Roads & Highways - Initiating Coverage 08-07-14

SBICAP Research on Bloomberg SBICAP , www.securities.com Please refer to our disclaimer given at the last page.

Institutional Equity

Research

July 8, 2014Infrastructure & Construction | India Roads & Highways

SBICAP Securities Ltd (SSL)Mafatlal Chambers, A-Wing 2nd Floor, N.M. Joshi Marg Lower Parel, Mumbai - 400013 + 91-22-4227 3300/01 [email protected]

Viral Shah +91 22 4227 3388 [email protected] Pranjal Sanghvi +91 22 4227 3428 [email protected]

Roads & Highways Sector SBICAP Securities Ltd

[email protected] I [email protected] July 8, 2014 | 2

Roads & Highways | India

Back on the road

Over the past couple of years, the infrastructure sector has been plagued byvarious headwinds such as deteriorating investment sentiment, depleting orderbook, delayed decision making, high leverage and difficult macro environmentscenario leading to a slowdown in investment in the sector. Despite all thechallenges, we believe that with a new and decisive government in place, theroad sector would be getting a much needed impetus. The new government is expected to resolve issues related to stalled road projects before resumingmeaningful awarding activity. Further, new positive policy announcement alongwith improvement in GDP growth and lowering of interest rate would benefit the companies in the road sector going forward.

The road journey so far : Post the euphoria of robust awarding activity of road projects in F11 and F12, the road sector has seen significant slowdown in awarding ofprojects. In F13 & F14e only ~1,933 kms & ~1,600 kms of road projects were awardedmainly due to tepid response from developers and also due to various issues such asdelay in decision making, land acquisition and environment clearance problems.

slow traffic growth a short term concern.: A deceleration in traffic growth hasbeen witnessed by most of the players on account of a slowing economy that is alsoreflected in our study set of 50 projects (across four players). The study shows that aslowdown in economic activity has led to traffic growth of 1.3% YoY and 3.7% YoY in F13 and F14e. We believe traffic growth is likely to be cyclical in nature and lowertraffic growth is merely a short term blip. In our view, any improvement in the GDPgrowth would lead to a proportionate growth in traffic. We expect an average traffic growth to inch up to ~5% plus YoY on a medium term basis.

awarding to pickup.: We believe, with a new and decisive government, the road sector would get a much needed impetus. The new government is expected to resolve issues related to stalled road projects before resuming meaningful awarding activity.The near term outlook looks challenging for developers. However, we expect thescenario to improve over the next 2-3 years aided by (a) pick up in execution, (b) improvement in cash flows and (c) step up in asset monetisation.

.lean period has helped nurse strength: In our analysis, the lull period of roughly over two years brought on by elusive project clearances has given certain companies,like SEL, IRB, ITNL and ASBL, accumulate a healthy asset portfolio. Executingbagged BOT projects has nursed their balance sheets such as to make them morerobust and impart cash flow visibility.

Valuations: Going forward, we expect the growth in road sector to be driven by (a) 56% medium-term traffic growth, (b) 56% of growth in toll rates, (c) pick-up in construction activity and (d) reduction in interest rate that would be beneficial in thelong run. We initiate coverage with a BUY rating on Sadbhav Eng (SEL) with a target price of Rs251 and re-initiate our coverage with a BUY rating on IRB Infrastructure (IRB) with a target price of Rs309 given (a) healthy asset portfolio, (b) robust order book, (c) healthy cash flow and (d) relatively strong balance sheet. We also re-initiate IL&FS Transport Networks (ITNL) with a BUY rating with a target price of Rs272 given a healthy mix of portfolio (Toll/Annuity), strong parentage and fulfilled equityrequirements. We initiate our coverage on Ashoka Buildcon (ABL) with a HOLD rating with a target price of Rs155 due to the limited upside available from current levels.

Key risks: We highlight a sluggish economic growth leading to lower-than-expected growth in traffic and high interest rate as the key macro risk to our sector call. Other factors like delay in decision making, issues pertaining to land acquisition and elusiveenvironment clearances could weigh upon the pace of awarding activity.

Sadbhav Engineering LtdY/E March (Rs mn) F15e F16eSales 28,542 31,171EBITDA 3,083 3,366PAT 1,119 1,261EPS (Rs) 7.4 8.3P/BV 2.9 2.6EV/EBITDA 12.7 11.7Dividend Yield (%) 0.3 0.3ROE (%) 11.1 11.3RecommendationRating BUYCMP (Rs) 203Target price (Rs) 251Upside (%) 23

IRB Infrastructure Developers LtdY/E March (Rs mn) F15e F16eSales 43,757 49,684EBITDA 20,785 23,997PAT 5,096 6,240EPS (Rs) 15.3 18.8P/BV 2.2 1.9EV/EBITDA 9.8 8.7Dividend Yield (%) 1.8 1.8ROE (%) 13.6 15.0RecommendationRating BUYCMP (Rs) 257Target price (Rs) 309Upside (%) 20

IL&FS Transportation Networks LtdY/E March (Rs mn) F15e F16eSales 74,905 85,279EBITDA 22,771 25,925PAT 4,583 5,585EPS (Rs) 18.6 22.6P/BV 0.9 0.9EV/EBITDA 11.1 10.2Dividend Yield (%) 2.2 2.2ROE (%) 8.6 9.4RecommendationRating BUYCMP (Rs) 219Target price (Rs) 272Upside (%) 24

Ashoka Buildcon LtdY/E March (Rs mn) F15e F16eSales 19,256 23,119EBITDA 4,949 5,941PAT 993 1,109EPS (Rs) 6.3 7.0P/BV 1.7 1.6EV/EBITDA 11.4 9.7Dividend Yield (%) 0.8 0.8ROE (%) 7.6 8.0RecommendationRating HOLDCMP (Rs) 144Target price (Rs) 155Upside (%) 7



Table of Contents

Roads & Highways Sector Back on the roads ..................................................................................................................................... 2

Investment summary ................................................................................................................................ 4

slow traffic growth a short term concern. ........................................................................................... 7

awarding to pickup. ........................................................................................................................... 8

.Lean period has helped to rethink .................................................................................................. 11

Relative valuation ................................................................................................................................... 13

Key risk ................................................................................................................................................... 16

Companies under coverage

Sadbhav Engineering Ltd .................................................................................................................... 17 Investment rationale ........................................................................................................................ 18

Financial Analysis ............................................................................................................................ 22

Valuations ........................................................................................................................................ 23

Key risk ............................................................................................................................................ 25

Company Profile .............................................................................................................................. 26

Key management ............................................................................................................................ 27

Financials ........................................................................................................................................ 28

IRB Infrastructure Developers Ltd ...................................................................................................... 29 Investment rationale ........................................................................................................................ 30


Valuations ........................................................................................................................................ 37

Key risk ............................................................................................................................................ 39

Company Profile .............................................................................................................................. 40

Key management ............................................................................................................................ 41

Financials ........................................................................................................................................ 42

IL&FS Transportation Networks Ltd ................................................................................................... 43 Investment rationale ........................................................................................................................ 44


Valuations ........................................................................................................................................ 52

Key risk ............................................................................................................................................ 54

Company Profile .............................................................................................................................. 55

Key management ............................................................................................................................ 56

Financials ........................................................................................................................................ 57

Ashoka Buildcon Ltd ............................................................................................................................ 58 Investment rationale ........................................................................................................................ 59


Valuations ........................................................................................................................................ 65

Key risk ............................................................................................................................................ 67

Company Profile .............................................................................................................................. 68

Key management ............................................................................................................................ 69

Financials ........................................................................................................................................ 70



Investment summary

Over the past couple of years, the infrastructure sector has been plagued by several headwinds such as inflationary pressures, tacky order inflows, high interest rates and excruciating policy paralysis. The resultant execution slowdown shrunk bottom-lines of most of infrastructure companies. Many projects could not take off due to delay in approvals and decision making. Along with this, a lack of investment in the infrastructure sector resulted in a downward spiral for infrastructure stocks over the last couple of years. Since most companies have become cautious on new investments or have declared investment holidays, we believe that overall situation will not improve until critical decision/reforms related to land acquisition, environment clearances and long term funding options are taken.

We now expect, with a new and decisive government in place, the caution exercised on investments thus far to be lifted and believe the road sector would get a much needed impetus. The new government is expected to resolve issues related to stalled road projects before resuming meaningful awarding activity. Further, new positive policy announcement along with improvement in GDP growth and lowering of interest rate would benefit the companies in the road sector going forward.

Exhibit 1: 12th Plan likely to see investment of Rs9,145bn (~US$152bn) in road & highways

(Rsbn) Total 10th

Plan% of total

spendTotal 11th

Plan% of total

spend F12-13 F13-14 F14-15 F15-16 F16-17Total 12th

Plan% of total

spendElectricity 2,747 30.0 7,285 29.9 2,284 2,593 2,944 3,335 3,862 15,017 26.9Renewable Energy 0 0.0 892 3.7 312 426 581 791 1,076 3,186 5.7Roads & Bridges 1,526 16.7 4,531 18.6 1,505 1,645 1,804 1,982 2,210 9,145 16.4Telecommunications 1,447 15.8 3,850 15.8 1,059 1,361 1,765 2,306 2,948 9,439 16.9Railways 1,035 11.3 2,012 8.3 647 786 969 1,217 1,574 5,192 9.3MRTS 0 0.0 417 1.7 136 171 223 298 413 1,242 2.2Irrigation (incl Watershed) 1,215 13.3 2,435 10.0 771 874 992 1,125 1,282 5,044 9.0Water Supply & Sanitation 606 6.6 1,208 5.0 366 426 497 581 683 2,553 4.6Ports 224 2.4 445 1.8 187 255 353 491 693 1,978 3.5Airports 74 0.8 456 1.9 77 107 152 220 321 877 1.6Oil & Gas Pipelines 234 2.6 625 2.6 122 166 238 364 598 1,489 2.7Storage 56 0.6 179 0.7 45 64 96 147 232 584 1.0Grand Total 9,162 100 24,335 100 7,510 8,875 10,613 12,856 15,893 55,747 100Source: Planning Commission, SSLe

The road journey so far

Post the euphoria of robust awarding activity of road projects in F11 and F12, the road sector has seen significant slowdown in awarding of projects. In F13 & F14e only ~1,933 kms & ~1,600 kms of road projects were awarded mainly due to tepid response from developers and also due to various issues such as delay in decision making, land acquisition and environment clearance problems. Moreover, developers were also bidding very cautiously for road BOT projects and were looking to procure more EPC/cash contracts during this period. This was mainly on account of (a) high interest cost and tough business environment, (b) difficulties in achieving financial closure and (c) banks turning cautious lenders to road projects and demanding higher equity contribution. Of the total projects awarded, ~8,126 lane kms of projects are either yet to receive LOA or commence construction work.



