construction sector update jun 12 edel1

7/28/2019 Construction Sector Update Jun 12 EDEL1

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Edelweiss Research is also available on www.edelresearch.com,

Bloomberg EDEL , Thomson First Call, Reuters and Factset. Edelweiss Securities Limited

The ambitious Dedicated Freight Corridor (DFC) project, targeting

creation of high-capacity, high-speed railway corridors dedicated to

freight movement, boasts of being Indias largest-ever infrastructure

project. The Delhi-Mumbai and Delhi-Kolkata corridors, with an

estimated completion cost of ~INR900bn, are expected to revolutionise

freight transport in India. With a 2017-18 completion target, steady

progress in land acquisition and funding, we expect the next couple of

years to see a lot of action on the project award side. This will trigger

significant opportunities for EPC players like L&T, IVRCL, NCC, among

others, apart from giving a fillip to the countrys logistic network.

DFC development imperative as existing network grossly clogged

Saturation of existing railway capacity has led to congestion and loss of freight market

share for Indian Railways (from ~90% in 1950s to


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2 Edelweiss Securities Limited

Dedicated Freight Corridor: The fine print

Dedicated Freight Corridor (DFC) is Indias largest-ever infrastructure project. It is being

piloted by the Dedicated Freight Corridor Corporation of India (DFCCIL), a wholly-owned

special purpose vehicle (SPV) of the Ministry of Railways. Its aim, in the first phase of the

project, is to construct over 3,300 kms of high-capacity, high-speed railway corridors

dedicated for freight movement along the Delhi-Mumbai (Western corridor) and Delhi-

Kolkata (Eastern corridor) rail routes. This phase is estimated to cost ~USD16bn.

Fig. 1: Proposed freight corridors in India

Source: Indian Railways, Edelweiss research


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In the future, four additional corridorsNorth-South Corridor (Delhi-Chennai, 2,173 kms),

East-West Corridor (Kolkata-Mumbai, 2,000 kms), East Coast Corridor (Kharagpur-

Vijayawada, 1,100 kms) and Southern Corridor (Chennai-Goa, 890 kms)are planned to be

undertaken by DFCCIL. The corporation has already engaged RITES to undertake feasibility

studies for these stretches. The latter has submitted the interim report for Preliminary

Engineering cum Traffic Survey work for these corridors.

Note: In this report, we have limited ourselves to 3,300 km corridors between Delhi-

Mumbai and Delhi-Kolkata.

Need for DFC: India lagging global peers in logistics infrastructure

India lags way behind when it comes to logistic infrastructure compared to global peers.

Logistics cost in India is at 13-14% of GDP compared to ~10% in developed countries.

Of more concern is the fact that logistic network development is not keeping pace with the

countrys economic growth (freight traffic generally has an elasticity of 1.25 to GDP

growth). As a result, in the World Bank logistic performance index, India has slipped to 46th

rank in 2012 compared to 39th position five years ago.

Chart 1: Average surface freight cost (in US cents) per tonne-km:

Source: KPMG-CII, Edelweiss research

When it comes to railways, Indias freight carrying efficiency is hampered by a lack of

investment in infrastructure.

Table 1: Comparison of carrying efficiency of railways


1.0

2.6

4.2

5.8

7.4

9.0

US Canada Japan Europe India

(cents/ton-km)

Average surface freight cost

Country India Developed worldAvg speed (kmph) 23.3 100

Capacity (TEUs) 90 150

Axle load of wagons (Tonnes) 22 30

Load capacity per wagon (Tonnes) 88 120

Pay load: Tare weight of wagon 2 - 2.6 4.5 - 5.5


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Thus, Indian Railway carries 450 kg of wagons dead weight for every 1,000 kg of freight

carried compared to only 170 kg in the US. This highlights the need of timely investment in

the countrys rail infrastructure.

A Mckinsey study on logistics in India had highlighted that there are seven high density

corridors in the country that carry 50% of freight traffic. These include the Golden

Quadrilaterals of Indian Railways as well as Phases I and II (GQ and NSEW) of the National

Highway Development Programme. Going ahead, the share of these corridors is projected

to inch even higher.

