Indian Construction Sector Breaking The Gridlock Anandrathi March 2012

Construction
India I Equities
Sector Report
9 March 2012
India Construction Sector

Breaking the gridlock
Overweight Sensex: 17173 Nifty: 5222
Manish Valecha
+9122 6626 6552 manishvalecha@rathi.com
Jaspreet Singh Arora

+9122 6626 6727 jaspreet@rathi.com
Anand Rathi Share and Stock Brokers Limited does and seeks to do business with companies covered in its research reports. Thus, investors should be aware that the firm may have a conflict of interest that could affect the objectivity of this report. Investors should consider this report as only a single factor in making their investment decision. Disclosures and analyst certifications are located in Appendix 1 Anand Rathi Research India Equities
Construction
India I Equities
Sector Report
9 March 2012

The construction sector is likely to see a turnaround in 2HFY13, as key hurdles order slowdown due to policy inaction and clearance delays, high interest rates and debt/equity funding constraints are expected to ease in 1HFY13. Positives include the expected recovery in industrial capex, an equity market revival led by higher FII inflows, improved debt available due to higher infra lending and the CRR cut. We expect better RoE, gearing and FCF over FY12-14 and initiate coverage with an Overweight view. Top Buys: Ramky Infra, Pratibha and KNR.
Overweight Sensex: 17173 Nifty: 5222
Policy action to revive orderflows. Buoyancy in orders is expected in FY13-14, led by greater impetus on infra investments and government action to revive stalled projects and approve new ones. A recent directive to Coal India to make a minimum 80% of coal requirement available to the power sector is a positive. Urban infra, road and water segments are likely to dominate order flow. We estimate revenue and earnings CAGR of our construction universe at 18% and 25%, respectively, over FY13-14e. Fixed investment revival, easing monetary policy to aid turnaround. We expect a turnaround in fixed investment in 2HFY13, as a result of a revival in industrial capex due to better replacement demand. A high positive correlation of fixed investment and our construction sector index points towards sector re-rating. We expect 75-100bps repo rate cut by Oct 12; a 100bps softening in interest rate would raise the NPM of our construction universe by 20-60bps and the RoE by 50-150bps. Rising access to capital. A recent revival in equity markets, including a rise in FII investments ($7bn ytd 2012), is likely to help fund this capitalintensive sector. We expect improved debt liquidity, driven by a 50bps CRR cut, a rise in infra loans and concessions in the coming Budget. Valuation. We value the sector at 5-9x (in line with the eight-year average). We favour pure construction vs. BOT/other assets. Top Buys: Ramky (CMP: `210, TP: `353), Pratibha (CMP: `44, TP: `73) and KNR (CMP: `131, TP: `197). Risks: low order flow; no major softening in interest rates.
Rating Buy Buy Buy Buy Buy Buy Hold Sell Price Target price Market cap (`) (`) (US$m) 210 353 267 44 131 232 232 172 140 55 73 197 289 333 239 164 56 90 82 256 86 106 565 315 PE (core) EV/EBITDA FY13e (x) FY13e (x) 4.7 5.4 4.4 4.5 7.2 3.2 5.0 7.0 4.9 3.9 2.9 5.0 3.4 3.3 7.0 8.8 P/BV Target PE FY13e (x) (const. biz) FY13e 1.0 9.0 0.7 0.8 0.9 0.9 0.9 1.2 0.6 7.0 7.0 9.0 5.0 7.0 9.0 5.0
Manish Valecha

Key data Ramky Pratibha KNR Simplex Supreme J Kumar Era NCC
RoE % FY13e 17.1 16.6 16.8 12.7 24.1 19.4 11.4 2.7
RoCE% FY13e 18.0 18.6 17.5 13.4 20.3 24.4 13.1 7.4
Net gearing (x) FY13e 0.9 1.0 0.2 1.6 1.9 0.2 1.8 1.2
Source: Anand Rathi Research
Note : Price as on 6 March 2012
9 March 2012
India Construction Sector Breaking the gridlock

Investment Argument and Valuation........................................................ 3 Policy action to revive orderflows ............................................................ 7 Easing monetary policy to help.............................................................. 21 Rising access to capital ......................................................................... 27 Company section ................................................................................... 33
Ramky ..................................................................................................... 34 Pratibha ................................................................................................... 45 KNR......................................................................................................... 57 Simplex.................................................................................................... 68 Supreme.................................................................................................. 78 J Kumar ................................................................................................... 90 Era......................................................................................................... 101 NCC....................................................................................................... 113
Annexures............................................................................................ 124
Anand Rathi Research
9 March 2012
Investment Argument and Valuation

The construction sector is likely to see a turnaround in 2HFY13, as key hurdles order slowdown due to policy inaction and clearance delays, high interest rates and debt/equity funding constraints are expected to ease in 1HFY13. Positives include the expected recovery in industrial capex, an equity market revival led by higher FII inflows, improved debt available due to higher infra lending and the CRR cut. We expect better RoE, gearing and FCF over FY12-14 and initiate coverage with an Overweight view. Top Buys: Ramky Infra, Pratibha and KNR.
Policy action to revive order flows

Buoyancy in orders is likely in FY13-14, led by greater impetus on infra investments and government action to revive stalled projects and ensure fast-track approvals for new ones. The recent government directive to Coal India to make available a minimum 80% of coal requirement to the power sector is a positive. The pressure of upcoming elections is likely to boost the launch pipeline of infrastructure projects, resulting in a pick-up in order flows. Between Nov 12 and May 14, nine large states of India will have assembly elections. This is in addition to the Central Parliamentary elections in 2014. The Planning Commission of India has projected investment of US$1trn or `50trn in infrastructure development during FY12-17 (the XII Five-Year Plan), compared to US$428bn in the XI Five-Year Plan. This expenditure is 10% of GDP in the XII-Plan period, compared to 7.5% of GDP in the XI-Plan period. The urban infra, road and water segments are likely to dominate order flow. We estimate revenue and earnings CAGR of our construction universe at 18% and 25%, respectively, over FY13-14e.
Easing monetary policy to aid turnaround

The recovery in fixed investments, easing monetary policy stance and lower borrowing costs, along with policy action to revive order inflows, are likely to turn around the construction sector in 2HFY13. Our economy team expects a turnaround in fixed investment from 2HFY13, as a result of a revival in industrial capex due to better replacement demand. If fixed investment turns negative or falls to low single digits, it normally takes 3-4 quarters to return to 6% plus growth. At present, we are in the third quarter of low/negative fixed-investment growth. A high positive correlation of fixed investment and our construction sector index points towards potential sector re-rating. Our economy team expects a 75-100bps repo rate cut by Oct 12; a 100bps softened interest rate would raise the NPM of our construction universe by 20-60bps and RoE by 50-150bps.
Rising access to capital

Regular capital flows are crucial to the construction sector short-term for working capital and long-term for capex requirements chiefly due to the sectors negative free cash-flow (internal accruals insufficient). We expect the recent revival in equity markets, including the rise in FII investments ($7bn ytd 2012) to aid in capital raising. Balance sheet strength and dilution are key focus areas. We also expect debt liquidity to improve, driven by a likely 50bps CRR cut, rise in infra lending and concessions in the coming Budget.
Anand Rathi Research 3
9 March 2012
Valuation
We value stocks at 5-9x (in line with the last eight-year average). We favour: i) pure construction businesses vs. BOT/other assets (which need huge equity funding), ii) high revenue visibility arising from large order books, iii) high earnings growth, iv) low gearing and better capital efficiency, leading to high return ratios. Top Buys: Ramky Infra (CMP: `210 TP: `353), Pratibha (CMP: `44, TP: `73) and KNR (CMP: `131, TP: `197). We value our universe of construction stocks using the sum-of-parts method. We value their core construction businesses at a one-year forward PE. We believe this method suits the industry, as the companies free cash-flow is normally negative for a substantial time due to the high capex and working capital required. We assign a multiple in line with the average of the last eight years multiple for mid-cap construction companies with core interest in construction (Simplex, Era) and an appropriate discount to the multiple for small-cap companies. We value the BOT, power, industrial parks, integrated townships and real estate businesses using the P/BV method.
Fig 1 One-year-forward PE: Mean and standard deviation
(x) 24 22 20 18 16 14 12 10 8 6 4 2 0
Sep-04 Sep-05 Sep-06 Sep-07 Sep-08 Sep-09 Sep-10 Sep-11 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11
+2SD
+1SD
Mean
-1SD
-2SD Mar-12
Source: Bloomberg, Anand Rathi Research (includes data for Simplex and Era)
We believe the improved macro-economic outlook, revival in equity markets and government impetus on infrastructure will drive a re-rating in valuation of the construction sector in the next 1-2 years.
Fig 2 India construction sector: Valuation matrix
Key data Ramky Pratibha KNR Simplex Supreme J Kumar Era NCC
PE core (x) FY12e FY13e FY14e P/BV (x) FY12e FY13e FY14e EV / EBITDA (x) FY12e FY13e FY14e
5.7 4.7 3.9 1.2 1.0 0.9 5.8 5.4 5.0
5.5 4.4 3.0 0.8 0.7 0.6 4.7 3.9 3.4
5.1 4.5 3.7 0.9 0.8 0.6 3.3 2.9 2.4
12.9 7.2 5.0 1.0 0.9 0.8 6.0 5.0 4.3
3.9 3.2 2.5 1.1 0.9 0.7 3.8 3.4 2.8
6.0 5.0 4.2 1.1 0.9 0.8 4.0 3.3 2.6
9.2 7.0 5.9 1.4 1.2 1.1 7.3 7.0 6.5
5.3 4.9 3.6 0.6 0.6 0.6 10.2 8.8 8.2
9 March 2012
Top Buys
We initiate coverage on eight companies with Buy ratings on Simplex (TP: `289), Ramky (TP: `353), Pratibha (TP: `73), Supreme (TP: `333), J. Kumar (TP: `239), KNR (TP: `197), a Hold on Era (TP: `164) and a Sell on NCC (TP: `56).
Ramky is one of the sectors fastest-growing companies (40% CAGR over FY08-11) due to its diversified order book and strong developer portfolio with limited equity outlay. Low leverage, healthy working capital management and better-than-peer return ratios are positives. We initiate coverage with a Buy rating and a sum-of-parts price target of `353. Pratibhas strong and quality order book, together with higher-thanpeer operating margins, is likely to lead to industry-leading return ratios. We estimate 29% earnings CAGR over FY13-14. We initiate coverage with a Buy rating and a price target of `73. KNR. A road specialist with strong margins, return ratios and balance sheet, KNRs aspirations in road BOTs are restricted to EPC cashcontracts. Key positives are its low net gearing, lack of equity dilution and high return ratios. We initiate coverage with a Buy rating and a price target of `197.
Fig 3 Anand Rathi Research (ARG) vs consensus (`m)

