009



Scale change ahead. We estimate our construction coverage universe (excl. JPA) to report 32% earnings CAGR over FY09-12, driven by India’s huge infra spend, better credit availability and leaner balance sheets. The massive infra spend is likely to lead to a scale change in order inflows over the next 12-18 months.

Infra spend – Sustained impetus. India’s infra spend will rise from 6.5% of GDP in FY09 to 9.3% by FY12. Almost half the investments would be in power and roads – construction orders for over 100 GW (Rs1.1trn) and 36,000km (Rs2.6trn) over the next 24-30 months. Over the next 15 months, we expect orders worth Rs0.5trn and Rs1.6trn from power and roads, respectively.

Strong earnings growth. We expect our coverage stocks (excl. JPA) to record earnings CAGR of 32% over FY09-12 on the back of stable operating margins and strong revenue growth. Despite a higher base (40% CAGR over FY06-09), we expect revenue to grow at 25% CAGR over FY09-12e.

Leaner balance sheets. Stronger balance sheets (led by availability of equity capital) are enabling construction companies to bid for larger orders and for more of them. Focus on core competency is reducing risk perception.

Top picks: JP Associates, Nagarjuna. We initiate coverage on JP Associates, NCC, Era Infra, IVRCL, HCC and Simplex with Buy ratings.

Overweight

Nifty/Sensex: 5117/17119

Relative price performance

Construction

Sensex

40

90

140

190

240

290

340

Dec

-08

Jan-

09

Feb-

09

Mar

-09

Apr-0

9

May

-09

Jun-

09

Jul-0

9

Aug-

09

Sep-

09

Oct

-09

Nov

-09

Dec

-09

Source: Anand Rathi Research

India Construction Sector – Valuation matrix Key Data JPA IVRCL NCC Era HCC Simplex

Rating Buy Buy Buy Buy Buy Buy

Price (Rs) (on 11 Dec ’09) 230 365 151 199 137 521

Target Price (Rs) 290 480 231 290 162 625

Upside (%) 26.3 31.4 52.8 45.6 18.4 19.9

Market Cap. (US$bn) 7.1 1.0 0.8 0.8 0.9 0.5

PE (const. biz) - FY11 (x) 11.9 10.6 8.9 10.1 10.8 12.5

Revenue CAGR FY09-FY12 (%) 29.7 23.7 24.2 37.5 23.0 19.9

PAT CAGR FY09-FY12 (%) 21.7 22.4 32.4 39.9 37.3 31.6

EPS CAGR FY09-FY12 (%) 21.9 21.9 28.2 26.8 29.8 31.6

Target PE (const. biz) - FY11 15.0 15.0 15.0 15.0 15.0 15.0


15 December 2009 India Construction Sector – Order, order, order! Time for a scale change

Anand Rathi Research 2



Investment Argument and Valuation.......................................................3 Infra spend – Sustained impetus ............................................................6

Infra spending spree...........................................................................6 Private sector investment to play a major role....................................7 Resilient infra lending .........................................................................7 Order inflows likely to revive from 2HFY10.........................................8

Power, roads orders at the forefront .....................................................10 Power: Orders of Rs0.5trn in the next 15 months.............................10 Roads: Vast opportunity for construction companies........................12 Irrigation and water projects .............................................................17 Railway infrastructure to reduce freight cost.....................................18 Investment in urban infra ..................................................................19 Real estate – demand revival ...........................................................20

Good earnings growth ..........................................................................21 Revenue growth to pick up in FY11..................................................21 EBITDA margins to be less volatile ..................................................22 Interest burden to ease.....................................................................22 Equity dilutions to suppress EPS growth in FY10.............................23

Leaner balance sheets .........................................................................24 Access to capital, crucial to growth...................................................24 The RBI's recent stance largely directional.......................................24 Equity market revival ........................................................................24 Balance sheet in much better shape ................................................25

Company Section .................................................................................27 Jaiprakash Associates......................................................................28 IVRCL Infra.......................................................................................54 Nagarjuna Constructions ..................................................................73 Era Infra Engrneering .......................................................................91 Hindustan Construction Company..................................................107 Simplex Infrastructure.....................................................................125

Annexures...........................................................................................142



Investment Argument and Valuation We estimate our construction sector coverage universe (excl. JPA) to report 32% earnings CAGR over FY09-12, driven by the government’s huge infra spend, better credit availability and leaner balance sheets. The massive infra spend is likely to lead to a scale change in order inflows over the next 12-18 months.

Infra spend – Sustained impetus

India’s infra spend will rise from 6.5% of GDP in FY09 to 9.3% by FY12. Given a stable government and better macro-economic environment, we expect the construction sector to receive strong order inflows in the next 15 months. Almost half the investments would be in power and roads – construction orders for over 100 GW (Rs1trn) and 36,000km (Rs2.6trn) over the next 24-30 months.

Infra lending has grown as a proportion of overall bank lending and we expect it to continue to grow over the next many years. Of the government’s US$428bn infrastructure development plan, we estimate that the private sector would contribute around 30%.

Power, roads ordering at the forefront

We expect power orders of Rs1.1trn (equally split between thermal and hydro) for construction companies over the next 24-30 months, of which Rs500bn would come over the next 15 months. In roads, we estimate potential orders of Rs2.6trn (36,400km) over the next 30 months, of which Rs1.6trn is expected over the next 15 months.

The need to create infrastructure in vital areas of irrigation and water, railways, urban infra (including metro, ports and airports) is expected to drive the balance orders. Strong liquidity, softer interest rates and de-leveraged balance sheets-led new projects launches have resulted in a demand revival from the real estate sector. This is expected to boost construction companies focusing on this segment.

Good earnings growth

We expect our coverage stocks (excl. JPA) to record earnings CAGR of 32% over FY09-12 on the back of stable operating margins and strong revenue growth. Despite a higher base (40% CAGR over FY06-09), we expect revenue at a 25% CAGR over FY09-12.

The EPS CAGR over FY09-12 is expected to be lower than the profit growth over the same period due to the equity dilution in 1H10 by some companies. The fund raising exercise enabled maintaining business momentum (funding working capital) and improved balance sheets (lowering leverage).

Leaner balance sheets

Regular capital flow is crucial to the construction sector both for working capital and capex requirements. Our chief economist, Sujan Hajra, expects overall liquidity in the system to be adequate (no reversal of last year’s credit-crunch days) and the interest rate environment to be accommodative relative to past averages.

A revival in equity markets and subsequent availability of capital is enabling companies to raise funds at the parent and subsidiary level and fund the



next level of growth. The resultant stronger balance sheets are enabling construction companies to bid for larger orders and for more of them. Focus on core competency is reducing risk perception.

Valuation

We value construction stocks using the sum-of-parts method. We value their core construction business on a one-year forward PE, an appropriate valuation method for such companies. We feel this method suits the industry well as companies’ free-cash-flow is normally negative for a substantial time due to the high capex and working capital required.

We assign a multiple which is in line with the average of the last five years’ multiple. We have valued the real estate business on an NAV basis and the BOT and power businesses utilizing the P/BV method. We have used a holding company discount to value listed subsidiaries.

Fig 1 – India construction sector – Valuation matrix Key Data JPA IVRCL NCC Era HCC Simplex

PE- Core (x)

FY10e 14.6 15.1 12.6 13.4 13.6 17.8

FY11e 11.9 10.6 8.9 10.1 10.8 12.5

FY12e 15.0 8.6 7.0 7.5 8.7 9.0

P/BV (x)

FY10e 3.5 2.4 1.8 2.5 2.6 2.5

FY11e 3.2 2.1 1.7 2.0 2.5 2.1

FY12e 2.8 1.8 1.6 1.6 2.3 1.1

EV / EBITDA (x)

FY10e 17.9 11.6 10.1 8.1 11.3 7.7

FY11e 14.2 9.4 9.0 6.6 10.1 6.3

FY12e 12.4 7.8 7.3 5.4 8.8 5.2


Top Buys

We initiate coverage on six companies. We have a Buy on JP Associates (TP: 290), IVRCL (TP: 480), NCC (TP: 231), Era Infra (TP: 290), Simplex (TP: 625) and HCC (TP: 162). Our estimates for FY11 and FY12 are 10-20% higher than the consensus.

JPA. We rate JPA a Buy, with a target price of Rs290. Our sum-of-parts valuation comprises US$100/ton for FY11 cement capacity, 10.5x EV/EBITDA construction, NAV and land value for real estate parcels, P/BV for various power assets and expressways and current market value of treasury stock.

NCC. We rate NCC a Buy, with a target price of Rs231. Our sum-of-parts valuation comprises PE of 15x for construction earnings at Rs197/share, Rs17 from five road BOT projects at 2x book value, Rs4 from three power BOT projects at book value and Rs12 from real estate at book value.

Era. We rate Era a Buy, with a target price of Rs290. Our sum-of-parts valuation comprises PE of 15x for core construction earnings at Rs274/share. We have valued BOT projects at 1.5x Mar ’09 book value at Rs11/share.

Rating: Buy Target price: Rs290





Fig 2 – Anand Rathi Research vs Consensus PAT JPA IVRCL NCC Era HCC Simplex

FY10e ARG 9,729 2,344 2,057 2,708 1,445 1,457

Consensus 11,978 2,596 1,956 2,318 1,227 1,506

Diff.(%) (18.8) (9.7) 5.2 16.9 17.7 (3.2)

FY11e

ARG 13,260 3,336 2,695 3,582 1,817 2,069

Consensus 14,741 3,221 2,531 2,951 1,592 1,872

Diff.(%) (10.0) 3.6 6.5 21.4 14.1 10.5

FY12e

ARG 16,092 4,140 3,570 4,814 2,248 2,889

Consensus 18,928 4,016 3,164 4,624 1,809 2,317

Diff.(%) (15.0) 3.1 12.8 4.1 24.3 24.7

Source: Bloomberg, Anand Rathi Research

Risks

Rise in interest rates. A rise in interest rates would lead to a further crunch in liquidity and hence hinder order-book execution.

Order inflow growth lower than estimated. The biggest risk to our call is lower-than-expected order inflow, which would provide bleak revenue growth visibility and lower margins and, therefore, lower earnings growth.

Deterioration in working capital cycle. Cash flows of construction companies are negative mainly on account of an elongated working capital cycle. In case of prolonged recessionary conditions, terms of payments/advances for infrastructure projects would impact the working capital cycle significantly.

Project execution risk. Could arise from a shortage of manpower, land acquisition issues or arbitration with clients. Maintaining experienced personnel is key in successfully executing construction projects. The growing attrition rate across the industry and lack of skilled manpower could add significantly to manpower cost and might delay project completion. Delay in executing projects-under-development beyond our estimates would impact earnings in the construction division.

Financial risk. Given the nature of the industry, companies would need to take on additional debt to fund their capex or working capital. A spike in interest rates could impact bottom lines. Construction companies also carry the risk of default of loans given to subsidiaries. Construction companies have equity commitments towards their BOT projects. Also, BOT projects depress initial RoEs. Companies’ inability to timely arrange funding would lead to project delays and cost overruns and hence affect top and bottom lines.

Political risk. A large proportion of construction orders come from the government. Any slowing of such orders due to elections or other political issues might impact the companies.

Our estimates for FY11 and FY12 are 10-20% higher than the

consensus



Infra spend – Sustained impetus India’s infra spend will rise from 6.5% of GDP in FY09 to 9.3% by FY12. Almost half the investments would be in power and roads – construction orders for over 100 GW (Rs1.1trn) and 36,000km (Rs2.6trn) over the next 24-30 months. Over the next 15 months, we expect orders worth Rs0.5trn and Rs1.6trn from power and roads, respectively.

Infra spending spree

Over FY07-12 (the XI Five-Year Plan), India plans to spend US$428bn on infrastructure development, with expenditure as percent of GDP rising from 5% in FY07 to 9.3% by the Plan-end. Such exponential growth in infrastructure spend could result in orders of US$80bn a year for Indian construction companies, more than 5x the current order book of the top six companies under our coverage. Power and Roads alone would account for nearly half the planned infra expenditure, with most of the remaining coming from Telecom, Railways and Irrigation.

Fig 3 – Infra spending in the XI Five-Year Plan US$ bn @ Rs. 48/$

Sectors X Five-Year Plan XI Five-Year Plan Sector share (%)

Electricity (incl. NCE) 60.8 138.9 32.4

Roads and bridges 30.2 65.4 15.3

Telecommunications 21.5 53.8 12.6

Railways (incl. MRTS) 24.9 54.5 12.7

Irrigation (incl. WD) 23.2 52.8 12.3

Water supply and sanitation 13.5 29.9 7.0

Ports 2.9 18.3 4.3

Airports 1.4 6.5 1.5

Storage 1.0 4.7 1.1

Gas 2.0 3.5 0.8

Total 181.6 428.4 100.0

Source: Planning Commission, Anand Rathi Research

In the Indian context, such ambitious plans have almost always come up against operational and execution-related issues that have in the past hindered infra growth. We expect a better record from the current Central government, given its stability, imperative for economic growth and the measures it has taken to address the major operational and execution problems.

Infrastructure expenditure as percent of GDP is expected to rise from 5%

in FY07 to 9.3% in FY12



Fig 4 – India’s infra spend to ramp up in FY11 and FY12

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

X Pl

an

FY08

FY09

FY10

e

FY11

e

FY12

e

XI P

lan

XII P

lan

(Rs bn)

Source: Planning Commission

Private sector investment to play a major role

Of the government’s US$428bn infrastructure development plan, we estimate that the private sector would contribute around 30%. Its role would be much higher in Central government projects than in state government projects, especially in roads, where the PPP model would be preferred. Funding constraints, however, could hamper any higher exposure.

Fig 5 – Spending expected in the XI Five-Year Plan

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

X Pl

an

2007

-08

2008

-09

2009

-10

2010

-11

2011

-12

XI P

lan

18%

20%

22%

24%

26%

28%

30%

32%

Public Investment Private Investment Pvt. as a % of total Invst. (RHS)

(Rs bn)


Resilient infra lending

Given the government’s focus on infrastructure development, there is no surprise that over the past decade infrastructure lending has grown steadily. In fact, infra lending has grown as a proportion of overall bank lending (see Fig 6) and we expect it to continue to grow over the next many years. Overall bank credit growth, however, is showing signs of fatigue and could taper off, given lower demand from the industrial sector.

Private sector expected to contribute 30% of the planned infra

expenditure of US$428bn

We expect infra lending as percent of total bank credit to rise



Fig 6 – Bank credit to infrastructure

0

500

1,000

1,500

2,000

2,500

3,000

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

0.0

5.0

10.0

15.0

20.0

25.0

30.0

Gross outstanding credit to infrastructure Infrastructure credit to total credit (RHS)

(Rs bn) (%)

Source: RBI, Anand Rathi Research

Order inflows likely to revive from 2HFY10

FY09 is a year almost everybody would like to forget; so too would construction companies. Almost all companies under our coverage saw order inflows decline in FY09 compared to the previous year. This arose from a near-standstill in property development, fewer orders in the international segment (mainly the Middle East) and almost no growth in industrial capex.

Given the stable government and better macro-economic environment, we expect the construction sector to receive strong order inflows in the next 15 months. Most of them would be in Power and Roads. Over the next 15 months, we expect orders worth Rs0.5trn and Rs1.6trn from power and roads, respectively.

Fig 7 – Order inflow to pick up in 2HFY10 (Companies under coverage excl. JPA)

0

100

200

300

400

500

FY04

FY05

FY06

FY07

FY08

FY09

FY10

e

FY11

e

FY12

e

-20%

0%

20%

40%

60%

80%

100%

120%

140%

Order Inflow Order Inflow growth(RHS)

(Rs bn) (%)

Source: Company, Anand Rathi Research

The sectors with high construction work in a project are railways, property (75% of project cost), water supply (65%) and roads (60%). For airports and ports, construction consists of around 40-50%. In industrial projects including power, the construction component accounts for around 15-20%.

Over the next 15 months, we expect orders worth Rs0.5trn and

Rs1.6trn from power and roads, respectively



Fig 8 – XI Five-Year Plan spending breakup

0102030405060708090

100

Elec

trici

ty

Roa

ds

Tele

com

Rai

lway

s

Irrig

atio

n

Wat

er

Ports

Airp

orts

Stor

age

Gas

Tota

l

Centre States Private

(%)




Power, roads orders at the forefront We expect power orders of Rs1.1trn (equally split between thermal and hydro) for construction companies over the next 24-30 months; of which 0.5trn could come over the next 15 months. In roads, we estimate potential orders of Rs2.6trn (36,400km) over the next 30 months; of which Rs1.6trn is expected over the next 15 months.

Power: Orders of Rs0.5trn in the next 15 months Given the power shortage the country faces – 9.4% total energy deficit and 12% peak power deficit in FY10 ytd – the major portion of India’s huge infrastructure expenditure would go towards the power sector.

Fig 9 – Peak deficit over the years

(18.0)(16.0)(14.0)(12.0)(10.0)

(8.0)(6.0)(4.0)(2.0)0.0

FY03

FY04

FY05

FY06

FY07

FY08

FY09

YTD

FY1

0

Peak deficit Base deficit

(%)

Source: CEA, Anand Rathi Research

Yet, capacity addition has been dismal – only 50% of the planned 41,110 MW in the X Five-Year Plan was commissioned. We would, however, like to point out that the issues were more about execution and clearance than placing orders. For the XI Five-Year Plan, 78,600 MW has been planned at a cost of US$140bn (including ancillary work such as T&D, etc). Of this, only 48,000 MW is expected to be commissioned – around 18,500 MW has already been commissioned and the balance is in various stages of construction, which should come up over the next three years.

Fig 10 – Plan-wise addition – achievement vs target

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

80,000

90,000

1951

-56

1956

-61

1961

-66

1969

-74

1974

-79

1980

-85

1985

-90

1992

-97

1997

-02

2002

-07

2008

-12

Target Achievement

(MW)

Source: CEA, Anand Rathi Research

Major portion of India’s infra expenditure to go towards power

sector



The XII Five-Year Plan aims at adding 100,000 MW. Of this, LoA (letters of award) for BTG for ~32,500 MW have already been issued, but orders have not been placed for BoP and civil works. Besides, we expect incremental additions by the private sector, including captive consumption units. We expect orders to flow to construction companies for the BoP and civil works over the next three to four years.

Construction work accounts for around 15-50% of the cost of a power plant, depending on type and level of work involved. For the XII Plan, building 90,000 MW of thermal capacity could result in construction orders of Rs550bn for civil and structural work at Rs6m per MW. If we include BoP work as well (construction companies such as Era and NCC are moving into this space), the scope of orders grows.

Fig 11 – Breakup of thermal power capex % Rsm/ MW For 90GW (Rs bn)

Land/Site improvement/ Civil/Structural works 15 6.0 540

Plant & Machinery 60 24.0 2,160

BOP 10 4.0 360

ICD, Contingency, Preoperative expenses 15 6.0 540

100 40.0 3,600


In hydropower, potential capacity addition of over 17,000 MW in the XII Plan implies potential work of ~Rs550bn at Rs33m per MW. Companies such as HCC, Patel Engineering and JaiPrakash Associates lead in this.

Fig 12 – Breakup of hydro power capex % Rsm/ MW For 17GW (Rs bn)

Civil Works 55 33 561

Electrical and Mechanical works 35 21 357

Hydro Mechanical works 10 6 102

100 60 935


Overall, we expect power orders of Rs1.1trn for construction companies over the next 24-30 months. Over the next 15 months we expect orders worth Rs0.5trn to be awarded to construction companies.

Fig 13 – Power capex trend

0

500

1,000

1,500

2,000

2,500

FY08

FY09

FY10

e

FY11

e

FY12

e

Centre State Private

(Rs bn)


Transmission and Distribution orders are generally placed closer to the commissioning of a power plant owing to the short execution period. The

Construction work accounts for around 15-50% of the cost of a

power plant; this would amount to orders worth Rs1.1trn over the next

24-36 months



scope of work involves capex almost equivalent to the amount spent in setting up a plant. This is a huge market for construction companies to tap in the coming years. Further, the government has constituted the Accelerated Power Development Reform Programme (APDRP) to reduce T&D losses of state utilities. It had also constituted the Rajiv Gandhi Grameen Vidyutikaran Yojana in 2005 to electrify all the villages of India. XI Plan fund allocations for these have been Rs516bn and Rs280bn, respectively. In Budget 2009-10, the government has increased allocation for APDRP by 160% to Rs20.8bn.

Roads: Vast opportunity for construction companies

India has one of the largest road networks in the world, about 3.3mkm. Roads carry 85% of passenger and 70% of freight traffic. The network consists of national highways, state highways, major district roads, other district roads and village roads. National highways comprise only 2% of the road network but carry 40% of the traffic. These national highways are too narrow for the kind of traffic they carry. Bottlenecks lengthen the time taken by suppliers to transport goods, leading to delays in delivery. Of the 66,754km of national highways, only 12% have four lanes, 50% two lanes and the rest mere single lanes, putting tremendous strain on them.

Fig 14 – Road network in India Category km % of total

National highways 66,754 2

State highways 128,000 3.9

Major district roads 470,000 14.2

Other district/ village roads 2,650,000 79.9

Expressways 200 0.01

Total 3,314,954 100

Source: NHAI

NHDP – Nodal programme of NHAI

The government of India through various phases of the National Highway Development Programme has launched major initiatives to upgrade and strengthen national highways. The NHDP is one of the largest road development programmes to be undertaken by a single authority in the world and involves widening, upgrading and rehabilitation of about 53,500km. Of that, about 11,000km is complete and further implementation of about 6,000km is underway. The National Highways Authority of India (NHAI) plans to award the remaining 36,500km in the next three to four years. It is also undertaking another 1,350km of development under port connectivity and ‘others’, of which 1,100km is already completed.

Most of the projects to be developed will be on public-private partnership (PPP) basis through the build, operate and transfer (BOT) annuity or BOT toll mode. This is a marked shift from the earlier strategy of awarding projects on a cash-contract basis, which had put the entire pressure of funding on the government.

NHAI plans to award orders to build 36,500km over the next

three to four years



Fig 15 – NHDP programme

02,0004,0006,0008,000

10,00012,00014,00016,00018,00020,000

GQ NS-EWPhase I & II

Phase III Phase IV Phase V

(kms)

Already 4-Laned (km) Under Implementation (km) Balance length for award (km) Source: NHAI

The opportunity

The government has already approved projects under four-laning of 12,109km (Phase III), six-laning of 6,500km (Phase V), 1,000km of expressways (Phase VI) and the construction of ring roads including improvement of NH links in cities, grade-separated intersections, flyovers, elevated highways, rail overbridges, underpasses and service roads (Phase VII). Proposed, too, is the two-laning with paved shoulders for 20,000km of national highways under Phase IV.

Fig 16 – NHDP programme and work plan NHDP

GQ NS-EW Phase I & II Phase III Phase IV Phase V Phase VI Phase VII NHDP Total

Length (km) 5,846 7,300 12,109 20,000 6,500 1,000 700 53,455

Already four-laned (km) 5,736 4,316 1,045 - 148 - - 11,245

Under implementation (km) 110 2,189 2,605 - 886 - 19 5,809

Balance length for award (km) - 795 8,459 20,000 5,466 1,000 681 36,401

Cost per km (Rs m) 110 110 110 35 109 167 238 73

Value (Rs bn) - 88 934 700 596 167 162 2,647

Blue Sky Estimates

FY10

Award Plan (km) - 764 4,778 3,298 3,107 - - 11,947

Cost per km (Rs m) 110 110 110 35 109 167 238 89

Value (Rs bn) - 84 528 116 339 - - 1,066

FY11

Award Plan (km) - 31 854 8,959 1,265 - - 11,109

Cost per km (Rs m) 110 110 110 35 109 167 238 49

Value (Rs bn) - 3 94 314 138 - - 549

FY12 and beyond

Award Plan (km) - - 2,827 7,744 1,094 1,000 681 13,346

Cost per km (Rs m) 110 110 110 35 109 167 238 77

Value (Rs bn) - - 312 271 119 167 162 1,032

Source: NHAI, Anand Rathi Research



We estimate a potential Rs2.6trn in the 36,400km of road projects in the pipeline as depicted in the above table. These orders are expected to be rolled out over the next three to four years. The government has already identified projects to be awarded during FY10 (totaling 11,947km) and FY11 (11,109km). During FY09 and 1HFY10, the NHAI has awarded projects covering 650km and 950km, respectively. In order to speed up things and encourage large private Indian and international players to participate, the NHAI has identified seven mega projects of Rs50bn each (~500km each), bids for which are expected to start soon.

We believe there would be certain slippages in awarding of orders in the near term. These should average out in FY11-12 and cumulative targets therefore achieved.

Apart from the NHDP, rural roads and refurbishment of old roads also open up vast opportunities. The investment in roads during the XI Plan is projected at Rs3trn, 100% more than the targeted X Plan investment. The private sector is expected to contribute ~34% of this investment outlay. Allocation of the NHAI for the NHDP has been on the rise; in Budget 2009-10 it was increased to Rs160bn, 23% over Budget 2008-09.

Fig 17 – Expected spending on roads and bridges

0

100

200

300

400

500

600

700

800

900

FY08

FY09

FY10

e

FY11

e

FY12

e


(Rs bn)


Expressways – Emerging prized asset

A part of the approved projects under the NHDP includes construction of 1,000km of expressways with full access control on new alignments at a cost of Rs167bn in Phase VI. In order to facilitate faster traffic between places, the Ministry of Highways proposes to set up a National Expressway Authority of India on the lines of the NHAI. This would look exclusively at the requirement for expressways. This would involve a much larger investment (Rs250-350m perkm) due to the structure of alignments. Also, it would involve development of townships and industrial corridors paralleling the expressways, which would aid their funding. Accordingly, it would as well solicit state government support.

Setting up challenging targets . . .

Despite India growing 9% in the first four years of the first term of the UPA government, no headway was made in ramping up road and port infrastructure under the leadership of T L Baalu, erstwhile Minister for Road Transport, Highways and Shipping. In its second term, the UPA has appointed Kamal Nath as Minister for Road Transport and Highways.

We estimate potential orders of Rs2.6trn in the 36,400km of road

projects in the pipeline

The National Expressway Authority of India to be formed to look exclusively at the requirement

of expressways



The new minister has set up a stiff target of building 20km of highways per day. To achieve this (7,000km a year), given the average three-year execution period, would imply that projects-under-execution have to increase from the present ~6,000km to 21,000km. For the past eight months, the minister has been working on the twin problems of financing and removing bottlenecks in the timely awarding of contracts. He has been on roadshows in many countries to tap private equity and FII money for the country’s road infrastructure.

. . . But how much can really be executed?

The NHAI’s track record has been unimpressive: averaging a mere 4km/day in the past four years. During FY06-09, 5,172km of road projects were completed. Thus, we believe that the target of 20km/day appears over-ambitious. We believe a more reasonable 10-12km a day is achievable, however, over the next two to three years as the NHAI currently manages about 6-7km/day. Based on this, the road segment is expected to see more than a 30% CAGR in revenue during FY09-12.

Fig 18 – Road-length additions during last four years (km) FY06 FY07 FY08 FY09

GQ 951 347 149 71

NSEW Corridor 122 85 1,080 1,474

NHDP III - - 330 457

NHDP V - - - 106

Total 1,073 432 1,559 2,108

Avg / day 2.9 1.2 4.3 5.8

Source: NHAI

Fig 19 – Road-length additions during five-year plans

010,00020,00030,00040,00050,00060,00070,00080,00090,000

1951

-56

1956

-61

1961

-66

1966

-69

1969

-74

1974

-78

1978

-80

1980

-85

1985

-90

1990

-92

1992

-97

1997

-02

2002

-07

2007

-12e

(Kms)

0

5000

10000

15000

20000

25000

30000(Kms)

Total Length Kms Addition (RHS) Source: NHAI, Anand Rathi Research

NHAI funding issues sorted out

Over 60% of the proposed investment required for the NHDP is expected to be privately financed, primarily through the BOT - Toll route.

For the balance, the NHAI has to invest in three areas:

First, on cash-contract projects (the standard financing format in J&K and the North-east where private players are not too keen on taking on the risks, rendering such projects commercially unviable);

Second, on the grant component (given for select projects to make them commercially viable through viability gap funding);

The NHAI aims to implement 20km per day; the present run rate is

6-7km



And third, the annuity to developers operating the project (25% of total funding) under the BOT-Annuity option.

Financing to develop national highways has moved from the single source of budgetary support from the GoI to a more inclusive basket of loans (The World Bank, The Asian Development Bank and The Japan Bank of International Cooperation), cess on fuel, and proceeds from the revenue share in certain projects. The World Bank is expected to lend fresh corpus of Rs140bn for the new projects.

Overcoming regulatory hurdles to achieve targets

In a bid to encourage developer interest in road projects, the NHAI and the government have over the past few months addressed a host of issues like cost overruns for old DPRs, land acquisition and concession period tenure. The recent report by the Chaturvedi Committee has further simplified many hurdles. These measures along with the softer interest rate regime should induce a more positive response to projects that would be opened for bids presently. We are already seeing high interest by the construction companies for the new orders now open for bidding through the PPP route. The NHAI plans to roll out orders totaling 10,646km by Mar ’10 and another 11,721km by Mar ’11. (Annexure 1, 2)

Some of the major issues addressed by the ministry earlier were:

Land acquisition norms. Earlier, a project was awarded once 50% of the land was acquired. The NHAI will now award projects only after acquiring 80% of the land required. The balance would be handed over within the next 180 days.

Estimated cost overruns. Old detailed project reports (DPR) were used for cost estimates. These were substantially lower than actual costs. Such DPR costs have been upped 20% for projects where DPRs were completed before 2007 and 10% for those completed after 2007.

Concession period. This has been increased from 18-20 years to 26-30 years for most projects.

Separate finance vehicle. At present, there is no separate financial body for roads. The government is planning to set up the Indian Road

Fig 20 – Investment required: Rs2,272bn

2 Laning NHDP-IV

12%

4 Laning NHDP-III

33%

GQ, ES-NW corridors

23%

Ring roads, flyovers, bypasses NHDP-VII

7%Expressways NHDP-VI

7%

6 Laning NHDP-V

18%

Source: MoRTH, Anand Rathi Research

Fig 21 – Funding sources: Rs1,735bn

Cess21%

Borrowings by NHAI24%

Private sector50%

User fee surplus2%External assistance

3%

Source: MoRTH, Anand Rathi Research

Based on the Chaturvedi Committee recommendations, the NHAI has addressed a host of

issues to encourage developer interest in road projects



Finance Corp. to mobilize funds for the highway sector (on the lines of the PFC).

In the second round of reforms, the panel on highway development, headed by B. K. Chaturvedi, has now been entrusted with expediting work on the NHDP. This includes exploring ways to improve fund-flows to developers executing road projects by making such funding attractive for financial institutions (including insurance companies) and by a speedier dispute-resolution mechanism.

We believe that, with the improving political situation, better structural and fund-raising options, the road sector is moving towards a high-growth trajectory. We expect both domestic and international financial institutions to come on board in order to capitalize on the upcoming lucrative opportunities. The companies under our coverage which are seriously looking at this space are IVRCL, NCC, HCC and Era Infra.

Irrigation and water projects The water industry in India has been growing at 18-20% in the past three years. There is a dire need to create infrastructure to ensure sustainable water supply for the country’s agricultural, industrial and domestic use.

The XI Plan aims at providing drinking water, sanitation and waste management to 100% of the urban population. The Planning Commission estimates investment of Rs2,533bn in irrigation in the XI Plan (from Rs1,115bn spent in the X) and Rs1,437bn has been earmarked for water supply and sanitation (Rs648bn spent in the X). The task would require

Fig 22 – Easing hurdles: Chaturvedi Committee recommendations Key Issues Proposed changes

Type of order Present government policy decrees all projects to be first offered as BOT Toll; on failure they are then to be offered under BOT Annuity. If this too fails, they are to be taken under EPC

Projects that are to be directly awarded under the Annuity mode are bid out accordingly. EPC contracts will be awarded for bids received under the Annuity mode but exceeding an equity IRR of 18%

Single bid Projects which attracted only single bids were re-offered for bidding

The NHAI empowered to accept single bids after examining their reasonableness

Change in norms of viability gap funding 20% of VGF was paid during pre- and post-construction period each

Now the entire 40% VGF would be paid during the construction period

Annual exercise for pre-qualification Pre-qualification (RFQ) process conducted separately for each project or set of projects

12-month validity for pre-qualification results

Termination provision Concession agreement will be terminated if toll collection exceeded its capacity for three years

This provision removed. Concessionaire to get an opportunity to develop the road further; the concession period extended (up to max five years).

Security to lenders Current RBI norms classify loans to highway projects as ‘unsecured’, raising interest cost and limiting overall funds available

Allowing the senior lenders a charge on a project’s escrow account would classify such loans as secured and offer lower interest cost and quantum benefits to the concessionaire

Number of bidders Maximum six per project for financial bidding Cap removed

Technical criterion The technical criterion of having completed in the last five years projects worth 2x of the total project cost

Proposed to be rolled back to a band of 1.5x – 2.5x, to ensure larger participation

Exit clause The lead partner has to hold a minimum 51% stake during construction and a minimum 26% stake, post-construction till the end of the concession period

Proposed to remove this clause so that a developer can use resources in other infrastructure development

Conflict-of-interest clause Ineligible to bid if a common shareholder holds more than a 5% equity stake in any two bidding companies

Limit increased to 25%

Disqualification penalty The bidder forfeits the entire bid-security amount to NHAI, if bids submitted contain errors or do not comply with standard formats

The Committee has reduced the quantum of forfeiture to just 5% of the bid security amount as bidders would lose their bid security amount even for minor errors

Revenue share The revenue share was earlier required to be quoted in percentage terms. And there was a 1% increase in the percentage revenue share every year

Revenue share will now have to be quoted in absolute terms and will escalate 5% every year. This would enable the NHAI to better plan funding requirements.

Source: B. K. Chaturvedi Committee report, Anand Rathi Research



active participation from the private sector. This is already underway and expected to continue. We expect a huge flow of orders from irrigation, water and sanitation projects. The strong emphasis on irrigation, on solutions to rural and urban drinking water problems besides the current boom in industrial construction, all point to a future replete with opportunities in the water sector in India.

Expenditure on irrigation by the states has not seen any major slowdown. The Andhra Pradesh government has been in the forefront of investment in irrigation. Its model is expected to be followed on an accelerated basis in other states, too, given the increased allocation for irrigation and water-related projects from Madhya Pradesh, Maharashtra, Gujarat, Orissa and Rajasthan. These projects include massive irrigation schemes, reservoir projects, drinking water schemes comprising treatment plants and pipeline systems to augment available water resources effectively.

The waste-water treatment segment is experiencing one of the fastest growth rates because of growing industrialization and urbanization, intensifying regulatory measures, and investment in sanitation.

Andhra Pradesh had seen a temporary slowdown in FY10 due to paucity of funds, elections and floods, and following the untimely and tragic demise of the Chief Minister. With the worst now behind, and the re-election of the Congress in AP, orders are expected to start flowing in.

The Accelerated Irrigation Benefit Programme (AIBP) was started to incentivize states to complete projects in a time-bound manner. Progress, though, has not been satisfactory. The government, in the current budget, has increased such allocation by ~8% to Rs70bn.

Fig 23 – Investment in irrigation and water supply

0

200

400

600

800

1,000

1,200

1,400

FY08

FY09

FY10

e

FY11

e

FY12

e


(Rs bn)


Railway infrastructure to reduce freight cost Railways play an important role in the overall development of the country’s economy. We believe that the Railways is on the verge of a major capacity enhancement and improvement phase, throwing up vast opportunities for developers and construction contractors. During the XI Plan, the Indian Railways is expected to embark on an ambitious Rs2.5trn expansion and modernization drive, aimed at better service. It plans to add 8,132km of new lines, convert 7,184km to broad gauge, modernize 22 stations and lay down dedicated freight corridors. The expansion-cum-modernization drive would also entail new signaling and safety systems, procurement of newer coaches, wagons and EMUs, apart from additional rail lines. Allocation for

AP model of high investment in irrigation would be replicated by

other states, opening up huge opportunities in the water and

irrigation segment



the Railways rose from Rs108bn in the interim budget 2008-09 to Rs158bn in 2009-10.

Fig 24 – Investment in Railways

0

100

200

300

400

500

600

700

800

900

FY08

FY09

FY10

e

FY11

e

FY12

e


(Rs bn)


Investment in urban infra India has about 300m urban residents (the second-largest in the world), comprising about 30% of the population and contributing over 60% to GDP. Besides essential infrastructure (water management, roads, housing, sanitation, sewage), transportation, both inter- and intra-city, is a great and urgent need. The government has already initiated a number of measures in this regard by aggressively looking at proposals regarding metro rail systems, greenfield airports and ports and modernization/expansion of the present ones. Many of these projects are being awarded on a PPP basis, which would shorten execution time and improve efficiency.

Allocation under the Jawaharlal Nehru National Urban Renewal Mission (JNNURM) was stepped up 72% for 2009-10 to Rs118.4bn. In Budget 2009-10, allocation for housing and providing basic amenities to urban poor was enhanced to Rs39.7bn.

Metro: In the tier I category, the Mumbai Metro (phases I, II and III) and Delhi Metro (phase III) are the ongoing/near term projects entailing massive investment. In the tier II category, Bangalore, Chennai, Hyderabad and Jaipur would throw up metro PPP opportunities in the short term and involve construction companies in a very large way. This model is also likely to be followed in other big towns in India.

Airports: Indian airports suffer from lack of handling capacities, parking space and inadequate runways. The Airports Authority of India (AAI) has undertaken an ambitious project of modernization of 35 non-metro airports and four metro airports. The process has already begun, with the Delhi and Mumbai modernization programmes already on track and significant milestones already attained. Large-scale improvisation and expansion in Indian airport infrastructure coupled with active government support for private participants, particularly in greenfield projects, has enabled huge strides forward. The government plans to spend Rs300bn on the airports sector during the XI Five-Year Plan.