Exhibit 2: Phase-wise status of road project till Jan 14

NHDP PhasesTotal

Length (Kms)

Already 2/4/6/8 Laned (Kms)

Under Implementation

(Kms)

Contracts Under Implementation

(No.)

Balance length for

award (Kms)

Approved Cost

(Rsbn)

Cumulative Expenditure

(Rsbn)

Expected Completion

Time Overrun (days)

GQ 5,846 5,846 0 0 0 303 318 Jun-12 767

NS - EW Ph 1 & 2 7,142 6,226 544 49 372 343 629 Dec-13 219

NHDP Phase III 12,109 5,927 4,497 61 1,685 806 757 Dec-13 219

NHDP Phase IV 14,799 409 4,548 8 9,842 278 55 Dec-15 (511)

NHDP Phase V 6,500 1,750 2,331 19 2,419 412 261 Dec-12 584

NHDP Phase VI 1,000 0 0 0 1,000 167 1 Dec-15 (511)

NHDP Phase VII 700 22 19 2 659 167 16 Dec-14 (146)

NHDP Total 48,096 20,180 11,939 139 15,977 2,476 2,035 621SARDP 388 75 37 2 276 0

Port Connectivity 380 375 5 2 0 0

Others 1,465 1,280 185 4 0 104

Total by NHAI 50,329 21,910 12,166 147 16,253 2,476 2,139Source: NHAI, SSLe

Included in GQ Cost

Exhibit 3: Only ~1200 kms of projects are awarded

959

262 480

391

1,31

8 2,3

51

753

635

1,68

5

2,20

3

2,69

3

1,78

0

2,24

7

2,70

6

1,13

3

809

895

3,47

6

671

342

1,30

5

4,74

0

1,73

4

1,23

4

643

3,36

0

5,05

8

6,55

1

1,43

2

1,20

0

0

2,000

4,000

6,000

8,000

Befo

re 2

000

00-0

1

01-0

2

02-0

3

03-0

4

04-0

5

05-0

6

06-0

7

07-0

8

08-0

9

09-1

0

10-1

1

11-1

2

12-1

3

13-1

4*

(Km

s)

Completed Length (Kms) Awarded Length (Kms)

Source: NHAI, SSLe

Exhibit 4: 14,794 kms projects completed as on Jan14 Exhibit 5: 12,341 kms projects under implementation as on Jan14

Toll , 3,614

Annuity, 1,213

EPC, 9,967

Toll , 9,706

Annuity, 1,128

EPC, 1,507

Source: NHAI, SSLe



Exhibit 6: Phase-wise kms already awarded Exhibit 7: . kms to be awarded/under implementation

5,84

6 7,14

2

12,1

09 1

4,79

9

6,50

0

1,00

0

700

388

380 1,

465

5,84

6

6,22

6

5,92

7

409 1

,750

0 22

75

375 1,

280

0

4,000

8,000

12,000

16,000 G

Q

Phas

e II

Phas

e III

Phas

e IV

Phas

e V

Phas

e VI

Phas

e VI

I

SAR

DP

Port

Con

Oth

ers

(Km

s)

NHDP Total (Kms) Already 2/4/6/8 Laned (Kms)

0

544 1

,969

496 83

8

0 19

37

5 112

0 372

1,6

85

9,84

2

2,41

9

1,00

0

659

276

0 0

0

3,000

6,000

9,000

12,000

GQ

Phas

e II

Phas

e III

Phas

e IV

Phas

e V

Phas

e VI

Phas

e VI

I

SAR

DP

Port

Con

Oth

ers

(Km

s)

Under Implementation (Kms) Balance length for award

Source:NHAI, SSLe Exhibit 8: No. of projects under implementation in terms of Toll, Annuity & EPC (as on Jan 14)

129

129

131

132

132

132

135

133

133

133

133

133

133

132

132

132

132

131

131

132

130

30 30 31 31 31 31 31

31 31 31 31 31 31 30 30 30 30 30 30 30 28

68 68 67 65 65 63 63 61 61 59 56 60 59 59 60 60 61 56 58 5759

0

60

120

180

240

May

-12

Jun-

12Ju

l-12

Aug-

12Se

p-12

Oct

-12

Nov

-12

Dec

-12

Jan-

13Fe

b-13

Mar

-13

Apr-

13M

ay-1

3Ju

n-13

Jul-1

3Au

g-13

Sep-

13O

ct-1

3N

ov-1

3D

ec-1

3Ja

n-14

(No.

of C

ontra

cts

)

Toll Annuity EPC

57 57 57 58 58 58 59 59 59 60 60 59 60 60 59 59 59 60 60 60 60

13 13 14 14 14 14 14 14 14 14 14 14 14 14 14 14 13 14 14 1413

30 30 29 29 29 28 28 27 27 26 25 27 26 27 27 27 27 26 26 2627

0%

25%

50%

75%

100%

May

-12

Jun-

12Ju

l-12

Aug-

12Se

p-12

Oct

-12

Nov

-12

Dec

-12

Jan-

13Fe

b-13

Mar

-13

Apr-

13M

ay-1

3Ju

n-13

Jul-1

3Au

g-13

Sep-

13O

ct-1

3N

ov-1

3D

ec-1

3Ja

n-14

Toll Annuity EPC Source: NHAI, SSLe

Exhibit 9: only ~24% target achived in F14 Exhibit 10: ~1,219 lane kms constructed till Jan 14 for F14

5,73

8

10,6

10

7,00

0

9,00

0

7,30

0

8,00

0

5,00

0

1,23

4

643

3,36

0 5,0

58 6,4

91

1,14

4

1,20

0

0%

25%

50%

75%

100%

0

3,000

6,000

9,000

12,000

07-08 08-09 09-10 10-11 11-12 12-13 13-14e

(Km

s)

Award Target (LHS) Awarded Length (LHS)Achieved (RHS)

2,88

5 3,5

19

3,16

5

2,50

0

2,50

0 3,00

0

3,00

0

1,68

5 2,20

3 2,6

93

1,78

0 2,24

7 2,70

6

1,21

9

0%

25%

50%

75%

100%

0

1,000

2,000

3,000

4,000

07-08 08-09 09-10 10-11 11-12 12-13 13-14*

(Km

s)

Construction Target (LHS) Completed Length (LHS)Achieved (RHS)

Source: NHAI, SSLe



slow traffic growth a short term concern.

Over the last couple of years, most of the players in the road BOT space have witnessed a weakness in traffic growth emanating from a slowdown in the economy. The decline in GDP growth rate from 8.5-9% few years ago to 4-5% current levels past few years caused in part by governments policy paralysis and in part by slowdown in the global economy growth led to the pain. As per our study that involves study of set of projects (~50 projects across four players); there is a positive correlation between the traffic growth and economic growth. The study shows that the slowdown in economy activity has led to traffic growth of 1.3% YoY and 3.7% YoY in F13 and F14e. Moreover, there was a decline in automobile sales, particularly in the commercial vehicle segment, that eventually resulted into lower traffic growth on most stretches of roads across the country. We believe, inspite of a limited history and paucity of data currently available on traffic in India, its growth is likely to be cyclical in nature and the lower growth phase is a mere short term blip. In our view, any improvement in the GDP growth would lead to a proportionate growth in traffic. Going forward, we expect an average traffic growth to inch up to ~5% plus YoY on a medium term basis.

Exhibit 11: Like-to-Like avg YoY traffic growth for 50 BOT projects Exhibit 12: Traffic growth positively correlated to Indian GDP

13.3

9.5

7.9

1.3

3.7

9.710.5

0

3

6

9

0

4

8

12

16

F10 F11 F12 F13 F14e F15e F16e

(%)

(%)

Traffic growth YoY (LHS) Average traffic growth (RHS)

13.3

9.5

7.9

1.3

8.69.3

6.2 5.0

0

4

8

12

16

F10 F11 F12 F13

(%)

India GDP Traffic growth YoY Source: Planning commission, Company, SSLe

Exhibit 13: % GDP growth in Gujarat & Maharashtra Exhibit 14: State-wise % CAGR over F08-13 of GDP

13.3 13.5

11.3

2.6

9.3 10.2

7.1 7.1

14.9

8.4

11.0

6.8

11.210.0

8.510.0

0

4

8

12

16

F06 F07 F08 F09 F10 F11 F12 F13

(%)

Gujarat GDP growth Maharashtra GDP growth

State Name %CAGR over F08-13

Chhattisgarh 14.8

Gujarat 11.2

Madhya Pradesh 10.2

Maharashtra 7.2

Odisha 6.8

West Bengal 6.6

India GDP 7.2

Source: Planning commission, SSLe



Exhibit 15: LCV & MHCV sales under pressue Exhibit 16: LCV & MHCV sales decline over past couple of years

0

20,000

40,000

60,000

80,000 Au

g-12

Sep-

12O

ct-1

2N

ov-1

2D

ec-1

2Ja

n-13

Feb-

13M

ar-1

3Ap

r-13

May

-13

Jun-

13Ju

l-13

Aug-

13Se

p-13

Oct

-13

Nov

-13

Dec

-13

Jan-

14Fe

b-14

Mar

-14

(No.

of V

ehic

les)

M&HCV DOMESTIC LCV DOMESTIC

(50)

(25)

0

25

50

0

200,000

400,000

600,000

800,000

F07 F08 F09 F10 F11 F12 F13 F14

(%)

No.

of

Vehi

cles

M&HCV DOMESTIC (LHS) LCV DOMESTIC (LHS)Growth (RHS)

Source: SIAM, SSLe awarding to pickup.