PAT Ramky Pratibha KNR Simplex Supreme J Kumar Era NCC
FY12e ARG Consensus Diff. (%) FY13e ARG Consensus Diff. (%) FY14e ARG Consensus Diff. (%) 2,234 2,521 (11.4) 1,454 NA 931 NA 2,306 1,629 41.6 1,251 NA 1,135 982 15.6 2,648 2,446 8.2 887 1,562 (43.2) 1,864 2,184 (14.7) 997 898 11.0 753 601 25.3 1,549 1,308 18.4 966 947 2.0 950 806 17.8 2,226 2,156 3.2 652 1,128 (42.2) 1,539 1,713 (10.2) 807 796 1.3 665 551 20.7 891 1,011 (11.9) 804 798 0.8 798 706 13.0 2,069 1,942 6.5 602 744 (19.1)
Source: Bloomberg, Anand Rathi Research
Risks
Rise in interest rates. A status-quo on interest rates (no major softening) could continue to hit profit margins of construction companies. Financial risk. Given the nature of the sector, companies would need to take on additional debt to fund capex or working capital. Deteriorating availability of debt funding due to a dip in infra lending or liquidity constraints in banking channels would lead to project delays and cost overruns. Volatile and depressed equity markets could also pose a risk to select companies, given their equity commitment to BOT projects. Order inflow growth lower than estimated. A major risk to our call is lower-than-expected order inflow, which would be bleak for revenue-growth visibility and margins and, therefore, lower earnings growth.
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9 March 2012
Deterioration in working-capital cycle. Cash flows of construction companies are negative mainly on account of a longer working-capital cycle. In prolonged recessionary conditions, terms of payments/ advances for infrastructure projects would significantly impact the working-capital cycle. Project execution risk. Project execution risk could arise from a shortage of manpower, land acquisition issues or arbitration with clients. The growing attrition rate across the sector and lack of skilled manpower could significantly add to manpower cost and could delay project completion. Delay in executing projects-under-development that extends beyond our estimates would cut into earnings in the construction division. Political risk. A large proportion of construction orders stem from the government. Any slowing of such orders due to elections or other political issues could impact companies.
9 March 2012
Policy action to revive orderflows

Buoyancy in orders is likely in FY13-14, led by a greater impetus on infra investments and government action due to pressure from stakeholders and the upcoming 2014 elections to revive stalled projects and ensure fast-track approvals for new ones. A recent directive to Coal India to make available a minimum 80% of coal requirement to the power sector is a positive step. The urban infra, road and water segments are likely to dominate order flow. We estimate the revenue and earnings CAGR of our construction universe at 18% and 25%, respectively, over FY13-14e.
Tackling structural issues: a step in the right direction

The Prime Minister has assumed the role of a mediator and key decisionmaker to clear bottlenecks, thereby hastening the pace of implementation of projects and reviving new project proposals Given the upcoming 2014 elections at the Centre and the governments increased impetus for economic growth, we expect a proactive and clear policy environment (less uncertainty), going forward. The last two years had seen a slew of inter-ministerial and industry vs. ministry disputes. Any ambitious plan to scale up investments in infrastructure faced multiple headwinds of land acquisition and clearances, besides the regular issues of funding, operations and execution. An initial measure began at the start of 2012, with the Prime Minister stepping into the role of a mediator and key decision-maker to clear bottlenecks, thereby hastening the pace of implementation of projects and reviving project proposals. This was followed by similar mediation by the Prime Ministers Office (PMO) and the Finance Minister. The PMO, led by principal secretary Pulok Chatterjee, has been active in addressing issues in six key areas ports, oil and gas, power, trade, pharma and roads The PMO, led by principal secretary Pulok Chatterjee, is addressing issues in six key areas ports, oil and gas, power, trade, pharma and roads. The PMO has intervened (except for roads) in sectors where decision-making has been stalled as the groups of ministers involved were locked into positions where they represented conflicting interest groups. Power One-third of the planned infrastructure expenditure constitutes investments slotted for the power sector. Despite an urgent need to raise capacity to address the rising demand, investments are slow paced. Key issues include:
Slowdown in bank lending. Banks have reached internal limits for lending to the sector, resulting in slower order inflow for construction. Government has given approval to banks to launch infrastructure debt funds (IDF) that will raise debt from foreign and domestic sources to finance large infrastructure projects. Recently, an ICICI bank-led consortium launched Indias first IDF.
9 March 2012
Fig 4 Bank credit to the power sector (as percent of non-food credit)
(%)
8.0
7.0
6.0
5.0
4.0
23-Oct-09 22-Oct-10 27-Aug-10 28-Aug-09 26-Aug-11 25-Feb-11 26-Feb-10 18-Jun-10 17-Jun-11 21-Oct-11 19-Dec-08 18-Dec-09 17-Dec-10 30-Dec-11 27-Feb-09 19-Jun-09 24-Apr-09 23-Apr-10 22-Apr-11
Source: RBI
Plants are running at less than a weeks supply of coal due to inadequate fuel supply from Coal India, the monopoly supplier (80% of domestic production). Plants now buy additional coal through eauctions or import coal, which raises the cost of procurement. Producers inability to revise electricity tariffs to counter cost pressures. The PMO is looking at the industry request to set up an expert body to evolve mechanisms to review contracts (power tariff hikes) impacted due to changes in the law in other countries such as Indonesia, fall in supply by Coal India and delay/denial in environment clearances to captive coal blocks. To sort out other smaller but relevant issues, the Association of Power Producers (APP) has requested certain measures such as signing of long-tem gas-supply agreements, re-allocation of gas supply meant for steel and fertilizer units to power plants, bulk coal and LNG imports, privatization of distribution firms, fast-track regulatory clearances, speeding up of hydro-power plants in the North-East and reviewing documentation to bid for power projects.
The Prime Minister, in a recent directive, ordered Coal India to ensure coal supplies for 20 years to 50,000 MW plants that are proposed to be commissioned by Mar 15.
The Prime Minister, in a recent directive, ordered Coal India to ensure coal supplies for 20 years to 50,000 MW plants that are proposed to be commissioned by Mar 15. Coal India will be penalized if supplies fall below 80% of commitments, and given incentives if they rise above 90%. It would arrange for supply of coal through imports or arrangements with state/Central PSUs that have been allocated coal blocks. Coal supplies would, however, be restricted to power plants that commit to long-term power supply to states. This directive would lead to signing fuel supply arrangements after a gap of three years. (Refer to Annexure 1 for details on the directive). With some progress towards addressing the woes of the power sector, we expect a revival of projects, leading to orders for construction companies. Rail-freight corridor The PMO has directed the Dedicated Freight Corridor Corporation of India to expedite progress on the rail-freight corridor a stalled XI FiveYear Plan project that was approved by the Cabinet Committee on Economic Affairs in 2005. At least one phase of the western corridor is to be operational by Sep 12.
9 March 2012
Roads Targeted investment in the road sector constitutes 15% of total infrastructure expenditure. The Ministry of Road Transport is looking to award 15 projects for 1,547km of highways in this financial year, while another 11 projects for 1,731km would be considered for speedy approval. This follows a directive from the PMO to ensure timely awards for the balance 2,800km projects that remain from the 7,300km (worth `570bn), (up from 3,360km in FY10 and 5,059km in FY11) of projects targeted by the National Highway Authority of India (NHAI). Given that the pace of construction is still far below the 20km per day targeted, the next intervention from the PMO is likely to be in the area of addressing procedural issues.
Order-flow boost; real leg-up in 2HFY13

