challenges ahead … · bridges spanning 1,100 meter each), on Roopnarayan River on NH6, in record time of 18 months ahead of schedule is the recent example of time saving due to

July 30, 2013

Ashoka Buildcon Ltd.

… challenges ahead

SKP Securities Ltd www.skpmoneywise.com Page 1 of 17

CMP ` 52 Initiating Coverage – Not Rated

Source: Capitaline

Company Profile Ashoka Buildcon Ltd (ABL) builds and operates BOT (Toll) projects in road infrastructure segment. ABL is currently managing 19 projects of which 15 are operational and four are under construction. The Company was established in the year 1976 focusing solely on engineering and construction of residential, commercial, industrial and institutional structures. Key Highlights Agreement with SBI Macquarie to invest in ACL through PE route – ease in equity funding:

Two PE funds managed by State Bank of India and Australia's Macquarie Group will jointly invest USD 150 mn in an ABL’s subsidiary namely Ashoka Concessions Ltd (ACL).

These funds will be used mainly to complete the under ‐construction projects of ACL. Presently, ACL holds seven road projects of which four are operational and three are under construction.

With this deal, the two PE fund managers will hold 34% stake in ACL, while 64% will be with ABL.

Apart from this PE fund has also made an additional commitment of ` 6.5 bn in ACL for funding new projects. This is quite advantageous for ABL when raising funds (especially for road projects) has become difficult.

Another benefit of the deal to ACL is that now it will be able to bid for the projects of higher value than at present. The company will be able to bid projects over ` 90 bn. Before this deal, the company was able to bid for projects whose value is ` 24 bn or less.

Further, it is also agreed upon that all EPC contracts for the new projects under ACL will be executed by ABL.

An integrated business model – provides complete control over BOT projects:

All the activities relating to BOT projects are undertaken in – house by ABL. It has in‐house traffic studying team which performs the dual role of conducting pre‐bidding traffic surveys and monitoring toll collections.

The company in‐house manufactures RMC and bitumen which further differentiates ABL from other road developers. Further, the company owns plants and equipments worth ` 1.5 bn (as on March 2013) which saves the equipment leasing cost.

All this reduces ABL’s dependence upon subcontractors resulting in decreased cost and time for a project. Recent commissioning of bridge (two parallel bridges spanning 1,100 meter each), on Roopnarayan River on NH6, in record time of 18 months ahead of schedule is the recent example of time saving due to robust business model of the company. We expect the company to collect extra toll revenue of ` 800 mn during the extra time of 18 months gained due to early commissioning of bridge on Roopnarayan River.

Outlook & Recommendation Debt levels of ABL seems to be at high end due to undergoing Dhankuni, Sambalpur and Belgaum projects wherein the ratio of debt to equity is about 7:3, which seems to be a concern in the current high interest rate scenario which is finally affecting net margins of the company, though the debt and equity are tied up. Thus, we recommend no rating to the stock till the scenario improves.

Key Share DataFace Value (`) 5.0Equity Capital (` mn) 789.7M.Cap (` mn) 8213.352‐wk High/Low (`) 93/47Avg. Daily Vol 4833BSE Code 533271NSE Code ASHOKAReuters Code ABDL.BOBloomberg Code ASBL IN

Shareholding Pattern (as on June 30, 2013)

18%

68%

14%

Institutions Promoters Public & Others

Particulars FY12 FY13 FY14E FY15ENet Sales 15000.4 18526.8 21407.1 24328.8Sales Gr. 15.1% 23.5% 15.5% 13.6%EBIDTA 3250.2 3718.8 4523.8 5457.5PAT 1247.8 841.9 1315.2 1310.8PAT Gr. 8.3% 4.5% 6.1% 5.4%EPS (`) 23.7 16.0 8.3 8.3CEPS (`) 39.8 41.1 17.0 17.6

Financials (` mn)

Particulars FY12 FY13 FY14E FY15EInt Cover (x) 2.1 1.7 1.5 1.3P/E (x) 2.2 3.3 6.2 6.3P/BV (x) 0.3 0.3 0.7 0.7P/Cash EPS (x) 1.3 1.3 3.1 3.0M.Cap/Sales (x) 0.2 0.1 0.4 0.3EV/EBIDTA (x) 5.7 6.9 10.0 8.9ROCE (%) 9.1% 7.1% 6.4% 7.4%ROE (%) 12.2% 8.1% 11.4% 10.5%EBIDTM (%) 21.7% 20.1% 21.1% 22.4%NPM (%) 8.3% 4.5% 6.1% 5.4%Debt‐Equity (x) 1.6 2.3 3.3 3.3

Key Ratios

Price Performance ABL vs BSESMALLCAP

‐20%

‐10%

0%

10%

20%

30%

40%

Jul‐1

2

Aug

‐12

Sep‐

12

Oct‐1

2

Nov

‐12

Dec

‐12

Jan‐

13

Feb‐

13

Mar‐1

3

Apr‐1

3

May‐1

3

Jun‐

13

Jul‐1

3

ABL

BSESMALLCAP

Analyst: Vineet P. Agrawal Tel No: +91 22 4922 6006; Mobile: 98195 10575 e‐mail: [email protected]


SKP Securities Ltd. www.skpmoneywise.com Page 2 of 17

Industry Overview Government Initiatives:

• India has one of the largest road networks in the world, consisting of national highways, state highways, major district roads, and rural roads.

