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Infrastructure Developers
THEMATIC
Analyst contacts
Nitin Bhasin
Tel: +91 22 3043 3241 nitinbhasin@ambitcapital.com
Bhargav Buddhadev
Tel: +91 22 3043 3252 bhargav.buddhadev@ambitcapital.com
Chhavi Agarwal
Tel: +9122 3043 3203 chhaviagarwal@ambitcapital.com
Diversified Developers Reliance Infra JPA GMR GVK Gammon Infra Road Developers IRB ITNL Utilities Reliance Power Adani Power Lanco Tata Power Torrent Power CESC JSW Energy 2.1 1.6 0.7 1.6 1.8 1.1 1.7
Source: Company, Ambit Capital research, Bloomberg, Note P/B multiple data as on March 21, 2011 Note: Strong, Relatively strong, Relatively weak
Average,
Ambit Capital and / or its affiliates do and seek to do business including investment banking with companies covered in its research reports. As a result, investors should be aware that Ambit Capital 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.
Please refer to disclaimer section on the last page for further important disclaimer.
Infrastructure Developers
CONTENT
Multiple issues leading to disappointing returns .................. 3 The well-known infrastructure growth story continues........ . 7 Valuations are attractive........................................................ 8 Should investors buy infrastructure developer stocks? ......... 9 Key triggers to watch out for ................................................ 19
Infrastructure Developers
to
Whilst the BSE100 has declined by ~6% in the last six months, the infrastructure developers have been amongst the worst performers with stock prices declining by 19-57% (ex-Tata Power). We believe that besides the macro issues which are dragging the market down, infrastructure stocks are also bearing the brunt of multiple sector-specific regulatory issues (such as in airports, land and environmental clearances in power) alongside the impact of rising funding costs for debt and the inability to raise equity given the state of the stock market.
CMP Rs 624 83 37 24 17 54 185 280 107 210 132 61 119 111 36 101 1,230 241 297 72
Mkt cap (Rs bn) 167 176 143 38 12 11 61 15 16 41 264 26 333 241 88 38 292 114 37 118
3m return -23 -19 -20 -39 -18 -26 -17 -3 -12 -30 -9 3 -21 -12 -41 -27 -4 -13 -19 -27
6m return -40 -31 -41 -49 -33 -57 -40 NA -31 -35 -19 NA -23 -21 -51 -39 -5 -29 -26 -43
1yr return -39 -43 -36 -42 -31 -53 -30 NA -17 NA -10 NA -17 -3 -29 -44 -8 -20 -25 -34 2 1 1 -16 -11
4 yr CAGR 8 4 0 -5 NA NA NA NA 27 NA NA NA NA NA 21 NA 25 41 -2.9 NA 9 10 10 NA 10
5 yr CAGR -1 5 NA -2 NA NA NA NA 30 NA NA NA NA NA NA NA 17 NA -2.3 NA 10 10 10 NA 9
Source: Ambit Capital research, Bloomberg, Note (a) Share prices and market cap data are as on 21 March, 2011
Infrastructure Developers
Source: Company, Capitalline, Ambit Capital research. Note (a) * FCF is defined here CFO-Capex
Infrastructure Developers
Multiple issues
Whilst the Public Private Partnership (PPP) initiative promoted by the Government is gaining momentum, (private sector share targeted to increase to 36% in XIth Five Year Plan v/s 20% in the Xth Five Year Plan), the projects under the PPP model are facing several challenges which have resulted in execution slippages. We have divided these challenges into two buckets: (a) generic issues that are common across all the sectors; (b) specific sector issues in roads, railways, airports and power, which have led to skewed private participation in these sectors.
Exhibit 4: Challenges in the PPP model
Generic Land acquisition problems, environmental and other regulatory issues clearances, lack of adequate capital (debt and equity), increasing cost of (applicable to capital (rising interest rates), delay in receiving financial closure.
all sectors)
Roads
Ports
Airports
Intense competiton, Intense competition, poor traffic studies, non-availbility of NHAIs limited contractors to carry organisational out the project in bandwith, sporadic remote areas. project bids by developers.