With most systemic structural issues in the process of being addressed, we expect a ramp-up in the award of cash contracts both from the private sector and government stables from 2HFY13, flowing through into FY14. We expect the current trend of order-flow through mainly captive PPP projects in roads and power to continue in the next 6-9 months. Order inflows of construction firms within our coverage universe showed -40% to +40% growth in FY11.
Fig 5 Order inflow to pick up in 2HFY13
(`bn) 450 360 270 180 90 0 FY12e FY13e FY14e FY08 FY09 FY10 FY11 (%) 90 70 50 30 10 -10
Order inflow
Source: Company, Anand Rathi Research
Order inflow growth (RHS)
Macro framework in place: huge infra-spending planned The private sector share is estimated at 50% in the XII-Plan period vs. 36% in the XI-Plan period implying opportunities worth three times as compared to XI plan period The Planning Commission of India has projected investment of US$1trn or `50trn on infrastructure development during FY12-17 (the XII FiveYear Plan) compared to US$428bn in the XI Five-Year Plan. This expenditure is 10% of GDP in the XII-Plan period, compared to 7.5% of GDP in the XI-Plan period. The private sector share is estimated at 50% in the XII-Plan period vs. 36% in the XI-Plan period. This implies, in the next five years, opportunities for private construction companies will be thrice the worth of those in the last five years. For companies looking to increase market share and supported by good balance sheets, this could translate to three to four times the current opportunity.
9 March 2012
Fig 6 Infra spending in the XII Five-Year Plan

Sectors (US$bn @ `48/$) XI Five-Year Plan XII Five-Year Plan Sector share (%)
Electricity (incl. NCE) Roads and bridges Telecommunications Railways (incl. MRTS) Irrigation (incl. WD) Water supply and sanitation Ports Airports Storage Gas Total
Source: Planning Commission, Anand Rathi Research
138.9 65.4 53.8 54.5 52.8 29.9 18.3 6.5 4.7 3.5 428.4
324.0 153.0 126.0 127.0 123.0 70.0 43.0 15.0 11.0 8.0 1,000.0
32.4 15.3 12.6 12.7 12.3 7.0 4.3 1.5 1.1 0.8 100
State and Central elections to boost order flows Between Nov 12 and May 14, nine large states of India will have assembly elections. This is in addition to the Central Parliamentary elections in 2014. This, we believe, would boost the launch pipeline of infrastructure projects, resulting in a pick-up in order flows.
Fig 7 State-wise election schedule
Major states Timeline Population % share
HP Gujarat Karnataka Rajasthan Delhi MP Chhatisgarh AP Central elections Orissa Maharashtra Haryana Jharkhand
Source: Election Commission of India
Nov 12 Dec 12 May 13 Nov 13 Nov 13 Nov 13 Nov 13 May 14 May 14 May 14 Oct 14 Feb 15 Feb 15
1 5 5 6 1 6 2 7 4 9 2 3
Key themes: urban infra, roads and water

We expect order inflows in infrastructure to be led by the urban infra, transportation (roads) and water segments. Key constituents within urban infrastructure would be metros, airports and the Railways, besides others such as ports. These sub-segments have two key positives: (1) the average ticket size is larger than works in other verticals and (2) construction work in such projects is comparatively large: 75% in Railways, 65% in water supply, 60% in roads and 40-50% for metros, airports and ports. In industrial projects including power, the construction component comprises only 15-20%.
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Fig 8 Project mix: Dec 11

Segments (%) NCC Era Simplex Ramky Pratibha Supreme J Kumar KNR
Water Irrigation Transportation Building & housing Industrial structures Power Metals and mining International Others Total
Source: Company
12.0 9.0 2.3 29.9 3.2 29.7 1.6 7.8 4.5 100.0
44.0 37.0 19.0 100.0
28.0 26.5 14.0 25.5 6.0 100.0
16.4 10.8 44.3 17.3 7.5 3.7 100.0
52.0 11.0 37.0 100.0
0.3 55.7 41.6 1.9 0.4 100.0 5.0 100.0 5.0 70.0 20.0
1.4 3.9 94.7
100.0
Urban infra We expect urban infra to be the biggest driver of orders for construction and infra companies during FY13-14, led by metro rail We expect urban infra to be the biggest driver of orders for construction and infra companies during FY13-14. The government has initiated a number of measures in essential infrastructure (water management, roads, housing, sanitation, sewage), transportation, both inter- and intra-city. It is aggressively looking at proposals regarding metro rail systems, Greenfield airports and ports and modernization/expansion of the present ones. The urgency level is high on these projects as the urban population in India amounts to over 320m (the second-largest in the world), comprises about 26% of the countrys population (expected to rise to over 40% by 2030) and contributes over 60% to GDP. Many of these projects are being awarded on a PPP basis, which would shorten execution time and improve efficiency. Most urban-infrastructure projects in India have larger financing options, given the interests of global agencies (the World Bank, the Asian Development Bank, Japanese banks) in funding these.
Metro Rail
In tier-II cities, Ahmedabad, Kochi, Chandigarh, Lucknow, Pune and others would throw up metro PPP opportunities in the short term and involve construction companies in a very large way
The rapid urbanization of large cities, combined with the exhaustion of traditional rail/road mass-transport systems, has led to acute requirement of an improved transit system such as metro rail systems. According to the Ministry of Urban Development, all Indian cities with a population of over 2m (approx 30 cities) are being evaluated for metro rail feasibility. In addition, the metro projects are also being evaluated from the perspective of monetization of land at stations, which the government has not done so far. In the tier-I category, the Mumbai Metro (phases I), Delhi Metro (phase III), Bangalore, Chennai, Hyderabad, Jaipur are ongoing/near-term projects entailing massive investment. In tier-II cities, Ahmedabad, Kochi, Chandigarh, Lucknow, Pune and others would throw up metro PPP opportunities in the short term and involve construction companies in a very large way. This model is also likely to be followed in other big towns in India.
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Fig 9 Status of various metro projects

Railway Status Cities
In operation Metro Systems
Monorail systems
Elevated rail systems
Delhi, Kolkata, Bangalore Chennai, Hyderabad, Jaipur, Mumbai, Navi Mumbai, Rapid Under construction Metro Rail Gurgaon Bhopal, Chandigarh, Indore, Kanpur, Kochi, Lucknow, Planned Ludhiana, Nagpur, Patna, Pune, MetroLink Express connecting Gandhinagar and Ahmedabad Under construction Mumbai Monorail Aizawl, Ahmedabad, Bangalore, Chennai, Delhi, Indore, Planned Kanpur, Kolkata, Kozhikode, Navi Mumbai, Patna, Pune, Thiruvananthapuram In operation Chennai Mass Rapid Transit System Planned Western Railway Elevated Corridor (Mumbai)
Airports
India has 125 airports, of which 11 are international. The Committee on Infrastructure initiated several policy measures that aim at time-bound creation of world-class airports in India. Large-scale improvisation and expansion in Indian airport infrastructure, coupled with active government support for private participants, particularly in Greenfield projects, have enabled huge strides forward. In the past, all airports were owned and operated by the Airports Authority of India (AAI). The government plans to spend `600bn on the airports sector during the XII Five-Year Plan The government aims to attract private investment in aviation infrastructure on the lines of privatization of the Delhi, Mumbai, Hyderabad and Bangalore airports. Opportunities in FY13-14 would come through building up Greenfield airport projects in Goa, Pune, Navi Mumbai, Greater Noida, Kannur and many others. The government plans to spend `600bn on the airports sector during the XII Five-Year Plan. Key private investment enabling policy measures are:

