infrastructure-roads sector update_290812

© Your success is our success Emkay S e c t o r U p d a t e Emkay Global Financial Services Ltd. 1 Infrastructure-Roads Work In Progress ! August 29, 2012 Ajit Motwani [email protected] +91-22-66121255 Jitesh Bhanot jitesh.bhanot@emkayglobal.co m +91-22-66242491 IRB Infrastructure (IRB) CMP: Rs126 Target: Rs230 Reco: Buy Price Performance (%) 1M 3M 6M 12M Absolute 11 11 (25) (10) Rel. to Nifty 6 2 (26) (20) Ashoka Buildcon (ABL) CMP: Rs254 Target: Rs350 Reco: Buy Price Performance (%) 1M 3M 6M 12M Absolute 25 27 30 0 Rel. to Nifty 19 17 28 (11) Il&FS Transportation (ITNL) CMP: Rs170 Target: Rs209 Reco: Accumulate Price Performance (%) 1M 3M 6M 12M Absolute 1 (2) (10) (5) Rel. to Nifty (4) (10) (11) (16) Source: Bloomberg n NHAI awarded only ~500kms YTD FY13 – Maintains ~9,500kms target for FY13–Low awards owing to slowing growth, funding constraints & low developer interest in NHDP phase IV n Lenders impose stringent requirement as projects fail to meet traffic est-ups due diligence by appointing independent traffic consultants. Continued preference for players with strong B/S n Participation continues to fall, only 4 bids with >10 applicants. More than 5 projects see no bids at all. Small players continue to shy away from bidding - Participation lowers as 22% players submit final bid (FY13YTD) v/s 34% in FY12 n Despite low activity, opportunity remains large- 18K kms still to be awarded-opportunity of ~USD21 bn. Lower competitive intensity to help improve IRRs-Developers with B/S strength to bag value accretive projects. BUY IRB Infra, ITNL & ABL NHAI awards only 500kms in YTDFY13 – 9,500 kms appears a tall ask After a blockbuster FY12 were NHAI awarded ~6,500 km o f road projects under NHDP, recent awarding activity under the NHDP program has slowed down considerably with only 500 kms awarded between April-July12 period. Apart from the slowing economy and poor macro sentiment, funding constraints & low traffic density stretches under NHDP phase IV, are the factors impacting developer’s interest. We see that participation in the final bids for the road projects continues to reduce which is clearly evident from the fact that final participation for FY13YTD is at 22% (Final bids as % of PQ bids) as compared to 62% same period last year 34% for FY12. Despite awarding only 500kms, NHAI has maintained its target of awarding 9,500 kms which appears to be an uphill task. Lenders resorting to stringent requirement and increased due diligence With increasing number of projects witnessing lower traffic as compared to expectation, lenders now have resorted to increased level of due diligence for addressing this traffic expectation mismatch. For e.g., lenders have started appointing independent traffic consultants as well as conducting parallel/subsequent road traffic checks for evaluating project’s economic viability. Further lenders continue to show funding preference for developers with strong balance sheet, as large developers have so far bailed out troubled projects by bringing in additional capital, which in turn has safeguarded interest of lenders. Smaller players facing major crunch in achieving financial closure Bank funding to road sector which grew at 42% CAGR in FY07-10 has declined to 23% CAGR in FY10-12. Small road developers which rely more on Banks are feeling the pinch of this sharp slowdown and stringent lending norms to the road sector. For example out of the 60 projects that were awarded in FY12, 10 projects have failed to achieve financial closure within the stipulated deadline & 2 projects are already annulled by NHAI Despite low awarding see enough opportunity - 18K kms still to be awarded Despite awarding only 500kms, NHAI maintain its target of awarding 9,500 kms which appears ambitious. We believe even if NHAI is able to award ~5K kms of BOT road projects in FY13, this will create enough opportunity for road developers. With 18k kms yet to be awarded under NHDP we estimate that developers still have an attractive long term NHDP opportunity of ~Rs1.15tn or ~USD21 bn. With smaller players continuing to feel the funding constraints and lower interest from even large developers we believe that competitive intensity in the sector is likely to subside which in turn is expected to improve Equity IRR’s. In the context of tougher domestic lending scenario we believe that players with stronger balance sheet are likely to be beneficiaries in the next round of awarding. We maintain our BUY rating on IRB Infra & Ashoka Buildcon (ABL). Both the companies have enough balance sheet room to expand their existing portfolio and bag value accretive projects. Maintain Accumulate on IL&FS transportation.

infrastructure-roads sector update_290812

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