Bharat Infrastructure Limited

SOTP Valuation Case Study 1

Bharat Infrastructure Limited
Transaction Overview
Hitarth scratched his head and took another sip of coffee. He listened to the rain splashing against
the glass building and sighed. Had he got access to the groups CFO, Hitarth wondered, he would
have received enough information to prepare a reasonable bid. Instead he was procrastinating by
checking his messages and studying the weather map of Mumbai. If only Neil were not on vacation,
Hitarth mused.
An alumnus of IIM Calcutta, Hitarths conviction on Indian growth story had made him turn down a
job offer in a London based bank during final placements in order to accept an M&A banking profile
in Mumbai. Unlike some of his less fortunate classmates, Hitarths career weathered the post-
Lehman crisis well. Having worked on over $1 billion worth of cross-border M&A deals, Hitarth
joined Firestorm Capital, an offshore private equity fund focused on India, in 2010. Firestorm Capital
was one of the best performing private equity firms in India, and Hitarth was part of its core
investment team.
Hitarths current assignment involved evaluating a potential investment in Bharat Infrastructure
Limited (BIL), a large Indian infrastructure conglomerate. Two days ago, Neil, a partner in Firestorm
Capital, had forwarded some information on the group and had requested Hitarth to prepare a
presentation on a potential private equity transaction in BIL. The transaction entailed a primary
investment of $25million in the group and a secondary purchase of 5% stake of an existing financial
investor.
Hitarths primary focus was to determine fair equity value of the company for the purpose of the
transaction as the deadline to bid for the transaction was nearing. Hitarth picked up the phone and
called his mentor, Prof. A. Mukherjee of IIM Calcutta.
The Indian Infrastructure Industry
The Indian Infrastructure Industry evolved from being only government funded to a public-private
partnership (PPP) model after the government opened up the sector for private investors in the
eleventh five year plan (2007-2012). This wave ended up with almost every large corporate house in
India having a significant exposure to infrastructure industry and a new crop of infrastructure funds
being raised. The twelfth five year plan (2012-2017) envisaged a requirement of USD 1 trillion of
investments (Exhibits 1 and 2) in the physical infrastructure of the country, out of which almost 50%
was planned to be funded by the private sector.
The share of private investment in the total investment in infrastructure rose from 22% in the Tenth
Plan (2002-2007) to 38% in the Eleventh Plan as large pools of foreign flows funded the balance
sheets of Indian infrastructure companies (Exhibit 3). However, as Indias GDP growth moved from
8-9% in 2009-2010 to sub-5% in FY2013 and FY2014, inflation rose and the Indian rupee depreciated,
the effect of implementation issues in infrastructure projects and lack of required reforms in the
sector magnified and eroded returns of most private equity infrastructure funds. Equity investments
in infrastructure dipped sharply thereafter leaving most companies with fractured balance sheets
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SOTP Valuation Case Study 2
and unfinished projects resulting in highest number of corporate debt restructuring cases in 2013.
The Indian Infrastructure sector soon became the synonym of crony capitalism.
But in 2014, as the new Modi government began laying the groundwork for structural reforms across
sectors, the infrastructure sector got rerated overnight and started witnessing huge foreign flows
into listed infrastructure companies. After a dismal performance of private equity investments in
infrastructure companies during the last wave, it was dj vu for Hitarth when he received an email
from Neil with information on BIL.
Company Background
Bharat Infrastructure Ltd (BIL) is a unique player in the Indian infrastructure space. The group was
founded by a few premier financial institutions in 1978. Over the years, the group diversified its
shareholder base to include other prominent Indian and international entities. BIL, having
pioneered the concept of public-private partnership model, evolved into an end-to-end solution
provider in various infrastructure segments such as transportation, energy, ports and urban
infrastructure. While the group is a sponsor and developer of projects in a wide array of
infrastructure sectors, its financial services arm continues to play an important role in the financing
of infrastructure projects. In addition, BIL is also playing an active role in the social infrastructure
sectors such as education, environment and employment generating schemes.
Exhibit 4 contains a brief presentation on the group.
Business Model
The group started its operations with two main verticals: financial services and infrastructure. As the
infrastructure segment developed across various sectors, projects were initially domiciled in
individual special purpose vehicles (SPVs). As an increasing number of projects came into its fold, the
management decided to restructure these projects into sector verticals. After a period of time, such
sector verticals, having achieved meaningful scale and critical mass, were spun off into independent
legal entities in the form of sector holding companies e.g. most road SPVs were grouped under a
road company and most energy SPVs were housed under a power holding company. This was an on-
going restructuring exercise and some of the sector projects were still held by BIL at present.
Exhibit 5 contains the holding structure details and BILs shareholding in underlying companies.
Exhibit 6 contains the abridged financial statements of the company. The groups strategic
investments into projects and sector platforms are available in Exhibit 7.
On closer scrutiny of BILs FY2014 annual report, Hitarth found that the group also owns an office
complex and a retail mall, from which it generates a rental income of INR 532mn and INR 657mn
respectively. In addition, BIL recently started the practice of charging royalty for its brand from its
operating subsidiaries and generated an income of INR 875mn from it in FY2014.
Roads Sector: Bharat Roads Limited
Bharat Roads Limited (BRL) is one of the largest BOT road operators in India with 6,000 km under its
management worth INR 150bn across 20 projects, 35% of which are operational, while the majority
of the remaining projects are expected to be operational in the next 2-3 years. Each project is
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SOTP Valuation Case Study 3
housed in an independent SPV. The company charges 3-4% of project cost for project advisory and
management services, which is paid by the SPV developing the project.
BRL has a good mix of annuity and toll projects, which positions it well to benefit from any upside in
toll collection due to accelerated economic growth; at the same time, the company is able to enjoy
stable cash flows from annuity projects. The momentum in road project awards is expected to pick
up, given the ambitious target of 25 km/day of road construction set by the government. BRL is
expected to be a key beneficiary of this.
BRL is listed on Indian bourses with a market capitalization of INR 58 billion as of July 31, 2014. A
road analyst had mentioned to Hitarth that the SOTP valuation of the companys BOT projects
coupled with the value of its engineering, procurement and construction (EPC) services business
(8xFY16E P/E) estimates the companys intrinsic value range from INR 75 to 82 billion.
The following is a summary of consensus estimates of the companys valuation parameters.