100% FDI permissible for existing airports; FIPB approval required for FDI beyond 74% 100% FDI under the automatic route permissible for Greenfield airports 49% FDI permissible in domestic airlines under the automatic route, but not by foreign airline companies; 100% equity ownership by nonresident Indians (NRIs) permitted 100% tax exemption for airport projects for 10 years.
Ports
To address bottlenecks, the XII Plan targets spending over `1.7trn in the port sector
Most foreign trade is through ports. Indias ports suffer from congestion, cargo delays and inefficiencies. Average turnaround time at Indian ports is about four days (against a few hours for most ports in south-east Asia). To address these bottlenecks, the government in the XII Plan aims to spend over `1.7trn. In the past, the government dominated maritime activity. The current policy direction is oriented to encourage the private sector to take the lead in port development and operations. 100% FDI under the automatic route is permitted for port development projects and 100% income-tax exemption is available for 10 years. Significant investment on a BOT basis done so far is by foreign operators including Maersk (JNPT, Mumbai) and P&O Ports (JNPT, Mumbai and Chennai), Dubai Ports International (Cochin and Vishakhapatnam) and PSA Singapore (Tuticorin).
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Railways
The government plans to spend `5trn on the Railways during the XII Five-Year Plan
The Railways is on the verge of a major capacity enhancement and improvement phase, throwing up vast opportunities for developers and construction contractors. We expect the Railways to roll out a large number of orders during FY13-14. The government plans to spend `5trn on the Railways during the XII Five-Year Plan. An expert committee, headed by Sam Pitroda, recently recommended investment of `8trn in the next five years to modernize operations. Most of this expenditure would be through gross budgetary support, internal generation and public-private-partnership projects. Aiming at better service and embark on an expansion and modernization drive, the committee recommends spending on new lines, track modernization, bridge strengthening, signalling and safety systems, new stations and terminals and building dedicated freight corridors. It would also entail procurement of new coaches, wagons and EMUs (electric multiple units).
Big-ticket infrastructure projects
The governments impetus on accelerating infrastructure-spends rests largely on implementation of big-ticket projects in urban infrastructure. The Dedicated Freight Corridor and the Delhi-Mumbai Industrial Corridor are two such examples that can step up the pace of investment. To reduce strain on existing rail tracks, the government plans to build a 10,122-km rail-freight corridor, at a cost of `776bn
Dedicated freight corridor. To reduce strain on existing rail tracks, the government plans to build a 10,122-km rail-freight corridor, at a cost of `776bn. Approval so far has been granted for only the Eastern and Western corridors, a 3,328-km stretch (Dadri to Mumbai and Ludhiana to Howrah) that carries 55% of revenue-earning traffic. The corridors, also known as dedicated freight corridors (DFC), have seen slow progress so far due to the lack of time and attention from the previous railway minister. The PMOs latest directive to the nodal agency, the Dedicated Freight Corridor Corporation of India (DFCCI) to start work on a priority basis and ensure that one phase of the western corridor be operational by Sep 12 is encouraging. The new lines would take the load off the existing corridors where passenger and freight trains run at capacity utilization levels of 115-150%. The nodal lines would service a whole range of cargo cities that would come up along these lines. The project is being implemented by government agencies with funding primarily from the Japanese government and the World Bank. The DFCCI has completed two-thirds of land acquisition on both sides of the corridor and aims to complete the balance by Mar 12. It is addressing issues of re-tendering on some stretches, stiff contractual clauses and delayed approvals from international lenders. Funds for part of the Western corridor, Rewari to Vadodara and then to JNPT have been tied up, while funds for the Eastern corridor have yet to come in.
Delhi-Mumbai Industrial Corridor. The recently-cleared DelhiMumbai Industrial Corridor (DMIC) involves the creation of 1,483km of multi-modal, high axle load, dedicated freight line, sixlane intersection-free expressway, seven mega-cities (around 50 sq km with 2m population), nine mega-industrial zones (250 sq km), three ports and six airports and a 4000MW power plant. The corridor will pass through six states (UP, Delhi, Haryana, Rajasthan, Gujarat, Maharashtra) with end terminals at Dadri (NCR) and Jawaharlal Nehru Port in Mumbai. The project was cleared by the Union Cabinet
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in 2011 and has secured mandatory approvals from all government departments. It is backed by financial and technical aid from Japan besides financial assistance from the Government of India. A band of 150 km on both sides of the freight corridor will be developed with globally competitive environment and state-of-the-art infrastructure to activate local commerce, enhance foreign investments, real-estate investments and attain sustainable development. In addition to the band, the project would also include development of requisite feeder rail/road connectivity to hinterland/markets and select ports along the western coast. Rajasthan (39%) and Gujarat (38%) together constitute 77% of the total length, followed by Haryana, Maharashtra with 10% each and UP, NCR 1.5 % each of total length. Roads Construction companies have moved from being contractors to developers by entering road BOT projects in a major way. This, however, exposes them to delays in land acquisition, right-of-way issues, clearances and other risks, which they were not previously faced with. Such risks have been key reasons for delays in execution of various projects in the past. We are positive on companies that are actively looking at roads either for the cash-contract works of the NHAI/state governments or for the EPC works secured as sub-contracts from the winning concessionaire. The margin profile in these orders should be a slice better than regular road contracts, given the greater importance afforded to quality work and timely completion. Companies under our coverage universe that are actively exploring this are Simplex, Supreme, J. Kumar and KNR.
Opportunity
India has the second-largest road network in the world, with over 4.24m km. Roads carry 85% of passenger and 70% of freight traffic. The network consists of national highways, state highways, expressways, major district roads, other district roads and village roads. National highways comprise only 2% of the road network but carry 40% of the traffic. These national highways are too narrow for the kind of traffic they carry. Bottlenecks lengthen the time taken by suppliers to transport goods, leading to delays in delivery.
Fig 10 Road network in India
Category km % of total
National highways State highways Major and other district roads Rural roads Total
Source: NHAI
70,934 154,522 2,577,396 1,433,577 4,236,429
1.7 3.6 60.9 33.8 100.0
An autonomous authority of the Government of India under the Ministry of Road Transport and Highways, the National Highways Authority of India (NHAI) was constituted by Parliament on June 15, 1989, through The National Highways Authority of India Act, 1988, and operationalized in February 1995 on the appointment of a full-time chairman and other members. Its scope was expanded in 1998 when the GoI announced the National Highways Development Programme (NHDP) comprising the Golden Quadrilateral linking the four metros, with connectivity to major
9 March 2012
ports in the first phase, and the North-South and East-West corridors in the second phase.
NHDP Nodal programme of the NHAI
The NHDP involves widening, upgrading and rehabilitating about 54,000 km, at a cost of `3trn. The NHAI plans to award the remaining 20,000 km in the next three years
The Government of India, through various phases of the NHDP, launched major initiatives to upgrade and strengthen the national highways. The NHDP is one of the largest road-development programmes to be undertaken by a single authority in the world. It involves widening, upgrading and rehabilitating about 54,000 km, at a cost of `3trn. Of the projects in hand (48,000 km), about 15,500 km are complete and further implementation of 13,000 km is underway. The NHAI plans to award the remaining 20,000 km in the next three years. It is also undertaking another 1,770 km of development under port connectivity and others, of which 1,287 km have already been completed. Most of the projects to be developed would be through public-private partnership (PPP) on the build, operate and transfer (BOT) annuity or BOT toll mode. This is a marked shift from earlier method (till 2005) of awarding projects on a cash-contract basis, which had put the entire pressure of funding on the government.
Approved programme
The government has already approved projects under four-laning of 6,359km (phase-I), four-laning of 6,702 km (phase-II), four-laning of 12,109 km (phase-III), two-laning with paved shoulders for 5,000 km of national highways under phase-IVA, six-laning of 6,500 km (phase-V), 1,000 km of expressways (phase-VI) and construction of ring roads including improvement of NH links in cities, grade-separated intersections, flyovers, elevated highways, rail over-bridges, underpasses and service roads (phase-VII). Phases I and II collectively comprise the Golden Quadrilateral, the North-South and East-West Corridors, port connectivity and other projects.
Fig 11 NHDP programme and work plan (31 Dec 11)
Programmed GQ NS-EW Phase I & II Phase III Phase IV Phase V Phase VI Phase VII NHDP Total
Length (km) Already four-laned (km) Under implementation (km) Balance length for award (km)
Source: NHAI
5,846 5,831 15 -
7,300 12,109 14,799 5,914 808 420 3,023 6,514 2,549
6,500 709 2,768 3,023
1,000 1,000
700 48,254 7 15,484 34 12,688 659 19,924
2,572 12,250
NHAI aims to award projects covering 7,300 km (worth `570bn) in FY12, compared to 3,359 km in FY10 and 5,059 km in FY11.
The NHAI aims to award projects covering 7,300 km (worth `570bn) in FY12, compared to 3,359 km in FY10 and 5,059 km in FY11. It aims at a similar rollout of projects every year for the next three years (FY13-15), covering the balance length for an award of ~20,000 km. We estimate 3,000 km (worth `200bn) of projects to be released over Mar-Apr 12. Apart from the NHDP, rural roads and refurbishment of old roads also open up vast opportunities. The investment in roads during the XII Plan is projected at `6trn, 100% more than the targeted XI-Plan investment. The private sector is expected to contribute ~50% of this investment outlay.
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Execution, the key
NHAI targets to build 20 km of highways per day. To achieve this (7,000 km a year), given the average three-year execution period, would imply that projects-under-execution have to increase from the present ~13,000 km to 21,000 km
The NHAIs track record in terms of road construction run-rate has been unimpressive: averaging a mere 4 to 7 km/day in the past four years. The NHAI has been working towards the target of building 20 km of highways per day. To achieve this (7,000 km a year), given the average three-year execution period, would imply that projects-under-execution have to increase from the present ~13,000 km to 21,000 km. We believe that the target of 20 km/day appears over-ambitious and a more reasonable 12-14 km a day is achievable, given the multiple challenges the industry faces from delay in construction (entire land not in possession or labour/ material-sourcing issues) or financial closure. Even a 12 km/day execution would translate to a doubling of revenue in the road segment for the major companies.
Fig 12 Past road-length additions
(km) 5,500 4,400 3,300 2,200 1,100 0 FY01 FY02 FY03 FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11
External assistance 7%
Awarded
Source: NHAI
Completed
NHAI funding issues sorted out
NHAI receives funding through (i) government support in the form of the capital base, cess fund, additional budgetary support, capital grant, maintenance grant, ploughing back of toll revenue and loans from the GoI; (ii) loans from multilateral agencies and (iii) market borrowings.
Fig 13 Investment required: `2,267bn
NHDP VII 7% NHDP VI 7% NHDP II 15% NHDP I 13%
Fig 14 Funding sources: `2,267bn