Ports: Most foreign trade is through ports. India’s ports suffer from congestion, cargo delays and inefficiencies. Average turnaround time at Indian ports is around four days (against a few hours for most ports in south-east Asia). To address these bottlenecks, the government in the XI

The AAI has undertaken an ambitious project of modernizing 35

non-metro airports and four metro airports

Balance work in Delhi Metro and upcoming opportunities in Mumbai

and tier II cities like Bangalore, Chennai, Hyderabad in metro

projects



Plan aims to spend over Rs800bn. It plans to add 485m tons of handling capacity at major ports and 345m tons at minor ports.

Fig 25 – Investment in ports

0

50

100

150

200

250

300

350

FY08

FY09

FY10

e

FY11

e

FY12

e


(Rs bn)


Real estate – demand revival Liquidity and interest rates have strong bearings on the performance of the real estate sector. The government’s stimulus packages and the RBI allowing special treatment to the sector could provide the requisite filip. In line with the government, equity markets looking up have also helped developers “re-capitalize”. Rs138bn of institutional paper was raised in 1HFY10, most of it primarily to bring down leverage.

Eighty percent of demand in the real estate sector still arises from the housing sub-segment. After price corrections in all major markets and changes in the kind of housing units offered by developers, projects launched since Mar ’09 have seen good traction. The volume of sales in the middle-income and affordable housing sub-segments by developers has been commendable, reflecting the positive outlook regarding such projects. This has attracted more developers to enter this arena.

Focus on affordable homes

By early FY10, most property developers had shifted focus to affordable housing, shunning townships and non-core assets they had accumulated as they grew. Volume-driven mass/affordable housing has become the name of the game. In these segments, execution is what matters. Now the gap between the launch of a project (offering units for sale) and the start of construction would narrow.

Govt plans to add 485m tons of handling capacity at major ports

and 345m tons at minor ports at a cost of Rs800bn

Demand revival in housing segment resulting in new projects launches

from property players augurs well for the construction companies focusing

on the segment



Good earnings growth We expect our coverage stocks (excl. JPA) to record earnings CAGR of 32% over FY09-12 on the back of stable operating margin and strong revenue growth. Despite a higher base (40% CAGR over FY06-09), we expect revenue at a 25% CAGR over FY09-12.

Revenue growth to pick up in FY11

Construction companies under our coverage (excluding JPA) reported a 40% CAGR in revenue over FY06-FY09, supported by the government’s huge spending on infrastructure and partly due to the low base effect. The global financial crisis and Parliamentary elections impacted order inflow growth in FY09-1HFY10. We expect orders to pick up from 2HFY10. The slow growth in orders in the past few quarters is likely to have an impact on revenue growth this year. The orderbook-to-bill ratio is not too far off from its highest level in the past four years, thus providing good revenue visibility for FY11-12. We expect stocks in our coverage to report a 25% CAGR in aggregate revenue over FY09-12 despite a higher base.

Fig 26 –Combined order book and book-to-bill ratio

0

100

200

300

400

500

600

700

800

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

e

FY11

e

FY12

e

2.6

2.8

3.0

3.2

3.4

3.6

3.8

4.0

Order Book Book to bill (RHS)

(x)(Rs bn)

Source: Company, Anand Rathi Research Note: For companies under coverage excl. JPA

Fig 27 – Latest order book

0

20

40

60

80

100

120

140

160

180

IVR

CL

HC

C

NC

C

Era

Sim

plex

JPA

(Rs bn)


We expect stocks in our coverage to report a 25% CAGR in aggregate

revenue over FY09-12 despite a higher base



EBITDA margins to be less volatile

Given the slowdown in order inflows in the past few quarters and resulting intense competition, many new contracts would have had razor-thin margins. With order flow improving, we expect margins also to improve. In FY09, margins were affected by the rise in commodity prices. Ahead, we do not expect any major risk to operating margins over FY10-12 given stable commodity prices and that most new projects are covered by a pass-through mechanism. In fact, some fixed-price contracts late last fiscal (assuming high input cost) may benefit companies to the extent of their proportion in overall contracts.

Fig 28 – Margin trend for all construction companies.

4

6

8

10

12

14

16

18

20

22

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

e

FY11

e

FY12

e

IVRCL HCC NCC Era Simplex Total

(%)


Interest burden to ease

Most of the funding requirements in recent times have been met through equity financing, leading to better leverage ratios. The resulting impact of lower interest outgo (as percent of revenue) is expected to be reflected in FY10 and maintained thereafter in FY11-12.

Fig 29 – Interest as % of sales

-

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

e

FY11

e

FY12

e

IVRCL HCC NCC Era Simplex

(%)


Fig 30 – EBITDA margin breakup (1HFY10)

0

2

4

6

8

10

12

14

16

IVR

CL

NC

C

Sim

plex

HC

C

Era

JPA

PAT Tax Depreciation Interest

(%)


With the improving order flow, we expect margins also to improve from

here on



Equity dilutions to suppress EPS growth in FY10

We expect our coverage stocks (excl. JPA) to record earnings CAGR of 32% over FY09-12 on the back of stable operating margin and revenue CAGR of 25%.

In the past four years, many construction companies diluted equity to fund core growth and non-core investments. To maintain business momentum (funding working capital) and improve balance sheets (lowering leverage) to absorb the next round of fresh orders, the trend was repeated in 1HFY10. This is expected to lower EPS growth compared to profit growth over FY09-12. However, EPS growth over FY10-12 would be better than FY09-10 unless a fresh round of dilutions takes place. The companies under our coverage do not foresee this as they aim to fund their requirements through internal accruals and debt.

Fig 31 – EPS CAGR growth affected due to dilutions (FY09-12)

0

5

10

15

20

25

30

35

40

45


PAT Growth EPS Growth

(%)


The companies do not foresee further equity dilutions as they aim to fund their requirements through internal

accruals and debt



Leaner balance sheets A revival in equity markets and subsequent availability of capital is enabling companies to raise funds at the parent and subsidiary level and fund the next level of growth. The resultant stronger balance sheets are enabling construction companies to bid for larger orders and for more of them. Focus on core competency is reducing risk perception.

Access to capital, crucial to growth

Regular capital flow is crucial to the construction sector – short-term for working capital and long-term for capex requirements – mainly because of the sector’s negative free-cash flow (internal accruals not enough). In a slowdown or economic crisis, when the working capital cycle lengthens and capital is hard to come by as in FY09, the situation worsens. On the other hand, the higher base (sales growing) and longer working capital cycles lead to a higher quantum of working capital. We expect the sector’s working capital requirements to rise, given our estimate that the companies under coverage would record a 25% CAGR in revenue over FY09-12.

The RBI's recent stance largely directional

Abundant liquidity or the lack of it has a major impact on the capital-hungry construction sector. Our chief economist, Sujan Hajra, expects the RBI’s exit from its exceptionally accommodative monetary policy to be slow and gradual. He expects overall liquidity in the system to be adequate (no reversal of last year’s credit-crunch days) and the interest rate environment to be accommodative relative to past averages.

Sujan expects liquidity to be more than adequate for the following reasons:

India’s high savings rate. In the past six years, India’s savings rate has risen to 37%, from 23%. Within overall savings, the proportion of financial savings, too, has been on the rise.

The government to borrow less in FY11. In FY10, the Indian government had to borrow a massive amount, mainly driven by one-time expenses: salary hikes for government employees, sharp tax cuts (part of the stimulus package) and a drop in tax receipts (due to the subdued economic environment following the global growth slump).

Equity market revival

The Nifty has gained 91% since its 2009 low. In that period, foreign investment in Indian equity touched US$16bn. Driving this market revival were the Indian economy’s far better growth outlook than those of developed nations and the rising risk appetite of investors. Given this, construction companies were able to cash in on the rising equity markets- NCC, HCC, JPA raised money at the parent level.

During the boom, many construction companies had invested heavily in non-core businesses, such as property, power and infrastructure. The re-focusing now on core activity and revival in equity market is leading construction companies to dilute their stake in non-core businesses by raising funds in their subsidiaries. NCC, HCC, JPA plan to raise money at the subsidiary level. Recently, IVRCL transferred its BOT projects to its subsidiary, IVR Prime, and plans to raise money at its subsidiary level in the near future.

Easing liquidity and equity market revival have helped

construction companies raise money and prepare their balance sheets for

the next round of growth



Fig 32 – Recent fund raisings Company Date Mode of fund raising Amount raised (Rsm)

JPA Aug ’09 Sale of treasury shares 16,900

HCC Jul ’09 QIP 4,801

NCC Aug ’09 QIP 3,673

Era May ’09 Warrants to promoters and others 2,975


Balance sheet in much better shape

Recent fund-raising drives by HCC, NCC and ERA have helped reduce debt. Many others, too, could take the same route. Some have sold non core assets, others lowered exposure to real estate, all to strengthen balance sheets. The net debt-equity ratio of companies under our coverage is expected to improve in FY10, over FY09.

Fig 33 – Net debt to equity

(1.0)

(0.5)

-

0.5

1.0

1.5

2.0

2.5

3.0

3.5

FY03

FY04

FY05

FY06

FY07

FY08

FY09

FY10

e

FY11

e

FY12

e


(x)




Company Section

Anand Rathi Financial Services Limited does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Disclosures and analyst certifications are located in Appendix 1 Anand Rathi Research India Equities

India I Equities


[email protected]


[email protected]

Key financials

Year end Mar FY08 FY09 FY10e FY11e FY12e

Sales (Rsm) 39,848 57,642 89,754 113,148 125,800

Net profit (Rsm) 5,972 8,927 9,729 13,260 16,092

EPS (Rs) 5.3 6.0 6.6 9.0 10.9

Growth (%) 49.7 13.2 9.5 36.3 21.4

PE (x) 38.8 81.4 34.8 25.5 21.0 PE Parent (x) 22.2 17.7 15.5 11.1 9.4 PE (construction)(x) 31.3 16.4 14.6 11.9 15.0RoE (%) 17.4 16.7 12.6 13.8 14.8

RoCE (%) 8.0 8.1 8.6 9.9 10.5

Net gearing (%) 151.3 159.7 119.1 112.8 98.9


Infrastructure

Initiating Coverage

15 December 2009

Jaiprakash Associates

Accelerating growth, multiple drivers; initiate at Buy

Multiple drivers; Buy. We initiate coverage on JPA with a Buy rating and target price of Rs290. A leader in infrastructure, JPA’s assets by Mar ’12 would include 33m tons cement capacity, 2,200 MW power, 400m sq. ft. property, and operational/under-construction expressways (Yamuna, Ganga, Himalayan).

Strong earnings growth over FY09-12. We estimate the parent would report FY09-12 revenue and profit CAGRs of 27% and 22%, respectively, led by the cement and construction divisions.

Low-land-cost advantage in Noida. JPA’s advantage of low land-cost (Rs70/sq. ft.) enables it to competitively price products at its Noida project, part of the Yamuna Expressway. We estimate a PBIT CAGR of 58% over FY09-12.

Well placed to meet funding needs. JPA parent’s Rs47bn capex over FY10-12 would largely be funded through internal accruals, given its strong cash generation and its recent Rs16.9bn sale of treasury stock. Its subsidiary JPVL’s equity commitment over FY10-12, of Rs46bn, net of securitisation of cashflows (Rs27bn) is planned to be funded through fresh equity.

Valuation. Our sum-of-parts valuation of Rs290 is based on US$100/ton for the FY11 cement capacity, 10.5x EV/EBITDA for construction, the NAV/ land value for real estate parcels, P/BV for various power assets and expressways, and the value of treasury stock based on current market price.

Rating: Buy Target Price: Rs290 Share Price: Rs230

Key data JPA IN /JAIA.BO

52-week high/low Rs270 / Rs53Sensex/Nifty 17119 / 51173-m average volume US$81m Market cap Rs322bn/US$7.0bShares outstanding 1402mFree float 53.5%Promoters 46.5%Foreign Insittutions 27.5%Domestic Institutions 10.6%Public 15.4%


JP Associates

Sensex

50

100

150

200

250

300

Nov

-08

Dec

-08

Jan-

09Fe

b-09

Mar

-09

Apr-0

9M

ay-0

9Ju

n-09

Jul-0

9Au

g-09

Sep-

09O

ct-0

9N

ov-0

9D

ec-0

9


15 December 2009 Jaiprakash Associates – Accelerating growth, multiple drivers; initiate at Buy


Quick Glance – Financials and Valuations Fig 1 – Income statement (Rsm) Year end 31 Mar FY08 FY09 FY10e FY11e FY12e

Net sales 39,848 57,642 89,754 113,148 125,800 Sales growth (%) 14.6 44.7 55.7 26.1 11.2 - Op. expenses 28,879 40,878 66,121 82,870 91,274 EBIDTA 10,969 16,764 23,633 30,278 34,526 EBITDA margins (%) 27.5 29.1 26.3 26.8 27.4 - Interest 3,391 5,043 9,004 9,446 9,646 - Depreciation 2,033 3,092 4,500 5,800 6,700 + Other income 2,764 3,838 3,384 3,384 4,170 - Tax 2,337 3,540 3,784 5,157 6,258 PAT 5,972 8,927 9,729 13,260 16,092 PAT growth (%) 43.9 49.5 9.0 36.3 21.4 Consolidated PAT 5,972 8,927 9,729 13,260 16,092 FDEPS (Rs/share) 5.3 6.0 6.6 9.0 10.9 CEPS (Rs/share) 7.4 9.2 10.5 14.3 17.3 DPS (Rs/share) 1.0 0.9 1.0 1.4 1.6 Source: Company, Anand Rathi Research

Fig 2 – Balance sheet (Rsm) Year end 31 Mar FY08 FY09 FY10e FY11e FY12e

Share capital 2,343 2,804 2,804 2,804 2,804 Reserves & surplus 43,637 64,177 91,115 102,160 115,627 Deferred Tax Liability 5,597 6,896 7,396 8,396 9,896 Shareholders’ fund 51,577 73,876 101,314 113,360 128,327 Debt 83,056 131,062 138,240 143,240 143,240 Minority interests - - - - -Capital employed 134,632 204,938 239,555 256,600 271,567 Fixed assets 79,305 118,999 137,589 144,909 148,929 Investments 32,248 44,652 51,719 57,168 60,305 Working capital 4,924 12,163 20,200 26,200 33,200 Cash 18,154 29,086 30,047 28,323 29,133 Misc. Exp not w/o 1 39 - - -Capital deployed 134,632 204,938 239,555 256,600 271,567 No. of shares (m) 1,171.5 1,401.8 1,401.8 1,401.8 1,401.8 Source: Company, Anand Rathi Research

Fig 3 – Cash flow statement (Rsm) Year end 31 Mar FY08 FY09 FY10e FY11e FY12e

Consolidated PAT 5,972 8,927 9,729 13,260 16,092 +Depreciation 2,033 3,092 4,500 5,800 6,700 +Deferred tax 696 1,300 500 1,000 1,500 Cash profit 8,701 13,318 14,729 20,060 24,292 - Incr/(Decr) in WC (470) 7,240 8,037 6,000 7,000 Operating cash flow 9,170 6,079 6,692 14,060 17,292 -Capex 30,257 42,785 23,090 13,120 10,720 Free cash flow (21,086) (36,707) (16,398) 940 6,572 -Dividend 1,341 1,427 1,640 2,215 2,625 + Equity raised 8,517 5,147 - - - + Debt raised 28,125 48,006 7,178 5,000 - -Investments 14,461 12,404 (1,513) 5,450 3,137 -Misc. items (4,102) (8,316) (10,308) - - Net cash flow 3,856 10,932 962 (1,724) 810 +Opening cash 14,298 18,154 29,086 30,047 28,323 Closing cash 18,154 29,086 30,047 28,323 29,133 Source: Company, Anand Rathi Research

Fig 4 – PE Band

10x

20x

30x

40x

0

50

100

150

200

250

300

350

400

450

Dec

-04

Dec

-05

Dec

-06

Dec

-07

Dec

-08

Dec

-09

(Rs/share)


Fig 5 – EV/EBITDA

5x

10x

15x

20x

0

100

200

300

400

500

600

700

800

Dec

-04

Dec

-05

Dec

-06

Dec

-07

Dec

-08

Dec

-09

(Rs bn)


Fig 6 – Order Book break-up

Transportation60%

Industrial Structures

2%Water and Irrigation

13%

Hydro Power25%




Investment Argument & Valuation We initiate coverage on JPA with a Buy rating and target price of Rs290. A leader in infrastructure, JPA’s assets by Mar ’12 would include 33m tons cement capacity, 2,200 MW power, 400m sq. ft. property, and operational/under-construction expressways (Yamuna, Ganga, Himalayan).

Infrastructure behemoth

A leader in the infrastructure space (cement, construction, real estate and power), JPA is poised to capitalize on the vast opportunities in the coming years. By Mar ’12, its assets would include 33m tons of cement, 2,200 MW, 400m sq. ft. of real estate, operational/under-const. expressways (Yamuna, Ganga, Himalayan) even as it continues as a leading construction player.

JPA’s growth plans in cement are the most aggressive in the industry given its vision of being an ‘all-India leading player’. In the next 15 months, we estimate its capacity would more than double (to 25m tons) from 12m tons. Most of its supplies would still go to the North, Central and East.

By FY12, JPA’s power portfolio would rise to 2200MW from the current 700MW (addition of 500MW Bina and 1000MW Karcham power plants). Its growth plans see a power portfolio of 11 GW by FY16 and 13.5 GW three years later. After the merger of JHPL with JPVL, and the latter’s majority control of Jaypee Karcham Hydro Corp, the entity will house all the power assets of JPA, thereby simplifying the holding structure.

In the real estate segment JPA is to develop and sell 6,250 acres (400m sq. ft.) at five locations along the Yamuna expressway, of which, it has already been allotted 2,786 acres (175m sq. ft). JPA’s maiden realty project in Greater Noida, involving developing 8m sq. ft. of golf course centric premium township has so far seen sales of 2.97m sq. ft.

JPA, a leading construction player with works spanning hydro-power, expressways, irrigation has an current order book of Rs97bn. (3.3x FY09 revenues); 75% of it comes from two big in-house projects: Karcham Hydro-Power and the Yamuna Expressway. It also has in hand Rs300bn Ganga Expressway projects which involves development of 30,000 (3.3bn sq ft) acres of real estate development.

Strong earnings growth over FY09-12

We estimate the parent would report FY09-12 revenue and profit CAGRs of 27% and 22%, respectively, led by the cement and construction divisions.

We estimate JPA’s cement division to report 47% and 43% CAGRs in revenue and PBIT, respectively, over FY09-12 following the 42% CAGR in volume.

We estimate a 13% CAGR in revenue over FY09-12 in the construction business, driven by the Rs97bn order book. Besides, potential order accretion from Ganga Expressway and the Lower Siang, JPA is also pre-qualified to tender for three projects in Manipur and J&K totalling 3,200 MW, with potential order value of Rs192bn. EBIT margins are expected to be high during FY10-11, given peak execution at both Karcham Hydro and Yamuna Expressway while FY12 would depend upon the quantum of revenue booked from hydro-power projects, captive or external.



We estimate revenue and PBIT in the parent’s realty division (JP Green, Greater Noida) to have CAGRs of 25% and 10%, respectively. It has, till date sold 2.97m sq. ft. out of the 8m sq ft. We expect the entire project to be sold out by FY15 (vis-à-vis management expectations of FY12).

Low-land-cost advantage in Noida

JPA’s advantage of low land-cost (Rs70/sq. ft.) enables it to competitively price products at its Noida project, part of the Yamuna Expressway. We estimate a PBIT CAGR of 58% over FY09-12.

We estimate revenues and PBIT of Jaypee Infra accruing from realty to have CAGRs of, respectively, 53% and 59% over FY09-12 on the back of robust sales. Of the planned development at Noida (75m sq. ft.), it has managed to sell around 16.6m sq ft at an average realisation of Rs3400/ sq ft. The sales figure is impressive, considering that most large real-estate players have been able to sell only in the range of 5m-15m sq. ft. in the same period.

Well placed to meet funding needs

JPA parent’s Rs47bn capex over FY10-12 would largely be funded through internal accruals, given its strong cash generation and its recent Rs16.9bn sale of treasury stock. Its subsidiary JPVL’s equity commitment over FY10-12, of Rs46bn, net of securitisation of cashflows (Rs27bn) is planned to be funded through fresh equity. The balance treasury stock of 126m shares is worth Rs30bn.

The strong profits together with sale of 75m treasury stock is expected to lower net debt-equity for the company to 1.2x in FY10 (from 1.6x in FY09). A further liquidation of balance treasury stock if done can potentially bring the leverage down to 0.75x which will result in a healthy balance sheet.

Valuation Cement: We have valued the cement business at Rs119bn for an estimated capacity of 24.6m tons in FY11 based on US$100 EV per ton. The valuation is at a discount to large players, ACC (US$114) and Ambuja (US$116), and on par with current replacement cost. At our target price, the cement business would be valued at an EV/EBITDA of 7.7x FY11 estimates which is in line with the large cap majors.

Construction: We have valued the construction business at Rs117bn, based on 10.5x FY11e EV/EBITDA. The valuation is at a sharp discount to similar multiples of L&T (15x).

Real Estate: We have valued the real estate parcels on an NAV basis. We estimate the Noida project (first land parcel on the Yamuna Expressway) at Rs90bn, which translates into Rs73m an acre. The going rates for land in the vicinity range from Rs70m to Rs80m an acre. The valuation is justified considering the location of the project, the benefit of contiguous land and the low-land-cost advantage.

The other four land parcels on the Yamuna Expressway are valued based on current land value.

For the JP Greens project (Greater Noida), we take the NAV of Rs16bn, which translates into Rs35m an acre.



Power: We have valued various projects within JPVL (merged with JHPL) at a multiple of book value. The operational assets of 700 MW (RoE of ~30%) are valued at 3.5x BV FY10e, in line with the valuation of power generation companies like Tata Power and NTPC. We have valued the new projects (Bina, Nigrie, Karchana and Bara thermal power plants and the proposed hydro-electric plants in Meghalaya and Arunachal Pradesh) at 1x their Mar’09 BV, given the delays associated with large projects on account of regulatory approvals or delay in supply of equipment. (JPA has already placed orders for equipment for the Bina, Nigrie and Bara plants for commissioning over FY12-15.)

We have valued the Karcham hydro-electric project (1,000 MW) at 2x FY10e book value, given that it would be commissioned in 3QFY12.

At our valuation of the power projects, the implied value of JPVL (merged entity including Karcham Hydro) comes to Rs70 a share, a 10% discount to the current market price.

Fig 7 – Sum-of-parts valuations Segments Methodology Stake % Value (Rsm) Value (Rs/ share)

Cement

Cement $100 FY11 EV per ton 100 118,687 85

85

Construction

Construction 10.5 x FY11 EV/EBITDA 100 117,223 84

84

Real Estate

Jaypee Green - G. Noida At NAV 100 16,013 11

Noida – 1,250 acres At NAV 99 90,127 64

Other – 5,000 acres Land value 99 36,850 26

102

Power

JPVL (700 MW operational) 3.5 x FY10 BV 76 91,780 65

JPVL (7.8 GW under const.) 1x FY09 BV 76 7,159 5

Karcham Hydro Corp 2x FY09 BV 100 18,500 13

Wind Power (49 MW) 2x FY09 BV 100 5,371 4

88

Hotels

FY11 5 x FY11 EV/EBITDA 100 811 1

1

Others

Yamuna Expressway NPV 99 (17.352) (12)

Ganga Expressway 2 x FY10 BV 100 8,000 6

Zirakpur-Parwanoo BOT 2 x FY10 BV 100 1,901 1

Treasury Stock 10% discount to CMP 100 25,936 18

Less: Net Debt (FY11) 114,917 82

Equity Value 290

No. of shares (m) 1,402


Fig 8 – Share of businesses in sum-of-parts valuation

Others, 4%

Power, 24%

Real Estate, 27%

Construction, 22%

Cement, 23%




Risks

Sharp dip in cement prices. Earnings from cement for JPA would be at risk both in price and volume. Erosion in cement prices more than we estimate, delay in commissioning of fresh capacity or in ramp-up time (thereby affecting volume estimates) are key risks. Also, a hike in coal prices either by Coal India or in the open market would cut into earnings.

Timely availability of coal. The successful commissioning of the 1,320 MW Nigrie plant depends on timely development of associated coal blocks: Amelia (North) and Dongri Tal II. Commissioning of the coal blocks beyond 2013 would jeopardize the interest of JPA on account of the higher cost of open-market fuel.

Equipment delay. Timely supply of equipment for the new projects in cement and power is crucial for JPA’s earnings, given that growth over FY09-12 would primarily kick in from the new projects. Cement kilns are being supplied by L&T, Polysius, KHD and FLS, while BTG for Bina/Bara and Nigrie are being supplied by, respectively, BHEL and L&T.

Execution risks. Delay in completing projects under development beyond what we estimate would hit earnings from the construction division.

Real estate market. A deterioration in the realty market in Noida or the adjoining areas, together with a drop in demand, would severely impact earnings from the realty division.

Regulatory risks. Any change in government regulations either at the Centre or at the state level would impact JPA’s growth plans. This is largely true for back-ended projects such as the Ganga Expressway and land allocation for the remaining 5,000 acres of the Yamuna Expressway.



Infrastructure behemoth A leader in the infrastructure space (cement, construction, real estate and power), JPA is poised to capitalize on the vast opportunities in the coming years. By Mar ’12, its assets would include 34m tons of cement, 2,200 MW, 400m sq. ft. of real estate, operational/under-construction expressways (Yamuna, Ganga, Himalayan) even as it continues as a leading construction player.

Third largest cement group by Mar ’11

JPA’s growth plans in cement are the most aggressive in the industry given its vision of being an ‘all-India leading player’. In the next 15 months, we estimate its capacity would more than double (to 25m tons) from 12m tons now, making it the third-largest cement group in India after Holcim and the Aditya Birla Group. Management, however, aims to take this to 30m tons in the same time-frame. By Mar’12 it plans to raise that to 34m tons. All the new units would be supported by their own thermal power plants similar to the present status.

From its present units, JPA services the North, Central and East regions of India. Through its new units in Gujarat and AP, it would cover the other two regions of India (West and South, respectively) thereby reaching across the country. However, most of its supplies would still go to the North, Central and East. (See Annexure 1: India map with JPA cement plants.)

Fig 9 – Cement expansion rollout Capacity (m tons) Location FY08 FY09 FY10e FY11e FY12e

Rewa Complex MP, UP 7.0 7.0 7.0 7.0 7.0

Dalla UP 0.4 0.4 1.5 1.5 1.5

Chunar (G) UP 1.5 1.5 1.5 1.5 1.5

Panipat (G) Haryana 1.0 1.0 1.5 1.5 1.5

Sidhi MP 2.0 2.0 2.0

GACL Gujarat 1.2 2.4 2.4

Baga HP - 1.5 1.5

Bagheri (G) HP - 2.0 2.0

Roorkee (G) UP - 1.2 1.2

Wanakbori (G) Gujarat - 2.4 2.4

Bhilai JV Chhattisgarh - 2.2 2.2

JP Super Dalla UP - - 1.8

Sikanderabad (G) UP - - 1.0

Bokaro JV (G) Jharkhand - - 2.1

Balaji AP - - 3.5

TOTAL 9.9 9.9 14.7 25.2 33.6

CPP (MW) 88 154 252 342 342


2,200 MW by Mar ’12

JPA’s venture into power is at present limited to hydro power (700 MW). On installing the 1,000 MW Karcham hydro-electric plant and the 500 MW Bina thermal power plant, we estimate that JPA would raise capacity to 2,200 MW by Mar’12. It aims at a long-term proportion of 60-40 in thermal and hydro-electricity. Its growth plans see a power portfolio of 11 GW by FY16 and 13.5 GW three years later.

Any power project (hydro or thermal) requires strong execution skills

Cement capacity expected to more than double (to 25m tons) from 12m

tons over the next 15 months

Its growth plans see a power portfolio of 11 GW by FY16 and 13.5 GW

three years later



along with expertise in obtaining timely clearances from regulatory bodies. Given that all its upcoming projects are either in hydro-electricity (construction experience of two decades) or in UP and MP (where it has experience in addressing state-level regulatory issues), the ramp-up should not be a torrid affair. (For project-wise milestones refer Annexure 2: Power business – under implementation projects.)

The company has during YTDFY10 placed orders for the 1,320MW Nigrie (MP) and 1,980MW of Bara- Phase I (UP) to L&T and BHEL respectively. Both the projects are financially closed as well. As a substantial chunk of upcoming thermal power capacity is estimated to be sold on merchant basis, JPA’s RoE is expected to improve yearly.

Power asset ownership simplified

JPA started off in power in FY04 with a 300-MW hydro-electric plant (Baspa II, HP) through its subsidiary Jaiprakash Hydropower (JHPL). It followed that up with a 400-MW hydro-power plant (Vishnu Prayag, Uttarkhand) in FY07 through another subsidiary, Jaiprakash Power Ventures (JPVL), which was supposed to launch the Nigrie project in MP and a couple of hydro-electric projects in east India. After this, a new 1,000-MW hydro-power project (Karcham Wangtoo, HP) was planned through a subsidiary, Jaypee Karcham Hydro Corp. (JKHC) to be commissioned in FY12.

In Jul ’09, JPA decided to merge JPVL (63% holding) with JHPL (80% holding), leading to 76.3% stake in the merged entity. The amalgamation would be effective Apr ’09, subject to the approval of the High Court. The amalgamated entity would be renamed Jaiprakash Power Ventures (JPVL). In subsequent years JPVL would pick up additional equity issued by JKHC leading to a 55% stake and JPA would become the minority holder.

After this, JPVL would house all the power projects, thermal and hydro. By FY15, JPVL aims to have operationalised power assets of hydro (1,700 MW) and thermal (5,900 MW) with an aggregate capacity buildup of ~7,600 MW.

400m sq. ft. of real estate development incl. 75m sq. ft. in Noida

JPA’s fully-owned subsidiary, Jaypee Infratech, is executing the 165km six-lane expressway connecting Noida to Agra on a BOT basis on a 36-year concessionaire period (Annexure 3 – Yamuna Expressway picture). The project expenditure, including cost of land, pre-operative expenses and

Fig 10 – Power plant: Commissioning schedules Capacity (MW) Fuel FY09 FY10e FY11e FY12e FY13e FY14e FY15e FY16e FY17e FY18e FY19e

- Baspa II Hydro 300 300 300 300 300 300 300 300 300 300 300

- Karcham Wangtoo Hydro 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000

- Vishnu Prayag Hydro 400 400 400 400 400 400 400 400 400 400 400

- Bina Power Thermal 500 500 500 1,250 1,250 1,250 1,250 1,250

- Nigrie Thermal 1,320 1,320 1,320 1,320 1,320 1,320

- Karchana Thermal 1,320 1,980 1,980 1,980 1,980

- Bara Thermal 1,980 3,300 3,300 3,300 3,300

- Lower Siang Hydro 1,200 1,200 1,200 2,700

- Hirong Hydro 500

- Kynshi II Hydro 450

- Umngot I Hydro 270

TOTAL 700 700 700 2,200 2,200 3,520 7,570 10,750 10,750 10,750 13,470


JPVL (merged with JHPL) subsequent to majority control of

Jaypee Karcham Hydro Corp will house the power assets of JPA, thereby simplifying the holding

structure

To cross-subsidise the project cost of the Yamuna Expressway, JPA will get 6250 acres along the expressway;

2786 acres allotted till date



interest, is ~Rs80bn (Annexure 4 – Cost & financing breakup). In order to cross-subsidize the project, JPA would be allotted 6,250 acres (400m sq. ft.) at five locations along the expressway. This could be utilized for real estate development. Of this, it has already been allotted 2,786 acres (Noida:1,175 acres fully paid for), which would result in 175m sq. ft. of development. Of the other four parcels, Agra would be the second-most lucrative after Noida; the others would be relatively less value-accretive. Potential revenue from the saleable 400m sq. ft. would add up to Rs900bn with the Noida project constituting around Rs285bn. Nevertheless, most of the development (excluding Noida) would take place in the last few years of the project, given delays in land allotment and potential lower real-estate demand.

JP Greens: 8m sq. ft. in Greater Noida

The flagship realty project of JPA parent, JP Greens at Greater Noida, involves developing 8m sq. ft. spread over 450 acres, comprising exclusive homes, a golf course and landscaped parks. The project also plans to incorporate a 200-room boutique spa hotel in collaboration with Six Senses by FY11 and an integrated sports complex. JP Greens has since its launch in FY05 sold 2.97m sq. ft. at an average Rs5,500 each. Potential revenue from the 8m sq. ft. saleable area could aggregate Rs45bn. (Till 2QFY10, the company had booked revenues of Rs8.8bn.)

Rs97bn construction order-book – 3.3x FY09 revenues

JPA is a leading construction player with works spanning hydro-power, expressways, irrigation and civil & structural works of cement plants. The company would rank third after L&T and Punj Loyd based on estimated FY11 PBIT of Rs11bn. Its order book at end-Mar ’09 (excl. Rs300bn from the Ganga Expressway) was Rs106bn. Of this, around 75% came from two big in-house projects: Karcham Hydro-Power and the Yamuna Expressway. The order book at end-Sep ’09 (incl. the recently bagged Agra project of Rs11bn) was Rs97bn, translating into 3.3x its FY09 revenues.

Work on the Yamuna Expressway is picking up: construction underway on the entire 165km or ~4,000 acres. The company aims to complete the project before the Commonwealth Games slated for Oct ’10 (Annexure 5: Progress as on 26-Oct-09.) Of the budgeted cost of Rs97bn, the company has spent ~Rs52bn till now.

Fig 11 – Mar ’09 order-book breakup Project Location Value (Rs m) Nature

Sardar Sarovar Gujarat 640 1,200 MW HEP

Baglihar II J&K 5,000 450 MW HEP

Karcham Wangtoo HP 23,770 1,000 MW HEP

Yamuna Expressway UP 55,550 Expressway and realty project

Zirakpur-Parwanoo Punjab, Haryana, HP 3,480 Highway project

Cement MP, Chhattisgarh 750 Civil & structural, Fabrication & erection works at Satna and Bhilai

Srisailam- Alimineti Madhava Reddy Project

AP 15,560 51km irrigation tunnel at Srisailam

Bokaro-JP Cement Jharkhand 1,010 Civil, structural work, residential complex etc. of G unit of Bokaro Jaypee Cement

Widening of Varindavan Parikarma Marg

UP 320 Widening & upgrading of Varindavan Parikrama Marg and construction of KesiGhat Bridge on VP Marg

Agra Ring Road Agra 10,980 27km, of which 5km elevated

Total 117,060

Source: Company

Current order book translates to 3.3 FY09 revenues; 75% of it

comprises in-house projects: Karcham Hydro-Power and the

Yamuna Expressway

JP Greens in Greater Noida, premium golf centric township has

seen sales of 2.97m sq ft till date out of total 8m sq ft



Ganga Expressway: Long gestation project

The Rs300bn project comprises building 1,047km of an eight-lane access-controlled expressway along the Ganga connecting Greater Noida to Balia for a 35-year concession period. Similar to the Yamuna Expressway, JPA will be given rights of development on 30,000 acres (3.3bn sq. ft.) along the expressway in order to cross-subsidize the construction cost of the expressway.

Of this, 2.2bn sq. ft. would be available in the first 180km stretch (a relatively prime area) and the balance 1.1bn sq. ft. on the remaining 867km. A topographic survey (expressway including link roads) has been conducted on 650km and land proposals along the expressway for 334km have been submitted to the UPEIDA (Annexure 6: Ganga Expressway Project picture).

JPA proposes to infuse up to Rs30bn towards equity in the subsidiary formed for this purpose. This would be utilized for initial project expenses (Rs15bn) and payment of the performance guarantee (Rs15bn). It has as on 31 Mar ’09 infused Rs2.7bn towards equity in the subsidiary. The project would involve a long gestation period, given the problems associated with acquiring land, both for the expressway and real estate development. Accordingly, it may be a while before financial closure is completed.

Ganga Expressway: Rs300bn project will give JPA rights of development for 30,000 acres



Strong earnings growth over FY09-12 We estimate the parent would report FY09-12 revenue and profit CAGRs of 30% and 22%, respectively, led by the cement and construction divisions.

Cement to drive earnings over FY09-12 (a 43% CAGR)

We estimate JPA’s cement division to report 47% and 43% CAGRs in revenue and PBIT, respectively, over FY09-12 following the 42% CAGR in volume. The sharp rise in cement capacity over FY10-12 is expected to fuel volume growth. PBIT growth over FY10-12 would come despite a continuous slide in EBITDA per ton (pressure from cement prices). Our volume sales estimate for FY10-12 is ~30% lower than the management guidance as we assume a gradual ramp-up of production at the new units.

Maintain high exposure to relatively better regions of North, Central and East

We estimate that the regional demand-supply mismatch in cement during FY11-12 would be more acute in the South and West, leading to more pricing pressure. The basis of this is our estimate of higher capacity addition in the South than in any other region and the high inter-regional movement of cement between the South and the West.

Fig 14 – Regional snapshot – South and West FY09 FY10e FY11e FY12e

SOUTH

Avg. Cement Capacity (m tons) 67.9 84.5 98.4 106.5

Production (m tons) 59.7 63.9 69.7 75.9

Production Growth % 10.2 7.0 9.0 9.0

Capacity Utilisation % 88 76 71 71

WEST



Production Growth % (1.0) 8.0 9.0 9.0


Source: CMA, Anand Rathi Research

Despite JPA’s forthcoming capacities in the South and West, it would still be better off than its peers, as over 80% of its supplies (the AP unit to serve the East primarily; the Gujarat unit to serve the North) would feed the markets in the North, Central and East where price erosion is expected to be less. JPA’s strength would continue to be the Central (~50% of supplies over FY10-12) where utilization rates are estimated to be strong.

Fig 12 – Key assumptions Fig 13 – Regional capacity mix FY09 FY10e FY11e FY12e (%) FY09 FY10e FY11e FY12e

Cement sales (m tons) 7.6 9.9 15.0 21.8 North 10 27 21 18

JPA sales target (m tons) 7.6 14.5 22.7 28.7 Central 90 53 44 44

East - 10 7 13

Realisation per ton (Rs) 3,194 3,923 3,623 3,523 West - 11 16 14

EBITDA per ton (Rs) 947 1,207 1,027 944 South - - 12 10

Revenue (Rs m) 24,431 38,976 54,485 76,935 Total 100 100 100 100

PBIT (Rs m) 6,850 11,303 14,711 20,003

Margins % 28.0 29.0 27.0 26.0

Source: Company, Anand Rathi Research Source: Company, Anand Rathi Research

Strong volume growth to drive a 43% CAGR in cement PBIT



Also, consumption growth in FY10 is expected to be better in the North, Central and East.