Exhibit 8 contains the consensus valuation estimates of BRLs peers.
Power Sector: Bharat Energy Limited
BIL created Bharat Energy Ltd (BEL) to house all energy related activities and investments to build a
platform that can be deployed to quickly agglomerate power generation capacities to become a
significant player in the Indian power market.
BEL is engaged in development of a number of power projects across the country on a variety of fuel
sources.

Capacity Fuel Source COD Project Cost D/E BELs Stake

MW

FY INR million

%
Project 1 600 Gas 2016 28,341 75% 50%
Project 3 400 Coal 2016 15,429 70% 5%
Project 4 1400 Coal 2018 74,328 80% 26%
Project 5 600 Coal 2018 31,295 80% 26%
Project 6 1800 Coal 2019 93,943 80% 26%
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SOTP Valuation Case Study 4
Project 7 400 Gas 2018 18,561 75% 50%
Project 8 80 Hydro 2016 6,048 70% 33%
Project 9 500 Coal 2017 26,000 80% 5%
Project 10 55 Hydro 2019 4,025 70% 100%
Project 11 20 Biomass 2016 1,093 70% 100%
Project 12 20 Biomass 2016 1,039 70% 100%
Project 13 60 Wind 2015 3,346 75% 100%
Project 14 80 Wind 2015 4,573 75% 100%
Project 15 150 Wind 2016 8,476 75% 100%
Project 16 400 Wind 2017 22,350 75% 100%
Project 17 300 Wind 2018 18,101 75% 100%