Private sector 2% Bugetary support 6% Government spending 1% Cess & Market borrowings 35%
NHDP V 18%
NHDP IVA 3% NHDP III 37%
BOT/SPV 49%
Source: MoRTH, Anand Rathi Research
Source: MoRTH, Anand Rathi Research
1HFY12
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Government Support. Government support to the NHAI primarily stems from the yearly budgetary allocations of the GoI. Cess. The GoI has, under the Central Road Fund Act, 2000, created a non-lapsable dedicated fund for the NHDP by levying a cess on high-speed diesel and petrol at `2 a litre. `0.50 per litre (levied in 2005-06) is allocated exclusively for NH. The allocation for balance cess of `1.5 a litre is as under:

50% of the cess collected from diesel is for rural roads The balance 50% cess from diesel and the entire cess on petrol, the allocation of funds for different categories of roads are as under:
1. 2. 3.
57.5% for NH 12.5% for road over-bridges/rail over-bridges (to be constructed by the Railways) 30% for roads other than NH.
Market borrowings; 54 EC bonds. The NHAI can issue capital gains tax-free bonds under Sec 54 EC of the Income-Tax Act, 1961. In this capital-gains-exemption bond, eligible investors can claim tax exemption by investing the component of long-term capital gains, either wholly or in part, in these bonds, within six months of the transfer of the asset. The funds have a maximum investment limit of `5m in one financial year for an investor with a lock-in of three years. The NHAI raised `21,606m during FY11. Loan assistance from multilateral agencies. The NHAI is implementing some projects under the NHDP with external assistance in the form of loans from multilateral development agencies such as The World Bank (WB) and The Asian Development Bank (ADB). Loans for NHAI projects tied up with these multilateral agencies, except for one ADB loan (for Surat Manor project), have been passed on to the NHAI by the GoI as 80% grant and 20% loan. The loan component would be repaid to the government by the NHAI and repayments to those agencies would in turn be done by the GoI. Grants. The NHAI also has a provision to provide grants of up to 40% of the project cost to render projects commercially viable. However, the quantum of the grant would be decided on a case-tocase basis and typically constitutes the bid parameter in BOT projects. NHAI projects, with higher traffic volumes, have also received negative grants (upfront payments payable by successful bidders to the NHAI) instead of grant/VGF as an outcome of the competitivebidding process. Further, under the revised Model Concession Agreement, projects under the BOT framework have been awarded on a revenue-share/premium basis, where the bidder offering the highest revenue-share/premium is awarded the project. These revenues are also ploughed back to develop and maintain the National Highways. Public-private partnerships (PPP). PPP is the preferred mode of delivery for future phases of the NHDP. The common forms that are popular in India and have been used to develop the NH are:
Build, Operate and Transfer (Toll) model Build, Operate and Transfer (Annuity) model
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Operate, Maintain and Transfer (OMT) model.

Incentives for private-sector participation
The government has put in place policy, institutional and regulatory mechanisms, including a set of fiscal and financial incentives to encourage private-sector participation in roads. In order to augment the flow of funds to the sector and to encourage private-sector participation in the roads sector, the government has taken several measures. These are:

Declaration of the road sector as an industry Provision of a capital grants subsidy of up to 40% of the project cost, to enhance viability of projects, on a case-to-case basis Duty-free import of certain identified high-quality construction plants and equipment 100% tax exemption in any consecutive 10 years within a period of 20 years on completion of the construction, provided the project involves addition of new lanes Provision of encumbrance-free sites, i.e., the government should meet all expenses relating to land and other pre-construction activities Foreign direct investment up to 100% in the roads sector.
Water supply including waste-water management and sanitation In the past three years the water sector in India grew 18-20% to cater to the dire need to create infrastructure to ensure sustainable water supply for the countrys agricultural, industrial and domestic use. While 85% of urban India has access to water supply, service quality is poor and most users receive water of dubious quality and only intermittently. Besides the traditional work of laying pipelines, the scope has extended today to distribution systems, water treatment, recycling plants, sewerage plants and water management. The waste-water treatment segment is seeing high growth rates due to growing industrialization and urbanization, intensifying regulatory measures and investment in sanitation. According to the Planning Commission, for the XII Five-Year Plan, an outlay of over `2.8trn has been suggested for rural domestic water supply The XII Five-Year Plan aims at providing drinking water, sanitation and waste management to 100% of the urban population. According to the recommendations of the working groups of the Planning Commission for the XII Five-Year Plan, an outlay of over `2.8trn has been suggested for rural domestic water supply, including the component of the National Rural Drinking Water Programme (NRDWP). This would be ~305% of the actual allocation in the XI Five-year Plan for the sector. The Central outlay would be 45% and states would contribute 55% of the expenditure.
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Fig 15 Investments in domestic water and sanitation

(`bn) 500 400 300 200 100 0 1969-1974 1974-1979 1980-1985 1985-1990 1992-1997 1997-2002 2002-2007 2002-2012 2010-11 2011-12
Centre
Source: Planning Commission
State
According to the Planning Commission for the XII Five-Year Plan, an outlay of over `441bn has been suggested for sanitation
According to recommendations of the working groups of the Planning Commission for the XII Five-year Plan, an outlay of over `441bn has been suggested for sanitation, aiming to increase such facilities to 100%, from 74% now. Waste-water treatment also offers huge opportunities to companies in this space as only 69% of the water is treated.
Fig 16 Sanitation levels in rural India
(%) 80 70 60 50 40 30 20 10 0 2000-01 2001-02 2002-03 2003-04 2004-05 2005-06 2006-07 2007-08 2008-09 2009-10
Fig 17 Waste water generation and treatment

(MLD) Class 1 (Population 0.1-1 m) Class II city (Population >1 m) Total
Wastewater generated Waste treatment capacity Missing capacity Untreated

Source: Central Pollution Control Board Annual report 2009
35,558 11,554 24,004 68%
2,697 234 2,463 91%
38,255 11,788 26,467 69%
Urban India will require huge investment in building and keeping pace with water and sewage infrastructure needs. In the past five years the JNNURM has been an important game-changer in this sector, providing much-needed public funding to build and refurbish assets. Under the JNNURM the bulk (70% of `600bn) of the projects are for water and sewage. Other major schemes include the NRDWP and ARWSP.
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Fig 18 Segment-wise breakdown of JNNURM outlay
Other urban sectors 29.6%
Water supply projects 32.1%
Preservation of water bodies 0.2% Drainage 13.7%
Sewerage projects 24.4%
State-level urban affair department and public health and engineering departments operate and maintain water supply and sewerage services. As a result, the public sector has been and continues to be dominant in the water and waste-water sector. However, because of the large capital investment required and since most state governments and local bodies do not have the required resources, there is a vast need for private-sector participation in the water and waste-water sector. We expect a huge flow of orders from water and sanitation projects. The emphasis on solutions to drinking water problems, besides the current boom in industrial construction, all point to a future replete with opportunities in water.
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Easing monetary policy to help

Our economy team expects a turnaround in fixed investment from 2HFY13, as a result of a revival in industrial capex due to better replacement demand. A high positive correlation of fixed investment and our construction sector index points towards potential sector re-rating. We expect 75-100bps repo rate cut by Oct 12. A 100bps softening in interest rate would raise NPM 20-60bps and RoE 50-150bps of our construction universe. Falling inflation, easing monetary policy stance and lower borrowing costs are likely to turn around the construction sector in FY13.
Macro-economic indicators point to a recovery

Contraction in fixed investment Due to the policy deadlock, high interest rate and economic uncertainty, real fixed investment contracted 1.2% in 3QFY12, a second quarter of negative growth. If fixed investment turns negative or falls to low single digits, it normally takes around 3-4 quarters to return to 6% plus growth. If fixed investment turns negative or falls to low single digits, it normally takes around 3-4 quarters to return to 6% plus growth. At present, we are in the third quarter of low/negative fixed-investment growth. Thus, the trend suggests that fixed investment might pick up in the coming quarters. Also, replacement demand is expected to result in a turnaround in fixed investment.
Fig 19 Real fixed investment negative in 3QFY12
20 15 (Real growth,%) 10 5 0 -5 Sep-03 Sep-06 Sep-09 Jun-01 Mar-02 Jun-04 Mar-05 Jun-07 Mar-08 Jun-10 Dec-02 Dec-05 Dec-08 Mar-11 Dec-11 Peak of global financial crisis
Fixed investment
Source: GoI
High positive correlation: fixed investment and construction index The construction sector performance is highly correlated with the performance of fixed investment in the economy. A turnaround in fixed investment in 2HFY13 on account of replacement capex is likely to be positive for the construction sector.
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Fig 20 High positive correlation between fixed investment & construction index
100 90 80 70 60 50 40 30 20 10 0 Feb-08 Apr-08 Jun-08 Aug-08 Oct-08 Dec-08 Feb-09 Apr-09 Jun-09 Aug-09 Oct-09 Dec-09 Feb-10 Apr-10 Jun-10 Aug-10 Oct-10 Dec-10 Feb-11 Apr-11 Jun-11 Aug-11 Oct-11 Dec-11
Construction index
Source: GoI
21 18 15 9 6 3 0 -3 -6 (Growth, %) 12
(Index)
Fixed investment (RHS)
Construction sector: turnaround on the cards Growth in construction (component of GDP) had fallen to a crisis low in 1QFY12. Thereafter, in 2QFY12 it recovered (grew 4.3%) and in 3QFY12 grew 7.2%. If the trend continues, it would boost performance of construction companies, going forward.
Fig 21 Construction sector begins an upswing
14 12 10 (Growth,%) 8 6 4 2 0 Dec-06 Mar-07 Jun-07 Sep-07 Dec-07 Mar-08 Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09 Mar-10 Jun-10 Sep-10 Dec-10 Mar-11 Jun-11 Sep-11 Dec-11 Construction activities
Source: GoI
Peak of global financial crisis
Fig 22 IIP and construction index