Currently, the road sector is going through a bumpy ride due to various issues mentioned above. However, we believe, with a new and decisive government, the road sector would get a much needed impetus. The new government is expected to resolve issues related to stalled road projects before resuming meaningful awarding activity. The near term outlook looks challenging for developers. However, we expect the scenario to improve over the next 2-3 years aided by (a) pick up in execution, (b) improvement in cash flows and (c) step up in asset monetisation.

Exhibit 17: Award target set at 6,500 kms for F15e; however we believe ~4,500kms would be awardedAward (Kms) F15e % Change F14e % Change F13 % Change F12 % Change F11NHAI 5,000 316.7 1,200 4.9 1,144 (82.4) 6,491 28.3 5,058

PWD's 1,500 275.0 400 (49.3) 789 (46.2) 1,466 1257 108

Total (Kms) 6,500 306.3 1,600 (17.2) 1,933 (75.7) 7,957 54 5,166Number of projectsNHAI 11 49 32

PWD's 13 15

Total projects 11 62 47Source: NHAI, SSLe Exhibit 18: 8,126 kms are yet to be issued LOA-Jan14

4,58

25,

920

6,00

15,

940

5,94

06,

199

6,61

76,

287

6,06

06,

729

7,04

56,

882

7,07

27,

162

7,35

86,

908

7,28

37,

808

8,18

68,

904

8,52

38,

223

8,08

09,

039

8,86

58,

866

8,57

98,

987

8,87

48,

755

8,59

98,

433

8,17

27,

893

7,89

37,

994

7,95

87,

957

7,61

87,

643

7,64

47,

712

7,70

67,

941

8,04

08,

1262

,938 2

,979

2,74

12,

905

2,83

82,

726

2,55

92,

743

3,04

13,

042

3,04

23,

140

3,00

83,

083

3,02

8 3,

470

3,54

7 4,

010

3,87

6 4,

173

4,73

5 4,

779

4,88

7 5,23

6 5,

217

5,09

6 5,

184

5,06

9 5,

128

5,13

1 5,

161

5,51

7 5,

519

5,52

9 5,

203

4,69

0 4,

738

4,55

6 4,

713

4,75

9 4,

688

4,59

9 4,

564

4,39

2 4,

239

4,02

0

0

4,000

8,000

12,000

16,000

Apr-

10M

ay-1

0Ju

n-10

Jul-1

0Au

g-10

Sep-

10O

ct-1

0N

ov-1

0D

ec-1

0Ja

n-11

Feb-

11M

ar-1

1Ap

r-11

May

-11

Jun-

11Ju

l-11

Aug-

11Se

p-11

Oct

-11

Nov

-11

Dec

-11

Jan-

12Fe

b-12

Mar

-12

Apr-

12M

ay-1

2Ju

n-12

Jul-1

2Au

g-12

Sep-

12O

ct-1

2N

ov-1

2D

ec-1

2Ja

n-13

Feb-

13M

ar-1

3Ap

r-13

May

-13

Jun-

13Ju

l-13

Aug-

13Se

p-13

Oct

-13

Nov

-13

Dec

-13

Jan-

14

(Km

s)

Letter of award issued / agreement signed and work to be started Currently Under Implementation Source: NHAI SSLe



Exhibit 19: BOT projects to be awarded

Type Project Name Source Scope of WorkTotal Prj

cost (Rsmn)

Length km

2/4/6 lane km

Last Date of Submission (e-Tendering Mode)

Posted Date

BOT Toll

Solapur- Bijapur NHAI

Four/Six Laning of Solapur- Bijapur Section of NH-13in the states of Maharashtra and Karnataka to beexecuted under NHDP Ph III

14,054 109 2-LANE/4-LANE 14th July 30-May-14

DBFOT-Toll

Yamunanagar-Saha-Barwala-Panckula

NHAIFour laning of UP/Haryana borderYamunanagar-Saha-Barwala-Panckula Section of NH-73 from km71.64 to km 179.3 in the State of Haryan.

11,364 105 4-LANE27th June 2014(On e-Tendering Mode)

28-May-14

BOT (Toll)

Yadgiri - Warangal NHAI

Four Laning of Yadgiri-Warangal section of NH-163from 54km to 150km in the State of Andhra Pradeshunder NHDP Ph IV

11,232 99 4-LANE9th July 2014(On e-Tendering Mode)

23-May-14

DBFOT (Toll)

Delhi-Meerut Expressway NHAI

RFP for development of Delhi-Meerut Expressway andother connecting roads including 6/8-laning of NH-24from 0km to 49.9km, 6-laning of NH-58 from 6.8km to52.6km and NH-235 from km 0.36 to 8.80 in the stateof Delhi & Uttar Pradesh on DBFOT (Toll) basis underNHDP Phase-VI.

65,710 150 6/8-LANE

6th June 2014(On e-Tendering Mode)

4-May-14

Source: NHAI, SSLe Exhibit 20: EPC contracts to be awarded


cost (Rsmn)

Length km

2/4/6 lane km


Posted Date

EPCChhapra-Rewaghat-Muzaffarpur

NHAI

Improvement/augmentation of chhapra-rewaghat-muzaffarpur section of nh-102 to 2-lane with pavedshoulders from km 1.3 to km 73.080 in the state ofBihar.

3416 73.080 2-LANE4th July 2014 (On e-Tendering Mode)

6-Jun-14

EPC Chas-Ramgarh NHAITwo laning with paved shoulders of Chas-RamgarhSection of NH-23 from 0km to 78.2km in the state ofJharkhand under Ph-IV.

3416.1 78 2-LANE

04th September 2014(On e-Tendering Mode)

6-Jun-14

EPC Jodhpur-Barmer NHAI

Widening and strengthening of Jodhpur-BarmerSection of NH-112 to 2/4 lane with paved shoulderfrom 140km to 225Km under NHDP- IV in the state ofRajasthan on EPC mode.

2124 86 2-LANE/4-LANE


23-May-14

EPC Jodhpur-Barmer NHAI

Widening and Strengthening of Jodhpur-BarmerSection of NH-112 (Bagundi-Barmer Package-II) toTwo lane with Paved Shoulder from Km 254.800 toKm 328.900 (Length 74.1 Km.) under NHDP- IV

1671.7 74 2-LANE


23-May-14

EPC Jaisalmer Barmer NHAIWidening and strengthening of Jaisalmer Barmersection of NH-15 to 2/4 lane with paved shoulder from0km to 153km under NHDP Ph-IV

2987.7 131 2-LANE/4-LANE

3rd June 2014(On e-Tendering Mode)

1-May-14

EPC Phalodi-Jaislmer NHAIWidening and strengthening of Phalodi-Jaislmersection of NH-15 to 2/4 Lane with paved shoulderunder NHDP-IV in the state of Rajasthan

5675.1 161 2-LANE18th June 2014(On e-Tendering Mode)

1-May-14

Source: NHAI, SSLe



Exhibit 21: Contract to be awarded on OMT/O&M basis


cost (Rsmn)

Length km

2/4/6 lane km


Posted Date

O & M Hinganghat ROB NHAI

Short term improvements & routine maintenance O&Mfor stretch from Km.36.600 to Km 93.750 of NH-7(Excluding Package NS-59-A(MH)-Hinganghat ROBfrom Km.75.950 to Km.77.100) in the state ofMaharashtra

2,119 56 17th June 2014(On e-Tendering Mode) 5-Jun-14

O & M Nagpur-Hyderabad NHAIOperation & Maintenance on Nagpur-Hyderabadsection of NH-7 in the state of Maharashtra 1,645 30

17th June 2014(On e-Tendering Mode) 5-Jun-14

O & M Garamore - Gagodhar NHAIRemaining work of Garamore - Gagodhar Section ofNH-8A & NH-15 on risk & cost 2,125 90

19th June 2014(On e-Tendering Mode) 5-Jun-14

O & M Gorhar to Barwa Adda NHAIShort term improvement and routine maintenance ofGorhar to Barwa Adda section of NH-2 in the state ofJharkhand.

11,270 79 3rd July 2014(On e-Tendering Mode) 4-Jun-14

O & M Kotwa-Mehsi-Muzaffarpur NHAI

Short term improvement and routine maintenance ofKotwa-Mehsi-Muzaffarpur section of NH-28 &Muzaffarpur to Darbhanga section of NH-57 in thestate of Bihar.

9,353 118 4th July 2014(On e-Tendering Mode) 4-Jun-14

O & MSUNAKHALA TO ICHAPURAM

NHAI O&M work of Sunakhala to Ichapuram section of NH-16 in the state of odisha for a period of two years 9,921 1071st July 2014(On e-Tendering Mode) 4-Jun-14

O & M Bamanbore-Garamore NHAI

Short term improvement and routine maintenancework of Bamanbore-Garamore section of NH-8A andRajkot Bamanbore section of NH-8B in the stateof Gujarat

4,231 102 2nd July 2014(On e-Tendering Mode) 4-Jun-14

Tollway

Belgaum- Khanapur/Khanapur-Karnataka/Goa

NHAI

Short term repair works to the existing carriageway ofproposed 4 laning of Belgaum- Khanapur section and2-laning with paved shoulders of Khanapur-Karnataka/Goa Border Section of NH-4A in the stateof Karnataka at the risk and cost of the concessionaire M/s. GVRMP Belgaum-Khanapur Tollway PrivateLimited.

2,890 84 2-LANE/4-LANE10th June 2014(On e-Tendering Mode) 2-Jun-14

O & M Hapur-Garhmukteshwar

NHAI Short term improvement & routine of Hapur-Garhmukteshwar section of NH-24 17,215 3527th June 2014(On e-Tendering Mode) 30-May-14

O & M Ludhiana Talwandi NHAIRepair and maintenance of NH-95 Ludhiana TalwandiSection in the state of Punjab. 3,268 78

2nd July 2014(On e-Tendering Mode) 23-May-14

O & M NH-4B, NH-4 NHAI Short term improvements and routine maintenance ofNH-4B and NH-4 in the State of Maharashtra 3,750 3019th June 2014(On e-Tendering Mode) 21-May-14

O & M USAYANI MOD JUNCTION

NHAI

Remedial works of black spot / improvement ofUsayani mod junction and providing & fixing of MSrailing at different locations in Firozabad city of NH-2(new NH-19) in the state of U.P.