Fig. 2: Freight traffic concentrated along certain corridors

Source: Mckinsey, Edelweiss research

One of the ways suggested in the study to efficiently cope with the expected increase in

freight traffic, was the creation of dedicated freight corridors (DFCs).


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Fig. 3: DFC is the best alternative for freight management


The study had suggested creation of five DFCs which will have the following benefits:

DFCs are the most cost-effective way to add freight traffic capacity. The cost per tonne-km of capacity added by a DFC (around USD25-30mn) is lower than investments in

other modes (~45% lower per tonne-km than that of an equivalent build-out of

expressways and approximately one-third of that for new roads).

DFCs enable higher-quality service compared to other modes. At higher average speedsof 75 km per hour, DFCs can cut travel time on rail by up to 66%.

Reducing variability in transit times also significantly reduces inventory requirements.


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Meeting notes with DFCCIL

Mr. P N Shukla - Director

(Operations & Business Devp.),

DFCCIL

The Insider

We met Mr. P N Shukla, Director (Operations & Business Development), DFCCIL. Key

takeaways from our meeting:

Q. What is the basic purpose behind DFC?

A. The basic purpose behind DFC is to improve the freight carrying efficiency of IndianRailways. The Golden Quadrilateral carries freight of ~600 mtpa. Currently, both freight

and passenger trains run on the same network, which has resulted in average speed of

freight trains being low at ~25 km per hour. DFC will increase this by a factor of three. It

will also improve the carrying capacity of trains (from 4,000 tonnes/train currently to

15,000 tonnes/train).

Q. What are the main advantages of DFC?

A. DFC will result in increase in the freight carrying capacity of railways. It will also lower

the unit cost of operations apart from helping in development of multi-modal logistic

parks. Current network has a mix of passenger and freight facilities which has prevented

optimum utilisation. A dedicated logistic park for cargo services is expected to deal with

such problems by making expansion easier.

Also, the DFC will decongest the current network in a significant way. The effective

capacity of the DFC would be as high as ~600 mtpa due to enhanced design features,

double stacking etc.

Q. What will be the revenue model for DFC?

A. Indian Railways will be the sole user of DFC. DFC will not have any marketing rights of its

own. Indian Railways will pay DFC track access charges to ensure cost recovery for

DFCCIL. The track access agreement is under finalisation.

Q. What is the estimated cost of the project?

A. The estimated completion cost of the project is INR900bn. The Western corridor will

cost ~INR460bn while the Eastern corridor will cost ~INR440bn. The average cost of the

Western corridor at INR250mn/ km is higher than the INR200mn/km cost of Eastern

corridor due to more bridges and higher technical requirements.

Q. Which components are included in the completion cost?

A. The completion cost includes construction cost, interest during construction, taxes,

insurance, inflation etc. It does not include land acquisition cost which is estimated to be

~INR60bn. Land acquisition will be done directly by Indian Railways (under Government

of India) which will then make the land available to DFCCIL at a nominal cost.

Q. What will be the broad break-up of construction cost?

A. The construction cost can be broadly broken up into civil construction (65%), electrical

(20%) and signalling (15%) work.


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Q. What will be the funding arrangement for the same?

A. While JICA is funding the Western corridor, World Bank is funding the Eastern corridor.

The overall debt/equity earlier envisaged for the project was 2:1, which may eventually

be finalised at 1.2:1. The Eastern corridor will have a higher equity component than the

Western corridor.

Q. What are the various types of contracts in DFC?

A. There are basically four types of works needed to be done under DFC:

Civil construction, structures etc. Track works, sleepers etc. Overhead equipment (OHE). Signaling and systems work.

Q. What is the progress as far as tendering is concerned?

A. Package 1 & 2 (costing INR80-90bn) on Phase I of Western corridor will be awarded this

year. Similarly, Phase I on Eastern corridor (overall cost ~INR80-90bn and civilconstruction cost of INR60bn) is expected to be awarded by September 2012. The

Sonnagar-Dankuni project (~INR110bn) will be done on PPP basis for which the PPP

mode is under finalisation. We are evaluating a number of models (e.g. the annuity

mode of project award) for the same.

