Infrastructure: Time to speed up

Infrastructure | Time to speed up

Contents

Time to speed up .................................................................................................................. 3

Infographics .......................................................................................................................... 5

Programs entailing INR7t investment already in place.......................................................... 7

State infrastructure: Abundant opportunities..................................................................... 13

Policy amendments key to revival of sector ........................................................................ 14

Sunny days ahead ............................................................................................................... 17

Funding in place .................................................................................................................. 23

Applying 3-S scale to pick potential winners ....................................................................... 25

Companies

................................................................................................................ 27

Ashoka Buildcon ......................................................................................................... 28

KNR Construction ........................................................................................................

Sadbhav Engineering ...................................................................................................

IRB Infrastructure .......................................................................................................

31 October 2017

Infrastructure | Time to speed up

Roads

Time to speed up

Enablers in place; opportunity sizeable



For the last three years, the government has been ironing out issues hampering the

Roads sector. It has cleared bottlenecks through suitable policy changes.

Predefined programs are now in place, entailing an investment of INR7t. Early signs of

revival in the sector have been evident for some time now.

Players with strong balance sheet, execution track record, and robust asset portfolio

would be the key beneficiaries. Our top picks are Sadbhav Engineering, Ashoka

Buildcon and KNR Construction.

Multiple steps taken by government to revive sector

The Roads sector has been identified as one of the top-3 capex themes by the

current NDA government. The Ministry of Road Transport and Highways (MORTH)

has taken multiple steps to revive the ailing sector over the last three years. We

believe the framework required for the speedy award and execution of projects is in

place. We expect activity to pick up, with the government addressing issues like:



Execution hurdles – awarding projects after 80% land acquisition under BoT and

90% land acquisition under EPC



Funding arrangement – cess trebled from INR2/liter to INR6/liter; market

borrowing plans in place



Faster forest and environmental clearances



Change in project model to ease funding burden of cash-strapped developers



Exit policy for developers to help unlock equity from completed projects, making

it potentially available for investment in new projects



Premium deferment scheme to ease cash flow issues faced by developers

Time to speed up

Roads

Activity showing early signs of pick-up

For the last three years, the government has been ironing out issues hampering

growth of the Roads sector. In FY17, early signs of revival in the sector became

evident, with project awards at 16,270km (up 56%) and construction at 8,230km (up

37%). The government has set steep targets for FY18 to award 25,000km and

construct 15,000km. Moving ahead, the trend looks promising, with industry reports

indicating that NHAI would award over 31,000km of road projects executable over

FY17-21E, entailing an estimated investment of INR3.6t (civil construction works).

We expect awarding activity to stabilize at 15,000km per year, and execution activity

to pick up – 9,300km in FY19 and 10,000km in FY20.

Focus on operating and financial parameters:

We have evaluated road

infrastructure companies on operating and financial parameters. We have looked at

(a) size and scalability, (b) strength of financials, and (c) strategic and other issues.

Sadbhav Engineering and KNR Construction appear most attractive.

+91 22 3029 5126

Amit.Shah@MotilalOswal.com

Please click here for Video Link

31 October 2017

Infrastructure | Time to speed up

Exhibit 1: Rating Scale

Ashoka Buildcon

Size and Scalability

Existing Project portfolio Quality

Incremental growth potential

Execution capability

Strategic and other issues

Business diversification

Management/strategic issues

Strength of Financials

Earnings (PBT) Growth

Debt:Equity*

RoCE

Total S-score

IRB

KNR

Sadbhav Eng

Picking potential winners

While Roads sector revival and improvement in business opportunities will benefit

majority of the players in the sector, we believe the preferred way to play the sector

at the current juncture is through asset-light E&C firms and select asset-owners with

good balance sheets and strong operational BoT assets. We initiate coverage on

Ashoka Buildcon, Sadbhav Engineering, KNR Construction and IRB Infrastructure.

Our top picks are Sadbhav Engineering (Buy; TP: INR385), Ashoka buildcon (INR260)

and KNR Construction (Buy; TP: INR295), given their strong execution track record,

healthy balance sheet, and stable operating margins.

Exhibit 2: Valuation metrics and framework

Consolidated

Ashoka Buildcon

FY18E

FY19E

Financial Snapshot

Revenue

33,736

EBIDTA

9,723

PAT

339

Growth YoY (%)

Revenue

EBIDTA

PAT

Margins

EBIDTA

28.8

PAT

1.0

Cashflow

Operating Cashflow

6,709

Free cashflow to Firm

3,625

Valuation Ratios

P/E

119

P/B

2.2

Ev/EBIDTA

9.0

Return Ratios

RoE

1.9

RoCe

9.8

Valuation Methodology

EPC

16x:Sep19 P/E

BoT

Total

DCF

38,666

10,799

1,321

290

27.9

3.4

7,172

4,021

30.5

2.1

8.4

7.1

10.2

180

260

Standalone

KNR construction

FY18E

FY19E

18,006

2,629

1,792

16.8

14.5

6.6

14.6

10.0

2,155

1,155

19.6

3.3

13.5

18.4

16.3

18x:Sep19 P/E

1x P/BV

20,214

2,951

1,917

12.3

7.0

14.6

10.0

1,559

559

18.3

2.8

12.0

16.7

15.7

256

295

Consolidated

IRB infrastructure

FY18E

FY19E

58,562

29,377

7,958

0.2

(3.6)

11.4

50.2

13.6

-15,556

78,852

14.1

1.9

7.2

9.9

8x: Sep19 P/E

DCF

65,670

33,051

8,390

12.1

12.5

5.4

50.3

12.8

25,332

-17,150

13.4

1.7

7.4

11.2

114

100

240

Standalone

Sadbhav Engineering

FY18E

FY19E

38,365

4,286

2,449

15.5

20.5

30.4

11.2

6.4

10,503

9,003

18.9

2.5

12.5

13.8

9.0

16x:Sep19 P/E

15% disc to

mkt cap

44,976

5,122

2,493

17.2

19.5

1.8

11.4

5.5

3,137

1,637

18.6

2.2

10.3

12.5

10.2

252

133

385

Source: Company, MOSL

31 October 2017

Roads: Enablers in place, time to speed up

Issues that hampered the growth in the sector

Infrastructure | Time to speed up

Infographics

Low traffic density led by

weak economic scenario

Delay in procuring financial closure.

Lenders averse to lending to

infrastructure projects

Non Availability of Right of Way

clearance and other clearances

(Projects were awarded with 30% land

acquisition)

Aggressive bids from the developers (The share

of projects awarded on premium basis had

increased to 68% in 2011-12 from 22% in 2008-

09, 60% of which are stalled and terminated)

Steps taken to revive the sector

Premium

Rescheduling

Deemed termination

of projects

Revenue Shortfall

loan/ deferred

premium payment

100% exit policy for

developers unlocks

capital for fresh projects

One time fund

infusion from

Government

Extension of concession

period to make stranded

projects viable

31 October 2017

Activity in the sector has shown initial signs of pick up in FY17

Awarding activity has registered 55% growth YoY

Awarded km (per day)

Infrastructure | Time to speed up

Construction activity has registered 35% growth YoY

Construction km (per day)

FY12

FY13

FY14

FY15

FY16

FY17

FY12

FY13

FY14

FY15

FY16

FY17

HAM to be preferred way of awarding projects

FY16

FY17

Competitive intensity has come down in the HAM

category

No of projects awarded

10.0

7.5

9.0

Average no of bidders

10.0

7.5

3.0

5.0

2.5

0.0

HAM

EPC

BoT

5.0

2.5

0.0

Bharatmala project to have dominant share in Centre’s

ordering activity

State wise opportunities in Road Sector (INRt)

22.9

Bharatmala

55.7

NHDP scheme

Others

2.0

1.1

0.1

1.5

21.4

Projects

Total (including land cost)

Total (excluding land cost,

assumption: land cost at 40%)

Cost (INR t)

5.7

3.4

31 October 2017

Infrastructure | Time to speed up

Programs entailing INR7t investment already in place

Sizable opportunity for all the players



Investment programs worth INR7t have been identified, ensuring a strong pipeline of

projects. Bharatmala to constitute 56% of the ordering.

Total projects of 9,304km could come up for award under the NHDP scheme.

Given that 50% of the highways in India are two-laned, four-laning itself promises to

be a big opportunity.

The outlook for the Roads sector has improved considerably over the last two years,

with roads being a key focus area for the new government to revive capex activity in

India. In its previous tenure as well, the NDA government had chosen the Roads

sector to accelerate the capex cycle and had awarded 23,000km over its five-year

tenure. In its current tenure, it has set an ambitious target to ramp up road

construction activity from 23km per day to 40km per day and has prepared a strong

pipeline of road projects, which entails an investment of INR7t (center and state put

together). Multiple states like Maharashtra, UP, Telangana, and Karnataka have a

strong pipeline of projects. Between the center and the states put together, there

exists an opportunity of over INR7t (center: INR4.0t; states: INR3.4t).

Exhibit 3: Immense business opportunity available in the sector from Centre

Component

Components under Phase-I of Bharatmala

Economic Corridor Development

Inter-corridors and Feeder Roads

National Corridor Efficiency Improvement

Border & International Connectivity Roads

Coastal & Port Connectivity Roads

Expressways

Sub-total (A)

Balance Road works under NHDP

Sub-total (A+B)

Roads under other existing schemes (E.g., LWE, SARDP-NE, NHIIP,

Setubharatam, Char Dham)

Total

Total (excluding land cost, R&R assumption: land cost and R&R at 40%)

9,000

6,000

5,000

2,000

800

24,800

10,000

34,800

48,877

83,677

Length (km)

INR t

1.2

0.8

1.0

0.3

0.2

0.4

3.9

1.5

5.4

1.6

7.0

4.0

Source: MoRTH, Media articles, MOSL

Exhibit 4: Immense business opportunity available in the sector from States

Projects

Maharashtra

Karnataka

Telangana

Andhra Pradesh

Madhya Pradesh

Uttar Pradesh

Total (including land cost)

Total (excluding land cost, R&R assumption: land cost and R&R at 40%)

Cost (INR t)

1.1

0.1

0.4

0.6

2.0

1.5

5.7

3.4

31 October 2017

Infrastructure | Time to speed up

NHDP

NHDP scheme being implemented in seven phases

The National Highway Development Program (NHDP) is the government’s flagship

program. It encompasses building, up gradation, rehabilitation and broadening of

existing national highways. The program is executed by the National Highways

Authority of India (NHAI) in coordination with the Public Works Departments

(PWDs) of various states. NHDP is being implemented in seven phases. As at the end

of FY17, NHDP has completed 58% of the projects, 22% are under construction, and

20% are yet to be awarded.

Exhibit 5: Road projects status under NHDP scheme

Contracts

Balance

Total

Already

Under

length for

Length 4/6Laned Implementatio

Implementation award

(Km.)

n (Km.)

(No.)

(Km.)

5,846

Details of the project

Golden Quadrilateral is a highway network connecting

many of the major industrial, agricultural and cultural

centers of India. It connects cities like Chennai, Kolkata,

Delhi and Mumbai

consists of building 7300 kilometers of four/six lane

expressways connecting Srinagar, Kanyakumari,

Porbandar and Silchar

upgrade 12,109 km of national highways on a BOT basis,

connectivity of state capitals via NHDP Phase I and II, and

connectivity to Centre’s of economic importance

Phase IV will convert existing single-lane highways into

two lanes with paved shoulders

As road traffic increases over time, a number of four-lane

highways will need to be upgraded/expanded to six

lanes.

Connect major commercial and industrial townships.

Improvements to city road networks by adding ring

roads to enable easier connectivity with national

highways to important cities.

NS - EW Ph. I & II

Port Connectivity

NHDP Phase III

NHDP Phase IV

NHDP Phase V

NHDP Phase VI

NHDP Phase VII

NHDP Total

Others (Ph.-I, Ph.-II

& Misc.)

SARDP -NE

Total by NHAI

7,142

435

11,809

13,203

6,500

1,000

700

46,635

2,048

110

48,793

6,568

383

7,621

4,058

2,564

27,062

1,743

107

28,915

300

2,161

6,050

1,428

184

10,269

305

10,574

105

257

276

274

2,027

3,095

2,508

816

584

9,304

Source: NHAI, MOSL

Major awarding now would happen from phase-IV projects, which involve up

gradation of two-lane highways – construction of paved shoulders on two-lane

national highways and four-laning of some stretches. Most projects under this phase

are likely to be awarded on EPC and HAM basis, as traffic volumes are lower, and are

thus, less attractive than phase-III and phase-V projects. Implementation of this

phase is expected to require an investment of around INR730b.

Rebidding for terminated contracts likely to be at more favorable terms

NHDP had terminated ~4,500km of the 9,297km of road projects awarded in FY11

and FY12. During FY11-12, most projects were awarded at premium, as the

economy was growing at 7-8% and the demand-supply equation favored road

developers. However, for a number of these projects, construction activity could not

pick up, as NHAI failed to arrange encumbrance-free land and obtain forest &

31 October 2017

Infrastructure | Time to speed up

environment clearances. These projects are now coming up for rebidding after

obtaining adequate encumbrance-free land and clearances. Given that the demand-

supply equation is now unfavorable for road developers, the rebidding is likely to be

at more favorable terms, leading to improved business economics.

Exhibit 6: List of projects terminated by NHAI

Stretch

Harangajo to Maibang (AS-21)

Kannur - Kuttipuram (Package -II)

Kannur - Kuttipuram (Package -I)

Jetpur - Somnath

Pimpalgaon – Nasik - Gonde

4-Laning of Solapur - Bijapur

Rohtak - Jind

Bhuneshwar - Puri

Talchar – Dubari- Chandikhole

Raiganj - Dalkola

Aligarh - Kanpur

Anandapuram-Visakapatnam-Anakapalli

Six-Laning of Gundugolanu Rajamundry

Six Laning of Greenfield Udaipur Bypass

Funded

NHAI

BOT

NHAI

BOT

HAM

NH no

203

23&20C

Length

(km)

123

111

132

283

121

When

terminated

Nov-13

Sep-13

NHDP

Phase

III

Dec-13

Sep-14

Dec-13

Source: NHAI, MOSL

Exhibit 7: List of projects foreclosed by NHAI

Stretch

Funded by

NH no

31C

210

215

113

6&33

458

Bijni – Assam/WB Border (AS-12)

NHAI

Goa/KNT Border - Panaji

BOT

Maharashtra/Goa border –

BOT

Panaji-Goa/KNT Border

Chethalai - Ochira

BOT

4 Laning of Coimbatore-Mettupalayam

BOT

Kota – Jhalawar

BOT

Karnataka /Kerala Border - Kannur

BOT

KaraiKudi - Ramanathapuram

BOT

Belgaum - Kanpur

BOT

Rimoli-Roxy-Rajmunda

BOT

Bimitrapur - -Barkate

BOT

Muhulia – Baharagora- Kharagpur

BOT

2 laning of Raipur – Jessa - Khera

NHAI

Fagne – Chilki PKG -2

BOT

Aurangabad-Barwa Adda

BOT

Chennai - Tada

BOT

Walajapet - Poonamalee

BOT

New 4 – Lane Elevated Road from Chennai

BOT

port – Maduravoyal

Length

(km)

139

127

150

220

Aug-13

Sep-13

Jan-14

Jul-16

Feb-17

Mar-14

Sep-14

Nov-14

Sep-14

Nov-13

Jun-16

Jul-16

When

terminated

NHDP

Phase

III

VII

Source: NHAI, MOSL

31 October 2017

Infrastructure | Time to speed up

Bharatmala Project

Bharatmala project has been launched as an umbrella program with primary focus

on optimizing the efficiency of the movement of goods and people across the

country. This program envisages a corridor approach in place of the existing

package-based approach which has resulted in skewed development. It is an

umbrella project, with estimated project cost of INR5.4t to build 34,800km of roads

of which phase I includes projects worth INR3.5t (24,800km). Government intends

to award the projects under phase I over the next two years and complete the

projects over the next five years. DPR preparation for projects with 9,000km is

already undertaken. Key Schemes envisaged under Bharatmala project include



Economic corridor:

Bharatmala project intends to develop corridors of

economic importance which are expected to carry 25% of the freight over the

coming years. Government has identified 50 corridors in a scientific manner by

a) survey of freight movement across 600 districts b) Automated traffic surveys

across 1500 points c) identifying shortest route for all origin-destination

movement d) Satellite mapping of corridors for identifying up-gradation

requirement. Once the network of Economic corridor (along with its feeder and

inter corridor routes), and national corridor is developed it is expected to carry

70-80% of the freight traffic. Around 26,200 km of Economic corridors have

been identified to be developed as Economic corridors out of which 9,000 kms

are being taken up in Phase-I of Bharatmala.

