SECTORUPDATE

CONSTRUCTION
Competitionshowssignsofeasing
IndiaEquityResearch|Construction

NHAI recently awarded nine projects spread over ~1,050 km worth INR106bn. Our analysis of bids reveals a definite moderation in competitiveintensity,whichhasbeenamajorconcernoverthepastyear. Webelievethehighwayauthorityisontracktoaward~7,000kmprojects in FY12 with ~4,500 km already awarded. We reiterate Sadbhav Engineering(Sadbhav)andIL&FSTransportation(ITNL)asourtoppicks.

NHAIawards~1,050kmworthINR106bn
NHAI has awarded nine projects spread across ~1,050 km, worth INR106bn recently. Listedplayershavewonsixprojects;theirshareintermsoflength(km)andprojectcost standsat68%and63%,respectively.

Definitesignsofrecedingcompetitiveintensity
We believe competition in NHAI projects has definitely moderated compared to bids submittedsixninemonthsago.Thisisevidentinthelessernumberofbidders(1015in mostcasesandinsingledigitsforsomeprojectsopposedto1820playersearlier).Also, thedifferencebetweenL1andL2bidshasdipped.

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duetoconcernsonprojectfunding
Thelargenumberofprojectsalreadyawardedandconcernsoverfinancialclosurehave forceddeveloperstobemorerationalwhilebidding.Withcapitalmarketscontinuingto remainweak,thereareconcernswithregardstoequityinfusionforsomecompanies. Thegovernment,concernedabouthighpremiumspromisedbydevelopers,isplanning tomeetbankstogettheirperspectiveonfinancialclosureoftheprojectsawarded.We expectbankstobecomemorecautiousgoingaheadwithroadprojectsfunding;thiswill leadtodevelopersbeingmorecircumspectwhilebidding.

Roadprojectsspanningaround4,500kmawardedinFY12tilldate
NHAIhassofarawardedprojectsspreadover~4,500kmamountingto~INR450bn.We believeitwillaward~7,000kmofprojectsinFY12(against5,083kminFY11and3,351 kminFY10).
ParvezAkhtarQazi
+912240635405 parvez.qazi@edelcap.com

Ourtoppicks:SadbhavEngineeringandIL&FSTransportation
WelikeSadbhavforitssuperiorexecutionandworkingcapitalefficiency.WelikeITNL asitisahighqualityinfracompanywithawelldiversifiedprojectportfolioandremains one of the best plays on peaking interest rates. Additionally, both companies have beencautiousinbiddingfornewprojectsinthepastfewmonthsgiventheaggressive biddingbypeers.Boththesecompaniesstandagoodchancetobagafewprojectsover thenextfourfivemonthsascompetitioneases.

ManishSarawagi
+912240407575 manish.sarawagi@edelcap.com

RohitPatni
+912266233392 rohit.patni@edelcap.com

November30,2011 EdelweissSecuritiesLimited

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Construction
NHAIprojectawardresumes
Overthepasttwoweeks,NHAIhasawardednineprojectsspreadacross~1,060km,worth INR106bn.Biddingfortheprojectsreflectsadefinitemoderationincompetition(compared totheaggressiveearlierbids)bothintermsofnumberofplayerscompetingaswellasthe differencebetweenL1andL2bidders. Listedplayershavewonsixprojectsoutofthenineawardedrecently.Theirshareintermsof length(km)andprojectcoststandsat68%and63%,respectively.

Table1:RecentNHAIprojectsawarded
ProjectName Maharashtra/Karnataka BorderSangareddy Section HospetChitradurga Section CuttackAngulSection RaipurBilaspurSection AgraEtawahBypass EtawahChakeri (Kanpur)Section RampurKathgodam Section NHDP Length NHAIproject Phase (inKm) cost(INRbn) III 145 12.7 L1Bidderand premium L&TINR800mn L2Bidderand premium RamkyINR750mn L3Bidderand premium EsselAssigniaINR 720mn AshokaGVRINR410 mn L&TINR510mn L&TINR420mn EssarINR1210mn ITNLINR550mn C&CINR20mn NA GulfarINR594mn semiannualannuity

III III IVA V V III

120 10.3 112 11.2 127 12.2 125 12.1 160 15.7 93 7.9

RamkyINR630mn AshokaBuildconINR 610mn IVRCLAssetsINR450 mn RamkyINR1280mn OrientalINR920mn EraInfraINR340mn

L&TINR450mn NCCINR512mn EraInfraINR430 mn OrientalINR1220 NCCINR680mn EsselINR54mn

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BakhtiyarpurKhagaria Section LucknowRaebareilly Section Total

III IVB

113 16.4 70 7.6 1,065 106.1

EssarKNRVGFofINR 5,370mn EsselINR504mn semiannualannuity

NavyugaVGFofINR 5,680mn L&TINR561mn semiannualannuity

Source:Industry,Edelweissresearch

Overall,theNHAIhasawardedprojectsspreadover~4,500kmsofarinFY12worth~INR450 bn. Of these, the share of listed players in terms of length (km) and project cost stands at 59%and60%respectively.