• National Highways (NH): National highways with the length of 76,818 km comprise only 2% of the road network and carry 40% of the road based traffic.

• In recent years special efforts has been made by Government of India to strengthen the national

highways and to improve rural road connectivity. India’s road network has benefited greatly from the NHDP programme which envisages an investment of about `236 tn during the period 2005‐12. Achievements of NHDP in 11th Five Year Plan:

Source: 12th Five Year Plan; GQ: Golden Quadrilateral; NS-EW: North South and East West Corridor; NHDP: National Highways Development Programme

Although NHDP envisaged award of concessions/contracts by the year 2012, the actual completion of the programme was expected to be accomplished only by the end of the 12th Plan.

• The Country had 21,440 kms of National highways as on April 1947 which has increased to

75,430 km by the end of 11th Five year plan. Achievement of National highways at a glance:

Source: 12th Five Year Plan

• State Highways (SH) and Major District Roads (MDR): The state highways and major district

roads together constitutes the secondary system of road transportation which contributes significantly to the development of the rural economy and industrial growth of the economy. The secondary system also carries about 40% of the total road traffic, though it constitutes 13% of the total road network.

• Investments including PPP under viability gap funding (VGF) programme of central government have been made by the State Governments to expand the networks of roads, especially state highways, which are part of the secondary and territory network. This has resulted in expansion of the road network as shown in table below:


Year GQ NS‐EW

Total Targeted Length (km) 5,846 7,142 12,109 14,799 6,500 700 1,383 Completed Total (km) 5,840 6,018 3,798 ‐ 940 14 961 Under Implementation (km) 6 691 2,802 3,318 1,181 27 409

NHDP Phase ‐ III

NHDP Phase ‐ IV

NHDP Phase ‐ V

NHDP Phase ‐ VII

Other NHs

1947‐69 24,000 14,000 ‐ ‐ 169 1969‐90 33,612 16,000 267 9,000 302 1990‐02 58,112 3,457 1,276 7,000 87 10th Plan (2002‐07) 66,590 4,177 6,769 8,377 611 11th Plan (2008‐12) 75,430 4,892 10,165 4,417 121 Total 42,526 18,477 28,794 1,290

PeriodCumulative

Length km

Widening to Two Lanes

km

Widening to Four Lanes

km

Strengthening of Pavements

km

Major Bridges

km

States 111,850 36,349 2,293 150,492 100,819 60,747 4,157 165,723 Union Territories 145 56 20 221 230 63 112 405 Total 111,995 36,405 2,313 150,713 101,049 60,810 4,269 166,128

Lane wise Length of SH in 2007 (km) Lane wise Length of SH in 2011 (km)Four Lane

and AboveTotal

LengthSingle Lane

Two LaneFour Lane

and AboveTotal

LengthSingle

Lane

Two Lane


SKP Securities Ltd www.skpmoneywise.com

• Pradhan Mantri Gram Sadak Yojana (PMGSY): PMGSY is a nationwide plan in India to provide good all‐weather road connectivity to unconnected villages, begun in December 2000.

• The programme seeks to connect all habitations − with a population of 500 persons and above in plain areas and 250 persons and above in

Hill States, Tribal areas, the Desert Areas and − in the 82 Selected and Tribal Backward districts (under IAP) as identified by the Ministry

of Home Affairs/ Planning Commission.

• The progress of PMGSY up to 11th Five Year Plan is as follows:


• Bharat Nirman: The President of India, in his address to Parliament on 25th February, 2005,

announced a major business plan for rebuilding rural India called Bharat Nirman.

• Under Rural Connectivity component of Bharat Nirman, all habitations having population of 1000 or more persons (500 or more in hilly and tribal areas) are to be provided connectivity with all‐weather roads.

• Accordingly, the programme envisages providing connectivity to 63,940 habitations under above

category. Projects to connect 58,387 habitations have been sanctioned. 44,089 habitations are connected by constructing 141,095 km of new roads up to March 31, 2012. 103,471 km of roads has also been upgraded (excluding renewals by States) by March 31, 2012.

• Proposals under 12th Five Year Plan: Despite these efforts the road networks remains grossly inadequate in various respects. It is unable to handle high density traffics and high speeds at many places. Thus, GoI has continued the thrust of upgrading the road infrastructure in the 12th Five Year Plan. The main targets of the 12th Five Year Plan is as follows:

− completion of on‐going works on Golden Quadrilateral and North–South and East–West corridors taken up in NHDP Phases I and II.

− completion of the remaining phases of NHDP namely NHDP‐III for inter‐district roads and other roads and NHDP‐IV which aims to convert single‐lane roads to double‐lane roads;

− continuation of NHDP – V involving conversion of GQ to six lane road; − upgradation of national NH and SH to minimum two lane standard; − connection of all villages with all weather roads; − enhancing the speed of work on access controlled express way – plan to develop15,600

km of expressways. It is hoped that 1,000 km of expressways would be completed during the 12th Plan, while land for another 6,000 km would be acquired to initiate work;

− to add another 10,000 km during the 12th Plan to NHs so that the total length of the highways. 10,000 km has been added to NHs in the 11th Plan. Total length of NHs will become 91,200 km with this addition;

− to connect remaining rural habitations by constructing about 158,000 km of new roads. 84,181 km of existing roads are planned to be upgraded during the Plan.