National Corridors Efficiency Improvement:

The existing Golden-Quadrilateral

and NS-EW corridors carry 35% of India’s freight and these would be declared as

National corridors. The National Corridors have developed choke points

impacting logistics efficiency and thus there is a requirement to build Ring Road

and bypasses/ elevated corridors in addition to lane expansion to decongest

these National Corridors.

Development of multimodal logistics parks:

To improve the efficiency of freight

traffic movement across the country, 24 logistic parks have been identified

which will cater to production and consumption centers accounting for 45% of

India’s road freight. Logistic parks intends to develop hub and spoke model

which will facilitate consolidated movement of freight by deploying larger

carrying capacity truck between the two hub points. Once developed, these

routes are expected to bring efficiency of freight movement on existing

corridors and reduce logistic cost by 25%. Around 5,000 kms are being taken up

under this category in Phase-I of Bharatmala.

Border and International connectivity roads:

- 3,300 km of border roads have

been identified to be built along the international border for their strategic

importance. Around 2,000 km of roads are required for connecting India’s major

highway corridor to International trade points so as to facilitate Export-Import

(EXIM) trade with our neighbors: Nepal, Bhutan, Bangladesh and Myanmar.

2,000 kms are being taken up under this category in Phase-I of Bharatmala.

Coastal and Port connectivity roads:

- 2,100 km of coastal roads have been

identified to be built along the coast of India. These roads would boost both

tourism and industrial development of the coastal region. Of the 2,100km of



31 October 2017

Infrastructure | Time to speed up

coastal roads 2,000 km of port connectivity roads have been identified to

facilitate EXIM trade with an emphasis to improve connectivity to non-major

ports. The roads identified have been synergized with the Sagarmala program

and are being taken up under this category in Phase-I of Bharatmala.



Green-field expressways-

Certain sections of National and economic corridors

have traffic exceeding 50,000 PCUs and have also developed several choke

points. About 1,900 km of these stretches have been identified for development

of green-field expressways. Around 800 kms are being taken up under this

category in Phase-I of Bharatmala.

Setubharatam Pariyojana:

The Setubharatam Pariyojana project aims at elimination of railway crossings in

India by constructing 1,500 major bridges and 200 railway over-bridges (ROBs) or

railway under-bridges (RUBs), with an investment of INR508b. It aims to make all

national highways free of railway level crossings by 2019 to prevent the frequent

accidents and loss of lives at level crossings. 208 ROBs/RUBs will be built at the level

crossings at a cost of INR208b as part of the program. In addition to this, about

1,500 old and worn-down bridges will also be improved by

replacement/widening/strengthening at a cost of about INR300b. Detailed project

reports (DPRs) have already been received for 73 ROBs.

Exhibit 8: Rail over-bridges identified to be built under Setubharatam Pariyojana

States

Andhra Pradesh

Assam

Bihar

Chatiishgarh

Gujarat

Haryana

Himachal Pradesh

Jharkhand

Karnataka

Kerala

Madhya Pradesh

Maharashtra

Odhisa

Punjab

Rajasthan

Tamil Nadu

Uttarakhand

Uttar Pradesh

West Bengal

Total

Rail over bridges

(number of units)

208

Source: MoRTH, MOSL

31 October 2017

Infrastructure | Time to speed up

Chardham Project:

The project envisages connecting Kedarnath, Badrinath, Gangotri and Yamunotri

through 888km of disaster-proof two-lane roads in Uttarakhand at a cost of

INR120b. The Finance Ministry has approved an extra budgetary support of

INR20.7b for the project. The project will be executed in seven packages. The

government has approved two packages – Rishikesh-Rudraprayag (Package-I) and

Rudraprayag-Mana village (Package-II) – on EPC mode.

Exhibit 9: Details of packages to be awarded under Chardham Connectivity Program

Package

Package-I

Package-II

Package-III

Package-IV

Package-V

Package-VI

Package-VII

Project name

Rishikesh-Rudraprayag

Rudraprayag-Mana village

Rishikesh-Dharasu

Dharasu-Gangotri

Dharasu-Yamunotri

Rudraprayag-Gaurikund

Pithoragarh-Tanakpur

NH No

NH-58

NH-94

NH-108

NH-94

NH-109

NH-125

Road length (Km)

140

160

144

124

150

Source: MoRTH, MOSL

North East Connectivity Project

Ministry of Road Transport and Highway (MoRTH) has assigned special emphasis to

the development of highways in the North East region and has incorporated a

company called National Highways & Infrastructure Development Corporation

(NHIDCL) in 2014 to address the concerns of sluggish pace of implementation of

infrastructure projects in the North East Region and Strategic Areas of the country

that share international boundaries. NHIDCL is currently handling 134 national

highway and other infrastructure development projects covering about 8,000km to

be executed at a cost of about INR1t. These include important projects such as

Chandkhera-Kurti Bridge, Rhenok-Pekyong (26km), four-laning of Dimapur-Kohima

section of NH-39, Imphal-Moreh section of NH-39 alternative alignment, etc.

Exhibit 10: North East Connectivity Program details

State

Andaman & Nicobar Islands

Arunachal Pradesh

Assam

Himachal Pradesh

Jammu & Kashmir

Manipur

Meghalaya

Mizoram

Nagaland

Sikkim

Tripura

Uttarakhand

West Bengal

Total

Road length (Km)

275

1,668

320

436

1,563

331

472

327

578

571

661

433

7,653

Estimated Cost (INR b)

163

124

778

Source: MoRTH, MOSL

31 October 2017

Infrastructure | Time to speed up

State infrastructure: Abundant opportunities

Ambitious plans by states to revamp road infrastructure

With the support from the center, several states have planned mega road projects.

States like Maharashtra, Uttar Pradesh, Karnataka, Andhra Pradesh and Telangana

have a robust pipeline of projects to be awarded over the next few years. Plans of

INR5.7t have been finalized and these should be executed over the next few years.

Exhibit 11: Planned capex by key states (Key projects)

Key Projects

Maharashtra

Mumbai Nagpur Samruddhi Corridor

Maharashtra Road improvement Program

Mumbai Transharbour link

Mumbai Coastal Road

Karnataka

Bangalore- Mysuru

KSHIP III

Telangana

Two Expressway connecting Hyderabad with Bengaluru and Vijaywada

Elevated corridor

State and National Highways

Madhya Pradesh

Narmada Expressway

Chambal Expressway and Road upgradation project

Andhra Pradesh

State Highways up gradation to National Highways

National highway improvement

Amravathi Anadapur Expressway

Outer Ring Road

Uttar Pradesh

Purvanchal Expressway

Ring roads, up gradation of roads etc

Total

Cost (INR b)

460

300

178

150

160

250

310

1190

Kms

710

10,000

117

419

400

16.4

1,265

300

280

200

190

1300

5,122

1,000

500

690

186

15,355

Maharashtra

Maharashtra has strong infrastructure development plans, with multiple large

projects in the pipeline – Mumbai-Nagpur (INR240b),, MRIP projects on HAM basis

(10,000km; INR300b), and Mumbai Coastal Road project (INR150b). Maharashtra

plans to award road projects worth INR1.1t over the next few years.

Source: Industry article, MoSL

Uttar Pradesh

Uttar Pradesh offers strong business opportunity for road developers post change in

state government. The center has approved road projects of INR100b for the

construction and upgradation of various roads in Uttar Pradesh. Projects include

upgradation of 73 state highways into national highways, with a total length of

6,260km. The government also plans to award Purvanchal Expressway (INR190b).

Andhra Pradesh

Andhra Pradesh has planned road project capex of INR553b. Key projects include

Outer Ring Road (INR200b) and Amravathi-Anadapur Expressway (INR280b).

31 October 2017

Infrastructure | Time to speed up

Policy amendments key to revival of sector

Focus on ironing out prevailing issues



The model concession agreement has been modified with the intent to make the

agreement more practical and developer-friendly.

The improved model concession agreement builds in issues like exit policy and revival

of stranded projects to ease the prevailing distress in the sector.

To achieve its ambitious target and revive the Roads sector, the government has

adopted a multi-pronged strategy. We believe key initiatives like (a) amendment to

the model concession agreement (premium rescheduling, deemed termination of

project), (b) bidding of tenders only after 80% procurement of land, and (c) exit

option available to developer after two years of project operation will go a long way

in improving the business dynamics and transparency in the sector and revive the

interest of the stakeholders.

Exhibit 12: Key announcements by the Ministry over the last few years

Key changes to various policies related to the Roads sector over the last few years

Mar-13 De-linking of forest and environmental clearances

Mar-14 Premium rescheduling for stressed projects

Jul-14

Bidding of tenders only after 80% land has been acquired

Aug-14 Waiver of charges for mutual usage of land between the railways and roads ministries

Fast track clearances: i)States to clear projects with up to 40 acres of forest land, ii) Increased limit for sand mining,

Aug-14

iii) Online filing and clearing of ROBs and RUBs

Dec-14 5:25 scheme which allowed banks to refinance or sell their long-term project loans every 5 years

Feb-15

Govt budgetary support to NHs raised by 178% to INR856b in Union Budget 2015-16

May-15 100% exit for developer after two years of project completion both for pre-2009 and post- 2009 projects

May-15 NHAI funding for projects that are stuck in advanced stages of completion

Aug-15 Removal of clause related to investment of money earned on exits in other NHAI projects

Sep-15

Amendments to MCA

Nov-15 34 Stalled projects given an extension in the construction period

Jan-16

Cabinet approves hybrid annuity model for construction of highways

Aug-16 Government's decision to pay 75% of arbitration amount to construction companies which have won arbitration awards against PSU

Source: Media articles, MOSL

Amendment to model concession agreement a game changer

The Roads sector received strong impetus post the amendment of the model

concession agreement (MCA) by the Ministry of Roads and Highways for awarding

projects on BOT basis. Changes like rescheduling premium payments and deemed

termination of project will help revive the confidence of key stakeholders. The

amendment to the model concession agreement addresses the following issues:

Premium rescheduling:

Under the amended MCA, premium payment will start from

the fourth year after the completion date as against the first year, previously. This

will significantly reduce the cash flow mismatch during the initial phase of the

project and will also give comfort to bankers, as debt servicing gets priority.

Deemed termination of projects:

Under the amended MCA, if the condition

precedents in the concession agreement are not fulfilled within one year of signing

the concession agreement, the project would be eligible for deemed termination.

This step is a huge positive for the sector, as this will significantly reduce the

projects getting stuck/stalled on account of non-fulfillment of the conditions in the

agreement. This will also reduce the risk of cost overrun of a particular project.

31 October 2017

Infrastructure | Time to speed up

Revenue shortfall loan / deferred premium payment:

Under the amended MCA,

revenue shortfall loan / deferred premium payment has been allowed not only for

an indirect political event or an authority default impacting the cash flow of the

project, but also for any judicial pronouncement impacting the cash flow of the

project. Thus, concessionaires have been allowed to defer premium payment for

projects that are not able to meet the premium obligation post servicing debt and

necessary expenses. To qualify for the premium deferment scheme, there has to be

a clear case of revenue shortfall and the concessionaire would be required to pay

interest on the deferred premium amount. The deferred premium would be to the

extent of the shortfall in payment of premium and would be capitalized. The

deferred amount would be recovered in future with interest of 2% over the bank

rate. The concessionaire would not be allowed to declare any dividend till the

premium is made good. In May 2014, NHAI approved deferment of premiums for

nine projects worth INR60b spread over next 12 years.

Exhibit 13: Projects where premium deferment has been approved by NHAI

Projects

Godhra- Gujarat/ Madhya Pradesh border

Beawar-Pali- Pindwara

Rohtak-Panipat

Hyderabad-Yadgiri

Samakhiyali-Gandhdham

Ahmedabad-Vadodara

Tumkur-Chitradurga

Indore-Dewas

Hosur Krishnagiri

Developers

BSCPL

L&T

Sadbhav

L&T

IRB

Gayatri-DLF

Reliance Infra

Premium postponed in

2014 (INR m)

1,704

473

129

244

2,367

815

293

407

Source: Company, MOSL

100% exit policy for developers unlocks capital for fresh projects

The Cabinet Committee Economic Affairs has approved a comprehensive Exit Policy

that permits concessionaires/developers to divest 100% equity two years after

completion of construction. This would help unlock equity from completed projects,

making it potentially available for investment in new projects. The policy is more

relevant and applicable for the pre-2009 built projects, where divestment of

promoter equity to the tune of 74% was allowed; for post-2009 projects, this exit

policy is available. The exit policy would be beneficial to 80 build, operate and

transfer (BOT) projects awarded prior to 2009 that have been completed with

equity-locked-in worth INR45b. Once unlocked, this could support incremental

1,500km of new highways on PPP mode, thus helping to revive the response to BOT

(T) projects.

The government has proposed a one-time fund infusion to revive and complete

languishing national highway projects under public-private partnership (PPP) mode

that have achieved at least 50% physical completion. NHAI will provide loan support

for a short tenure at ‘bank rate + 2%’ and will have first charge on the toll

receivables. The government has identified 15 stalled projects, where INR13.5b is

required to be infused to complete the projects. However, lenders are not agreeable

to NHAI’s first charge on receivables.

31 October 2017

Infrastructure | Time to speed up

Extension of concession period to make stranded projects viable

Delays in land acquisition and in obtaining environmental clearances have often led

to revenue loss resulting from extended construction period, which lowers the

tolling period. The government has cleared a proposal that will extend the

construction period of toll projects without reducing the original tolling (revenue

collection) period, subject to delays not being attributable to the concessionaire. For

annuity projects, concession tenure would remain unchanged, with compensatory

annuities being given for the duration of such delays.

Issues resolved for languishing projects

73 national highway projects with aggregate length of around 8,310km were

languishing after award around two and half years back. Issues like non availability

of land, Environmental clearances and lack of availability of funds had hampered the

progress of these projects. Estimated capital investment of around INR1t was

involved in these projects. Interventions by the Ministry, which took policy

measures after interacting with concessionaires and bankers, have resulted in most

such projects coming back on track. Of the 73 languishing projects as mentioned

above, issues remain to be resolved for only 10 projects.

31 October 2017

Infrastructure | Time to speed up

Sunny days ahead

FY17 target missed, but award activity has gathered steam



Aggressive targets to award 25,000km and construct 15,000km in FY17 have been

missed; however, policy initiatives have gathered steam.

FY18 could see strong growth on the construction side, as key issues of land

acquisition and funding arrangement have been addressed.

New project model (Hybrid Annuity Model; HAM) has been introduced to alleviate the

funding concerns of the sector.

FY17 target missed

The Ministry had set an ambitious target of 2.5x increase in award and construction

of national highways for the year 2016-17. It had targeted award of 25,000km of

national highways in 2016-17 against the award of 10,000km in 2015-16. The

construction target was set at 15,000km against the 6,000km constructed in 2015-

16. Of the total length of national highways targeted for award, 15,000km would fall

under the target of NHAI and 10,000km would fall under the target of the Ministry

and National Highways and Infrastructure Development Corporation (NHIDCL).

NHAI’s target for construction was fixed at 8,000km while the Ministry and NHIDCL’s

target was 7,000km. Of this, NHAI and MORTH have been able to award 16,270km

and construct 8,230km of highways. For FY18, we expect ordering activity to

stabilize around the FY17 level however we expect construction activity to show

traction as most of the new projects have been awarded post 80% land acquisition

which will ensure timely execution of projects.

Exhibit 14: Projects award have started to pick up pace with

land acquisition issues getting addressed

Awarded km(NHAI+ Morth)

16270

Exhibit 15: Construction activity has shown strong pick up

with construction activity at 23km per day

construction Km (NHAI+MoRTH)

8231

9794

10404

7980

3169

5013

5732

4260

4410

6029

1916

FY12

FY13

FY14

FY15

FY16

FY17

FY12

FY13

FY14

FY15

FY16

FY17

Source: NHAI, MOSL

However, activity has picked up

Industry reports indicate that NHAI would award over 31,000km of road projects

from 2016-17 to 2020-21, with an estimated investment of INR3.6t. With build,

operate and transfer (BOT) projects losing flavor among developers in the last two

years, NHAI has been awarding more projects through the EPC and HAM route. We

expect EPC and HAM projects to attract greater player interest, as they require

limited upfront capital and involve lower risk than BOT projects. In the near term,

about 50% of the projects would continue to be awarded on an HAM basis, and the

balance 45% on the EPC basis. Current NHAI project pipeline indicates project worth

31 October 2017

Infrastructure | Time to speed up

INR600b to be bidded out by December 2017 of which INR269b would be on HAM

basis, INR269b on EPC basis and balance INR63b on ToT basis

HAM projects would hasten the pace of award and construction of national

highways apart from de-risking developers and lenders from inherent shortcomings

associated with conventional toll and annuity-based design, build, finance, operate

and transfer (DBFOT) model.