Construction index
Source: GoI
21 18 15 12 9 6 3 0 -3 -6 -9
Industrial production (RHS)
(Growth, %)
(Index)
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Fig 23 Manufacturing production and construction index

Construction index
Source: GoI
21 18 15 12 9 6 3 0 (3) (6) (9) (12)
Manufacturing production (RHS)
Budget expected to lift market sentiment

Aggregate spending on infrastructure at `1.73trn in FY11 Union Budget was 16% of the expenditure (`11trn) and 44% of XI Plan expenditure. This was 38% of the `4.5trn spent in FY11 as part of the XIth Plan period. As a proportion of the `3trn of government spend on infra in FY11, the spend was 55%. Thus the proposals in the Union Budget are relevant to financing infrastructure spending. We expect the coming Budget to, besides other things, provide some relief with regard to funding a large number of infrastructure programmes. This would give a much-needed boost to the outlook regarding order flows for construction companies. (Refer to Annexure 2 for details on expected budget announcements.) Impact of reducing interest rates A 100bps softening in interest rates would raise the NPM of our construction universe by 20-60bps and the RoE by 50-150bps Our analysis of the construction sector reveals that the movement of key interest rates (bank borrowing rates) has a major bearing on profit margins and return ratios of the companies. This stems from two industry-specific reasons: low operating margins and high gearing (due to a higher workingcapital cycle). A 100bps softening in interest rates would raise the NPM of our construction universe by 20-60bps and the RoE by 50-150bps. Of our coverage universe, companies that would gain the maximum benefit on account of the drop in interest rates are Era, Pratibha and Supreme.
Fig 25 Impact of 1% change in interest rates (FY12e)
(bps) 160
Fig 24 Interest as % of sales

(%) 12 10
120 8 6 4 2 0 Simplex Ramky NCC Pratibha J Kumar FY12e FY13e FY14e Supreme FY06 FY07 FY08 FY09 FY10 FY11 KNR Era 0 80
40
NCC
Era
Simplex
Ramky
Pratibha
Supreme
J Kumar
KNR
Decline in NPM
Decline in RoE
(Growth, %)
(Index)
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Any change in interest rates would also affect the fundamentals of BOT projects, considering their highly-leveraged nature. Apart from increasing the interest during construction (IDC) portion of the cost of BOT projects, an increase in interest rates also affects debt-servicing ability. The recent aggressive bidding for BOT projects has already lowered the equity internal rates of returns (IRR) earned by developers on such projects. With BOT projects being sensitive to interest-rate movements, a softening of the interest-rate scenario would lift their IRRs. This would aid companies in securing better valuations while inducting private investors at the project/subsidiary levels. Within our coverage universe, companies that have greater exposure to BOT and would gain the maximum benefit on account of the drop in interest rates are Era, NCC and Supreme.
Fig 26 EBITDA constituents FY10
(%) NCC Era* Simplex Ramky Pratibha Supreme J Kumar KNR
PAT Tax Depreciation Interest Other income EBITDA margin

Source: Company
4.0 2.3 1.1 2.8 (0.1) 10.1
6.8 3.5 2.1 7.5 (0.7) 19.1
2.8 1.5 3.4 2.5 (0.4) 9.8
5.5 1.4 0.6 3.4 (0.4) 10.5
6.1 2.1 1.2 5.3 (0.0) 14.7
7.4 3.1 3.8 4.1 (0.5) 17.9
8.2 4.1 2.0 2.0 (0.8) 15.6
7.1 4.7 3.7 1.0 (1.1) 15.4
* EBITDA margin for Era includes margin for equipment rental business
Fig 27 EBITDA constituents FY12e

(%) NCC Era* Simplex Ramky Pratibha Supreme J Kumar KNR
PAT Tax Depreciation Interest Other income EBITDA margin
1.2 0.6 1.6 5.2 (0.2) 8.4
5.0 2.2 2.3 10.4 (1.0) 18.9
1.6 0.8 3.2 3.8 (0.4) 9.0
4.9 2.2 1.0 3.3 (0.7) 11.0
5.6 2.0 1.3 6.4 (0.3) 14.9
5.6 2.6 2.2 6.5 17.1
7.8 3.5 1.9 3.1 (0.6) 15.7
7.7 3.8 5.3 1.1 (1.2) 16.8
Source: Anand Rathi Research, *EBITDA margin for Era includes margin for equipment rental business
Respite from hyper inflation

The wholesale price index (WPI)-based inflation has softened to 6.6% in Jan 12, the lowest in 26 months. Inflation had been near the double digits for around two years before it started softening, in Dec 11. The sharp rises in food and crude-oil prices have been major reasons for the rise in average inflation in India. Along with the favourable base, a decline in vegetable prices has been the key factor behind the sharp softening of WPI inflation in the last two months.
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Fig 28 Inflation near double digits for around two years

12 10 8 (Inflation, %) 6 4 2 0 -2 Aug-06 Sep-08 May-05 May-10 Aug-11 24 20 (Inflation, %) 16 12 8 4 0 May-10 May-11 Sep-09 Sep-10 Sep-11 Jan-10 Jan-11 Nov-09 Nov-10 Nov-11 Mar-10 Mar-11 Jan-12 Jul-10 Jul-11 Feb-09 Nov-07 Jul-09 Dec-09 Oct-05 Jan-07 Jun-07 Oct-10 Mar-06 Mar-11 Jan-12 Apr-08 Period of high inflation
Source: GoI
Record production in foodgrain helps soften inflation A record production of foodgrain in the kharif season has led to softening food prices in the last two months. Inflation for primary food articles has eased to 2.3% in Jan 12 after being in the double digits between Sep 09 and Oct 11 (average inflation: 16.1%).
Fig 29 Primary inflation has sharply softened
210 200 190 (Index) 180 170 160 150
Primary articles index

Source: GoI, RBI
Primary articles inflation (RHS)
Inflation to soften further We expect inflation to hold below 8% in FY13. In our base case scenario, inflation is likely to fall to ~6.3% by Mar 12 A sharp softening in primary food prices and a favourable base would lead to further softening of inflation. The key risk to this assumption is escalating international fuel prices. Any major increase in administered fuel prices after the state elections would push up inflation again. Factoring in the risks, we expect inflation to hold below 8% in FY13. In our base case scenario, inflation is likely to fall to ~6.3% by Mar 12. We expect inflation to keep softening till Sep 12 to ~5.6% and then start inching up to ~7.4% by Mar 13.
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Fig 30 Inflation to be contained in FY13

12 Actual 10 (Inflation, %) 8 7.4 6 4 Dec-10 Dec-11 Dec-12 Mar-11 Mar-12 Sep-11 Sep-12 Mar-13 Estimate Jun-11 Jun-12 6.5 6.2 5.4 6.6 7.4 9.5 9.5 9.8 9.1 14-mth estimate
WPI
Source: GoI, RBI, Anand Rathi Research
Monetary stance to ease; RBI to front-load monetary easing We expect a 75-100bp cut in the repo rate till Oct 12, with the first cut starting in Mar 12 Inflation has softened sharply since Dec 11 and growth indicators are at crisis low levels (a low single-digit industrial-production growth, negative fixed-investment growth and GDP growth at a three-year low). Thus, we expect the RBI to ease monetary policy to provide support to the faltering economy. However, the non-food manufactured-products inflation (6.7% in Jan 12), which the RBI interprets as a proxy for demand-side pressures is still higher than the RBIs comfort zone of 4-5%. A very favourable base would bring non-food manufactured inflation down from the present highs. According to our estimates, non-food manufactured-product inflation is likely to soften in 1H CY12. This, coupled with deterioration in growth indicators, could lead to a considerable softening of policy rates by the RBI. Our assumption is that inflation would start inching up again after Sep 12 and we expect 2HFY13 to be better than 1HFY13 in terms of economic growth. Therefore, the RBI has a narrow window to take monetary-easing actions. We expect a 75-100bp cut in the repo rate till Oct 12, with the first cut starting in Mar 12.
Fig 32 RBI to take monetary easing actions in 1HFY13
10 9 8 (%)
Fig 31 Policy rate likely to soften in 1HFY13

