Thematic |
October
2017
Infrastructure
Time to speed up
Amit Shah
- Research Analyst
(Amit.Shah@MotilalOswal.com); +91 22 3029 5126
Ankur Sharma
- Research Analyst
(Ankur.VSharma@MotilalOswal.com); +91 22 3982 5449
Investors are advised to refer through important disclosures made at the last page of the Research Report.
Motilal Oswal research is available on www.motilaloswal.com/Institutional-Equities, Bloomberg, Thomson Reuters, Factset and S&P Capital.

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 ........................................................................................................
40
Sadbhav Engineering ...................................................................................................
51
IRB Infrastructure .......................................................................................................
63
31 October 2017
2

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
3

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
3
4
3
2
3
3
4
2
24
IRB
2
4
3
4
2
3
3
2
23
KNR
2
4
4
3
4
3
4
3
27
Sadbhav Eng
3
3
3
3
4
4
4
2
26
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
13
EBIDTA
9
PAT
NM
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
15
11
290
27.9
3.4
7,172
4,021
30.5
2.1
8.4
7.1
10.2
180
67
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
12.3
7.0
14.6
10.0
1,559
559
18.3
2.8
12.0
16.7
15.7
256
39
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
14
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
13
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
4

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
5

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
45
Construction km (per day)
23
17
27
29
22
5
9
14
16
12
12
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
71
54
38
21
8
HAM
EPC
BoT
5.0
2.5
8
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
MP
2.0
MH
1.1
KA
0.1
TS
0.1
AP
0.1
UP
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
6
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
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
7

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
Under
length for
Length 4/6Laned Implementatio
Implementation award
(Km.)
(Km.)
n (Km.)
(No.)
(Km.)
GQ
5,846
5,846
0
0
-
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
-
22
27,062
1,743
107
28,915
300
52
2,161
6,050
1,428
184
94
10,269
305
0
10,574
28
7
71
105
33
9
4
257
18
1
276
274
-
2,027
3,095
2,508
816
584
9,304
-
-
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
8

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
by
NHAI
BOT
BOT
BOT
BOT
BOT
BOT
BOT
NHAI
BOT
BOT
BOT
BOT
HAM
NH no
54
17
17
8D
3
13
71
203
23&20C
34
91
5
5
8
Length
(km)
26
82
83
123
60
111
49
67
132
50
283
58
121
24
When
terminated
Nov-13
Sep-13
NHDP
Phase
II
III
III
III
III
III
III
III
III
III
IV
V
V
V
Dec-13
Sep-14
Dec-13
Dec-13
Source: NHAI, MOSL
Exhibit 7: List of projects foreclosed by NHAI
Stretch
Funded by
NH no
31C
4A
17
47
67
12
17
210
4A
215
113
6&33
458
6
5
5
46
4
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)
30
69
139
84
54
88
127
80
82
96
86
127
32
150
220
43
93
19
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
II
III
III
III
III
III
III
III
III
III
IV
IV
IV
IV
V
V
V
VII
Source: NHAI, MOSL
31 October 2017
9

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
10
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)
33
12
20
5
8
10
5
11
17
4
6
12
4
10
9
9
2
9
22
208
Source: MoRTH, MOSL
31 October 2017
11

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-58
NH-94
NH-108
NH-94
NH-109
NH-125
Road length (Km)
140
160
144
124
95
76
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
19
320
436
1,563
331
472
327
578
571
661
433
7,653
Estimated Cost (INR b)
40
22
1
32
163
124
18
71
70
53
55
67
63
778
Source: MoRTH, MOSL
31 October 2017
12

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
40
27
160
14
250
310
1190
Kms
710
10,000
22
30
117
419
400
16.4
1,265
300
50
23
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
13

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
14

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
Sadbhav
L&T
IRB
IRB
Gayatri-DLF
Reliance Infra
Premium postponed in
2014 (INR m)
82
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
15

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
16

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
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
17