Fig 15 – Regional Snapshot – North, Central and East FY09 FY10e FY11e FY12e

NORTH





CENTRAL


Production (m ton) 26.1 28.9 31.5 34.4



EAST





Source: CMA, Anand Rathi Research

Cost-reduction measures to arrest major dip in margins when prices decline

Apart from embarking on huge capacity expansion programmes, JPA is working on measures to help it contain costs. The benefits of these would be available (and arrest a major dip in the operating margin) during FY10-12, when prices are expected to come under pressure.

Fig 16 – Cost-reduction measures Heads Measure 1 Measure 2 Measure 3

Coal Installation of modern pyro- processing system in all new units, leading to lower coal consumption

MSW plant at Chandigarh to produce pallets for kiln-firing at Baga

Recently allotted two coal blocks in Mandla, MP, to reduce coal costs from FY12

Freight Clinker units located close to sources of key raw materials: limestone, gypsum and additives

Split location grinding units which are close to end use markets and fly-ash source

Optimum utilization of distribution mix: 50% each for rail and road

Power Existing cement plants, 90% fed by captive thermal power, resulting in savings of Rs1.5/unit or Rs125/ton

All new units with their own power plants

Taxes 10-year exemption on sales tax, royalty & electricity duty on captive power plant for 3m-ton UP project

10-year exemption on excise duty for 7m-ton capacity at HP projects

10m tons of new capacities entitled to various fiscal benefits

Source: Company

Momentum in construction to continue over FY10-11

We estimate a 13% CAGR in revenue over FY09-12 in the construction business, driven by the Rs97bn order book. While the Yamuna Expressway and the Karcham hydro-electric project would contribute to growth till FY11, the Ganga Expressway and the Lower Siang project are expected to start pulling in revenue from FY12. Work on Lower Siang (2,700 MW) itself is worth Rs122bn and exceeds the current order book. Further order inflows could come from captive hydro-power projects totalling 1,220 MW, which would bring in orders of Rs73bn; these, however, would be back-ended as their commissioning schedule is FY19.

JPA is pre-qualified to tender for three projects in Manipur and J&K totalling 3,200 MW, with potential order value of Rs192bn. We have not included revenue from any new external project (hydro- power/ irrigation) over FY10-12.

The Yamuna Expressway and the Karcham Hydro-electric project would

contribute to growth till FY11



EBIT margins are expected to be high during FY10-11, given peak execution at both Karcham Hydro and Yamuna Expressway. FY12 margins would depend upon the quantum of revenue booked from hydro-power projects, captive or external.

Fig 17 – Construction division financials FY09 FY10e FY11e FY12e

Revenue (Rsm) 29,439 45,870 52,761 41,949

PBIT (Rsm) 7,637 9,174 11,080 8,809

Margins% 25.9 20.0 21.0 21.0

Note: Adjusted for claim of Rs1 bn received from Baglihar project completed in previous quarters, FY09 margins at 22.5% Source: Company, Anand Rathi Research

Realty division (JP Greens) earnings –moderate growth

The response to JP Greens has been mixed so far, with sales slowing down in FY09. This was largely expected, given the premium positioning of the project. It has, since its FY05 launch, sold 2.97m sq. ft. at an average realization of Rs5,500 each. JPA has so far received Rs11.2bn in cash towards sales done, representing 70% of estimated sales revenue. With the broad pickup in the real-estate market and new launches, we estimate sales to also pick up from FY10. We expect the entire project to be sold out by FY15 (vis-à-vis management expectations of FY12) with average sales realization of ~Rs6,100/sq. ft. at a construction cost of ~Rs2,600/sq. ft. We estimate revenue and PBIT in the parent’s realty division to have CAGRs of 25% and 10%, respectively.

Fig 18 –JP Green’s financials FY08 FY09 FY10e FY11e FY12e

Revenue (Rs m) 2,558 4,414 6,294 7,551 8,709

PBIT (Rs m) 809 2,171 2,016 2,324 2,922

Margin % 31.6 49.2 32.0 30.8 33.5

Area sold (m sq ft) 0.79 0.31 0.80 0.80 0.80

Price (Rs/ sq ft) 5,500 4,450 6,300 6,615 6,615


We estimate revenue and PBIT in the parent’s realty division to have

CAGRs of 25% and 10%, respectively



Low-land-cost advantage in Noida JPA’s advantage of the low cost of land (Rs70/sq. ft.) enables it to price its products competitively in the Noida real estate parcel, part of the Yamuna Expressway. We estimate a PBIT CAGR of 59% over FY09-12.

Cost per sq. ft. at Noida: Rs70

JPA’s cost of land for the 1,175 acres of contiguous land in Noida (part of the Yamuna Expressway project) is ~Rs70 a sq. ft. Against a cost for others, of Rs500-1,000 per sq ft, the huge advantage puts it in a sweet spot to offer flexibility to price its products competitively. A case in point was the successful launch of project ‘Aman’ encompassing 3.6m sq. ft. This was sold in a single day given its attractive pricing (Rs2,250 a sq. ft., when prices in the vicinity ranged from Rs4,000 to Rs5,000 a sq. ft.). The prices were also much lower than the project ‘Wishtown’, JPA’s first launch, in Nov ’07, at around Rs5,900 a sq. ft. By adjusting pricing to market conditions, JPA monetized its assets and ensured steady cash flows.

PBIT estimated to grow a CAGR of 59% over FY09-12

From Nov ’07 to Oct ’09, JPA has sold ~16.56m sq. ft. in the Noida project – at an average realization of ~Rs3,500/ sq ft. This figure is impressive, considering that most large real-estate players have been able to sell only in the range of 5m-15m sq. ft. in the same period. JPA has so far received Rs16bn of cash towards total sales effected, representing 28% of total estimated sales revenue. This, of course, would lubricate the working capital requirements. Of the planned development at Noida (75m sq. ft.), it has managed to sell around 35% of the residential space earmarked. We estimate the balance to be sold over FY10-17 (vis-à-vis management expectations of FY15) at an average sales realization of Rs4,400/sq. ft. and a construction cost of Rs2,000/sq. ft.

We estimate revenues and PBIT of Jaypee Infra accruing from realty to have CAGRs of, respectively, 53% and 59% over FY09-12.

Fig 19 –Japyee Infratech financials FY08 FY09 FY10e FY11e FY12e

Revenue (Rs m) 8 5,563 22,913 14,612 19,922

PBIT (Rs m) (113) 3,036 17,537 8,930 12,099

Margin % - 54.6 76.5 61.1 60.7

Area sold (m sq ft) 2.35 2.79 12.86 3.00 9.00

Price (Rs/ sq ft) 5,500 4,666 3,591 4,000 4,200

Source : Company, Anand Rathi Research

JPA’s land cost is just Rs70/sq. ft. against Rs500-1,000 for others



Well placed to meet funding needs JPA parent’s Rs47bn capex over FY10-12 would largely be funded through internal accruals, given its strong cash generation and its recent Rs16.9bn sale of treasury stock. Its subsidiary JPVL’s equity commitment over FY10-12, of Rs47bn, net of securitisation of cashflows (Rs27bn) is planned to be funded through fresh equity.

All JPA’s projects in various segments have been funded

In FY09, four subsidiaries, in cement and hotels, were amalgamated with the parent company, thereby consolidating the businesses. This was followed by the recent consolidation of all power assets under the listed subsidiary, Jaiprakash Hydro-Power (JHP). This clear demarcation of businesses as power and infrastructure (non-power) makes it convenient to raise the requisite capital to fund the projects under the two companies. Besides, the increased traction in all business segments and improved equity market conditions will enable JPA to fund its projects cost-effectively.

JPA’s parent capex for FY10-12 of Rs47bn can be entirely funded through internal accruals (our estimate: Rs59bn). It had, in 1HFY10, raised Rs16.9bn by divesting 75m shares of the 201m treasury shares created by merging its four subsidiaries. It plans to divest the remaining shares in phases over the coming years, based on requirements. At current valuations the balance shares would yield ~Rs30bn.

The strong profits together with sale of 75m treasury stock is expected to lower net debt-equity to 1.2x in FY10 (from 1.6x in FY09). A further liquidation of balance treasury stock if done can potentially bring the leverage down to 0.75x. This would result in a healthy balance sheet and in turn enable raising of any new debt at competitive rates.

JHPL to raise up to Rs15bn through the equity market

We estimate that JHPL would require Rs28bn by Mar ’11 and Rs47bn by Mar ’12 to fund its equity commitment in ongoing power projects. Securitisation of cash flows from the operational Vishnuprayag Hydropower projects has yielded Rs16.5bn while that for Baspa has yielded Rs10.5bn.

JHPL intends to tap the equity market through an FPO/QIB/FCCB/ ADR/GDR to raise up to Rs15bn (special resolution passed in the last AGM). This should not be a monumental task, given the recent successful IPOs of power utilities such as NHPC and Adani Power.

Rs47bn capex will be largely funded by internal accruals

JHPL intends to tap equity market to raise Rs15bn to fund part of its

equity commitment towards ongoing projects



Financials Fresh capacities coming on stream in the cement division would drive JPA’s overall revenue. We expect revenue and PBIT to post CAGRs of, respectively, 28% and 22% over FY09-12. Rising free cash-flows over FY10-12 and diminished debt would lower JPA’s net gearing to 99% by FY12 – from 160% three years earlier.

Revenue and PBIT estimated at 28% and 22% CAGRs over FY09-12

Fresh capacities coming on-stream in the cement division would drive overall revenue of JPA. Supported by 42% volume CAGR, we expect a 47% CAGR in cement revenue over FY09-12. Average FY10 realisations are estimated to be up 23% yoy, then drop 11% over FY11-12.

Cement’s share of revenue is expected to move up to 58% in FY12 (from 39% three years earlier). Similarly, PBIT in cement is estimated at a 43% CAGR over FY09-12, with slight pressure on margins due to the drop in realisation.

Construction’s revenue and PBIT are estimated at 13% and 5% CAGRs, respectively. Its share in revenue is expected to drop to 32% in FY12 (from 47% three years earlier) while its share in PBIT is expected to drop to 26% from 41% in FY09.

Fig 20 – Revenue break-up – FY09

Cement, 39%

Construction, 47%

Real Estate, 7%

Wind Power, 0%

Investments, 3%

Unallocated, 2%Hotels/Hospit

ality & Golf Course, 3%


Fig 21 – Revenue break-up – FY11e

Cement, 46%Construction,

44%

Real Estate, 6%

Wind Power, 0%

Investments, 1%

Unallocated, 1%

Hotels/Hospitality & Golf Course, 1%


Fig 22 – PBIT break-up – FY09

Cement, 36%

Construction, 41%

Real Estate, 12%

Wind Power, 1%

Investments, 9%

Unallocated, 0%

Hotels/Hospitality & Golf Course, 2%


Fig 23 – PBIT break-up – FY11e

Cement, 49%Construction,

37%

Real Estate, 8%

Wind Power, 1%

Investments, 4%

Unallocated, 0%Hotels/Hospit

ality & Golf Course, 1%


Supported by 42% volume CAGR, we expect a 47% CAGR in cement

revenue over FY09-12



Revenue and PBIT from real estate are expected at, respectively, 25% and 10% CAGRs over FY09-12. Revenue contribution is expected to be ~7% through FY12 and PBIT contribution at 9% in FY12.

PBIT margins to be volatile through FY10-12

Margins in JPA’s standalone core businesses (cement, construction and real estate) are expected to be volatile through FY10-12. This largely arises from inherent characteristics of the individual businesses and is more relevant in cement and real estate. Margin pressure on JPA’s cement business, however, will not be as severe as on other cement manufacturers due to the former’s better volume growth, scale of operations and various cost-saving steps undertaken.

Fig 24 – PBIT margins – segment-wise

0%

10%

20%

30%

40%

50%

60%

70%

FY08

FY09

FY10

e

FY11

e

FY12

e

Cement Construction Wind Power Hotels/Hospitality Real Estate JPA Source: Company, Anand Rathi Research

Net gearing to improve

Rising free cash-flows through FY10-12 and lower debt would shrink JPA’s net gearing to 99% by FY12 (from 160% three years earlier). The cash-flow would be capped by the rise in working capital, which is expected to go up as we approach the trough of the cement cycle. We expect the average working capital cycle to jump from 54 days in FY09 to 75 two years later.

Fig 25 – FCF and net debt-equity

-40

-30

-20

-10

0

10

FY08

FY09

FY10

e

FY11

e

FY12

e

0.9

1.05

1.2

1.35

1.5

1.65

FCF Net D/E (RHS)

(x)(Rs bn)


Rising free cash-flows through FY10-12 and lower debt would

shrink JPA’s net gearing to 99% by FY12 from 160% in FY09



Fig 26 – Income statement (Rsm) Year end 31 Mar FY08 FY09 FY10e FY11e FY12e

Net sales 39,848 57,642 89,754 113,148 125,800

Sales growth (%) 15 45 56 26 11

Total Operating Expenses 28,879 40,878 66,121 82,870 91,274

EBIDTA 10,969 16,764 23,633 30,278 34,526

EBITDA Growth (%) 16.4 52.8 41.0 28.1 14.0

EBITDA margins (%) 27.5 29.1 26.3 26.8 27.4

+ Other income 2,764 3,838 3,384 3,384 4,170

- Interest 3,391 5,043 9,004 9,446 9,646

- Depreciation 2,033 3,092 4,500 5,800 6,700

PBT 8,309 12,466 13,513 18,416 22,350

- Tax 2,337 3,540 3,784 5,157 6,258

PAT 5,972 8,927 9,729 13,260 16,092

PAT growth (%) 43.9 49.5 9.0 36.3 21.4

PAT margin (%) 15.0 15.5 10.8 11.7 12.8

FDEPS (Rs/share) 5.3 6.0 6.6 9.0 10.9

CEPS (Rs/share) 7.4 9.2 10.5 14.3 17.3

DPS (Rs/share) 1.0 0.9 1.0 1.4 1.6


Fig 27 – Balance Sheet (Rsm) Year end 31 Mar FY08 FY09 FY10e FY11e FY12e

Sources of Funds

Share capital 2,343 2,804 2,804 2,804 2,804

Reserves & surpluses 43,637 64,177 91,115 102,160 115,627

Deferred tax liability 5,597 6,896 7,396 8,396 9,896

- Miscellaneous expenses 1 39 - - -

Shareholders’ funds 51,576 73,838 101,314 113,360 128,327

Total loans 83,056 131,062 138,240 143,240 143,240

Minority interests - - - - -

Total 134,631 204,900 239,555 256,600 271,567

Application of Funds

Gross Block 51,662 86,192 135,042 156,762 181,282

Less: Depreciation 14,547 18,013 22,513 28,313 35,013

Net block 37,115 68,179 112,529 128,449 146,269

CWIP 42,190 50,819 25,060 16,460 2,660

Investments 32,248 44,652 51,719 57,168 60,305

Debtors 5,862 10,220 16,000 18,000 20,000

Inventory 9,813 12,286 22,000 30,000 35,000

Loans & advances 22,219 33,081 55,000 65,000 75,000

Other current assets 3,581 6,943 8,200 10,200 11,200

Total current assets 41,475 62,530 101,200 123,200 141,200

Provision 3,061 4,823 6,000 7,000 8,000

Current liabilities 33,491 45,544 75,000 90,000 100,000

Total Current liabilities 36,551 50,367 81,000 97,000 108,000

Working capital 4,923 12,163 20,200 26,200 33,200

Cash 18,154 29,086 30,047 28,323 29,133

Total 134,631 204,900 239,555 256,600 271,567





Consolidated PAT 5,972 8,927 9,729 13,260 16,092

+Depreciation 2,033 3,092 4,500 5,800 6,700

+Deferred tax 696 1,300 500 1,000 1,500

Cash profit 8,701 13,318 14,729 20,060 24,292

- Incr./(Decr.) in WC (470) 7,240 8,037 6,000 7,000

Operating cash flow 9,170 6,079 6,692 14,060 17,292

-Capex 30,257 42,785 23,090 13,120 10,720

Free cash flow (21,086) (36,707) (16,398) 940 6,572

-Dividend 1,341 1,427 1,640 2,215 2,625

+ Equity raised 8,517 5,147 - - -

+ Debt raised 28,125 48,006 7,178 5,000 -

+ Minority interests - - - - -

-Investments 14,461 12,404 (1,513) 5,450 3,137

-Misc. items (4,102) (8,316) (10,308) - -

Net cash flow 3,856 10,932 962 (1,724) 810

+Opening cash 14,298 18,154 29,086 30,047 28,323

Closing cash 18,154 29,086 30,047 28,323 29,133


Fig 29 – Ratio analysis @ Rs 230 on 11th Dec 2009 Year end 31 Mar FY08 FY09 FY10e FY11e FY12e

Profitability Ratios

EBITDA margin (%) 27.5 29.1 26.3 26.8 27.4

PAT margin (%) 15.0 15.5 10.8 11.7 12.8

Income tax rate (%) 28.1 28.4 28.0 28.0 28.0

RoE (%) 17.4 16.7 12.6 13.8 14.8

RoCE (%) 8.0 8.1 8.6 9.9 10.5

Other Ratios

Net debt / equity (%) 151.3 159.7 119.1 112.8 98.9

W C turn (days) 47 54 66 75 86

Per Share Data

Earnings per share (Rs) 5.3 6.0 6.6 9.0 10.9

Book value per share (Rs) 36.6 45.6 64.8 72.7 82.3

Dividend per share (Rs) 1.0 0.9 1.0 1.4 1.6

Cash earnings per share (Rs) 7.4 9.2 10.5 14.3 17.3

Valuation Ratios

PE (x) 38.8 81.4 34.8 25.5 21.0

PE Parent (x) 22.2 17.7 15.5 11.1 9.4

PE (construction)(x) 31.3 16.4 14.6 11.9 15.0

P / BV (x) 6.3 5.0 3.5 3.2 2.8

EV / EBITDA (x) 30.4 24.7 17.9 14.2 12.4




Company Background & Management The flagship company of the Jaypee Group, JPA is ranked as one of India's largest private sector companies and was incorporated in 1979 by Shri Jaiprakash Gaur, an engineering graduate of the University of Roorkee.

The group started off in civil engineering construction in 1979 and diversified into cement, setting up its first plant in Madhya Pradesh in 1983. It has since been expanding into various segments: hotels, hydro-power, real estate and expressways. It is now the country's largest private hydro-electricity player, and a leading cement and construction player.

In cement, JPA has capacity of 12m tons across central India and plans to expand it to 34m tons all India by FY12.

In construction, JPA with an order book of Rs97bn in hydro-power (Karcham Wangtoo) and expressway development (Yamuna) is one of the leading players in India.

In power, JPA has operational assets of 700 MW in two plants (HP, Uttarkhand). It plans to scale its power assets to 2.2 GW by 2012 and 13.5 GW by 2018.

In roads, the company is building two expressways: Yamuna in UP and Himalayan in Punjab covering 165km and 29km, respectively, on a BOT basis. In addition, it has another BOT project in UP, namely, Ganga, covering 1,047km from Greater Noida to Balia.

In real estate, the company is building 8m sq. ft. (Jaypee Greens) in Greater Noida and 75m sq. ft. in Noida. Besides, it will be allotted for real estate development 325m sq ft along the Yamuna Expressway and 3.3bn sq. ft. along the Ganga Expressway.

Fig 30 – Key management Key Person Designation Background

Jaiprakash Gaur Chairman Engineering graduate of Roorkee University and founder of the group

Manoj Gaur Executive Chairman & CEO

Distinguished alumnus from BITS, Pilani. On completing his B.E (Hons.) degree in Civil Engineering, he joined the construction division of JPA.

Sunil Kumar Sharma Executive Vice-Chairman Holds a bachelor's degree in science from the University of Meerut. Has over 30 years experience in planning, procurement, execution and financial management of major construction projects, operation of hotels, and the cement plant as well as cost & quality control

S D Nailwal Director, Finance Has 38 years experience in project finance, corporate planning and as Company Secretary. Is a Fellow of the Institute of Company Secretaries of India

Source : Company



Fig 31 – Equity History No. of shares (m) Original Addition Final Comments

FY06 172 25 197 Allotted to shareholders of erstwhile Jaypee Greens under scheme of amalgamation

FY06 197 14 211 FCCB converted

FY06 211 4 215 ESOPs

FY07 215 4 219 FCCB converted

FY08 219 877 1,096 Split 1:5

FY08 1,096 75 1,172 FCCB converted

FY09 1,172 2 1,174 FCCB converted

FY09 1,174 10 1,184 Shares allotted to promoters on preferential basis FY09 1,184 218 1,402 Equity Shares to be allotted pursuant to scheme of

amalgamation to shareholders of Jaypee Hotels, Jaypee Cement, JaiPrakash Enterprises and Gujarat Anjan Cement




Fig 32 – JPA cement plants across India, post-commissioning

Balaji Cement, AP (3.5 m ton)

Bhilai, CTG (2.2 m ton)

Bagheri, HP (2.0 m ton)

Wanakbori, Gujrat (2.4 m ton)

GACL, (2.4 m ton)Gujrat

Sikanderabad, UP (1 m ton)Panipat, Haryana (1.5 m ton)

Roorkee, UP (1.2 m ton)Sadwakhurd, UP (0.6 m ton)

Chunar, UP (0.5 m ton)

Baga, HP (1.5 m ton)

Siddhi, MP (2.0 m ton)

JP Super, Dalla, UP (1.8 m ton)

Dalla, UP (2.5 m ton)

Rewa Complex, (7 m ton)MP

Bokaro JV, (2.1 m ton)MP




Fig 33 – Power business – Under implementation projects Project Land Water Environment Clearance

DPR/EPC Order DPR/ EPC Order Fuel PPA

Baspa II - 300 MW PROJECT IN OPERATION

Vishnuprayag – 400 MW PROJECT IN OPERATION

Karcham Wangtoo – 1,000 MW 20% merchant

Lower Siang – 2,700 MW - Approval for pre-construction activities granted by MOEF

DPR submitted to CEA 50% merchant

Hirong - 500 MW - Same as above Acres (Canada) appointed for DPR preparation

50% merchant

Bina Power – 1,250 MW GoMP - 42%, Merchant- 40%

Nigrie Thermal – 1,320 MW 90% Acquired; plant land in poss.

Final presentation made to MOEF. Appr. exp. shortly

GoMP - 37.5%, Merchant- 50%

Karchna Thermal – 1,980 MW 62% acquired for Phase I

Applied for DPR prepared 33% merchant

Bara Thermal – 3,300 MW 100% acquired for Phase I

Applied for 38% merchant

Source: Company

Fig 34 – Yamuna Expressway

AGRA

MATHURA

DISTRICTAGRA

DISTRICT HATHRAS

SADABADDISTRICT MATHURA

TAJ ECONOMIC ZONEDISTRICT ALIGARH

INTERNATIONALAIRPORT

HARYANA

CHHATA TAHSIL

GAUTAM BUDH NAGAR

GREATERNOIDA

NOIDA

5

432

1

NEW DELHILand for development at five 6,250 acres to be developed by JAL

locations;

Greater Noida to Agra – developed by JAL

Yamuna Expressway to be

Noida to Grea ter Noida Expressway completed

LEGEND :

Proposed metro up to Jewar

SPORTS SDZ (1000 Ha.)

METRO currently under construction up to Noida City CentreMETRO extension proposed to planned Airport in Jewar

165km long six-lane access-controlled expressway connecting Noida to Agra

Estimated cost: Rs9,739cr (US$2.02bn)

Rights to concessionaire for 36 years

mt. of land along the expressway Ribbon development of 25m sq.

Noida or Greater Noida): 90-year leaseFive or more locations (one either

Source: Company

Fig 35 – Yamuna Expressway - Project Cost and Means of Finance Project Cost Breakup Rs bn

Cost of land - Expressway and Structures 9.0

Road construction cost 53.0

Preliminary, Pre-operative and Contingencies 4.7

Interest during construction 13.5

Cost of land - for development 17.2

Total 97.4

Means of Finance Rs bn

Equity/ IPO/ Private placement 22.5

Inflows from real estate 14.9

Senior Debt / Term loans 60.0

Total 97.4

Source: Company



Fig 36 – Yamuna Expressway – Status as on 26-Oct-09 S.N. Activity Quantity On 30-Mar-08 % On 26-Oct-09 %

(lakh cum) (lakh cum) (lakh cum)

1 Clearing and Grubbing 1,735 Ha 33.50 Ha 2 1,652 Ha 95

2 Earthwork in enbankment 374.58 5.94 2 250.0 67

3 Flyash 27.16 - - 10.54 39

4 Structural Concrete

a) Culverts 0.78 0.02 3 0.46 59

b) Vehicular Underpasses / Cart Tracks Underpasses 2.54 0.04 2 0.77 30

c) Minor Bridges 1.68 - - 0.77 46

d) Interchanges 3.95 - - 0.99 25

Source: Company

Fig 37 – Ganga Expressway

GANGA EXPRESSWAY PROJECT

400m sq. ft.

165 km

180 km

2.6bn sq. ft.

1,047 km

3.7bn sq. ft.

1,047km expressway 35-year concession period Development rights to an estimated 30,000 acres along the expressway 3.3bn. sq. ft. built-up area

Source: Company



Fig 38 – Power Business – Summary of intended portfolio

Karcham WangtooHydro Power Bina Thermal Power Nigrie Thermal Power

Karchana Thermal Power

Bara Thermal Power

Lower Siang Hydro Power

Hirong Hydro Power

Location Kannur, HP MP Singrauli, MP UP UP Arunachal Pradesh

Arunachal Pradesh

Capacity 1,000 MW (4x250) 500 MW (2x250) 1,320 MW (2x660) 1,980 MW (3x660)

3,300 MW (5x660)

2,700 MW 500 MW

Regulated Tariff 800 MW 300 MW 660 MW 1320 MW 2,045 MW 1,350 MW 250 MW

Merchant Power 200 MW 200 MW 660 MW 660 MW 1,255 MW 1,350 MW 250 MW

PPA 120 MW- Free Power to state 704 MW- PPA with PTC 176 MW- Merchant sale

Merchant- 40% GoMP- 42%

Merchant- 50% GoMP- 37.5%

Merchant- 33%

Merchant- 38%

Merchant- 50% Free power to state- 12% for the first 10 years (15% subsequently)

Merchant- 50% Free power to state- 12% for the first 10 years (15.5% subsequently)

Description Run-of-the-river project on the Sutlej in Kannur district of Himachal Pradesh

1,250,MW coal-fired plant in MP, with 500 MW coming up in phase I; Project acquired from the Aditya Birla Group

Super-critical power plant Coal to be supplied by MPSMCL (JV between MP State Mining Corp. and JPA) from the Amelia (North) and Dongri Tal-II blocks, which are to be used solely to fuel Nigrie plant Mining in Amelia to start from Dec ’09

Awarded by UP govt through tariff-based bidding in FY09 UP govt. the original promoter, has done the groundwork related to infrastructure and clearances

Awarded by UP govt through tariff-based bidding in FY09 UP govt. the original promoter, has done the groundwork related to infrastructure and clearances

Run-of-the-river project Equity participation by the Government of Arunachal Pradesh, of 11%

Run-of-the-river project Equity participation by the Government of Arunachal Pradesh, of 11%

Completion Schedule 3Q FY12 3Q FY12 3Q FY14 FY15 FY15 FY16 FY19

Project Status Land, water and environmental clearances in place; construction in full swing

Coal linkage, land and water in place; environmental clearance being revalidated

Coal linkage, land (100%) and water in place; environmental clearance expected shortly; Work started and accommodation for 2,500 people ready

Coal linkage, land (50%) and water in place for 1,320 MW; environmental clearance applied for

Coal linkage, land (94%) and water in place for 1 980 MW; environmental clearance applied for

Water in place, approval for pre-construction activities granted by MOEF

Water in place, approval for pre-construction activities granted by MOEF

Equipment Supplier Voith Siemens/ VA Tech

BHEL Boiler: L&T-MHI JV Turbine/Generator: L&T

DPR prepared Equipment to be ordered in 2H FY10

BHEL / Siemens/ Alstom

DPR submitted to CEA

DPR under preparation

Cost Rs 69bn Rs56bn Rs80bn Rs99bn Rs165bn Rs122bn Rs30bn

Funding (D:E) 70:30 Financial Closure done

70:30 Financial Closure for Phase I done

70:30 Financial Closure done



70:30 Financial Closure pending

70:30 Financial Closure pending

JPA stake % 100.0 To come down to 43.6

76.5 76.5 76.5 76.5 68.1 68.1

Source: Company



Fig 39 – Holding Structure

BOO Power Infrastructure

Jaypee Infratech

Ltd.

98.96%

Cement

Himalayan Expressway

Ltd.

100%

4.3 M tpa

Joint ventures

Coal Mining

Coal Mining JV with State Govt.

For 1,320 MW Thermal power

Jaiprakash Hydro Power Ltd.(300 MW – Hydro – Baspa II – in operation)

(400 MW – Hydro – Vishnuprayag – in operation(1,320 MW Thermal – under implementation)

76.25%

-JKHCL (1,000 MW)

Karcham Wangtoo project

Jaypee Powergrid

Ltd

74%

Arunachal Projects

(3,200 MW)

Meghalaya Projects (720 MW)

74%

89%

Jaypee Ganga Infra.

Corp. Ltd.

100%

Bina Power (1,250 MW)

100%

Jaiprakash Associates Ltd.

E&C

(Yamuna Expressway Project)

56.45%

(43.55% held by JAL)

UP Power projects

(5,280 MW)

100%

Real Estate &HospitalityCement - 29.25 M tpa

JPSK SportsPvt. Ltd.

(Formula 1)

61.7%

JPVLTo be renamed

Source: Company


India I Equities


[email protected]


[email protected]

Key financials

Year end 31 Mar FY08 FY09 FY10e FY11e FY12e

Sales (Rsm) 36,606 48,819 58,139 73,836 92,295

Net profit (Rsm) 2,105 2,260 2,344 3,336 4,140

EPS (Rs) 15.8 16.9 17.4 24.7 30.7

Growth (%) 44.5 7.3 2.6 42.4 24.1

PE (core) (x) 16.3 15.1 14.8 10.4 8.4

PBV (x) 3.0 2.7 2.4 2.1 1.8

RoE (%) 14.4 13.3 12.1 15.1 16.2

RoCE (%) 14.4 12.7 14.0 15.9 17.7

Dividend yield (%) 0.4 0.4 0.4 0.5 0.5

Net gearing (%) 55.4 71.6 69.6 72.3 72.8


Construction

Initiating Coverage

15 December 2009

IVRCL Infra

Favourite watering hole, renewed BOT focus; initiate at Buy

Buy. We initiate coverage on IVRCL Infra with a Buy rating and a target price of Rs480. A strong order book, renewed focus on BOT projects and synergies from HDO are key growth drivers.

Strong order pipeline. IVRCL’s order book of Rs146bn together with L1 totals Rs190bn (3.8x FY09 revenue). Of it, 70% is from the rapidly growing, high-margin water segment, where it is the leader. We expect 22% earnings CAGR over FY09-12, on huge investments in water, power, railways and roads.

IVR Prime – Renewed focus post-restructuring. With real estate growth plans on the back burner, IVRCL plans to transfer its share in BOT projects (one water, three road) to IVR Prime. The result: net worth would double, enabling it to bid for large projects; it is in the fray for three projects. We expect it to be a strong contender for upcoming NHAI projects.

Hindustan Dorr-Oliver offering synergies. The HDO acquisition has proven value accretive for IVRCL: the former is better positioned in design engineering and complements the latter’s civil and structural capabilities. HDO is today better set to bag large turnkey projects.

Valuation. Our sum-of-parts valuation is Rs480: Rs371 for its core construction at 15x FY11e earnings and Rs54/Rs20 at a 30% holding company discount for both IVR Prime (post-restructuring) and HDO, respectively.


Key data IVRC IN/ IVRC BO

52-week high/low Rs425 / Rs82 Sensex/Nifty 17119 / 51173-m average volume US$20.2m Market cap Rs49.2bn/US$1.07bnShares outstanding 133.5mFree float 90.3%Promoters 9.7%Foreign Institutions 54.7%Domestic Institutions 16.8%Public 18.8%


IVRCL Infra

Sensex

75125175225275325375425

Nov

-08

Dec

-08

Jan-

09Fe

b-09

Mar

-09

Apr-0

9M

ay-0

9Ju

n-09

Jul-0

9Au

g-09

Sep-

09O

ct-0

9N

ov-0

9D

ec-0

9


15 December 2009 IVRCL Infra – Favourite watering hole, renewed BOT focus; initiate at Buy



Net sales 36,606 48,819 58,139 73,836 92,295Sales growth (%) 58.7 33.4 19.1 27.0 25.0 - Op. expenses 32,990 44,601 52,720 66,842 83,539 EBIDTA 3,616 4,218 5,419 6,995 8,756 EBITDA margins (%) 9.9 8.6 9.3 9.5 9.5 - Interest 478 1,306 1,498 1,603 1,898 - Depreciation 328 473 550 675 775 + Other income 44 299 180 190 190 - Tax 749 478 1,207 1,570 2,133 PAT 2,105 2,260 2,344 3,336 4,140 PAT growth (%) 48.8 7.4 3.7 42.4 24.1 Consolidated PAT 2,105 2,260 2,344 3,336 4,140 FDEPS (Rs/share) 16 17 17 25 31 CEPS (Rs/share) 19 21 22 30 37 DPS (Rs/share) 1.4 1.4 1.6 1.8 2.0 Source: Company, Anand Rathi Research


Share capital 267 267 270 270 270 Reserves & surplus 15,892 17,956 20,483 23,635 27,580 Shareholders’ fund 16,159 18,223 20,752 23,905 27,850 Debt 10,678 13,980 16,505 18,310 20,365 Minority interests - - - - -Capital employed 26,837 32,203 37,258 42,215 48,215 Fixed assets 3,733 5,402 5,452 6,277 7,002 Investments 3,409 3,892 4,557 4,557 4,557 Working capital 17,924 21,900 25,048 30,141 36,244 Cash 1,772 1,009 2,201 1,240 412 Capital deployed 26,837 32,203 37,258 42,215 48,215 No. of shares (m) 133.5 133.5 134.9 134.9 134.9 Net Debt/Equity (%) 55.4 71.6 69.6 72.3 72.8W C turn (days) 106 117 122 120 120 Source: Company, Anand Rathi Research

Fig 3 – Cash flow statement (Rsm)

Year end 31 Mar FY08 FY09 FY10e FY11e FY12eConsolidated PAT 2,105 2,260 2,344 3,336 4,140 +Depreciation 328 473 550 675 775 +Deferred Tax 47 14 90 100 120 Cash profit 2,480 2,747 2,984 4,111 5,035 - Incr/(Decr) in WC 6,591 3,977 3,147 5,093 6,103 Operating cash flow (4,111) (1,230) (164) (982) (1,067) -Capex 1,626 2,143 600 1,500 1,500 Free cash flow (5,737) (3,373) (764) (2,482) (2,567) -Dividend 219 219 253 284 316 + Equity raised 830 - 348 - - + Debt raised 5,117 3,302 2,525 1,805 2,055 -Investments 580 483 665 - - -Misc. items (122) (9) 0 (0) 0 Net cash flow (466) (763) 1,192 (961) (828) +Opening cash 2,238 1,772 1,009 2,201 1,240 Closing cash 1,772 1,009 2,201 1,240 412 Source: Company, Anand Rathi Research

Fig 4 – PE Band

5x

10x

15x

20x

0

100

200

300

400

500

600

Dec

-04

Dec

-05

Dec

-06

Dec

-07

Dec

-08

Dec

-09

(Rs/share)


Fig 5 – EV/EBITDA Band

5x

8x

11x

14x

0

10

20

30

40

50

60

70

80

90

100

Dec

-04

Dec

-05

Dec

-06

Dec

-07

Dec

-08

Dec

-09

(Rs bn)



Water and Environmental

Projects70%

Building and Industrial Structures

20%

Power and Transmission

Lines5%

Roads and Bridges

5%




Investment Argument & Valuation A strong order book, renewed focus on BOT projects and synergies from HDO are key growth drivers. We initiate coverage on IVRCL Infra with a Buy rating and a target price of Rs480.

Strong order pipeline

IVRCL’s order book together with L1 totals Rs190bn (3.8x FY09 revenue). Of it, 70% is from the rapidly growing, high-margin water segment, where it is the leader. We expect 22% earnings CAGR over FY09-12, on huge investments in water, power, railways and roads.

The current order book, with average execution of two and a half years, offers good revenue visibility for FY10-11. We expect a healthy order book through FY10-12 on the back of the government thrust in infrastructure development especially for the roads, power and water sectors and IVRCL’s focus on these segments.

Most of IVRCL’s order book (~91%) comprises contracts with full “pass-through” costs: 21% WPI/RBI-linked, 70% at a Star rate and the balance 9% on a fixed-price basis. IVRCL’s order book, in terms of the mix of escalation costs, is one of the best in the industry.

IVR Prime – Renewed focus, post-restructuring

With real estate growth plans on the back burner, IVRCL plans to transfer its share in BOT projects (Rs17bn) (one water, three road) to IVR Prime. The resultant doubling of net worth would enable it to bid for large projects; it is in the fray for three projects (IVRCL’s share Rs22bn). As per the scheme, the shareholders of Strategic Resources and Water Infrastructure, ie, IVRCL, will receive 59.46m shares in IVR Prime. This would increase the stake of IVRCL in IVR Prime from 62.4% to 80.4%. This ratio values the BOT portfolio at Rs8.25bn (59.46m new shares of IVR Prime at ~Rs139, price on the date of announcement). The transaction implies a valuation of 3.2x Mar ’09 book.

The company has recently bagged another project at Baramati-Phaltan and has L1 status for two large projects: the Sion- Panvel and Tankage project, which would also be passed on to IVR Prime. IVR Prime would bid for all the new projects while IVRCL would execute them on a cash-contract basis. We expect it to be a strong contender for upcoming NHAI projects.