Total Elegible Sanctioned CompletedHabitations (in Nos.) 158,891 114,963 84,414 % Completion 73%New Conectivity (km) 367,673 279,811 209,570 % Completion 75%Upgradation Length (km) 374,844 164,096 140,930 % Completion 86%

Page 3 of 17



Declining interest in BOT projects due to pending clearances with MoEF: • Investor indifference to PPP projects in highways has forced the government to revisit the old

EPC model after a four‐year gap.

• The ministry of road transport and highways has set a target to award 4,000 km or nearly half of the highway projects it plans to award this fiscal through this conventional mode.

• Not a single EPC project has been awarded in the sector between 2008‐09 and 2011‐12. Highway

projects of 3,055 km were awarded through the EPC mode in 2005‐06 but it rapidly lost its sheen. The next year, only 345 km were awarded, slipping to 89 km in the following year. During these years, BOT projects have generally seen an increase, peaking at 6,491 km in 2011‐12.

• Under an EPC contract, the government funds the construction and the road developer only has

to develop the project in a stipulated period of time. In the BOT mode, the developer invests in the project and recoups it either through tolling rights or annuity.

• The shift from BOT mode to EPC has been necessitated in the wake of a constant fall in the

number of bidders on the BOT toll basis due to financial reasons and commercial unviability because of delay in regulatory clearances (such as forest and environment clearances).

• Since developers could not have started collecting revenues without environment clearance, it

further dents the financial viability of projects.

• Faced with huge slippages from targets, the ministry of road reckons that the less time‐consuming EPC mode could be preferred. EPC mode takes only 3‐4 months for award of a project while BOT takes 18‐20 months.

Slowdown in NHAI orders:

• Number of orders awarded by NHAI is declining gradually for the reasons such as – − already awarded projects failing to make progress (80% of projects awarded during FY12

await financial closure, 50% past contractual deadline) on the back of stringent conditions put forth by banks;

− execution issues led by land acquisition and environment clearance delays. As of January 2013, 2800 km of NHAI’s projects are struck with Ministry of Environment for want of clearances (MoEF);

− slowing traffic growth; − lower interest level with several projects now not receiving bid interest; and − slow land acquisition as sellers hope for better compensation once the land Bill is

cleared.

Intense completion is another bane to the sector: • The average number of players shortlisted per bid has increased from 6 to 30, from 2007 to

2011.

• Sector giants are bidding ‘irrationally’ to defend their turf. There was massive competition in 2010‐11 and 2011‐12, as firms bid aggressively to win PPP concession contracts. In many cases, they offered to pay huge premiums to NHAI.

• New entrants are bidding low to build their order books and credentials and smaller companies

flush with private equity funds are bidding aggressively to deploy their funds – and in this game, NHAI seems to have benefited the most.

Page 4 of 17



Supreme Court delinked green nod from environment clearance – a ray of new life for the industry:

• The Supreme Court's Forest Bench, in March 2013, allowed the Ministry of Environment & Forests (MoEF) to modify the 2011 norms, which were based on the apex court's verdict in the Lafarge case, under which NHAI and MoEF has delinked environmental and forest clearances in case of all linear projects like roads, transmission lines, rail tracks.

• This means for the projects (involving widening or expansion of existing national highways) wherein environment clearance has been obtained but forest clearance is pending, concessionaire will be permitted to begin work on non‐forest land.

• About 21 road projects spanning 2,700 km and valued at ` 270 bn, which are stuck because of

the delay in forest clearance, though environment clearances had been obtained, of them, about 15 projects have also received financial closure. It is expected that these projects will be able to start work immediately.

• Since mid‐2011, the Environment Ministry had started linking both the clearances, which

essentially prevented developers from starting work on projects till both the clearances were in place. Highway developers were unable to get any funding from banks, and were unable to begin work due to these pending approvals.

• NHAI, thus, in Sept 2012, requested MoEF to dilute environment norms for road projects in forest areas which was rejected by the ministry. Consequently, NHAI moved to the Supreme Court seeking de‐linking of environment clearance from forest clearance for highway projects.

Addressing other hurdles:

• Relaxing norms for ‘minor minerals’: The Environment Ministry is also addressing some of the other hurdles facing highway projects ‐ One is about relaxing norms on sourcing earth, soil, or mud from areas of below 5 hectares.

• As per the Supreme Court order dated February 27, 2012, leases of ‘minor minerals’, including their renewal for an area of less than 5 hectares can be granted by states only after getting MoEF clearances.

• Easy exit norms: Another move under consideration that will inject funds into the sector is relaxation of exit clause for developers, allowing developers to exit entirely from projects after completing construction. It is expected that a proposal to this effect will be moved to the Cabinet soon.

• Highway developers are demanding easy exit routes from completed projects for long time.

Outlook:

With the intervention of Apex Court and positive efforts from NHAI and MoEF to ease the norms we expect that Private equity funds, financial investors will be keen to invest in highway projects, as risks for highway projects will reduce and the highway sector to be back on track over the next few months.

Page 5 of 17



The Company: A Snap Shot

• Ashoka Buildcon Ltd (ABL) was established in the year 1976 with focus solely in engineering and construction of residential, commercial, industrial and institutional buildings.