9 7 5 (yoy, %) 3 1 -1 -3 Oct-07 Jan-08 Apr-08 Jul-08 Oct-08 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12
10 Actual 9 8 (%) 7 6 5 4
7 6 5 4
Non food manufactured inflation

Repo rate (RHS)

Feb-08 May-08 Aug-08 Nov-08 Feb-09 May-09 Aug-09 Nov-09 Feb-10 May-10 Aug-10 Nov-10 Feb-11 May-11 Aug-11 Nov-11 Feb-12 May-12 Aug-12 Nov-12 Repo rate
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Rising access to capital

Construction companies need equity and debt at parent and subsidiary levels in order to ensure growth. We expect the recent revival in equity markets, including the rise in FII investments ($7bn ytd 2012) to aid in capital raising; balance sheet strength and dilution would be key focus areas. We also expect debt liquidity to improve, driven by a 50bps CRR cut, rise in infra lending and concessions in the coming Budget.
Access to capital is crucial to growth

Regular capital flows are crucial to the construction sector short-term for working capital and long-term for capex requirements chiefly because of the sectors negative free cash-flow (internal accruals insufficient). A severe fund crunch had hit construction companies in the last six quarters due to a rise in receivables, reduction in mobilization and advances (for new projects awarded), disbursement delays/no fresh funding from banks and stock-market weakness/volatility. The sector was faced with similar pressures in FY09 but had emerged unscathed the following year on improved macro-economic factors, fiscal stimuli and fund infusion through equity dilution and easy availability of new debt. With FY11/12 seeing a repeat of FY09, we expect the funding crunch to ease off only in FY13 (mostly in the latter half). The easy access to capital from both channels of debt and equity (stock market or PE) would be huge positives. Private-sector funding requirement to increase manifold The private-sector share in the XIIPlan period ($1trn investment) is estimated at 50% (vs. 36% in the XI-Plan period) The private-sector share in the XII-Plan period ($1trn investment) is estimated at 50% (vs. 36% in the XI-Plan period). For private construction companies, this implies opportunities in the next five years worth thrice those of the last five years. The role of the private sector should be much higher in Central government projects than in state government projects, especially in roads, where the PPP model would be preferred. Therefore, it is imperative that private funding channels be enhanced and mechanisms improved.
Fig 33 Private-sector funding requirement to increase manifold
36% 64%
50%
50%
XI-Plan
Public sector
XII-Plan Private sector
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Bank lending resilient infra Given the governments focus on infrastructure development, there is no surprise that in the past decade infrastructure lending has steadily grown. In fact, infra lending (as proportion of overall bank lending) has risen and we expect it to continue to rise in the years ahead. Overall bank credit growth, currently showing signs of fatigue given the subdued demand from the industrial sector, is also likely to inch up from 2HFY13, in line with our premise of industrial-capex recovery.
Fig 34 Bank credit to infrastructure (as % of non-food credit)
(%) 16.0
14.0
12.0
10.0
8.0
27-Feb-09 26-Feb-10 28-Aug-09 27-Aug-10 25-Feb-11 24-Apr-09 23-Apr-10 22-Apr-11 26-Aug-11 19-Jun-09 23-Oct-09 18-Jun-10 22-Oct-10 17-Jun-11 19-Dec-08 18-Dec-09 17-Dec-10 21-Oct-11 30-Dec-11
Source: RBI, Anand Rathi Research
Recent initiatives to boost debt fund-raising
To boost infrastructure development, the GoI allowed the issue of tax-free bonds during FY12, amounting to `300bn, by specific government undertakings including the NHAI. Accordingly, the NHAI during Jan12 raised `100bn through the issue of such bonds, now listed on stock exchanges. This fund raising is expected to lessen the financial burden for FY13 on the NHAI as it plans to deploy these funds primarily towards land acquisition (`50bn) and award certain cash-contract works (`50bn). The present limit for investment in corporate debt instruments such as non-convertible debentures/bonds by FIIs is US$25bn. Following the announcement by the Union Finance Minister in his Budget 201112, the government in consultation with the regulators had raised the limit for FII investment in long-term corporate bonds issued by companies in the infrastructure sector, from US$5bn to US$25bn. This is expected to give a fillip to select entities in infrastructure. The ceiling on overseas borrowings without prior approvals has been raised from $500m to $750m. Also, Indian companies can now borrow in Chinese yuan. Government has given approval to banks to launch infrastructure debt funds (IDF) that will raise debt from foreign and domestic sources to finance large infrastructure projects. Recently, an ICICI bank-led consortium launched Indias first IDF with a capacity to raise $2bn. Other members in the consortium are Bank of Baroda, Citicorp Finance and LIC.
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System liquidity to improve; 50bps cut in CRR likely by Mar 12 Given the current liquidity situation in the market, our economy team is of the view that the RBI may cut the CRR by another 50bps by Mar 12 Despite the 50bps cut in the CRR in Jan 12, liquidity in the system has not improved. For the last five months, the liquidity shortage has been more than `1trn daily. The RBIs comfort zone is +/-1% of NDTL (net demand and time liabilities). Given the current liquidity situation in the market, our economy team is of the view that the RBI might cut the CRR by another 50bps by Mar 12. This is expected to improve overall liquidity in the system, thereby benefiting the infrastructure sector.
Fig 35 Acute shortage of liquidity in the last five months
1,000 500 (Net LAF, `bn) 0 -500 -1,000 -1,500 -2,000 May-10 Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11 Jun-11 Jul-11 Aug-11 Sep-11 Oct-11 Nov-11 Dec-11 Jan-12 Feb-12 Mar-12 Net liquidity
Source: GoI, RBI, Anand Rathi Research
RBI's comfort zone
RBI cut SLR by 100bps
Strain on sub-contractor-dependent companies to ease With increasing order-book sizes, as also average ticket size and project complexity over the years, larger construction companies have come to rely partly on smaller sub-contractors to execute works awarded them. Most such sub-contractors face contraction in funding available from banks besides issues of higher interest rates, leading to difficulty in funding working capital. This results in a strain on the parent contractor. With improved liquidity in the banking channels at lower interest rates, we expect less strain on the sub-contractors, thereby benefiting construction companies. Low cost of borrowing to help construction sector The credit growth rate for the fortnight ending 10 Feb 12 has declined to a two-year low of 15.7%. As the RBI cut the repo rate, banks are likely to pass this on to consumers in order to improve credit off-take. Thus, we expect borrowing costs in the next one year to come down from present levels. There is a negative correlation between interest rates and the construction index. Therefore, a softening borrowing-cost scenario is likely to provide the requisite boost to the construction sector in FY13 and FY14.
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9 March 2012
Fig 36 Negative correlation between interest rates and construction index

100 90 80 70 60 50 40 30 20 10 0 Feb-08 Apr-08 Jun-08 Aug-08 Oct-08 Dec-08 Feb-09 Apr-09 Jun-09 Aug-09 Oct-09 Dec-09 Feb-10 Apr-10 Jun-10 Aug-10 Oct-10 Dec-10 Feb-11 Apr-11 Jun-11 Aug-11 Oct-11 Dec-11 Construction index
Source: RBI, Bloomberg
10 9 8 7 6 5 4 3 2 (%)
(Index)
Repo rate (RHS)
Equity-market revival The Nifty has gained 16% ytd CY12, whereas the CNX MidCap and CNX Infra have gained 32% and 24%, respectively. In that period, FII inflows in Indian equity have touched ~$7bn, compared with $110m outflow in CY11 (DIIs invested $1.5bn and -$550m in CY11 and CY12 ytd respectively). This was led by a declining trend of adverse events/news both on the global and domestic fronts. The recent revival in Indian equity markets, coupled with stable global and Indian economies, augurs well for future flows of FIIs, resulting in increased appetite for growth (and beaten down) sectors such as infrastructure. This, we believe, would open the gates to capital-raising opportunities for companies in construction, backed by the rising risk-appetite of foreign investors. The policy continuity from the PMO and the RBIs policy shift from inflation to growth would also provide a fillip. Our interaction with industry participants suggests a revival of pending capital-raising deals in the last two months. The overwhelming response to the recent IPO issue of the Multi-Commodity Exchange (MCX) has also provided a ray of hope. We expect a spate of fund-raising activities (QIPs, IPOs) in the construction and infrastructure sectors starting from 2QFY13. This would help address the equity commitments of many construction companies or lower gearing levels. PE-backed project funding to continue With many stocks available at attractive valuations, several construction and infrastructure companies in the last two years have raised equity from private-equity investors either at the parent or intermediate holding company levels. Companies also raised equity by selling minority stakes to strategic investors at the SPV (special-purpose-vehicle) level. This is likely to continue during FY13-14 as well, driven by acute requirements of equity capital and the sharper focus of cash-rich PE investors on the infrastructure sector. Our interaction with some of the PE funds and construction companies indicates a strong pipeline of deals that are stuck for valuation reasons. An improved and stable stock market should help convert some of these deals.
The Nifty has gained 16% ytd CY12, whereas the CNX MidCap and CNX Infra have gained 32% and 24%, respectively. In that period, FII inflows in Indian equity have touched ~$7bn, compared with $110m outflow in CY11
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9 March 2012
Fig 37 Recent fund raisings: Construction and infrastructure