For the 109 km stretch between New Ganjkhwaja to New Karwandia, civil construction

contract had been awarded earlier. We are now in the process of awarding the package

for construction of track and related works for the 66km stretch from New Karwandiya

to Durgawati on the same section.

Q. What are the timelines for the project?

A. it will take ~4 years post contract award for the project to be completed. We expect that

a significant part of the corridor will be operational by 2017. We are focused on getting

the requisite clearances necessary for project award and expect to see meaningful

progress soon.


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Rationale: Declutter over burdened, saturated network

DFC is needed due to the following concerns:

Saturation of existing capacity: Indian Railways golden quadrilateral, which links thefour metros and two diagonals viz., Delhi-Chennai and MumbaiKolkata, accounts for

just 16% of the entire railway route in India, but carries 58% of the total freight and

52% of passenger traffic.

Specifically, Delhi-Kolkata and Delhi-Mumbai corridors are highly saturated with line

capacity utilisation varying between 115% and 150%. Chronic under investment in

capacity expansion has raised the spectre of choking of Indian Railways freight carrying

capacity.

The DFC project, once completed, will meet the transport requirements of the two busy

trunk routes for the next 15-20 years.

Loss of market share: Due to congestion in the railway network, rail transport, in spiteof being cheaper than road transport, has steadily lost market share. Indian Railways'

share in the freight transportation market has declined from 89% in 1950-51 to less

than 40% currently. Highways have been prime gainers, increasing their share from 11%to around 60% over the same period.

Chart 2: Share of different modes in freight transport across countries


The low share of railways is surprising given that 65% of Indias freight comprises bulk

commodities which move across long distances and thus can be more economically served

by rail transport. Also, about 80% of the bulk freight is transported (in tonne-km) over

distances of more than 400 km.

22

37

57

47

48

36

30

~146


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Chart 3: Break-up of bulk freight traffic in India as per distance travelled


Slow speeds: Indian Railways currently runs mixed traffic (passenger and freight) on itsexisting network. With passenger trains getting priority over goods trains, the average

speed of freight trains is limited to 22-25 kmph.

Need for a new approach: Keeping in mind the expected surge in freight traffic in thefuture and the need to eliminate logistic inefficiencies in the network, an integrated

approach like the DFC is required rather than the incremental approach which has been

followed historically by Indian Railways (putting up additional lines or improving

signaling in times of capacity constraints).

Advantages: Fast tracking growth

Faster freightmovement: DFC is expected to revolutionise freight movement. This willfructify via reduced congestion, a high-capacity efficient network and enhanced designfeatures, much superior to the current network. The table below gives a comparative

framework of the same:

0-400 km

19%

400-700 km

26%

> 700 km

55%


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Fig. 4: Comparison of existing rail network and DFC

Source: DFCCIL, Edelweiss research

As can be seen, DFCs superior capacity will emanate from bigger dimensions of

rolling stock as well as the networks improved design features. This will reduce

the unit cost of operations.


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Fig. 5: Comparison of DFC with competing modes

Source: Indian Railways, World Bank, Edelweiss research

Another advantage will be that freight trains on DFC can run at an average speed of

over 65 kmph against 22 kmph currently, thus limiting transit time.

Also, due to smaller workforce (one person per track km on DFC), latest loading

technology and efficiency of rolling stock, operating costs are expected to be half of the

existing railway system.

Superior planning and optimum network utilisation: Segregation of freight andpassenger traffic will enable better planning and optimum utilisation of the network,

resulting in faster movement of goods. This will also remove inefficiencies, as seen in

the current system, and save costs by eliminating uncertainties on transit time. This will

enhance railways freight market share with it becoming better suited for freight

movement over shorter distances.

Development of associated infrastructure: Multimodal logistic park (MMLPs) willenhance industrial development and create the necessary base for the Delhi-Mumbai

Industrial Corridor. They will act as hubs providing state-of-the-art integrated logistic

facilities. Features like mechanised handling and intelligent inventory management are

likely to reduce overall logistics costs. This will be further leveraged by the modern,

high-capacity rail connectivity of DFCs capable of meeting time-sensitive freight

transportation requirement.

A RITES report has suggested development of such parks at Rewari, Vapi, Navi Mumbai

and Ahmedabad on the Western corridor, and Ludhiana, Durgapur and Kanpur on theEastern corridor. These terminals will be set up as one-stop shops for all value-added

services like warehousing, packaging, custom bonding, etc.

