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NHAI recently awarded nine projects spread over ~1,050 km worth INR106bn. Our analysis of bids
NHAI recently awarded nine projects spread over ~1,050 km worth INR106bn. Our analysis of bids

NHAI recently awarded nine projects spread over ~1,050 km worth INR106bn. Our analysis of bids reveals a definite moderation in competitive intensity, which has been a major concern over the past year. We believe the highway authority is on track to award ~7,000 km projects in FY12 with ~4,500 km already awarded. We reiterate Sadbhav Engineering (Sadbhav) and IL&FS Transportation (ITNL) as our top picks.

 

NHAI awards ~1,050 km worth INR106bn

NHAI has awarded nine projects spread across ~1,050 km, worth INR106bn recently. Listed players have won six projects; their share in terms of length (km) and project cost stands at 68% and 63%, respectively.

Definite signs of receding competitive intensity

We believe competition in NHAI projects has definitely moderated compared to bids submitted sixnine months ago. This is evident in the lesser number of bidders (1015 in most cases and in single digits for some projects opposed to 1820 players earlier). Also, the difference between L1 and L2 bids has dipped.

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… due to concerns on project funding

The large number of projects already awarded and concerns over financial closure have forced developers to be more rational while bidding. With capital markets continuing to remain weak, there are concerns with regards to equity infusion for some companies. The government, concerned about high premiums promised by developers, is planning to meet banks to get their perspective on financial closure of the projects awarded. We expect banks to become more cautious going ahead with road projects funding; this will lead to developers being more circumspect while bidding.

Road projects spanning around 4,500 km awarded in FY12 till date

NHAI has so far awarded projects spread over ~4,500 km amounting to ~INR450bn. We believe it will award ~7,000 km of projects in FY12 (against 5,083 km in FY11 and 3,351 km in FY10).

Parvez Akhtar Qazi

+91224063 5405 parvez.qazi@edelcap.com

Our top picks: Sadbhav Engineering and IL&FS Transportation

Manish Sarawagi

We like Sadbhav for its superior execution and working capital efficiency. We like ITNL as it is a high quality infra company with a well diversified project portfolio and remains one of the best plays on peaking interest rates. Additionally, both companies have been cautious in bidding for new projects in the past few months given the aggressive bidding by peers. Both these companies stand a good chance to bag a few projects over the next four five months as competition eases.

+91224040 7575 manish.sarawagi@edelcap.com

Rohit Patni

+91226623 3392 rohit.patni@edelcap.com

November 30, 2011

Edelweiss Research is also available on www.edelresearch.com, Bloomberg EDEL <GO>, Thomson First Call, Reuters and Factset.

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Construction

Construction NHAI project award resumes Over the past two weeks, NHAI has awarded nine projects spread

NHAI project award resumes

Over the past two weeks, NHAI has awarded nine projects spread across ~1,060 km, worth INR106bn. Bidding for the projects reflects a definite moderation in competition (compared to the aggressive earlier bids) both in terms of number of players competing as well as the difference between L1 and L2 bidders.

Listed players have won six projects out of the nine awarded recently. Their share in terms of length (km) and project cost stands at 68% and 63%, respectively.

Table 1: Recent NHAI projects awarded

 

NHDP

Length

NHAI project cost (INR bn)

L1 Bidder and premium

L2 Bidder and premium

L3 Bidder and premium

 

Project Name

Phase

(in Km)

 

Maharashtra/ Karnataka Border – Sangareddy Section

III

145

12.7 L & T INR 800 mn

Ramky INR 750 mn

Essel Assignia INR 720 mn

Hospet Chitradurga Section

III

120

10.3 Ramky INR 630 mn

L & T INR 450 mn

Ashoka GVR INR 410 mn

Cuttack – Angul Section

III

112

11.2 Ashoka Buildcon INR NCC INR 512 mn 610 mn

L & T INR 510 mn

Raipur Bilaspur Section IVA

127

12.2 IVRCL Assets INR 450 Era Infra INR 430 mn

mn

L & T INR 420 mn

Agra Etawah Bypass

V

125

12.1 Ramky INR 1280 mn

Oriental INR 1220

Essar INR 1210 mn

Etawah – Chakeri (Kanpur) Section

V

160

15.7 Oriental INR 920 mn NCC INR 680 mn

ITNL INR 550 mn

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Rampur Kathgodam Section

III

93

7.9 Era Infra INR 340 mn Essel INR 54 mn

C & C INR 20 mn

 