881 30 11th June 2014(On e-Tendering Mode) 21-May-14

O&M Bakhtiyarpur Khagaria NHAIPeriodical repair work of Bakhtiyarpur KhagariaSection of NH-31 for the year 2014-15 14,780 63

5th June 2014(On e-Tendering Mode) 12-May-14

OMT Chandikhole Paradip NHAIRFP for O&M of Chandikhole Paradip section of NH 5A in the state of Odisha on OMT basis (Package No.33/2013)

793 77 11th June 2014(On e-Tendering Mode) 1-May-14

OMT

Purnea Junction - Dalkhola - Islampur - Siliguri

NHAI

RFP for O & M of Purnea Junction - Dalkhola -Islampur - Siliguri section of NH-31 in the states ofBihar and West Bengal on OMT Basis [PACKAGENO:OMT/07/2013]

1,361 143 2nd June 2014(On e-Tendering Mode) 29-Apr-14

OMTIchchapuram-Srikakulam-Anandpuram

NHAIO&M of Ichchapuram-Srikakulam-Anandpuramsection of NH-5 in the state of Andhra Pradesh onOMT Basis. Pkg:OMT-25-(GQ)

1,972 206 6th June 2014(On e-Tendering Mode) 21-Apr-14

OMTAgra-Makhanpur-Etawah

NHAIReplacement of flexible pavement with rigid pavementat toll plaza locations at 225km & 285km of NH-2under O&M of Agra-Makhanpur-Etawah section

725 184 11th June 2014(On e-Tendering Mode) 21-Apr-14

Source: NHAI, SSLe



.lean period has helped to rethink

In our analysis, the lull period of roughly over two years brought on by elusive project clearances has given certain companies, like SEL, IRB, ITNL and ASBL, accumulate a healthy asset portfolio. Executing bagged BOT projects has nursed their balance sheets such as to make them more robust and impart cash flow visibility. We believe the above names will benefit the most from the recovery of the investment cycle as they are strategically positioned in the market.

Exhibit 22: Monthly completed projects till Jan14 Exhibit 23: Monthly awarded projects till Jan14

(220)

0

220

440

660

Jun-

11

Aug-

11

Oct

-11

Dec

-11

Feb-

12

Apr-

12

Jun-

12

Aug-

12

Oct

-12

Dec

-12

Feb-

13

Apr-

13

Jun-

13

Aug-

13

Oct

-13

Dec

-13

(Km

s)

GQ NS-EW Ph1&2 Phase IIIPhase IV Phase VII SARDPPort Connectivity Others

0

450

900

1,350

1,800

Jun-

11

Aug-

11

Oct

-11

Dec

-11

Feb-

12

Apr-

12

Jun-

12

Aug-

12

Oct

-12

Dec

-12

Feb-

13

Apr-

13

Jun-

13

Aug-

13

Oct

-13

Dec

-13

(Km

s)

GQ NS-EW Ph1&2 Phase IIIPhase IV Phase VII SARDPPort Connectivity Others

LeanPeriod

Source: NHAI, SSLe

Exhibit 24: 16,253 km of projects yet to be awarded as on Jan 14

0

2,500

5,000

7,500

10,000

NS - EW Ph 1 & 2

NHDP Phase

III

NHDPPhase IV

NHDP Phase

V

NHDP Phase

VI

NHDP Phase

VII

SARDP

(Km

s)

NS - EW Ph 1 & 2

2%NHDP

Phase III10%

NHDPPhase IV

61%

NHDP Phase V

15%

NHDP Phase VI

6%

NHDP Phase VII

4%

SARDP2%

Source: NHAI, SSLe



Exhibit 25: Annualized kms/day of road project awarded

0

5

10

15

20

0

450

900

1,350

1,800Ap

r-11

May

-11

Jun-

11

Jul-1

1

Aug-

11

Sep-

11

Oct

-11

Nov

-11

Dec

-11

Jan-

12

Feb-

12

Mar

-12

Apr-

12

May

-12

Jun-

12

Jul-1

2

Aug-

12

Sep-

12

Oct

-12

Nov

-12

Dec

-12

Jan-

13

Feb-

13

Mar

-13

Apr-

13

May

-13

Jun-

13

Jul-1

3

Aug-

13

Sep-

13

Oct

-13

Nov

-13

Dec

-13

Jan-

14

(Km

s/da

y)

(Km

s)

Awarded Length (LHS) Awarded (RHS) Annualised Source: NHAI, SSLe

Exhibit 26: SEL & IRB has a healthy order backlog led by new order inflow in F14 while ABL has order book-to-sales of 1.7x SEL IRB

70 76

101 89

0.0

1.5

3.0

4.5

6.0

0

30

60

90

120

F11 F12 F13 F14

(%)

(Rs

bn)

Order backlog (LHS) Order book-to-sales (RHS)

97

65 64

100

0.0

2.0

4.0

6.0

8.0

0

30

60

90

120

F11 F12 F13 F14

(%)

(Rs

bn)


ITNL ABL

92

121 147

115

0.0

1.5

3.0

4.5

0

38

76

114

152

F11 F12 F13 F14

(%)

(Rs

bn)


47 50

36 35

0.0

1.0

2.0

3.0

4.0

0

15

30

45

60

F11 F12 F13 F14

(%)

(Rs

bn)

Order backlog (LHS) Order book-to-sales (RHS) Source: Company, SSLe



Relative valuation

We expect SEL and IRB to report revenue CAGR of ~15% over F14-16e mainly led by commissioning of new BOT projects and growth in construction income. BOT revenue of ITNL is expected to grow at CAGR of 10.6% over F14-16e driven by commissioning of BOT projects. On the other hand, we expect ABL to report revenue of CAGR of 13.4% over F13-16e, mainly led by commissioning of Sambalpur-Baragarh, Dhankuni-Kharagpur, Jaora-Nayagaon and Belgaum-Dharwad BOT projects.

Exhibit 27: SEL & IRB has decent ~15% CAGR over F14-16e while ITNL & ABL has ~13.5% CAGR over F14-16e

28,542

43,737

74,905

19,256

21.0

17.2

13.7

7.3

0

6

12

18

24

0

20,000

40,000

60,000

80,000

SEL IRB ITNL ABL

(%)

(Rs

mn)

Revenues (LHS) Growth (RHS)

15.015.3

13.813.4

12

13

14

15

16

SEL IRB ITNL ABL

(%)

Revenue % CAGR over F14-16e Source: Company, SSLe

Despite sluggish order inflows F13 and F14, the order book of the developers has been decent. Slowdown in execution pace in some cases due to headwinds at governments end has also kept the company's order book at higher levels. This order backlog gives comfort for growth over the next couple of years. IRB bagged three new BOT projects worth Rs70bn during F14 while SEL bagged various project worth Rs2.3bn during the year.

Exhibit 28: SEL & IRB has bagged healthy order inflows during F14

89,407100,198 114,970

35,460

0%

30%

60%

90%

120%

0

30,000

60,000

90,000

120,000

SEL IRB ITNL ABL

(Rs

mn)

Road BOT projects Road EPC projectsPower MiningIrrigation Metro Rail% captive orders

23,170

73,206

34,223

17,729

0

20,000

40,000

60,000

80,000

SEL IRB ITNL ABL

(Rs

mn)

Order inflow Source: Company, SSLe



Margins improvement driven by change in revenue mix We expect the share of BOT revenues to increase due to commissioning of BOT projects thereby improving EBITDA margins for all the four developers in the range of 150-300bps. We expect the road companies to maintain their construction margins.

Exhibit 29: Margins to improve owing to commissioning of BOT projects

10.8% 10.8% 8.6% 10.6% 10.8% 10.8%

45% 44% 44%47.0% 47.5% 48%

19%22% 20% 22.0%

25.7% 25.7%

29%26% 28%

28.7% 30.4% 30%

0%

15%

30%

45%

60%

F11 F12 F13 F14 F15e F16e

(%)

Sadbhav IRB ITNL Ashoka

16.216.9 17.1

22.7

0

6

12

18

24

Sadbhav IRB ITNL Ashoka(%

)EBITDA % CAGR over F14-16e

Source: Company, SSLe Infrastructure companies have projects with asset profiles spread across roads, airports, power, real estate etc. Also, most companies have risks that vary considerably depending on their project portfolio. Thus, the companies are strictly not comparable. As SEL, IRB, ITNL and ABL cater primarily to the BOT road segment, we believe some comparisons may be in order though not entirely. SEL & IRB have an impressive execution track record and amongst their peers they also have a healthy EPC order book. We initiate/re-initiate coverage on three companies, SEL, IRB and ITNL with a BUY rating with a TP of Rs251, Rs309 and Rs272 respectively. We initiate with a HOLD rating on ABL with a TP of Rs155 due to limited upside from current levels.