HAM introduced with intention to reduce risk for developers

Given the distress in the sector on account of high leverage and stretched balance

sheets of major players, the government has introduced the hybrid annuity model

(HAM). In HAM-based road projects, the government would fund 40% of the

construction cost and the balance 60% would be paid as annuity to the developers.

HAM has completely taken away the traffic risk from the developers. Even their

equity contribution has halved from 30% to ~15%. The Ministry has prepared a

strong pipeline to be awarded on HAM basis. In FY17, 54% of the projects were

awarded on HAM basis, 38% on EPC basis, and only 8% on BOT basis.

About HAM

HAM is a mix of engineering, procurement and construction (EPC) and build-

operate-transfer (BOT) formats, with the government and private companies

sharing the total project cost in the ratio of 40:60. NHAI will collect toll and refund

the amount over 10 years in 20 equated installments. This new model will reduce

financial burden on the concessionaire during the project implementation phase.

Compared to EPC projects, the shift to HAM would also ease cash flow pressure on

the NHAI. Till now, 40 national highway projects with aggregate length of around

2,549km and involving a cost of around INR405.5b have been awarded under the

model. Many more are in mature stages of bidding.

31 October 2017

Infrastructure | Time to speed up

Exhibit 16: List of projects awarded under HAM

Project

Construction of 4 Lane Laddowal bypass linking

NH-95 with NH-1

Four laning of Bhavnagar - Talaja

Four laning of Talaja - Mahuva

Four laning of Una - Kodinar

Four laning of Kagavadar - Una

six laning of greenfield proposed Udaipur Bypass

Four laning of Mahuva to Kagavadar section of

PKG-III

Salasar - Nagaur section of NH-65

4 laning of Kodinar to Veraval section of NH-8E

NH No

Length

120

171

104

Cost

(INR b)

392

998

835

763

724

726

763

637

830

689

1,583

1,388

1,170

951

1,009

1,065

1,072

417

904.16

1,251

745

1,042

985

1,377

1,098

1,060

1,030

988

832

1,288

Maharashtra

Karnataka

Odisha

Madhya Pradesh

1,185

[84.70]/ Uttar

Pradesh[.70]

2,511

Uttar Pradesh

Madhya

1,373 Pradesh[19]/Utt

ar Pradesh[57]

993

Karnataka

State

Punjab

Gujarat

Rajasthan

Gujarat

Rajasthan

Gujarat

Rajasthan

Himachal

Pradesh

Punjab

Karnataka

Odisha

Maharashtra

Gujarat

Maharashtra

Gujarat

Maharashtra

Andhra Pradesh

Karnataka

Award

Date

NHDP Phase

Developer

Eagle Infra India Ltd

May-16 NHDP Phase VII

May-16 NHDP Phase IV Sadbhav Engineering Ltd

MEP Infrastructure

May-16 NHDP Phase IV

Developers Ltd

May-16 NHDP Phase IV Sadbhav Engineering Ltd

Agroh Infrastructure &

May-16 NHDP Phase IV

Developers Pvt Ltd

Jun-16 NHDP Phase V MBL Infrastructure s Ltd

MEP Infrastructure

Jun-16 NHDP Phase IV

Developers Ltd

Dinesh Chandra R.

Jun-16 NHDP Phase IV

Agarwal Infracon Pvt.Ltd

Agroh Infrastructure &

Jul-16 NHDP Phase IV

Developers Pvt Ltd

Jul-16

Aug-16

Sep-16

Oct-16

Nov-16

Dec-16

Feb-17

Jan-17

NHDP Phase IV

PNC Construction Co.

Four laning / Two Laning with PS of Dausa - Lalsot

11A Extn

- Kauthun section of NH-11A

Two laning with formation of Four Lane of

proposed Shimla Bypass (Kaithlighat to Shimla

Section)

4/ 6 Laning of Kharar to Ludhiana section NH-95

4 Laning from Phagwara to Rupnagar

344A

Two/Four laning of BRT Tiger Reserve Boundary

209

to Bangalore section of NH-209

Four Laning of Binjhabahal - Telebani

Four Laning of Tarsod - Fagne section of NH-6

Four laning of Chikhali - Tarsod section of NH-6

2 Laning with PS of Gadu - Porbander

Four laning of Tuljapur Ausa ( including Tuljapur

Bypass)

Six laning from 401.200 to Km.494.410 of NH-8 (

PKG-6)

Four lanning of Bodhare - Dhule

Six Laning of Ranastalam to Anandapuram

Six laning of Hubli - Haveri

Delhi Meerut Expressway

Four lanning of Mahagaon - Yavatmal

Four lanning of Waranga - Mahagaon

Four lanning of Wardha - Butibori

Four lanning of Yavatmal -Wardha

Six laning of Davanagere -Haveri

Four Laning of Singhara - Binjhabahal

Four laning of Jhansi - Khajuraho(PKG-II)

Six laning of Handia - Varanasi

Four laning of Jhansi - Khajuraho(PKG-I)

Six laning of Chitradurga -Davanagere

361

211

361

75&76

NHDP Phase III Chetak Enterprises Ltd

NHDP Phase V Ashoka Concessions Ltd

Others

GR Infra Projects Limited

NHDP Phase IV Sadbhav Engineering Ltd

Oriental Structural

Engineers Pvt. Ltd.

MBL Infrstructure Ltd -

NHDP Phase IV Agroh Infrastructure

Developers Ltd

Viswaraj Environmental

NHDP Phase IV

Pvt Ltd

Kalthia Engineering &

NHDP Phase IV

Construction Ltd

NHDP Phase IV

NHDP phase V

Dilip Buildcon Ltd

Atlanta Ltd

Sunil Hi tech Engineers

Ltd-Varaha Infra Ltd

Ashoka Concessions Ltd

Montecarlo Ltd

APCO Infratech Pvt Ltd -

Chetak Enterprise Ltd

Dilip Buildcon Ltd

Sadbhav Engineering Ltd

Dilip Buildcon Ltd

IRCON International Ltd

Montecarlo Ltd

PNC Infratech Ltd

G.R.Infraprojects Ltd

PNC Infratech Ltd

Mar-17 NHDP phase IV

Mar-17 NHDP phase V

Mar-17 NHDP phase VI

Mar-17

NHDP phase IV

NHDP Phase IV

NHDP Phase V

NHDP Phase IV

NHDP Phase III

NHDP Phase V

NHDP Phase III

NHDP Phase V

Source: NHAI, MOSL

31 October 2017

Infrastructure | Time to speed up

EPC and HAM to drive NHAI’s ordering activity

With build, operate and transfer (BOT) projects losing flavor among developers in

the last two years, given (a) their weak financial position, and (b) weak economic

activity impacting traffic growth, EPC and HAM would be the preferred routes for

NHAI to award road projects. We believe EPC and HAM projects would attract

higher interest, as they require limited upfront capital and involve less risk than BOT

projects. Maximum ordering will be for NHDP phase-4, which is a two-lane program,

with low traffic density. It is expected that about 45% of projects will be awarded on

an HAM/annuity basis in the near term, constituting INR269b of market potential for

HAM players in the national highways segment.

Exhibit 17: HAM model to be preferred way of awarding projects going ahead

Development mode

EPC

HAM

ToT

Grand Total

Cost (INR b)

269

600

Length (Km)

1,204

1,110

681

2,995

Source: NHAI, MOSL

31 October 2017

Infrastructure | Time to speed up

Exhibit 18: Project pipeline to be awarded under EPC and HAM Model

Projects

Sethiyahopu – Cholopuram

Narasannapeta - Ranastalam

Ichapuram to Narasannapeta

Jaipur Ring Road between Agra Road and Ajmer Road

Bhadrak – Baleshwar

Strengthening of NH-248A

Ring Road/ Bypass around Jammu City

Bangalore-Nidagatta Section

Nidagatta-Mysore Section

Bihar-Jharkhand Border (Chordaha) to Gorhar Section

Chandikhole-Bhadrak Section

delinked stretch of Seoni – MP/MH Border of NH-7 in the state of Madhya Pradesh

Construction of Road Tunnel, viaduct and Churhat Bypass of Rewa Sidhi Section of NH 75E

Vadodara Kim Expressway-Phase I

Vadodara Kim Expressway-Phase II

Vadodara Kim Expressway-Phase III

Vadodara Kim Expressway-Phase IV

Vadodara Kim Expressway-Phase V

Gorhar to Khairatunda Section

Khairatunda to Barwa Adda Section

Cuttack – Angul Section

New 4-Lane Bridge over River Ganga

Cuttack-Angul Section of NH-42 (New NH-55)

Puruliya – Balrampur - Chandil section

Widening of Pipli–Bhavnagar section

Varanasi Ring Road

Construction of 4-Lane NH-29 Bypass connecting NH-29 (with NH-2 )

Dangiywas to Jajiwal

Delhi-Meerut Expressway from Dasna to Meerut

Dwarka Expressway

Hybrid ETC and Toll Management Systems at Eastern Peripheral Expressway (EPE)

Chakur – Loha Section

Aurangabad to Karodi

Karodi to Telwadi Road section

Kozhikode Bypass

Loha –Waranga section of NH-361

Gandhigram (Godda) to Hansdiha section

6-Laning Of Existing 2-Lane Nandigama Bypass And Kanchikacherla Bypass

Repallewada to Telangana/ Maharashtra Border

Four laning Ghoshpukur- Salsalabari Section in the State of West Bengal

Solan Kaithlighat Section of NH-22

Aurangabad to Bihar – Jharkhand Border (Chordaha) Section of NH-2

4-laning Section from Km. 1.700 (Pirpaiti of NH-80) in the State of Bihar

Six laning and Strengthening of new NH-248A in the State of Haryana Package-2

Four Laning of NH-363 From Mancherial to Repallewada

Maheshkhunt – Saharsa - Purnea section

Construction of Dwarka Expressway

Anandauram–Pendurthi-Anakapalli section of NH-5

Thalapady to Chengala section of NH-17 in the State of Kerala

Khambataki Ghat Section of NH-4

Sangli-Solaopur Section of NH-166

Sangli-Solapur (Package –II: Borgaon to Watambare) section

Sangli – Solapur (Package – III: Watambare to Mangalwedha of length 45.600 km.)

Sangli-Solapur (Package-IV: Mangalwedha to Solapur)

Ausa-Chakur Section of NH-361

9 Projects on Toll Operate Transfer Mode

Amount in m Km

10,171 50.5

13,232 54

4,414 111

9,595 46

8,259 63

6,956 9

14,718 58

19,840 56

21,693 61

9,876 71

12,119 75

8,198 30

7,420 15

17,295 24

13,544 32

11,322 31

12,962 13

11,558 25

7,049 40

7,930 40

7,299 60

5,160 5

6,867 52

5,929 73

7,396 33

4,861 17

10,573 27

10,676 75

12,253 32

17,803 10

7,791 62

5,212 30

5,219 56

12,886 28

11,940 68

6,107 45

3,287 14

6,773 53

10,786 42

4,787 23

8,942 70

5,134 49

6,668 13

9,702 42

5,737 64

14,529 4

23,924 64

16,733 39

6,184 6

10,093 41

9,824 52

9,121 46

11,019 57

8,361 59

62,580 681

Type

HAM

EPC

HAM

EPC

HAM

EPC

HAM

EPC

HAM

EPC

HAM

EPC

HAM

EPC

HAM

EPC

HAM

EPC

HAM

EPC

HAM

EPC

HAM

ToT

Region

Tamilnadu

Rajasthan

Odhisa

Haryana

Jammu

Karnataka

Jharkhand

Odhisa

Gujarat

Jharkhand

Odhisa

WB &Jharkhand

Gujarat

Rajasthan

Haryana

Maharashtra

Kerala

Maharashtra

Jharkhand

Telangana

Bihar

Jharkhand

Haryana

Telangana

Bihar

Haryana-Delhi

Kerala

Maharashtra

AP and Gujarat

Source: NHAI, MOSL

31 October 2017

Infrastructure | Time to speed up

InvIT: Vehicle to deleverage balance sheet and enable capital recycling

Introduction of the infrastructure investment trust (InvIT) has helped infrastructure

asset owners to free up invested capital by divesting stake in operational assets and

to recycle the capital for creating new assets. Asset divestment through InvIT also

helps the asset owner to deleverage the balance sheet.

InvIT has been made attractive for investors, as it offers (a) lower taxes, (b) mandate

for high payout, (c) cap on leverage, and (d) lower execution risk.

About InvIT:

InvIT is an investment vehicle with underlying investments in

infrastructure assets. These assets are revenue generating/operational projects that

provide a steady source of income to the unit holders. In turn, an InvIT distributes

this income to its investors in the form of dividends and interest.

Key requirements



InvITs have to ensure that they distribute 90% of their net cash flows to the unit

investors.



There is a leverage cap of 49% on the net asset value.



There is cap on exposure to under-construction assets (for publicly-placed

InvITs).



The sponsor shall hold minimum 15% of the units issued by the InvIT with a lock-

in period of three years from the date of issuance of units.



80% of investments in completed and revenue-generating assets.

Exhibit 19: Structure of infrastructure investment trust

Source: Industry, MOSL

31 October 2017

Infrastructure | Time to speed up

Funding in place

Market borrowing to be the key source

To meet the capex requirement of constructing 83,677km of roads, Government has

laid out clear cut plan of funding the same. Of the total anticipated cost of INR6.9t,

major source of the funding (65%) would be met from raising money from market

borrowing (INR2.1t) and central road fund (INR2.4t).

Central road fund was introduced by the government (cess on petrol and diesel

sales) to meet the funding requirement for the development and maintenance of

national and state highways. The road cess on petrol and diesel has been one of the

major sources of funding for NHAI projects over the years (from INR60b in FY13 to

INR96b in FY15). It was tripled in the FY16 budget to INR6/liter from INR2/liter on

petrol and high-speed diesel. However, NHAI’s share of the road cess was reduced in

2016-17. While it was given INR150b in 2015-16 from the Central Road Fund, the

budgeted amount for 2016-17 is only INR121b. Government allocation of INR2.4t

fund to CRF will bring in stability and certainty of funds available for road

development in the long run

Exhibit 20:

NHAI’s sources of funds

Cess funds

2010-11

2011-12

2012-13

2013-14

2014-15

2015-16

150

Ploughing back of

Borrowings 54-EC

funds deposited

budgetary support

Bonds+tax free

by NHAI

125

190

Source: MoRTH, MOSL

Bharatmala-I

(INR b)

1.4

0.3

0.5

2.1

1.1

5.4

Other Schemes

(INR b)

1.0

0.6

Exhibit 21:

Source of Funding to meet the road capex requirement

Source

CRF earmarked for NH

GBS –SARDP-NE, EAP, Counterpart Funds, etc.

Expected monetization of NH

PBF –Toll Collections of NHAI

Market Borrowings

Private Investment (PPP)

Total

Total (INR b)

2.4

2.1

1.1

6.9

1.6

Source: Industry, MOSL

Budgetary allocation for road development increased substantially

Budgetary allocation for the Roads sector has been increasing over the last three

years. For FY18, budgetary allocation has been increased to INR1,242b 44% CAGR

growth over FY14-18. This reflects the government’s seriousness to develop road

infrastructure in India. The increase in allocation is also on account of increased

ordering on EPC basis in FY16/17, which will require higher government spending as

against BOT basis in previous years.

31 October 2017

Infrastructure | Time to speed up

Exhibit 22: Budgetary allocation has been increased meaningfully over the last three years

emphasizing governments focus on infrastructure development

Ministry of Road and Higways (INRb)

1,117

723

323

211

287

1,242

FY12

FY13

FY14

FY15

FY16

FY17RE

FY18BE

Source: MoRTH, Company

Funding requirement to be partially met by recycling of operational highway

assets using toll-operate-transfer (TOT) model

MORTH has developed the toll-operate-transfer (TOT) model to free up capital,

which will help to fund the equity requirement of upcoming projects. Under the TOT

model, the right of toll collection for operational public-funded national highway

projects will be assigned for a pre-determined concession period (30 years) to

concessionaires against upfront payment of a lump-sum amount. Initially, 75 public-

funded national highway projects with aggregate length of around 4,500km and

annual toll revenue collection of around INR27b have been identified for the TOT

model. The model concession agreement (MCA) has been developed and the first

round of bidding for projects is expected to be taken up in 2HFY18.