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
18

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
17
8E
8E
8E
8E
8
8E
65
8E
48
45
41
41
24
40
120
42
83
27
76
81
171
78
87
63
92
67
93
67
47
63
19
80
67
59
65
79
104
85
72
77
73
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
Maharashtra
Maharashtra
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
Gujarat
Gujarat
Gujarat
Rajasthan
Gujarat
Rajasthan
Gujarat
Rajasthan
Himachal
Pradesh
Punjab
Punjab
Karnataka
Odisha
Maharashtra
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
Aug-16
Aug-16
Sep-16
Oct-16
Nov-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
22
Section)
4/ 6 Laning of Kharar to Ludhiana section NH-95
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
6
6
6
8E
361
8
211
4
4
24
361
361
361
361
4
6
75&76
2
75&76
4
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 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
Dilip Buildcon Ltd
IRCON International Ltd
Montecarlo Ltd
PNC Infratech Ltd
G.R.Infraprojects Ltd
PNC Infratech Ltd
PNC Infratech Ltd
Mar-17 NHDP phase IV
Mar-17 NHDP phase IV
Mar-17 NHDP phase V
Mar-17 NHDP phase VI
Mar-17
Mar-17
Mar-17
Mar-17
Mar-17
Mar-17
Mar-17
Mar-17
Mar-17
Mar-17
NHDP phase IV
NHDP Phase IV
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
19

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
269
63
600
Length (Km)
1,204
1,110
681
2,995
Source: NHAI, MOSL
31 October 2017
20

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
HAM
EPC
EPC
HAM
HAM
EPC
HAM
HAM
EPC
HAM
EPC
HAM
EPC
EPC
EPC
EPC
EPC
HAM
HAM
EPC
EPC
EPC
EPC
EPC
HAM
HAM
HAM
EPC
EPC
HAM
EPC
EPC
HAM
HAM
EPC
EPC
EPC
EPC
EPC
EPC
EPC
HAM
EPC
EPC
EPC
HAM
HAM
EPC
HAM
HAM
HAM
HAM
HAM
ToT
Region
Tamilnadu
AP
AP
Rajasthan
Odhisa
Haryana
Jammu
Karnataka
Karnataka
Jharkhand
Odhisa
MP
MP
Gujarat
Gujarat
Gujarat
Gujarat
Gujarat
Jharkhand
Jharkhand
Odhisa
WB
Odhisa
WB &Jharkhand
Gujarat
UP
UP
Rajasthan
UP
Haryana
Maharashtra
Maharashtra
Maharashtra
Kerala
Maharashtra
Jharkhand
AP
Telangana
WB
HP
Bihar
Jharkhand
Haryana
Telangana
Bihar
Haryana-Delhi
AP
Kerala
Maharashtra
Maharashtra
Maharashtra
Maharashtra
Maharashtra
Maharashtra
AP and Gujarat
Source: NHAI, MOSL
31 October 2017
21

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
22

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
84
62
60
69
95
150
Ploughing back of
Borrowings 54-EC
funds deposited
budgetary support
Bonds+tax free
by NHAI
16
22
8
27
125
12
18
17
6
48
79
55
33
65
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
0
1
1
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
23

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
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
24

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
3
4
3
10
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
2
4
3
9
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
2
4
4
10
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
3
3
3
9
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).
2
3
5
Capital allocation of 13% to commercial real estate segment
Fully focused on the road sector.
IRB
4
2
6
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
3
4
7
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
3
4
7
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
25

Infrastructure | Time to speed up
Exhibit 27: Strength of Financials (15)
Ashoka
buildcon
IRB
Earnings (PBT)
Growth
3
3
Debt:
Equity*
4
3
RoCE
2
2
Total Remarks
9
8
KNR
Sadbhav Eng
3
4
4
4
3
2
10
10
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
3
4
2
24
3
3
2
23
3
4
3
27
4
4
2
26
2
3
4
2
3
4
3
4
3
4
3
2
4
3
2
4
4
3
3
3
IRB
KNR Sadbhav Eng
31 October 2017
26

Infrastructure | Time to speed up
Companies
BSE Sensex: 33,266
S&P CNX: 10,364
October 2017
Companies
31 October 2017
27

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
69
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
NP
-0.1
0.3
1.3
EPS
-0.5
1.8
7.1
EPS Gr (%)
NM
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 (%)
NM
1.9
7.1
RoCE (%)
9.5
9.8
10.2
Shareholding pattern (%)
As On
Sep-17 Jun-17 Sep-16
Promoter
56.6
56.6
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
28

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
NHAI
NHAI
NHAI
Toll
Toll
Toll
Toll
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
WPI
3%+40%
of WPI
3%+40%
of WPI
3%+40%
of WPI
-
25 yrs
20 yrs
20 yrs
30 yrs
30 yrs
16-Mar-08 29-Feb-28
4-May-11
3-May-41
29-Dec-11 13-May-41
NHAI
Toll
Annuity
Annuity
Annuity
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
10 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
10-Dec-15
9-Dec-25
9-Dec-25
Source: Company, MOSL
31 October 2017
29