Hindustan Dorr-Oliver offering synergies

The HDO acquisition has proved value accretive for IVRCL: the former is better positioned in design engineering and complements the latter’s civil and structural capabilities. HDO is today better set to bag large turnkey projects.

HDO’s current order book of Rs16bn (3.1x FY09 revenue) is split between water (40%), minerals & metals (40%) and manufacturing & paper (20%). A 57% CAGR in revenue was seen through FY06-09. Management expects revenue to grow at around 45% in FY10.



Valuations To value IVRCL Infra, we use the sum-of-parts method (for its core construction business and its subsidiaries). We value IVRCL at Rs371 a share with a target PE multiple of 15x FY11 earnings for the core construction business (in line with the five-year average multiple). The two subsidiaries, Hindustan Dorr Oliver (a 55% stake) and IVR Prime Urban (an 80.5% stake) are valued at a 30% discount to their current prices. We initiate coverage on IVRCL with a Buy rating and a target price of Rs480.

Fig 7 – Sum-of-Parts Valuations

Particulars Basis of Valuation Multiple

(x) IVRCL's

stake Value

(Rs m)Value (Rs) per share

Core Construction P/E FY11 15.0 50,046 371

IVR Prime Urban 30% holding co. discount to market cap 1.0 80.5% 12,253 91

HDO 30% holding co. discount to market cap 1.0 55.0% 2,398 18

Fair Value (Rs per share) 480


At the current price of Rs365, the stock trades at a PE (core) of 14.8x and 10.4x its FY10 and FY11 earnings estimates.

Risks Project execution risk. Could arise from a shortage of manpower, land acquisition issues or arbitration with clients.

Financial risk. Given the nature of the industry, IVRCL would need to take on additional debt to fund capex or working capital. A spike in interest rates could hit its bottom line. There is also the risk of default – on loans given to subsidiaries, in particular IVR Prime.

Low promoter holding. At present, IVRCL’s promoters hold less than a 10% stake. The low promoter stake increases the threat of a takeover while leaving little scope for fund-raising through equity if the need arises.

Political risk. Around 98% of IVRCL’ order book comes from the government. The slowing down of government spending or state elections might impact the order flow.

Value of core construction business: Rs 371 share;

value of subsidiaries: Rs109/share



Strong order pipeline IVRCL’s order book together with L1 totals Rs190bn (3.8x FY09 revenue). Of it, 70% is from the rapidly growing, high-margin water segment, where it is the leader. We expect 22% earnings CAGR over FY09-12, on huge investments in water, power, railways and roads.

Order-book momentum to continue

IVRCL’s present order book of Rs146bn is 2.9x FY09 revenues. Together with L1 orders of Rs44bn, this amounts to a formidable Rs190bn, 3.8x FY09 revenues. The L1 orders are expected to be awarded by Mar ’10. A 60% CAGR was seen in the order backlog through FY05-FY08. In FY09, it slowed down due to state and Central government elections, when the order intake declined 30% yoy and the order backlog grew only 13%. (The order book primarily consists of government sector orders, and home state Andhra Pradesh makes up ~35%.)

Fig 8 – Growing order book

0

30

60

90

120

150

180

210

240

270

FY06

FY07

FY08

FY09

FY10

e

FY11

e

FY12

e

2.5

3.0

3.5

4.0

Order book Book-to-bill (RHS)

(Rs bn) (x)

Source: Company, Anand Rathi Research.

The current order book, with average execution of two and a half years, offers good revenue visibility for FY10-11. We expect a healthy order book through FY10-12 on the back of the government thrust in infrastructure development especially for the roads, power and water sectors and IVRCL’s focus on these segments. We believe that the political benefits gained by the Andhra Pradesh government due to massive spending on irrigation would encourage other states like Karnataka, Madhya Pradesh, and Maharashtra to increase their expenditure on irrigation.

The revival in real estate and industrial capex also augurs well for IVRCL as 22% of order book is from this segment. The company is one of the leading contractors and offers services in integrated townships, commercial and retail space, educational buildings and industrial construction.

IVRCL’s present order book of Rs146bn is 2.9x FY09 revenues.

Together with L1 orders, this translates to 3.8x FY09 revenues



Fig 9 – Order-book breakup Power and

Transmission Lines, 5

Building and Industrial

Structures, 20

Water and Environmental Projects, 70

Roads and Bridges, 5


70% of order book from high-margin ‘water’ projects

IVRCL operates in all the water infrastructure sub-segments (irrigation, drinking, industrial). These comprise 70% of its present order book. (See Fig 26) The great emphasis on irrigation, on solutions to alleviate rural water problems, on urban drinking requirements and the mounting needs for industrial construction points to potentially vast opportunities. With proven capabilities and credentials, IVRCL is uniquely positioned to benefit.

Compared to the other segments that the company operates in, water is a high-margin business, with high entry barriers. And it faces less competition here than in the other segments, and even less in complex water projects. It is concentrating on water, more so on complex water projects and water BOT projects.

Irrigation comprises two-thirds of its water projects and expenditure by states in this segment is not likely to slow down significantly due to the political sensitivity in lowering such spending.

Within the water EPC vertical, besides irrigation and water distribution projects, IVRCL has established itself in industrial water solutions as well. Its repertoire includes water works associated with thermal-power plants for clients such as NTPC, Neyveli Lignite and APGENCO. With a large number of power plants coming up across the country, the scope for similar works opens up immense opportunities. And aiming to deepen its basket, IVRCL is targeting related works: industrial high-purity water solutions, waste-water treatment and re-circulation systems and industrial-effluent treatment.

Order book shielded from escalations

Most of IVRCL’s order book (~91%) comprises contracts with full “pass-through” costs: 21% WPI/RBI-linked, 70% at a Star rate and the balance 9% on a fixed-price basis. IVRCL’s order book, in terms of the mix of escalation costs, is one of the best in the industry. Others in the industry have most of their order book linked to the broader WPI (wholesale price index). This does not fully capture volatility in prices of individual components, i.e., raw materials such as steel, cement, etc.

91% of IVRCL’s present order book comprises full cost pass-through

contracts

Undisputed leader in the high-margin water business. Present in all

sub-segments of water



Fig 10 – Small proportion of fixed-price contracts

Fixed Price9%

Star rate70%

WPI linked21%


New verticals to drive growth

IVRCL is making consistent efforts to increase operations in other core infrastructure sectors (power, railways and roads). At present, power comprises 3% of its order book. It is scaling up its design and engineering capabilities in hydro-power generating stations, BoP works for thermal-power projects, material-handling systems, critical building designs and capabilities in various T&D works. Power transmission and distribution offer immense potential mainly due to high capacity addition in power generation in coming years. The company has ramped up its T&D business in last few years and is aggressively expanding its footprint here.

In railways, IVRCL plans to be a beneficiary of the massive investments planned for various projects including the Dedicated Freight Corridor and RVNL projects. Having bagged some of the orders for the Bangalore Metro, it is focusing on upcoming metro rail projects in other cities, as well as port connectivity projects.

Having established itself as a key player in transportation, IVRCL had till FY09 focused on completing existing projects and bidding for turnkey contracts in roads, bridges and tunnels. After the reforms in NHAI policies, it plans to re-enter in a big way the roads BOT segment. It now has three toll road projects valued at Rs12.6bn. It recently bagged its fourth road BOT project in Maharashtra (the Rs4bn Phaltan-Baramati Expressway, with a 75% stake). Further, it is categorized as L1 for another project in Mumbai (the Panvel-Sion Highway) valued at Rs15bn, with a 51% share. With the NHAI expected to award contracts worth Rs1trn for 12,000km in the next round of bidding, IVRCL aims to bag a couple of them.

De-risking geographical concentration

We expect IVRCL to be the biggest beneficiary ofmore project awards for irrigation, drinking and industrial purposes from Madhya Pradesh, Uttar Pradesh, Kerala, Karnataka, West Bengal and Rajasthan, which have launched massive projects in the water segment. This would enable it to de-risk its geographical concentration; at present 50% of its water projects are in Andhra Pradesh, which contributes 35% of the order book.

Also, with orders from the emerging segments of roads, power, railways throughout India, the company’s country-wide presence would be further accentuated. It now operates in 21 states in India.

Working towards de-risking vertical and geographical concentration. New verticals of power, railways and road

will drive future growth



IVR Prime – Renewed focus, post- restructuring With real estate growth plans on the back burner, IVRCL plans to transfer its share in BOT projects (Rs17bn) (one water, three road) to IVR Prime. The resultant doubling of net worth would enable it to bid for large projects; it is in the fray for three projects (IVRCL’s share Rs22bn). We expect it to be a strong contender for the upcoming NHAI projects.

Transferring BOT assets to IVR Prime

IVRCL plans to transfer two subsidiaries – IVR Strategic Resources & Services with three toll-road BOT projects (Jalandhar to Amritsar, Kumarapalayam Tollway, Salem Tollway) and IVRCL Water Infrastructure with the Chennai water desalination project – to its real-estate subsidiary, IVR Prime. It has recently bagged another project at Baramati-Phaltan and has L1 status for two large projects: the Sion- Panvel and Tankage project, which would also be passed on to IVR Prime. IVR Prime would bid for all the new projects while IVRCL would execute them on a cash-contract basis.

The objective of the transfer is to have all the infrastructure business under one company. This would help in better utilization of resources. The restructuring would also help IVRCL ramp up the pre-qualification credentials by leveraging the net worth of IVR Prime, which was Rs10bn in Mar ’09. With the addition of the BOT projects, IVR Prime’s net worth would almost double and enable it to bid for larger BOT projects. This would also offer relatively smoother revenue streams compared to the lumpy ones from the real estate business. This restructuring would allow easier access to funds, which means no further dilution for IVRCL’s promoters. While this allows IVRCL to de-leverage its balance sheet, it also eases raising of debt on IVR Prime’s balance sheet.

As per the scheme, the shareholders of Strategic Resources and Water Infrastructure, i.e. IVRCL, will receive 59.46m shares in IVR Prime. This would increase the stake of IVRCL in IVR Prime from 62.4% to 80.4%. This ratio values the BOT portfolio at Rs8.25bn (59.46m new shares of IVR Prime at ~Rs139, price on the date of announcement). The transaction implies a valuation of 3x Mar ’09 book value.

IVRCL plans to transfer its four BOT projects to its real-estate

subsidiary, IVR Prime, which will be the bidding company for new

BOT projects

Doubling of IVR Prime’s net worth to enable bids for larger BOT

projects



Fig 11 – Proposed Structure

Source: Company

Fig 12 – Current Structure

Source: Company

Low pending equity commitment for under-construction BOTs

The company’s pending investments to the existing BOTs is of lower magnitude than other companies. Three of its four BOTs (one water, two roads) are in the last stage of completion and would start generating revenue latest by Mar ’10 (Kumarapalayam started in Sep ’09.) Of the total Rs3.4bn, pending equity commitment to these BOTs is ~Rs670m.

On commissioning, management expects all three BOT road projects to generate a daily cash flow of Rs4.5m, and the water desalination project Rs4m. The strong cash-flow generation and IVR Prime’s comfortable balance sheet would aid it to effectively invest in BOT projects in the next two years. This would also help build up IVRCL order book in its core construction segment.

IVRCL Infrastructure & Projects Ltd

IVR Prime Urban Developers Ltd.

First STP

Tankage

Chennai Desal

37.5%

95%

75%

100%Alkor Petro

Kumarapalayan Tollways Ltd.

Jalandhar & Amritsar Tollways

Salem Tollways Ltd.

100%

100%

100%

51% Panvel-Sion

Paltan - Baramati 75%

80.4%

IVRCL Infrastructure & Projects Ltd

IVRCL Water Infrastructures

First STP

Tankage

Chennai D l

37.5%

95%

75%

100%Alkor Petro

Kumarapalayan Tollways Ltd.

Jalandhar & Amritsar Tollways

Salem Tollways Ltd.

100%

100%

100%

51%Panvel - Sion

Paltan - Baramati 75%

IVR Strategic Resources & Ser.

IVR Prime Urban Developers Ltd.

62.35% 100%100%



Fig 13 – BOT projects Particulars (Rs m) Stake % Project cost Equity Equity Invested IRR % Completion Date

Jalandar-Amritsar Tollway 100 3,436 641 413 20 Mar ’10

Kumarapalayam Tollway 100 4.216 651 650 20 Completed

Salem Tollway 100 5,020 800 799 15 Jan ’10

Chennai water desalination 75 5,679 1,730 854 20 Completed

Baramati-Phaltan 75 3,600 1,300 0 20 Sep ’12

Total 3,821 2,715

Source: Company

New orders in IVR Prime

For the last two years IVRCL had stayed away from BOT projects, and has renewed its focus on the road transport BOTs recently, especially after the changes in the Model Concession Agreements (MCA) by the National Highway Authority of India (NHAI).

It recently bagged the Rs3.6bn Baramati-Phaltan toll project. It is also L1 for two others: Sion-Panvel toll (Rs15bn) and IOC tanks (Rs30bn). Equity investment in the three amounts to ~Rs3.85bn. It has pending equity in under-construction projects of Rs0.6bn and Rs2.8bn of loans to be repaid to its parent IVRCL. Accordingly, the funds required, of Rs7.3bn in the next two and a half years is to be obtained through sales in the real-estate business and equity dilution through an FPO or private equity investment.

These projects will now be under IVR Prime, whereas the cash contracts will be executed by IVRCL resulting in strong order flows from the road segment.

Baramati-Phaltan: 78-km, Rs3.6bn road project between Baramati and Phaltan. IVRCL’s stake in the JV is 75%.

Sion-Panvel: 25-km expressway, expanding the present road to a ten-lane concrete expressway at Rs15bn (IVRCL’s stake, 51%).

Tank project. Annuity-based tank order from Indian Oil Corp. with about Rs7bn of work for IVRCL of the project cost of Rs30bn. IVRCL’s stake in the JV would be 37.5%. Exploring new BOT projects

Besides roads, IVR Prime plans to bid for parking lots, industrial parks, toll-roads, de-salination plants, urban amenities, etc. It expects greater activity in private-public-partnerships in the power-distribution segment.

Real estate: No big plans

The real estate business under IVR Prime Urban Developers (IVR Prime), subsidiary of IVRCL would become the non-core business, post-restructuring. The company’s plans include sale of land or sale of developed properties from the present ~3,400 acres (~88m sq. ft).

IVR Prime is looking at starting work on low-cost housing projects at Noida, Chennai, Nagpur and Hyderabad, depending on demand from the real estate industry in these cities. Also, at Bangalore, it is likely to receive the city development authority permission, after which it could start development of plots.

Equity investment towards three new BOTs, pending investments of old BOTs and loan repayment to

parent to be partly financed through a dilution in the near future

Land bank of IVR Prime: ~3400 acres



Fig 14 – Land bank details – IVR Prime Particulars Area (acres)

Tamil Nadu 1,541

Karnataka 266

Noida 101

Hyderabad 60

Maharashtra 1,205

Vishakapatnam 220

Total 3,393

Source: Company



Hindustan Dorr-Oliver offering synergies The HDO acquisition has proved value accretive for IVRCL: the former is better positioned in design engineering and complements the latter’s civil and structural capabilities. HDO is today better set to bag large turnkey projects.

Acquisition of HDO, value accretive

HDO’s core business lies in engineering and turnkey solutions, technology and EPC installations in liquid-solid-separation applications for various industries such as mineral processing and beneficiation, pulp and paper processing, fertilizer/chemical and environmental management (industrial and municipal waste-water). Client industries include petrochemicals and oil & gas.

The manufacturing division focuses on manufacture and supply of custom-engineered critical chemical process plant equipment to core sectors such as petrochemicals, refineries, chemicals, minerals, pulp & paper, fertilizers, etc. This knowledge-process outsourcing division provides engineering solutions to high-end technology sectors comprising process design, engineering analysis, engineering process support, production and plant engineering, design automation, etc.

Fig 15 – Business Model - HDO


The acquisition of HDO has added value to IVRCL. The former’s expertise in design engineering together with the latter’s civil and structural abilities and decent balance sheet size better positions it to bag larger turnkey projects. IVRCL holds a 55% stake in HDO.

HDO’s current order book of Rs16bn (3.1x FY09 revenue) is split between water (40%), minerals & metals (40%) and manufacturing & paper (20%). A 57% CAGR in revenue was seen through FY06-09. Management expects revenue to grow at around 45% in FY10.

HDO’s current order book of Rs16bn (3.1x FY09 revenue)

Hindustan Dorr

Engineering, Procurement &Construction (EPC)

Manufacturing Knowledge-Process Outsourcing (KPO)

Mineral Processing & Beneficiation Environment

Fertilizers & Chemicals Pulp & Paper

Proprietary Equipment Products of hydrocarbon

sector

Design and Engineering Outsourcing



Financials IVRCL’s order book offers good visibility of revenue flow for the next two years. We expect the company to post a strong 24% CAGR in revenue from FY09-12, and 22% in profit after tax. Ahead, we expect the operating margin to be stable.

Robust revenue growth

On the back of proven execution capabilities and a strong order backlog, we expect a robust topline performance: a 24% CAGR from FY09 to FY12. Water and irrigation would have a major share (~70%) in revenue. We expect some increase in the share of revenue from roads and highways.

Fig 16 – Strong revenue growth

0

15

30

45

60

75FY

05

FY06

FY07

FY08

FY09

FY10

e

FY11

e

15.0

25.0

35.0

45.0

55.0

65.0

Revenue Revenue Growth (RHS)

(Rs bn) (%)

Source: Anand Rathi Research.

Stable margin ahead

We expect the EBITDA margin to increase 50bps, to 9.5%, in FY10 and FY11 (management guidance: 9.5% to 10%). The present order-mix constitutes 70% of high-margin water projects, to be executed in the next two years. We expect some decrease in costs of raw material (steel and cement). This would raise margins of fixed-price contracts.

Fig 17 – EBITDA and EBITDA margin

0

1,500

3,000

4,500

6,000

7,500

FY05

FY06

FY07

FY08

FY09

FY10

e

FY11

e

8.0

8.5

9.0

9.5

10.0

10.5

EBITDA EBITDA Margin (RHS)

(Rs bn) (%)


We expect a 24% CAGR in revenues from FY09 to FY12 on the back of a strong order backlog and proven execution capabilities

We expect a 22% CAGR in net profit from FY09 to FY12



PAT margin to rise on higher OPM, lower financing cost

We expect the net profit margin to rise ~50bps over FY10-FY11 following the increase in OPM and the lower interest cost. Interest cost is expected to decline 50-100bps in FY11. A 22.4% CAGR in net profit is expected over FY09-12.

The higher margins in FY11-12 would reflect the expanded return ratios. We expect the RoE to improve from 13.3% in FY09 to 16.2% three years on, and the RoCE from 12.7% to 17.7% in FY12.

Fig 18 – PAT and PAT margin

0

500

1,000

1,500

2,000

2,500

3,000

3,500

FY05

FY06

FY07

FY08

FY09

FY10

e

FY11

e

4.0

4.3

4.6

4.9

5.2

5.5

5.8

6.1

PAT Pat Margin (RHS)

(Rs bn) (%)


Comfortable balance sheet

IVRCL’s leverage on 31 Mar ’09 was 0.7x, and is expected to be at similar levels through FY09-12. This would favor it for large orders and hold interest costs low. Part of the cash required for the BOT division would also be funded from toll collections through the year. From the four BOT projects, the company expects to collect Rs3.1bn a year in toll.

Withdrawal of Sec 80 (IA) benefit

Earlier, the company benefited from Sec 80 (IA). With the Feb ’09 provisional budget clarifying that such benefits were not available to contractors, the company has not claimed any deduction in 1HFY10. IVRCL has set aside Rs1.41bn as special reserve in regard to deductions under Sec 80 (IA) claimed in previous years. Accordingly, we believe this would not have any impact on profits in future and on cash flows, as the tax has already been paid out earlier.




Net sales 36,606 48,819 58,139 73,836 92,295

Sales growth (%) 58.7 33.4 19.1 27.0 25.0


EBIDTA 3,616 4,218 5,419 6,995 8,756

EBITDA Growth (%) 56.0 16.7 28.5 29.1 25.2

EBITDA margins (%) 9.9 8.6 9.3 9.5 9.5

+ Other income 44 299 180 190 190

- Interest 478 1,306 1,498 1,603 1,898

- Depreciation 328 473 550 675 775

PBT 2,853 2,738 3,551 4,906 6,273

- Tax 749 478 1,207 1,570 2,133

PAT 2,105 2,260 2,344 3,336 4,140

PAT growth (%) 48.8 7.4 3.7 42.4 24.1

PAT margin (%) 5.7 4.6 4.0 4.5 4.5

FDEPS (Rs/share) 15.8 16.9 17.4 24.7 30.7

CEPS (Rs/share) 18.6 20.6 22.1 30.5 37.3

DPS (Rs/share) 1.4 1.4 1.6 1.8 2.0



Sources of Funds

Share capital 267 267 270 270 270

Reserves & surplus 15,789 17,839 20,275 23,328 27,152

Deferred tax liability 103 117 207 307 427

- Miscellaneous expenses - - - - -

Shareholders’ fund 16,159 18,223 20,752 23,905 27,850

Secured Loans 5,788 10,185 11,210 12,015 12,070

Unsecured Loans 4,891 3,795 5,295 6,295 8,295

Total Loans 10,678 13,980 16,505 18,310 20,365


Total 26,837 32,203 37,258 42,215 48,215


Gross Block 4,176 6,624 7,019 8,519 10,019

Less: Depreciation 984 1,417 1,967 2,642 3,417

Net Block 3,192 5,207 5,052 5,877 6,602

CWIP 541 196 400 400 400

Investments 3,409 3,892 4,557 4,557 4,557

Debtors 6,585 11,430 13,061 18,206 20,229

Inventory 1,943 2,093 2,389 3,034 3,793

Loans & advances 7,806 9,319 10,000 11,000 13,500

Other current Assets 10,725 14,284 17,521 21,645 26,551

Total Current Assets 27,059 37,127 42,972 53,886 64,073

Sundry Creditors 5,892 10,406 12,424 17,195 20,229


Provision 238 440 500 550 600

Total Current Liabilities 9,136 15,226 17,924 23,745 27,829

Working capital 17,924 21,900 25,048 30,141 36,244

Cash 1,772 1,009 2,201 1,240 412

Total 26,837 32,203 37,258 42,215 48,215






+ Depreciation 328 473 550 675 775

+ Deferred Tax 47 14 90 100 120

Cash profit 2,480 2,747 2,984 4,111 5,035

- Incr/(Decr) in WC 6,591 3,977 3,147 5,093 6,103

Operating cash flow (4,111) (1,230) (164) (982) (1,067)

-Capex 1,626 2,143 600 1,500 1,500

Free cash flow (5,737) (3,373) (764) (2,482) (2,567)

-Dividend 219 219 253 284 316

+ Equity raised 830 - 348 - -

+ Debt raised 5,117 3,302 2,525 1,805 2,055

-Investments 580 483 665 - -

-Misc. items (122) (9) 0 (0) 0

Net cash flow (466) (763) 1,192 (961) (828)

+Opening cash 2,238 1,772 1,009 2,201 1,240

Closing cash 1,772 1,009 2,201 1,240 412


Fig 22 – Ratio analysis @ 365 on 11th Dec 09 Year end 31 Mar FY08 FY09 FY10e FY11e FY12e


EBITDA Margin (%) 9.9 8.6 9.3 9.5 9.5

PAT Margin (%) 5.7 4.6 4.0 4.5 4.5

Income Tax Rate (%) 26.2 17.5 34.0 32.0 34.0

RoE (%) 14.4 13.3 12.1 15.1 16.2

RoCE (%) 14.4 12.7 14.0 15.9 17.7

Other Ratios

Net Debt/Equity (%) 55 72 70 72 74

W C turn (days) # 106 117 122 120 120

Per Share Data

Earnings Per Share (Rs) 15.8 16.9 17.4 24.7 30.7

Book Value Per Share (Rs) 120.1 135.4 152.1 174.7 203.1

Dividend Per Share (Rs) 1.4 1.4 1.6 1.8 2.0

Cash Earnings Per Share (Rs) 18.6 20.6 22.1 30.5 37.3

Valuation Ratios

PE (x) 16.3 15.1 14.8 10.4 8.4

P/BV (x) 3.0 2.7 2.4 2.1 1.8

EV/EBITDA (x) 15.9 14.6 11.7 9.5 7.9




Company Background & Management IVRCL, promoted by E. Sudhir Reddy (chairman and managing director), started operations two decades back. It provides services in water and environment, transportation/roads, buildings and industrial structures, power & transmission projects and BOT projects.

Incorporated in 1987, IVRCL was converted into a public limited company in 1994. It is one of the strongest operators in the water segment in India and has, over the years, built ~15,000 km of pipelines. It has entered into joint ventures with various others to strengthen its pre-qualification criteria.

Fig 23 – Key Management Key Person Designation Background

E. Sudhir Reddy

Chairman and Managing Director

Promoter, commerce graduate. Director in other subsidiaries like IVR Prime, HDO and IVR Road Toll Holding

E Sunil Reddy

Director Commerce graduate and bachelor of law. Practiced as a lawyer before joining the company. In charge of legal matters of the company.

R. Balarami Reddy

Executive Director (Finance) & Group CFO

Joined the company in 1994. He is a Fellow Member of the ICAI and Associate Member of the Institute of Cost & Works Accountants of India as well as the Institute of Company Secretaries of India. Practiced as a CA for seven years before joining the company.

T. R. C. Bose

Director B.E. Electrical has more than four decades of work experience. Worked as director projects with A.P. State Electricity Board and has taken foreign assignment with UN development program.

Source: Company

Equity History

In the past, to fund its expansion plans, the company opted to issue equity. It made a QIP in Dec ’06 at Rs370 a share. Also, most of the FCCBs (~88%) issued in Jun ’05 were converted in FY07 and FY08. The promoters’ stake has plummeted from 49% in 1995 to 9.7% in Sep ’09.

Fig 24 – Equity History Date Type Subscribers m shares Issue Price Rs Rs m

Apr ’05 FPO Public 18.3 79 1,449

Jun ’05 FCCB Listed on the Singapore Stock Exchange 12.7 234 2,980

Dec ’06 QIP 15 370 5,550




Fig 25 – Major Orders

Verticals Area of operation Past Projects Current Projects

Water Supply Drinking Water Supply Scheme for Sasaram Town (2nd Phase) on Turnkey Basis

Sripada Sagar Lift Irrigation (Rs6.2bn)

(Transmission, Distribution, Pumping & re-circulating systems, storage, O&M)

Execution of Clear Water Transmission main from RIICO Industrial area - Jaipur.

Indira Sagar Project (Rs4.8bn)

Environmental Sattenapally Water Supply Improvement Scheme Dahez Petro Commercial (Rs8.4bn) (Sewage, water treatment, Solid waste recycling)

Muzaffarpur Urban Water Supply Scheme Chennai Water Desalination (Rs4.9bn)

Irrigation Water Carrier System (RA 8) package for Neyveli Lignite Corporation Limited in Rajasthan

Construction of water tunnel from Kapurwadi to Bhandup (Rs 11.45bn)

Industrial Water Jindal River Intake Pumping & Piping system from Dam to Power Plant site

Interegrated Sewerage work inAllahabad (Rs2870m)

Oil & Gas pipelines Make -up Water System Package for Sipat Super Thermal Power Project

Drinking Water Supply in Mumbai from Tansa. (Rs4213m)

Canal Make -up Water Pre-Treatment, CW System, ETP for Vindhyachal Super TPP for NTPC

Multivillage water supply scheme in Bihar (Rs2990m)

Desalination Rayalaseema Thermal Power Project Water Supply Scheme at Kadapa for APGENCO.

Pipeline Project from Reverse canal to various tanks of IdarTaluka & Vadali taluka , Gujarat

Somasila Drinking Water Supply Project Drinking Water Scheme from Kishangunj Town Comprehensive Water Supply Scheme from Almatti Dam

under UIDSSMT. Water Supply Scheme with Veligallu Reservoir as source

under UIDSSMT. Rehabilitation of Kozhipally Water Supply Scheme in

Palakuzha Panchayath- Distribution System for Dehani Lift Irrigation Scheme.

Water

Guntakal Comprehensive Water Supply Improvement Scheme -

Mechanised lining of Dhom Balkawdi Right bank Canal in Maharashtra (Rs1627m)

Roads Improvement and Maintenance on Pachpadra to Ram Ji Ki Gol Road in Rajasthan -133.85 km

Madurai-Kanyakumari NHAI (Rs3.9bn)

(National Highways/expressways) Doubling of Mohol - Solapur BG Railway line work on Chennai

Upgradation of Darbhanga- Madhwapur Road of 47km (Rs1570m)

Bridges Salem-Kumaraplayam (Rs5.0bn) (Major/minor with well/pile/open foundation, pre-stressed concrete, Girders, ROB, RUB)

Kumaraplayam-Chengapalli (Rs4.2bn)

Railways/Tunnels Jalandhar-Amritsar (Rs3.4bn) Baramati- Phaltan (Rs4bn)

Transportation

Construction of Vivekanand road flyover in Kolkatta Rs1646m)

Residential, commercial incl. townships Construction of Sea woods Estate Phase-ll Housing

Rzesidential at Chitrapuri (Rs5.5bn)

Construction of Swimming Pool at Ponda Sports Complex

Secretariat at Naya Raipur (Rs1.8bn)

Industrial construction Bangalore Metro Railway Stations (Rs2.4bn) Office Complex at Cidco, Navi Mumbai (Rs2.1bn) Storm water drains, underground drains, Five building towers and a hotel in Pune. (Rs2.4bn)

Buildings & Industrial

Construction of Housing complex for AIIMS at Raipur. Construction Elevated Metro in Chennai Civil & Structural works offsites & utilities for Guru

Gobind Singh Refinery Project of M/s.HPCL Transmission Line New KVA distribution transformers and conversion

of LT line to 11KV line for Punjab SEB Rural Electrification Projects (Rs3.8bn)

High voltage distribution Rural Electrification works in Purulia District of West Bengal

220/120KV substation projects (Rs0.6bn)

Sub-stations Rural Electrification works in Purbi Champaran district of Bihar.

400KV transmission lines (Rs0.2bn)

765KV substation at Sipat (Rs0.1bn) Rural Electrification work in Uttar Dinajpur - West

Bengal. Rural Electrification facility in the district of Bilaspur,

(CG). Phase Double Circuit Transmission line from Latehar to

Daltonganj (Package- B) on Turnkey basis.

Power and T&D

Tower Package Seoni - Nandanwadi Transmission Line -Wardha Transmission Line

Source: Company



Fig 26 – Water Infrastructure Value Chain

Irrigation Lift IrrigationTunnels,Aqueducts, Viaducts

Canals

IndoreTelugu Ganga Pkg 3Bhadra Pkg 2 & 3

PurandarSripad SagarDeheniKoilsagar Stg 1 & 2Kalwakurthy pkg 28HNSS PADA I & IIPunasa (MP)

Koilsagar Stg 1 & 2Indira Sagar, IndorePranahita Chevella Pkh 9 & 20Viaduct Koilsagar, FFCAqueduct - Indira Sagar, Indore

Telugu Ganga Pkg 3Kalwakurthy Pkg 28Bhadra Pkg 2 & 3Godavari Delta ModernisationThotapalli

Drinking Water

Desalination STP WTP

Kilpauk Water DistK.K. Nagar Water DistJalore Water SupplyChertalaCDBPBisalpur DUDUIndoreYeolaTambaram WSIS

Chennai Desal Semmenchery STP SagarparaJaloreCDBP

Industrial Water Power PlantsCirculating pipelines,makeup water systems, Demineralised water

ETP

NLC - Ra 8 - Barsingar Water Carrier system

Tirpur - ETP

Proj

ect S

ize

Private / Corporateclients

Centre / State Govt

Centre / State Govt

Source: Company


India I Equities


[email protected]


[email protected]

Key financials


Sales (Rsm) 34,729 41,514 48,987 61,233 79,603

Net profit (Rsm) 1,619 1,539 2,057 2,695 3,570

EPS (Rs)* 7.3 7.9 9.3 13.1 16.7

Growth (%)* 73.6 8.3 17.7 40.8 27.2

PE (x)* 16.0 14.8 12.6 8.9 7.0 P/BV (x) 2.2 2.0 1.8 1.7 1.6 RoE (%) 12.5 9.5 10.8 12.4 15.5

RoCE (%) 15.0 11.8 13.5 14.7 16.9

Dividend yield (%) 0.9 2.0 3.0 4.0 4.0 Net gearing (%) 42.2 65.8 50.4 74.6 84.7 Source: Company, Anand Rathi Research * Incl. International business

Construction

Initiating Coverage

15 December 2009

Nagarjuna Constructions

Strong order inflows, focus on core; initiate at Buy

Buy. NCC’s strong order book position, focus on core operations (cash contracts, road BOT projects), 33% earnings CAGR over FY09-12e and attractive valuations makes it the top pick in our coverage universe. We initiate coverage with a Buy and a target price of Rs231.

Growing and diversified order book. We expect NCC’s order inflow momentum (Rs60bn in FY10 ytd, 37% of the current order book) to continue. The consolidated order book of Rs161bn (3.4x FY09 revenue) encompasses the major verticals – buildings, irrigation, water, oil & gas, metals, power and roads.

Focus on core operations. NCC has re-focused on core strengths: cash-contracts and road BOT projects. It shelved two airport projects, capped further property investments and sold its stake in Gautami Power. The recent QIP proceeds would help it lower leverage and bid aggressively for new BOT projects.

Strong earnings growth over FY09-12. We estimate 33% earnings CAGR over FY09-12, led by strong revenue and better operating margin seen in 1HFY10. We expect order inflow momentum (Rs60bn in FY10 ytd) to continue.

Valuation. Our sum-of-parts value is Rs231; Rs197 from construction at a PE of 15x FY11e earnings, Rs17 from five road BOT projects at 2x book value, Rs4 from three power BOT projects at book value and Rs12 from real estate at book value.


Key data NJCC.IN/ NGCN.BO

52-week high/low Rs184/Rs34 Sensex/Nifty 17119 / 51173-m average volume US$7.7m Market cap Rs38.7bn/US$0.84bnShares outstanding 256.6mFree float 79.5%Promoters 20.5%Foreign Institutions 33.3%Domestic Institutions 23.1%Public 23.1%


Nagarjuna Const.

Sensex

30

60

90

120

150

180

Nov

-08

Dec

-08

Jan-

09Fe

b-09

Mar

-09

Apr-0

9M

ay-0

9Ju

n-09

Jul-0

9Au

g-09

Sep-

09O

ct-0

9N

ov-0

9D

ec-0

9


15 December 2009 Nagarjuna Constructions – Strong order inflows, focus on core; initiate at Buy



Net sales 34,729 41,514 48,987 61,233 79,603Sales growth (%) 21.0 19.5 18.0 25.0 30.0 - Op. expenses 31,132 37,777 44,096 55,080 71,573 EBIDTA 3,598 3,737 4,891 6,154 8,030 EBITDA margins (%) 10.4 9.0 10.0 10.0 10.1 - Interest 719 964 1,321 1,521 2,021 - Depreciation 482 533 550 600 650 + Other income 56 42 51 51 51 - Tax 832 743 1,013 1,388 1,839 PAT 1,619 1,539 2,057 2,695 3,570 PAT growth (%) 6.6 (5.0) 33.7 31.0 32.5 Consolidated PAT* 1,675 1,813 2,394 3,371 4,288 FDEPS (Rs/share)* 7.3 7.9 9.3 13.1 16.7 CEPS (Rs/share) 9.2 9.1 10.2 12.8 16.4 DPS (Rs/share) 1.3 3.0 4.5 6.0 6.0 Source: Company, Anand Rathi Research * Incl. International business


Share capital 458 458 513 513 513 Reserves & surplus 15,376 16,586 20,910 21,803 23,572 Shareholders’ fund 15,834 17,043 21,423 22,316 24,085 Debt 8,938 12,439 13,389 18,189 22,789 Minority interests - - - - -Capital employed 24,772 29,482 34,812 40,505 46,874 Fixed assets 5,340 4,873 5,323 5,723 6,073 Investments 5,648 7,402 10,371 10,732 12,032 Working capital 11,455 15,861 16,421 22,376 26,228 Cash 2,330 1,345 2,697 1,674 2,541 Capital deployed 24,772 29,482 34,812 40,505 46,874 No. of shares (m) 228.9 228.9 256.6 256.6 256.6 Net Debt/Equity (%) 42.2 65.8 50.4 74.6 84.7 W C turn (days) # 75 99 99 99 99 Source: Company, Anand Rathi Research # Excl loans to subsidiary


PAT 1,619 1,539 2,057 2,695 3,570 + Depreciation 482 533 550 600 650 +Deferred tax 52 21 - - -Cash profit 2,153 2,092 2,607 3,295 4,220 -Inc/(Dec) in WC 6,079 4,407 560 5,955 3,852 Operating cash flow (3,926) (2,314) 2,047 (2,661) 368 -Capex 1,593 67 1,000 1,000 1,000 Free cash flow (5,518) (2,381) 1,047 (3,661) (632) -Dividend 348 803 1,351 1,801 1,801 +Equity raised 4,154 - 3,673 - - +Debt raised 2,569 3,501 950 4,800 4,600 -Investments 880 1,754 2,968 361 1,300 -Miscellaneous items 80 (453) 0 0 0 Net cash flow (104) (985) 1,352 (1,023) 867 +Opening cash 2,434 2,330 1,345 2,697 1,674 Closing cash 2,330 1,345 2,697 1,674 2,541 Source: Company, Anand Rathi Research

Fig 4 – PE Band

8x

14x

20x

26x

0

50

100

150

200

250

300

350

Dec

-04

Dec

-05

Dec

-06

Dec

-07

Dec

-08

Dec

-09

(Rs/share)



5x

8x

11x

14x

0

10

20

30

40

50

60

70

80

90

Dec

-04

Dec

-05

Dec

-06

Dec

-07

Dec

-08

Dec

-09

(Rs bn)


Fig 6 – Order book break-up

International27%

Mining3% Building

21%

Water21%

Irrigation5%

Electrical5%

Power1%

Oil & Gas0%

Metals9%

Roads8%




Investment Argument & Valuation NCC’s strong order book position, focus on core operations (cash contracts, road BOT projects), 33% earnings CAGR over FY09-12 and attractive valuations makes it the top pick in our coverage universe. We initiate coverage on NCC with a Buy and a target price of Rs231.