Steps taken to streamline land acquisition

Land acquisition remains the key for successful ramp-up of the road award and

construction activity. The Ministry has taken multiple steps to expedite the land

acquisition process. The Land Acquisition Cell has been constituted in the Ministry

by engagement of a retired Revenue Officer as Consultant. Besides, a policy decision

on acquisition under the National Highways Act, 1956 has been taken to ensure

availability of requisite land for national highways through bulk purchase in

accordance with the policies of the concerned state governments. So far,

instructions have been issued for bulk acquisition/purchase of land through consent

of land owners in the states of Himachal Pradesh, Goa, Odisha, Bihar, Rajasthan,

Chhattisgarh, Kerala, Telangana, West Bengal, Punjab, Maharashtra, Uttar Pradesh

and Karnataka.

Exhibit 23: Focus to improve land acquisition

Land Acquisition (hectares)

12,000

6,762

8,465

9,285

6,733

6.0

8.0

9.2

13.5

Exhibit 24: Compensation increased multifold to get land

acquisition in place

Acquisition Cost (INR m per hectare)

20.5

FY12

FY13

FY14

FY15

FY16

FY12

FY13

FY14

FY15

FY16

Source: MOSL, Industry reports

31 October 2017

Source: MOSL, Industry reports

Infrastructure | Time to speed up

Applying 3-S scale to pick potential winners

Sadbhav and KNR are the most attractive



We have applied a 3-S scale to objectively evaluate Road sector companies on 1) size

& scalability, (2) strategic & other issues, and (3) strength of financials.

While the 3-S score ranks these companies on their relative attractiveness on

operating parameters, we weigh the 3-S score against the valuation score to pick

potential winners.

Based on the 3-S / valuation score analysis, Sadbhav and KNR are the most attractive.

Focus on operating and financial parameters

We have evaluated road infrastructure companies on operating and financial

parameters. We have looked at (a) scale and scalability, (b) strength of financials,

and (c) strategic and other issues. KNR Construction and Sadbhav Engineering

appear most attractive.

Exhibit 25: Size and Scalability (15)

Existing Project

portfolio Quality

Growth

Potential

Execution

capability

Total Remarks



Existing project portfolio highly linked to economic activity and thus

traffic growth to remain volatile.

Ashoka



Balance sheet quality strong and thus incremental growth potential

by bagging new projects remain high.

buildcon



Execution capability and historic track record gives comfort of

completing newly bagged projects on time



Near term earnings highly dependent on Mumbai Pune Highway.

IRB



Recent InvIT issue offers bandwidth for growth earnings.



Historic track record provides comfort on timely execution



Weak project portfolio with traffic growth below estimates.



Extremely healthy balance sheet provides ample room for growth

KNR

potential.



Excellent execution capability with multiple project completed ahead

of schedule



Projects based in High NSDP area thus providing comfort on the

earnings potential.

Sadbhav Eng



Consol balance sheet strained for new business opportunity.



Historic track record provides comfort on the execution capability of

the management

Rated based on existing project portfolio and balance sheet quality to take new projects. Also looked into historic execution track record

Exhibit 26: Strategic and other issues (10)

Business

diversification

Ashoka

buildcon

Management/

strategic issues

Total Remarks



Have diversified into multiple areas (CGD, commercial Real estate,

power T&D).



Capital allocation of 13% to commercial real estate segment



Fully focused on the road sector.

IRB



Upfront booking of profit by charging higher than industry standard

profit in the EPC segment



Diversified into Irrigation segment to counter slowdown in the Road

KNR

infrastructure segment.



Conservative Management with focus on execution and profitability



Diversified into irrigation and mining sector to counter slowdown in

the road infrastructure segment.

Sadbhav Eng



Strong management bandwidth to execute multiple large projects on

time

Assigning higher score for companies with pure play on Roads. Also, evaluating any management/ strategic issues influencing companies

31 October 2017

Infrastructure | Time to speed up

Exhibit 27: Strength of Financials (15)

Ashoka

buildcon

IRB

Earnings (PBT)

Growth

Debt:

Equity*

RoCE

Total Remarks



KNR

Sadbhav Eng



Earnings growth to pick up with pick up in economic activity.

Leanest balance sheet in the industry at the consolidated level.

Near term earnings growth totally dependent on Mumbai Pune

Highway.

Recent InvIT issue has helped to raise capital for the growth

opportunity.

Earnings growth to be moderate given conservative management

strategy to bag orders with 14% threshold EBIDTA margin.

Best Return Ratio profile in the industry

Strong earnings growth with pick up in execution of HAM projects.

Standalone Debt: Equity well within comfort zone.

Exhibit 28: Final Rating Scale

Ashoka Buildcon

Size and Scalability

Existing Project portfolio Quality

Incremental growth potential

Execution capability

Strategic and other issues

Business diversification

Management/strategic issues

Strength of Financials

Earnings (PBT) Growth

Debt:Equity*

RoCE

Total S-score

IRB

KNR Sadbhav Eng

31 October 2017

Infrastructure | Time to speed up

Companies

BSE Sensex: 33,266

S&P CNX: 10,364

October 2017

Companies

31 October 2017

Ashoka Buildcon

BSE SENSEX

33,266

S&P CNX

10,364

Infrastructure |

31 October 2017

Time to speed up

Update

| Sector:

Infrastructure

CMP: INR 215

TP: INR 260(+ 21%)

Buy

Integrated road infrastructure player

Clear dominance on NH-6 an advantage



Stock Info

Bloomberg

Equity Shares (m)

52-Week Range (INR)

1, 6, 12 Rel. Per (%)

M.Cap. (INR b)

M.Cap. (USD b)

Avg Val, INRm

Free float (%)

ASBL IN

187.1

232 / 134

13/0/17

40.2

0.6

43.4



A dominant player on NH-6, ASBL would be a key beneficiary of any pick-up in

industrial activity.

Balance sheet quality provides room for equity commitment for additional projects.

We initiate coverage with a Buy rating and target price of INR260.

Financials Snapshot (INR b)

Y/E MARCH

FY17 FY18E FY19E

Net Sales

29.8

33.7

38.7

EBITDA (Rs b)

8.9

9.7

10.8

-0.1

0.3

1.3

EPS

-0.5

1.8

7.1

EPS Gr (%)

NM 289.9

BV/Share (Rs)

89.3

96.5 101.2

P/E (x)

NM 118.7

30.5

P/BV (x)

2.4

2.2

2.1

RoE (%)

1.9

7.1

RoCE (%)

9.5

9.8

10.2

Shareholding pattern (%)

As On

Sep-17 Jun-17 Sep-16

Promoter

56.6

56.7

DII

26.7

24.5

22.7

FII

5.9

7.8

8.4

Others

10.8

11.1

12.1

FII Includes depository receipts

Stock Performance (1-year)

Robust operational BOT portfolio, with domination of NH-6

ASBL has a strong BOT road project portfolio of 4,216 lane km, spread across

Maharashtra, Chhattisgarh, Karnataka, Madhya Pradesh, Orissa, West Bengal and

Tamil Nadu. Of the 4,216 lane km portfolio, 1,739 lane km is on NH-6. The 1,949km

NH-6 connects East and West India, stretching from Kolkata in the East to Surat in

the West. Eastern states like Chhattisgarh, Orissa and Jharkhand are mineral-rich

while Gujarat and Maharashtra in the West are industrial states. We believe ASBL’s

portfolio will benefit in a major way with pick-up in mining and industrial activity.

Strong balance sheet to support equity commitments for upcoming projects

ASBL has a consolidated debt of INR43b; its debt-equity of 2.3x is lower than other

developers. It sold 39% stake in Ashoka Concession (ACL) to SBI-Macquarie for

INR8b in 2013 and also did a QIP of INR5b to part finance the BOT projects it had

bagged. Timely divestment has helped the company to maintain debt at reasonable

levels. This will also help ASBL to bid for incremental projects on BOT basis.

Strong EPC order book of INR64b provides visibility of 3.2x FY17 revenue

ASBL has a robust EPC order book of INR64b executable over the next two years. Of

this, the road portfolio is worth INR46.5b and the power T&D portfolio is worth

INR17.8b. Order inflow in FY17 was INR39.3b. Barring the Islampur order of

INR2.8b, all other orders are progressing as per schedule. Currently, road projects

constitute 72% (BOT: 38%; EPC: 34%) of the order backlog and power T&D projects

constitute 28%. The management intends to maintain order book bifurcation at

70:30 for roads and power T&D.

SBI-Macquarie’s investment of INR8b due for exit in FY18

SBI-Macquarie had invested INR8b in ACL for a 39% stake in 2013, with exit option

after five years. The investment had been assured 12% equity IRR and the current

value of the investment stands at INR14b. With the lock-in period ending in January

2018, SBI-Macquarie might look to sell the stake to another investor. Equity

infusion from SBI-Macquarie had considerably eased ACL’s financing requirement.

Valuation and view

ASBL is well placed to benefit from upcoming opportunities in the roads sector,

given its well-funded balance sheet; its healthy order book lends confidence to EPC

revenue CAGR of 19% over FY17-19E. However, the SBI-Macquarie investment is

due for exit in FY18; this along with the income tax investigation case would remain

an overhang on valuations. We value the company on SoTP basis with a target

price of INR260 and initiate coverage on the stock with BUY rating. We value ASBL’s

EPC business at 16x Sept19E EPS of INR11.2 at INR180, value BOT business on DCF

valuation of INR65 and land parcel at 1x its book value at INR15 per share.

31 October 2017

Infrastructure | Time to speed up

BoT assets: Focussed on NH-6

Play on pickup in economic activity

Robust operational BOT portfolio, with domination of NH-6

ASBL has a strong BOT road project portfolio of 4,216 lane km spread across

Maharashtra, Chhattisgarh, Karnataka, Madhya Pradesh, Orissa, West Bengal and

Tamil Nadu. Of the total portfolio of 17 BOT assets, Ashoka Concessions Limited

(ACL), a subsidiary of ASBL holds seven projects. Of the seven projects with ACL, six

are operational and one is expected to be operational in 2HFY18. ABL holds 10

projects directly. Of these, the recently bagged three projects are under

construction. For the balance seven projects, the concession period would expire by

the end of FY18. Thus, from the valuation perspective, ACL is key.

Of the 4,216 lane km portfolio, 1,739 lane km is on NH-6. The 1,949km NH-6

connects East and West India, stretching from Kolkata in the East to Surat in the

West. Eastern states like Chattisgarh, Orissa and Jharkhand are mineral-rich while

Gujarat and Maharashtra in the West are industrial states. Traffic along NH-6 has

been muted due to sluggish mining and industrial activity. As mining and industrial

activity picks up, ASBL’s portfolio would benefit.

Exhibit 29: Ashoka Concession’s project portfolio, with high concentration on NH-6

Project

Awarding Project

agency

type

Length Total

Debt

Equity

(Lane

cost

(INR m) (INR m)

km) (INR m)

Signing

date

Expiring in

Toll hike Concession Premium/(Grant)

formulae period INR m

INR153.9 m for 1st

year after COD,

incremental 5% p.a.

INR10 m payable in

13th yr of

concession period

(INR100 m)

INR310 m for 1st

year after COD,

incremental 5% p.a.

INR13.3 mn for 1st

year after COD,

incremental 5% p.a.

INR1260.6 mn for

1st year after COD,

incremental 5% p.a.

Grant of INR1970 m

Grant of INR1360 m

Grant of INR755m

Grant of INR656m

Ashoka Concession Limited

Jaora-

Nayagaon

Durg

Chattisgarh

Bhandara

Road

Belgaum

Dharwad

Sambalpur

Baragarh

Dhankuni

Kharagpur

MPRDC

NHAI

Toll

319

332

377

454

408

8,651

6,305

5,280

6,941

11,422

5,545

4,100

3,545

4,790

8,100

3,106

2,205

1,635

1,850

3,322

7% every

20-Jan-08 15-Feb-33

year

21-Jul-08

17-Jul-28

WPI

3%+40%

of WPI

3%+40%

of WPI

3%+40%

of WPI

25 yrs

20 yrs

30 yrs

16-Mar-08 29-Feb-28

4-May-11

3-May-41

29-Dec-11 13-May-41

NHAI

Toll

Annuity

841

183

216

127

116

22,050

14,400

4,560

3,300

3,090

17,460

10,800

2,650

1,980

1,990

4,590

1,630

550

570

440

1-Apr-12

31-Mar-37

25 yrs

20 yrs

10 yrs

Chennai ORR

TNRDC

Ashoka Buildcon Limited

PWD,

KSHIP - II

Karnataka

Bagewadi

KRDCL

Saundatti

Hungud

KRDCL

Talikot

10-Mar-14 18-Mar-34

12-Dec-14 11-Dec-24

10-Dec-15

9-Dec-25

Source: Company, MOSL

31 October 2017

Infrastructure | Time to speed up

Toll revenue for ACL to grow at a CAGR of 14% over FY17-19

In FY17, toll revenue growth (excluding revenue from Nashik-Pimpalgaon and Dewas

Bypass in FY16) stood muted on account of demonetization, however for FY17-19E

we factor in toll revenue CAGR of 14% for the ACL projects given toll revenue pick

up expected from Dhankuni and Sambalpur driven by pick-up in mining and

industrial activity. Consolidated toll revenue growth would be muted, given that

seven assets would lose toll collection rights in 2018.

Exhibit 30: Consolidated Toll revenue to register muted growth over FY17-19, given that

seven assets would lose toll collection rights

BOT Revenues (INR b)

63.9

68.7

69.1

65.2

61.3

BOT EBITDA margins (%) - RHS

69.0

71.1

72.9

74.8

2.0

FY11

2.7

FY12

2.9

FY13

2.9

FY14

4.3

FY15

7.0

FY16

8.9

FY17

9.2

FY18E

9.7

FY19E

Source: MOSL, Company

Project refinancing to help reduce cost of borrowing

Over the last three years, ASBL has refinanced four projects – Jaora-Nayagaon, Durg

Bypass, Bhandara, and Sambhalpur-Baragarh – with savings of 140-330bp in interest

cost. Refinancing of these four projects would help save INR260m. Refinancing of

other projects, as and when it materializes, would be incrementally value-accretive.

With the interest rate regime becoming benign, there could be further reduction in

cost of borrowing. We are assuming an interest rate of 10.5% for projects except for

the four projects mentioned above, but expect upside, as refinancing

announcements happen.

Exhibit 31: Refinancing of projects to help reduce interest cost

Projects

Jaora-Nayagaon

Durg Bypass

Bhandara

Belgaum

Sambhalpur

Current borrowing

Cost (%)

8.50%

9.30%

9.90%

9.00%

10.30%

Reduction

(bps)

286

331

303

210

141

Source: MOSL, Company

Premium deferment for two projects to help reduce cash burn

ASBL has been able to defer premium payment to NHAI for two BOT projects –

Dhankuni-Kharagpur and Belgaum Dharwad – on account of lower than expected

traffic. Premium rescheduling would help the company to reduce its cash burn by

INR3.1b over FY17-19. This would ensure that debt servicing and project viability

stays on track.

31 October 2017

Infrastructure | Time to speed up

Exhibit 32: Deferment of premium to help reduce cash burn

Projects

Dhankuni Kharagpur

Belgaum Dharmwad

Total

Original Premium to be paid

FY17

FY18

FY19

1,532

1,609

1,689

1,572

1,650

1,733

Deferred Premium to be paid

FY17

FY18

FY19

389

645

937

427

665

975

Deferment granted

FY17

FY18

1,143

964

1,145

985

FY19

753

758

Source: MOSL, Company

SBI-Macquarie’s investment of INR8b due for exit in FY18

SBI-Macquarie had invested INR8b in ACL for a 39% stake in 2013 with exit option

after five years. The equity infusion had considerably eased out ACL’s financing

requirement. The lock-in period ends in January 2018, post which SBI-Macquarie

might consider selling its stake. The investment was assured 12% equity IRR; the

current value of the investment is INR14b.

Key projects in road BOT portfolio

Dhankuni-Kharagpur:

Dhankuni-Kharagpur is ASBL’s biggest BOT project (project

cost of INR20b). Daily toll collection is INR8.7m which is currently 12% less than the

estimated traffic. ASBL expects traffic growth over the next few years to be in the

range of 8-9%. NHAI has approved premium deferment for the project, taking into

consideration lower than expected collection. Original premium of INR1.5b for FY17

has been scaled down to INR389m, leading to a deferment of INR1.1b. This would

ease the cash flow burn for the company and ensure smooth interest servicing. ASBL

is in the process of refinancing the project, which would bring down the cost of

borrowing to 9.4% from the current 11.25%.