Despite good MCAs, Uncertainty there is a lack of around tariffs support from State and returns Governments, potential, Land uncertainity on usage and sale connecting proceeds infrastructure sharing
6,586 2,787 3,451 2,008 2,462 1,117 406 361 90 1,273 20,541
6,196 20,542
Infrastructure Developers
Structural problems at NHAI: NHAIs limited organizational bandwidth has resulted in poor project structuring, delayed awards and inadequate administration of the national highways. Moreover, our primary data contacts highlight a shortage of technical strength within the NHAI; and the Governments announcements of restructuring within NHAI are not visible at the ground level. Sporadic project bids: Most road developers still have a contractors mindset they place bids for projects with the construction opportunity in mind and with an objective to maximize current profits rather than focus on the life cycle of the road asset. Improper traffic studies and lower estimates of operations & maintenance (O&M) costs for the project (in order to be the lowest bidder) at the developers end, lower the project IRR. Intense competition: Increasing competition from the small and international players has lowered project returns in the sector. On the national and state highway projects, about 70 mid-to-large sized Indian and foreign contractors are working. Not only are the smaller Indian construction companies becoming developers but also international companies (from Israel, Japan and South Africa) are entering the Indian markets in hordes. Recently a number of European and Asian players such as Atlantis, Vinci and Orascom have announced JVs for their Indian road development ambitions.
Infrastructure Developers
Power and roads continue to form the largest share of the pie
Combined together the total Government spend in the two sectors is expected to be ~Rs20tn in XIIth Five year Plan (assuming share of each sector remains the same as the XIth Five year Plan), an opportunity of at least ~Rs7.4tn for the private sector (considering contribution of private participation to remain at 44% in power and 16% in the roads segment.)
Exhibit 7: Power and roads will continue to be the largest opportunities in XIIth plan
XIth Plan (revised est.) Sector/Metric Rs bn Electricity Roads and Bridges Telecommunications Railways Irrigation Water supply and sanitation Ports Airports Storage Gas Total 6,586 2,787 3,451 2,008 2,462 1,117 406 361 90 1,273 20,542 US$bn @ % Rs 45/$ share 165 70 86 50 62 28 10 9 2 32 514 32 14 17 10 12 5 2 2 0 6 XIIth Plan (estimates) Rs bn 14,630 6,190 7,667 4,460 5,470 2,481 903 803 199 2,828 US$bn @ Rs 45/$ 325 138 170 99 122 55 20 18 4 63 1,014 Opportunity for private sector in XIIth plan % share % based Rs bn share on XIth plan 32 14 17 10 12 5 2 2 0 6 100 6,387 1,019 6,300 184 0 11 723 514 190 1,173 16,501 44 16 82 4 0 0 80 64 96 41 36
100 45,630
Source: Planning Commission , Ambit Capital research Note: (a) Our estimates of sector allocation in the XIIth Five Year Plan are based on the % share of the respective sectors in XIth Five Year Plan (b)Opportunity for private sector is based on the private sector share in the XIth plan.