Exhibit 30: Valuation Summary

F15e F16e F15e F16e F15e F16e F15e F16eSadbhav Eng. (S) BUY 203 251 7.4 8.3 27.6 24.5 2.9 2.6 11.1 11.3IRB Infra BUY 257 309 15.3 18.8 16.8 13.7 2.2 1.9 13.6 15.0

ITNL BUY 219 272 18.6 22.6 11.8 9.7 0.9 0.9 8.6 9.4

Ashoka Buildcon HOLD 144 155 6.3 7.0 22.9 20.5 1.7 1.6 7.6 8.0

Source: SSLe, Company, (S) - Standalone Financials

EPS (Rs.) P/E (x) RoE (%)P/B (x)Company Rating CMP TP



Exhibit 31: P/E band comaprison

SEL IRB ITNL ABL

0

10

20

30

40

Feb-

08Se

p-08

Apr-

09N

ov-0

9Ju

n-10

Jan-

11Au

g-11

Mar

-12

Sep-

12Ap

r-13

Nov

-13

Jun-

14

(x)

0

10

20

30

40

50

Feb-

08Se

p-08

Apr-

09N

ov-0

9Ju

n-10

Jan-

11Au

g-11

Mar

-12

Sep-

12Ap

r-13

Nov

-13

Jun-

14

(x)

5

7

9

11

13

15

Mar

-10

Sep-

10M

ar-1

1Au

g-11

Feb-

12Ju

l-12

Jan-

13Ju

l-13

Dec

-13

Jun-

14

(x)

0

5

10

15

20

25

Oct

-10

Jan-

11Ap

r-11

Jul-1

1O

ct-1

1Ja

n-12

May

-12

Aug-

12N

ov-1

2Fe

b-13

May

-13

Aug-

13N

ov-1

3M

ar-1

4Ju

n-14

(x)

Source: Bloomberg, SSLe

Exhibit 32: P/BV band comparison SEL IRB ITNL ABL

0.0

1.5

3.0

4.5

6.0

Feb-

08Se

p-08

A pr-

09N

ov-0

9Ju

n-10

Jan-

11Au

g-11

Mar

-12

Sep-

12A p

r-13

Nov

-13

Jun-

14

(x)

0.0

1.0

2.0

3.0

4.0

5.0

Feb-

08Se

p-08

Apr-

09N

ov-0

9Ju

n-10

Jan-

11Au

g-11

Mar

-12

Sep-

12Ap

r-13

Nov

-13

Jun-

14

(x)

0.0

0.7

1.4

2.1

2.8M

ar-1

0Se

p-10

Mar

-11

Aug-

11Fe

b-12

Jul-1

2Ja

n-13

Jul-1

3D

ec-1

3Ju

n-14

(x)

0.0

0.5

1.0

1.5

2.0

Oct

-10

Jan-

11A p

r-11

Jul-1

1O

ct-1

1Ja

n-12

May

-12

Aug-

12N

ov-1

2Fe

b-13

May

-13

Aug-

13N

ov-1

3M

ar-1

4Ju

n-14

(x)


Exhibit 33: EV/EBITDA band comparison SEL IRB ITNL Ashoka

0

5

10

15

20

Feb-

08Se

p-08

Apr-

09N

ov-0

9Ju

n-10

Jan-

11Au

g-11

Mar

-12

Sep-

12Ap

r-13

Nov

-13

Jun-

14

(x)

0

10

20

30

40

50

Feb-

08Se

p-08

Apr-

09N

ov-0

9Ju

n-10

Jan-

11Au

g-11

Mar

-12

Sep-

12A p

r-13

Nov

-13

Jun-

14

(x)

8

9

10

11

12

Mar

-10

Sep-

10M

ar-1

1Au

g-11

Feb-

12Ju

l-12

Jan-

13Ju

l-13

Dec

-13

Jun-

14

(x)

5

10

15

20

25

Oct

-10

Jan-

11A p

r-11

Jul-1

1O

ct-1

1Ja

n-12

Ma y

-12

Aug-

12N

ov-1

2Fe

b-13

Ma y

-13

Aug-

13N

ov-1

3M

ar-1

4Ju

n-14

(x)




Key risk

Execution risk: In the road sector, there can be various issue such as - delay in land acquisition by NHAI thereby delay in providing Right of Way, delay in clearances from various authorities like environment, forest and railways etc. which could lead to execution risk. Such delays have a larger impact on BOT project compared to an EPC project. Thus, any delay in the underdevelopment projects would adversely impact our NPV valuation.

Sensitivity to traffic growth: The feasibility of any BOT (toll) road projects is highly dependent on traffic growth and toll rate hike. While, the toll rate hikes are fixed as per contractual terms, traffic growth is more a function of the overall health of economy. In our view, if the traffic growth is well below estimate by more than 5-7%, it would have an adversely impact on profitability. In the present scenario, we have seen a relatively low traffic growth in most projects which is compensate by high enough toll rate hike (linked to inflation).

Slowdown in new projects: The order inflows for the road companies would be affected by any slowdown in new projects being awarded by NHAI or state governments.

Aggressive bidding: Due to slowdown in order inflows in various other sectors due to variety of reasons, the competitive intensity in NHAI bids had increased tremendously. There few road companies who had bid aggressively bid for road projects. However, the competition has reduced lately with only few serious players biding for the project. In our view a project based on aggressive assumptions, it would act as a negative trigger.

Interest rate & liquidity risk: The road BOT projects are high leverage assets since most of the funding is done in the D/E ratio of 70:30. Thus, any surge in interest rate can have a negative impact on the profitability of the road asset. Further, financial closure of road BOT project is dependent on prevailing economic and market conditions and any delays can negative impact on returns.



Research \

Financial SummaryY/E Mar (Rsmn) F12 F13 F14e F15e F16eNet sales 26,755 18,110 23,581 28,542 31,171growth (%) 21.1 (32.3) 30.2 21.0 9.2EBITDA margin (%) 10.8 8.6 10.6 10.8 10.8Adjusted net profit 1,404 214 1,445 1,119 1,261EPS (Rs) 9.3 0.9 9.5 7.4 8.3growth (%) 17.2 (90.7) 995.1 (22.6) 12.7P/E (x) 21.8 233.8 21.4 27.6 24.5EV/EBITDA (x) 11.9 24.5 15.5 12.7 11.7Dividend yield (%) 0.3 0.3 0.3 0.3 0.3RoE (%) 18.4 2.7 16.1 11.1 11.3RoCE (%) 8.6 3.6 9.6 5.7 5.8Source: Company, SSLe

On an upward journey; Initiate with a BUY Sadbhav Engineering Ltd (SEL), a leading EPC and infrastructure development company, has more than two decades of experience in developing projects in the road & highway, irrigation and mining sectors. SEL started as an EPC player in Gujarat and gradually expanded across the country. The company has a portfolio of 13 projects (comprising 2,710 lane kms), of which nine are operational and four are under various stages of construction. SEL has an order book of Rs89.4bn (3.8x on a trailing basis) as on 4QF14. Going forward, based on healthy order inflows and execution pick-up in its under-construction BOT projects, we expect the company to report EPS of Rs7.4 and Rs8.3 in F15e and F16e respectively. We initiate with a BUY rating on SEL with a TP of Rs251 valuing the company on SOTP basis.

Management strategy for cautious bidding played a key role: SEL has been a disciplined player as far as the bidding profile or execution of projects is concerned, especially in the road BOT space. As a part of its strategy, the company has not bid aggressively for road projects in F11 and large part of F12, when most of the industry players were bidding very aggressively. Going forward, we expect the company to continue to bid strategically for BOT projects aided by (a) relatively low competitive intensity at the biding stage, and (b) expectation of awarding activity to pick-up in 2HF15e.

Robust order inflows over past few quarters: Despite weak macroeconomic environment and investment sentiment, SEL has won new orders across various sectors worth Rs76.5bn during the last two years (F12 and F13). Continuing with the trend, SEL has already won ~Rs23.1bn of orders in F14, primarily in the mining sector. As on 4QF14, SELs order book stood at Rs89.4bn, thereby converting into an order book-to-sales ratio of 3.8x on a trailing basis. With the new and decisive government in place we expect the ordering activity to pick up in 2HF14 and expect order inflows of Rs29.9bn in F15e & Rs35.4bn in F16e, respectively.

Equity requirement completely funded: The Company has already invested ~Rs2.4bn till F14 in under-development BOT portfolio of ~US$384mn and would require an incremental equity investment of ~Rs3.5bn over the next two years. We believe that the company is well-positioned to meet of its medium-term equity requirement based on: (a) recently raised Rs1.3bn through non convertible debenture issue and (b) securitization amount from Ahmedabad project.

Initiate with a BUY: Given, the healthy order book (3.8x trailing revenue) and strong execution capabilities, we expect the company to report revenues of Rs28.5bn and Rs31.2bn for F15e and F16e, respectively. We have used sum-of-the-parts (SOTP) valuation method for SEL, valuing the construction business at an EV of 7x on F16e EBITDA which is lower than its 3-year average and the BOT projects on a NPV basis at a CoE of 14%. We initiate coverage on the stock with a BUY rating and a target price of Rs251.

Key risk to our call would be lower than expected traffic growth, slower execution, lesser expected project wins, and greater competitive intensity in the roads sector.

Sadbhav Engineering Ltd SADE IN; SADE.BO

Initiating Coverage BUY

Current price (4 Jul) RsTarget price RsUpside/(downside) % 23

Market dataMkt capitalisation Rs bn 30.9Average daily vol '000 86.852-week H/L Rs 213 / 51.25Shares O/S mn 151.8Free float mn 77.9Promotor holding % 48.7Foreign holding % 16.0Face value Rs 1.0

Price performance (%)1m 3m 6m 1yr

Nifty (abs) 4.7 15.8 24.8 32.8Stock (abs) 2.2 105.5 122.5 122.6Relative to Index (2.5) 89.7 97.7 89.8

Performance

203 251

(50)

0

50

100

150

0

50

100

150

200

250

Jul-13 Oct-13 Dec-13 Mar-14 Jun-14Sadbhav (LHS) Rel. to Nifty (RHS)

(%)(Rs)


July 8, 2014Infrastructure & Construction | India


Sadbhav Engineering Ltd SBICAP Securities Ltd


Investment rationale

Dominant BOT player in the road BOT space SEL has one of the largest portfolios of BOT road projects with the portfolio aggregating to ~US$2bn spread across most parts of the country (~85% portfolio skewed towards west and north). The portfolio includes 13 projects (comprising 2,710 lane kms), of which nine are operational and four are under various stages of construction. Of the four projects under development, the work on three (ShreenathjiUdaipur, RajsamandBhilwara and RohtakHissar) has already commenced, while the construction of the fourth project (Karnataka state highway project) is expected to begin by 1QF15e.