Techno economic feasibility study for logistic parks at Ahmedabad, Navi Mumbai and

Kanpur has been taken up already.

With reduction in load on the existing network, Indian Railways can run additionalpassenger trains.


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Indirect benefits to economy: A 2007 study by the Japan International CooperationAgency (JICA) assessed the financial viability of DFC project. JICAs calculations, taking

into account the total investment cost, maintenance, and operation cost for 35 years,

indicates that the economic IRR was 13.95% for the Western corridor and 15.09% for

the Eastern corridor. The study judged the project as viable, given that 12% economic

IRR is considered a minimum base for considering a project feasible.

The financial IRR was 9.08% for the Western corridor and 15.59% for the Eastern

corridor. The economic IRR includes indirect benefits to the economy that are unlikely

to be ploughed back to investors, whereas the financial IRR measures the direct

financial benefits from the project over a 35 year cycle.

The business model: SPV structure

DFCCIL will enter into a concession agreement with the Ministry of Railways. The Indian

Railways will pay track access charges to the company. These charges will essentially cover

DFCCILs entire debt obligations as well as its operation and maintenance costs. The

corporation will work on a no-profit no-loss basis. It will not own any rolling stock.

The corporation will not be able to approach customers and market its infrastructure; this

will be done by Indian Railways. DFCCIL will be paid by the latter for providing a certain

number of paths, with certain speed and specified transit time.

The total track access charges will comprise primarily of fixed and some variable costs.

Significant portion of the total DFCCIL network cost will be fixed (capital, financing, material

for consumables, staff) while the variable cost element will cover traction fuel.

Current scope and various phases

DFC, in its current form, consists of the following two corridors which will be interlinked at

Khurja (Uttar Pradesh):


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West Bengal and Khurja in Uttar Pradesh, and an electrified single-track segment of 447

km between Ludhiana-Khurja-Dadri in the states of Punjab and Uttar Pradesh. The

corridor is proposed to be extended in the future to serve a new deep sea port in

Kolkata area.

About 80% of the corridors will run along existing tracks.

Traffic on the two corridors will consist of the following:

Western corridor: It will mostly cater to container traffic between various ports on thewestern coast (JNPT, Mumbai Port, Pipavav, Mundra and Kandla) and the North Indian

hinterland, specifically the inland container depots (ICDs) located at Tughlakabad, Dadri

and Ludhiana.

Table 3: Traffic projections on Western DFC as per RITES report


Eastern corridor: It will mostly cater to coal and steel movement from Eastern toNorthern India as well of food grains, cement, fertilisers, lime stone etc., from

Northern to Eastern India.

Direction/Commodity (mn tonnes/year) 2016-17 2021-22

UP Direction

Food grains, Fertil iser 1.2 1.8

POL 0.3 0.5

Cement, Salt, Miscellaneous 0.4 0.8Containers 26.6 37.8

Sub-Total 28.5 40.9

DN Direction

Coal, Cement, Iron & Steel 6.3 9.4

Ferti l izer, Foodgrains, Salt 1.6 2.6

POL 1.0 1.5

Containers 26.6 36.4

Sub-Total 35.5 49.9

Grand Total 64.0 90.8


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Table 4: Traffic projections on Eastern DFC as per RITES report


One may very well argue the significance of DFCs considering the fact that the desig ned

capacity is only ~200 mn tonnes (mt), that too in FY22, whereas the Indian Railways carried

970 mt of freight in FY12 itself.

However, this would be not taking into account the multiplier effect that projects like DFC

have on the freight carrying capacity.

Mega projects like DFC are known to add eight times to existing freight capacity. A similarmodel exists in China over 650 km. This line was commissioned in 2002 with a coal carrying

capacity of 200 mt. In 2009, 800 mt was carried on the same corridor. One single line carried

almost half of Chinas coal requirement. Similarly, the Eastern corridor will carry the entire

North Indias coal requirement from collieries.