• ABL started bidding for contracts of toll roads and toll bridges on a BOT basis after acquiring EPC skills in the year 1997. The company was awarded its first toll contract of Dhule Bypass in Maharashtra, India, in 1997.

• The Company started its own ready mix concrete (RMC) division during the year 2002 for internal

consumption. It also sells RMC to third parties.

• ABL began processing bitumen to a higher grade, in fiscal 2005, at its facility at Pune. Bitumen is one of the key raw materials for road construction.

• Today, ABL is among the players who operate one of the highest toll based BOT projects in India.

Businesses of ABL can be categorized in to following four divisions:

Source: Company and SKP Research Desk

BOT Division

• Building and operating roads and bridges in India.

• Currently operates around 19 BOT projects of which 15 are operational.

• ABL started as state level construction player by winning its first toll project of Dhule Bypass, Maharashtra in 1997. Since then, it has gradually become national level player by winning national highway projects.

• ABL is the largest BOT player on NH6 with 4 projects in hand spanning 1,739 lane km with over 24% of PPP market share.

• ABL is also managing one BOT toll project each on NH3 and NH4.

EPC Division

• Primarily engineers and designs roads, procures the raw material & equipment for roads & bridges construction for BOT division and third parties.

• It also constructs commercial and industrial buildings for third parties.

• NHAI awards contracts under DBFO scheme wherein the detailed design work is done by concessionaire.

ABL

RMC and Bitumen Division

• Sells Ready Mix Concrete and supports EPC Division by ensuring adequate and timely supply of quality RMC.

• Supplies and sells bitumen to EPC division and third parties for use in road projects.

Toll Collection Contract Division

• Collects toll on ABL’s BOT Projects and for third parties.

• The division collected more than ` 2 bn in FY12.

Page 6 of 17



Company Structure:

• Chart below shows the company structure of ABL:

Source: Company; SKP Research Desk

• Ashoka concessions Ltd (ACL) is the direct subsidiary of ABL with the portfolio of 7 large BOT

projects spanning in 3,239 lane kms spreading across Maharashtra, Madhya Pradesh, Chhattisgarh, Karnataka, West Bengal and Orissa.

• SBI Macquarie acquired 34% stake in ACL: − Macquarie SBI Infrastructure Fund and SBI Macquarie Infrastructure Trust are investing

$150 million in ACL. ABL has already received first tranche of ` 2.4 bn.

− Both the funds are paying `7 bn (USD 150 mn) against the existing portfolio of 7 BOT assets of ABL and have committed to put `1 bn as contingency fund to take care of any cost overrun in these projects. The ABL’s stake in these BOT assets is now owned by ACL.

− The total equity requirements of these projects are ` 15.5 bn.

− EPC portion of all the contracts under ACL will be given to ABL, as per the agreement.

EPC RMC & Bitumen Business

Ashoka Buildcon Ltd. (ABL)

Portfolio

BOT Projects

Ashoka Concessions Ltd. (Stake: ABL 66% and SBI Macquarie 34%)

BOT Projects

BOT Projects under ACL StakeBelgaum Dharwas Road 100.0%Sambalpur Baragarh Road 100.0%Dhankuni Khadagpur Road 100.0%Bhandara Road 51.0%Durg Chhattisgarh 51.0%Jaora nayagaon Road 37.7%PNG Road 26.0%

BOT Projects under ABL StakeAhmednagar Aurangabad Road 100.0%Ahmednagar Karmala Road 100.0%Sheri Nallah Bridge 100.0%Nashirabad Railway ‐ Over bridge 100.0%Pune ‐ Shirur Road 100.0%Dewas Bypass 100.0%FOB in Mumbai 100.0%Katni Bypass 99.9%Dhule Bypass 99.9%Indore Edalabad Road 99.7%Wainganga Bridge 50.0%Anawali Kasegaon 5.0%

Subsidiary of ABL Businesses of ABL

Page 7 of 17



Materials and Equipment Procurement

• ABL require materials and equipment for road construction. Materials may include cement, metal, sand and construction chemicals used for manufacturing RMC. Bitumen is made from refined residue from the distillation process of crude oil.

• Some of the important construction equipments required by ABL are:

Source: Company

• ABL carry out material, services and equipment procurement for all project sites through its purchase department. Once the contract is awarded, the purchase department is provided with the project details along with the budgeted rates for material, services and equipment.

• The material, services and equipment required for projects are estimated by the engineering personnel for the individual project sites and then passed on to the purchase department along with the schedule of requirements.

• Over the years ABL has developed cordial relationships with a number of vendors for key

materials, services and equipment. Procurement of material, services and equipment from external suppliers typically comprises a significant part of a project’s cost. The Company does not have any long‐term contract with its vendors for raw material supply.

• As mentioned earlier RMC and bitumen division of ABL takes care of the requirement of RMC and

bitumen.

Peers

• Comparitively, ABL’s balance sheet size is smaller than its peers such as IRB infrastructure Developers Ltd (IRB) and IL&FS Transportation Networks Ltd (ITNL).

• ABL and IRB is have only BOT (Toll) projects in its kitty whereas ITNL undertook projects based on toll as well as annuity. ITNL have foreign presence while ABL and IRB are present in India only.