Ourviewonrecentprojectsaward
We believe competition in NHAI projects has definitely moderated compared to bids submittedsixninemonthsago.Thisisevidentas: The number of bidders has dipped opposed to some of the earlier projects which had received bids from 1820 players. Most of the recent projects have received bids from 1015players.Infact,thenumberofbiddersinsomeprojectswasinsingledigits. The difference between L1 and L2 bids has dipped compared to earlier bids. The differencewasquitehighinsomeoftheearlierprojectsascanbeseenbelow:

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Construction
Table2:Stiffcompetitioninearlierprojects
Dateof award Apr11 NHAI Length projectcost (inKm) (INRbn) 88 5.3 L1Bidderand premium KetiConstruction PremiumofINR35 mn GannonDunkerley VGFofINR370 mn NKGPremiumof INR10mn L2Bidderand premium JMCVGFofINR 340mn GammonVGFof INR2,230mn VijayInfraVGFof INR690mn L3Bidderand premium MEILVGFofINR 400mn JMCVGFofINR 2,240mn PNCVGFofINR 990mn

Sl.No 1

Projectname KotaJhalawar

Jul2011

JabalpurLakhnadon

74

7.76

Aug11

RohtakJind

50

2.83

Source:NHAI,Industry,Edelweissresearch

Webelievethismoderationincompetitionisduetothefollowingfactors: Large quantum of project awards:Thequantumofprojectsawardedhasbeenhighat ~INR450bn.FY12islikelytoseethehighestnumberofprojectsawardedinthepastsix years. As expected, once a company wins a certain number of projects, its aggression leveldipsmarkedlyanditsfuturebidsarecomparativelymoderate.Thelargenumberof projectsalreadyawardedaswellasagoodprojectpipelinemeansthatcompanieshave becomemoreselectiveinbiddingforprojects.

Concerns over equity infusion:Withcapital marketscontinuingtoremain weak,there are concerns with regards to equity infusion for some companies. Many players had plannedfundraisingbydilutingstakeintheroadBOTholdingcompany;however,onlya ISIEmergingMarketsPDF us-3m from 122.252.231.41 on 2011-12-01 10:39:57 EST. DownloadPDF. fewlikeSadbhavandHCChavebeensuccessfulindoingso. Concerns over financial closure: Recent news articles suggest that the government is worriedaboutthehighpremiumsquotedbydevelopersonsomeearlierprojects.Ithas expressedconcernsovertheireventualexecutionandfutureviabilityandisplanningto meet banks/ financial institutions to get their perspective on the financial closure of theseprojects.Newsreportssuggestthatthehighwayssecretaryisexpectedtotakeup theissuewiththefinancialservicessecretaryshortly.

Notably, a study undertaken by the Roads Ministry on 66 projects that have achieved financial closure suggests that in some cases, banks have financed more than twice the projectcostestimatedbyNHAI.Aboutonefourthoftheprojectsweresanctionedloans50 100% higher than NHAI estimates. On an average, banks have extended ~39% higher loans than NHAI estimates. This has led to concerns in the government including the Planning Commission. While developer costs have traditionally been higher by 3040% compared to NHAI project costestimates,whathasraisedthegovernmentshacklesistheaggressivepremiumsquoted on some projects as well as traffic disappointment on many that have become operational over the past couple of years. News reports suggest that some projects that have become operational have already been downgraded by rating agencies and are staring at debt restructuring. This has led to concerns in government circles about the fate of projects awardedoverthepastyearorso.