Source: Infraline Energy

The two corridors will consist of various phases which along with their lengths are as

follows:

Direction/Commodity (mn tonnes/year) 2016-17 2021-22

UP Direction

Power House coal 54.5 62.0

Public Coal 0.6 1.0

Steel 8.2 9.7

Others 1.6 3.0

Logistic Park 1.2 2.4

Sub-Total 66.1 78.0

Down Direction

Fertil izer 0.2 0.4

Cement 0.8 1.5

Limestone for the

Steel Pl ants

Salt 0.7 1.0

Others 1.6 3.0

Logistic Park 1.2 2.4

Sub-Total 9.5 13.3

Grand Total 75.6 91.3

5.0 5.0


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Table 5: Lengths of the corridors


Money bags: Analysing project cost

The projects current completion cost is estimated at ~INR900bn. It has changed over the

years due to increase in scope of work, change in specifications, escalations etc. A brief over

view of the same is as follows:

In January 2007, RITES estimated the project cost for the Eastern and Western corridorsat INR282bn at 2007 prices (INR166bn for the Western and INR116bn for the Eastern

corridor).

The same was later revised to ~INR370bn by JICA in its feasibility report submitted tothe Ministry of Railways in October 2007.

Later, a number of additions were made to the project like junction arrangement (forseamless operation), double track, electrification of the Western corridor, increase in

width of formation from 12.5 to 13.5 meters for moving wider wagons etc. This, along

with inflation, escalated completion cost to ~INR780bn (based on 2009 prices).

As per the Ministry of Railways business plan, the total project cost was estimated atINR818bn, which included completion cost of INR776bn (INR391bn for Eastern DFC and

INR385bn for Western DFC) and land cost of INR42bn.

Recent news reports suggest that the overall project completion cost has been revisedupwards to INR900bn.

The completion cost translates into a per km cost of INR200mn-250mn (as mentioned

before, DFCCIL will not bear cost of rolling stock). This represents a significant EPC

opportunity for construction players.

Money trail: Combination of budgetary support, loans, equity

The DFC project with an overall requirement of ~INR900bn will be funded through a

combination of general budgetary support (GBS), commercial loans and equity.

The GBS from the Government of India will be in the form of loans contracted via the

Ministry of Finance from bilateral/multilateral agencies like the World Bank and JICA.

Kms

Phase I Rewari- Vadodara 930

Package 1 - Rewari - Ajmer 283

Package 2 - Ajmer - Ikbalgarh 342

Package 3 - Ikbalgarh - Vadodara 305

Phase II Vadodara - JNPT and Dadri - Rewari 569

Phase I Khurja - Kanpur 343

Phase II Kanpur - Mughals arai 393

Phase III Ludhiana - Khurja 447

Phase IV Sonnagar - Dankuni 538

Phase I (a) Mugal Sarai - Sonnagar 118

Western Corridor

Eastern Corridor


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Additional funding will be in the form of equity from Indian Railways and commercial

borrowings, which DFCCIL will raise from the market.

The project has a debt: equity ratio of roughly 2:1 (GBS: ~INR450bn, equity of ~INR215bn),

funding through the PPP mode with the shortfall met through commercial borrowings.

Funding sources of two corridors are given below:

Table 6: Funding sources of DFC


Western Corridor: It will be funded via a STEP (Special Terms of Economic Partnership)loan from JICA. JICA is providing a (Japanese yen) JPY679bn loan on soft terms (0.2%

p.a., 0.01% p.a. for consulting services) for 40 years with a moratorium of 10 years. This

loan will be sufficient to fund 80-85% of the total project cost. Balance cost (mainly

towards land acquisition) will be borne by Ministry of Railways in the form of equity to

DFCC.

JICA has already sanctioned JPY405bn for Phase I between Rewari and Vadodara. The

loan agreement for the first tranche of JPY90.2bn has already been signed.

For Phase II (Vadodara-JNPT and Rewari-Dadri), an Engineering Services loan

agreement for JPY1.6bn has been signed. Main loan agreement for Phases II and III of ~

JPY274bn is targeted for signing soon.

Apart from this, the work for design and construction of 54 major and important

bridges in Vasai-Bharuch section is being executed from Indian Railways resources.

Work has already been awarded by DFCCIL in February 2009.