• Debt‐Equity of ABL, IRB and ITNL are pretty high at 2.5x, 2.4x and 3.6x respectively during FY13

which is the industry trend.

• Following is the financial comparision betweent the three:

Source: SKP Research Desk, Capitaline and Bloomberg Consensus

Equipments ApplicationCrusher Plant Crushing of stones and aggregatesBatch type hot mix plant For preparing bitumenBatch Plant For preparing concretePaver For paving the road layerDumper and Tipper For transporting materialsDiesel Generator Sets For power generationExcavator cum back hoe loaders Excavates earthMotorised Grader Grades the earth layersLoader For loading and handling materialsWet Mix macadam Plant Mixes aggregate and soil

FY12 FY13 FY14E FY15E FY12 FY13 FY14E FY15E FY12 FY13 FY14E FY15EIRB 2.2 1.2 0.7 0.6 7.6 6.3 7.2 5.3 12.8 7.1 5.2 4.5ITNL 1.4 1.0 0.6 0.6 8.5 8.7 7.2 6.1 6.6 7.6 4.6 4.1ABL 0.3 0.3 0.7 0.7 5.7 6.9 10.0 8.9 2.2 3.3 6.2 6.3

P/EPlayers

P/BV EV/EBIDTA

Page 8 of 17



Key Highlights of the Company

Agreement with SBI Macquarie to invest in ACL through PE route – ease in equity funding: • Macquarie SBI Infrastructure Fund (MSIF) and SBI Macquarie Infrastructure Trust (SMIT) had

together agreed to invest ` 8.25 bn in ABL’s subsidiary ACL, for 34% stake, in August 2012.

• SBI Macquarie has the option to increase its stake to 39% depending upon the performance of the projects. The two private equity funds are managed by the State Bank of India and Macquarie of Australia.

• The investment of SBI‐Macquarie PE fund in ACL bodes well for the company in many ways

beside the availability of funds for its projects in the coming quarters. Presently, ACL holds seven road projects of which four are operational and three are under construction. The investment values the subsidiary at ` 20.6 bn.

• The seven BOT projects requires total equity investment of nearly ` 20.3 bn of which ` 7.25 bn will come from this deal. Furthermore, additional ` 1 bn will be infused by SBI Macquarie based on the performance of the project.

• ABL’s total equity requirement over FY14E‐FY15E at a glance:


• Apart from this PE fund has also made an additional commitment of ` 6.5 bn in ACL for funding

new projects. This is quite advantageous for ABL when raising funds (especially for road projects) has become difficult.

• ACL and SBI Macquarie are sitting on a pipeline of 25 highway projects, spanning 7,300 km, for which they are qualified. We expect that the company may win at least one or two projects out of this pipeline, this year (FY14). 70% of these bids are expected to come during the first six months of FY14.

• Another benefit of the deal to ACL is that now it will be able to bid for the projects of higher value than at present. The company will be able to bid projects over ` 90 bn. Before this deal, the company was able to bid for projects whose value is ` 24 bn or less.

• Further, it is also agreed upon that all EPC contracts for the new projects under ACL will be

executed by ABL.

Belgaum‐Dharwad 510 C&EPC Cash Flow 2,577

Sambalpur‐Baragarh 1,518 BOT Cash Flows 740

Dhankuni‐Kharagpur 966 Consolidated Cash balance (FY13) 517

Durg‐Chattisgarh ‐

Bhandara Road ‐

Jaora‐Nayagaon ‐ Pimpalgaon‐Nashik‐Gonde ‐

Equity Required 2,993 Available Fund 3,835

Surplus 841 Shortfall ‐ Total 3,835 3,835

ProjectsEquity

Required Rs mn

FundingFunding

Rs mn

Page 9 of 17



An integrated business model – provides complete control over BOT projects: • ABL undertakes all the activities relating to BOT projects in‐house, from tendering for the project

through to the collection of tolls.

• The company has an in‐house traffic studying team which performs the dual role of conducting pre‐bidding traffic surveys and monitoring toll collections. ABL’s traffic studying team have in‐depth knowledge of traffic patterns in Maharashtra, Madhya Pradesh, Chhattisgarh, Tamil Nadu, Gujarat, Rajasthan, Uttar Pradesh and Punjab.

• As mentioned earlier the company in‐house manufactures RMC and bitumen which further differentiates ABL from other road developers. Further, the company owns plants and equipments worth ` 1.5 bn (as on March 2013) which saves the equipment leasing cost.

• All this reduces ABL’s dependence upon subcontractors resulting in decreased cost and time for a

project. Commissioning of bridge (two parallel bridges spanning 1,100 m each), on Roopnarayan River on NH6, in record time of 18 months ahead of schedule is the recent example of time saving due to robust business model of the company.

• Completion of a 90 m long bridge on the Mahad‐Pandharpur state highway in 38 days compared

with the scheduled construction time of 12 months and construction of a 100 m long Paragon bridge (under BOT contract) in 65 days compared with the scheduled construction time of 18 months are other examples of early completion.

• Such early completion of a road or bridge under a BOT agreement before the scheduled

completion date provides ABL with the benefit of collecting tolls on that project earlier than anticipated, which increases the total period for collecting tolls, thereby increasing its revenue from the project. We expect the company to collect extra toll revenue of ` 800 mn during the extra time of 18 months gained due to early commissioning of bridge on ‘Roopnarayan River’.