Bakhtiyarpur Khagaria Section

III

113

16.4 Essar KNR VGF of INR Navyuga VGF of INR

NA

5,370 mn

5,680 mn

LucknowRaebareilly

IV B

70

7.6

Essel

semi annual annuity

INR 504 mn

L & T INR 561 mn semi annual annuity

Gul far INR 594 mn semi annual annuity

Section

 

Total

1,065

106.1

annuity Section   Total 1,065 106.1 Source: Industry, Edelweiss research Overall, the NHAI

Source: Industry, Edelweiss research

Overall, the NHAI has awarded projects spread over ~4,500 km so far in FY12 worth ~ INR 450 bn. Of these, the share of listed players in terms of length (km) and project cost stands at 59% and 60% respectively.

Our view on recent projects award

We believe competition in NHAI projects has definitely moderated compared to bids submitted sixnine months ago. This is evident as:

The number of bidders has dipped opposed to some of the earlier projects which had received bids from 18 20 players. Most of the recent projects have received bids from 1015 players. In fact, the number of bidders in some projects was in single digits.

The difference between L1 and L2 bids has dipped compared to earlier bids. The difference was quite high in some of the earlier projects as can be seen below:

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Construction

Construction

Table 2: Stiff competition in earlier projects

 

NHAI

 

Date of

Length

project cost

L1 Bidder and premium

L2 Bidder and premium

L3 Bidder and premium

Sl. No

award

Project name

(in Km)

(INR bn)

1

Apr 11 Kota Jhalawar

88

5.3 Keti Construction – JMC – VGF of INR

MEIL – VGF of INR

 

Premium of INR 35 mn

340 mn

400

mn

2

Jul 2011 Jabalpur Lakhnadon

74

7.76 Gannon Dunkerley – VGF of INR 370 mn

Gammon – VGF of INR 2,230 mn

JMC – VGF of INR 2,240 mn

3

Aug11 Rohtak Jind

50

2.83 NKG – Premium of INR 10 mn

Vijay Infra –VGF of INR 690 mn

PNC – VGF of INR

 

990

mn

Source: NHAI, Industry, Edelweiss research

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We believe this moderation in competition is due to the following factors:

Large quantum of project awards: The quantum of projects awarded has been high at ~ INR450bn. FY12 is likely to see the highest number of projects awarded in the past six years. As expected, once a company wins a certain number of projects, its aggression level dips markedly and its future bids are comparatively moderate. The large number of projects already awarded as well as a good project pipeline means that companies have become more selective in bidding for projects.

Concerns over equity infusion: With capital markets continuing to remain weak, there

are concerns with regards to equity infusion for some companies. Many players had planned fund raising by diluting stake in the road BOT holding company; however, only a

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few like Sadbhav and HCC have been successful in doing so.

Concerns over financial closure: Recent news articles suggest that the government is worried about the high premiums quoted by developers on some earlier projects. It has expressed concerns over their eventual execution and future viability and is planning to meet banks/ financial institutions to get their perspective on the financial closure of these projects. News reports suggest that the highways secretary is expected to take up the issue with the financial services secretary shortly.

Notably, a study undertaken by the Roads Ministry on 66 projects that have achieved financial closure suggests that in some cases, banks have financed more than twice the project cost estimated by NHAI. About one fourth of the projects were sanctioned loans 50100% higher than NHAI estimates. On an average, banks have extended ~39% higher loans than NHAI estimates. This has led to concerns in the government including the Planning Commission.