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Construction
However, we caution that while the signs are encouraging with regards to moderation in competition,someaggressionstillremainsasfarasbiddingisconcerned.Thiscanbegauged fromthefollowingfactors: The government had expected some recent projects would require a grant; however, developers have still gone ahead and promised a small premium to win projects. This suggeststhatthereisstillsomeaggressiononpartofplayers. While the difference between L1 and L2 bidders has narrowed, there still remains a substantialgapbetweenthetop23biddersandrestoftheplayersinsomeprojects.For e.g.,intheRampurKathgodamproject(whichthegovernmentexpectedwillrequirea grant),whilethreebiddershavequotedasmallpremium,manyothershadaskedfora grant ranging between INR2bn and INR3bn. This difference in bids on a project of less thanINR10bnsize,ishumungous.

Ourview
Projectaward:Withastrongprojectpipeline,weexpectNHAItomoreorlessmeetits targetofawarding~7,000kmofprojectsinFY12. Competitioninfutureprojects:Whilewebelievecompetitiveintensityhasmoderated, theroadsindustryisstillnotcompletelyoutofthewoods.Lackofprojectsfromother segmentshasforceddeveloperstobidforroadprojects,evenatlowIRRs.Webelieve the trend of moderation in competition will continue going ahead. With concerns alreadybeingraisedaboutthepowerportfoliooffinancialinstitutions,banksarelikely tobecomemorecautiousgoingaheadwhilefundingroadprojects.Thisshouldleadto morerationalityinbiddingfromdeveloperswhichwillbepositivefortheindustry. m n g M a r k e t s P D F u s 3 Profitability of projects being awarded: With the toning down of competition, we believeIRRsonprojectshavealsoinchedup.Ourinitialdiscussionswithdeveloperson recent project awards suggest the same. Many projects awarded earlier this year had single digit IRRs and negative NPVs which developers expected to compensate with profits on the EPC part. For projects awarded recently, we believe this is not the case and they will be value neutral at worst on NPV basis; developers will still earn EPC profits.

Ourtoppicks:SadbhavEngineeringandIL&FSTransportation
We like Sadbhav for its superior execution and working capital efficiency. Our SOTPbased targetpriceofINR173pershareconsistsofINR102fromconstructionbusiness(valuedat9x FY13EP/E)andINR71fromBOTprojects(valuedonDCF,impliedP/BVat2xonQ2FY12). We like ITNL since it is a high quality road infra company with a well diversified project portfolioandremainsoneofthebestplaysonpeakinginterestrates.OurSOTPbasedtarget price stands atINR255/share, valuing BOT projects on DCF and EPC on P/E basis. A 100bps declineininterestratesincreasesourSOTPby13%.

EdelweissSecuritiesLimited

Construction
EdelweissSecuritiesLimited,EdelweissHouse,offC.S.T.Road,Kalina,Mumbai400098. Board:(9122)40094400,Email:research@edelcap.com
VikasKhemani NischalMaheshwari HeadInstitutionalEquities HeadResearch vikas.khemani@edelcap.com nischal.maheshwari@edelcap.com +912222864206 +912266233411

Coveragegroup(s)ofstocksbyprimaryanalyst(s):Construction

ConsolidatedConstructionCo.,HindustanConstructionCo.,IL&FSTransportationNetworks,IRBInfrastructure,IVRCLInfra,Jaiprakash Associates,BLKashyap&SonsLtd,NagarjunaConstructionCo,RamkyInfrastructure,SadbhavEngineering,SimplexInfrastructuresLtd
RecentResearch Date Company Title Price(INR) 231 202 38 Recos Buy Hold Buy

(INR)

1,150 950 750 550 350 150

15Nov11

Ramky Infrastructure Simplex Infrastructure IVRCLInfra Buy Buy

Outlookremainsrobust; ResultUpdate SimplexInfrastructures; ResultUpdate Potentialassetsalesa positive;ResultUpdate

Buy

15Nov11 14Nov11

DistributionofRatings/MarketCap
Buy

J ul-08 Aug-08 Se p-08 Oc t-08 Nov-08 De c -08 J a n-09 Fe b-09 Ma r-09 Apr-09 May-09 J un-09 J ul-09

EdelweissResearchCoverageUniverse

RatingInterpretation Rating
Expected to

Hold

Reduce

Total

RatingDistribution* 132 51 18 203 Buy appreciatemorethan15%overa12monthperiod *2stocksunderreview ISIEmergingMarketsPDF us-3m from 122.252.231.41 on 2011-12-01 10:39:57 EST. DownloadPDF. Hold appreciateupto15%overa12monthperiod MarketCap(INR) Access the entire repository of Edelweiss Research on www.edelresearch.com
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> 50bn

Between 10bn and 50 bn

< 10bn

117

65

21

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depreciatemorethan5%overa12monthperiod

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