• ABL’s business model of the company at a glance:


ABL

Feasibility Study &

Tendering

Traffic Survey

In‐house mfg of RMC

and Betumin

Owned Equipments

In‐house EPC

Toll Collection

Road Maintenance

Re‐leveraging

Page 10 of 17



Robust order book boosting EPC revenues: • ABL has a strong order backlog of ` 25.6 bn (as on March, 2013) from its various business

segments which is 1.4x of FY13 EPC revenue. The above order book is excluding Cuttak – Angul Order worth ` 10 bn. Breakup of the order book is as follows:

Source: Company – Investor Presentation – January 30, 2013; SKP Research Desk

• Strong Growth in order book y‐o‐y: Order book of the company is growing at the CAGR of 15.4%

for past three years. The following graph indicates the order backlog by ABL, in past three years:


• Robust order book is resulting in strong growth of EPC revenue: We expect ABL to be cautious

while bidding for new orders on the back of robust order book in hand. We expect the revenues of the company from EPC to remain subdued in FY14 due to surrender of Cuttak ‐ Angul project. We expect it to grow by 10% in FY15 with the growth in order book.


Business Contribution Segment %Roads Dhankuni 14.5

Sambalpur 5.4Belgaum 2.0PNG 0.4Others 0.9Total Road Segment 23.2 90%

Power T&D 2.5 10%Total Order Book 25.6 100%

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Page 11 of 17

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ource: Company & SKP

15% between F

CAGR of 15%

14% between F

een a robust CFY13‐15E on tcollection of A

10.7

2

11.1

1

0.45

1.90

10 FY11

BOT EPC

5.1

FY12

com

KP Research Desk

Research Desk

FY13‐15E:

between FY13

FY10‐13 and w

CAGR growth the back of inABL at a glance

12.6

5

15.8

5

2.59

2.68

FY12 FY13

7.8

FY13 F

As

3‐15E from ` 1

we further expe

of 81% betwencreasing toll

e:

15.6

5 5.

76

3 FY14E

9.2

FY14E FY

shoka Buildc

18.5 bn in FY13

ect it to touch

een FY10‐13. Wl due to in‐tim

17.2

1 7.

11

FY15E

10.8

Y15E

Pag

con Ltd.

3 to ` 24.3

` 17 bn by

We further me project

ge 12 of 17



EBITDA margin to increase by 100 bps and 130 bps in FY14E and FY15E respectively: ABL has witnessed an EBITDA margin of 20.1%, a decline by 160 bps, in FY13 due to increase in material cost. We expect the margins of the company to rise by 100 bps and 130bps in FY14 and FY15 respectively due to increase in the share of toll in the revenue. Source: Company and SKP Research Desk

PAT to remain under pressure due to high debt and interest cost: PAT margin has declined to 4.5% in FY13 due to increase in interest cost by about 21% in FY13 which can be attributable to Bhandara and Durg project and higher taxation. In the recent past ABL has received large projects from NHAI which will result in further leveraging of balance sheet. Thus, we expect PAT to remain under pressure during FY13‐15, again, due to high interest cost attributable to Dhankuni and Sambalpur project. The Interest cost has to be capitalized till the end of H1FY15 in Sambalpur project and H1FY14 in Dhankuni project.


Interest and Interest Coverage Debt, Equity and D/E


716.

2

1144

.3

1394

.5 2043

.8 3045

.2

2.6

2.1

1.71.5

1.3

0.0

0.5

1.0

1.5

2.0

2.5

3.0

0.0

500.0

1000.0

1500.0

2000.0

2500.0

3000.0

3500.0

FY11 FY12 FY13 FY14E FY15E

Inte

rest

Cov

erag

e (x

)

Inte

rest

Cos

t (`

mn)

12.2 16

.3 23.5

37.7 41

.5

8.9

10.2

10.4

11.6

12.5

1.371.60

2.27

3.26 3.32

0.00

0.50

1.00

1.50

2.00

2.50

3.00

3.50

0

5

10

15

20

25

30

35

40

45


`bn

Debt

Equity

D/E (x)

2.5 3.

3 3.7 4.

5 5.5

19.4%

21.7%

20.1%

21.1%

22.4%

18%

19%

20%

21%

22%

23%

0.0

1.0

2.0

3.0

4.0

5.0

6.0


EBID

TA M

argi

n (%

)

EBID

TA (` b

n)

2080

.0

1247

.8

841.

9 1315

.2

1310

.8

16.0%

8.3%

4.5%

6.1%5.4%

0.0%

3.0%

6.0%

9.0%

12.0%

15.0%

18.0%

0.0

500.0

1000.0

1500.0

2000.0

2500.0


PATM

(%)

PAT

(`m

n)

Page 13 of 17



Valuation

• We have valued BOT toll business of ABL on SOTP basis.

• We have arrived at the value of ` 85 per share for ABL’s BOT toll business by using NPV method of valuation.

• We have arrived at the fair value of assigned P/E of 2.5x to the EPC business of the company which is lower than it peers such as IRB and ITNL on the grounds of scale of operations.