Growing and diversified order book

We expect NCC’s order inflow momentum (Rs60bn in FY10 ytd, 37% of the present order book) to continue. The consolidated order book of Rs161bn (3.4x FY09 revenue) encompasses the major verticals – buildings, irrigation, water, oil & gas, metals, power and roads. In addition, it has an L1 status for orders of Rs4bn.

A dominant 85% of the domestic order-book constitutes government orders. Also, the order book is fairly well spread across India, with south India and international orders covering two-thirds of the book. The share of international orders has steadily increased over the years to 30% now.

Of its Rs161bn order book, NCC has Rs10bn coming in from the Dubai region. Of this, Rs1bn is for a water pipeline project of the Dubai Electricity and Water Authority where no payment problem is expected as it is a government agency.

Focus on core operations

NCC has re-focused on core strengths: cash-contracts and road BOT projects and shelved non core businesses or capped further investments.

The RoE and RoCE have declined in the past three years, mainly due to the shift in its business model from a pure cash-contract business to BOT projects. NCC plans to restructure its BOT portfolio, focusing on road and power projects only where it has the experience and technical capabilities. In Aug ’09 it sold off its stake in Gautami Power to its joint venture partner for Rs1.1bn. It now plans to exit the Gulbarga and Shimoga airport projects and may also look at quitting the Machlipatnam seaport project.

It plans to cap further equity investment in the real estate business and focus on new project launches when the market revives.

Strong earnings growth over FY09-12

We estimate 33% earnings CAGR over FY09-12 from core business (including international), led by strong revenue and better operating margin seen in 1HFY10. We expect order inflow momentum (Rs60bn in FY10 ytd) to continue.

We estimate standalone revenue to report 18% CAGR over FY09-12, driven by strong implementation in buildings, transportation and the new divisions of power, metals, mining and oil & gas. In FY10-12, we expect better OPM and NPM (than in FY09) to lead to higher return ratios. We estimate RoE to improve steadily from 9.5% in FY09 to 15.5% three years later. Similarly, RoCE is expected to rise from 11.8% to 16.9% in FY12.

Focus on core strengths: cash-contracts and BOT projects, shelve

further investments in non core businesses



Valuations

At the current price of Rs151, the stock trades respective FY10 and FY11 PE of 12.6x and 8.9x. We initiate coverage on NCC with a Buy rating and a target price of Rs231 based on SOTP.

We value the core construction business (including the international subsidiary) at a target P/E of 15x FY11e earnings, in line with the other construction companies. As they are nearing completion, we value the five road BOTs at 2x book value. We value the three power projects and real-estate portfolio at book value.

Fig 7 –Valuation Table

Valuation basis Multiple (x) Value (Rsm) Per-share value (Rs)


Road BOT Projects

- Brindavan Infrastructure P/BV – Jun ’09 2.0 300 1.2

- OB Infrastructure P/BV – Jun ’09 2.0 1,872 7.3

- Western UP Tollway P/BV – Jun ’09 2.0 608 2.4

- Bangalore Elevated Tollway P/BV – Jun ’09 2.0 1,246 4.9

- Pudicherry—Tindivanam P/BV – Jun ’09 2.0 334 1.3

Power BOT projects

- Himachal Sorang P/BV – Jun ’09 1.0 550 2.1

- Himalayan Green P/BV – Jun ’09 1.0 250 1.0

- NCC Power P/BV – Jun ’09 1.0 121 0.5

Ports - Machlipatnam Seaport P/BV – Jun ’09 1.0 196 0.8

Real Estate

- NCC Urban BV – Mar ’09 1.0 1,200 4.7

- Jubilee Hills BV – Mar ’09 1.0 585 2.3

- Tellapur Techno City Private BV – Mar ’09 1.0 825 3.2

- NCC Vizag Urban Infra BV – Mar ’09 1.0 499 1.9

Fair Value 231


Risks

Project execution risk. This could arise from a shortage of manpower, land acquisition issues or arbitration with clients. Maintaining experienced personnel is key to successful implementation of construction projects. The growing attrition rate in the industry and lack of skilled manpower can add significantly to manpower costs and may delay projects.

Financial risk. Given the nature of the industry, NCC would need additional debt to fund its capex or working capital. It has equity commitments for its BOT projects. Such projects pull down the initial RoE. The company’s inability to arrange timely funding could lead to project delays and cost overruns and hence strike at both the top and bottom lines.

Raw Material Risk. A significant hike in raw material costs would impact NCC as 38% of its contracts have been secured at fixed prices.

Value of core construction:

Rs197/share.

Value of other businesses: Rs34/share



Growing and diversified order book We expect NCC’s order inflow momentum (Rs60bn in FY10 ytd, 37% of the present order book) to continue. The consolidated order book of Rs161bn (3.4x FY09 revenue) encompasses the major verticals – buildings, irrigation, water, oil & gas, metals, power and roads.

Robust order inflow in 1HFY10 . . .

With a track record of three decades in engineering and construction, NCC is poised to capitalize on growth opportunities in infrastructure. Its (consolidated) order backlog now stands at Rs161bn, implying an orderbook-to-revenue ratio of 3.4x FY09 revenue. In addition, it has an L1 status for orders of Rs4bn.

The order backlog has consistently grown over the past five years – except in FY09 when the economic slowdown coincided with State and Central elections. Its order inflow rate picked up in 1HFY10, faster than most other construction companies. It added over Rs60bn in fresh orders in the first seven months of FY10 (in contrast to Rs54bn for the whole of the previous year), inching closer to its full-year guidance of Rs65bn. Its present order book, with an average execution period of two and a half years, promises revenue visibility for FY10-11.

Fig 8 – Consolidated order book v/s book-to-bill ratio

-

50.0

100.0

150.0

200.0

250.0

FY06

FY07

FY08

FY09

FY10

e

FY11

e

FY12

e

-

0.5

1.0

1.5

2.0

2.5

3.0

3.5

Order Book Book-to-Bill (RHS)

(Rs bn) (x)


. . . momentum to continue

We expect the order inflow rate to be maintained at a healthy level through FY10-11, following the company’s leaner and focused structure, higher net worth and strengthening macro-economic conditions. The company’s current net worth bolsters its pre-qualification criteria for large, complex and high-margin projects. In Mar ’09, NCC’s capacity and capability reflected a potential order backlog of Rs185bn compared to the Rs122bn it actually had. This capacity is expected to go up after its recent QIP issue.

We believe that the company is poised to capitalize on the vast infrastructure opportunities now opening up. Its strategy of fortifying its expertise in select verticals, focusing on quality products, diversifying into different sectors and countries (besides making inroads into existing markets) and increasing its focus on BOT and BOOT projects in transportation and hydropower would definitely help.

NCC’s order backlog now stands at Rs161bn, implying an orderbook-to-revenue ratio of 3.4x FY09 revenue



In order to succeed in this strategy, NCC would use newer technologies and methods, provide better services to clients, forge alliances with large domestic and international players (in bidding for large projects) and transform its business strategy (from bidding for small projects where competition is high to bidding for larger projects befitting its size and scale).

Diversified order book

In terms of verticals, NCC’s order book is properly diversified, alleviating the risk of a slowdown in a particular segment. It is now established in about 10 industry sectors, also having reasonably spread out geographically. (Fig 31: Major orders in various segments.) Its order book of Rs161bn (Sep ’09) encompasses the major verticals of buildings and housing, transportation, irrigation, water, electrical, oil & gas, metals, power, mining and roads.

Fig 9 –Increasing order book diversity

Source: Company

In the past three years, it has focused on EPC works and made forays into new verticals such as power, oil and gas, mining and metals. These enable it to reap the benefits of the huge expenditure planned by the government and the private sector. It expects the new verticals (15% of order book) to drive growth in the next three to five years. It plans to build partnerships with industry leaders in each vertical (tying up with Posco for steel projects) to establish itself.

Fig 10 – Key projects won/executed in new verticals Division Key projects won / Completed

Power EPC order of KVK Nilanchal Power Project (1 x 350 MW): Rs8,995m

Metal SAIL - IISCO expansion project at Burnpur, West Bengal: Rs15,722m

Oil & Gas Balance offsite & Utilities and Interconnection with IOCL, Panipat refinery: Rs1,423m Mining Blast hole drilling, controlled blasting, excavation, loading, transport and dumping of

overburden for Singreni Collieries: Rs3,600m Source: Company

A dominant 85% of the domestic order-book constitutes government orders. Also, the order book is fairly well spread across India, with south India and international orders covering two-thirds of the book. The share of international orders has steadily increased over the years to 30% now.

Dubai exposure risk limited to Rs4.5bn

Of its Rs161bn order book, NCC has Rs10bn coming in from the Dubai region. Of this, Rs1bn is for a water pipeline project of the Dubai Electricity and Water Authority where no payment problem is expected as it is a government agency.

The other Rs9bn (from Dubai) stems from its own real estate project, NCC Harmony, a 1.45m sq. ft. project to be developed in two phases. The first (Tower I) has been entirely sold out, with 80% of the funding in place. NCC has postponed the launch of the second tower till that market

NCC’s order book of Rs161bn

encompasses the major verticals of buildings and housing,

transportation, irrigation, water, electrical, oil & gas, metals, power,

mining and roads

Of its Rs161bn order book, NCC

has Rs10bn coming in from the Dubai region

Building & Housing

Irrigation

International

Transportation & Electrical Power, Metals, Oil & Gas

Water & Environment Mining

19781998

1999

2004

2005

2007 2008



revives. Accordingly, we believe that the work order for the second tower (of ~Rs4.5bn) will be at risk of not taking off in the near future. This order forms 2.8% of the overall order book.

High proportion of fixed-price contracts not a major concern

The company has a high proportion of fixed-price contracts (38% of the order book) compared to the industry standard. This we believe need not pose a huge challenge to the net margin, given that the bulk is from an international subsidiary where the tax rate is marginal. Also, the softening of commodity prices worldwide with no real threat of a major spike in the short term should help NCC protect margins.

In order to soften the risk from fixed-price contracts, it builds in possible escalations while bidding. It also enters long-term contracts taking into account price volatility, regular augmentation of storage for raw materials and monitoring carrying costs of raw materials.

Fig 13 – Order-book breakup – Raw material cost escalation

Pass through, 62%

Fixed price, 38%


Fig 11 – Order-book breakup - Regional

West, 9%

North, 11%

South, 32%

International, 31%

East, 17%


Fig 12 – Order-book breakup - Verticals

Building, 21%

Metals, 9%

Electrical, 5%

Irrigation, 5%

Oil & Gas, 0%Power,

1%

Roads, 8%

Water, 21%

Mining, 3%

International, 27%


38% of the order book on fixed-price contracts does not pose a major risk



Focus on core operations NCC has re-focused on core strengths: cash-contracts and road BOT projects. It shelved two airport projects, capped further property investments and sold its stake in Gautami Power. The recent QIP proceeds would help it bid aggressively for new BOT projects.

Funding pressure eases

In the past six months, NCC has turned leaner, concentrating on its core cash-contracts business and upcoming road BOT opportunities. It sold off its 9.5% stake in Gautami Power, for Rs1.1bn (Mar ’09 book value: Rs0.5bn). During Aug ’09, it raised Rs3.7bn through a QIP @ Rs132.5 a share; offer was oversubscribed 1.8 times. These funds would be utilized to repay loans, fund the additional working capital required and invest in its present BOT projects. This would then result in lower interest costs.

Accordingly, the net gearing has fallen to 30% (from 70% in Mar ’09). This would enable it to bid aggressively for new BOT and cash-contract projects without necessitating any further issue of equity capital. It aims to grow its business in the next two years without any fresh equity issue.

Focus on road and power BOTs

The RoE and RoCE have declined in the last three years – from 16.5% and 14.6%, respectively, to 9.5% and 11.8%. This is mainly due to the shift in its business model from a pure cash-contract business to BOT projects. NCC plans to restructure its BOT portfolio, focusing on road and power projects only where it has the experience and technical capabilities. In Aug ’09 it sold off its stake in Gautami Power to its joint venture partner for Rs1.1bn. It now plans to exit the Gulbarga and Shimoga airport projects and may also look at quitting the Machlipatnam seaport project.

Its active portfolio now includes eight BOT projects (five road, two hydro-power and one thermal power). Its equity commitment for these is ~Rs15.5bn, of which Rs4.6bn has been infused till Jun ’09. Most of its balance commitments (~Rs10bn) pertain to Himalayan Green (280 MW hydro) and NCC Power (1,320 MW thermal). These would be completed in phases over FY11-16, not putting any pressure on the balance sheet in the near term.

NCC’s plans to offload part of its 100% stake in the thermal power project (NCC Power) will, when crystallized, further lessen the burden on its balance sheet. The immediate requirement of Rs1.6bn would come through internal accruals and the QIP proceeds. It aims to complete the remaining four road BOT projects in the next six to nine months, after which the cash flows would start.

It has submitted several pre-qualification bids for forthcoming road BOT projects and expects to win three or four of them.

Focus on core businesses of cash contracts and BOT. Recent QIP

issue to deleverage and allow aggressively bidding of new projects



Fig 14 – BOT Portfolio Project(Rsm) % stake Proj. Cost Equity Inv. up to Jun ’09 Completion Date

Roads

Brindavan Infra 33 2,475 150 150 Jun ’06

OB Infra 64 5,848 936 936 Dec ’09

Western UP 51 6,670 671 304 Mar ’10

BETL 40 8,650 1,063 623 Oct’ 09

Pudicherry-Tindivanam 48 3,150 324 167 Jul ’10

Power

Himachal Sorang 67 6,000 804 550 Dec ’10

Himalayan Green 54 16,800 2,268 250 Dec ’13

NCC Power 100 68,640 8,369 121 Dec ’16

Ports

Machilipatnam Seaport 25 16,800 844 100 Dec’ 12

135,033 15,429 3,201

Source: Company

Fig 15 – BOT asset ownership structure


Maytas JV – Buying out stake

Of the eight active BOT projects, NCC has partnered Maytas on five; of these, one (a road project) is already operational. It has indicated that it would, in consultation with the other partners, buy out Maytas if the latter is unable to fund its equity contribution. For example, in the Bangalore Elevated Tollway it raised its stake from 33% to 40% and in Western UP from 30% to 51%.

In the Himachal Sorang power project, NCC will invest part of Maytas’s share of pending equity, thereby raising its stake from 67% at present to 75%. The recent takeover of Maytas by IL&FS would strengthen the ability of Maytas to raise funds for the rest of its equity commitments.

NCC Infra

NCC Ltd

Roads Power

Others

Brindavan Infrastructure (~63 km)

Western UP Tollway (~79 km)

Bangalore Elevated Tollway

OB Infra (~63 km)

Pudicherry – Tindivanam (~36 km)

Himachal Sorang (100 MW)

Himalayan Green (280 MW)

NCC Power Project (1,320 MW)

Machilipatnam Seaport

NCC in consultation with the other partners, buy out Maytas if the latter

is unable to fund its equity contribution



NCC is also implementing one real estate project, Jubilee Hills Landmark, in a joint venture with Maytas. In this, it holds 25%, ICICI Ventures 60% and Maytas 15%. The partners have brought in their entire equity contribution and the project has achieved financial closure for debt of Rs4.65bn. At present, the project is awaiting approval from the Greater Hyderabad Municipal Corp. As there is no equity commitment left from Maytas, management believes there will be no problems in implementing the project.

Real estate: going slow

NCC operates in real estate through its subsidiary NCC Urban Infra (an 80% stake) and three real estate SPVs (special-purpose vehicles). NCC Urban Infra has ~450 acres, of which ~206 (11.5m sq. ft.) is to be developed in Phase I. It is currently executing projects in Hyderabad, Ranchi, Bangalore, Cochin and Dubai covering 6.5m sq. ft.; the balance 5m sq. ft. projects have yet to commence.

NCC, through its three SPVs (JHLP, Tellapur Technocity, NCC Vizag Urban), has effective economic interest in 125 acres in Hyderabad and Vishakhapatnam where development has yet to commence. As of Sep ’09, it had invested nearly Rs4.2bn in various real estate projects in India and Dubai, and loaned its subsidiary Rs2.9bn. It plans to cap further equity investment in the business and focus on new project launches when the market revives.

Fig 15 – Holding structure


Dubai exposure

NCC’s 1.45m sq. ft. Dubai real estate project (NCC Harmony, consisting of two towers) has been modified. Only the first tower (already largely pre-sold) would now be constructed; construction of the second would be taken up later (when the market improves). At present, foundation and basement work has been completed. Of the monies required (Rs4.5bn) to construct Tower I, about Rs3.5bn has already been roped in (Rs0.7bn in equity, Rs1.8bn in upfront payments, Rs1bn in loans). The company is in talks with banks for the balance Rs1bn. It expects to complete work till the 10th floor by Dec ’10, after which it would be entitled to receive the next milestone payment.

Based on our valuation methodology, the risk to our fair price (from the project) based on equity invested till date is Rs3 per share.

NCC Urban

NCC Ltd. Promoters

Tellapur Technocity

NCC Vizag Urban

JHLP

Real Estate SPVs

20%

100%

26%

25%

80%

Dubai exposure at Rs9bn across two towers. First tower largely funded for

and full sold out. Risk of Rs3/ share based on equity invested till

date



Fig 16 – Land bank details – Ongoing projects NCC Urban Infrastructure City Stake % Land bank (acres) Builtup area (m sq. ft.)

Ongoing Projects

Gadchibowly Hyderabad 70 9.2 1.13

Ranchi - Games Village Ranchi 88 56.5 2.00

Tulip Tower Bangalore 60 8.0 0.80

NCC Premier Bangalore 55 1.8 0.19

Green Valley Cochin 100 0.9 0.15

Nagarjuna Aster Park Bangalore 80 3.2 0.35

Maple Heights Bangalore 100 2.1 0.24

Nagarjuna Laurel Cochin 100 1.2 0.16

NCC Harmony Dubai 4.2 1.45

Total 87.1 6.5

Source: Company

Fig 17 – Projects yet to commence Projects City % holding Acreage Built up area (m sq. ft.)

Gajula Ramaram Hyderabad 25 38.0 1.46

Kompally Hyderabad 100 38.0 0.68

Poppulaguda Hyderabad 100 9.1 0.90

Batchupally Hyderabad 100 25.0 1.40

Symphony Apartments Chennai 100 9.3 0.57

Total 119.4 5.0

Source: Company

Fig 18 – Land for future development Proposed projects Land Bank (Acres)

Bowrampet Village (Qutbullapur Mandal, R.R. District) Hyderabad 18.2

Banjara Hills Hyderabad 2.2

Sri Sainath Gardens (Rudraram Village,Patancheru, Medak) Hyderabad 3.4

Keesara (R.R.District) Hyderabad 23.0

Kadubeesanahally Bangalore 0.3

Gunjur Village Bangalore 2.0

Church Road Bangalore 0.1

Meyyur Village Chennai 28.6

Gurgaon Delhi 5.0

Raipur Raipur 1.0

Nemam Village Kakinada 150.0

Goa Goa 9.0

Total 242.9

Source: Company

Fig 19 – SPVs under NCC Projects City % holding Acres Built up area (m sq. ft.)

JHLP Hyderabad 25 6 0.9

Tellapur TechnoCity Hyderabad 26 100 7.5

NCC Vizag Urban Vishakhapatnam 100 98 4.9

Gajularamaram Hyderabad 75 - 4.4

Source: Company



Stout earnings growth over FY09-12 We estimate 33% earnings CAGR over FY09-12, led by strong revenue and better operating margin seen in 1HFY10. We expect order inflow momentum (Rs60bn in FY10 ytd) to continue.

Order book points to revenue for the next two years

NCC’s present consolidated order book of Rs161bn is to be executed over the next two and a half years. Of this, over Rs60bn was received in FY10 (ytd), signalling the strong order-flow momentum. We expect the impetus to continue. In this light, we expect execution of new orders to lead to a strong top line in FY11-12.

Standalone revenue is estimated at grow 24% CAGR over FY09-12, driven by strong implementation in buildings, transportation and the new divisions of power, metals, mining and oil & gas.

Fig 20 – Revenue growth

0

10

20

30

40

50

60

70

80

FY04

FY05

FY06

FY07

FY08

FY09

FY10

e

FY11

e

FY12

e

-

10

20

30

40

50

60

70

80

Revenue Revenue growth (RHS)

(Rs bn) (%)


The lackluster operating margin of FY09 (curbed by raw-material and employee-cost hikes) is expected to revert to the 10% levels. Management is confident of maintaining margins around 1HFY10’s 10.3%. Also, reduced interest costs (as the recent QIP proceeds have been used to repay debt) should keep the net margin healthy. Given the better net margins in international orders, we estimate a 33% CAGR in net profit from core business (including international) over FY09-12.

Consolidated revenue to climb from FY11

Consolidated revenue (from FY11) would be boosted by collections from the four new BOT road projects, which would all be operationalised from Dec ’09 to Jul ’10.

NCC revenue is estimated at an 24% CAGR over FY09-12,

driven by strong implementation of order book

Better net margins in international orders to drive a 33% CAGR in

profits over FY09-12



Financials We expect higher (operating profit and net profit) margins in FY10-12 than in FY09, resulting in enhanced return ratios. NCC’s net debt-equity ratio is estimated to come down in FY10 consequent on the sale of its stake in Gautami Power and a QIB issue

Return ratios to improve

We expect the FY10-12 better OPM and NPM (than in FY09) to lead to higher return ratios. We estimate RoE to improve steadily from 9.5% in FY09 to 15.5% three years later. Similarly, RoCE is expected to rise from 11.8% to 16.9% in FY12.

Fig 21 – OPM and NPM

-

2.0

4.0

6.0

8.0

10.0

12.0

FY04

FY05

FY06

FY07

FY08

FY09

FY10

e

FY11

e

FY12

e

OPM NPM

(%)


Fig 22 – Return ratios

-

5.0

10.0

15.0

20.0

25.0

30.0

FY04

FY05

FY06

FY07

FY08

FY09

FY10

e

FY11

e

FY12

e

RoE RoCE

(%)


Net debt-equity to continue at comfortable levels

NCC’s net debt-equity ratio is estimated to come down in FY10 subsequent to the sale of its stake in Gautami Power and the QIB issue. In future, this is expected to be at comfortable levels of ~0.7x, which is healthier than industry standard of 1x to 1.2x. It also leaves room to raise further debt if the need arises.

We assume a working-capital cycle of 100-105 days over FY10-12, marginally higher than FY09’s 100. We believe that, with increased traction

We expect the FY10-12 better OPM and NPM (than in FY09)

to lead to higher return ratios

Recent QIP and stake sale in Gautami power has got down the net debt to equity to a comfortable 0.7x



in new verticals and the competitive landscape, the company may not be able to reduce this significantly.

Fig 23 – Working-capital days

-

20

40

60

80

100

120

FY04

FY05

FY06

FY07

FY08

FY09

FY10

e

FY11

e

FY12

e

(days)


Fig 24 – Net debt-equity ratio

0

10

20

30

40

50

60

70

80

90

FY04

FY05

FY06

FY07

FY08

FY09

FY10

e

FY11

e

FY12

e

(%)





Net sales 34,729 41,514 48,987 61,233 79,603

Sales growth (%) 21.0 19.5 18.0 25.0 30.0


EBIDTA 3,598 3,737 4,891 6,154 8,030

EBITDA Growth (%) 33.4 3.9 30.9 25.8 30.5

EBITDA margins (%) 10.4 9.0 10.0 10.0 10.1

+ Other income 56 42 51 51 51

- Interest 719 964 1,321 1,521 2,021

- Depreciation 482 533 550 600 650

PBT 2,452 2,282 3,070 4,083 5,409

- Tax 832 743 1,013 1,388 1,839

PAT 1,619 1,539 2,057 2,695 3,570

PAT growth (%) 6.6 (5.0) 33.7 31.0 32.5

PAT margin (%) 4.7 3.7 4.2 4.4 4.5

FDEPS (Rs/share) 7.1 6.7 8.0 10.5 13.9

FDEPS (Rs/share) (Incl Intl Subsidiaries) 7.3 7.9 9.3 13.1 16.7

CEPS (Rs/share) 9.2 9.1 10.2 12.8 16.4

DPS (Rs/share) 1.3 3.0 4.5 6.0 6.0


Fig 26 – Balance Sheet (Rsm) Year end 31 Mar FY08 FY09 FY10e FY11e FY12eSources of Funds

Share capital 458 458 513 513 513


Deferred tax liability 167 188 188 188 188

- Miscellaneous expenses -


Secured Loans 7,188 8,864 9,814 11,614 13,214

Unsecured Loans 1,750 3,575 3,575 6,575 9,575

Total Loans 8,938 12,439 13,389 18,189 22,789


Total 24,772 29,482 34,812 40,505 46,874


Gross Block 6,620 6,233 7,364 8,364 9,364


Net Block 5,197 4,592 5,173 5,573 5,923

CWIP 143 281 150 150 150

Investments 5,648 7,402 10,371 10,732 12,032

Debtors 8,677 10,260 12,079 15,099 19,628

Inventory 5,493 7,495 8,724 10,905 13,085

Loans & advances 13,786 14,514 15,000 17,800 19,000




Provision 880 867 1,000 1,200 1,400


Working capital 11,455 15,861 16,421 22,376 26,228

Cash 2,330 1,345 2,697 1,674 2,541

Total 24,772 29,482 34,812 40,505 46,874






+ Depreciation 482 533 550 600 650

+Deferred tax 52 21 - - -

Cash profit 2,153 2,092 2,607 3,295 4,220

-Inc/(Dec) in WC 6,079 4,407 560 5,955 3,852

Operating cash flow (3,926) (2,314) 2,047 (2,661) 368

-Capex 1,593 67 1,000 1,000 1,000

Free cash flow (5,518) (2,381) 1,047 (3,661) (632)

-Dividend 348 803 1,351 1,801 1,801

+Equity raised 4,154 - 3,673 - -

+Debt raised 2,569 3,501 950 4,800 4,600

-Investments 880 1,754 2,968 361 1,300

-Miscellaneous items 80 (453) 0 0 0

Net cash flow (104) (985) 1,352 (1,023) 867

+Opening cash 2,434 2,330 1,345 2,697 1,674

Closing cash 2,330 1,345 2,697 1,674 2,541


Fig 28 – Ratio analysis @ Rs151 on 11th Dec 09 Year end 31 Mar FY08 FY09 FY10e FY11e FY12e


EBITDA Margin (%) 10.4 9.0 10.0 10.0 10.1

PAT Margin (%) 4.7 3.7 4.2 4.4 4.5

Income Tax Rate (%) 34.0 32.6 33.0 34.0 34.0

RoE (%) 12.5 9.5 10.8 12.4 15.5

RoCE (%) 15.0 11.8 13.5 14.7 16.9

Other Ratios

Net Debt/Equity (%) 42 66 50 75 85

W C turn (days) # 75 99 99 99 99

Per Share Data

Earnings Per Share (Rs) * 7.3 7.9 9.3 13.1 16.7




Valuation Ratios

PE (x) * 16.0 14.8 12.6 8.9 7.0

P/BV (x) 2.2 2.0 1.8 1.7 1.6

EV/EBITDA (x) 11.4 12.2 10.1 9.0 7.3

Source : Company, Anand Rathi Research * Incl. International business # excl loans to subsidiary.



Company Background & Management Established by A V S Raju in 1978 as a partnership firm, NCC was converted into a public limited company in 1990, going public in 1992. It has a fairly diversified business mix – of roads, buildings, water, irrigation, hydro-power, etc.


Dr A V S Raju Chairman Dr. A. V. S. Raju, Founder Chairman and Director on the Board of the Company

AAV Ranga Raju, Managing Director One of the chief promoters, with over 33 years of experience in the construction industry

J V Ranga Raju Wholetime Director Has over 23 years experience in the construction industry. Holds a masters degree in commerce.

A G K Raju Executive Director One of the chief promoters, with over 23 years experience in the construction industry.

A V N Raju Wholetime Director One of the promoter directors, a graduate in arts, with over 18 years experience in the construction industry.

Source: Company


Mar ’04 Preferential issue Individuals, Companies, NRIs 10.0 27 270

Nov ’04 Preferential issue 14.8 55.6 820

Nov ’04 Warrants Promoters 4 27 108

Dec ’04 Warrants Rakesh Jhujhunwala, ICICI Ventures 3.5 55.6 195

Dec ’06 GDR issue 23.5 233.2 5,476

Oct ’07 Preferential issue Blackstone 20.2 202.5 4,100

Aug-09 QIP 27.7 132.5 3,673




Fig 31 – Major orders

Verticals Area of operation Past Projects Current Projects

Residential, commercial incl. townships

Construction of Mega Sports Complex (Rs1522m) Cement Plant at Kurnool (Rs1100m)

Construction of Software Technology Park (Rs827m) Construction of 186 Flats and Rooms for SBI (Rs610m)

Industrial construction Construction of Logistic Facilities and Hospital Complex (Rs504m)

HCA International Cricket Stadium (Rs403m)

Construction of Cricket Stadium Complex (Rs587m) Andhra Pradesh Industrial Infrastructure Corporation (Rs527m)

Storm water drains, underground drains,

Construction of District Court at Dwarka (Rs557m) Construction of I.T Parks at MIDC Knowledge Park for Patni Computers Ltd (Rs606m)

Construction of Grade Separator (2 Nos) Along outer Ring road one (Rs939m)

Construction of Cricket Stadium - Raipur (Rs828m)

Constn. of Nizam's Institute of Medical Sciences, University campus Heart Institute (Rs932m)

Construction of medical college at Himachal pradesh (Rs6bn)

Development of Transport Infrastructure facilities for Mysore under JNNURM (Rs1086m)

Constn. of Times Print City - Airoli - Mumbai (Rs1088m)

Development of Sports facilities for Common wealth Games (Rs2518m)

Constn. of Paint Shop and Body shop at Pune (Rs1172m)

Constn. of 5 star deluxe hotels at Shilpakalavedika (Rs1210m)

Constn. of Bridges in Karnataka (Pkg. Ill) near Bangalore (Rs593.3m)

Constn. of Boys & Girls hostel dining, common rooms, electrical sub-stations, drainage & Electrical (Rs990m)

Constn. of Cabinet Secretariat Building (Rs860.4m)

Design and Constn. of elevated structures (Viaduct) excluding station portions in reach - 4 (Rs1506m)

Permanent Accomodation for Medical Sciences (Rs672m)

Construction of 304 type-VI houses & 99 type -1 house for NMDC (Rs1616m)

Pushkar Lift Irrigation Scheme - East Godavari District (Rs503m)

Provision of Permanent Accommodation for Army College of Medical Sciences (Rs672m)

Constn & Comig. of 339 MLD Capacity Pumping Station at Amberpet, Hyderabad (Rs1187m)

Construction of seven storeyed Tower Block – I, Govt. Hospital Campus (Rs641m)

National Games village at Bangalore (Rs853m)

Construction of Residential Apartments for sriram properties (Rs560m)

Nuclear Power Corporation, Kaiga,(Rs440m)

South Asian Games village at Chennai (Rs639m)

Construction of Resi. Flats at Singapore class township at Pocharam (Rs1623m)

Buildings and Industrials

DDA Mega Housing project (Rs450m)

Roads Grand Trunk Road improvement Project in U.P. (Rs4961m)

Construction of Ghaziabad-Hapur Section (Rs1154m)

(National Highways/expressways) Rehabilitation and Upgrading of Garamore- Gagodhar Road Section (Rs3390m)

East West Corridor Project - Pkg. VI - Under Joint Venture - DIC NCC (JV) (Rs4259m)

Bridges Rehabilitation and Upgrading of Radhanpur-Deesa Road Section (Rs3260m)

Four laning and Strenthening of Existing 2 lane system on NH2 - Bihar SDB-NCC JV (Rs2649m)

(Major/minor with well/pile/open foundation, pre-stressed concrete, Girders, ROB, RUB)

Four laning of Bangalore – Mysore State Highway (Rs4800m)

Road work at Morvi section SDB - NCC JV (Rs1027m)

Railways/Tunnels Improvement, Operation and Maintenance of meerut Muzzafarpur road (Rs4500m)

Transportation

Design, Engineering, Construction, Development, Finance on Orai-Bhognipur (Rs5200m)

Water Supply Execution of works related to RWSS Umed Dhawa Samdari Khandap Part-Ill Pkg. No. 3 (Rs2191m)

Combined Water Supply Scheme in Amravati dist. (Rs1070m)


Direct Pipeline for supply of water from Pawana Dam to the water treatment plan at sector - 23 Nigdi (Rs1592m)

Manufacturing, laying and commissioning of pipes supply of drinking water (Rs1600m)

Environmental Eluru water Supply scheme under UIDSSMT (Rs728m) Modhera Lift Irrigation Scheme on EPC basis (Rs1235m)

(Sewage, water treatment, Solid waste recycling)

Transmission of Godavari water from Yellampally Barrage for drinking water needs of Hyderabad (Rs4010m)

Construction of gravity canal across parnihita river AP. (Rs4180m)

Irrigation J.Chokkarao Devadula Lift Irrigation Scheme Phase II (Rs4707m)

Restoration of Eastern Gandak canal system in Bihar (Rs4490m)

Industrial Water Sub transmission lines in Osmanabad Division under Osmanbad Circle & Lathur Division. (Rs2289m)

Water Supply and sewerage project Bangalore (Rs3280m)

Oil & Gas pipelines Chevella Lift Irrigation Scheme - near Tummidi Hetti Adilabad Dist. (Rs1077m)

Jalundra Lift Irrigation Scheme (Rs1492m)

Canal Osmanabad Water Supply sceheme (Rs1820m)

Water & Environment

Dhanbad Water Supply Scheme (Rs1097m)

Source: Company


India I Equities


[email protected]


[email protected]

Key financials


Sales (Rsm) 14,645 23,769 35,916 47,271 61,816

Net profit (Rsm) 1,214 1,757 2,708 3,582 4,814

EPS (Rs) * 9.0 12.2 14.0 18.6 25.0

Growth (%) 19.5 35.5 14.7 32.3 34.4

PE (core) (x) 20.8 15.3 13.4 10.1 7.5

PBV (x) 4.7 3.2 2.5 2.0 1.6

RoE (%) 30.6 25.7 23.4 22.3 22.7

RoCE (%) 17.4 15.4 19.0 20.0 21.6

Dividend yield (%) 0.2 0.2 0.3 0.4 0.6

Net gearing (%) 210 184 128 122 90

Source: Company, Anand Rathi Research * Fully Diluted

Construction

Initiating Coverage

15 December 2009

Era Infra Engineering

High growth on power capex; initiate at Buy

Strong business portfolio; Buy. Era’s focus on high-margin contracting, EPC and equipment-rental puts it on a firm footing to capitalize on opportunities in the infra space. We initiate coverage with a Buy rating and a target price of Rs290.

Quality order book. Era’s two-decade-long presence in power, urban infra and industrial buildings, relatively lower raw material risk, and an in-house equipment bank gives it a better-than-peer OPM of 15% in construction business. Its Rs75bn order-book, 3.8x FY09 rev, and Rs25bn of L1 projects, provide good revenue visibility. We estimate 40% earnings CAGR over FY09-12.

Preferred contractor for govt projects. Era’s experience in BOP works for large thermal power plants has made it the preferred contractor for clients such as NTPC and BHEL (75% of its order book comprise govt. projects). To tap growth opportunities, it plans to diversify into new segments, focus on large projects and enhance pre-qualification through strategic alliances.

Well entrenched in equipment rental. Era is a leading player in the high-margin equipment-rental business, which supplements its core construction business. We estimate the division’s share of profit at ~20%, resulting in healthy margins and return ratios.

Valuation. Our sum-of-parts valuation is Rs290: Rs279 for its core construction business at 15x FY11e earnings and Rs11 for its BOT projects at 1.5x Mar ’09 book value.