Sambalpur-Baragarh:

Sambalpur-Baragarh is a toll-based project based in Odhisa

and caters to the mining requirement of industries based in the south of Sambalpur.

Mining ban as well as weak demand from industries has led to weaker than

anticipated traffic growth. Current traffic of INR1.6m per day is 15% less than

estimated. ASBL expects traffic growth of 9-10% over the next few years, led by

improvement in mining activity. The project would require cash infusion of INR950m

over the next two years, which would be met by positive cash flow generated from

the Jaora-Nayagaon project.

31 October 2017

Infrastructure | Time to speed up

Exhibit 33: Value of BOT assets

Project Name

ABL-Anagar-Abad

ABL-Nashirabad

VHPL-Indore

JAIPL-Wainganga

SH-31-JN

ABL - Total (A)

Project Name

NH-4-Belgaum

NH-6-Sambalpur

NH-6-Dhankuni

Kharagpur

NH-6-Durg

NH-6-Bhandara

SH-31-JN

NH-3-PNG

Chennai ORR

ACL - Total (B)

Total BoT value (A+B)

Ownership (%)

100

36.2

Project Value

(INR m)

242

120

851

707

12,356

14,277

Value for ABL

(INR m)

242

120

851

353

4,473

6,040

Per share value

(4)

Ownership (%)

100

Project Value

Value for ABL

(INR m) (INRm) @ 61% stake

1,678

1,023

(1,162)

(709)

3,183

686

145

4,663

905

10,098

24,374

1,942

418

2,844

552

6,159

12,200

Source: MOSL, Company

Ventures into city gas distribution business:

ASBL recently won a 25-year exclusive

license for gas distribution (piped LNG and LPG) in Ratnagiri. The project requires

investment (project cost) of INR1.5b in the next five years and incremental

investment of INR3.5b over the license period. The company expects equity IRR of

20%. ASBL would carry out the EPC portion of the project. Post the initial learning

curve based on the Ratnagiri project’s profitability, ASBL would decide whether to

participate in upcoming CGD projects. ASBL expects revenue contribution from CGD

to begin from 4QFY18.

Ventures into commercial real estate business:

ABL has ventured into real estate

business by bagging a letter of award (LoA) from Mumbai International Airport Pvt

Ltd (MIAL) to develop land parcels located at near Chhatrapati Shivaji International

Airport for development of commercial/office space of potential built-up area of

1.17 m sq ft (msf) and saleable area of ~1.5 msf for an aggregate lease period of 49

years. ABL envisages total investment of INR8-9b (INR2.5b equity and balance debt)

over the next three years with initial payment of refundable security deposit of

INR3.3b & annual lease rental of INR150m to MIAL with an escalation of 15% every

three years. ABL anticipates 20% equity IRR from this project

Strong EPC order book of INR64b providing revenue visibility of 3.2x FY17 revenue

ASBL has a robust EPC order book of INR64b executable over the next two years. Of

this, the road portfolio is worth INR46.5b and the power T&D portfolio is worth

INR17.8b. Order inflow in FY17 was INR39.3b. Barring the Islampur order of INR2.8b,

all other orders are progressing as per schedule. Currently, road projects constitute

72% (BOT: 38%; EPC: 34%) of the order backlog and power T&D projects constitute

28%. The management intends to maintain order book bifurcation at 70:30 for roads

and power T&D.

31 October 2017

Infrastructure | Time to speed up

Exhibit 34: Robust order book provides strong medium-term revenue visibility

7.4

Order Book (INR b)

EPC Revenues (INR b)

Order book/sales (x) - RHS

4.4

2.8

2.3

35 15

FY14

2.1

31 19

FY15

2.2

41 19

FY16

3.6

4.4

4.6

47 11

FY11

50 13

FY12

36 16

FY13

70 20

FY17

91 25

FY18E

112

FY19E

Source: MOSL, Company

Order inflow to remain robust, led by pick-up in award activity

Order inflow for FY17 stood robust at INR39.3b as against INR28.2b in FY16 (up 39%

YoY). Management expects the order inflow to remain robust in FY18, given strong

pipeline of orders in the Road and power T&D segment. Management has provided

guidance of order inflow of INR50b for FY18. We have built in order inflow of

INR45b; (up 15% YoY) for FY18.

Exhibit 35: Order inflow to remain robust, supported by pick-up in ordering activity in the

roads and T&D segment

Order inflow (INR b)

743.3

Growth (% YoY)

(89.3)

1.7

FY13

14.1

FY14

(1.9)

104.1

39.1

15.0

12.0

13.8

FY15

28.2

FY16

39.3

FY17

45.1

FY18E

50.6

FY19E

Source: MOSL, Company

EPC revenue to grow at a CAGR of 19% over 2017-19

Given the strong order backlog, we expect ASBL’s EPC revenue to grow at a CAGR of

19% over FY17-19. Orders like eastern peripheral highway and Mumbai JNPT Port

would be the key contributors to revenue in FY18. We also expect the two BOT

projects and one HAM project to start contributing to revenue from FY18.

Exhibit 36: EPC revenue to register 19% CAGR over FY17-19

13.8

EPC Revenues (Rs bn)

13.6

13.1

11.1

EPC EBITDA Margins (%)

13.1

12.7

12.3

12.2

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18E

FY19E

Source: MOSL, Company

31 October 2017

Infrastructure | Time to speed up

Margins to remain stable at 12-13%

EPC operating margins are expected to remain stable at 12-13% over the next few

years, as the revenue mix tilts towards execution of captive road sector projects

where margins are 100bps better than third party EPC projects. Road sector EPC

margins are in the range of 12-13%, whereas margins in the power T&D business are

in the range of 11-12%.

Exhibit 37: Operating margin to remain stable in the EPC segment given Road segment to

drive execution

EPC EBITDA (Rs bn)

EPC EBITDA Margins (%)

1.6

FY11

1.8

FY12

1.7

FY13

2.0

FY14

2.5

FY15

2.5

FY16

2.6

FY17

2.9

FY18E

3.5

FY19E

Source: MOSL, Company

Strong balance sheet to support equity commitments for upcoming projects

ASBL has a consolidated debt of INR43b and its debt-equity ratio of 2.3x is much

lower than other developers. ASBL sold 39% stake in its subsidiary, ACL to SBI-

Macquarie for INR8b in 2013 and also did a QIP of INR5b to part-finance the BOT

projects it had bagged. Timely divestment of stake has helped the company to

maintain debt at reasonable levels. Its strong balance sheet would help the

company to bid for incremental BOT projects.

Exhibit 38: Decent balance sheet quality to support equity commitments of the upcoming

projects

Net Debt (Rs bn)

2.8

2.3

1.4

1.6

2.5

2.2

2.4

Net D/E Ratio (x) - RHS

2.6

2.7

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18E

FY19E

Source: MOSL, Company

Earnings to pick up given strong execution of order book in hand and improvement

in performance of BOT projects

We expect earnings performance to improve given pick up in execution of orders in

hand and led by improvement in toll collection from Sambalpur-Baragarh and

Dhankuni-Kharagpur. We have factored in toll collection CAGR of 14% over FY17-19

for ACL projects. Improvement in toll collection would be led by pick-up in traffic

volumes in Dhankuni-Kharagpur and Sambalpur-Baragarh projects. Pick-up in mining

and industrial activity hold key for ASBL’s projects.

31 October 2017

Infrastructure | Time to speed up

Exhibit 39: Earnings to pickup, supported by improvement in toll collection from

Sambalpur-Baragrah and Dhankuni-Kharaghpur projects

Adjusted PAT

999

5.4

-20.0

1,131

6.3

13.3

3.5

-28.0

815

-120.6

-168

FY13

FY14

FY15

FY16

-0.6

-0.3

-42.5

-97

FY17

1.0

3.3

337

-448.8

FY18E

FY19E

1,291

Change (%)

Margin (%)

283.3

Source: MOSL, Company

Valuation and view

BoT portfolio Valuation:

We have valued BoT portfolio at INR65 per share. Key Assets contributing to the BoT

assets fair value are Jaora Nayagaon (INR40 per share) and Dhankuni Kharakpur

(INR17 per share). For the BoT portfolio we have assumed average traffic growth of

5% for the entire portfolio through the lifecycle of the project. We have also

considered toll hike in line with the concession agreement that each SPV has

entered into with the concerned authority. We have used 14% as the cost of equity

for valuing the assets.

EPC business

We have valued Ashoka’s EPC business on P/E basis assigning 15x P/E multiple on

FY19E basis given a) strong and diversified order book of INR64b providing 3.1x its

FY17 revenue visibility, b) healthy balance sheet with net debt: Equity ratio of 0.1x:1

providing enough room to provide equity support if required to bid for the BoT

projects, c) Self-sufficient BoT portfolio of ACL, thus limiting the capital infusion

requirement d) Robust revenue CAGR of 19% over FY17-19E and earnings CAGR of

3% given higher tax rate (29% vs 21% in FY17) and lower other income.

ASBL is well placed to benefit from upcoming opportunities in the roads sector,

given its well-funded balance sheet. Its healthy order book lends confidence for EPC

revenue CAGR of 19% over FY17-19E. However, SBI-Macquire’s investment is due

for exit in FY18. This along with the income tax investigation case would remain an

overhang on the stock. We value the company on SoTP basis with a target price of

INR260 and initiate coverage on the stock with BUY rating. We value ASBL’s EPC

business at 16x Sept19E EPS of INR11.2 at INR180, value BOT business on DCF

valuation of INR65 and land parcel at 1x its book value at INR15 per share.

Exhibit 40: Valuation Metodology

INR m

BOT Projects

EPC

Land

Total

Valuation Methodology

DCF

P/E

1x Book Value

Multiple

@ 61%

12,200

33,640

2,782

49,406

Per Share Value

180

260

Source: MOSL, Company

31 October 2017

Infrastructure | Time to speed up

SWOT Analysis



Robust execution track

record



Lean balance sheet



Strong operational asset

portfolio



Experienced management



Project portfolio

concentrated on NH-6

(industrial corridor); thus,

traffic growth cyclical.



Road capex of INR7t to be

incurred over the next few

years; being one of the

leading players, ASBL would

be a key beneficiary.



Power T&D capex of

INR2.6t to be incurred over

the next few years



Competitive intensity in the

sector remains high, with

multiple local players vying

for orders.



Sector highly dependent on

government policies. Any

adverse change in the

government policies can

severely impact the

business.

31 October 2017

Infrastructure | Time to speed up

Bull & Bear case

Bull Case

In our bull case, we assume higher growth than the base case in all segments.



We assume 16% revenue CAGR over FY17-19, driven by execution improvement

in the EPC segment and better traffic growth. We assume operating margin to

be higher than in the base case, driven by operating leverage.



Assuming the same target multiple as in the base case, we get a bull case target

price of INR310 as against base case target price of INR260.



Bear Case

In our bear case, we assume EBITDA margins to be lower than in the base case

over FY17-19. We assume EBITDA margin at 27.5% for FY19 and sales CAGR of

10% over FY17-19, against 14% sales CAGR in the base case scenario.



We assume muted execution and sluggish traffic growth as compared to the

base case scenario.



Assuming the same target multiple as in the base case, we get a bear case target

price of INR225 as against base case target price of INR260.



Exhibit 41: Scenario Analysis – Bull Case

FY17

Sales

Growth YoY (%)

EBIDTA

EBIDTA Margin (%)

Growth YoY (%)

PAT

PAT Margin (%)

PAT Growth (%)

29,794

5.5

8,930

30.0

(4.1)

-97

-0.3

FY18E

34,384

15.4

10,065

29.3

12.7

755

2.2

FY19E

Exhibit 42: Scenario Analysis – Bear Case

FY17

29,794

5.5

8,930

30.0

(4.1)

-97

-0.3

FY18E

32,448

8.9

9,310

28.7

4.3

-66

-0.2

FY19E

36,133

11.4

9,950

27.5

6.9

548

1.5

136.6

40,192

Sales

16.9

Growth YoY (%)

11,333

EBIDTA

28.2

EBIDTA Margin (%)

12.6

Growth YoY (%)

1,961

PAT

4.9

PAT Margin (%)

159.8

PAT Growth (%)

Source: Company, MOSL

31 October 2017

Infrastructure | Time to speed up

Financials and Valuations

Consolidated - Income Statement

Y/E March

Total Income from Operations

Change (%)

Raw Materials

Employees Cost

Other Expenses

Total Expenditure

% of Sales

EBITDA

Margin (%)

Depreciation

EBIT

Int. and Finance Charges

Other Income

PBT bef. EO Exp.

EO Items

PBT after EO Exp.

Total Tax

Tax Rate (%)

Minority Interest

Reported PAT

Adjusted PAT

Change (%)

Margin (%)

FY13

18,527

23.5

13,824

502

482

14,808

79.9

3,719

20.1

1,324

2,395

1,395

294

1,294

-157

1,138

685

60.2

-389

842

999

-20.0

5.4

FY14

17,949

-3.1

12,988

583

556

14,127

78.7

3,822

21.3

1,389

2,432

1,335

297

1,394

-157

1,237

688

55.6

-425

974

1,131

13.3

6.3

FY15

23,197

29.2

16,712

754

1,001

18,467

79.6

4,730

20.4

1,517

3,213

2,721

290

782

796

101.7

-828

815

-28.0

3.5

FY16

28,253

21.8

16,922

958

1,060

18,941

67.0

9,312

33.0

2,688

6,624

7,930

783

-522

-570

-1,092

976

-89.4

-1,331

-738

-168

-120.6

-0.6

FY17

29,753

5.3

18,563

1,182

1,061

20,806

69.9

8,946

30.1

2,735

6,211

7,899

1,224

-464

790

-170.2

-1,155

-99

-41.0

-0.3

FY18E

33,736

13.4

21,640

1,300

1,073

24,013

71.2

9,723

28.8

2,475

7,248

7,895

862

214

961

449.1

-1,086

339

-442.5

1.0

FY19E

38,666

14.6

25,343

1,430

1,094

27,867

72.1

10,799

27.9

2,804

7,995

7,324

948

1,619

1,048

64.7

-750

1,321

289.9

3.4

(INR m)

FY20E

43,379

12.2

29,779

1,573

1,138

32,490

74.9

10,889

25.1

3,735

7,154

4,810

957

3,301

1,223

37.1

-916

2,994

126.6

6.9

Consolidated - Balance Sheet

Y/E March

Equity Share Capital

Eq. Share Warrants & App. Money

Total Reserves

Net Worth

Minority Interest

Total Loans

Deferred Tax Liabilities

Capital Employed

Gross Block

Less: Accum. Deprn.

Net Fixed Assets

Capital WIP

Total Investments

Curr. Assets, Loans&Adv.

Inventory

Account Receivables

Cash and Bank Balance

Loans and Advances

Curr. Liability & Prov.