While developer costs have traditionally been higher by 3040% compared to NHAI project cost estimates, what has raised the government’s hackles is the aggressive premiums quoted on some projects as well as traffic disappointment on many that have become operational over the past couple of years. News reports suggest that some projects that have become operational have already been downgraded by rating agencies and are staring at debt restructuring. This has led to concerns in government circles about the fate of projects awarded over the past year or so.

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Construction

Construction However, we caution that while the signs are encouraging with regards to moderation in

However, we caution that while the signs are encouraging with regards to moderation in competition, some aggression still remains as far as bidding is concerned. This can be gauged from the following factors:

The government had expected some recent projects would require a grant; however, developers have still gone ahead and promised a small premium to win projects. This suggests that there is still some aggression on part of players.

While the difference between L1 and L2 bidders has narrowed, there still remains a substantial gap between the top 23 bidders and rest of the players in some projects. For e.g., in the Rampur–Kathgodam project (which the government expected will require a grant), while three bidders have quoted a small premium, many others had asked for a grant ranging between INR2bn and INR3bn. This difference in bids on a project of less than INR10bn size, is humungous.

Our view

Project award: With a strong project pipeline, we expect NHAI to more or less meet its target of awarding ~7,000 km of projects in FY12.

Competition in future projects: While we believe competitive intensity has moderated, the roads industry is still not completely out of the woods. Lack of projects from other segments has forced developers to bid for road projects, even at low IRRs. We believe the trend of moderation in competition will continue going ahead. With concerns already being raised about the power portfolio of financial institutions, banks are likely to become more cautious going ahead while funding road projects. This should lead to more rationality in bidding from developers which will be positive for the industry.

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Profitability of projects being awarded: With the toning down of competition, we believe IRRs on projects have also inched up. Our initial discussions with developers on recent project awards suggest the same. Many projects awarded earlier this year had single digit IRRs and negative NPVs which developers expected to compensate with profits on the EPC part. For projects awarded recently, we believe this is not the case and they will be value neutral at worst on NPV basis; developers will still earn EPC profits.

Our top picks: Sadbhav Engineering and IL&FS Transportation

We like Sadbhav for its superior execution and working capital efficiency. Our SOTP based target price of INR173 per share consists of INR102 from construction business (valued at 9x FY13E P/E) and INR71 from BOT projects (valued on DCF, implied P/BV at 2x on Q2FY12).

We like ITNL since it is a high quality road infra company with a well diversified project portfolio and remains one of the best plays on peaking interest rates. Our SOTP based target price stands at INR255/share, valuing BOT projects on DCF and EPC on P/E basis. A 100bps decline in interest rates increases our SOTP by 13%.

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Edelweiss Securities Limited , Edelweiss House, off C.S.T. Road, Kalina, Mumbai 400 098. Board: (9122) 4009 4400, Email: research@edelcap.com

VikasKhemani

Head

Institutional Equities

vikas.khemani@edelcap.com

+91 22 2286 4206

Nischal Maheshwari

Head

Research

nischal.maheshwari@edelcap.com

+91 22 6623 3411

Coverage group(s) of stocks by primary analyst(s): Construction

Consolidated 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

Recent Research

Date

Company

Title

Price (INR) Recos

1,150

950

750

550

350

150

 

15Nov11

 

Ramky

 

Outlook remains robust; Result Update

231

Buy

   

Infrastructure

 
 
 
 

Buy

15Nov11

 

Simplex

Simplex Infrastructures;

202

Hold

 

Infrastructure

Result Update

 

14Nov11

IVRCL Infra

Buy

Potential asset sales a positive; Result Update

38

Buy

 
Buy

Buy

   
   

J

Distribution of Ratings / Market Cap

 

J

J

J

Edelweiss Research Coverage Universe

 

Rating Interpretation

 

Buy

Hold

Reduce

Total

Rating

Expected to

Rating Distribution*

132

51

18

203

* 2 stocks under review

 

Buy

appreciate more than 15% over a 12 month period

 

Hold

appreciate up to 15% over a 12month period

 

> 50bn

Between 10bn and 50 bn

< 10bn

 
 

Reduce

dep reciate more than 5% over a 12month p eriod

Market Cap (INR)

117

 

65

21

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