Japanese funding has come with the following conditions:

Mandatory requirement of prime contractor being a Japanese firm. In case of a JV,the lead partner in the consortium should be a Japanese company with 51% stake.

Sub-contractors can be from any country.

Not less than 30% of the total amount of contracts (excluding consulting services)financed by the STEP loan must be accounted for by goods and services from

Japan.

Funding source

Phase I Rewari- Vadodara JICA

Phase II Vadodara - JNPT and Dadri - Rewari JICA

Funding source

Phase I Khurja - Kanpur World Bank

Phase II Kanpur - Mughalsarai World Bank

Phase III Ludhiana - Khurja World Bank

Phase IV Sonnagar - Dankuni PPP mode

Phase I (a) Mugal Sarai - Sonnagar Indian Railways

Western Corridor

Eastern Corridor


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In case of consulting services, the prime contractor i.e., consultants will be eitherJapanese or a JV with Indian partners where the formers total share of work in the

JV is more than 50% of the contract amount.

Eastern corridor: It will have three main sources of funds. World Bank will fund Phase I-III (which will cover the 1,183 km section between Ludhiana and Mughalsarai) via a loan

of USD2.725bn. It will fund about 67% of the project cost.

The World Bank loan is an Adaptable Programme Loan (APL) in which loans for

subsequent sections will be sanctioned based on achievement of certain milestones

(with regards to land acquisition, civil contract award etc.) in the previous sections.

The World Bank Board has already approved USD975mn loan for the Khurja-Kanpur

section; it has a maturity period of 22 years including a seven year grace period. There

will be another two tranches of USD1.05bn and USD700mn.

For Phase IV between Sonnagar and Dankuni, the PPP mode will be used. Initial

estimates available with DFCCIL indicate that around INR110bn will be required for

completing the segment. As per a recent meeting called by the Prime Minister for FY13infrastructure targets, the contract for this segment is to be awarded in FY13.

Phase I (a) between Mughalsarai and Sonnagar is being implemented with Indian

Railways resources. Civil construction contract for 109 km section (New Ganjkhwaja to

New Karwandia) has already been awarded in December 2008 and work is in progress.

Opportunities galore

DFC will have multi-fold benefits. Both EPC contractors as well as rolling stock

manufacturers will have increased opportunities from DFC.

Near-term beneficiaries include EPC contractors like L&T, IVRCL, NCC, HCC, Simplex,Gammon, among others. However, competition is likely to be high as is evident fromthe number of companies applying for pre-qualification.

Long-term beneficiaries include companies related with associated infrastructure likeTexmaco, Titagarh Wagons, CONCOR, BEML, Kalindee Rail Nirman, Siemens, among

others.

Land acquisition: Current status

Land for the project is being acquired under the Railways (Amendment) Act, 2008, since the

DFC has been declared as Special Railway Project. The amendment, which gives Indian

Railways special powers to take possession of land, was essentially brought in to hasten the

land acquisition process for key projects.

Land Acquisition Act, 1894, is not applicable to land acquired under the 2008 act.


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Fig. 7: Flowchart of land acquisition process


The project has seen steady progress on the land acquisition front. By FY12 end, more than

60% of total land required had been acquired. A brief snapshot of the land acquisition

progress is given below:

Table 7: Land acquisition progress of DFC


Project Description/SectionLength

(km)Area (Ha.)

Length

(km)Area (Ha.)

Length

(km)Area (Ha.)

Length

(km)Area (Ha.)

Award

(INR mn)

Disbursed

(INR mn)

Eastern Corridor

Khurja-Kanpur APL-1 343 1,320 343 1,320 343 1,320 314 1,172 89% 2,360 840

Kanpur-Mughalsarai APL-2 393 1,400 393 1,400 393 1,400 363 1,083 77% 2,360 980

Ludhiana-Khurja Section APL-3 447 802 447 802 447 802 317 520 65% 9,372 137

Mughalsarai-Sonnagar 118 319 118 319 106 303 74 186 58% 2,630 490

Sonnagar-Dhankuni 538 1,002 123 180 0 0 0 0 0% - -Sub-total 1,839 4,843 1,424 4,021 1,289 3,825 1,068 2,961 61% 16,722 2,447