Source: SKP Research Desk

Project NameOwnershi

pDiscountin

gProject

ValueValue for

ABLPer share

value% % ` Mn ` Mn `

Operational Projects

1 Ahmednagar ‐ Aurangabad roa 100% 13% 196 196 1.2

2 Ankali ‐ Sherinallah Bridges 100% 13% 82 82 0.5

3 Nashirabad 100% 13% 197 197 1.2

4 Indore ‐ Edalabad 100% 13% 2,540 2,540 16.1

5 Pune ‐ Shirur 100% 13% 192 192 1.2

6 Katni 100% 13% 178 178 1.1

7 Dewas Bye‐pass 100% 13% 534 534 3.4

8 Wainganga 50% 13% 954 477 3.0

9 FOB ‐ Eastern Express Highway 100% 13% 58 58 0.4

10 AI‐Dhule Bye‐pass 100% 13% 30 30 0.2

ABL ‐ Total 4,960 4,483 28

Projects under Implementation

1 Belgaum ‐ Dharwad 100% 15% 1,496 1,496 6

2 Sambalpur ‐ Baragarh 100% 15% 1,421 1,421 6

3 Dhankuni ‐ Kharagpur 100% 15% 5,281 5,281 22

4 NH‐6‐Durg 51% 15% 408 208 1

5 NH‐6‐Bhandara 51% 15% 1,026 524 2

6 SH‐31‐Jaora Naigaon 38% 15% 5,868 2,212 9

7 NH‐3‐PNG 26% 15% 9,079 2,361 10

ACL ‐ Total 24,580 13,502 56

ABL BOT Value 85

ABL EPC Value P/E (2.0x) 1,973 12 ABL Fair Value 97

Page 14 of 17



Key Concerns

Change in Government policies may impact the results:

• ABL’s business is substantially dependent upon roads and bridges projects in India awarded by Government authorities such as NHAI, PWD etc. funded by Governments, or international or multilateral development finance institutions.

• If there is any change in governmental policies that result in a slowdown in the development of road and bridge projects or a decrease in the participation of the private sector in such projects, our business and results of operations could be materially and adversely affected.

Decrease in traffic volume: • ABL’s business is substantially dependent on accurate forecasting of traffic volumes for toll‐based

BOT projects and contracts to collect tolls.

• Any material decrease between the actual traffic volume and the Company’s forecast traffic volume could have a material adverse effect on its cash flows, results of operations and financial condition

Limited increase of toll rates: • ABL’s ability to increase tolls on a BOT project is limited by the terms of the contract governing

the BOT project.

• If the increases in tolls do not keep pace with increases in costs of materials and labour for maintaining and operating the project or increases in interest rates payable on the loan or loans for the project, it could have a material adverse effect on the Company’s results of operations and financial condition.

Highly Competitive Industry:

• The competition for EPC contracts and BOT projects varies depending on the size, nature and complexity of the project and on the geographical region in which the project is to be executed. Some of the EPC businesses and BOT project businesses ABL compete against have greater financial resources, economies of scale and operating efficiencies.

• ABL also face competition for sales of ready‐mix concrete and bitumen and in winning contracts for collecting tolls on roads/bridges owned and constructed by third parties. The firms that solely operate in the ready‐mix concrete market are ACC Ltd, Ultratech Ltd and Ambuja Cements Ltd.

• Since, ready‐mix concrete must be delivered within three hours of being poured into the transit

mixer, competition is localized. Customers generally place orders based on the closeness of the competing firms’ ready‐mix concrete plants and the price charged.

• Any failure to compete effectively may have an adverse effect on ABL’s business, financial

condition and results of operations.

Page 15 of 17



Consolidated Financials

Source: Company, SKP Research

FINANCIALS(All data are in ` mn unless specified, Y/e March)

Income Statement FY12 FY13 FY14E FY15E Balance Sheet FY12 FY13 FY14E FY15E

Net Operating Income 15000.4 18526.8 21407.1 24328.8 Equity Capital 552.2 526.5 789.7 789.7

Operating Expenditure 11750.2 14808.0 16883.3 18871.3 Reserves 9640.1 9831.7 10772.6 11709.0

EBIDTA 3250.2 3718.8 4523.8 5457.5 Net Worth 10192.3 10358.2 11562.3 12498.8

Depreciation 849.6 849.6 1323.8 1362.3 Share App Money 148.91 148.91 148.91 148.91

EBIT 3250.2 3718.8 4523.8 5457.5 Minority Interest 629.76 2786.94 2498.58 2372.35

Interest 1144.3 1394.5 2043.8 3045.2 Loan Funds 16266.5 23469.0 37657.5 41450.3

Other Income 353.9 294.0 342.5 389.3 Deferred Tax Liab. 10.3 0.0 0.0 0.0

EBT 1610.2 1294.5 1460.3 1328.5 Total Liabilities 48190.5 115137.4 128507.0 131383.6

Exceptional Item 0.0 156.9 0.0 0.0 Gross Fixed Assets 47540.8 116374.5 132206.0 135751.3

Tax 451.1 685.0 569.5 491.6 Less Acc Dep 4502.6 5274.9 6637.2 8110.3

Minority Interest 88.7 ‐389.3 ‐356.4 ‐300.0 Net Fixed Assets 43038.2 111099.5 125568.8 127641.1

Profit From Associates 0.0 0.0 68.0 173.8 Investments 2051.83 2819.78 2819.78 2819.78