Key data ERIE.IN / ERCI.BO

52-week high/low Rs212/Rs62Sensex/Nifty 17119 / 51173-m average volume US$5mMarket cap Rs38.4bn/US$0.83bnShares outstanding 143.7mFree float 41.9%Promoters 58.1%Foreign Institutions 4.0%Domestic Institutions 1.5%Public 36.4%


Era Infra

Sensex50

80

110

140

170

200

Nov

-08

Dec

-08

Jan-

09

Feb-

09

Mar

-09

Apr-0

9

May

-09

Jun-

09

Jul-0

9

Aug-

09

Sep-

09

Oct

-09

Nov

-09


15 December 2009 Era Infra Engineering – High growth on power capex; initiate at Buy



Net sales 14,645 23,769 35,916 47,271 61,816Sales growth (%) 91.9 62.3 51.1 31.6 30.8 - Op. expenses 11,714 19,633 29,263 38,627 50,698 EBIDTA 2,931 4,136 6,653 8,644 11,118 EBITDA margins (%) 20.0 17.4 18.5 18.3 18.0 - Interest 980 1,728 2,233 2,751 3,206 - Depreciation 201 459 700 870 1,060 + Other income 348 353 322 392 442 - Tax 884 545 1,334 1,833 2,480 PAT 1,214 1,757 2,708 3,582 4,814 PAT growth (%) 53 45 54 32 34 Consolidated PAT 1,214 1,757 2,708 3,582 4,814 FDEPS (Rs/share) 9.0 12.2 14.0 18.6 25.0 CEPS (Rs/share) 15 20 21 27 32 DPS (Rs/share) 0.4 0.4 0.6 0.8 1.2 Source: Company, Anand Rathi Research

Fig 2 – Balance sheet (Rsm)


Share capital 231 287 357 357 386 Reserves & surplus 5,250 9,412 15,250 19,015 26,159 Shareholders’ fund 5,481 9,699 15,607 19,372 26,545 Debt 14,520 17,964 19,385 23,516 23,798 Minority interests - - - - -Capital employed 20,001 27,663 34,992 42,888 50,343 Fixed assets 7,102 12,010 14,050 15,420 16,100 Investments 2,185 1,761 2,246 3,622 3,622 Working capital 6,452 12,101 17,648 21,991 28,897 Cash 4,263 1,791 1,049 1,856 1,725 Capital deployed 20,001 27,663 34,992 42,888 50,343 No. of shares (m) 115.5 143.6 178.6 178.6 192.9 Net Debt/Equity (%) 209.5 184.0 127.8 121.9 89.8 W C turn (days) 137 141 151 153 150 Source: Company, Anand Rathi Research

Fig 3 – Cash flow statement (Rsm)


Consolidated PAT 1,214 1,757 2,708 3,582 4,814 +Depreciation 545 784 1,050 1,220 1,410 +Deferred tax 344 325 350 350 350 Cash profit 1,759 2,541 3,758 4,802 6,224 - Incr/(Decr) in WC 1,743 5,649 5,547 4,343 6,906 Operating cash flow 16 (3,108) (1,789) 459 (682) -Capex 3,603 5,368 2,740 2,240 1,740 Free cash flow (3,587) (8,475) (4,529) (1,781) (2,422) -Dividend 159 67 125 167 271 + Equity raised 5,670 - 2,975 - 2,279 + Debt raised 6,379 3,444 1,421 4,131 282 -Investments 933 (424) 484 1,376 - -Misc. items 4,878 (2,203) - 0 - Net cash flow 2,492 (2,472) (742) 807 (131) +Opening cash 1,771 4,263 1,791 1,049 1,856 Closing cash 4,263 1,791 1,049 1,856 1,725 Source: Company, Anand Rathi Research

Fig 4 – PE Band

3x

6x

9x

12x

020406080

100120140160180200220

Dec

-04

Dec

-05

Dec

-06

Dec

-07

Dec

-08

Dec

-09

(Rs)



1x

3x

5x

7x

0

10

20

30

40

50

60

Dec

-04

Dec

-05

Dec

-06

Dec

-07

Dec

-08

Dec

-09

(Rs bn)



Power23%

Roads16%

Industrials15%

Social Infra & Bdg30%

Infra16%




Investment Argument & Valuation Era’s focus on high-margin contracting, EPC and equipment rental puts it on a firm footing to capitalize on opportunities in the infra space. We initiate coverage with a Buy rating and a target price of Rs290.

Quality order book

Era’s two-decade-long presence in power, urban infra and industrial buildings, relatively lower raw material risk, and an in-house equipment bank gives it a better-than-peer OPM of 15%. Its current order-book of Rs75bn, 3.8x FY09 revenue, and Rs25bn of L1 projects, provide good revenue visibility. We estimate 27% earnings CAGR over FY09-12.

With pre-qualifications of Rs300bn, bids-under-evaluation of Rs50bn and a strong L1 status, the order inflow momentum is expected to be sturdy over the next six to nine months. The company aims at an order book of Rs100bn by Mar ’10. The current order book, with an average execution period of two-and-a-half years, offers good revenue visibility for FY10-11.

Over the past couple of years, the company has been focusing on EPC and international works, and plans to make a foray into new verticals such as irrigation and hydropower. It would thus reap the benefit of the vast spending planned by the government and private players.

Preferred contractor for govt projects

Era’s experience in BOP works for large thermal power plants has made it the preferred contractor for clients such as NTPC and BHEL (75% of its order book comprise government projects). To tap growth opportunities, it plans to diversify into new segments, focus on large projects and enhance pre-qualification through strategic alliances.

Within the power sector, Era’s scope of work has so far been limited to civil, structural and foundation work for thermal power plants. It is currently working on around 40% of NTPC’s projects and is also associated with most of NTPC’s other projects for smaller job works. With NTPC accounting for most of the power capacity growth in the 12th Five-year Plan, Era’s successful association with it and with BHEL over the past 10 years puts it in a sweet spot to bag fresh orders.

Also, contracts would be doled out by many private players, who have plans to add power capacity. Ahead, Era plans to widen its scope of work and execute orders within the Balance of Plant (BoP) by tying up with various private players who are leaders in their space (eg, in fly-ash handling and coal-ash handling).

Well entrenched in equipment rental

Era is a leading player in the high-margin equipment-rental business, which supplements its core construction business. We estimate the division’s share of profit at ~20%, resulting in healthy margins and return ratios. With reliable and timely key deliverables, the business characteristically commands high margins and has few large competitors. The RoCE here is ~25%, relatively much higher than in its main contracting business.

It has an equipment bank of Rs3.5bn and plans to double that over the next three years. The services are provided all over India through four

Era current order-book of Rs75bn, 3.8x FY09 revenue, and Rs25bn of

L1 projects, provide good revenue visibility

Era’s association with public-sector units and government bodies for

projects in its various divisions has enabled it establish itself as a tier-1

contractor for their projects

Besides construction, Era wants to grow its recent and related ventures of Equipment hiring, EPC and RMC



depots – at Kolkata, Hyderabad, Mumbai and Delhi

Around 40% of this business arises internally, the balance from external customers. Internally, the machines are rented out at a discount to market rates. The business involves repairs and maintenance costs, which average up to 20% of sales, giving it an operating margin of over 80%. Daily costs (diesel, workers and upkeep) are borne by the clients.

Valuations At the current price of Rs198, the stock trades at PEs of 14.1x and 10.7x respective FY10 and FY11 earnings estimates. Adjusted for the fair value of BOT assets, it trades at PEs of 13.3x and 10.1x FY10 and FY11 estimates, respectively. We initiate coverage on Era with a Buy rating and a target price of Rs290.

We have valued Era on a sum-of-parts basis at Rs290 a share, based on the fully-diluted equity (FCCB conversion). We have valued the core construction business at a target PE of 15x FY11e earnings. We have valued the three road BOTs at 1.5x Mar ’09 book value. We have valued Era in line with the target multiples of the other construction companies due to its high earnings growth, superior margins and the narrowing gap in their balance sheet sizes.

Fig 7 – Sum of Parts valuation Basis of Valuation Multiple

(x) Value

(Rs. Mn) Value Per share

(Rs)

Core Business P/E FY11 15.0 53,732 279

Road BOT Projects

- Gwalior Bypass P/BV – Mar’09 1.5 746 3.9

- Hyderabad Ring Road P/BV – Mar’09 1.5 645 3.3

- Bahadurgarh-Rohtak P/BV – Mar’09 1.5 733 3.8

Fair Value 290


Risks Project execution risk. Could arise from a shortage of manpower, land acquisition issues or arbitration with clients. Maintaining experienced personnel is key in the successful implementation of construction projects. The growing attrition rate in the industry and lack of skilled manpower can add significantly to manpower cost and may lead to delay in project completion.

Financial risk. Given the nature of the industry and its high growth phase, Era will continue to generate negative operating and free cash-flows. It would therefore continuously need additional debt or equity to fund working capital and capex. Moreover, its equity commitments towards its BOT projects would depress its initial RoE. Its inability to arrange timely funding would lead to project delays and cost overruns, affecting both top and bottom lines.

High gearing risk. Era’s net gearing as in Mar ’09 of 1.8x is one of the highest in the industry. This is expected to drop to 1.3x in FY10 due to the infusion of equity (35m warrants) and robust profits, but would still be high considering the company’s plans of aggressively bidding for BOT projects.

Value of core construction: Rs.279/share

Value of BOT business: Rs.11/share



Quality order book Era’s two-decade-long presence in power, urban infra and industrial buildings, relatively lower raw material risk, and an in-house equipment bank gives it a better-than-peer OPM of 15% in construction business. Its current order-book of Rs75bn, 3.8x FY09 revenue, and Rs25bn of L1 projects, provide good revenue visibility. We estimate a 40% earnings CAGR over FY09-12.

Order inflow momentum to drive revenues

With a two-decade track record in engineering and construction, Era is well set to capitalize on the rising growth opportunities in infrastructure. Its order book grew at a 68% CAGR over FY06-09 and now stands at Rs75bn. This implies an orderbook-to-revenue ratio of 3.8x FY09 revenue. In addition, it has L1 status for orders of Rs25bn. Its current order book includes Rs5bn from the unexecuted portion of in-house road BOT projects.

The company added fresh orders of over Rs20bn in 1HFY10 compared with Rs36bn added in all of FY09. With pre-qualifications of Rs300bn, bids-under-evaluation of Rs50bn and a strong L1 status, the order inflow momentum is expected to be sturdy over the next 6-9 months. The company aims at an order book of Rs100bn by Mar ’10. The current order book, with an average execution period of two and a half years, offers good revenue visibility for FY10-11.

Fig 8 – Order book vs Book-to-bill ratio

-

25

50

75

100

125

150

175

FY06

FY07

FY08

FY09

FY10

e

FY11

e

FY12

e

2.0

2.5

3.0

3.5

4.0

4.5

5.0

Orderbook Book to Bill (RHS)

(Rsbn) (x)


Diversified orders within contracting, EPC

Era’s order book is diversified in terms of verticals. This alleviates the risk of a slowdown in a particular segment. Its order book encompasses the major verticals of power, buildings and housing, transportation, urban infrastructure and industrials. Its 70 project sites span 20 states in India. And the average order size has jumped from Rs0.2bn to Rs1bn in the past three years.

Current order-book of Rs75bn, 3.8x FY09 revenue



Over the past couple of years the company has been focusing on EPC and international works, and plans to make a foray into new verticals such as irrigation and hydropower. It would thus reap the benefit of the vast spending planned by the government and private players. To further establish itself, it plans to partner with industry leaders and has tied up with a company in the Ukraine for the Delhi Metro project in Dwarka.

Industry-leading operating margin in core business

Era’s overall operating margin at 18-20% is high, given the industry-leading margin in its core construction division (~15%) and higher margin in the equipment hiring business (~80%). The catalysts for the high margin in its core construction division are:

100% use of in-house machinery and equipment

In-house technical expertise and strong project management capabilities (these ensure timely execution within budgeted costs while maintaining quality standards).

No risk of rise in raw material prices as in ~50% of its projects clients supply the raw materials. (Other projects are covered by WPI-linked escalation clauses.) This results in better return ratios – RoE of ~25% and RoCE of ~18%.

The company is professionally managed, with qualified and experienced personnel in all areas, including engineering, finance and administration. It has on its rolls ~2,900 employees, including 760 experienced and skilled engineers. It has in-house ERP and MIS systems.

Fig 11 – Peer comparison: EBITDA and PBIT margins EBITDA Margin % PBIT Margin %

FY08 FY09 1H10 FY08 FY09 1H10

Era 17.9 14.8 17.1 16.7 13.5 15.6

IVRCL 9.9 8.6 9.3 7.7 9.0 8.1

NCC 10.4 9.0 10.3 9.0 7.7 9.0

HCC 11.9 13.0 13.9 8.8 9.5 10.2

Simplex 10.2 9.1 10.1 7.9 6.3 6.5


Fig 9 – Order-book breakup – Verticals

Social Infra & Bdg, 30%

Power, 29%

Infra, 13%

Roads, 13%

Industrials, 16%


Fig 10 – Order-book breakup – Government vs Private

Private, 25%Public Sector and Government, 75%


Construction margin of 15% is one of the highest in industry



Preferred contractor for govt. projectsEra’s experience in BOP works for large thermal power plants has made it the preferred contractor for clients such as NTPC and BHEL (75% of its order book comprise government projects). To tap growth opportunities, it plans to diversify into new segments, focus on large projects and enhance pre-qualification through strategic alliances.

Large PSUs drive the business

Era’s association with public-sector units (BHEL, NTPC, SAIL, etc) and state and Central government bodies (NHAI, DMRC, CPWD, etc) for projects in its various divisions has enabled it establish itself as a tier-1 contractor for their projects. Of its present order book, government projects contribute 75%. This shields it from any slowdown in the private sector. On the other hand, this also increases the working capital cycle compared to a company working mostly with private clients.

Within the power sector, Era’s scope of work has so far been limited to civil, structural and foundation work for thermal power plants. It is currently working on around 40% of NTPC’s projects and is also associated with most of NTPC’s other projects for smaller job works. With NTPC accounting for most of the power capacity growth in the 12th Five-year Plan, Era’s successful association with it and with BHEL over the past 10 years puts it in a sweet spot to bag fresh orders. Also, contracts would be doled out by many private players, who have plans to add power capacity. Ahead, Era plans to widen its scope of work and execute orders within the Balance of Plant (BoP) by tying up with various private players who are leaders in their space (eg, in fly-ash handling and coal-ash handling).

Fig 12 – Business segments Division Work profile

Power Civil and structural works, erection, fabrication and commissioning, BOP work Social Infrastructure, Buildings

Buildings and housing, low-cost housing, commercial complexes, hospitals, educational institutes

Roads Roads, bridges, highways

Urban Infrastructure Airports, metros, railways, stadia

Industrials Civil and structural works

Source: Company

Era’s association with public-sector units and government bodies for

projects in its various divisions has enabled it establish itself as a tier-1

contractor for their projects



Well entrenched in equipment rental Era is a leading player in the high-margin equipment-rental business, which supplements its core construction business. We estimate the division’s share of profit at ~20%, resulting in healthy margins and return ratios.

Aim to establish foot in related businesses

To capitalize on the emerging opportunities in infrastructure and simultaneously raise efficiency in implementing its own projects, Era has set up four strategic business verticals. These define well-structured, robust and scalable business lines.

Fig 13 – Era’s four business lines Era Infra Engineering

Construction &Contract Division

EPC & BOT Division

Equipment Management

Division

Ready MixConcrete Division

Source: Company

Besides construction, Era wants to grow its recent and related ventures of EPC, equipment-hiring and RMC, all begun within the past two years. These four divisions offer a mix of infrastructure projects, with continuing business impetus in one or more divisions at all times.

Focus on EPC and BOT projects

Era wants to grow its EPC division (which focuses on projects where designing is done in-house) within the urban infrastructure space. Besides road BOT projects, it is also implementing work for the Delhi Metro Rail Corp. in collaboration with a company in Ukraine. The Rs1.5bn project involves designing and constructing an underground station. Ahead, the company, in strategic tie-ups with others, has plans for railway freight corridors, hydro-electricity, power transmission and distribution projects, low-cost housing projects, automated parking lots, regional ports and airports, besides PPP projects. It has in place formal strategic alliances

Fig 14 – Revenue breakup (FY09)

Contracts, 81%Equipment Hiring, 4%

Trading, 12%

Others, 2%


Fig 15 – PBIT contribution (FY09)

Contracts, 77%

Equipment Hiring, 21%

Trading, 2%

Others, 0%


Besides construction, Era wants to grow its recent and related ventures of

EPC, equipment-hiring and RMC



with foreign companies from Korea, Switzerland and the Ukraine to bid for EPC contracts. It is also identifying opportunities and prospects for joint development in Africa and the UAE.

Portfolio of three BOT projects

Era’s strategy for growth in roads is to capitalize on the huge opportunities coming up in the sector through public-private partnerships. Its present projects include three road BOT projects aggregating ~Rs13bn. Of this, Rs3.4bn would come through equity, the rest through debt. For part of the equity investment, Era is subscribing to preference shares, increasing its economic interest (ranging from 39% to 49%) in the projects to ~97%. The target IRRs from the projects are 16-18%. The company has, as on 30 Sep ’09, invested Rs1.8bn in these projects. The balance would be made over next year, given targeted completion dates ranging from Sep to Dec ’10. The two annuity projects would bring in Rs1.15bn a year from FY12. The contracts division is executing all the BOT projects. The extensive expertise and experience in constructing high-value projects across highways and railways would enable timely completion of projects of standard quality.

The ambitious rollout of projects of the NHAI (The National Highways Authority of India) stipulates the award of orders of Rs1trn by Mar ’10 and Rs0.6trn by Mar ’12. The company has submitted several pre-qualifications for forthcoming road BOT projects and expects to secure a couple of them.

Fig 16 – BOT details Economic Project Cost Debt-Equity Investment till Completion

Road Projects Interest % (Rsm) (x) Mar ’09 (Rsm) Nature DateWest Haryana Highway 97.5 5,688 2.3 489 Toll Oct ’10

Gwalior Bypass Project 97.0 3,321 2.6 498 Annuity Sep ’10

Hyderabad Ring Road 97.5 3,759 3.4 430 Annuity Dec ’10

12,768 1,416

Source: Company

Three-pronged strategy for next level of growth

Current strategy involves demonstrating execution abilities, climbing the value chain in EPC and in PPP, and establishing partnerships with leading players to gain entry into new business segments.

To tap growth opportunities, the company plans to diversify into new segments such as refineries, hydro-electricity, irrigation and ports, establish itself in sectors in which it now operates (through concentrating on large projects) and enhancing its pre-qualification criteria through strategic alliances.

Well-entrenched in equipment rental

The boom in infrastructure has generated the need for technically advanced machinery and equipment. Era’s leasing out of idle machinery has led to the emergence of a full-fledged division under the brand name Era Machine Mart. With reliable and timely key deliverables, the business characteristically commands high margins and has few large competitors. The RoCE here is ~25%, relatively much higher than in its main contracting business. Key clients are Ahluwalia Contracts, HCC, L&T, Shapoorji Pallonji, Tantia, Samsung, McNally Bharat, etc, besides its own construction division. The company plans to build up this division by aggressively building up its equipment bank and providing complete

Era’s present projects include three road BOT projects aggregating

~Rs13bn



“equipment solutions” to clients. It has an equipment bank of Rs3.5bn and plans to double that over the next three years. The services are provided all over India through four depots – at Kolkata, Hyderabad, Mumbai and Delhi.

Fig 17 – Fleet of Machinery and Equipment Head Equipment Type Usage

Lifting / Material Handling Cranes (all-terrain, rough terrain, crawlers, tower cranes), fork-lifts, excavators, etc

At all levels of construction Aim: to acquire specialized machinery along with experienced personnel

Soil Improvement Piling rigs, extractors, pile-drivers Used for solid foundations for major projects, bridges

Aerial Platforms and Boom Lifts

Aerial platforms, boom lifts, scissor lifts Used for airport projects and maintenance works

Others Motor graders Used in road projects

Source: Company

High-margin business

Around 40% of the equipment rental business arises internally, the balance from external customers. Internally, the machines are rented out at a discount to market rates. The business involves repairs and maintenance costs, which average up to 20% of sales, leaving an operating margin crossing 80%. Daily costs (diesel, workers and upkeep) are born by clients.

A strong upswing in capital expenditure in industry and infrastructure will continue to widen the demand-supply gap for modern equipment-maintenance services. This, too, would benefit the division.

The equipment rental business has operating margin of more than 80%



Financials We estimate Era to record 38% revenue CAGR over FY09-12. We also expect a slight improvement in NPM, resulting in earnings CAGR of 40% over FY10-12. We estimate its net debt-equity ratio to fall in FY10, aided by the inflow of the balance monies from 35m warrants converted to equity.

We expect Era’s revenue and EBITDA to have, 38% and 39% CAGRs respectively, over FY09-12, driven by robust profitability in construction and the equipment-hiring division.

An improvement in NPM over FY10-12 over FY09 would likely result in a 40% CAGR in profit after tax. Accordingly, we estimate RoE and RoCE to be steady, around the FY09 levels of 25.7% and 15.4%, respectively.

Fig 18 – OPM and NPM

0%

5%

10%

15%

20%

25%FY

07

FY08

FY09

FY10

e

FY11

e

FY12

e

OPM NPM Source: Anand Rathi Research

Fig 19 – Return ratios

0%

5%

10%

15%

20%

25%

30%

35%

FY07

FY08

FY09

FY10

e

FY11

e

FY12

e

RoE RoCE Source: Anand Rathi Research

Net debt-equity ratio to be comfortable

Era’s net debt-equity ratio is estimated to come down in FY10, aided by the inflow of the balance monies from 35m warrants converted to equity. Ahead, this ratio it is expected to continue at levels of ~1.2x.

We assumed a working capital cycle of ~150 days over FY10-12, in line with FY09. This is higher than its peers due to its high exposure to

We expect Era’s revenue and EBITDA to have, 38% and 39%

CAGRs, respectively, over FY09-12



government orders. In the competitive landscape, Era may not be able to reduce this significantly.

Fig 20 – Working capital days

125

130

135

140

145

150

155

FY07

FY08

FY09

FY10

e

FY11

e

FY12

e

(Days)


Fig 21 – Net debt-equity

0.0

0.5

1.0

1.5

2.0

2.5

FY07

FY08

FY09

FY10

e

FY11

e

FY12

e

(x)





Net sales 14,645 23,769 35,916 47,271 61,816

Sales growth (%) 91.9 62.3 51.1 31.6 30.8


EBIDTA 2,931 4,136 6,653 8,644 11,118

EBITDA Growth (%) 108.5 41.1 60.8 29.9 28.6

EBITDA margins (%) 20.0 17.4 18.5 18.3 18.0

+ Other income 348 353 322 392 442

- Interest 980 1,728 2,233 2,751 3,206

- Depreciation 201 459 700 870 1,060

PBT 2,097 2,301 4,042 5,415 7,295

- Tax 884 545 1,334 1,833 2,480

PAT 1,214 1,757 2,708 3,582 4,814

PAT growth (%) 53.4 44.7 54.2 32.3 34.4

PAT margin (%) 8.29 7.39 7.54 7.58 7.79

FDEPS (Rs/share) 9.0 12.2 14.0 18.6 25.0

CEPS (Rs/share) 15.2 19.6 21.0 26.9 32.3

DPS (Rs/share) 0.4 0.4 0.6 0.8 1.2



Sources of Funds

Share capital 231 287 357 357 386


Deferred tax liability 586 911 1,261 1,611 1,961



Secured Loans 9,714 12,639 15,325 19,425 22,075

Unsecured Loans 4,806 5,325 4,060 4,091 1,723

Total Loans 14,520 17,964 19,385 23,516 23,798


Total 20,001 27,663 34,992 42,888 50,343


Gross Block 5,774 11,773 14,547 16,787 18,527

Less: Depreciation 397 797 1,497 2,367 3,427

Net Block 5,377 10,976 13,050 14,420 15,100

CWIP 1,725 1,034 1,000 1,000 1,000

Investments 2,185 1,761 2,246 3,622 3,622

Debtors 4,363 7,241 11,316 14,246 19,476

Inventory 3,838 6,722 9,840 12,951 16,936

Loans & advances 1,649 3,636 5,000 6,000 7,000



Other Current liabilities 448 1,008 1,500 2,000 2,500

Provision 158 99 120 140 160


Working capital 6,452 12,101 17,648 21,991 28,897

Cash 4,263 1,791 1,049 1,856 1,725

Total 20,001 27,663 34,992 42,888 50,343






+Depreciation 201 459 700 870 1,060

+ Deferred Tax 344 325 350 350 350

Cash profit 1,759 2,541 3,758 4,802 6,224

- Incr/(Decr) in WC 1,743 5,649 5,547 4,343 6,906

Operating cash flow 16 (3,108) (1,789) 459 (682)

-Capex 3,603 5,368 2,740 2,240 1,740

Free cash flow (3,587) (8,475) (4,529) (1,781) (2,422)

-Dividend 159 67 125 167 271

+ Equity raised 5,670 - 2,975 - 2,279

+ Debt raised 6,379 3,444 1,421 4,131 282

-Investments 933 (424) 484 1,376 -

-Misc. items 4,878 (2,203) - 0 -

Net cash flow 2,492 (2,472) (742) 807 (131)

+Opening cash 1,771 4,263 1,791 1,049 1,856

Closing cash 4,263 1,791 1,049 1,856 1,725


Fig 25 – Ratio analysis @ Rs199 on 11 Dec 09 Year end 31 Mar FY08 FY09 FY10e FY11e FY12e

Profitability Ratios (%)

EBITDA margin 20.0 17.4 18.5 18.3 18.0

PAT margin 8.3 7.4 7.5 7.6 7.8

Income tax rate 42.1 23.7 33.0 33.9 34.0

RoE 30.6 25.7 23.4 22.3 22.7

RoCE 17.4 15.4 19.0 20.0 21.6

Other Ratios

Net Debt/Equity (%) 210 184 128 122 90

W C turn (days) # 137 141 151 153 150

Per-Share data (Rs)

Earnings 9.0 12.2 14.0 18.6 25.0

Book value 42.4 61.2 80.4 99.5 127.4

Dividend 0.4 0.4 0.6 0.8 1.2

Cash earnings 15.2 19.6 21.0 26.9 32.3

Valuation Ratios (x)

PE 20.8 15.3 13.4 10.1 7.5

P/BV 4.7 3.2 2.5 2.0 1.6

EV/EBITDA 11.3 10.8 8.1 6.6 5.4

# Excluding loans to subsidiary Source : Company, Anand Rathi Research



Company Background & Management Era Infra Engineering is the flagship company of the Era Group, promoted by HS Bharana, a civil engineer. Established as a private limited company in 1990, it was converted to a public limited company in 1992, listing in 1995.

Starting off as a mere construction company, it today has a fairly diversified business mix of roads, power, urban infrastructure, buildings and housing, and caters to clients across the public and private sectors, besides its foray into BOT projects. The company counts leading private groups like Adani, Aditya Birla, Dalmia, Lanco, etc and PSUs like BHEL, NTPC, SAIL, IOC as its esteemed clients.

Era ventured into real estate in FY08 but exited in FY09 – sold off to the promoters at a Rs269m profit (on investments of Rs1.27bn) – aiming to concentrate on its core construction business. Capitalizing on upcoming opportunities in infrastructure, it has created four strategic divisions: Construction & Contracts, EPC & International, RMC, and Equipment Hiring. The last two were formed in 2007-08. These two contributed 6% and 20% to revenue and PBIT, respectively, during FY09.


H S Bharana Chairman & MD Promoter and civil engineer. Has about 28 years experience in construction and infrastructure

Joy Saxena Group CFO Chartered Accountant, Cost Accountant and PGDBA, with 24 years experience. Previously with DLF, Vedanta, Daewoo Motors and the Sahara Group

S M Gupta Financial Consultant CA, with 22 years experience; previously with Alps Inds. and Pearl Polymers

T D Arora Head, Construction Division

Civil engineer, working with the company for the last 21 years

J L Khushu Head, EPC and BOT Division

Civil engineer (Masters in Structural Engineering); retired Chief Engineer, Ministry of Urban Development, GoI; with 43 years experience

Pradeep Kathuria Head, Equipment and RMC Division

Mechanical engineer, with 32 years experience in industry, including the equipment-rental industry

Ajay Mishra President M.Sc. and MBA, with 23 years experience in management and administration

Raj Sharma Head, HR PGDBM with 20 years experience

Source: Company

Fig 27 – Equity History Date Type # shares (m) Issue Price (Rs) Amount raised (Rsm)

Jul ’05 FPO 34.2 14 492

Feb ’06 GDR 26.3 51 1,334

Jun ’07 Warrants 22.5 27 606

Dec ’08 Warrants 27.5 85 2,338

Feb ’09 Bond Conversion 0.6 159 87

Jun ’09 Bond Conversion 0.1 159 24

Oct ’09 Warrant Conversion 21.0 85 1,785

Oct ’09 Warrant Conversion 14.0 85 1,190

Source: Company, Anand Rathi Research Note: Based on Rs2 paid up



Fig 28 – Major Orders Verticals Area of operation Clients Past Projects Current Projects

Power Civil and structural work, Erection, fabrication & commissioning, BOP work

NTPC, BHEL, Aravali Power, Lanco

4x500 MW Talcher Super TPP; Stage II 2x500 MW Kahalgaon Super TPP; Stage II 1x500 MW Ramagundam Super TPP; Stage III 2x500 MW Vindhyanchal Super TPP; Stage III 1x500 MW SGTPS Birsinghpur TPP, MP

Civil & structural work of TPP at Jhajjar, Haryana – Rs2.9bn

Main plant, offsite civil works for Mauda super TPP in Maharashtra – Rs2.2bn

Civil, structural work of 980MW TPP at Dadri, UP (Rs1.9bn) and Samadhari, AP

Civil, structural & architectural work for main power block and auxiliaries and BOP for 500 MW TPP at Ukai, Tapi district, Gujarat

Civil work - I & III package for 2x600 MW Lanco Anpara TPP at Sonebhadra, UP – Rs0.6bn

Civil, structural & architectural work for main plant, BoP and buildings at Bawana, Delhi – Rs2bn

Main plant & auxiliary plant building for 500 MW TPP Unit II at Bellary, Karnataka

Main plant and BoP works for 350 MW at Hazira, Surat, Gujarat

Industrials Civil and structural

work Bajaj Hindustan, Birla Tyres, Videocon, SAIL, IOC

Construction of RCC building incl. electrical works& external development (roads, drains) for 10,000 tcd sugar plant at Pilibhit

Construction of RCC building incl. electrical works and external development at Uttarakhand

Civil construction works for project in Kashipur, Uttrankhand

Construction of civil & structural work for new batch house at Bahadurgarh for HNG

Structural works for New CRM complex at SAIL- Bokaro Steel plant of 7m tons – Rs1.2bn expansion project

Civil and structural work for IOC Civil and structural work for Birla Tyres

Buildings & Housing

Buildings and housing, Lost-cost housing, Commercial complexes, Hospitals, Educational institutes

PWD of New Delhi, Army, Punjab Dev. Authority, Delhi State Ind. Dev. Corp, Private mall and real estate players

3,164 low-cost housing for Bawana Ind. Complex, New Delhi

Campus, office complex of NIOS, Noida Auditorium, academic buildings at Udhampur Students’ Centre, Girls’ Hostel at Longowa General, special ward and casualty block at Lok

Nayak Hospital, Delhi Dental wing at Maulana Azad Medical College,

Delhi Army Institute, Educational Society at Greater

Noida District administration complex at Hoshiarpur Galaxy World Multiplex, Ambala Shopping mall + Cineplex at Meerut

Building at Capitol Complex, Naya Raipur, Chhattisgarh – Rs2.1bn

IT park at Manesar, Gurgaon – Rs1.5bn CBI head office building at Lodhi Road, Delhi –

Rs1.1bn 5,888 EWS houses at Samaspur Khalsa, Delhi –

Rs1.1bn 1,892 industrial workers dwellings at Narela, Delhi

for DSIIDC Central Park-II at Sohna Road, Gurgaon 200=bed hospital at Kokiwala Bagh, Ashok Vihar,

Phase-IV, Delhi for PWD – Rs0.7bn Multi-storeyed buildings at Sahara City Homes,

Gwalior – Rs0.5bn Hospital building for Hindustan Latix Mega-hostel at NIT, Calicut, for The National

Institute of Technology Medical College and campus buildings at Faridkot

for PIDB

Urban Infra Airport, Metro, Rail, Stadiums

Integrated cargo complex at Kolkata airport Expansion of Indore airport runway

Four railway projects of 233 km Upgrading and expanding Pune, Raipur

(Rs1.3bn) and Indore airports Four stadia in New Delhi for Commonwealth

Games EMU maintenance car-shed between

NallaSopara and Virar stations of the Western Railway – Rs0.9bn

General pool office accommodation at Secunderabad for the CPWD

Sarita Vihar depot-cum-workshop for The Delhi Metro Rail Corp.

Roads Roads, bridges,

highways including work for captive BOT projects

Construction of Manasa-Rampura-Banpura road project for MP Road Development Corp.

Captive road BOT projects in Haryana, MP and AP, totaling 117 km



India I Equities


[email protected]


[email protected]

Key financials


Sales (Rsm) 30,828 33,137 39,433 49,291 61,614

Net profit (Rsm) 617 868 1,445 1,817 2,248

EPS (Rs) 2.4 3.4 4.8 6.0 7.4

Growth (%) (22.2) 40.8 40.6 25.8 23.7

PE (core) (x) 26.8 19.1 13.6 10.8 8.7

P/ BV (x) 3.5 3.5 2.6 2.5 2.3

RoE (%) 6.5 8.6 11.1 11.2 13.0

RoCE (%) 9.8 9.9 11.1 12.1 13.2

Dividend yield (%) 0.6 0.6 0.7 0.7 0.8

Net gearing (%) 156.1 214.5 118.3 145.7 152.8


Construction

Initiating Coverage

15 December 2009

Hindustan Construction Company

Execution expertise, revenue visibility; initiate at Buy

Buy. We initiate coverage on HCC with a Buy rating and a target price of Rs162. Its proven execution capabilities, good revenue visibility and possible upside from real estate projects are the key growth drivers.

Sturdy order book: 4.1x FY09 revenue. HCC’s order book of Rs136bn stands at 4.1x FY09 revenue, offering good revenue visibility for FY09-12. We expect its proven execution capabilities to enable it to bag large orders in its core areas of hydro, nuclear, thermal power and road projects.

To grow in the BOT space on de-leveraged balance sheet. HCC aims to grow its BOT portfolio from the current Rs23bn (three road projects) to Rs100bn by FY14 – comprising roads, hydropower and airports. Although it lowered leverage through a QIP in Jul ’09, we estimate that its FY10 net gearing (1.2x) would still be high relative to peers given its high working capital cycle.

Property – Concentrated portfolio. HCC’s exposure to property development is largely restricted to Lavasa township and Vikhroli corporate park. While the first phase is adequately funded for, the near-term trigger will be steady pick up in sales. We believe the project to be accretive over the long term given its high gestation.

Valuation. Our SOTP value is Rs162: Rs90 for construction at 15x FY11e earnings, Rs68 for Lavasa and Vikhroli props at 30% discount to NAV and Rs4 for its BOT investments at book value.


Key data HCC.IN /HCNS.BO 52-week high/low Rs147/Rs29 Sensex/Nifty 17119 / 51173-m average volume US$15.5mMarket cap Rs41.6bn/US$0.90bnShares outstanding 303.2mFree float 60.2%Promoters 39.8%Foreign Institutions 26.8%Domestic Institutions 14.8%Public 18.6%


HCC

Sensex

25

55

85

115

145

Nov

-08

Dec

-08

Jan-

09Fe

b-09

Mar

-09

Apr-0

9M

ay-0

9Ju

n-09

Jul-0

9Au

g-09

Sep-

09O

ct-0

9N

ov-0

9D

ec-0

9


15 December 2009 HCC – Execution expertise, revenue visibility; initiate at Buy



Net sales 30,828 33,137 39,433 49,291 61,614 Sales growth (%) 30.8 7.5 19.0 25.0 25.0 - Op. expenses 27,162 28,823 34,094 42,798 53,768 EBIDTA 3,666 4,314 5,339 6,494 7,847 EBITDA margins (%) 11.9 13.0 13.5 13.2 12.7 - Interest 1,524 2,105 2,247 2,447 2,947 - Depreciation 962 1,152 1,300 1,500 1,700 + Other income (91) 204 206 206 206 - Tax 472 392 553 936 1,158 PAT 617 868 1,445 1,817 2,248 PAT growth (%) (22) 41 66 26 24 Consolidated PAT 617 868 1,445 1,817 2,248 FDEPS (Rs/share) 2.4 3.4 4.8 6.0 7.4 CEPS (Rs/share) 7.2 9.3 10.4 12.3 14.7 DPS (Rs/share) 0.8 0.8 0.9 1.0 1.1 Source: Company, Anand Rathi Research


Share capital 256 256 303 303 303 Reserves & surplus 10,917 10,924 17,203 18,008 20,366 Shareholders’ fund 11,174 11,180 17,507 18,312 20,669 Debt 18,449 23,218 20,964 25,447 28,947 Minority interests - - - - -Capital employed 29,622 34,398 38,470 43,758 49,616 Fixed assets 10,206 11,746 12,446 12,946 13,246 Investments 2,955 3,655 5,055 6,799 6,799 Working capital 13,817 17,458 19,041 22,525 28,581 Cash 2,644 1,539 1,929 1,488 989 Capital deployed 29,622 34,398 38,470 43,758 49,616 No. of shares (m) 256.3 256.3 303.3 303.3 303.3 Net Debt/Equity (%) 156.1 214.5 118.3 145.7 152.8 W C turn (days) 150 159 151 140 140 Source: Company, Anand Rathi Research


PAT 1,088 1,253 1,074 1,817 2,248 + Depreciation 962 1,152 1,300 1,500 1,700 +Deferred tax 278 (1) 400 425 500 Cash profit 2,327 2,404 2,774 3,742 4,448 -Inc/(Dec) in WC 1,755 3,641 1,582 3,484 6,056 Operating cash flow 572 (1,237) 1,192 257 (1,609) -Capex 2,194 2,692 2,000 2,000 2,000 Free cash flow (1,621) (3,929) (808) (1,743) (3,609) -Dividend 240 240 319 355 390 +Equity raised - - 4,801 - - +Debt raised 2,938 4,769 (2,254) 4,483 3,500 -Investments 669 700 1,400 1,745 - -Miscellaneous items (152) 1,006 (371) 1,082 0 Net cash flow 560 (1,105) 390 (441) (499) +Opening cash 2,084 2,644 1,539 1,929 1,488 Closing cash 2,644 1,539 1,929 1,488 989 Source: Company, Anand Rathi Research

Fig 4 – PE Band

10x

20x

30x

40x

0

50

100

150

200

250

300

Dec

-04

Dec

-05

Dec

-06

Dec

-07

Dec

-08

Dec

-09

(Rs/share)


Fig 5 – EV/EBITDA

5x

10x

15x

20x

0

20

40

60

80

100

120

Dec

-04

Dec

-05

Dec

-06

Dec

-07

Dec

-08

Dec

-09

(Rs bn)



Water31%

Power54%

Others2%

Transportation13%




Investment Argument and Valuation HCC’s proven execution capabilities, good revenue visibility and possible upside from real estate projects are the key growth drivers. We initiate coverage on HCC with a Buy rating and a target price of Rs162.

Sturdy order book: 4.1x FY09 revenue

HCC’s order book of Rs136bn stands at 4.1x FY09 revenue, offering good revenue visibility for FY09-12. We expect its proven execution capabilities to enable it to bag large orders in its core areas of hydro, nuclear, thermal power and road projects.

HCC has made a conscious shift in its order book mix in favor of high-margin hydropower projects. The shift in the project-mix would help it expand its operating margin and thus boost overall profitability. It has a high proportion of pass-through contracts (~85% of its order book) and 15% are on a fixed-cost basis. We estimate the strong and diversified order book will drive a 23%/40% CAGR in revenue and net profit over the next three years.