Infrastructure Developers
Exhibit 8: Diversified players are trading at lower than their average one-year forward P/B multiples
7 6 5 4 3 2 1 0 Sep-07 May-09 Apr-07 Jul-08 Dec-08 Feb-08 Avg P/B multiple: Reliance Infra :1.3X GMR: 3.2X GVK: 2.3X
Exhibit 9: Power companies are trading at lower than their average one-year forward P/B multiples
6 5 4 3 2 1 Mar-10 Sep-07 Apr-07 Jul-08 May-09 Aug-10 Dec-08 Oct-09 Avg P/B multiple: Reliance Power : 2.6X Torrent: 2.1X Tata Power: 2.3X
Mar-10
Oct-09
Aug-10
Jan-11
Reliance Infra
GMR
GVK
Feb-08
Torrent Power
Source: Company, Ambit Capital research, Bloomberg Note (a) Reliance power is included from Feb-08
Exhibit 10: Road developers are trading at lower than their one-year forward P/B multiples
4 3 2 1 Aug-08 Aug-09 Aug-10 Feb-08 Feb-09 Feb-10 Feb-11 Avg P/B multiple: IRB : 2.8X ITNL: 2.5X
Exhibit 11: Port developer, Mundra, is trading at lower than its one-year forward P/B multiple
12 10 8 6 4 2 Sep-08 May-10 Mar-11
8
IRB
IL &FS Transport
Source: Ambit Capital research, Bloomberg Note(a) IL&FS Transport (ITNL) is included from April-10
Jan-11
Infrastructure Developers
The opportunity attracts competition: Given that roads and power generation require less capital and have a larger share in the total infrastructure spending, they suffer from stiff competition compared to other sectors. Ports, railways and power transmission and distribution have lower competition. Revenue Visibility: Whilst power generation companies have assured revenues for a considerable period of time (due to long term power purchase agreements (PPAs)), toll roads suffer from the problem of revenue visibility in the long run. Moreover, poor traffic studies and rising O&M costs in the later years have accentuated the problem for the toll road developers. Power transmission and annuity roads are assets which receive guaranteed payments from the Government. Increasing share of merchant power in the independent power producer (IPP) model reduces revenue visibility in the power generation sector. Better regulatory system: Sectors with established and well functioning regulatory bodies and clear contractual agreements have lower regulatory risks versus others. We believe that power has lower regulatory risks compared to roads, which are suffering from inefficiencies at the NHAI. Financial risks: Assured off-take and pass though of interest costs (in the case of a case II bidder) leads to the power generation sector being loaded with low financial risks. Rising input costs and interest costs with no pass through agreements have increased the financial risks for the roads and the railways (metros) sectors. Project returns: Projects in the power generation sector have higher returns driven by the incentive payments and increasing use of merchant power with IPPs; toll returns are declining on account of lower-thanexpected traffic growth and rising input and interest expenses.
Infrastructure Developers Exhibit 12: The Power sector offers better revenue visibility and higher returns
Sectors Power Generation Power T&D Roads Toll Roads Annuity Airports Ports Urban Infrastructure Railways (Metro)
Source: Ambit Capital research, industry, Note: Strong, Relatively strong, Average, Relatively weak
Competition
Revenue Visibility
Regulatory risks
Financial risks
Exhibit 13: Porter analysis of Indian power industry Bargaining power of suppliers MEDIUM Competition has started increasing recently with new entrants like L&T, Thermax, BGR and JSW. Put together, these players are planning to have capacity in excess of 10GW compared with BHELs 15GW Demand for equipment from IPP,s on the other hand, has remained constant at a run rate of 20GW on a per annum basis. Competitive outlook POSITIVE From a competitive perspective, Indian power generation is an almost ideal sector characterised by excess demand on the back of headwinds in new capacity addition and high barriers to entry. Bargaining power of buyers LOW Buyer power is low as there is a huge shortage of power Industrial customers have no bargaining power against State Electricity Boards as their offtakes are meagre compared to the large corporates (who have some bargaining power at least)
Barriers to entry HIGH Power generation is a capex heavy industry (roughly $1m of capex required to install 1MW) and hence availability of finance acts as a barrier. Moreover, availability of fuel for thermal plants is also a big challenge especially after Coal India made a statement that they will not honour linkages. Hence large scale entry into Indian power generation is difficult and takes deep pockets, political connections and patience.
Source: Ambit Capital research, Industry
Threat of substitution LOW Neither solar nor hydropower has developed sufficiently in India to be a threat to thermal power. Alternative sources of energy in India are not available at low enough prices or large enough quantities to be a viable proposition for commercial buyers of power.
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Infrastructure Developers Exhibit 14: Porter analysis of the Indian roads industry
Bargaining power of suppliers MEDIUM Competitive intensity HIGH Bargaining power of buyers MEDIUM
Capital providers of debt and equity (banks, funds PE, FIs etc.) have higher bargaining power given lack of liquidity in the financial market. Rising interest rates have also made the debt availability difficult. The construction companies providing the EPC work are large in number, hence have low bargaining power.