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
30

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
40
42
44
1,572
1,650
1,733
Deferred Premium to be paid
FY17
FY18
FY19
389
645
937
38
20
38
427
665
975
Deferment granted
FY17
FY18
1,143
964
2
22
1,145
985
FY19
753
5
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
31

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
100
100
50
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
1
1
5
2
24
32
Per share value
5
(4)
10
2
0
15
-
3
33
65
Ownership (%)
100
100
100
51
51
38
26
50
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
89
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
32

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
29
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
13.8
EPC Revenues (Rs bn)
13.6
13.1
11.1
EPC EBITDA Margins (%)
13.1
12.7
12.3
12.2
11
FY11
13
FY12
16
FY13
15
FY14
19
FY15
19
FY16
20
FY17
25
FY18E
29
FY19E
Source: MOSL, Company
31 October 2017
33

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)
14
14
11
14
13
EPC EBITDA Margins (%)
13
13
12
12
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
12
FY11
17
FY12
24
FY13
31
FY14
38
FY15
41
FY16
43
FY17
47
FY18E
50
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
34

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
16
@ 61%
12,200
33,640
2,782
49,406
Per Share Value
65
180
15
260
Source: MOSL, Company
31 October 2017
35

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
36

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
NM
FY18E
34,384
15.4
10,065
29.3
12.7
755
2.2
NM
FY19E
Exhibit 42: Scenario Analysis – Bear Case
FY17
29,794
5.5
8,930
30.0
(4.1)
-97
-0.3
NM
FY18E
32,448
8.9
9,310
28.7
4.3
-66
-0.2
NM
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
Source: Company, MOSL
31 October 2017
37

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
0
782
796
101.7
-828
815
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
0
-464
790
-170.2
-1,155
-99
-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
0
214
961
449.1
-1,086
339
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
0
1,619
1,048
64.7
-750
1,321
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
0
3,301
1,223
37.1
-916
2,994
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
0
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
0
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
0
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
0
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
0
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
0
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
38

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
57
100
0.2
1.2
2.7
FY16
-0.9
13.5
99.9
1.8
-51.9
NM
16.0
2.2
2.9
8.7
0.8
4.0
-1.0
10.4
9.6
0.2
0.4
141
47
52
0.2
0.8
2.0
FY17
-0.5
14.1
89.3
2.0
NM
NM
15.3
2.4
2.8
9.3
0.9
25.8
-0.6
9.5
8.6
0.2
0.4
122
49
97
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
47
94
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
47
94
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
8.7
0.3
0.5
118
38
95
0.4
1.5
2.1
0.9
-25.1
9.6
6.9
-6.1
0.9
0.5
106
17
100
0.1
1.7
2.0
0.7
-37.1
9.8
5.5
-4.1
0.4
0.4
128
27
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
0
5,758
17
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
0
7,391
-1,335
-266
0
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
0
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
0
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
0
-1,758
0
4,396
-7,899
-438
0
-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
0
-2,222
0
3,000
-7,895
-438
0
-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
0
-2,203
0
3,000
-7,324
-438
0
-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
0
-2,194
0
3,000
-4,810
-438
0
-2,248
3,797
3,148
6,944
31 October 2017
39

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
28
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
NP
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
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
40

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
79
94
43
34
14
36
31
34
14
20
29
8
44
13
14
11
21
5
11
22
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
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Infrastructure | Time to speed up
Exhibit 45: Order backlog dominated
by roads sector
Irrigation
15%
Exhibit 46: Client-wise order book
bifurcation
Others International
6%
2%
Central
Gvernment
53%
Exhibit 47: Top-5 customers account
for 59% of order book
Other road
projects
26%
Others
0%
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
42

Infrastructure | Time to speed up
Exhibit 48: EPC share in NHAI ordering picks up post FY13
EPC
26
7
BOT Toll
BOT Annuity
8
24
HAM
9
33
66
8
FY11
FY12
FY13
FY14
FY15
FY16
93
100
92
Exhibit 49: 38% of the orders awarded by NHAI in FY17 are
on EPC basis
BoT
8%
76
EPC
38%
58
HAM
54%
Source: MOSL, Company
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
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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
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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
register strong 17% revenue CAGR and 20% earnings CAGR over FY07-17. Moving
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
Roads Toll
Value
(INRm)
36,043