Account Payables

Other Current Liabilities

Provisions

Net Current Assets

Appl. of Funds

FY13

527

149

9,832

10,507

2,787

24,535

-7

37,822

20,275

5,264

15,010

96,047

2,824

10,457

5,399

862

517

3,679

86,516

5,070

80,118

1,328

-76,059

37,822

FY14

790

149

11,690

12,628

4,645

31,926

-21

49,179

46,718

6,467

40,250

79,621

2,847

12,443

6,272

1,305

945

3,921

85,982

5,701

78,773

1,508

-73,539

49,179

FY15

793

12,776

13,569

5,047

38,726

-99

57,244

132,023

6,311

125,712

1,505

2,345

16,947

7,286

3,644

410

5,607

89,265

6,332

80,956

1,978

-72,319

57,244

FY16

936

17,752

18,688

4,995

42,777

-221

66,238

134,483

8,652

125,831

3,455

3,377

21,020

10,890

3,660

1,679

4,791

87,445

4,054

81,270

2,121

-66,425

66,238

FY17

936

15,781

16,717

4,490

47,173

-203

68,177

137,483

11,387

126,096

3,437

3,377

24,210

9,932

3,973

3,787

6,517

88,942

7,946

78,375

2,621

-64,733

68,177

FY18E

936

17,116

18,052

3,846

50,173

-203

71,868

140,483

13,863

126,620

3,521

3,377

27,012

10,871

4,349

2,940

8,852

88,662

8,697

77,295

2,671

-61,650

71,868

FY19E

936

17,999

18,935

3,615

53,173

-203

75,520

143,483

16,666

126,817

3,606

3,377

30,589

12,398

4,959

3,148

10,085

88,869

9,918

76,230

2,721

-58,280

75,520

(INR m)

FY20E

936

20,555

21,491

3,366

56,173

-203

80,826

146,483

20,401

126,082

3,693

3,377

36,866

14,049

4,496

6,944

11,377

89,191

11,239

75,181

2,771

-52,325

80,826

31 October 2017

Infrastructure | Time to speed up

Financials and Valuations

Ratios

Y/E March

Basic (INR)

EPS

Cash EPS

BV/Share

DPS

Payout (%)

Valuation (x)

P/E

Cash P/E

P/BV

EV/Sales

EV/EBITDA

Dividend Yield (%)

FCF per share

Return Ratios (%)

RoE

RoCE

RoIC

Working Capital Ratios

Fixed Asset Turnover (x)

Asset Turnover (x)

Inventory (Days)

Debtor (Days)

Creditor (Days)

Leverage Ratio (x)

Current Ratio

Interest Cover Ratio

Net Debt/Equity

FY13

5.3

12.4

56.1

2.0

52.0

FY14

6.0

13.5

67.5

1.5

33.7

FY15

4.4

12.5

72.5

1.5

40.3

49.4

17.3

3.0

3.4

16.6

0.7

-26.6

6.2

5.8

27.4

0.2

0.4

115

100

0.2

1.2

2.7

FY16

-0.9

13.5

99.9

1.8

-51.9

16.0

2.2

2.9

8.7

0.8

4.0

-1.0

10.4

9.6

0.2

0.4

141

0.2

0.8

2.0

FY17

-0.5

14.1

89.3

2.0

15.3

2.4

2.8

9.3

0.9

25.8

-0.6

9.5

8.6

0.2

0.4

122

0.3

0.8

2.4

FY18E

1.8

15.0

96.5

2.0

129.2

118.7

14.3

2.2

2.6

9.0

0.9

19.4

1.9

9.8

9.7

0.2

0.5

118

0.3

0.9

2.4

FY19E

7.1

22.0

101.2

2.0

33.1

30.5

9.8

2.1

2.3

8.4

0.9

21.5

7.1

10.2

10.0

0.3

0.5

117

0.3

1.1

2.5

FY20E

16.0

36.0

114.8

2.0

14.6

13.4

6.0

1.9

2.1

8.2

0.9

27.2

14.8

8.7

0.3

0.5

118

0.4

1.5

2.1

0.9

-25.1

9.6

6.9

-6.1

0.9

0.5

106

100

0.1

1.7

2.0

0.7

-37.1

9.8

5.5

-4.1

0.4

128

116

0.1

1.8

2.2

Consolidated - Cash Flow Statement

Y/E March

OP/(Loss) before Tax

Depreciation

Interest & Finance Charges

Direct Taxes Paid

(Inc)/Dec in WC

CF from Operations

Others

CF from Operating incl EO

(Inc)/Dec in FA

Free Cash Flow

(Pur)/Sale of Investments

Others

CF from Investments

Issue of Shares

Inc/(Dec) in Debt

Interest Paid

Dividend Paid

Others

CF from Fin. Activity

Inc/Dec of Cash

Opening Balance

Closing Balance

FY13

1,294

1,324

1,395

-702

61,230

64,541

458

64,999

-69,694

-4,695

-686

-360

-70,740

-64

7,466

-1,395

-250

5,758

500

517

FY14

1,394

1,389

1,335

-702

-38

3,379

479

3,858

-10,802

-6,944

-90

1,672

-9,220

7,391

-1,335

-266

5,790

428

517

945

FY15

782

1,517

2,721

-874

-1,317

2,829

1,069

3,898

-8,872

-4,973

231

514

-8,127

-106

6,811

-2,721

-290

3,694

-535

945

410

FY16

563

2,491

7,930

-1,095

-1,949

7,941

806

8,747

-7,998

749

-1,667

812

-8,853

4,916

1,276

-4,478

-338

1,375

1,269

410

1,679

FY17

-464

2,735

7,899

-790

-350

9,030

-1,224

7,806

-2,982

4,825

1,224

-1,758

4,396

-7,899

-438

-3,941

2,108

1,679

3,787

FY18E

214

2,475

7,895

-961

-2,495

7,129

-420

6,709

-3,084

3,625

862

-2,222

3,000

-7,895

-438

-5,333

-846

3,787

2,941

FY19E

1,619

2,804

7,324

-1,048

-3,097

7,601

-429

7,172

-3,151

4,021

948

-2,203

3,000

-7,324

-438

-4,762

207

2,941

3,148

(INR m)

FY20E

3,301

3,735

4,810

-1,223

-2,094

8,529

-291

8,239

-3,151

5,088

957

-2,194

3,000

-4,810

-438

-2,248

3,797

3,148

6,944

31 October 2017

KNR Construction

BSE SENSEX

33,266

S&P CNX

10,364

Infrastructure |

31 October 2017

Time to speed up

Update

| Sector:

Infrastructure

CMP: INR 249

TP: INR 295(+19% )

Buy

Well positioned for sustainable growth

Execution capabilities par excellence



Stock Info

Bloomberg

Equity Shares (m)

52-Week Range (INR)

1, 6, 12 Rel. Per (%)

M.Cap. (INR b)

M.Cap. (USD b)

Avg Val, INRm

Free float (%)

KNRC IN

140.6

262 / 125

17/17/47

35.0

0.5

42.6



Strong order book coupled with strong execution capabilities should facilitate 15%

revenue CAGR over FY17-19.

Earnings could remain muted, given expiry of 80IA benefits. However, adjusting for

tax benefits, we expect 14% earnings CAGR over FY17-19.

We initiate coverage with a Buy rating and a target price of INR295.

Financials Snapshot (INR b)

Y/E MARCH

FY17 FY18E FY19E

Net Sales

15.4

18.0

20.2

EBITDA (Rs b)

2.3

2.6

3.0

1.7

1.8

1.9

EPS

12.0

12.7

13.6

EPS Gr (%)

4.3

6.6

7.0

BV/Share (Rs)

63.7

75.2

88.6

P/E (x)

20.8

19.6

18.3

P/BV (x)

3.9

3.3

2.8

RoE (%)

20.7

18.4

16.7

RoCE (%)

16.8

16.3

15.7

Shareholding pattern (%)

As On

Sep-17 Jun-17 Sep-16

Promoter

57.4

58.1

DII

28.5

28.4

26.4

FII

3.3

3.9

5.0

Others

10.8

10.3

10.5

FII Includes depository receipts

Stock Performance (1-year)

Best-in-class EPC player with excellent execution capabilities

KNRC is a strong EPC player in the road sector with an excellent track record. It has

a history of completing multiple road projects ahead of schedule, thereby enabling

it to earn early completion bonus. Its execution track record is supported by its

large in-house construction equipment fleet and its close monitoring of projects

under execution. KNRC has completed over 6,000km across 12 states in India.

Order book provides strong medium-term revenue visibility

KNRC’s current order book stands at INR33.4b, of which 85% comes from the roads

sector and the balance 15% from the irrigation sector. Projects in South India

account for 89% of its order book. FY16 saw strong order inflow on lower base and

finalization of big orders like Hospet-Hubli, Madurai-Ramanathpuram, and

Thiruvanantpuram Bypass. FY17 has been a muted year given KNR’s conservative

approach to bid orders with threshold margin profile of 14%. Expect FY18 order

inflow to remain stable at INR25b

Timely project completion enables superior EBITDA margins

KNRC enjoys one of the highest EBITDA margins in the EPC space, led by multiple

initiatives taken by the management. KNR’s policy to bids for the project with

threshold margin of 14.5%, along with its model of backward integration, especially

for its road projects, where it sources material for its road projects from captive

quarrying mines and employs crusher units and batch plants. In-house raw material

and construction equipment also ensures that that there is no delay in executing

the projects for the lack of material and equipment.

Strong balance sheet

KNRC has a strong balance sheet, with net debt-equity of 0.1:1. This is mainly on

account of the company’s lean working capital cycle. Its working capital cycle is 40

days, one of the lowest in the construction space. Unlike other construction

companies, KNRC has limited exposure to the BOT business. Of its four BOT

projects, KNRC has recently sold off its stake in two, and now has two BOT projects

left, which it intends to sell over the next three years.

Valuation and view

We initiate coverage on KNR with a

Buy

rating and an SOTP-based target price of

INR295. We like the company for its robust execution track record, driven by

backward integration, strong balance sheet with net debt-equity of 0.1x, and

consistent operating margins of 14.5-15%. We value the company on SOTP basis

with INR256 for standalone EPC business (18x P/E on Sept19EPS of INR14.2 and 1x

P/B of investments of INR37/share (BOT projects and land parcels).

31 October 2017

Infrastructure | Time to speed up

Prepped for upcoming opportunities

Expect revenue CAGR of 15%, with consistent margins

Best-in-class EPC player with excellent execution capabilities

KNRC is a strong EPC player in the road sector with an excellent track record. It has a

history of completing multiple road projects ahead of schedule, thereby enabling it

to earn early completion bonus. Its execution track record is supported by its large

in-house construction equipment fleet and its close monitoring of projects under

execution. KNRC has completed over 6,000km across 12 states in India.

Exhibit 43: Strong execution capabilities – has completed multiple projects ahead of time

Scheduled Completion (Days)

Actual Completion (Days)

Source: MOSL, Company

Exhibit 44: In-house equipment helps to execute projects on time

Equipment

Tippers

Excavators

Compactors

Concrete Mixers And Pumps

Loaders

Pavers

Crushers

Graders

Tractors

Cranes

Trailers

Rollers

Batching & Mixing

Hot Mix Plant

Drillers

Dozers

Wet Mix Plant

Spayers and Sweeping machines

Weigh bridges

Curblaying machine

Compressors

Transformers and Lidht sources

Generators & Others

Gross Block of Plant & Machinery

Qty

664

171

122

INR5.9b

Source: MOSL, Company

Robust order book provides strong medium-term revenue visibility

KNRC’s current order book stands at INR37.7b, of which 85% comes from the roads

sector and the balance 15% from the irrigation sector. Projects in South India account

for 89% of its order book. FY16 saw strong order inflow, led by finalization of big

orders like Hospet-Hubli, Madurai-Ramanathpuram, and Thiruvanantpuram Bypass.

31 October 2017

Infrastructure | Time to speed up

Exhibit 45: Order backlog dominated

by roads sector

Irrigation

15%

Exhibit 46: Client-wise order book

bifurcation

Others International

Central

Gvernment

53%

Exhibit 47: Top-5 customers account

for 59% of order book

Other road

projects

26%

Others

Roads - Non

Captive

85%

Source: MOSL, Company

State Projects

39%

Source: MOSL, Company

Irrigation

projects

15%

Top 5

Customers

59%

Source: MOSL, Company

Irrigation segment offers interesting opportunity

Of the current order book of INR33.4b, the irrigation segment accounts for 15%.

KNRC recently bagged INR6.8b of orders from the Telangana government; this

should improve its pre-qualification to bid for higher value projects. KNRC now

intends to participate in tenders funded by international agencies or by the central

government. It expects projects worth INR70b to be ordered out under the

Accelerated Irrigation Benefit program.

The union government launched the Accelerated Irrigation Benefit Program (AIBP)

to (1) provide financial assistance, and (2) expedite the completion of ongoing (a)

major/medium irrigation (MMI) projects including extension, renovation and

modernization (ERM), (b) surface minor irrigation schemes, as well as (c) lift

irrigation schemes (LIS). The Cabinet Committee has identified 99 ongoing AIBP

projects to be completed by March 2020. Of these, 23 projects are targeted to be

completed by 2016-17, 31 projects by 2018, and 45 projects by 2019-20. The

balance cost of these projects is indicated to be INR819.2b, including command area

development works.

NHAI/states’ focus on EPC and HAM mode for road projects over FY17-18 to

benefit KNRC

We believe KNRC would be a key beneficiary of the ordering activity in the road

sector, as the government intends to order projects on EPC/HAM basis, given the

stressed financials of a majority of infra companies and weak response to the road

project tenders on BOT basis over FY13-14. NHAI’s ordering pipeline seems to be

robust, with 6500km of projects expected to be awarded by FY18. KNRC has

currently participated in tenders worth INR40b, and we expect order inflow of

INR25b in 2HFY18 and order backlog of INR45b by FY18-end.

31 October 2017

Infrastructure | Time to speed up

Exhibit 48: EPC share in NHAI ordering picks up post FY13

EPC

BOT Toll

BOT Annuity

HAM

FY11

FY12

FY13

FY14

FY15

FY16

100

Exhibit 49: 38% of the orders awarded by NHAI in FY17 are

on EPC basis

BoT

EPC

38%

HAM

54%

Source: MOSL, Company

Expect revenue CAGR of 15% over FY17-19

We expect 15% CAGR in KNRC’s revenue over FY17-19, led by execution of orders in

hand. KNRC has a strong order backlog of INR33.4b, which is executable over the

next 2-2.5 years. Given its strong execution track record, we believe KNRC would

deliver 15% revenue CAGR over FY17-19.

Exhibit 50: Expect 16% revenue CAGR over FY17-19, led by timely order execution

Revenue (INR m)

YoY Growth

70.7

20.6

(4.6)

7,562

FY12

(8.5)

6,921

FY13

8,348

FY14

5.0

3.0

16.8

12.3

8,761

FY15

9,025

FY16

15,411

FY17

18,006

FY18E

20,214

FY19E

Source: MOSL, Company

Earnings to remain flat on expiry of section-80IA benefit

KNRC currently avails tax benefits under section-80IA available for creating

infrastructure assets. With the government announcing sunset clause for section-

80IA benefit by March 2017, KNRC’s tax rate would increase from the current 3% to

15% in FY19 given MAT credit availability that KNR intends to utilize it over next two

years. This would lead to muted earnings growth, however if we adjust for the tax

benefit, earnings CAGR over FY17-19E would be 14%.

Exhibit 51: PAT growth to be impacted by KNRC’s migration to full tax rate

PAT (iNR m)

PAT Margin

17.9

10.9

7.0

7.5

7.3

8.3

10.0

9.5

528

FY12

521

FY13

610

FY14

730

FY15

1,611

FY16

1,681

FY17

1,792

FY18E

1,917

FY19E

Source: MOSL, Company

31 October 2017

Infrastructure | Time to speed up

Superior EBITDA margin led by timely project completion

KNRC enjoys one of the best EBITDA margins in the EPC space, led by multiple

initiatives taken by the management. It bids for projects with threshold margin of

14.5%. Its backward integration also helps – it sources material for its road projects

from captive quarrying mines, and employs crusher units and batch plants. In-house

raw material and construction equipment ensures that that there is no delay in

executing projects for lack of material and equipment.

Exhibit 52: EBITDA margin consistency led by timely execution and backward integrated

business model

18.4

EBITDA (INR m)

16.8

15.1

14.4

EBITDA Margin

17.2

14.9

14.6

14.5

1,394

FY12

1,164

FY13

1,258

FY14

1,261

FY15

1,554

FY16

2,296

FY17

2,629

FY18E

2,951

FY19E

Strong balance sheet

KNRC has a strong balance sheet, with net debt-equity of 0.1:1. This is mainly on

account of the company’s lean working capital cycle. Its working capital cycle is

40days, one of the lowest in the construction space. Unlike other construction

companies, KNRC has limited exposure to the BOT business. Of its four BOT projects,

KNRC has recently sold off its stake in two, and now has two BOT projects left, which

it intends to sell over the next three years.

Exhibit 53: Extremely well managed balance sheet with debt well within comfort zone

0.72

0.52

0.36

0.12

0.16

0.18

0.17

0.16

0.15

0.72

Debt/Equity (x)

Source: MOSL, Company

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

Source: MOSL, Company

Monetization of two BOT assets

KNRC has signed a share purchase agreement for two (KNRC’s stake: 40%; Patel

Engineering’s stake: 60%) of its four BOT projects with the Essel Group. It is selling

its entire stake to the Essel Group for an EV of INR8.5b. The deal is expected to be

completed by 2HFY18. As KNRC had already securitized the receivables, project

divestment is value-neutral for the company. However, it has INR3.2b claims

pending with NHAI for these projects, which it will receive when settled by NHAI.

KNRC Intends to sell the balance two operational toll-based BOT projects (Walayar

and Muzzafarpur-Barauni) over the next three years. The intention is to exit the BOT

business, focus on the EPC business, and remain asset light.