The status update of projects as of July 31, 2014 is mentioned in Exhibit 9.
Each power project is housed in a separate SPV and BEL acts as a holding company of all SPVs. BEL
also provides project advisory, bidding and development services in the power sector from which
BEL generated revenue of INR 500mn in FY2014, of which 70% is attributable to projects of its own
SPVs.
BEL had a debt of INR 20bn in its stand-alone balance sheet as of March 31, 2014 and is looking to
improve its debt-equity ratio in order to achieve financial closure for remaining projects. The
company is in the process of raising funds at the holding company level as well as at the SPV level.
The management of BEL told Hitarth that the company has already received bids from several
private equity players valuing the company between INR 25bn-30bn and the transaction is nearing
closure. Hitarth noted that it may be useful to compare valuation parameters of the companys
peers listed on Indian bourses mentioned in Exhibit 10.
Financial Services Sector: Bharat Finance Limited
Bharat Finance Limited (BFL) is a financial services company engaged in brokerage services, project
debt syndication, structured finance and corporate advisory services. BFL acts as a nodal agency for
BIL group for financing of all its infrastructure projects. Exhibit 11 contains key financials of BFL and
Exhibit 12 contains its peer comparison matrix. Hitarth wondered how he could use the given
information to value BFL.
Ports Sector: Bharat Ports Ltd
Bharat Ports Ltd (BPL) has been set up with the objective of consolidating existing port segment
assets in the group and to create a port sector platform. BPL is creating a diversified portfolio of
assets, services and strategic alliances through development and implementation of port
Bharat Infrastructure Limited
SOTP Valuation Case Study 5
infrastructure assets. As per Maritime Agenda 2020, the traffic at Indian ports is expected to grow at
a CAGR of around 14% in the next 10 years due to strong demand led by infrastructure and trade
growth.
Exhibit 13 contains the investments in the port sector made by BPL.
BPL had total assets of INR 4.1bn, net worth of INR 1.2bn and borrowings of 2.7bn as of March 31,
2014.
By the time Hitarth finished the phone call with Prof Mukherjee, he had formulated a framework to
value BIL. He opened his laptop and began examining the comps sheet for the infrastructure sector
prepared by a leading research house (Exhibit 14).

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SOTP Valuation Case Study 6
Exhibit 1: Projected Investment in Infrastructure during the Twelfth Five Year Plan

Exhibit 2: Sector-wise Investment Pattern: Eleventh and Twelfth Plan (INR Billion at current prices)

Source: Planning Commission
Exhibit 3: FDI in infrastructure over past few years (INR billion)


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SOTP Valuation Case Study 7
Exhibit 4: Investment Presentation




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SOTP Valuation Case Study 8


Exhibit 5: Holding Structure of BIL Group
Company Sector BILs Stake BILs Investment (INR mn)
BEL Power 90% 7,500
BFL Financial Services 90% 15,000
BRL Roads 45% 5,600
BPL Ports 85% 1,320

Exhibit 6: Abridged Financials of BIL as of Mar 31 , 2014
INR mn
Net Assets 3,700
Net Investments 69,680
Current Assets (ex cash) 6,238
Cash and Cash Equivalents 6,764
Net Worth 24,760
Secured Loans 48,325
Unsecured Loans 5,625
Current Liabilities 7,672
Revenue 12,355
PAT 3,245


Bharat Infrastructure Limited
SOTP Valuation Case Study 9
Exhibit 7: BILs Strategic Equity Investments
Name of Company Sector Cost as of Mar 31, 2014 (INR mn)
Bharat Education Ltd. Education 175
Bharat Engineering Ltd Engineering 1495
Bharat Finance Ltd (BFL) Financial Services 10,960
Bharat Brokerage Services Ltd Financial Services 985
Bharat Investments Ltd Financial Services 2,525
Bharat Capital Ltd Financial Services 530
Bharat Consulting Ltd Infra Advisory 125
Bharat Ports Ltd (BPL) Ports 1,320
Supreme Ports Ltd Ports 350
Highpoint Shipyard Ltd Ports 565
Bharat Logistics Ltd Ports 224
Bharat Energy Ltd (BEL) Power 2,560
Bharat Wind Power Ltd Power 965
Global Power Ltd Power 1,850
Gujarat Power Company Ltd Power 1,330
Orissa Power Ltd Power 795
Bharat Roads Ltd (BRL) Roads 4,530
North East Highway Ltd Roads 355
J&K Expressway Ltd Roads 11
Pune Metro Rail Ltd Roads 704
Bharat Technologies Limited Technology 60
Bharat Water Ltd Water 700