Barriers to entry MEDIUM
A large number of Indian/international players are bidding for limited road projects as NHAI has slowed the pace of awarding projects. A large number of European and Asian players such as Atlantis, Vinci and Orascom have announced JVs with Indian companies for their Indian roads development ambitions Experienced players like IRB, GMR with a large number of operational assets have gained the confidence of regulators and are superior to others.
Improving Unchanged Deteriorating
State/rural governments and NHAI are the main clients Given that Government needs to increase private sector participation, which has remained subdued over 2009 and 2010, the bargaining power of Government has reduced. However Governments new Model Concession Agreement (MCA) caps returns and limits the private sectors bargaining power
Low capital requirement compared with other infrastructure sectors has attracted many small and large EPC players who have entered in partnership with other big national/ international players/financial institutions. Large-sized road projects of NHAI requiring huge capital, limits the entry of small players with low balance sheet
Source: Ambit Capital research, Industry
Given the Governments policy to promote private sector participation in the roads infrastructure, it will not execute the road projects on its own. Hence, road developers face a low threat of substitution.
Power sector
Our Power analyst, Bhargav Buddhadev, in his thematic dated January 19, 2011 The Good, The Bad & The Ugly, had mentioned that on a qualitative basis, Tata Power and GVK Power are the clear winners, as both have the right mix of experience, aggression, offtake and raw material linkages tied up. It is also pertinent to note that both of these companies have zero reliance on Chinese equipment. Other companies that stand out in the analysis are Torrent Power, CESC and GMR Infra. On the quantitative balance sheet parameters, Torrent Power clearly emerges as a winner on the back of strong cash flow generation coupled with high return ratios. Besides Torrent Power, Tata Power, JSW Energy and CESC too score well on these parameters signifying the underlying strength of their balance sheets.
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Infrastructure Developers
RoCE
RoE
Overall score
JSW Energy Adani CESC Torrent Power Lanco Infra Tata Power GVK GMR
Source: Company, Ambit Capital research, Industry
Financial control
Cost efficiency
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Infrastructure Developers
Level III. Strong association of the promoter with one or more politician: GMR, Reliance Infra, Reliance Power, Gammon, JPA, KSK, Adani and IRB, ITNL, Ashoka Buildcon, IVRAH, Gujarat Pipavav, Sadbhav
Level IV. Ex-members of ministry or Government bodies as directors or senior management: GVK, Jaiprakash, Mundra port, Tata Power, Reliance Power, Gammon, KSK, ITNL, Ashoka Buildcon, IVRAH, Gujarat Pipavav, Sadbhav
Roads sector With a large number of operational assets, better operational management and strong relationships we find that IRB, GMR and IL&FS Transport Network (ITNL) are the strongest players in the roads sector.
Exhibit 19: Positioning of listed players in the road segment
Cos ITNL IRB Ashoka Buildcon GMR L&T Infra Sadbhav IVRAH Gammon Infra Reliance Infra GVK Lanco JPA Experi ence (yrs) 11 13 14 10 10 6 6 10 5 8 3 1 Operatio nal (kms) 1527 701 454 421 315 297 97 142 97 90 0 0 Under devp. (kms) 2435 549 446 309 789 369 410 100 873 83 163 1239 D/E (x) 1HFY11 2.1 1.7 1.8 1.6 0.1 0.9 0.3 2.8 0.5 1.5 1.0 2.2 EBITDA Margins (%) (9MFY11) 31% 87% 80% 83% NA NA NA NA 29% 66% NA NA
Exhibit 20: Competitive positioning amongst players (this is taken from the adjacent table)
Companies ITNL IRB Ashoka Buildcon GMR L&T Infra Sadbhav IVRAH Gammon Infra Reliance Infra GVK Lanco JPA Source: Company, Ambit Capital research, Industry Note: Strong, Relatively Strong Average
listed
Market Managing Cost of Negotiating share Finance operations Power Overall (35%) (20%) (25%) (20%)
Source: Company, Ambit Capital research, Industry, Notes: (a) Experience is taken based on the number of years company has been in the road BOT segment (b)Debt:Equity is calculated for the entire business (c) EBITDA margins are the margins in the roads segment , we have taken EBIT margins for Reliance Infra and ITNL in roads
Relatively weak
Airports and Ports Due to the substantial capital requirements, there are very few players in the airports and roads segments. Whilst GMR is the strongest player in the airports sector with three operational airports, Mundra is a leading player in the ports sector. Given that the Government itself upgrades the existing assets or creates smaller assets through private participation, airports and ports will continue to remain relatively smaller opportunities.