Exhibit 34: BOT portfolio increase to ~US$2bn

Name of the Project Total Cost (Rsmn)Length

(km)Length

(Lane km)Concession period Client

COD/Expected

COD

Debt (Rsmn)

Equity (Rsmn)

Grant (Rsmn)

Sadbhav 's share (%)

Toll revision

dates

Operational projectsAhmedabad Ring Road 5,150 76 304 20 years AUDA 30-Jun-08 4,050 740 360 80 September

Aurangabad- Jalna 2,770 66 263 23 years & 6 months MSRDC 28-Jul-09 1,940 830 0 100Every 3 year

Mumbai-Nashik 7,530 8 30 20 years NHAI 1-Dec-12 6,500 520 510 20 July

Nagpur-Seoni 2,780 28 56 20 years NHAI 1-May-10 1,711 1,068 0 51

Dhule-Palasner 14,200 97 194 18 years NHAI 1-Jun-12 10,650 3,550 0 27 April

Maharashtra Border 14,264 6 12 24 years & 6 monthsMah. State Govt 1-Apr-12 9,985 4,279 0 100

Every 3 year

Rohtak Panipat 12,136 66 132 25 years NHAI 9,708 2,428 0 100 April

Bijapur- Hungund 12,571 100 200 20 years NHAI 1-Mar-13 8,465 1,370 2,736 77 April

Hyderabad-Yadgiri 4,802 35 71 23 years NHAI 1-Jun-12 3,802 1,000 0 60 April

Total (a) 76,203 482 1,262 56,811 15,785 3,606

Project under construction / LOAShreenathji-Udaipur 11,515 79 317 27 years NHAI 1-Apr-16 8,400 3,115 0 100 April

Rajsamand-Bhilwara 6,761 87 349 30 years NHAI 1-Apr-16 2,764 1,333 2,664 100 April

Mysore Bellary Highway Private Limited 7,372 193 387 10 years

Karantaka State Govt 3,486 1,494 2,392 50

Rohtak- Hissar 12,716 99 395 22 years NHAI 1-Apr-16 9,524 1,077 2,115 100 April

Total (b) 38,363 459 1,448 24,174 7,018 7,171Total (a+b) 114,566 940 2,710 80,985 22,804 10,777 Source:NHAI, Company, SSLe

Management strategy for cautious bidding played a key role SEL has been a disciplined player as far as the bidding process followed or execution of projects is concerned, especially in the road BOT space. As a part of its strategy, the company has not bid aggressively for road projects in F11 and large part of F12, when most of the industry players were bidding very aggressively. This was evident as the company did not bag new projects during that period. Only towards the end of F12, the company bagged two road BOT projects (ShreenathjiUdaipur and SolapurBijapur) with both the projects strategically fitting its existing portfolio. However, as NHAI was not able to get environment clearance for more than one year, the company terminated the contract for SolpaurBijapur BOT project. Going forward, we expect the company to continue to bid strategically for the BOT projects aided by (a) relatively low competitive intensity at the biding stage, and (b) expectation of awarding activity to pick-up in 2HF15e.

Disciplined player as far as the bidding process followed or execution of projects is

concerned, especially in the road BOT space.



Exhibit 35: NO project wins during aggressive bidding

Source: Company, SSLe

Strong execution track record The company has a strong execution track record. Most of its projects are completed in time or well ahead of the schedule. This timely/earlier completion of projects has helped the company (a) improve toll collection, (b) avoid project cost overruns, and (c) enhance the IRR of the project. At a time when some of its peers were experiencing significant project delays and looking for equity, the companys performance on execution has been very impressive. SEL has completed projects, Dhule-Palesnar and Bijapur-Hungud, well ahead of schedule for which it received a performance bonus of Rs609mn in F13.

Exhibit 36: Project-wise bonus received

BOT project Bonus Received (Rsmn)Dhule-Palasner 182Bijapur Hungud 427

Total Amount (Rs) 609Source: Company,SSLe BOT revenues to increase 54% CAGR over F1316e SEL has nine projects that are currently operational and generate revenues, while the remaining four projects are under various stages of construction. Currently, the operational BOT projects generate toll revenues of Rs3.2mn per day, up from Rs2.4mn in F10. The commissioning of the road BOT projects such as RohtakPanipat, BijapurHungund, HyderabadYadgiri and Maharashtra Border has led to substantial growth in toll revenues. During F14, based on WPI, the company had toll rate hike of 5-6% in projects such as BijapurHungund and HyderabadYadgiri while 18% toll hike was witnessed in Aurangabad BOT project. Meanwhile, the company witnessed an average traffic growth of 12% on most of its operational projects.

We estimate SELs toll revenues to increase from Rs1.9bn to Rs7.1bn in F16e, a 54% CAGR over F13-16e, mainly on account of (a) 45% medium-term traffic growth, (b) 56% of growth in toll rates, and (c) CAGR of 33.8% over F13-16e in lane kms.

Excellent execution helps company receive performance bonus in couple of

projects

BOT to increase 54% CAGR over F13-16e led by commissioning of BOT projects



Exhibit 37: BOT revenues to increase 54% CAGR over F1316e Exhibit 38: Portfolio to increase 2.4x by F16e

253 359 643 871

1,008

1,976

4,435

6,338

7,157

0

2,000

4,000

6,000

8,000

F08 F09 F10 F11 F12 F13 F14e F15e F16e

(Rs

mn)

BOT revenues

304

457 0 56

313 132

1,061 387 263 2,710

0

500

1,000

1,500

2,000

2,500

3,000

F09 F10 F11 F12 F13 F14e F15e F16e F17e F17e (Total)

(Lan

e k

ms)

Source: Company, SSle

Robust order inflows over past few quarters Despite weak macroeconomic environment and investment sentiment, SEL has won new orders across various sectors worth Rs76.5bn during the last two years (F12 and F13), translating into a healthy order inflow-to-sales ratio of 3.0x. Continuing with the trend, SEL has already won ~Rs23.1bn of orders in F14, primarily in the mining and irrigation segment. As on 4QF14, SELs order book stood at Rs89.4bn, thereby converting into an order book-to-sales ratio of 3.8x on a trailing basis. With a new and decisive government in place we expect the ordering activity to gather pace in 2HF15e and expect order inflows of Rs29.9bn in F15e & Rs35.4bn in F16e, respectively.

Exhibit 39: Healthy order inflows over past few quarters Exhibit 40: Segment-wise breakup as on F14

3046 51 54

6646 42 42

7

6 1012

20

2426 28

6

89

10

15

19 22 25

0.0

1.5

3.0

4.5

6.0

0

27

54

81

108

F09 F10 F11 F12 F13 F14e F15e F16e

(%)

(Rs

bn)

Road (LHS) Irrigation (LHS)

Mining (LHS) OB-to-sales (x) (RHS)

Mining27%

Iriigation22%

Captive Road BOT

34%

Road EPC contracts

17%

Transportation51%


Construction revenues to increase 19.8% CAGR over F1316e The construction segment revenue had declined significantly (32.3% YoY) in F13 on the back of early completion of projects and delay in securing clearances for newly awarded BOT projects in F12. In our view, robust order inflows, start of construction activity in its under-construction BOT projects and strong order book-to-sales of 3.8x on trailing revenues provide a comfortable revenue visibility over the next 34 years. Going forward, as execution of its four under-construction projects ramps up, and as construction activity picks up in mining and irrigation segments, we estimate the company would report construction revenues of Rs28,5bn and Rs31.2bn in F15e and F16e, respectively.



Exhibit 41: Strong execution to boosts construction revenue growth

7,67

0

9,78

8

17,1

12

22,4

15

12,7

92

17,0

99

16,3

97

16,9

78

1,475754

2,205

2,146

2,462

3,399 6,5457,501

1,464 2,023

2,777

2,194

2,856

3,084 5,600

6,691

0

8,000

16,000

24,000

32,000

F09 F10 F11 F12 F13 F14e F15e F16e

(Rs

mn)

Road Irrigation Mining Source: Company, SSLe

Equity requirement completely funded The company has a portfolio of four projects of ~US$2bn at various stages of construction. It has already invested ~Rs2.4bn in under-development BOT portfolio till F14 and would require an incremental equity investment of ~Rs3,472mn over the next two years. The company has already securitised its Ahmedabad Ring Road project for Rs2,520mn in F14, and is in process to securitising Nagpur Seoni project (raising ~Rs175200mn). We believe that the company is well positioned to meet of its medium-term equity requirement based on (a) recently raised Rs1.3bn through non convertible debenture issue and (b) securitization amount from Ahmedabad project.

Exhibit 42: Equity requirement in under construction projects

F15e F16eShreenathji-Udaipur 3,115 1,037 1,020 1,058

Rajsamand-Bhi lwara 1,332 867 465Karantaka state highway improvement project

395 0 200 195

Rohtak- Hissar 1,077 543 534 0

Total 5,919 2,447 2,219 1,253Source: Compnay, SSLe

BOT project details (Rsmn) Equity requirement

Equity invested

till F14

Equity to be invested in projects

Exhibit 43: Under-constrcution project funded completelySource of funds (Rsmn) Application of Funds (Rsmn)Non covertible debenture issued 1,300 Equity in BOT projects 3,472

Securitisation amount from Ahmedabad prj. 2,520 Repayment to SEL 348

Total 3,820 Total 3,820Source: Company, SSLe

Equity requirement of Rs3.5bn well taken care of



Financial Analysis

EBIDTA margin to stabilise in the range of 1011% on standalone basis SELs margins had declined to 8.6% in F13, mainly due to (a) poor execution, which led to lower fixed-cost absorption and (b) rising raw material prices. For F14, with execution picking up, the company has reported an EBIDTA margin of 10.6%. On the back of healthy execution and change in project mix, we expect margins to remain stable in the range of 1011% for F15e and F16e, respectively.