Western Corridor

Phase-I Rewari-Vadodara 930 3,608 930 3,608 826 3,205 776 2,998 83% 7,930 5,970

Phase-II Vadodara-JNPT & Dadri - Rewari 569 2,252 569 2,252 464 1,718 143 782 35% 3,660 3,460

Sub-total 1,499 5,860 1,499 5,860 1,290 4,923 919 3,780 65% 11,590 9,430

Grand Total 3,338 10,703 2,923 9,881 2,579 8,748 1,987 6,741 63% 28,312 11,877

Total ScopeSection/Area

notified under 20A

Section/Area

notified under 20E

Progress of issuing

of 20FAmount

% of land

acquired

(20 F

stage)


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The comparatively slow progress on land acquisition for the Sonnagar-Dankuni stretch has

pushed the overall figure down. However, with the new directive from the Prime Ministers

Office, we now expect things to gather pace.

Meaning of various stages highlighted in the table above is given below:

Section 20A: The issuance of 20A means marking of the land identified for acquisition,which is ready for further survey and compensation studies.

Section 20E: This notification is issued for declaration of acquisition' by the UnionGovernment under the Indian Railways (Amendment) Act 2008. 20E is an important

milestone as it allows the railways to take steps required to build, maintain and manage

the project.

Section 20F: This relates to the eventual declaration of award by paying compensationto the owner and closing the deal by taking possession of the land.

Tendering: Current status

DFCCIL has been preparing the framework for this humungous project over the past coupleof years. Work had commenced more than four years ago when tenders for detailed

engineering construction survey were awarded. Since then, ~20 contracts for project

management and consultancy works as well as other ancillary jobs have been awarded.

As far as civil construction is concerned, till date, two major tenders have been awarded on

DFC (both awarded in FY09):

Construction of 54 major bridges in the Vasai-Bharuch section (Phase II i.e., JNPT-Vadodara stretch) of the Western corridor - INR6.05bn order bagged by Soma

Enterprises.

Civil construction contract for 109 km section form New Ganjkhwaja to New Karwandia(Phase I (a) MughalsaraiSonnagar stretch) on Eastern corridor - INR7.8bn contractbagged by B. Seenaiah.

Currently, DFCCIL is in the process of awarding four major tenders:

INR80bn-90bn contract for civil construction, building and track works for package 1and 2 on Phase I (Rewari-Vadodara) of the Western corridor. Phase I has been further

sub-divided into three separate packages:

Package 1: Rewari-Ajmer section of 283 kms. Package 2: Ajmer-Ikbalgarh section of 342 kms. Package 3: Ikbalgarh-Vadodara section of 305 kms.


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Fig. 8: Tendering on Western DFC


The RfQ process for package 1 & 2 (overall 625 kms) is already over. Competition for

this is now limited to two contendersL&T-Sojitz Corporation and the IRCON-Leighton

Welspun-Mitsui consortium. We expect the contract to be awarded over the nextcouple of months.

INR60bn-70bn contract for civil construction, structure and track laying work for Phase I(Khurja-Kanpur) on the Eastern corridor. The RfQ process for this contract is already

over; 27 companies expressed interest, of which 14 have been pre-qualified for bidding.

The contract will be awarded by September 2012.


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Fig. 9: Eastern DFC

Source: Edelweiss research

Design, procurement and construction of track and related works for 66km stretch fromNew Karwandiya to Durgawati on Phase I (a) (Mughalsarai-Sonnagar section of the

Eastern corridor. The RfQ process is over and 22 firms have been pre-qualified for this

stretch.

Design, construction and commissioning of 2*25 kV electrification and signalling worksfor the 66km stretch from New Karwandiya to Durgawati. The RfQ process is over and 4

firms have been pre-qualified for this stretch.

Apart from this, work for awarding the following contracts has already commenced:

RfQ process for design and construction of civil, building and track works for package 3on Phase I (Rewari-Vadodara) of the Western corridor has already started. The RfQ

document mentions that submission of bids will happen in Feb 2013.

Preparation for awarding the systems contract (electrical, signaling and telecom) forPhase I (Khurja-Kanpur section) on Eastern corridor is already on.