Adjusted PAT 1247.8 841.9 1315.2 1310.8 Net Current Assets 3100.5 1211.1 111.4 915.8

EPS (`) 23.7 16.0 8.3 8.3 Total Assets 48190.4 115137.4 128507.0 131383.6

Cash Flow Statement FY12 FY13 FY14E FY15E Ratios FY12 FY13 FY14E FY15E

PBT 1610.2 1294.5 1460.3 1328.5 Valuation ratios (x)

P/E 2.2 3.3 6.2 6.3

P/Cash EPS 1.3 1.3 3.1 3.0

Net change in WC, Tax, Int 21224.4 60914.7 ‐656.4 ‐2110.3 P/BV 0.3 0.3 0.7 0.7

EV/EBIDTA 5.7 6.9 10.0 8.9

EV/Sales 1.2 1.4 2.1 2.0

Capital Expenditure ‐27632.0 ‐69694.4 ‐15831.6 ‐3545.3 Earning Ratios (%)

EBIDTAM 21.7% 20.1% 21.1% 22.4%

OPM 16.0% 12.9% 14.8% 16.4%

NPM 8.3% 4.5% 6.1% 5.4%

ROE 12.2% 8.1% 11.4% 10.5%

ROCE 9.1% 7.1% 6.4% 7.4%

B/S Ratios

Current ratio (x) 1.6 1.1 1.0 1.1

D/E (x) 1.6 2.3 3.3 3.3

Opening Cash Balance 547.3 500.4 517.4 666.1 Debtor Days 43.1 22.9 14.6 13.7

Creditor Days 56.8 86.9 96.1 99.5

Inventory Days 91.6 112.1 134.6 133.3

Closing Cash Balance 500.4 517.4 666.1 1230.7 FA/Turnover (x) 0.3 0.2 0.2 0.2

Investments, Sales of FA, Dividend received and others ‐585.8 ‐1045.9 0.0 0.0

Add: Depreciation, Interest & Other Exppenditure 1884.4 2789.9 3406.1 4518.2

Cash flow from Financing Activities 3051.3 5758.2 11770.4 373.3

Cash Flow from Operating Activities 24718.9 64999.0 4209.9 3736.5

Cash balance of acquired subsidiaries 400.7 0.0 0.0 0.0

Cash flow investing Activities ‐28217.8 ‐70740.3 ‐15831.6 ‐3545.3

Net Increase/Decrease in Cash & Cash equivalents ‐447.5 ‐123.5 ‐447.5 16.9

Page 16 of 17



Notes:

The above analysis and data are based on last available prices and not official closing rates. SKP Research is also available on Bloomberg, Thomson First Call & Investext Myiris, Moneycontrol, Tickerplant and ISI Securities. DISCLAIMER: This document has been issued by SKP Securities Ltd (SKP), a stock broker registered with and regulated by Securities & Exchange Board of India, for the information of its clients/potential clients and business associates/affiliates only and is for private circulation only, disseminated and available electronically and in printed form. Additional information on recommended securities may be made available on request. This document is supplied to you solely for your information and no matter contained herein may be reproduced, reprinted, sold, copied in whole or in part, redistributed or passed on, directly or indirectly, to any other person for any purpose, in India or into any other country without prior written consent of SKP. The distribution of this document in other jurisdictions may be strictly restricted and/ or prohibited by law, and persons into whose possession this document comes should inform themselves about such restriction and/ or prohibition, and observe any such restrictions and/ or prohibition. If you are dissatisfied with the contents of this complimentary document or with the terms of this Disclaimer, your sole and exclusive remedy is to stop using the document and SKP shall not be responsible and/ or liable in any manner. Neither this document nor the information or any opinion expressed therein should be construed as an investment advice or offer to anybody to acquire, subscribe, purchase, sell, dispose of, retain any securities or derivatives related to such securities or an offer to sell or the solicitation of an offer to purchase or subscribe for any investment or as an official endorsement of any investment. Any recommendation or view or opinion expressed on investments in this document is not intended to constitute investment advice and should not be intended or treated as a substitute for necessary review or validation or any professional advice. The views expressed in this document are those of the analyst which are subject to change and do not represent to be an authority on the subject. SKP may or may not subscribe to any and/ or all the views expressed herein. It is the endeavor of SKP to ensure that the analyst(s) use current, reliable, comprehensive information and obtain such information from sources, which the analyst(s) believes to be reliable. However, such information may not have been independently verified by SKP or the analyst(s). The information, opinions and views contained within this document are based upon publicly available information, considered reliable at the time of publication, which are subject to change from time to time without any prior notice. The Document may be updated anytime without any prior notice to anybody. SKP makes no guarantee, representation or warranty, express or implied; and accepts no responsibility or liability as to the accuracy or completeness or correctness of the information in this Report. SKP, its Directors, affiliates and employees do not accept any liability whatsoever, direct or indirect, that may arise from the use of the information or recommendations herein. Please note that past performance is not necessarily a guide to evaluate future performance. SKP or its affiliates, may, from time to time render advisory and other services to companies being referred to in thiss document and receive compensation for the same. 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Documents

challenges ahead … · bridges spanning 1,100 meter each), on Roopnarayan River on NH6, in record time of 18 months ahead of schedule is the recent example of time saving due to