Exhibit 44: EBITDA margins to remain stable

1,07

9

1,36

7

2,37

7

2,90

3

1,55

7

2,49

4

3,08

3

3,36

6

10.2

10.9 10.8 10.8

8.6

10.6

10.8 10.8

8

9

10

11

12

0

875

1,750

2,625

3,500

F09 F10 F11 F12 F13 F14e F15e F16e

(%)

(Rs

mn)

EBIDTA (LHS) EBIDTA (RHS) Source: Company, SSLe

Working capital cycle poised to improve SEL witnessed significant increase in working capital requirement in F13 as its receivables were stuck with Dhule project for over 2 years. In May 2013, the NHAI provided approval to start toll on the developed section and the balance section along the Tapi River of the Dhule project. As on 4QF14, the company has Rs720mn of receivable pending which is expected to be release by 2QF15e. It would significantly improve SELs working capital position. We believe the working capital requirement would remain stable for the next 12 years as the company is expected to focus on the execution of BOT road projects (does not have negative impact on working capital) and mining projects.

Strong balance sheet and leverage Despite the increasing working capital requirement, SEL ended F13 with 0.9x debt-to-equity ratio (standalone) which demonstrates the strength of the balance sheet of the company. We expect the leverage to improve going forward as execution picks up and would subsequently lower the working capital requirement.

Exhibit 45 : Comfortable D/E of 0.9x

3,43

5

3,91

5

6,25

7

7,62

3

8,32

5

9,57

2

10,5

86

11,7

41

2,11

1 4,2

42

4,00

4

4,48

8

7,63

0 8,63

3

9,13

3 9,63

3

0.0

0.3

0.6

0.9

1.2

0

3,000

6,000

9,000

12,000

F09 F10 F11 F12 F13 F14e F15e F16e

(x)

(Rs

mn)

Net worth (LHS) Total Debt (LHS) Debt to equity (RHS) Source: Company, SSLe

Margins to remain stable in the range of 10-11% on the back of strong execution

Release of receivable from Dhule projects to improve working capital



Valuation

Given, the healthy order book (3.8x trailing revenue) and strong execution capabilities, we expect the company to report revenues of Rs28.5bn and Rs31.2bn for F15e and F16e, respectively. We have used sum-of-the-parts (SOTP) valuation method for SEL, valuing the construction business at an EV of 7x on F16e EBITDA estimate which is lower than its 3-year average and the BOT projects on a NPV basis at a CoE of 14%. We initiate coverage on the stock with a BUY rating and a target price of Rs251, indicating an upside of 23%.

Exhibit 46: SOTP Valuation

Particulars Segment Driver Multiple Value (Rsmn)Value per share (Rs)

Proportionate stake (%) Basis

Engineering & Construction business Construction 3,366 7 23,565 155 61.8 EV/EBIDTA of 7x one year rolling forward earningsNet debt (7,871) (52) (20.6) Standalone net debt as on Mar '14

Total 15,694 103 41.2Road BOT projectsAhmedabad Ring Road Toll 3,699 24 9.7 NPV at CoE of 14%

Aurangabad- Jalna Toll 2,329 15 6.1 NPV at CoE of 14%

Mumbai-Nashik Toll 1,230 8 3.2 NPV at CoE of 14%

Nagpur-Seoni Annuity 240 2 0.6 P/BV of 1x

Dhule-Palasner Toll 822 5 2.2 NPV at CoE of 14%

Maharashtra Border Toll 3,329 22 8.7 NPV at CoE of 14%

Rohtak Panipat Toll 5,046 33 13.2 NPV at CoE of 14%

Bijapur- Hungund Toll 1,893 12 5.0 NPV at CoE of 14%

Hyderabad-Yadgiri Toll 1,115 7 2.9 NPV at CoE of 14%

Shreenathji-Udaipur Toll 2,348 15 6.2 NPV at CoE of 14%

Rajsamand-Bhilwara Toll 3,321 22 8.7 NPV at CoE of 14%

Rohtak-Hissar Toll 2,382 16 6.2 NPV at CoE of 14%

Mysore-Bellary Highway Annuity 297 2 0.8 NPV at CoE of 14%

Total SIPL value 27,754 185 73.6

SEL's stake in SIPL @ 80% 148 58.8

Grand Total 43,448 251 100.0Source: SSLe Exhibit 47: P/BV and EV/EBIDTA graphs

0

60

120

180

240

Feb-

08Ju

n-08

Nov

-08

Mar

-09

Jul-0

9N

ov-0

9M

ar-1

0Au

g-10

Dec

-10

Apr-

11Au

g-11

Dec

-11

May

-12

Sep-

12Ja

n-13

May

-13

Oct

-13

Feb-

14Ju

n-14

(x)

Share price 0.8x 1.5x 2.0x 3x 3.0x

0

12,500

25,000

37,500

50,000

Feb-

08Ju

n-08

Nov

-08

Mar

-09

Jul-0

9N

ov-0

9M

ar-1

0Au

g-10

Dec

-10

Apr-

11Au

g-11

Dec

-11

May

-12

Sep-

12Ja

n-13

May

-13

Oct

-13

Feb-

14Ju

n-14

(x)

EV 5.0x 7.5x 10.0x 12.5x 15.0x Source: Bloomberg, SSLe



Exhibit 48: BOT assumption sheet

Project Client Lane KmsSEL's

Stake (%)TPC SPV Equity Debt

Grant/(Prem.)

Toll revision month

Int. Rate (%)

Toll Inc (%)

Traffic Inc (%)

Operational ProjectsAhmedabad RAUDA 304 80 5,150 740 4,050 360 September 11 5 5

Aurangabad- MSRDC 263 100 2,770 830 1,940 0 Every 3 year 11 18 5

Mumbai-NashNHAI 30 20 7,530 520 6,500 510 July 12 5 5

Nagpur-Seoni NHAI 56 51 2,780 1,068 1,711 0 - - -

Dhule-Palasn NHAI 194 27 14,200 3,550 10,650 0 April 12 5 5

Maharashtra BMah. State Govt 12 100 14,264 4,279 9,985 0 Every 3 year 11 18 5

Rohtak Panip NHAI 132 100 12,136 2,428 9,708 0 April 12 5

Bijapur- Hung NHAI 200 77 12,571 1,370 8,465 2,736 April 12 5 5

Hyderabad-YaNHAI 71 60 4,802 1,000 3,802 0 April 12 5 5

Under cons./develop.Shreenathji-U NHAI 317 100 11,515 3,115 8,400 0 April 11 5 5

Rajsamand-B NHAI 349 100 6,757 1,329 2,764 2,664 April 12 5 5

Mysore Bellar NHAI 387 50 7,893 1,650 3,850 2,392

Rohtak- HissaNHAI 395 100 12,716 1,077 9,524 2,115 April 12 5 5Source:Company, SSLe

(Rsmn)

Exhibit 49: Order book assumption(Rsmn) F10 F11 F12 F13 F14e F15e F16eOrder inflow 29,113 31,803 32,651 43,999 11,558 29,877 35,385

Revenue 12,565 22,094 26,755 18,110 23,581 28,542 31,171

Order backlog (Y/E) 59,936 69,645 75,541 101,430 89,407 90,743 94,957

Order bookto-sales ratio (x) 4.8 3.2 2.8 5.6 3.8 3.2 3.0Source: Company, SSLe

Exhibit 50: Operating expense assumption As % of sales F12 F13 F14e F15e F16eMaterial Consumed 12.3 14.8 12.5 12.5 12.5Construction Expenses 6.5 9.1 6.5 6.5 6.5(Increase)/Decrease in stocks 0.0 0.0 0.0 0.0 0.0Labour expense 65.2 60.0 63.5 63.9 63.9Employee Costs 1.5 2.4 2.6 2.5 2.5Administrative and Other Expenses 3.7 5.1 4.4 3.8 3.8Total cost 89.2 91.4 89.4 89.2 89.2Source: Company, SSLe



Key risk

Execution risk: In the road sector, there can be various issue such as - delay in land acquisition by NHAI thereby delay in providing Right of Way, delay in clearances from various authorities like environment, forest and railways etc. which could lead to execution risk. Such delays have a larger impact on BOT project compared to an EPC project. Thus, any delay in the underdevelopment projects would adversely impact our NPV valuation.

Sensitivity to traffic growth: The feasibility of any BOT (toll) road projects is highly dependent on traffic growth and toll rate hike. While, the toll rate hikes are fixed as per contractual terms, traffic growth is more a function of the overall health of economy. In our view, if the traffic growth is well below estimate by more than 5-7%, it would have an adversely impact on profitability. In the present scenario, we have seen a relatively low traffic growth in most projects which is compensate by high enough toll rate hike (linked to inflation).

Slowdown in new projects: The order inflows for the road companies would be affected by any slowdown in new projects being awarded by NHAI or state governments.

Interest rate & liquidity risk: The road BOT projects are high leverage assets since most of the funding is done in the D/E ratio of 70:30. Thus, any surge in interest rate can have a negative impact on the profitability of the road asset. Further, financial closure of road BOT project is dependent on prevailing economic and market conditions and any delays can negative impact on returns.



Company Profile

Incorporated in 1988, Sadbhav Engineering Ltd (SEL) is an Ahmedabad based leading infrastructure development and construction company. On the infrastructure side, SEL through Sadbhav Infrastructure Project Ltd holds 80% stake, post dilution). It holds a stake in various SPVs, which develop, operate and maintain road infrastructure assets. Currently, it has a BOT project portfolio of 13 projects, aggregating Rs114bn. On the construction side, the company undertakes EPC work in roads, irrigation and mining operations. With a presence of over more than two decades in the industry, the company has a reputation for completing projects ahead of schedule along with quality work. SEL has executed projects for clients such as Sardar Sarovar Narmada Nigam, NHAI, Coal India, GIPCL and GHCL and worked with industry majors like L&T, HCC, Punj Lloyd and Gammon.

Exhibit 51: SEL company structure




Key management

Mr. Vishnubhai M Patel, promoter Mr. Patel is the promoter of Sadbhav Engineering Limited (SEL). He has 40 years of experience in the construction business. Since 1968, he has been actively involved in the family construction business as partner of M/s Bhavna Construction Co. where he was in-charge of canal and road projects. In the year 1988, SEL was incorporated and took over the business of M/s. Bhavna Construction Co. SEL has successfully completed various canal works for one of the largest irrigation projects in the world viz. Sardar Sarovar Narmada Project under his leadership. Mr. Vishnubhai has been conferred the UdyogRatna Award by the Institute of Economic Studies of New Delhi for outstanding performance in the field of Industrial Development of our country. Under his guidance the company has successfully completed various projects displaying high quality standards and has also been awarded the Excellence Award for excellence in Quality, Innovation and Management. He has also been awarded the Paridar Ratna

Nitin R Patel, Executive Director Nitin R Patel is a Chartered Accountant and full time director of the company. His areas of responsibility include execution of projects and overall functioning of the entire corporate affairs of the company. He plays an important role in policy implementation and liaisoning with banks and financial institutions.