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Infrastructure Developers
of
different
players
in
the
Exhibit 22: Competitive positioning amongst the listed players (this is taken from the adjacent table)
Companies GMR GVK IRB
Source: Company, Ambit Capital research Note: Strong, Relatively Strong Average Relatively weak
Cos
Market Managi Cost of Negotiati position ng Overa operatio on power ing Finance ll rank ns (30%) (20%) (30%) (20%)
Source: Company, Ambit Capital research, Industry, Notes: (a) Experience is taken based on the number of years company has been in the airports BOT segment (b) Debt:equity is calculated for entire business
Exhibit 24: Competitive positioning amongst the listed players (this is taken from the adjacent table)
Cos Mundra Gammon infra Gujarat Pipavav Source: Ambit Capital research, Industry Note: Strong, Relatively Strong Average Relatively weak Market Managing Cost of Negotiati Overall positioning Finance Operations on power rank (30%) (20%) (30%) (20%)
Diversified players In order to assess the overall competitive advantage of the diversified players, we have considered three parameters: (a) the companys exposure to the respective sector (based on total project cost); (b) competitive positioning of the company in the respective sector; and (c) the asset creation opportunity of the sector. GMR is the strongest diversified developer followed by GVK & L&T Infra.
Exhibit 25: Diversified different sectors
Diversified Developers Reliance Infra GMR GVK Gammon Infra L&T Infra
players'
exposure
to
Total 100% 100% 100% 100% 100%
Exhibit 26: Overall ranking of the diversified players (this is taken from the adjacent table) xx
Company/Metric Reliance Infra GMR GVK Gammon Infra L&T Infra NA NA NA Power (30%) Roads Airports (15%) (25%) Ports (30%) NA NA NA Overall Ranking
Power Roads Airports Ports 28% 58% 42% NA 53% 70% 11% 6% 80% 33% 2% 31% 52% NA NA NA NA NA 20% 13%
Source: Ambit Capital research, Company, Notes: (a) Exposure to a particular sector is based on the total cost of all projects undertaken by the company in that sector
Source: Ambit Capital research, Company, Notes: (a) We have assigned percentages to respective infrastructure sectors based on opportunities in that sector Note: Strong, Relatively Strong Average Relatively weak
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Infrastructure Developers
Overall
Strongest players Torrent Power, Tata Power Torrent Power, Tata Power, Reliance Power, GVK IRB, GMR, ITNL IRB, ITNL GMR, GVK Mundra Reliance Infra, L&T Infra
companies
with
attractive
Whilst DCF is the best valuation method to value a public infrastructure asset (long duration assets with unique characteristics), lack of data for a number of inputs required for each BOT project makes the DCF valuation difficult. Therefore, we have used relative valuations to compare the infrastructure companies across sectors. We have used EV/EBITDA and P/B multiples to value these companies as we believe that EV/EBITDA reflects the infrastructure asset duration and the risk associated with it. For companies in the roads and the power sectors, P/B multiple is preferred, as it captures the equity returns (RoEs) which are more predictable and easy to calculate for these BOT assets. Overall, companies with lower risk, lower tax rates, longer duration assets and higher growth should trade at a multiple to others. Therefore, we believe that diversified players with power and airport assets should trade at a premium to road developers.