31 October 2017

Infrastructure | Time to speed up

Valuation and view

KNR is one of the leading Road EPC player with 89% of the order backlog coming

from southern region. KNR’s strength lies in a) top management deeply involved in

the operations of the business (Involvement from evaluating the tender to

completion of project), b) Backward integration to ensure timely availability of raw

material c) huge repertoire of in house equipment so as to ensure timely execution

of projects in hand and d) stringent internal threshold operating margins of 14% e)

one of the leanest working capita profile in the industry

Ownership of quarries (key raw material), in house equipment and low dependence

on the sub-contractor ensures that projects are completed on or before time

thereby enabling KNR to claim early completion bonus. This has enabled KNR to

ahead we expect revenue CAGR of 15% over FY17-19E and earnings CAGR of 20%

over FY17-19E.

Despite registering strong earnings CAGR of 21% (FY07-17), KNR’s balance sheet

quality remain superior with net debt to Equity ratio at 0.2:1 and Core net working

capital cycle of 20 days.

KNR has one of the highest operating margins in the business of 14%. KNR has

internal criteria to bid for projects with threshold margin of 14%.

KNR’s return profile in a sector which is saddled with execution delays, highly debt

laden speaks about the quality growth that the company has achieved over the last

10 years (21% RoE in FY17), adjusting for the equity investment and loans provided

to its subsidiary Return ratio profile looks extremely robust. Adjusting for the loans

of INR4b, KNR’s RoE stands at 42% in FY17.

We initiate coverage on KNR with a

Buy

rating and target price of INR295. We value

the company on SOTP basis with INR256 for standalone EPC business (18x P/E on

FY19EPS of INR14.2 and 1x P/B of investments of INR37/share (BOT projects and

land parcels).

Exhibit 54: Valuation Matrix

Particulars

KNR Standalone

Kerala BOT Project

Muzaffarpur Barauni BOT

Land Cost

Segments

Core construction business

Roads Toll

Value

(INRm)

36,043

3,970

520

649

41,182

Value per share

(INRm)

256

4.6

295

Rationale

At 18x Sept 19E EPS

1x P/BV of equity invested as on date

Source: MOSL, Company

31 October 2017

Infrastructure | Time to speed up

Risks and concerns

Slowdown in road sector capex:

Capex in the road sector has witnessed some

revival over the last two years. Any slowdown in project awarding would impact the

company’s growth and our estimates.

Delay in execution of projects in hand:

Delay in execution of projects in hand due to

delays in land acquisition or other regulatory bottlenecks could adversely affect

KNRC’s revenue.

Aggressive bidding for projects:

Owing to stressed financial condition of road sector

companies, majority of the upcoming orders are on EPC and HAM basis. This entails

higher competition from players in the EPC segment, where KNRC intends to

participate. An aggressive bidding environment may negatively impact our margin

estimates.

31 October 2017

Infrastructure | Time to speed up

SWOT Analysis



Excellent execution

capability, with multiple

projects being completed

ahead of schedule



Focused management, with

hands-on approach



Focus on profitability and

timely execution of projects

on hand



Strong balance sheet to

support upcoming

opportunities in the Road

sector



The southern region accounts

for most of the order book.

Any slowdown in the region

could impact the company’s

financials.



KNR has been averse to the

asset ownership model of

business, given its experience

with BoT assets that it

bagged. Going forward,

majority of the projects are

likely to be awarded on HAM.

Inability to adapt to a new

model could impact the

company’s financials.



Two BoT projects the

company owns have been

receiving lower than

estimated traffic, resulting in

losses. The promoters have

had to infuse equity and

repay debt to make the

projects self-sufficient.



The Roads sector is likely to

have investments of INR7t

over the next couple of

years, which provides a

strong opportunity to

players in the sector.



The Irrigation sector also

offers sizable opportunity,

with various state

governments having strong

capex plans to develop

irrigation facilities within

the states.



Metro rail development

also provides strong

business opportunities for

which the company is

prequalified.



Competition in the sector

remains extremely high,

with multiple local players

vying for orders.



The sector is highly

dependent on government

policies. Any adverse policy

change can severely impact

the business.

31 October 2017

Infrastructure | Time to speed up

Bull & Bear case

Bull Case

In our bull case, we assume higher growth than the base case in all segments.



We assume 22% revenue CAGR and operating margin expansion of 30bp to

15.1% over FY17-19, driven by operating leverage. This leads to EPS CAGR of

18% to INR16.7.



Assuming the same target multiple as in the base case, we get a bull case target

price of INR340 against the base case target price of INR295.



Bear Case

In our bear case, we assume 100bp EBITDA margin decline to 13.9% and sales

CAGR of 12.5% (against 15% in base case scenario) over FY17-19.



In our bear case, we assume weak ordering activity and subdued execution. This

will lead to 1% CAGR in adjusted PAT over FY17-19 against 7% CAGR in the base

case scenario.



Assuming the same target multiple as in the base case, we get a bull case target

price of INR221.



Exhibit 55: Scenario Analysis – Bull Case

FY17

Sales

Growth YoY (%)

EBIDTA

EBIDTA Margin (%)

Growth YoY (%)

PAT

PAT Margin (%)

PAT Growth (%)

15,411

70.7

2,296

14.9

47.7

1,681

10.9

4.3

FY18E

20,440

32.6

3,086

15.1

34.4

2,204

10.8

31.1

FY19E

Exhibit 56: Scenario Analysis – Bear Case

FY17

15,411

70.7

2,296

14.9

47.7

1,681

10.9

4.3

FY18E

17,346

12.6

2,446

14.1

6.5

1,627

9.4

(3.2)

FY19E

19,520

12.5

2,713

13.9

10.9

1,714

8.8

5.4

22,866

Sales

11.9

Growth YoY (%)

3,453

EBIDTA

15.1

EBIDTA Margin (%)

11.9

Growth YoY (%)

2,343

PAT

10.2

PAT Margin (%)

6.3

PAT Growth (%)

Source: Company, MOSL

31 October 2017

Infrastructure | Time to speed up

Financials and Valuations

Standalone - Income Statement

Y/E March

Total Income from Operations

Change (%)

Materials & Subcontracting Cost

Employees Cost

Other Expenses

Total Expenditure

% of Sales

EBITDA

Margin (%)

Depreciation

EBIT

Int. and Finance Charges

Other Income

PBT bef. EO Exp.

EO Items

PBT after EO Exp.

Total Tax

Tax Rate (%)

Minority Interest

Reported PAT

Adjusted PAT

Change (%)

Margin (%)

FY13

6,921

-8.5

5,291

295

171

5,757

83.2

1,164

16.8

557

608

113

175

670

149

22.2

521

-1.2

7.5

FY13

281

4,275

4,557

710

-36

5,231

5,083

2,181

2,901

483

6,081

297

1,213

4,499

4,274

1,063

2,118

1,093

1,808

5,231

FY14

8,348

20.6

6,510

349

230

7,090

84.9

1,258

15.1

572

686

172

155

669

8.8

610

17.0

7.3

FY14

281

4,852

5,133

908

-118

5,923

5,252

2,615

2,637

400

6,386

341

1,171

112

4,763

3,505

786

2,282

437

2,881

5,922

FY15

8,761

5.0

6,696

381

423

7,500

85.6

1,261

14.4

541

721

122

125

723

-7

-1.0

730

19.7

8.3

FY15

281

5,411

5,692

964

-239

6,417

5,482

3,239

2,243

315

7,211

359

1,765

157

4,930

3,379

705

2,365

309

3,832

6,417

FY16

9,025

3.0

6,805

435

231

7,471

82.8

1,554

17.2

431

1,123

126

305

1,301

-310

-23.8

1,611

120.7

17.9

FY16

281

6,988

7,270

1,168

-276

8,162

5,784

3,375

2,409

434

9,603

353

1,294

161

7,794

4,343

1,121

2,690

532

5,259

8,162

FY17

15,411

70.7

8,756

552

3,806

13,115

85.1

2,296

14.9

639

1,657

219

303

1,741

3.4

1,681

4.3

10.9

FY17

281

8,674

8,955

1,303

-432

9,827

7,236

4,014

3,222

5,351

7,158

574

1,640

246

4,698

5,920

1,427

2,127

2,366

1,238

9,827

FY18E

18,006

16.8

14,045

792

540

15,377

85.4

2,629

14.6

696

1,933

244

303

1,991

199

10.0

1,792

6.6

10.0

FY18E

281

10,287

10,569

1,136

-432

11,273

8,236

4,710

3,526

5,601

9,231

880

2,960

707

4,684

7,100

1,480

3,075

2,545

2,131

11,273

FY19E

20,214

12.3

15,767

889

606

17,263

85.4

2,951

14.6

786

2,165

213

303

2,255

338

15.0

1,917

7.0

9.5

FY19E

281

12,171

12,453

936

-432

12,957

9,236

5,496

3,739

5,851

11,009

994

3,600

570

5,846

7,659

1,661

3,453

2,545

3,351

12,957

(INR m)

FY20E

23,751

17.5

18,573

1,045

713

20,331

85.6

3,420

14.4

876

2,544

169

303

2,677

589

22.0

2,088

9.0

8.8

FY20E

281

14,227

14,508

736

-432

14,812

10,236

6,372

3,863

6,101

13,396

1,178

4,295

1,370

6,553

8,563

1,952

4,066

2,545

4,833

14,813

Standalone - Balance Sheet

Y/E March

Equity Share Capital

Total Reserves

Net Worth

Total Loans

Deferred Tax Liabilities

Capital Employed

Gross Block

Less: Accum. Deprn.

Net Fixed Assets

Capital WIP

Total Investments

Curr. Assets, Loans&Adv.

Inventory

Account Receivables

Cash and Bank Balance

Loans and Advances

Curr. Liability & Prov.

Account Payables

Other Current Liabilities

Provisions

Net Current Assets

Misc Expenditure

Appl. of Funds

(INR m)

31 October 2017

Infrastructure | Time to speed up

Financials and Valuations

Ratios

Y/E March

Basic (INR)

EPS

Cash EPS

BV/Share

DPS

Payout (%)

Valuation (x)

P/E

Cash P/E

P/BV

EV/Sales

EV/EBITDA

Dividend Yield (%)

FCF per share

Return Ratios (%)

RoE

RoCE

RoIC

Working Capital Ratios

Fixed Asset Turnover (x)

Asset Turnover (x)

Inventory (Days)

Debtor (Days)

Creditor (Days)

Leverage Ratio (x)

Current Ratio

Interest Cover Ratio

Net Debt/Equity

FY13

3.7

7.7

32.4

0.2

6.3

FY14

4.3

8.4

36.5

0.2

5.4

FY15

5.2

9.0

40.5

0.2

4.5

48.0

27.6

6.2

4.1

28.4

0.1

2.8

13.5

10.7

10.2

1.6

1.4

2.1

5.9

0.1

FY16

11.5

14.5

51.7

0.2

2.0

21.7

17.2

4.8

4.0

23.2

0.1

0.6

24.9

15.1

13.4

1.6

1.1

2.2

8.9

0.1

FY17

12.0

16.5

63.7

0.2

1.9

20.8

15.1

3.9

2.3

15.7

0.1

36.5

20.7

16.8

22.6

2.1

1.6

1.2

7.6

0.1

FY18E

12.7

17.7

75.2

0.2

1.8

19.6

14.1

3.3

2.0

13.5

0.1

8.2

18.4

16.3

33.7

2.2

1.6

1.3

7.9

0.0

FY19E

13.6

19.2

88.6

0.2

1.7

18.3

13.0

2.8

1.8

12.0

0.1

4.0

16.7

15.7

30.2

2.2

1.6

1.4

10.2

0.0

FY20E

14.9

21.1

103.2

0.2

1.6

16.8

11.8

2.4

1.4

10.1

0.1

10.3

15.5

28.7

2.3

1.6

15.0

0.0

0.1

-8.2

12.1

12.7

11.3

1.4

1.3

1.4

5.4

0.0

0.1

7.7

12.6

11.9

10.9

1.6

1.4

1.8

4.0

0.1

Standalone - Cash Flow Statement

Y/E March

OP/(Loss) before Tax

Depreciation

Interest & Finance Charges

Direct Taxes Paid

(Inc)/Dec in WC

CF from Operations

Others

CF from Operating incl EO

(Inc)/Dec in FA

Free Cash Flow

(Pur)/Sale of Investments

Others

CF from Investments

Issue of Shares

Inc/(Dec) in Debt

Interest Paid

Dividend Paid

Others

CF from Fin. Activity

Inc/Dec of Cash

Opening Balance

Closing Balance

FY13

670

557

112

-266

-1,838

-764

-6

-770

-383

-1,153

-269

-581

155

-112

-33

556

566

-12

FY14

669

572

175

-235

165

1,345

-13

1,332

-252

1,081

-599

-799

197

-172

-33

-517

-524

112

FY15

723

541

128

-251

-516

624

671

-272

400

-30

-250

-130

-33

-302

-409

112

157

FY16

1,301

431

126

-22

-1,423

414

-334

-119

-2

-455

204

-126

-33

157

161

FY17

1,632

639

219

-60

4,108

6,538

-1,408

5,130

-4,917

-6,261

136

-219

-83

161

246

FY18E

1,991

696

244

-199

-578

2,155

-1,000

1,155

-250

-1,250

-167

-244

-33

-444

461

246

707

FY19E

2,255

786

213

-338

-1,357

1,559

-1,000

559

-250

-1,250

-200

-213

-33

-446

-137

707

570

(INR m)

FY20E

2,677

876

169

-589

-682

2,452

-1,000

1,452

-250

-1,250

-200

-169

-33

-402

800

570

1,370

31 October 2017

Sadbhav Engineering

BSE SENSEX

33,266

S&P CNX

10,364

Infrastructure |

31 October 2017

Time to speed up

Update

| Sector:

Infrastructure

CMP: INR 317

On strong footing

Multiple catalysts at play



TP: INR385 (+22%)

Buy

SADE has a robust operational portfolio, with average toll collection life of 15 years,

which should ensure sustained cash flow and growth.

Order backlog of INR84b gives strong EPC revenue visibility.

We initiate coverage with a Buy rating and target price of INR385.

Stock Info

Bloomberg

Equity Shares (m)

52-Week Range (INR)

1, 6, 12 Rel. Per (%)

M.Cap. (INR b)

M.Cap. (USD b)

Avg Val, INRm

Free float (%)

SADE IN

171.5

351 / 220

6/-16/-13

54.4

0.84

53.2



Financials Snapshot (INR b)

FY17 FY18E FY19E

Y/E MARCH

Net Sales

33.2

38.4

45.0

EBITDA (Rs b)

3.6

4.3

5.1

1.9

2.4

2.5

EPS

11.0

14.3

14.5

EPS Gr (%)

42.3

30.4

1.8

BV/Share (Rs)

96.8 109.7 122.8

P/E (x)

28.9

22.2

21.8

P/BV (x)

3.3

2.9

2.6

RoE (%)

12.0

13.8

12.5

RoCE (%)

7.9

9.0

10.2

Shareholding pattern (%)

As On

Sep-17 Jun-17 Sep-16

Promoter

46.8

DII

25.5

25.3

FII

16.6

18.2

17.6

Others

11.1

9.7

10.4

FII Includes depository receipts

Stock Performance (1-year)

Strong operational BOT project portfolio, with presence in high-NSDP states

SADE through its subsidiary SIPL has a strong BOT project portfolio, with sizeable

operational assets. Its current project portfolio consists of 18 road projects, of

which 10 are fully operational, one is partially operational, and the remaining seven

are in various stages of development. Average toll collection life of 17 years

remains, ensuring sustained future cash flows and growth. SADE’s BOT projects are

located in the states of Maharashtra, Gujarat, Rajasthan, Karnataka, Haryana and

Telangana, where NSDP and per capita income are higher than the national

average. Further, its BOT projects are also located along the main freight corridors

of India, with high industrial traffic growth. We believe that the location of projects

in states with high economic growth strengthens the stability of SADE’s revenue.

EPC business in a sweet spot

SADE provides EPC services in the roads, mining and irrigation segments. Roads

currently form the major portion of its revenue as well as order backlog. Given the

precarious financial position of road-building contractors, the Roads Ministry

intends to award most projects on EPC or HAM basis. SADE expects EPC orders of

INR129b and HAM orders of INR146b to be tendered over the next couple of

months. We expect annual order inflow of INR60b for SADE for the next two years.

Healthy and diversified order book of INR84b for construction business

SADE has a healthy and diversified order book for the construction business. Its

construction order book stands at INR84b, of which 69% comes from

transportation projects (BOT assets: 55%; EPC contracts: 14%), 20% from mining

projects, and 11% from irrigation projects. SADE’s order book provides decent

medium-term revenue visibility. SADE’s diverse order book includes contracts from

state governments as well as NHAI, in-house as well as third-party construction

activities, and fixed-priced as well as contracts with price escalation.