Exhibit 8: Peer Valuation Matrix for BRL

Road Company 13 11.6 1 0.9 8.2 8
Hindustan
Construction
NA NA 2.1 2.3 NA NA
IVRCL Infra NA NA 0.6 0.7 NA NA
Nagarjuna
Construction
36.5 13.9 0.7 0.7 1.9 4.9
Simplex Infrastructure 19.9 11.4 1 0.9 5.3 8.7
AVERAGE 10.7 2.2 1.1 1.1 NA NA


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SOTP Valuation Case Study 10
Exhibit 9: Status of BELs Power Projects
Project # Environmental Clearance? PPA Signed? Fuel Source Tied Up? Financial Closure?
1 Y Y Y Y
2 Y N N Y
3 Y N Y N
4 Y N Y N
5 N N N N
6 Y Y Y N
7 Y Y Y Y
8 Y N Y Y
9 N N N N
10 Y Y Y Y
11 Y Y Y Y
12 Y Y Y Y
13 Y Y Y Y
14 Y Y Y Y
15 Y N Y N
16 Y N Y N

Exhibit 10: Peer Valuation Matrix for BEL





Bharat Infrastructure Limited
SOTP Valuation Case Study 11
Exhibit 11: Key Financials of BFL
INR million FY2011 FY2012 FY2013 FY2014
Net Worth 6,304.0 6,481.1 7,248.7 8,010.5
YoY growth (%)

3% 12% 11%
Total Assets 41,888.5 33,306.5 33,810.2 42,809.0
YoY growth (%)

-20% 2% 27%
PBT

904.9 2,337.2 2,353.5
Taxes

287.9 764.1 725.2
PAT 842.0 617.0 1,573.0 1,628.4
YoY growth (%)

-27% 155% 4%
Dividends

366.0 805.5 866.5
YoY growth (%)

120% 8%
Shares Outstanding (mn) 131.6 132.8 132.8 132.8

Exhibit 12: Peer Valuation Matrix for BFL

Exhibit 13: Investments in Port Sector by BPL
SPV Investment (INR million) Stake (%)
Highpoint Shipyard Ltd 565 51%
Dahej Port Ltd* 125 25%
Khambat Port Ltd 1374 100%
Dahej SEZ 849 100%
*Listed on Indian stock exchange with a market cap of INR 1.2 bn as of July 31, 2014.





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SOTP Valuation Case Study 12
Exhibit 14: Infrastructure Sector Valuation Matrix
P/E (x) EV/EBITDA (x) P/B (x) ROE (%)
2015E 2016E 2015E 2016E 2015E 2016E 2015E 2016E
Highways
Sadbhav Engineering 27 20.2 11.3 9.7 2.8 2.4 11 12
IL&FS Transportation 9.8 9.1 9.7 8.4 0.9 0.8 9 10
IRB Infrastructure 11.4 10.6 7 6 1.6 1.4 14 14
Ashoka Buildcon 20.5 18.3 10.1 7.3 1.7 1.5 8 9
Diversified Infra
GMR - - 12.8 9.3 1.7 1.7 -11 -3
JPA 68.2 15.7 9.8 8.5 1.2 1.2 3 8
JSPL 11.5 9.4 8.2 7 1.2 1.1 11 12
EPC
Punj Lloyd - - 6 5.5 0.6 0.6 -3 -4
KEC International 15.8 11.9 7.4 6.3 2.2 1.9 15 17
Kalpataru Power 12.7 11 7.3 6.2 1.1 1 9 10
Engineers India 20.1 16.5 18.7 11.9 3.6 3.2 19 20
Logistics
Adani Ports 20.9 16.4 15.4 12.9 4.3 3.5 23 23
Concor 19.9 17.3 15 12.8 2.9 2.6 15 15