Property – concentrated portfolio

HCC’s exposure to property development is largely restricted to Lavasa township and Vikhroli corporate park. While the Lavasa’s first phase is adequately funded for, the near-term trigger will be steady pick up in sales. We believe the project to be accretive over the long term given its high gestation.

HCC currently has a land bank of about 14,000 acres, including 12,500 acres in Lavasa. Valuation for the real-estate venture works out to 40% of our sum-of-parts-based target price of Rs162.

To grow in the BOT space on de-leveraged balance sheet

HCC aims to grow its BOT portfolio from the current Rs23bn (three road projects) to Rs100bn by FY14 – comprising roads, hydropower and airports. The recent fund-raising (QIP in Jul ’09) has turned the balance sheet leaner, ie, improved the company’s leverage position. The net debt-to-equity ratio currently stands at 1.2x, compared to 2.1x before the issue. The increased net worth and lean balance sheet would help HCC bag more orders including debt-heavy BOT projects.

On a peer set comparison basis, HCC’s FY10 net gearing would still be high given its high working capital cycle.



Valuation In valuing HCC, we have used the sum-of-parts approach. We value separately the core construction business, BOT road projects, the real-estate project and Lavasa Corp. We have a Buy rating on HCC with a target price of Rs162 per share.

Fig 7 –Valuation Table

Particulars Basis of ValuationHCC's stake

Multiple (x)

Value (Rs m)

Value (Rs per share)


Lavasa 30% Discount to NAV 65.0% 1.0 17,420 57

Vikhroli IT Park 30% Discount to NAV 100.0% 1.0 3,474 11

BOT

- Nirmal BOT P/BV – Sept ‘09 2.0 630 2.1

- Badarpur Elevated Expressway P/BV – Sept ‘09 1.0 100 0.3

- Dhule - Maharashtra P/BV – Sept ‘09 1.0 400 1.3

Fair Value 162


We have assigned a PE multiple of 15x FY11e earnings to arrive at a value for its core construction business of Rs90 a share. We put Lavasa Corp. and the Vikhroli IT Park at a 30% discount to NAV, at respectively Rs57 and Rs11 per share. We value the three BOT projects using a P/BV multiple, valuing them at Rs4 a share.

At the current price of Rs137, the stock trades at 13.6x and 10.8x core PE for FY10 and FY11 earnings estimates. On an EV/EBITDA basis for similar years it trades at 11.4x and 10.2x.

Risks Project execution risk. The primary risk associated with any

infrastructure company arises from shortage of manpower, land acquisition problems and arbitration with clients over various issues.

Political risk. Around 90% of HCC’s order book comes from the government. Slowing orders might impact the company.

Bandra-Worli Sea Link cost escalation beyond current levels.

Value of core construction: Rs 90/share; real estate business:

Rs 68/share; BOT business: Rs 4/share



Sturdy order book: 4.1x FY09 revenueHCC’s order book of Rs136bn stands at 4.1x FY09 revenue, offering good revenue visibility for FY09-12. We expect its proven execution capabilities to enable it to bag large orders in its core areas of hydro, nuclear, thermal power and road projects.

Strong order book – 4.1x FY09 revenue

HCC’s present order backlog of Rs136bn (excluding the Rs19.6bn disputed Sawalkote project in J&K) results in the highest orderbook-to-revenue figure (4.1x FY09 revenue) among companies under our coverage. In addition, it has an L1 status for orders of Rs9.6bn, has bid for projects worth Rs90bn and has submitted pre-qualification bids for projects of Rs150bn. Its order backlog has seen a 26% CAGR (from FY04-08) to Rs102bn to FY08. However, in FY09 alone it has been successful in winning orders worth Rs76bn (up 42% yoy), more than cumulative orders secured in FY07 and FY08. Around 67% of the new orders in FY09 came in from high-margin segments such as hydro-power and water. This therefore points to a robust margin outlook for HCC.

We expect a healthy order book over FY10-12 following the government’s strong focus on infrastructure development and HCC’s established position in the industry. In the next two or three years we expect strong inflows from the road and power segments. The current order book averaging an execution time of about three and a half years, offers good revenue visibility over FY10-12. The adequate finance available (raised through the QIP) would ensure faster execution.

Fig 8 – Order book v/s Book-to-bill ratio

-

30

60

90

120

150

180

FY06

FY07

FY08

FY09

FY10

e

FY11

e

FY12

e(Rs bn)

3.0

3.5

4.0

4.5

5.0(x)

Order book Book to Bill (RHS) Source: Company, Anand Rathi Research

Favorable project-mix to raise profitability

HCC has made a conscious shift in its orderbook mix in favor of high-margin hydropower projects. The shift in the project-mix would help it expand its operating margin and thus boost overall profitability. Considering its leading position, we believe HCC would be the biggest beneficiary of the proposed investment in hydropower. The growing interest of neighboring countries in developing hydropower with the help of India opens up new business opportunities for HCC.

The company has orders from all parts of India. During FY09, it bagged two international orders (from Bhutan and Nepal). It is thus tapping

Present order backlog of Rs136bn results in orderbook-to-revenue figure

of 4.1x FY09 revenue



increasing opportunities in international markets.

Fig 9 – Order-book breakup

15 921 17

32 31

4340

3231

14 13

38 48 4751 5451

4 3 231-

0102030405060708090

100

FY06

FY07

FY08

FY09

1QFY

10

2QFY

10

Water Transportation Power Others

(%)

Source: Company

Little risk from raw-material price escalations

HCC has a high proportion of pass-through contracts (~85% of its order book) and 15% are on a fixed-cost basis. Also, most of the order backlog (90%) comes from the government. This cushions the company against any risk of cancellation/deferment.

Fig 10 – Order-book breakup – raw-material price escalation

WPI Linked, 35%

Fixed price, 15% Star Rate, 50%

Source: Company

Bandra-Worli Sealink woes behind it

The south-bound bridge of the prestigious BWSL has been commissioned recently. The north-bound bridge will be completed by Dec ’09. HCC has booked a loss of about Rs2.5bn on this project. It has till now received an escalation amount of Rs1.5bn from MSRDC and is likely to claim another Rs2bn as it completes the rest of the project. It is hopeful of getting its claim cleared by FY11.

HCC has a high proportion of pass-through contracts (~85% of its order

book) and 15% are on a fixed-cost basis.



Property – Concentrated portfolio HCC’s exposure to property development is largely restricted to Lavasa township and Vikhroli corporate park. While the first phase of Lavasa is adequately funded for, the near-term trigger will be steady pick up in sales. We believe the project to be accretive over the long term given its high gestation.

Twin projects at the helm

The pick-up in real estate in the past few months is music to HCC’s ears, given its reasonable exposure here. However, this has been restricted to just two projects currently, Lavasa and Vikhroli, through its wholly-owned subsidiary, HCC Real Estate Ltd (HREL). HREL focuses on developing unique projects in India rather than large spread-out land banks in many places. Apart from these two, the company has also identified/acquired land totaling 1,146 acres in other parts of Mumbai, Thane, Nashik and Pune. HCC has also entered an MoU with the Gujarat government for 4,000 acres in WaterFront City. The sum-of-parts valuation for the real-estate venture works out to 40% of our target price of Rs162.

Lavasa crucial to future growth

HCC aims to develop the 12,500-acre Lavasa township as a complete city. Besides housing permanent residents and industrial workers, the project has been envisioned to attract tourists and second-home residents. It is a Rs1,400bn complete urban development and management project, expected to evolve over the next 12 years around the development of four towns, together comprising Lavasa. Economic activity has started in Lavasa with the help of business campuses, and the hospitality, education and tourism industries. These would be future drivers of growth. The company has entered into JVs with various parties to set up base in Lavasa. Of the planned 200m sq, ft., it has 16m earmarked for the first town of Dasve (expected to be operational by Dec ’10). Of this 16m sq. ft., 13m have already been sold out.

Funding in place

In the first of the project’s three phases, ~1,400 acres would be developed at an investment of ~Rs22bn. This first phase has been financially closed: Rs3bn through equity, Rs6.5bn through quasi-equity, Rs3bn from cash advances and Rs10bn of sanctioned loans from banks. The Rs6.5bn quasi-equity is a mix of convertible debentures and convertible preference shares issued to banks (Axis, Allahabad, Indusind, Andhra, Union and Bank of India) and Bennett Coleman & Co. and represents a 6.5% equity stake in Lavasa.

Following the overwhelming response to phase I, HCC wants to accelerate development plans for the other two phases at Lavasa. Equity infusion required is planned to be roped in through an IPO or PE investment. Nevertheless, the company does not expect any development on this front before 2QFY11. The balance investment is planned to come from internal accruals, debt and convertible debentures.

Lavasa is a Rs1,400bn complete urban development projects involving

development of 12,500 acres over next 10-12 years

First phase funding in place; Plans for PE/ IPO by 2QFY11 for

funding of other two phases



Fig 11 – Lavasa bookings Rs m Bookings at the end of

Land Sales 4QFY09 1QFY10 2QFY10

Institutional land sales 550 540 850

SPV land sale 1,000 1,710 1,051

Residential land sales 200 530 199

Subtotal – Land Sales 1,750 2,780 2,100

Build Space Sales

Apartments 1,620 1,680 1,904

Villas 3,780 4,000 4,325

Retail 920 940 916

Sub-total – Build space sales 6,320 6,620 7,145

Project management consultancy - - -

Club membership 10 10 21

Affordable rental housing - - 400

Hostels - - 691

Total Sales 8,080 9,410 10,357

Source: Company

Starting to book revenue from 4QFY09, Lavasa has, till 2QFY10, reported revenue of Rs4.1bn (of total pre-sales of Rs10.4bn) and net profit of Rs1.8bn.

Fig 12 – Lavasa - Financials (Rs m) FY09 1QFY10 2QFY10

Revenue 2,120 933 1,029

Operating Expenditure 770 533 570

EBT 1,350 400 459

EBT Margin (%) 64 43 45

Tax 120 136 154

Tax rate (%) 8.9 34.0 33.6

PAT 1,230 264 305

Source: Company

247 Park at Vikhroli

Launched in Mar ’08, 247 Park has 1.8m sq. ft. of office space in Vikhroli (W) in Mumbai out of which the leasable area is 1.2m sq. ft. Part will be occupied by HCC as its corporate office. The company has so far leased out 65% of the area at ~Rs75/sq. ft. and is looking for clients for the remaining 35%. It expects to lease out the entire area by Jan ’10. Construction is complete and possession has already been given for furniture fit-outs.

HCC is also implementing an SRA scheme at Vikhroli (E), for which it has received consent from more than 70% of the tenants. This is a long-drawn-out project with work moving slowly. The scope of land acquisition has risen from 15 acres to 50 acres.

HCC plans to participate in real estate business through a joint development model. This would mean partnering various entities and utilizing their expertise at different stages of development.

247 Park has 1.8m sq. ft. of office space in Vikhroli. The company has so far leased out 65% of the area at

~Rs75/sq.



Fig 13 – HCC new business strategy

Project Identification Feasibility Study Investment Proposal

HCC Real Estate

Predevelopment Stage

Project Development Project Management Equity Infusion

Execution Stage

Marketing & Sales Divestment Proposal Liquidation of Project

Divestment Stage

Land as an Equity Further Equity if willing

Owner / Developer

Predevelopment Stage

Partial / Full Equity withdrawal

Execution Stage

Profit Sharing

Divestment Stage

Property & Asset Management

Fund Raising Due Diligence Investment Decision Equity Allocation

Project Company (SPV)

Divestment Decision (Sales) Profit Allocations Proposal Liquidation of Project

Property Investor / Buyer (Completed Project)

Project Identification Feasibility Study Investment Proposal

Project Development Project Management Equity Infusion

Profit Sharing Divestment Proposal Liquidation of Project

Third Parties

HCC Real Estate – Owner / developer JV / SPV

Distribution of Profits

Equity Injection

Source: Company,



To grow in the BOT space on de-leveraged balance sheet HCC aims to grow its BOT portfolio from the current Rs23bn (three road projects) to Rs100bn by FY14 – comprising roads, hydropower and airports. Although it lowered leverage through a QIP in Jul ’09, we estimate that its FY10 net gearing would still be high relative to peers given its high working capital cycle.

The government’s emphasis on infrastructure development necessitates projects being awarded through public-private partnerships (PPP). After the recent reform measures of the NHAI in awarding of contracts, we expect a huge flow of orders from the roads sector. This, together with the revival in credit and the equity market, augurs well for established players in BOT. HCC has set up an infrastructure division to specifically focus on BOT and BOO projects, with emphasis on developing skills to take up risk-based, equity participation in infrastructure development. Besides roads, the division would also examine opportunities in power, water and urban infrastructure.

Fig 14 – HCC Holding Structure

Source: Company

HCC has three ongoing projects (worth Rs23.4bn), for which equity commitment is Rs3.5bn. Of this, it has already spent ~Rs870m. It aims at an operational asset of Rs100bn by FY14 in segments such as roads, power, water, ports and airports.

The four-laning of the Nirmal BOT annuity project in AP is now operational. HCC would get semi-annuity payment of Rs238m from NHAI. It would also get an early completion bonus of Rs133m.

Badarpur Elevated Expressway BOT-toll was awarded in May ’08 and achieved financial closure in Jan ’09. Construction has commenced and has seen 30% progress.

The four-laning of the Maharashtra-Madhya Pradesh border BOT-toll was awarded in Jan ’09 to the consortium of John Laing Plc of the UK, Sadbhav Engineering and HCC. Financial closure is expected by Dec ’09. The concession agreement has been signed.

Hindustan Construction Company Limited (“HCC”)

HCC Real Estate Limited (“HREL”)

HCC Infrastructure Limited (“HIL”)

Vikhroli Corporate

Park (“VCP”)

Lavasa Corporation

(“LCL”)

Charosa Wineries (“CWL”)

Nirmal BOT

Badarpur Elevated

Expressway

Dhule Palesner Tollways

100%

80% 64.9% 100%

20%

100% 100% 37%

HCC has three ongoing road projects worth Rs23.4bn. Targets a

Rs100bn portfolio by FY14



Fig 15 – BOT projects (Rs m) Stake % Length km Project Cost HCC Equity Eq. Inv till date

Nirmal BOT (road in AP) 100 31.0 3,200 315 315

Badarpur Elevated Expressway 100 4.4 5,720 1,720 100

Dhule, Maharashtra 37 96.5 14,500 1,425 400

Source: Company

Lean balance sheet post QIP

In Jul ’09, HCC raised Rs4.9bn through a QIP leading to an 18% equity dilution. Some of the proceeds went to repaying debt of Rs2bn; the rest would go towards investment in BOT projects.

The fund-raising has turned the balance sheet leaner, ie, improved the company’s leverage position. The net debt-to-equity ratio currently stands at 1.2x, compared to 2.1x before the issue. The increased net worth and lean balance sheet would likely help HCC bag more orders including the debt-heavy BOT projects, in our view.

Net debt-to-equity ratio down to 1.2x, compared to 2.1x before the

QIP issue



Financials HCC’s current order book offers good revenue visibility for the next three years. We expect a strong 23% CAGR in revenue and 37% in net profit over FY09-FY12. We believe that the project mix is tilted towards high-margin projects and that falling raw-material prices would ease margin pressures over the next two years.

Strong revenue growth

On the back of proven execution capabilities and a strong order backlog, we expect a robust performance from HCC in revenue and expect it to post a 23% CAGR over FY09-12. The power segment would be a major contributor (~50%) to revenue and the share, too, of transportation is expected to rise.

Stable margins

We see cost pressures for HCC easing from FY10. We believe that its project mix is geared towards high-margin projects and that falling raw material prices would ease margin pressure over the next two years. HCC had made provision for huge losses in the past from projects such as the BWSL. In the past two or three years, this has pulled down margins. We expect margin to be stable at around 13% through FY10-12.

Fig 18 – EBITDA and EBITDA Margin

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

9,000

FY06

FY07

FY08

FY09

FY10

e

FY11

e

FY12

e

8

9

10

11

12

13

14


(%)(Rs bn)


Fig 16 – Robust Revenue Growth

0

10

20

30

40

50

60

70

FY06

FY07

FY08

FY09

FY10

e

FY11

e

FY12

e

(Rs bn)

5

10

15

20

25

30

35

(%)

Revenue Revenue Growth (RHS)


Fig 17 – Revenue breakup over the years

4027 24 27 20 25

3347 45 34

38 29

20 20 28 3829 31

15131367

0102030405060708090

100

FY06

FY07

FY08

FY09

1QFY

10

2QFY

10

Water Transportation Power Others

(%)




Lower interest to boost net profit growth

Following strong operating margins and reduced interest costs, we expect a 37% net profit CAGR over FY09-12. FY10-11 interest cost is expected to decrease as high-cost debt has been repaid from the QIP proceeds.

Higher FY10-12 margins would be reflected in expanded return ratios: we expect the RoE to climb from 8.6% in FY09 to 13.0% in FY12 and the RoCE to increase from 9.9% to 13.2% in FY12.

Fig 19 – Net profit and net profit margin

0

500

1,000

1,500

2,000

2,500

FY06

FY07

FY08

FY09

FY10

e

FY11

e

FY12

e

1.5

2.0

2.5

3.0

3.5

4.0

4.5

PAT PAT Margin (RHS)

(%)(Rs bn)


Fund raising to make balance sheet leaner and hasten execution

In July, HCC concluded a QIP, raising Rs4.9bn. A portion of that has gone to repaying debt of Rs2bn; the rest would be invested in BOT projects. Though the issue has diluted equity 18%, it has improved the company’s leverage position. The net debt-to-equity ratio now stands at 1.2x, compared to 2.1x before the issue. The funds from the QIP would make HCC’s balance sheet leaner and help speed up execution and order intake capacity. Also, the higher net worth enhances its order intake capacity.

During FY06, HCC had raised US$100m through FCCBs (maturing Mar ’11 at a conversion price of Rs248/share). Given the huge difference in prices (of conversion and current market), we have not taken into account any FCCB conversion. Our estimates factor in their repayment including the premium on redemption (37.7%) in FY11.

Fig 20 – Net debt-to-equity ratio to fall in FY10

-

5

10

15

20

25

30

35

FY06

FY07

FY08

FY09

FY10

e

FY11

e

FY12

e

0.0

0.5

1.0

1.5

2.0

2.5

Debt Net Debt/Equity (RHS)

(x)(Rs bn)


We expect a 37% net profit CAGR over FY09-12




Net sales 30,828 33,137 39,433 49,291 61,614

Sales growth (%) 30.8 7.5 19.0 25.0 25.0


EBIDTA 3,666 4,314 5,339 6,494 7,847

EBITDA Growth (%) 70.3 17.7 23.8 21.6 20.8

EBITDA margins (%) 11.9 13.0 13.5 13.2 12.7

+ Other income (91) 204 206 206 206

- Interest 1,524 2,105 2,247 2,447 2,947

- Depreciation 962 1,152 1,300 1,500 1,700

PBT 1,089 1,260 1,998 2,753 3,406

- Tax 472 392 553 936 1,158

PAT 617 868 1,445 1,817 2,248

PAT growth (%) (22.2) 40.8 66.4 25.8 23.7

PAT margin (%) 2.0 2.6 3.7 3.7 3.6

FDEPS (Rs/share) 2.4 3.4 4.8 6.0 7.4

CEPS (Rs/share) 7.2 9.3 10.4 12.3 14.7

DPS (Rs/share) 0.8 0.8 0.9 1.0 1.1



Sources of Funds

Share capital 256 256 303 303 303

Reserves & surpluses 9,784 9,792 15,672 16,052 17,909

Deferred tax liability 1,133 1,132 1,532 1,957 2,457



Secured Loans 5,208 9,041 4,240 5,770 7,770

Unsecured Loans 13,241 14,177 16,724 19,677 21,177

Total Loans 18,449 23,218 20,964 25,447 28,947


Total 29,622 34,398 38,470 43,758 49,616


Gross Block 14,097 16,828 18,893 20,893 22,893


Net Block 9,531 11,282 12,046 12,546 12,846

CWIP 675 464 400 400 400

Investments 2,955 3,655 5,055 6,799 6,799

Debtors 45 47 54 68 84

Inventory 21,660 27,766 32,411 38,488 48,110

Loans & advances 2,753 5,322 5,300 6,000 6,500




Provision 466 1,651 1,900 2,100 2,300


Working capital 13,817 17,458 19,041 22,525 28,581

Cash 2,644 1,539 1,929 1,488 989

Total 29,622 34,398 38,470 43,758 49,616






+ Depreciation 962 1,152 1,300 1,500 1,700

+Deferred tax 278 (1) 400 425 500

Cash profit 2,327 2,404 2,774 3,742 4,448

-Inc/(Dec) in WC 1,755 3,641 1,582 3,484 6,056

Operating cash flow 572 (1,237) 1,192 257 (1,609)

-Capex 2,194 2,692 2,000 2,000 2,000

Free cash-flow (1,621) (3,929) (808) (1,743) (3,609)

-Dividend 240 240 319 355 390

+Equity raised - - 4,801 - -

+Debt raised 2,938 4,769 (2,254) 4,483 3,500

+Minority interests - - - - -

-Investments 669 700 1,400 1,745 -

-Miscellaneous items (152) 1,006 (371) 1,082 0

Net cash flow 560 (1,105) 390 (441) (499)

+Opening cash 2,084 2,644 1,539 1,929 1,488

Closing cash 2,644 1,539 1,929 1,488 989



Profitability Ratios%

EBITDA Margin 11.9 13.0 13.5 13.2 12.7

PAT Margin 2.0 2.6 3.7 3.7 3.6

Income Tax Rate 43.4 31.1 27.7 34.0 34.0

RoE 6.5 8.6 11.1 11.2 13.0

RoCE 9.8 9.9 11.1 12.1 13.2

Other Ratios

Net Debt/Equity (%) 156 214 118 146 153

W C turn (days) 150 159 151 140 140

Per-Share Data(Rs)

Earnings 2.4 3.4 4.8 6.0 7.4

Book Value 78.4 78.4 105.3 107.8 120.1

Dividend 0.8 0.8 0.9 1.0 1.1

Cash Earnings 7.2 9.3 10.4 12.3 14.7

Valuation Ratios(x)

PE (Core) 26.8 19.1 13.6 10.8 8.7

P/BV 3.5 3.5 2.6 2.5 2.3

EV/EBITDA 13.9 13.1 11.3 10.1 8.8




Company Background & Management HCC is a nine-decade-old construction company, specializing in cash contracting in segments such as power, roads, bridges, dams, barrages, industrials, buildings, water supply, ports and other marine works. Promoter holding is about 40%.

Key Management

Fig 25 – Management Person Designation Background

Ajit Gulabchand

Chairman and managing director

A Walchand scion, he took charge of HCC after successfully managing other large public limited companies promoted by the Walchand parivar

S. K. Fotedar

Executive director Serves as executive director (technical). Served as President (Construction), HCC. Has been executive director since 29 Sep ’05.

K. G. Tendulkar

Deputy managing director

Has been deputy managing director since Sep ’05 and served as executive director (operations). Has 27 years’ experience. Served as Practicing Chartered Accountant. Has been whole-time director since Nov ’93. Holds B.Com. BGL and FCA degrees.

Rajgopal Nogja President – Lavasa Corporation

He has over 15 years of rich experience in Real Estate and Construction Industry. In the current role, he has been spearheading the challenge in transforming the Lavasa vision into reality and has played a pioneering role in building and transforming it into a robust and successful business model.

Source: Company


Jul ’09 Preferential Issue - QIP Institutional Investors 47.0 102.2 4,801

Mar ’06 GDRs 26.9 1 27

Mar ’05 Preferential issue of shares FIIs and Mutual Funds 2.9 45 130




Fig 27 – Major Orders Verticals Area of operation Past Projects Current Projects

Hydro Power Underground powerhouse and tunnel Papvinasam Dam Chutak Hydro elctric project (Rs4110m)

Head race tunnel Godavari Lift irrigation Sceheme Phase I Nimoo Bazgo Hydro electric project (Rs3840m)

Spillway Underground powerhouse and tunel for chamera hydel power project

Teesta Low dam HEP (Rs3960m)

Dam Chandil Dam Kashang Hydroelectric project

Icha Dam Uri-II Hydroelectric power project

Kadra Dam Chamera Hydro electric project

Double curvature Arch dam at idduki dam across river Cheruthoni

Loharinagpala hydro electric project

Vaitarna Dam JCR Devadula Lift irrigation III

Teesta hydro electric project stage IV Parnahita Chevella lift irrigation sceheme

Maneri Bhali Hydel project Godavari Lift irrigation Sceheme Phase II

Dhauliganga Hydro electric project Gosikhurd Power project (Rs2288m)

Kolkatta metro Railway tunnel and Subway structures Punatsangchhu II hydro electric project Bhutan (Rs6.88bn)

Kurichu Hydroelectric dam project Pare hydro electric project AP. (Rs2764m)

Dagachhu hydro power corporation Bhutan (Rs3.87bn)

Transportation Roads Gujarat State highway project - mehsana to palanpur EW Coridor project - 60 km

(National Highways/expressways) Karnataka State highway project, Phase I Allahabad Bypass - 40 km (Rs4470m )

East West Corridor project Pacakage II Chennal Bypass - 32.5 km (Rs4040m)

Bridges Bridges over Vasai creek at Western Railway Mughal Road - 83 km

(Major/minor with well/pile/open foundation, pre-stressed concrete, Girders, ROB, RUB)

Mumbai Pune expressway Section B Chowk to Adoshi. NS Corridor - 31km

Udhampur Srinagar Baramullah rail line project Lucknow Muzzafarpur National Highway - 156 km

Railways/Tunnels Road Bridge Across Mahanadi DMRC - Airport metro expressline contract

Mass Rapid transit system Tamil Nadu Badarpur Elevated highway

Cable strayed bridge across Naini - Allahabad NH3 - MP / Maharashtra border - Dhule

Gosikhurd Spillway Nagpur Bandra Worli Sea link

Water Supply and Irrigation

Water Supply Water and Sewerage treatment plants in Delhi JCR Devadulla Lift irrigation Sceheme


Wsewerage treatment plant at Koyambedu - Chennai Mumbai Water Supply project

Environmental Tirupur Water Suply Project Maroshi Ruparel Tunnel (Rs4150m)

(Sewage, water treatment, Solid waste recycling)

GQ Road project - Kolaghat to Kharagpur Godavari Lift irrigation sceheme

Irrigation, Canal Lavasa Pune

Industrial Water Water supply sceheme from kesaria to sonaria (Rs1676.7m)

Others Buildings Reactor buliding main building and other structures for BARC.

Kudankulam Neuclear power project

Steel works Housing complex at Kharghar Mumbai. Bhilai Steel plant

Malvika Steel works

Haldia Docks

Source: Company



Fig 28 – Economic Drivers - Lavasa

Source: Company

Fig 29 – 247 Park

Source: Company

Fig 30 – Lavasa under development

Source: Company

Lavasa

Dasve, Mugaon, Dhamanhol, CBD, Sakhri & Wadavli

Business Campuses

Tourism Hospitality Education

Residential

IT – ITES

Biotech

Media & Animation

MediCity

R & D

Edutainment Park

Amusement Park

Adventure Sports

Leisure Tourism

Multi segment

Convention Center

Spas & Clubs

Residential Schools

Colleges

Life long Learning

Villa

Apartments

Work force housing


India I Equities


[email protected]


[email protected]

Key financials


Sales (Rsm) 28,328 46,882 52,508 65,110 80,736

Net profit (Rsm) 901 1,268 1,457 2,069 2,889

EPS (Rs) 18.1 25.5 29.3 41.7 58.2

Growth (%) 45.4 40.8 14.9 42.0 39.6

PE (core) (x) 28.7 20.4 17.8 12.5 9.0

P/BV (x) 3.4 2.9 2.5 2.1 1.1

RoE (%) 17.5 15.3 15.1 18.5 21.6

RoCE (%) 17.8 16.0 15.7 18.3 21.0

Dividend yield (%) 0.4 0.6 0.7 0.9 1.0

Net gearing (%) 83.0 124.1 126.6 116.9 105.8


Construction

Initiating Coverage

15 December 2009

Simplex Infrastructure

Quality order book, smart model; initiate at Buy

Buy. We initiate coverage on Simplex with a Buy rating and a target price of Rs625. We expect a revival in order inflows, focus on quality order book and a smart business model to drive 32% CAGR in net profit over FY09-12.

Order book momentum to pick up. Simplex’s order book has been static for the past six quarters – around Rs105bn – due to private-capex slowdown, mounting competition and focus on high-margin orders. With clearer signs of a revival in government and private capex, we expect its order book to expand leading to better revenue visibility.

Focus on quality. With a proven operational track record, Simplex is focusing on orders that offer better margins or are from the slowdown-immune government stable (39% share now, up from 30% in FY08). A high proportion of star-rate/full cost pass-through contracts would likely protect current margins.

Smart business model. The company has a smart and low-risk business model: it operates in all verticals, has projects all over India and overseas, has a shorter execution period than peers and a low working-capital cycle.

Valuation. At our target price of Rs625 the stock would trade at 15x FY11e earnings, in line with the multiple used for our coverage universe.


Key data SINF.IN / SINF.BO

52-week high/low Rs546 / Rs102 Sensex/Nifty 17119 / 51173-m average volume US$0.3m Market cap Rs25.9bn / US$563mShares outstanding 49.5mFree float 45.3%Promoters 54.7%Foreign Institutions 12.3%Domestic Institutions 19.0%Public 14.0%


Simplex

Sensex

100

200

300

400

500

600

Nov

-08

Dec

-08

Jan-

09Fe

b-09

Mar

-09

Apr-0

9M

ay-0

9Ju

n-09

Jul-0

9Au

g-09

Sep-

09O

ct-0

9N

ov-0

9D

ec-0

9


15 December 2009 Simplex Infrastructure – Quality order book, smart model; initiate at Buy



Net sales 28,328 46,882 52,508 65,110 80,736Sales growth (%) 65.6 65.5 12.0 24.0 24.0 - Op. expenses 25,446 42,611 47,434 58,752 72,785 EBIDTA 2,882 4,271 5,074 6,357 7,951 EBITDA margins (%) 10.2 9.1 9.7 9.8 9.8 - Interest 1,037 1,418 1,550 1,800 2,040 - Depreciation 643 1,299 1,450 1,570 1,700 + Other income 69 192 101 101 101 - Tax 370 477 718 1,019 1,423 PAT 901 1,268 1,457 2,069 2,889 PAT growth (%) 67.7 40.8 14.9 42.0 39.6 Consolidated PAT 901 1,268 1,457 2,069 2,889 FDEPS (Rs/share) 18.1 25.5 29.3 41.7 58.2 CEPS (Rs/share) 33.0 55.9 63.0 78.3 97.8 DPS (Rs/share) 2.0 3.0 3.5 4.5 5.0 Source: Company, Anand Rathi Research


Share capital 99 99 99 99 99 Reserves & surplus 7,803 9,502 10,976 13,034 15,902 Shareholders’ fund 7,903 9,602 11,076 13,133 16,002 Debt 7,493 12,205 13,305 14,711 15,611 Minority interests - - - - -Capital employed 15,396 21,806 24,380 27,844 31,612 Fixed assets 6,537 10,153 10,253 10,283 10,233 Investments 99 201 201 201 201 Working capital 7,528 10,451 13,643 16,781 21,113 Cash 1,232 1,002 284 579 65 Capital deployed 15,396 21,806 24,380 27,844 31,612 No. of shares (m) 49.7 49.7 49.7 49.7 49.7 Net Debt/Equity (%) 83.0 124.1 126.6 116.9 105.8 W C turn (days) 85.3 70.0 83.7 85.3 85.7 Source: Company, Anand Rathi Research

Fig 3 – Cash flow statement (Rsm) Year end 31 Mar FY08 FY09 FY10e FY11e FY12eConsolidated PAT 901 1,208 1,457 2,069 2,889 + Depreciation 372 772 900 970 1,050 + Deferred tax 191 207 220 250 270 Cash profit 1,463 2,187 2,577 3,289 4,209 - Incr/(Decr) in WC 1,808 2,923 3,192 3,138 4,332 Operating cash flow (345) (736) (615) 151 (123)-Capex 3,290 4,387 1,000 1,000 1,000 Free cash flow (3,635) (5,123) (1,615) (849) (1,123)-Dividend 116 116 203 261 291 + Equity raised 4,080 - - - -+ Debt raised 617 4,711 1,100 1,406 900 -Investments 46 102 - - --Misc. items 93 (399) (0) 0 (0)Net cash flow 807 (230) (718) 295 (514)+ Opening cash 425 1,232 1,002 284 579 Closing cash 1,232 1,002 284 579 65 Source: Company, Anand Rathi Research

Fig 4 – PE Band

5x

10x

15x

20x

0

100

200

300

400

500

600

700

800

Dec

-04

Dec

-05

Dec

-06

Dec

-07

Dec

-08

Dec

-09

(Rs/share)



5x

7x

9x

11x

0

10

20

30

40

50

60

70

Dec

-04

Dec

-05

Dec

-06

Dec

-07

Dec

-08

Dec

-09

(Rs bn)


Fig 6 – Order book break-up

Urban Infrastructure

17%

Industrial Construction

17%

Power26%

Buildings and Housing

15%

Roads, Railways &

Bridges16%

Piling4% Marine

5%




Investment Argument and Valuation We initiate coverage of Simplex with a Buy rating and a target price of Rs625. We expect a revival in order inflows, focus on quality order book and a smart business model to drive 32% CAGR in net profit over FY09-12.

Order book momentum to pick up

Simplex’s order book in the last six quarters has been static, around the current Rs105bn, due to the private-capex slowdown, mounting competition and focus on high-margin orders. With clearer signs of government and private capex revival, we expect it to pick up momentum leading to better revenue visibility than now (2.2x FY09 revenue).

Simplex operates in all construction verticals in India and overseas. We expect this to ease the effects of a slowdown in any given vertical. On the other hand, it could allow Simplex to capture any sudden growth spurt in any vertical.

Simplex’s largest order in hand is from Oman’s Saud Bahwan. Its order book is well-diversified in terms of clients, with none of them individually accounting for more than 5% of the order book.

Focus on quality

With a proven operational track record, Simplex is focusing on orders that offer better margins or are from the slowdown-immune government stable (39% share now, up from 30% in FY08). A high proportion of star-rated/full cost pass-through contracts would protect current margins.

The contribution of private contracts, domestic and international clients make up the balance 39% and 22%, respectively, of its order book. With increasing focus on government orders, we expect Simplex to have an even mix of government and private orders, thereby providing it the much-needed insulation from a slowdown in a particular segment.

Smart business model

The company has a smart and low-risk business model: it operates in all verticals, has projects all over India and overseas, has a shorter execution period than peers and a low working-capital cycle.

Simplex operates both in India and overseas. In India, its operations span all the regions; outside India, it is concentrated in West Asia (the Middle East), where it has been operating for more than five years now. Simplex’s average execution period is about two years, the shortest among its peers who operate on a two-and-a-half- to three-year execution cycle. Over FY07-09, Simplex cut its working capital days from 105 to 70 on the back of improved contract terms. A reduced billing cycle and increase in private and overseas revenue booking (lower working capital) also aided the contraction.

Revival in private and govt spend expected to revive order inflows

Increasing exposure to slowdown immune govt contracts and low risk

from fixed price contracts (5% of orderbook)



Valuation

We value Simplex at 15x FY11e, in line with other construction companies. The multiple is in line with its average multiple of the last five years. At the target price of Rs625, the stock would trade at FY11e EV/EBITDA of 7.1x (last three years’ one-year forward range: 5x to 11x). We have not included any potential upside related to the company’s investments in its real-estate and oil-rig businesses.

At the current price of Rs521, the stock trades at 17.8x and 12.5x FY10 and FY11 earnings estimates, respectively, and 7.7x and 6.3x EV/EBITDA.

Risks

Project execution risk. Could arise from a shortage of manpower, land-acquisition issues, or arbitration with clients.

Financial risk. Given the nature of the industry, Simplex would need additional debt to fund its capex or working capital. A spike in interest rates could impact its bottom line.

Political risk. Around 40% of Simplex’ order book comes from the government.



Order book momentum to pick up Simplex’s order book in the last six quarters has been static, around the current Rs105bn, due to the private-capex slowdown, mounting competition and focus on high-margin orders. With clearer signs of government and private capex revival, we expect it to pick up momentum leading to better revenue visibility than now (2.2x FY09 revenue).

Order inflow revival in sight

FY08 was a good year for Simplex in terms of order inflows – orders worth Rs67bn flowed in compared to Rs25bn in FY07. However, the economic slowdown squeezed inflows in FY09 to Rs57bn. Accordingly, the order book, currently at Rs105bn, has been around the same level for the last six quarters. Also, the focus on high-margin orders resulted in selective bidding. With increasing signs of a revival in government and private capex, we expect order inflows to pick up momentum in the next one year. This could lead to better revenue visibility than at present (2.2x FY09 revenue).

Fig 7 – Growing order book

0

20

40

60

80

100

120

140

160

180

FY06

FY07

FY08

FY09

FY10

e

FY11

e

FY12

e

(Rs bn)

2.0

2.5

3.0

3.5

Order book Book to bill (RHS)

(x)


Targeting big ticket orders

Simplex’s average order size (excluding piling) has risen from Rs270m in FY05 to Rs1.12bn in 1H10. This is the result of growth in investment in industry and infrastructure, and a management decision to avoid bidding for orders below Rs1.5bn (except piling). As the size of orders rise, we expect the company to benefit from economies of scale, which would then translate into better margins.

Order inflows to pick up momentum in next one year leading to better

revenue visibility than current

Increase in order size to bring economies of scale



Fig 8 – Increase in average order size

270

490550

910980

1120

0

200

400

600

800

1,000

1,200

FY05

FY06

FY07

FY08

FY09

1H10

(Rs m)

Source: Company

Major orders and diversified clients

Simplex’s largest order in hand is from Oman’s Saud Bahwan. Its order book is well-diversified in terms of clients, with none of them individually accounting for more than 5% of the order book.