Strong balance sheet, execution track record provide comfort

SADE has not only grown but has also maintained the quality of its balance sheet in

a fiercely-competitive and debt-laden sector. It has periodically infused capital

through stake sale and has maintained its net debt-equity ratio at below 1x.

Valuation and rating

Given SADE’s strong execution track record, healthy balance sheet, robust order

backlog and strong operational BOT portfolio, we initiate coverage with a

Buy

rating

and SoTP target price of INR385. INR252 for the core EPC business (16x its Sept19EPS

of INR15.8) and INR133 for the BoT projects based its current market capitalization

(adjusting for Sadbhav’s stake and providing 15% holding company discount).

31 October 2017

Infrastructure | Time to speed up

Strong operational BOT project portfolio



Portfolio of 18 road projects:

SADE has a strong BOT project portfolio, with

sizeable operational assets. Its current project portfolio consists of 18 road

projects, of which 10 are fully operational, one is partially operational, and the

remaining seven are in various stages of development. Average toll collection

life of 17 years remains, ensuring sustained future cash flows and growth. In

FY18, we expect toll revenue to grow 46%, led by (a) commissioning of the

MBCEL and MBL projects, and (b) pick-up in revenue from other operational

projects.

Total Project

Cost

5,214

2,754

2,780

14,600

14,200

5,131

12,134

13,227

11,515

12,716

6,761

7,893

7,380

6,570

8,190

6,230

10,080

8,300

7,450

End of

Concession

Jan-27

Jul-30

Nov-27

Oct-35

Dec-27

Feb-38

Apr-41

Sep-34

Apr-40

Dec-35

Oct-43

Dec-24

Oct-33

Dec-33

Feb-34

Exhibit 57: Strong BOT portfolio with presence in high growth states

Project

Ahmedabad Ring Road

Aurangabad Jalna Tollway

Nagpur Seoni Expressway

Maharashtra Border Check Post

Network

Dhule Palasner Tollway

Hyderabad Yadgiri Tollway

Rohtak Panipat Tollway

Bijapur Hungund Tollway

Shrinathji Tollways

Rohtak Hissar

Rajsamamd Bhilwara

Mysore Bellary

Rampur Kathgodam Package 1

Rampur Kathgodam Package 2

Bhavnagar Talaja

Una Kodinar

BRT Reserve to Bangalore

Waranga Mahagaon

Udaipur bypass

Type

State Toll

NHAI Annuity

State Border Check

Post

NHAI Toll

NHAI Annuity

Hybrid Annuity

Status

Operational

Partly Operational

Operational

Under Construction

Under Development

Under Construction

Under Development

Lane kms

304

276

111

422

392

143

323

389

332

395

344

387

174

199

164

684

COD

May-08

Jul-09

May-10

May-13

Feb-12

Dec-12

Jan-14

May-12

Dec-15

Jul-16

Jun-16

Mar-17

Oct-18

Dec-18

Feb-19

Source: MOSL, Company



BOT assets present in states with high NSDP:

SADE’s BOT projects are located in

the states of Maharashtra, Gujarat, Rajasthan, Karnataka, Haryana and

Telangana, where NSDP and per capita income are higher than the national

average. For the period 1993-94 to 2012-13, Maharashtra and Gujarat had NSDP

of 7.52% and 8.40%, respectively, and per capita income of 5.89% and 6.70%,

respectively as compared to the country’s NSDP of 6.81% and per capita income

of 5.12%. Further, its BOT projects are also located along the main freight

corridors of India, with high industrial traffic growth. We believe that the

location of projects in states with high economic growth strengthens the

stability of SADE’s revenue.

31 October 2017

Infrastructure | Time to speed up

Exhibit 58: Toll collection revenue to be driven by key projects like MBCP, Dhule-Palesnar, Shreenathji-Udaipur and Bijapur-

Hungud

Name of SPV (Rs. Mn)

Mumbai Nasik

Ahmedabad Ring Road

Aurangabad Jalna

Dhule Palasner

Hyderabad Yadgiri

Bijapur Hungund

Rohtak Panipat

Maharashtra Border CP

Nagpur Seoni

Shreenathji Udaipur

Bhilwara Rajsamand

Rohtak Hissar

Mysore Bellary

Total Toll Collections

2013

1,306

738

277

112

862

614

2,603

2014

1,313

738

280

383

950

191

302

384

3,227

2015

978

854

353

449

1,044

852

917

384

4,852

2016

932

420

626

543

1,148

805

1,542

384

288.6

6,688

2017E

858

369

1,544

514

1,121

786

1,700

380

940

354

472

9,038

2018E

2019E

850

946

354

382

1,535

1,734

511

572

1,137

1,285

798

910

2,491

3,225

380

1,003

1,154

467

528

710

809

1,422

11,658

13,346

Source: MOSL,Company



Premium deferment to help reduce cash burn:

SADE has been able to defer its

premium payment for two projects, Hyderabad-Yadgiri and Rohak-Panipat,

which will help the company to reduce cash burn in both the projects. We

expect cash burn reduction of INR2b.

Refinancing of projects to help generate better IRR for operational projects:

SADE has recently refinanced its operational projects, leading to a 120-150bp

reduction in borrowing cost over the last two years. The recent fall in major

banks’ lending rates augurs well for SADE, as this would help to bring its

borrowing cost down further. SADE is in process to refinance for 4 more

projects, which is expected to be completed by 2QFY18 and expect MBCPNL

refinancing to be completed by end FY18.

Post Refinance cost of borrowing (%)

9.7

8.8

9.7

9.8

10.3

FY16

11.7

8.9

11.3

11.4

11.0



Exhibit 59: Refinancing of projects to help reduce interest outgo over the next few years

Refinancing of loans- SPV wise

Dhule Palesnar Tollway Limited

Nagpur Seoni Express Limited

Bijapur Hungud Tollway Private Limited

Hyderabad Yadgiri Tollway Private Limited

Aurangabad Jalna Tollway Limited

Source: MOSL, Company



Monetization of assets to fund equity requirement of recently-won projects:

SADE intends to monetize a few of its toll-based operational road assets to

unlock value and use the proceeds to build new highways. SIPL has recently

bagged five HAM projects, with total project cost of INR38.5b. Its equity

commitment towards these projects would be INR4.2b and proceeds from

monetization of the assets would be used to fund the equity requirement.

31 October 2017

Infrastructure | Time to speed up

SADE’s key BOT projects



MBCPNL:

MBCPNL is a first-of-its-kind project in India. It envisages 22 border

check posts located around Maharashtra to facilitate RTO checks, sales tax and

excise clearances, and weighing of vehicles, with IT support to ensure no delays

or tax leakages. Of the 22 check posts, 12 are on national highways (NH-3, NH-4,

NH-6, NH-7, NH-8, NH-9, NH-13, NH-17, NH-69) and 10 are on state highways,

attracting large share of interstate movement. MBPCNL would provide

connectivity to adjoining states like Gujarat, Madhya Pradesh, Chhattisgarh,

Andhra Pradesh, Karnataka and Goa.

SADE’s main revenue stream from the project would be service income for

providing services like road works (design & development of entry and exit

points & lanes, development of parking, service roads, etc), providing electrical

& electronic equipment (development of lighting systems, power systems &

back-up power systems, installation and maintenance of electronic

weighbridges, etc), computer works (installation and maintenance of computer

hardware/software/networking equipment), support infrastructure

(development of infrastructure for administration, development of water supply

systems, development of facility center), miscellaneous works (landscaping and

beautification, development of facility centers, setting up of signboards for

advertisement). In addition to service fee, MBCPNL may also lease commercial

space available, earn revenue from advertising along the project site, and

charge for loading/unloading and parking.

Currently, MBPCNL generates revenue of INR1.7b, with 19 posts operational.

We expect the entire project to be operational by FY18 and expect cash flow

generation of INR1.2b. We expect the project to generate equity IRR of 28%.



Bijapur-Hungud:

The project is located along NH-13 in the state of Karnataka. It

caters to North-South traffic, originating from Bengaluru to Delhi. It connects

Chitradurga, the industrial area of Karnataka, to Solapur in Maharashtra.

Bijapur-Hungud caters to commercial traffic originating from various industrial

areas like Bellary, Hospet and Sandur (BHS) mines, located close to the project.

We expect the project to generate equity IRR of 12%

EPC business in a sweet spot

SADE provides EPC services in the roads, mining and irrigation segments. Roads

currently form the major portion of its revenue as well as order backlog. Given the

precarious financial position of road-building contractors, the Roads Ministry

intends to award most projects on EPC or HAM basis. Given the government’s

emphasis to ramp up activity in the road sector and existing order pipeline, we

believe the Road segment will continue to drive revenue growth and order backlog.

SADE expects EPC orders of INR129b and HAM orders of INR146b to be tendered

over the next couple of months. We expect annual order inflow of INR50b-60b for

SADE for the next two years.

31 October 2017

Infrastructure | Time to speed up

Exhibit 60: Weak ordering in the road segment has impacted

the order book in the segment

Roads & highways (INR b)

-6

Growth YoY

Exhibit 61: However, execution of the order book in hand

remains robust

Roads & highways (INR b)

Growth YoY

-32

FY12

FY13

FY14

FY15

FY16

FY17

FY12

-41

FY13

FY14

FY15

FY16

25.35

FY17

Source: MOSL, Company



Source: MOSL, Company

Mining sector:

In the mining segment, SADE is currently engaged in the

overburden removal activity for PSUs. In mining, nine projects are at the verge

of being tendered out, of which five would be under MDO model, with 4-7-year

contracts. SADE has 11 projects with activities ranging from removal of

overburden, hiring HEMM for removal, excavation and transportation, to

extraction of ores like coal, lignite and uranium. It also focuses on hiring

earthmoving equipment and trained manpower for the same.

Exhibit 63: Revenue growth in the segment impacted in

FY16/17 on account of the service tax issue with BCCL

Mining (IN b)

100

-16

-25

3.2

FY17

Growth YoY

Exhibit 62: Mining segment contribution to the order book

stands at 26%

Mining (INR b)

105

Growth YoY

-15

FY16

-13

FY17

-33

FY12

FY13

FY14

FY12

FY13

FY14

FY15

FY16

Source: MOSL, Company



Source: MOSL, Company

Irrigation sector:

In the irrigation segment, SADE is involved in the construction

of earthen dams, canals, and siphons, and in remodeling and improving canals.

Current tender pipeline stands at INR41b for the irrigation projects in Madhya

Pradesh, Gujarat and Rajasthan, for which SADE has already submitted bids.

Margins in the irrigation segment are 10%. SADE has prequalification to

participate in projects worth INR13b.

31 October 2017

Infrastructure | Time to speed up

Exhibit 64: Irrigation order backlog contribution stands at

19% of the total order book

Irrigation (INR b)

-3

-20

-30

Growth YoY

Exhibit 65: Revenue growth strong given low base

irrigation (INR b)

100

-14

FY15

FY16

4.6

FY17

Growth YoY

10.8

FY12

14.4

FY13

18.3

FY14

17.8

FY15

14.2

FY16

9.9

FY17

FY12

FY13

FY14

Source: MOSL, Company



Source: MOSL, Company

EPC revenue to grow at a CAGR of 16% over FY17-19:

We expect SADE to

INR84b, executable over the next 2-2.5 years. SADE’s order inflow for FY17 was

INR32b, with order wins of five HAM projects. Strong order inflow as well as

healthy ordering pipeline provides comfort of achieving 16% revenue CAGR over

FY17-19. For FY17, 70% of the revenue contribution came from transport, 17%

from mining, and the balance 13% from irrigation. We expect the revenue mix

to remain in favor of roads, given the strong traction the sector has seen.

Exhibit 66: Revenue to grow at a CAGR of 16%, with execution of the strong order book

75.8

Revenues (Rs bn)

30.2

Growth YoY

18.3

21.1

25.9

7.3

4.2

15.5

17.2

(32.3)

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18E

FY19E

Source: MOSL, Company

Order backlog provides strong medium-term revenue visibility

SADE has a healthy and diversified order book for the construction business. Its

construction order book stands at INR84b, of which 69% comes from transportation

projects (BOT assets: 55%; EPC contracts: 14%), 20% from mining projects, and 11%

from irrigation projects. SADE’s order book provides decent medium-term revenue

visibility. SADE’s diverse order book includes contracts from state governments as

well as NHAI, in-house as well as third-party construction activities, and fixed-priced

as well as contracts with price escalation.

31 October 2017

Infrastructure | Time to speed up

Exhibit 67: Order inflow to pick up, with activity in road

segment picking up

Order Inflow (Rs bn)

Exhibit 68: Order backlog to remain stable, given strong

execution of orders in hand

Order Book

(12)

101

(8)

(11)

115

Order book growth (%)

Source: MOSL, Company

Consistent margins

SADE has maintained its margins at 10-11%, historically. It provides EPC services for

in-house BOT projects as well as third-party projects/EPC contracts. Margins are 11-

12% in the road EPC segment, 18-20% in the mining segment, and 6-7% in the

irrigation segment. We expect margins to remain stable, as recently-won seven

HAM projects start contributing to revenue from FY18. We expect the revenue

contribution to remain in favor of the transportation segment over FY17-19.

Exhibit 69: Margins to remain stable, with increasing contribution from road sector order

book

Revenues (Rs bn)

EBIDTA Margins (%) - RHS

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18E

FY19E

Source: MOSL, Company

31 October 2017

Infrastructure | Time to speed up

Valuation and view

Sadbhav historically has demonstrated strong execution track record to successfully

execute the projects on time. Its demonstrated track record to grow revenue from

INR5b in FY07 to INR33b in FY17 (21% CAGR) without diluting the margin profile and

registering earnings CAGR of 21% over the same period lends confidence on the

company’s ability to consistently deliver on the revenue and earnings front going ahead.

To reduce its dependence on Road sector and mitigate the slowdown in the road

sector, Sadbhav over the years have diversified irrigation, mining and metro

segment. New business verticals now forms 35% of the order book. Business

prospects going ahead looks promising for Sadbhav as key states in which Sadbhav

has very strong presence has strong pipeline of projects to be awarded over the

next couple of years. We expect Sadbhav to register 16% revenue CAGR over FY17-

19 and earnings CAGR of 15% over the same period. Current order book of INR84b

and Sadbhav’s execution track record lends us the confidence on Sadbhav delivering

on the earnings front over FY17-19.

Despite registering strong earnings CAGR of 21% (FY07-17), Sadbhav’s balance sheet

quality remains superior with net debt to Equity ratio at 0.6:1. Sadbhav has been

able to maintain the balance sheet quality in rather fiercely competitive and debt

laden sector by regularly raising equity to meet the growth demand of the company.

Although on reported basis Sadbhav’s return profile seems mediocre (12% RoE in

FY17), adjusting for the equity investment and loans provided to its subsidiary

Sadbhav infrastructure limited Return ratio profile looks extremely robust. Adjusting

for the equity investment of INR4b and loans of INR4b, Sadbav’s RoE stands at 25%.

With SIPL’s road asset portfolio now becoming self-sufficient, we expect SIPL to

return the loan support of INR4b provided by the Sadbhav over the next 2 years.

This will provide growth capital to Sadbhav to meet its future growth capital

requirement ensuring that the balance sheet quality if the company remain robust.

Given Sadbhav’s strong execution track record, healthy balance sheet, and strong

order backlog in hand we initiate coverage on the stock with BUY rating and SoTP

target price of INR385. INR252 for the core EPC business (16x its sept19EPS of

INR15.8) and INR117 for the BoT projects based its current market capitalization

(adjusting for Sadbhav’s stake and providing 15% holding company discount).

Exhibit 70: Valuation Table

Particulars

Sadbhav

Standalone

SIPL stake

SOTP Value

Segments

Core construction

business

Subsidiary

Value (Rs m)

43,305

22,919

66,224

Value per

Rationale

share (Rs)

252

133

385

At 16x Sept19E Earnings

Valued SADE's 68.3% stake in SIPL by

giving a 15% holding company discount

to current market capitalization

Source: MOSL, Company

Risks and concerns

Any slowdown in ordering activity from NHAI and MoRTH:

SADE relies heavily on

NHAI and MoRTH ordering for its EPC business revenue. Any slowdown in order

awards from NHAI and MoRTH might hurt the financials of the company.

Lower than estimated toll collection:

Weaker than estimated traffic growth could

severely impact the toll collection of BOT projects, in turn impacting their valuation.

31 October 2017