Financials (Standalone) Income Statement Balance SheetY/E Mar (Rsmn) F12 F13 F14e F15e F16e Y/E Mar (Rsmn) F12 F13 F14e F15e F16eNet sales 26,755 18,110 23,581 28,542 31,171 Cash & Bank balances 563 218 762 951 1,184growth (%) 21.1 (32.3) 30.2 21.0 9.2 Other Current assets 14,627 16,004 19,326 21,703 23,817Operating expenses 23,853 16,553 21,087 25,459 27,804 Investments 3,323 5,385 5,210 5,360 5,510EBITDA 2,903 1,557 2,494 3,083 3,366growth (%) 22.1 (46.3) 60.1 23.6 9.2 Net fixed assets 2,881 3,303 4,982 4,953 4,898Depreciation &amortisation 274 318 474 529 556 Goodwill & intangible assets 0 0 0 0 0EBIT 2,628 1,239 2,020 2,554 2,811 Other non-current assets 0 0 0 0 0Other income 108 103 114 138 151 Total assets 21,394 24,908 30,279 32,966 35,409Interest paid 651 844 931 1,022 1,079Extraordinary/Exceptional items - 609 (383) - - Current liabilities 9,048 8,636 11,717 12,891 13,678PBT 2,086 1,108 820 1,670 1,883 Borrowings 4,488 7,630 8,633 9,133 9,633Tax 681 285 (242) 551 621 Other non-current liabilities 235 317 357 357 357Effective tax rate (%) 32.7 25.7 (29.5) 33.0 33.0 Total liabilities 13,771 16,583 20,707 22,381 23,668Net profit 1,404 823 1,062 1,119 1,261Minority interest - - - - - Share capital 150 151 152 152 152Reported Net profit 1,404 823 1,062 1,119 1,261 Reserves & surplus 7,473 8,174 9,421 10,434 11,590Non-recurring items - (609) 383 - - Shareholders' funds 7,623 8,325 9,572 10,586 11,741Adjusted Net profit 1,404 214 1,445 1,119 1,261 Minority interest - - - - - growth (%) 17.4 (84.8) 576.1 (22.6) 12.7 Total equity & liabilities 21,394 24,908 30,279 32,966 35,409

Key Financials ratios Cash Flow StatementY/E Mar F12 F13 F14e F15e F16e Y/E Mar (Rsmn) F12 F13 F14e F15e F16eProfitability and return ratios (%) Pre-tax profit 2,086 1,108 820 1,670 1,883EBITDAM 10.8 8.6 10.6 10.8 10.8 Depreciation 274 318 474 529 556EBITM 9.8 6.8 8.6 8.9 9.0 Chg in working capital (1,572) (1,788) (241) (1,203) (1,327)NPM 5.2 1.2 6.1 3.9 4.0 Total tax paid (680) (368) 242 (551) (621)RoE 18.4 2.7 16.1 11.1 11.3 Other operating activities 74 (527) 423 0 0RoCE 8.6 3.6 9.6 5.7 5.8 Operating CF 182 (1,256) 1,718 445 490RoIC 7.6 0.7 5.9 4.0 4.2

Capital expenditure (858) (740) (2,153) (500) (500)Per share data (Rs) Chg in investments (51) (2,062) 174 (150) (150)O/s shares (mn) 150.4 150.9 151.7 151.7 151.7 Other investing activitiesEPS 9.3 0.9 9.5 7.4 8.3 Investing CF (909) (2,802) (1,979) (650) (650)FDEPS 9.3 0.9 9.5 7.4 8.3 FCF (727) (4,058) (261) (205) (160)CEPS 11.2 3.0 12.7 10.9 12.0BV 50.7 55.2 63.1 69.8 77.4 Equity raised/(repaid) 0 1 232 0 0DPS 0.7 0.7 0.7 0.7 0.7 Debt raised/(repaid) 484 3,142 1,003 500 500

Dividend (incl. tax) (105) (105) (106) (106) (106)Valuation ratios (x) Other financing activities 64 675 (325) (0) (0)PE 21.8 233.8 21.4 27.6 24.5 Financing CF 444 3,713 805 394 394P/BV 4.0 3.7 3.2 2.9 2.6EV/EBITDA 11.9 24.5 15.5 12.7 11.7 Net chg in cash & bank bal. (282) (346) 544 189 234EV/Sales 1.3 2.1 1.6 1.4 1.3 Closing cash & bank bal 563 218 762 951 1,184

Other key ratiosD/E (x) 0.6 0.9 0.9 0.9 0.8DSO (days) 101 158 118 106 111

Du Pont Analysis - RoENPM (%) 5.2 1.2 6.1 3.9 4.0Asset turnover (x) 1.3 0.8 0.9 0.9 0.9Equity multiplier (x) 2.8 2.9 3.1 3.1 3.1RoE (%) 18.4 2.7 16.1 11.1 11.3Source: Company, SSLe



Research \

Financial SummaryY/E Mar (Rsmn) F12 F13 F14e F15e F16eNet sales 31,330 36,872 37,319 43,757 49,684growth (%) 28.5 17.7 1.2 17.3 13.5EBITDA margin (%) 43.7 44.3 47.0 47.5 48.3Adjusted net profit 4,960 5,567 4,591 5,096 6,240EPS (Rs) 14.9 16.7 13.8 15.3 18.8growth (%) 9.6 12.2 (17.5) 11.0 22.5P/E (x) 17.2 15.3 18.6 16.8 13.7EV/EBITDA (x) 10.1 9.7 10.5 9.8 8.7Dividend yield (%) 0.8 1.8 1.8 1.8 1.8RoE (%) 17.4 18.2 13.5 13.6 15.0RoCE (%) 8.4 8.6 6.9 6.4 6.7Source: Company, SSLe

Steadfastly growing; Re-initiate with a BUY IRB Infrastructure ltd (IRB) is a fully integrated road developer with a portfolio of 21 projects worth US$4bn under its belt. It has a healthy order book of ~Rs100bn (3.8x trailing construction revenues) as on 4QF14, indicating a growth of 56% YoY, mainly led by new BOT project wins during the year. On consolidated basis we expect the company to report revenue and PAT CAGR of 15.4% and 16.6% during F14-16e respectively. We re-initiate our coverage with a BUY rating on the stock with a target price of Rs309 based on SOTP basis. The construction business contributing Rs179 and Mumbai-Pune expressway contributing Rs48 are two major driving SOTP.

Excellent portfolio of BOT toll road projects: IRB has a strong BOT portfolio of 21 projects worth ~US$4bn, of which 16 projects have already commenced operation. The company has a healthy market share of 11.07% in the total Golden Quadrilateral stretch. With the commissioning of 4 projects during F14 the companys operational portfolio has increased to 4,646 lane kms. We expect BOT revenue to clock 23% CAGR over F13-16e led by commencement of under-construction BOT projects, growth in traffic and rise in toll rates.

New project wins to boost construction revenue: IRB has recently won two new projects YedeshiAurangabad and KaithalRajasthan taking its order book to ~Rs100bn (excluding O&M contracts) as on 4QF14. This translates into order book-to-sales ratio of 3.8x trailing construction revenues that provides comfortable revenue visibility over next 2-3 years. Going forward, we estimate construction revenues to register 4.7% CAGR over F13-16e mainly led by pickup in execution in its under construction portfolio.

Equity investment of Rs28.5bn over next 2-3 years: Over the past few years, the company has been generating healthy available cash flows from operation of Rs10.2bn and Rs7.5bn in F13 and F14 respectively. Going forward, we expect IRB to generate cash flows from operation of US$390mn (Rs23.4bn) till F16e which would be sufficient to fund equity requirement for its under-development projects.

Re-initiate with a BUY: We re-initiate coverage on the stock with a BUY rating with a target price of Rs309. We have used Sum-Of-The-Parts (SOTP) method to value the stock. We value the construction business at a EV/EBITDA of 7.5x F16e EBITDA estimate, which in line with its 3-year average of 7.5x, and IRBs BOT projects on a NPV basis at a CoE of 14%. We have not included the Sindhudurg airport project, the 4-star hotel in Kolhapur and Real Estate business in our SOTP valuation. At the CMP, the stock trades at a P/BV of 2.2x F15e and 1.9x F16e earnings and trades at EV/EBITDA of 9.8x F15e and 8.7x F16e EBITDA.

Key risk to our call would be lower than expected traffic growth, slower execution, and lesser expected project wins.

IRB Infrastructure Ltd IRB IN; IRBI.BO

Re-initiating Coverage BUY

Current price (4 Jul) RsTarget price RsUpside/(downside) % 20

Market dataMkt capitalisation Rs bn 85.4Average daily vol '000 7508.552-week H/L Rs 260 / 51.9Shares O/S mn 332.4Free float mn 127.3Promotor holding % 61.7Foreign holding % 25.7Face value Rs 10.0

Price performance (%)1m 3m 6m 1yr

Nifty (abs) 4.7 15.8 24.8 32.8Stock (abs) 23.5 128.4 169.4 169.7Relative to Index 18.8 112.6 144.6 136.9

Performance

257 309

(50)

0

50

100

150

0

80

160

240

320

Jul-13 Oct-13 Dec-13 Mar-14 Jun-14

IRB (LHS) Rel. to Nifty (RHS)

(%)(Rs)


July 8, 2014Infrastructure & Construction | India


IRB Infrastructure Ltd SBICAP Securities Ltd


Investment rationale

Excellent portfolio of BOT toll road projects IRB is one of the largest BOT toll operators in the country having market share of 11.07% in the total Golden Quadrilateral projects. The

Documents

Roads & Highways - Initiating Coverage 08-07-14