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Construction


World Bank has approved short listing of general consultants for Phases II and III on theEastern corridor and RfP documents for the same have been issued. DFCCIL expects to

award these contracts by July 2013 and October 2013, respectively.

The way ahead: DFC gathering pace

The governments emphasis on the project is evident from the proposed guarantee to be

provided by Indian Railways (assuring timely servicing of the underlying principal/interestobligations) against DFCCILs future borrowing programme. Also, given its strategic

importance, the project is being directly monitored by the Prime Ministers Office.

In this backdrop, along with steady progress in land acquisition and financing, we expect the

DFC project to roll on smoothly going ahead. The World Banks and JICAs involvement will

ensure its regular monitoring.

This is evident from the fact that one of the conditions laid down for project award is the

achievement of milestones for land acquisition (currently, tenders have been invited only

for packages which have acquired more than 80% of land). We believe the focus on getting

land acquisition/ other regulatory approvals in place before project award is likely to ensure

that there are no hiccups in execution.

The objective of completing the project by 2017-18 means the next two years are expected

to see a lot of action on the tendering side. Overall, we believe the project will be a

significant value enhancer for the Indian logistics space apart from being a new opportunity

for EPC contractors.

Table 8: Valuations snapshot

*P/E & P/BV for implied construction business

Source: Edelweiss research

CMP Target price Asset value

(INR per share) (INR per share) (INR per share) FY13E FY14E FY13E FY14E FY13E FY14E FY13E FY14E

Sadbhav Engg* 141 170 91 8.8 11.6 5.7 4.3 58.7 69.7 0.8 0.7

Ramky Infra* 90 253 64 23.7 29.3 1.1 0.9 192.7 222.0 0.1 0.1

IVRCL Infra* 51 40 20 1.6 2.4 19.2 12.9 74.8 75.7 0.4 0.4NCC* 40 59 22 4.2 6.1 4.2 2.9 97.8 103.6 0.2 0.2

Hindustan Construction 20 24 24 (3.5) (2.9) NA NA 17.9 15.0 1.1 1.3

Simplex Infra 209 218 0 24.3 33.9 8.6 6.2 266.3 297.8 0.8 0.7

B.L. Kashyap 9 11 0 0.8 1.5 10.4 5.8 28.2 29.7 0.3 0.3

Consolidated Construction 13 12 0 1.2 2.3 11.5 5.8 34.6 36.3 0.4 0.4

Rel iance Infra 534 936 936 50.1 50.7 10.7 10.5 747.0 789.6 0.7 0.7

CompanyEPS (INR) P/E Book value (INR) P/BV


24/25

Construction


Edelweiss Securities Limited, Edelweiss House, off C.S.T. Road, Kalina, Mumbai 400 098.

Board: (91-22) 4009 4400, Email: [email protected]

Vikas Khemani Head Institutional Equities [email protected] +91 22 2286 4206

Nischal Maheshwari Co-Head Institutional Equities & Head Research [email protected] +91 22 4063 5476

Nirav Sheth Head Sales [email protected] +91 22 4040 7499

Coverage group(s) of stocks by primary analyst(s):ConstructionConsolidated Construction Co., Hindustan Construction Co., IL&FS Transportation Networks, IRB Infrastructure, IVRCL Infra, Jaiprakash Associates, BL

Kashyap & Sons Ltd, Nagarjuna Construction Co, Ramky Infrastructure, Sadbhav Engineering, Simplex Infrastructures Ltd

Distribution of Ratings / Market Cap

Edelweiss Research Coverage Universe

Rating Distribution* 104 60 18 183

* 1 stocks under review

Market Cap (INR) 114 58 11

Date Company Title Price (INR) Recos

Recent Research

19-Jun-12 Construction Highway to growth;

Sector Update

07-Jun-12 IL&FS

ransporation

In pole position;

Visit Note

175 Buy

06-Jun-12 Sadbhav

Engineering

Temporary hiccup;

Result Update

120 Buy

> 50bn Between 10bn and 50 bn < 10bn

Buy Hold Reduce Total

Rating Interpretation

Buy appreciate more than 15% over a 12-month period

Hold appreciate up to 15% over a 12-month period

Reduce depreciate more than 5% over a 12-month period

Rating Expected to


25/25

SECTOR UPDATE

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