Fig 9 – Major orders in hand Client Verticals Contract Size (Rs m)

Saud Bahwan, Oman Industrials 4,700

MMRDA, Mumbai Roads 4,600

Intl. Company for Inv. Services, Libya Buildings & Housing 3,990

Jindal Power, Chattisgarh Power 3,280

Jindal Power, Orissa Power 2,840

Maithon Power, Bihar Power 2,840

Mumbai Metro One Pvt. Ltd. Urban 2,790

NTPC, MP Power 2,610

Angul, Anant pur Barrage, Orissa Urban 2,450

Intl. Company for Inv. Services, Libya Buildings & Housing 2,440

NTPC, MP Power 2,390

Cinda Engg & Const., Kerala Industrials 2,260

Bilaspur Municipal, Chattisgarh Urban 2,180

Abhijeet Infra, Jharkhand Power 1,990

Bangalore Metro Rail Corp. Urban 1,920

Muscat Municipality, Oman (Towell) Roads 1,760

PWD, Govt of Manipur Urban 1,740

Commonwealth Games Roads 1,720

Gulf Cement Company, Qatar Industrials 1,720

India Gateway Terminal Pvt. Ltd, Kochi Marine 1,580

Keppel Puravankara Develop Pvt. Ltd, Kanakapura Buildings & Housing 1,570

Indore Municipality Urban 1,540

Keppel Magus Dev. Pvt. Ltd, Kolkata Urban Infra 1,530

Commonwealth Games Roads 1,510

Goa Shipyard Marine 1,490

Total 59,440

Source: Company

Low client risk – no client accounts for more than 5% of order book



Operates in all construction verticals

Simplex operates in all construction verticals in India and overseas. We expect this to ease the effects of a slowdown in any given vertical. On the other hand, it could allow Simplex to capture any sudden growth spurt in any vertical.

Proven execution track record

A large order book requires strong execution capabilities for timely completion of projects. Over the years Simplex has invested substantial amounts in its asset base and manpower. From FY06 to FY09, its gross block and manpower have seen CAGRs of 61% and 25%, respectively. Almost all the incremental capex was utilized to purchase equipment. Today, the company is self-sufficient in equipment and hires occasionally to avoid project delays, enabling it to speedily complete projects.

Diversified order book mitigates vertical slowdown risk

Fig 10 – Order book Break up International

Industrial Construction,

38%

Power, 16%

Buildings and Housing, 32%

Roads, Railways & Bridges, 9%

Marine, 3%Piling, 2%

Domestic

Piling, 4%

Marine, 6%

Urban Infrastructure,

22%

Industrial Construction,

14%Roads, Railways & Bridges, 17%

Power, 30%

Buildings and Housing, 7%

Source: Company

Fig 11 – Increase in gross block

12,46012,205

7,809

4,533

2,953

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

FY06

FY07

FY08

FY09

2QFY

10

(Rs m)

Fig 12 – Manpower over the years

7,2957,2637,082

5,244

3,737

0

1,000

2,000

3,000

4,000

5,000

6,000

7,000

8,000

FY06

FY07

FY08

FY09

2QFY

10

(Nos)

Source: Company



Focus on quality With a proven operational track record, Simplex is focusing on orders that offer better margins or are from the slowdown-immune government stable (39% share now, up from 30% in FY08). A high proportion of star-rate/full cost pass-through contracts would protect current margins.

Increasing share of government contracts

Simplex’s order inflows, after rising a spectacular 160% in FY08, dropped 15% in FY09 due to a major slowdown in private capex. Subsequently, the company’s focus on government contracts saw its share rising from 30% in FY08 to 39% of the order book currently. The contribution of private contracts, domestic and international clients make up the balance 39% and 22%, respectively, of its order book. With increasing focus on government orders, we expect Simplex to have an even mix of government and private orders, thereby providing it the much-needed insulation from a slowdown in a particular segment.

Fig 13 – Breakup of order book (government/private)

24 2332 38 41 39

43 3937

36 36 39

33 3831 26

3322

0

20

40

60

80

100

1Q09

2Q09

3Q09

4Q09

1Q10

2Q10

Govt Pvt Intl.

(%)


Raw material price hikes, little impact on margins

Simplex’s order-book mix, in terms of escalation clause, is one of the best in the industry. Private and international orders constitute 61% of Simplex’s current order book. Here, materials are either supplied by the contractor or are covered by a star-rate (full cost pass-through) contract. Government contracts are a mix of fixed-price, full-pass-through or WPI-linked.

Fixed-price contracts constitute only 4% of the current order book. In addition, most of the fixed-price contracts either constitute piling, where execution is two to three months, or have back-to-back raw material supply arrangements.

Low share of fixed-price contracts to mitigate raw material risk

Increasing share of government orders insulates from a slowdown in any one

segment



Fig 14 – Low proportion of fixed-price contracts Fixed price

4%

WPI linked26%

Star Rate52%

Free Issue18%

Source: Company



Smart business model The company has a smart and low-risk business model: it operates in all verticals, has projects all over India and overseas, has a shorter execution period than peers and a low working-capital cycle.

Well-diversified across verticals

Simplex has projects all over India and in all the verticals of the construction business. Its diversified order book in terms of both verticals and geographical regions provides it a hedge against any slowdown in one of the verticals or a region. It has the most diversified order book among its peers. Within the segments, Simplex has identified power and urban infrastructure as high-growth, high-margin areas and aims to raise their shares in the overall business. These segments require specialized skills compared to other segments and command higher margins. From 22% in FY07, the share of these segments has risen to 43% in 2QFY10. We expect order flows within these verticals to be high as huge capex is planned by both the private and the public sectors.

With fewer orders for roads on a cash-contract basis, Simplex’ share in the segment has slipped from 29% in FY07 to 16% in 2QFY10. We expect this trend to be maintained, given the company’s preference for cash-contract orders.

Fig 15 – Higher share of high-margin verticals in order book

5 6 10 42 1

8 454 9 12

14 10 171010

2217 34

1721 18

29 1914

1634 37

10 19 1126

6 5

151717221722

0102030405060708090

100

FY05

FY06

FY07

FY08

FY09

2QFY

10

Piling Marine Urban InfrastructureIndustrial Construction Roads, Railways & Bridges PowerBuildings and Housing

(%)

Source: Company

Shorter execution period

Simplex’s average execution period is about two years, the shortest among its peers who operate on a two-and-a-half- to three-year execution cycle. This is for two reasons: the share of hydro-power projects, roads and bridges (which takes three to five years to be completed) in its order book is comparatively lower, and the quicker execution required by private clients (which constitute 61% of its order book).

Low geographic concentration risk

Simplex operates both in India and overseas. In India, its operations span all the regions; outside India, it is concentrated in West Asia (the Middle East), where it has been operating for more than five years now. The proportion of international projects in its order book after the initial uptrend is currently at 22%. Its exposure to West Asia is Rs20bn or 19%; of this, its Dubai exposure is only Rs2bn. The balance is in Oman, Qatar



and Libya.

Management aims to maintain a healthy mix of domestic and international orders to alleviate any risk from geographical concentration. It is actively looking to add more regions: Kuwait, Abu Dhabi, Bahrain, Muscat and North Africa.

Fig 16 – Order-book break-up (domestic and overseas)

93 8673 67

78

714

27 3322

0

20

40

60

80

100

FY06

FY07

FY08

FY09

2Q10

Domestic International

(%)

Source: Company

Lowest working capital days

Over FY07-09, Simplex cut its working capital days from 105 to 70 on the back of improved contract terms. A reduced billing cycle and increase in private and overseas revenue booking (lower working capital) also aided the contraction. Ahead, we expect this to inch up slightly on account of the increase in government orders. Despite that however, it is expected to be the lowest among the companies in our universe. The narrower working capital cycle also results in better-than-industry return ratios.



Financials The current order book offers fair visibility of revenue flow over the next two years. We expect a 20% CAGR in revenue over FY09-12, with an estimated 32% CAGR in net profit, driven by a better operating margin.

Robust revenue growth

On the back of proven execution capabilities and a revival in order flows, we expect a 20% CAGR in Simplex’s revenue over FY09-12. We believe there will be strong growth in revenue from power and urban infrastructure as these constitute ~43% of the current order book (22% in FY07).

Fig 17 – Robust revenue growth

0

10

20

30

40

50

60

70

80

90FY

06

FY07

FY08

FY09

FY10

e

FY11

e

FY12

e

0

15

30

45

60

75

Sales Sales growth (RHS)

(%)(Rs bn)


Scope for EBITDA margin improvement

The current order book comprises 44% from the high-margin power and urban infrastructure. These have an average execution of about two and a half years. This together with a strong revenue growth is expected to lift the EBITDA margin by 70bps, to 9.8%, in FY11 and FY12. Any increase in share of foreign orders (~3-4% higher margin) in its order book from the current levels of 22%, will further boost operating margins.

Fig 18 – EBITDA margins to improve

0.5

1.5

2.5

3.5

4.5

5.5

6.5

7.5

8.5

FY06

FY07

FY08

FY09

FY10

e

FY11

e

FY12

e

8.5

9.0

9.5

10.0

10.5


(%)(Rs bn)




Net profit margin to rise on higher OPM, lower financing cost

We expect net profit margin to improve 80bps from FY09 to FY12 on the back of an improvement in the operating profit margin and lower interest charges (as percent of sales). We estimate interest as a percentage of sales to fall 40bps from 3% in FY09 to 2.6% three years later, and net profit rise at a 32% CAGR over FY09-12.

The higher margins in FY11-12 would reflect the expanded return ratios. We expect the RoE to improve from 15.3% in FY09 to 21.6% three years on, and the RoCE from 16% to 21% in FY12.

Fig 19 – Expansion in net profit margin

0

500

1,000

1,500

2,000

2,500

3,000

3,500

FY06

FY07

FY08

FY09

FY10

e

FY11

e

FY12

e

2.6

2.9

3.1

3.4

3.6

PAT PAT Margin (RHS)

(%)(Rs m)


Comfortable balance sheet

The improved working-capital cycle (105 days in FY07 to 70 days in FY09) has helped Simplex lower its gearing from 2.3x to 1.2x. We expect it to be maintained around 1.2x through FY09-12 enabling it bid for large orders and hold interest costs low.

Fig 20 – Net debt-to-equity ratio to fall

0

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

FY06

FY07

FY08

FY09

FY10

e

FY11

e

FY12

e

0.0

0.6

1.2

1.8

2.4

3.0

Debt Net Debt to Equity (RHS)

(x)(Rs m)





Net sales 28,328 46,882 52,508 65,110 80,736

Sales growth (%) 66 65 12 24 24


EBIDTA 2,882 4,271 5,074 6,357 7,951

EBITDA Growth (%) 78.0 48.2 18.8 25.3 25.1

EBITDA margins (%) 10.2 9.1 9.7 9.8 9.8

+ Other income 69 192 101 101 101

- Interest 1,037 1,418 1,550 1,800 2,040

- Depreciation 643 1,299 1,450 1,570 1,700

PBT 1,271 1,746 2,175 3,088 4,312

- Tax 370 477 718 1,019 1,423

PAT 901 1,268 1,457 2,069 2,889

PAT growth (%) 67.7 40.8 14.9 42.0 39.6

PAT margin (%) 3.2 2.7 2.8 3.2 3.6

FDEPS (Rs/share) 18 26 29 42 58

CEPS (Rs/share) 33.0 55.9 63.0 78.3 97.8

DPS (Rs/share) 2.0 3.0 3.5 4.5 5.0



Sources of Funds

Share capital 99 99 99 99 99


Deferred tax liability 371 579 799 1,049 1,319



Secured Loans 3,800 7,693 8,793 9,493 9,893

Unsecured Loans 3,694 4,512 4,512 5,218 5,718

Total Loans 7,493 12,205 13,305 14,711 15,611


Total 15,396 21,806 24,380 27,844 31,612


Gross Block 7,567 12,066 13,005 14,005 15,005


Net Block 6,295 10,014 10,053 10,083 10,033

CWIP 243 139 200 200 200

Investments 99 201 201 201 201

Debtors 11,497 16,676 18,701 23,190 28,755

Inventory 4,741 6,761 7,912 9,811 12,166

Loans & advances 3,673 4,562 6,000 7,000 7,200


Provision 116 116 120 125 130

Sungry Creditors 6,057 8,780 9,351 11,595 14,378

Other current liablities 6,210 8,652 9,500 11,500 12,500


Working capital 7,528 10,451 13,643 16,781 21,113

Cash 1,232 1,002 284 579 65

Total 15,396 21,806 24,380 27,844 31,612





Consolidated PAT 901 1,208 1,457 2,069 2,889

+Depreciation 372 772 900 970 1,050

+Deferred tax 191 207 220 250 270

Cash profit 1,463 2,187 2,577 3,289 4,209

- Incr/(Decr) in WC 1,808 2,923 3,192 3,138 4,332

Operating cash flow (345) (736) (615) 151 (123)

-Capex 3,290 4,387 1,000 1,000 1,000

Free cash flow (3,635) (5,123) (1,615) (849) (1,123)

-Dividend 116 116 203 261 291

+ Equity raised 4,080 - - - -

+ Debt raised 617 4,711 1,100 1,406 900

+ Minority interests - - - - -

-Investments 46 102 - - -

-Misc. items 93 (399) (0) 0 (0)

Net cash flow 807 (230) (718) 295 (514)

+Opening cash 425 1,232 1,002 284 579

Closing cash 1,232 1,002 284 579 65




EBITDA Margin (%) 10.2 9.1 9.7 9.8 9.8

PAT Margin (%) 3.2 2.7 2.8 3.2 3.6

Income Tax Rate (%) 29.1 27.3 33.0 33.0 33.0

RoE (%) 17.5 15.3 15.1 18.5 21.6

RoCE (%) 17.8 16.0 15.7 18.3 21.0

Other Ratios

Net Debt/Equity (%) 83.0 124.1 126.6 116.9 105.8

W C turn (days) 85.3 70.0 83.7 85.3 85.7

Per Share Data

Earnings Per Share (Rs) 18.1 25.5 29.3 41.7 58.2




Valuation Ratios

PE (x) 28.7 20.4 17.8 12.5 9.0

P/BV (x) 3.4 2.9 2.5 2.1 1.1

EV/EBITDA (x) 11.2 8.7 7.7 6.3 5.2




Company Background & Management Simplex has been into construction for the past eight decades. It started as a piling and ground engineering company, later diversifying into all industry verticals.

Company history and promoters

Simplex Infrastructure was incorporated in 1924 in Calcutta as the British-owned Simplex Concrete Piles (India) Ltd. In 1947, it was taken over by the Mundhra family. Current chairman B. D. Mundhra manages the company along with sons Amitabh and Rajiv. The Mundhra family holds about a 55% stake.

Simplex designed and constructed the first RCC-framed structure in Asia, in 1958, the 18-storey National Tower in Kolkata. In 1960, it made a foray into thermal power plants. In 1990, it bagged its first international order for piling, in the UAE. In 1993, it went public, with a follow-on issue in 1996. In 2005, its name was changed to Simplex Infrastructures Ltd. In FY08, it raised funds via the issue of warrants and a QIP.


B.D. Mundhra Chairman and Managing Director

Associated with the company since 1961. Became the MD in 1987. Founder member of the National Institute of Construction Management and Research.

Amitabh Mundhra Director Associated with the company since 1995. Looks after project implementation and monitoring, business development - domestic and overseas.

Rajiv Mundhra Director Associated with the company since 1997. Looks at finance, material management, administration, site management, project planning, monitoring and control.

N.K. Kakani Executive Director, CFO B.Com, CA. Has 32 years of experience in finance, growth strategies & business development. Associated since 2005 and has worked in many industries.

A.K. Chatterjee

Technical Director Civil Engineer, associated with the company since 1963. 44 years of experience in project planning, design and execution.

S. Guha

Technical Director Civil engineer, associated with the company since 1970. 50 years of experience in construction; previously worked with HCC and Shib Banerjee Construction Pvt Ltd

A.K. Dutta Technical Director Civil engineer, associated with the company since 2002. 40 years of experience in construction; previously COO of Bridge & Roof Co (I) Ltd.

Source: Company

Fig 26 – Equity history

Date Type Subscribers No. of

shares (m) Issue

Price (Rs)Total raised

(Rsm)

Aug ’05 Preferential issue Beethoven Ltd. (Mauritius) 1.3 726.3 933 Oct ’07 Warrants RBS Credit and Financial Development

Pvt. Ltd. (promoter group company) 5.5 401.0 2,206

Dec ’07 QIP GE Capital, Deutsche Asset Management, SBI, HSBC, Tata Mutual Fund and UTI Mutual Fund

6.4 625.0 4,000

Jan ’08 Warrants 5.5m warrants issued to promoters @Rs401 each. Half a million warrants converted; balance lapsed leading to forfeiture of initial deposit of Rs201m

0.5 401 401




Fig 27 – Verticals Verticals Since Clients Area of operation Past Projects Current Projects

Piling and Ground Engg.

1924 Qatar Power Plant, Gujarat UMP

Foundation work, pre-cast piling, soil investigation, diaphragm walls, grouting, stone columns

Concrete piles for a steel plant complex at Hazira, Gujarat

Piles for a fertilizer plant at Kakinada, AP

Qatar Petroleum

Industrials 1935 Adani, Hindalco, Birla, Tata and Reliance

Cement, steel, engineering, petrochemicals, oil & gas, fertilizers and chemicals

Civil and structural work for a petroleum refinery in Jamnagar

1.4m ton alumina refinery in Orissa

Civil work for aluminium smelter projects in Orissa.

Saud Bahwan Cinda Engg & Const., Kerala Gulf Cement Company- Qatar SAIL (Rourkela Steel Plant)

Marine 1940 Mundra port and DP world, Cochin Port, Adani, Marg, Paradeep

Ports, jetties, harbours, wharves and breakwaters

Causeway reclamation works at JNPT

Design and construction of container terminal T-2 at Mundra

India Gateway Terminal Pvt Ltd Goa Shipyard

Buildings and Housing

1955 Unitech, Sheth Builders and Brigade, Ritz Carlton, Hilton, Keppel, Al – Arab Contractor

High-end high-rise residential and commercial towers, hotels and institutional buildings

Hospital building and research centre in Delhi

Construction of 3,168 low-cost tenements and 72 shops in Mumbai

3 towers of 33 storeys at Mumbai Udaipur Airport Terminal

Intl. Company for Inv. Service, Libya Keppel Puravankara, Karnataka Keppel Magus – Rajarhat, Kolkata Bando Engineering Co, UAE Al Tajir Real estate LLC, Dubai Nitesh Residency, Karnataka

Power 1960 NTPC, BHEL, GMR, NHPC, Maithon, Doosan, Vedanta and Gujarat UMPP

Civil and structural construction of coal, gas and oil power plants, nuclear power plants and hydro-electric power plants

Simhadri thermal power plant in AP

Godavari gas power project at Kakinada

Switchyard central control building for Kudankulam Nuclear Plant

4 x 250 MW plant at Raigarh 3 x 30 MW captive power

plant at Orissa

4 x 600MW Jindal Power, Chatisgarh 6 x 135MW Jindal Power, Orissa 2 x 525 MW Maithon Power, Bihar 2 x 500MW NTPC, MP (2 projects) 2 x 270MW Abhijeet Infra, Jharkhand

Urban Infrastructure

1965 Delhi Metro, Mumbai Metro, Dubai Metro; Ranchi, Jabalpur, Indore, Kolkata and Hyderabad Corporations

Metro stations, airports, water and sewage-treatment plants and pipelines, sports complexes, health centers

Sewage pumping station and laying down of sewage pipelines in Chennai

Dubai Metro project Udaipur domestic airport

terminal Construction of several metro

station buildings including stations for the Delhi Metro Rail Corp.

Wharf and reclamation project in Navi Mumbai

Mumbai Metro One Pvt. Ltd (Versova to Ghatkopar route)

Anant pur Barage, Orissa Bilaspur Municipal, Chattisgarh Sewerage system in Indore Sewerage lines at Jabalpur, MP

Roads & Railways

1980 Indian Railways, NHAI, state road transport corporations

Highways, expressways, flyovers and bridges; railway tracks and platforms; elevated corridors

Construction of flyovers in Delhi, Jaipur, Mumbai, Kolkata, Bangalore and others, Four lanes of Kolhapur-Satara road

Flyover from Prince of Wales museum to Anik Panjarapole, Mumbai

Muscat Municipality, Oman (Towell) -6 flyovers

Commonwealth Games, Bridge Bangalore Dev. Authority- Bridge

Source: Company



Annexures



Annexure 1 – List of road projects to be awarded by March 10. State Name of project Project Cost (Rs bn) Kms Likely date of Award of work

Andhra Pradesh Ichapuram-Srikakulam-Vishakapatnam - Rajahmundri 43.6 436 31/03/10

Rajatahan Kishangarh-Udaipur 31.5 315 31/12/09

Uttar Pradesh/Bihar Varansi – Aurangabad 28.48 190 Dec-09

Haryana/ Uttar Pradesh Eastern Peripheral Expressway 27.25 135 31/03/10

Jammu & Kashmir Chenani-Nashri (Pkg V) 25.8 12 28/02/10

Rajatahan Udaipur-Ahmedabad 24.2 242 28/02/10

Orissa/West Bengal Dankuni-Baleshwar 24 240 28/02/10

Jammu & Kashmir Quazigund-Banihal (Pkg II) 19.87 15 28/02/10

Jammu & Kashmir Jammu-Udhampur (Pkg VI) 19.39 65 28/02/10

Kerala Thiruvanthapuram-Ochira 19.33 86 30/11/09

Andhra Pradesh Nellore-Chilakaluripet 18.4 184 15/12/09

Haryana/ Uttar Pradesh Delhi - Agra 18 180 28/02/10

Jharkhand Ranchi-Jamshedpur 15.58 164 31/01/10

West Bengal Realignment to Ghoshukur-Salsalabari 15.58 164 31/03/10

Orissa Panikoli-Keonjhar-Rimuli Section 15.49 163 28/02/10

Kerala Cherthalai-Ochira 15.35 84 30/11/09

Tamil Nadu Krishnagiri-Walajahpet 14.8 148 30/11/09

Uttar Pradesh Bareilly - Sitapur 14.54 153 31/12/09

Maharashtra Pune-Satara 14.5 145 31/01/10

Maharashtra Satara-Kagal 13.3 133 28/02/10

Orissa Chandikhole-Dubari-Talchar 12.64 133 28/02/10

Kerala KNT/Kerala border-Kannur 12.35 130 31/03/10

Rajatahan Pali-Pindwara 12.35 130 28/02/10

Jharkhand/West Bengal Barwa Adda – Panagarh 12 120 31/03/10

Uttar Pradesh Ghaziabad-Aligarh 11.97 126 31/12/09

Rajasthan Deoli - Kota 11.78 124 31/03/10

Madhya Pradesh Indore-Gujarat/MP border 11.75 155 31/03/10

Goa Maharashtra/Goa border-Panaji Goa/KNT Border 11.69 123 31/01/10

Jammu & Kashmir Srinagar-Banihal (Pkg I) 11.66 68 28/02/10

Uttar Pradesh Moradabad-Bareilly 11.5 121 31/12/09

Karnataka Tumkur-Chitradurga 11.4 114 31/01/10

Gujarat Ahmedabad-Godhra 11.21 118 31/01/10

Rajatahan Beawar-Pali 11.02 116 28/02/10

Kerala Kuttipuram-Edapally 10.64 112 28/02/10

Haryana Panchkula - Barwala - Saha - Yamuna Nagar up to UP border 10.26 108 28/02/10

Orissa Rimuli-Roxy Rajamunda Section 10.07 106 28/02/10

Jammu & Kashmir Ramban-Banihal (Pkg III) 9.86 36 28/02/10

West Bengal Farakka-Raiganj 9.79 103 31/12/09

Jammu & Kashmir Udhampur-Ramban (Pkg IV) 9.71 43 28/02/10

West Bengal Bahrampore -Farakka 9.6 101 31/12/09

Gujarat Ahmedabad-Vadodara 9.5 95 31/03/10

Karnataka Hungud-Hospet 9.31 98 31/12/09

Karnataka Bijapur-Hungud 9.22 97 31/12/09

Tamil Nadu Walajpet-Poonamalee 9.2 92 31/03/10

Karnataka Kundapur-Surthkal & Mangalore-KNT/Kerala Border 8.55 90 31/12/09

Others 300.81 5221.00 Up To March 2010

Total 988.8 11,134




Annexure 2 – List of road projects to be awarded by March 11. State Section Length km Invitation of RFP

Maharashtra Amravati-Dhule-Gujrat Border 450 Jul-10

Orissa Bahargora-Sambalpur 370 Sep-10

Punjab/ Haryana Jullunder-Jind 350 Sep-10

Uttar Pradesh Varanasi-Lucknow 300 Sep-10

Uttar Pradesh Nepal Border to Varanasi 292 Sep-10

Uttar Pradesh Ambedkar Nagar to Banda 287 Sep-10

Karnataka Hospet-Hubli-Ankola 271 Sep-10

Orissa Jn. With NH-6 at Sambalpur-Jn. With NH-5 in Cuttack 261 Sep-10

Maharashtra/ Andhra Pradesh Solapur-Sangareddy 234 Sep-10

Chattisgarh Dhamtari-Jagdalpur 222 Sep-10

Uttar Pradesh Aurangabad-Bawra Adda 220 Aug-10

Karnataka Gulbarga-Bijapur-Homnabad 200 Sep-10

Andhra Pradesh Vijayawada-Elluru-Rajamundry 198 Mar-10

Chattisgarh Bilaspur-Ambikapur 190 Sep-10

Madhya Pradesh Jabalpur-Mandla-Chilpi 189 Apr-10

Maharashtra Khed-Nasik 180 Sep-10

Punjab SriGanganagar-Amritsar 172 Sep-10

Uttar Pradesh Raibareilly to Jounpur 169 Sep-10

Uttarakhand/ Uttar Pradesh Haridwar-Kashipur 167 Sep-10

Tamil Nadu Vikravandi-Kumbakonam-Thanjavur 165 Apr-10

Uttar Pradesh Allahabad Bypass-Varanasi 160 Mar-10

Uttar Pradesh Etawah-Chakeri 157 Aug-10

Uttar Pradesh Chakeri-Allahabad 153 Aug-10

Chattisgarh Arang-Saraipalli-Orissa Border 150 Sep-10

Jharkhand/WB Jamshedpur-Kharagpur 150 Sep-10

Madhya Pradesh O’ganj to Betul 143 Sep-10

Maharashtra Dhule-Aurangabad 140 Sep-10

Uttar Pradesh Meerut to Nazibabad 139 Sep-10

Tamil Nadu Tiruchirapalli-Lalgudi-Chidambaram & Meenusuriti-Jayamkondam-Kootu 135 Mar-10

Orissa Talchar-Chandikhole 133 Sep-10

Chattisgarh/Jharkhand Pathalgaon to Gumala 130 Sep-10

Jharkhand Junction with Govindpur at NH-2-Dhanbad-Bokaro-Ramgarh 130 Sep-10

Tripura Agartala-Sabroom 130 Aug-10

Chattisgarh Chilpi-Simga 128 Sep-10

Orissa Birmitrapur-Palhara 128 Sep-10

Uttar Pradesh Agra-Etawah Bypass 125 Mar-10

Assam/ Nagaland Daboka-Dimapur 124 Mar-10

Rajsthan/Gujarat Padhi-Dahod 123 Sep-10

Tamil Nadu Thanjavur - Pudukkotai - Sivaganga - Manamadurai 122 Mar-10

Rajsthan/Madhya Pradesh Jhalawar-Biaora 121 Sep-10

Karnataka Hospet-Chitradurga 119 Sep-10

Assam Assam/Meghalaya Border-Assam/Tripura Border 116 Mar-10

Madhya Pradesh Betul to Maharashtra/ Madhya Pradesh border (km 143 to km 257) 115 Apr-10

Chattisgarh Raipur-Bilaspur 112 Jul-10

Tripura Manu-Agartala 110 Mar-10

Bihar Muzaffarpur-Barauni 107 Sep-10

Others 3434 Up to Mar-11

Total 11721




Annexure 3 – Project mix: Mar’09 Segments (%) JPA IVRCL NCC ERA HCC Simplex

Water and Irrigation 13 69 26 - 17 -

Transportation 60 5 8 16 31 14

Building & Housing - 21 21 31 - 17

Industrial Structures 2 - - 15 - 34

Thermal Power - 5 6 23 - 11

Hydro Power 25 - - - 51 -

Metals and Minning - - 12 - - -

International - - 27 - - -

Urban Infra/ Others - - - 16 1 24

Total 100 100 100 100 100 100


Annexure 4 – Pvt - Govt IVRCL HCC NCC Era Simplex

Private 2% 10% 35% 25% 61%

Government 98% 90% 65% 75% 39%

Total 100% 100% 100% 100% 100%


Annexure 5 – Contract Type (Fixed, Pass on) IVRCL HCC NCC Era Simplex

Pass through 91% 85% 62% 100% 85%

Fixed 9% 15% 38% 0% 15%

Total 100% 100% 100% 100% 100%


Annexure 6 – Order Book (Rs bn) FY07 FY08 FY09 FY10e FY11e FY12e

IVRCL 70 128 145 170 213 268

HCC 93 102 144 132 116 93

NCC 73 114 122 151 192 222

Era 17 50 71 104 143 169

Simplex 51 90 100 122 147 168

Total 304 483 582 679 811 919


Annexure 7 – Book to Bill (x) FY07 FY08 FY09 FY10e FY11e FY12e

IVRCL 3.0 3.5 2.9 2.9 2.9 2.9

HCC 3.9 3.3 4.4 3.4 2.4 1.5

NCC 2.5 3.2 2.6 2.7 2.5 2.3

Era 2.2 3.9 3.6 3.4 3.5 3.1

Simplex 3.0 3.2 2.1 2.3 2.3 2.1




Annexure 8 – Working Capital Days Working Capital Days FY07 FY08 FY09 FY10e FY11e FY12e

IVRCL 96 106 117 122 120 120

HCC 124 150 159 151 140 140

NCC 83 75 99 99 99 99

Era 143 137 141 151 153 150

Simplex 106 85 70 84 85 86

JPA 71 47 54 66 75 86


Annexure 9 – Net Debt-Equity (x) FY07 FY08 FY09 FY10e FY11e FY12e

IVRCL 0.2 0.6 0.7 0.7 0.7 0.7

HCC 1.5 1.6 2.1 1.2 1.5 1.5

NCC 0.4 0.4 0.7 0.5 0.7 0.8

Era 2.1 2.1 1.8 1.3 1.2 0.9

Simplex 2.3 0.8 1.2 1.2 1.2 1.1

JPA 1.6 1.5 1.6 1.2 1.1 1.0


Annexure 10 – EBITDA Margin (%) FY07 FY08 FY09 FY10e FY11e FY12e

IVRCL 10.1 9.9 8.6 9.3 9.5 9.5

HCC 9.1 11.9 13.0 13.5 13.2 13.0

NCC 9.4 10.4 9.0 10.0 10.1 10.1

Era* 17.4 17.9 14.8 15.9 14.9 14.4

Simplex 9.5 10.2 9.1 9.7 9.8 9.8

JPA* 21.9 19.8 25.8 20.0 21.0 21.4

Source: Anand Rathi Research. * Construction Division

Annexure 11 – PAT Margin (%) FY07 FY08 FY09 FY10e FY11e FY12e

IVRCL 6.1 5.7 4.6 4.0 4.5 4.5

HCC 3.4 2.0 2.6 3.7 3.7 3.8

NCC 5.3 4.7 3.7 4.2 4.5 4.6

Era* 8.6 5.8 4.9 5.9 5.5 5.7

Simplex 3.1 3.2 2.7 2.7 3.1 3.5

JPA* 10.9 10.8 15.0 10.8 11.5 11.5

Source: Anand Rathi Research. * Construction Division

Annexure 12 – EBITDA Margin constituents (1H10) (%) IVRCL NCC Simplex HCC Era JPA

PAT 3.6 3.6 2.3 2.6 4.8 6.4

Tax 1.7 1.7 1.3 0.5 2.4 2.1

Depreciation 1.1 1.1 3.3 2.7 1.4 2.7

Interest 3.2 2.9 2.8 4.8 5.0 4.3

EBITDA Margin 9.7 9.3 9.7 10.6 13.6 15.5




Annexure 13 – Revenues (Rs m) FY07 FY08 FY09 FY10e FY11e FY12e

IVRCL 23,059 36,606 48,819 58,139 73,836 92,295

HCC 23,576 30,828 33,137 39,433 49,291 61,614

NCC 28,711 34,729 41,514 48,987 61,233 79,603

Era* 7,623 12,685 19,962 30,941 41,152 54,732

Simplex 17,110 28,328 46,882 52,508 65,110 80,736

JPA* 16,590 17,947 29,439 45,870 52,761 41,949

Source: Anand Rathi Research * Construction Division

Annexure 14 – PAT (Rs m) FY07 FY08 FY09 FY10e FY11e FY12e

IVRCL 1,415 2,105 2,260 2,344 3,336 4,140

HCC 793 617 868 1,445 1,817 2,248

NCC 1,519 1,619 1,539 2,057 2,695 3,570

Era* 657 736 981 1,821 2,281 3,112

Simplex 537 901 1,268 1,457 2,069 2,889

JPA* 1,801 1,934 4,414 4,954 6,078 4,833

Source: Anand Rathi Research * Construction Division

Annexure 15 – Operating Cash Flows (Rs m) FY07 FY08 FY09 FY10e FY11e FY12e

IVRCL (4,671) (4,111) (1,230) (164) (982) (1,067)

HCC (6,505) 572 (1,237) 1,192 257 (1,487)

NCC 4,960 (3,926) (2,314) 2,047 (2,590) 437

Era (2,421) 16 (3,108) (1,764) 455 (720)

Simplex (545) (74) (208) 183 749 523

JPA 8,598 9,170 6,079 6,692 14,060 17,292


Annexure 16 – Free Cash Flows (Rs m) FY07 FY08 FY09 FY10e FY11e FY12e

IVRCL (5,948) (5,737) (3,373) (764) (2,482) (2,567)

HCC (10,228) (1,621) (3,929) (808) (1,743) (3,487)

NCC 2,369 (5,518) (2,381) 1,047 (3,590) (563)

Era (5,219) (3,587) (8,475) (4,504) (1,785) (2,460)

Simplex (2,285) (3,635) (5,123) (1,367) (851) (1,127)

JPA (10,677) (21,086) (36,707) (16,398) 940 6,572


Annexure 17 – Core Return ratios* Core RoE (%) Core RoCE (%)

FY06 FY07 FY08 FY09 FY06 FY07 FY08 FY09

IVRCL 43.6 22.8 18.2 16.7 18.1 16.9 16.6 14.4

HCC 14.6 10.7 8.4 12.1 9.0 6.2 10.7 10.8

NCC 18.2 21.4 20.4 15.4 15.5 18.9 19.8 15.4

Era 19.6 29.0 33.4 30.3 22.0 17.9 17.8 16.1

Simplex 24.5 21.3 17.8 15.6 18.1 16.5 20.0 19.0

Source: Anand Rathi Research * Adjusted for investments in BOT, real estate, others

Appendix 1 Analyst Certification The views expressed in this research report accurately reflect the personal views of the analyst(s) about the subject securities or issuers and no part of the compensation of the research analyst(s) was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) in this report. The research analysts, strategists, or research associates principally responsible for the preparation of Anand Rathi Research have received compensation based upon various factors, including quality of research, investor client feedback, stock picking, competitive factors, firm revenues and overall investment banking revenues.

Anand Rathi Ratings Definitions

Analysts’ ratings and the corresponding expected returns take into account our definitions of Large Caps (>US$1bn) and Mid/Small Caps (<US$1bn) as described in the Ratings Table below.

Ratings Guide Buy Hold Sell Large Caps (>US$1bn) >20% 5-20% <5% Mid/Small Caps (<US$1bn) >30% 10-30% <10%

Anand Rathi Research Ratings Distribution (as of 2 Nov 09) Buy Hold Sell Anand Rathi Research stock coverage (98) 53% 12% 35% % who are investment banking clients 8% 0% 0% Other Disclosures This report has been issued by Anand Rathi Financial Services Limited (ARFSL), which is regulated by SEBI.

The information herein was obtained from various sources; we do not guarantee its accuracy or completeness. Neither the information nor any opinion expressed constitutes an offer, or an invitation to make an offer, to buy or sell any securities or any options, futures or other derivatives related to such securities ("related investments"). ARFSL and its affiliates may trade for their own accounts as market maker / jobber and/or arbitrageur in any securities of this issuer(s) or in related investments, and may be on the opposite side of public orders. ARFSL, its affiliates, directors, officers, and employees may have a long or short position in any securities of this issuer(s) or in related investments. ARFSL or its affiliates may from time to time perform investment banking or other services for, or solicit investment banking or other business from, any entity mentioned in this report. This research report is prepared for private circulation. It does not have regard to the specific investment objectives, financial situation and the particular needs of any specific person who may receive this report. Investors should seek financial advice regarding the appropriateness of investing in any securities or investment strategies discussed or recommended in this report and should understand that statements regarding future prospects may not be realized. Investors should note that income from such securities, if any, may fluctuate and that each security's price or value may rise or fall. Past performance is not necessarily a guide to future performance. Foreign currency rates of exchange may adversely affect the value, price or income of any security or related investment mentioned in this report.

This document is intended only for professional investors as defined under the relevant laws of Hong Kong and is not intended for the public in Hong Kong. The contents of this document have not been reviewed by any regulatory authority in Hong Kong. No action has been taken in Hong Kong to permit the distribution of this document. This document is distributed on a confidential basis. This document may not be reproduced in any form or transmitted to any person other than the person to whom it is addressed.

If this report is made available in Hong Kong by, or on behalf of, Anand Rathi Financial Services (HK) Limited., it is attributable to Anand Rathi Financial Services (HK) Limited., Unit 1211, Bank of America Tower, 12 Harcourt Road, Central, Hong Kong. Anand Rathi Financial Services (HK) Limited. is regulated by the Hong Kong Securities and Futures Commission.

Anand Rathi Financial Services Limited and Anand Rathi Share & Stock Brokers Limited are members of The Stock Exchange, Mumbai, and the National Stock Exchange of India.

© 2009 Anand Rathi Financial Services Limited. All rights reserved. This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of Anand Rathi Financial Services Limited.

Additional information on recommended securities/instruments is available on request.

india construction sector overweight nifty/sensex:...

Documents