15
Infrastructure Developers Exhibit 28: Relative valuation of infrastructure developers across different sectors
CMP Mkt cap Mkt cap Company Diversified Developers Reliance Infra JPA GMR GVK Gammon Infra Average Road Developers IRB ITNL Average Port Developers Mundra Utilities Reliance Power Adani Power Lanco KSK Tata Power Torrent Power CESC JSW Energy Average All Average 119 111 36 101 1,230 241 297 72 333 241 88 38 292 114 37 118 7,388 5,352 1,950 837 6,486 2,528 825 2,616 43.0 36.8 13.5 18.0 15.5 12.0 12.4 12.6 21.6 29.7 44.1 10.0 9.0 10.4 12.9 9.7 9.7 7.7 15.1 14.5 17.4 7.0 6.8 8.3 11.5 9.6 7.0 8.2 9.6 8.5 99.6 27.5 7.6 14.6 10.5 7.0 7.7 9.9 24.9 14.3 30.5 7.2 4.8 8.9 7.8 6.1 6.9 5.4 10.3 8.2 8.1 4.4 3.6 7.2 6.6 6.1 4.6 5.4 5.8 5.7 1.9 3.8 2.2 1.3 2.2 2.4 0.8 2.1 2.1 1.9 1.8 2.8 1.7 1.2 1.9 1.9 0.8 1.6 1.7 1.6 1.5 2.0 1.3 1.0 1.7 1.6 0.8 1.4 1.4 1.3 132 264 5,855 30.2 19.6 14.9 22.3 15.1 11.9 6.4 5.1 3.9 185 210 61 41 1,362 907 12.7 10.2 11.4 11.3 7.9 9.6 10.6 6.2 8.4 8.1 7.6 7.8 6.4 5.7 6.0 5.2 4.1 4.7 2.5 2.0 2.2 2.1 1.6 1.8 1.7 1.3 1.5 624 83 37 24 17 167 176 143 38 12 3,708 3,921 3,178 853 271 10.5 18.7 319.6 22.1 83.8 90.9 9.2 15.3 61.8 15.2 47.9 29.9 8.0 11.2 17.8 9.9 29.9 15.4 15.4 13.7 19.7 15.6 16.7 16.2 10.7 8.9 15.2 12.2 7.7 10.9 8.1 6.7 10.0 7.3 5.7 7.6 0.7 1.9 1.8 1.1 1.8 1.5 0.7 1.6 1.8 1.1 1.7 1.4 0.6 1.2 1.3 0.9 1.6 1.1 Rs P/E (x) EV/EBITDA (x) P/B (x) Rs bn US$ mn FY11E FY12E FY13E FY11E FY12E FY13E FY11E FY12E FY13E
Source: Company, Ambit Capital research, Bloomberg , Note (a) We have taken consensus data as on March 21,2011
Amongst the diversified players we find GVK and Reliance Infra to be undervalued on the P/B multiple. Whilst GMR is trading at a premium both on P/B and EV/EBITDA multiple, we believe that GMR deserves to trade at a premium given that it has a large number of higher RoE generating operational assets v/s peers. Also, JPA and Gammon infra are overvalued on the P/B multiple, they are undervalued on the EV/EBITDA multiple. Amongst the power players, we find that whilst Adani power is trading at a significant premium to peers, Torrent Power and Tata Power are trading at a slight premium to peers. As highlighted by our Power analyst, Bhargav Buddhadev, in his thematic dated January 19, 2011 The Good, The Bad & The Ugly, Torrent Power deserves to trade at a premium as it is an attractive franchise and has the best operational efficiency. However, he believes whilst Adani Power is trading at a premium; consensus is not factoring in the potential execution slippages and low PLF levels of the company. Our key takeaways from the relative valuation exhibits of diversified players and power companies shown on the next page are: Diversified players 1) On P/B compared to ROE, Gammon Infra appears over valued and Reliance Infra appears undervalued 2) On Revenues/Capital employed compared to EV/EBITDA , Reliance Infra is at a premium and GVK is undervalued
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Infrastructure Developers
Power Companies 3) On P/B compared to ROE, appears undervalued Adani appears overvalued and CESC
4) On Revenues/Capital employed compared to EV/EBITDA, Tata power is trading at a premium while Lanco is undervalued
Exhibit 29: Gammon Infra appear overvalued
2.0 1.7 P/B FY12E 1.4 1.1 0.8 0.5 0% 4% 8% 12% 16% 20% ROE(FY10)
Source: Company, Capitalline, Ambit Capital research, Bloomberg Note: Size of the bubble denotes capital employed at FY10-end
Exhibit 30: Reliance Infra Power business places it at a premium, GVK appear undervalued
1.6
Gammon Infra GMR GVK Reliace Infra
Revenue/CE (FY10)
JPA
Reliance Infra
GMR
GVK
10 12 EV/EBITDA (FY12E)
14
16
Source: Company, Capitalline, Ambit Capital research, Bloomberg Note: Size of the bubble denotes ROCE at FY10-end
Exhibit 31: Adani Power appears overvalued and CESC appears undervalued
3.5
P/B FY12E
Revenue/CE (FY10)
Adani
Tata Power
Lanco
16%
20%
24%
28%
10
ROE(FY10)
Source: Company, Capitalline, Ambit Capital research, Bloomberg Note: Size of the bubble denotes capital employed at FY10-end
EV/EBITDA (FY12E)
Source: Company, Capitalline, Ambit Capital research, Bloomberg Note: Size of the bubble denotes ROCE at FY10-end
17
Infrastructure Developers
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Infrastructure Developers
Source: Ambit Capital research, Company, Bloomberg Notes: (a) Share prices have been indexed to 100., IRB share prices are available from 22 Feb 2008 (b) We have used BBB 10-year corporate bond rates because we find that most of the BOT asset are BBB-rated; (c) We have not used SBI PLR because we believe it is not a true indicator of the interest rates at which developers borrow funds for their BOT assets
Procedural acceleration: Land acquisition issues, environmental clearance problems and lengthy approval procedures have resulted in long execution cycles for infrastructure projects, especially in the power and the roads sectors. Over 65% of the NHAIs projects have been impacted by time and cost overruns. Any significant improvement in the currently stalled projects due to speed up in the procedural formalities can improve the revenue visibility and cash flow generation from existing projects. Development of a long-term bond market: Creation of a long-term bond market can increase the availability of funds for the sector and reduce the dependence on banks. Given that infrastructure projects have long gestation periods of 25-30 years, the average debt tenure for the infrastructure sector should be ~10-15 years. However, the Indian banks are reluctant to lend for such a long duration, thereby reducing the average loan tenure to 5-6 years, which is around 50-70% of most of the concession agreements. Moreover, the restricted investment guidelines on the pension funds and life insurance companies limit the funds to be channelized to the infrastructure sector. The Government in its FY11-12 budget has announced an increase in the budgetary allocation to the infrastructure sector to Rs2.14tn (up 23% YoY), issuance of tax-free infra bonds worth Rs300bn by Government undertakings and increase in the FII limit for investment in corporate bonds issued in infrastructure sectors to US$40bn (earlier US$20bn). In our opinion these measures should increase funds availability for the sector. Availability of equity capital: Our primary data checks have highlighted that more than the rising interest rates, lack of availability of the capital has resulted in execution slippages in the BOT assets. Given the lack of sufficient cash flows from operations, asset developers have continued to depend on equity markets for funds. However, given the current liquidity crunch in the Indian markets and the disappointing financial performance of the developers, it is becoming difficult for
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Infrastructure Developers
developers to get capital for their projects. Therefore any improvement in the macro environment resulting in credit offtake can improve funds availability with the developers.
Source: Ambit Capital research, Bloomberg, Notes: (a) We include L&T, Punj Lloyd, IVRCL, NCC, HCC and Simplex in model portfolio for EPC companies (weighted by market cap) and GMR, GVK, JP Associates, Reliance Infra, Tata Power and CESC in model portfolio (weighted by market cap) for developer companies
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Infrastructure Developers
Shariq Merchant
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Designation VP - Ins Equity VP - Ins Equity Senior Manager Equities VP - Ins Equity Director, Sales
Desk-Phone (022) 30433295 (022) 30433289 (022) 30433053 (022) 30433228 +44 (0) 20 7614 8374
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Infrastructure Developers
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