Company Date PE funds who invested Amount raised (US$m)
Supreme Infrastructure India HCC Concessions GVR Infra Projects GVK Energy GVK Energy Pratibha Industries GMR Energy GMR Energy
Feb-12 Jul-11 Jul-11 Dec-10 Nov-10 Oct-10 Jun-10 Apr-10
3i Infra Xander Investment Holding IDFC PE Actis, GIC 3i, Others ChrysCapital IDFC PE, Argonaut, Ascent Capital, Others Temasek
61 55 33 155 267 22 100 200
Real estate largest beneficiary of better capital access Liquidity and interest rates have strong bearings on the performance of the real estate sector, given large bank funding requirements both from suppliers and buyers. Improved liquidity in the banking sector, less aversion to the sector, softening of interest rates and a vibrant equity market are all positives for the real-estate sector. This, combined with project launches, should result in better order-flows for construction companies during FY13-14. Eighty percent of demand in the real-estate sector still arises from the housing sub-segment. After price stabilization in some markets and changes in the kind of housing units offered by developers, projects launched in the last two years have seen good traction across cities. The volume of sales in the middle-income and affordable housing subsegments by developers has been commendable, reflecting the positive outlook regarding such projects. This has attracted more developers to enter this arena.
Focus on affordable homes
The Maharashtra government has recently signed an agreement with real-estate developers in Mumbai to construct 500,000 affordable houses in the MMR for middle and lower income groups
In the last couple of years, most property developers have shifted focus to affordable housing, shunning townships and non-core assets they had accumulated as they grew. Volume-driven mass/affordable housing has become the name of the game. In these segments, execution is what matters. The Maharashtra government has recently signed an agreement with real-estate developers in Mumbai to construct 500,000 affordable houses in the Mumbai Metropolitan Region (MMR) for middle and lower income groups. The project, entailing investment of `150bn, would provide ample orders for construction companies. We expect similar initiatives taken by other states such as Andhra Pradesh to be positive for the construction sector.
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Company section
33
Construction
India I Equities
Initiating Coverage
9 March 2012
Ramky Infrastructure
Rapid growth, strong balance sheet; Buy
Ramkys diversified order book and strong developer portfolio with limited equity outlay make it one of the fastest-growing companies in the sector (40% CAGR over FY08-11). Low leverage, excellent workingcapital management and good return ratios are strong positives. We initiate coverage with a Buy and a sum-of-parts target price of `353.
Rating: Buy Target Price: `353 Share Price: `210
Fast-growing and diversified order book. Increasing focus on the fastgrowing water and transportation segments has upped the order book to `138bn (4.7x TTM revenues). This, together with L1 projects of `21bn, gives good revenue visibility over FY13-14. No segment brings in over 20% to the order book, except for transportation. Ramky is spread across India, with exposure in Andhra Pradesh down to 25%, from 30% in FY07. It is also exploring opportunities in select overseas territories such as Oman, Qatar and Saudi Arabia, in addition to its operations in Gabon. Robust portfolio with low equity outlay. Ramky has a portfolio of 19 BOT assets, of which eight are in road. The remaining equity outlay in the road projects (including three new projects) is `7.8bn, which is to be funded via internal accruals. The other projects are in nascent stages spread across segments such as bus stands, SEZs and corporate parks with funding via real estate sales. Ramky has the advantage of arranging equity for BOT projects without pressure of dilution at parent/SPV level. Strong financial profile. Ramky has one of the lowest gearings in the sector (standalone: 0.6x) and strong working-capital management despite high government exposure (70% of order book). Return ratios are likely to remain stable at ~18% over FY12-14. We estimate Ramky to be one of the few sector companies with positive free cash flow over FY13-14. Valuation. Our sum-of-parts-based price target of `353 is based on 9x FY13e PE for the core business (`293), in line with other midcap target multiples, and 1x Dec 11 P/BV of investment (`60). Risk: Dip in OPM.
FY10 FY11 FY12e FY13e FY14e
Key data 52-week high / low Sensex / Nifty 3-m average volume Market cap Shares outstanding
RMKY IN / RAMK.BO `330 / `182 17173 / 5222 US$0.1m `12.0bn / US$267m 57.2m
Shareholding pattern (%) Dec 11 Sep 11 Jun 11 66.9 66.9 66.9 Promoters 7.9 7.9 0.0 - of which, pledged 33.1 33.1 33.1 Free float 3.3 3.3 3.3 - Foreign institutions 7.1 7.1 7.4 - Domestic institutions 22.7 22.7 22.4 - Public
Relative price performance

350 300 250 200 RMKY 150 Sep-11 May-11 Nov-11 Mar-11 Jan-12 Mar-12 Jul-11 Sensex
Source: Bloomberg
Key financials (YE Mar)
Sales (`m) Net profit (`m) EPS (`) Growth (%) PE Core (x) EV/EBITDA (x) PBV (x) RoE (%) RoCE (%) Dividend yield (%) Net gearing (x)
18,613 1,027 20.8 51.2 7.3 7.1 2.4 27.5 22.9 0.8
27,305 1,574 27.5 32.3 5.5 6.2 1.4 23.9 21.6 2.1 0.6
31,128 1,539 26.9 (2.2) 5.7 5.8 1.2 16.2 17.9 2.1 0.8
37,354 1,864 32.6 21.1 4.7 5.4 1.0 17.1 18.0 2.1 0.9
44,824 2,234 39.0 19.8 3.9 5.0 0.9 17.7 17.8 2.4 0.9
Manish Valecha

9 March 2012
Ramky Infrastructure Rapid growth, strong balance sheet; Buy
Quick Glance Financials and Valuations

Fig 1 Income statement (`m)
Year-end: Mar FY10 FY11 FY12e FY13e FY14e
Fig 2 Balance sheet (`m)

Net revenues Revenue growth (%) - Op. expenses EBIDTA EBITDA margin (%) - Interest expenses - Depreciation + Other income - Tax Effective tax rate (%) Reported PAT +/- Extraordinary items +/- Minority interest Adjusted PAT Adj. FDEPS (`/share) Adj. FDEPS growth (%)
18,613 27.6 16,666 1,946 10.5 627 105 70 257 20.0 1,027 1,027 20.8 51.2
27,305 46.7 24,446 2,859 10.5 684 193 139 548 25.8 1,574 1,574 27.5 32.3
31,128 14.0 27,704 3,424 11.0 1,032 300 205 758 33.0 1,539 1,539 26.9 (2.2)
37,354 20.0 33,245 4,109 11.0 1,207 325 205 918 33.0 1,864 1,864 32.6 21.1
44,824 20.0 39,894 4,931 11.0 1,432 370 205 1,100 33.0 2,234 2,234 39.0 19.8
Share capital Reserves & surplus Net worth Minority interest Total debt Def. tax liab. (net) Capital employed Net fixed assets Investments - of which, liquid Net working capital Cash and bank balance Capital deployed Net debt WC days Book value (`/sh)
494 3,768 4,263 4,739 (7) 8,995 1,386 601 5,623 1,384 8,995 3,355 100 86
572 8,318 8,890 6,757 32 15,678 3,653 2,141 8,885 999 15,678 5,758 97 155
572 9,556 10,128 8,957 107 19,191 4,153 2,341 11,559 1,138 19,191 7,819 120 177
572 11,119 11,691 10,957 207 22,854 4,328 6,313 11,598 615 22,854 10,342 113 204
572 13,018 13,590 14,457 307 28,353 4,458 8,847 13,443 1,604 28,353 12,852 102 238
Fig 3 Cash-flow statement (`m)

Fig 4 Ratio analysis @ `210

PAT + Non-cash items Cash profit - Incr./(decr.) in WC Operating cash-flow - Capex Free cash-flow - Dividend + Equity raised + Debt raised - Investments - Misc. items Net cash-flow + Op. cash & bank bal. Cl. Cash & bank bal.
1,027 129 1,157 1,046 110 126 (16) 15 840 74 765 619 1,384
1,574 231 1,805 3,262 (1,457) 2,460 (3,917) 299 3,353 2,018 1,540 (385) 1,384 999
1,539 375 1,914 2,674 (760) 800 (1,560) 301 0 2,200 200 139 999 1,138
1,864 425 2,289 38 2,250 500 1,750 301 (0) 2,000 3,972 (523) 1,138 615
2,234 470 2,704 1,845 858 500 358 335 (0) 3,500 2,534 989 615 1,604
P/E (x) P/E core (x) P/B (x) EV/EBITDA (x) RoE (%) RoCE (%) Fixed asset turnover (x) Dividend yield (%) Dividend payout (%) Interest exp./sales Debtors (days) Revenue growth (%) PAT growth (%) EBITDA growth (%) EPS growth (%)
10.1 7.3 2.4 7.1 27.5 22.9 11.4 3.4 113 27.6 51.2 41.1 51.2
7.6 5.5 1.4 6.2 23.9 21.6 9.8 2.1 16.4 2.5 142 46.7 53.2 46.9 32.3
7.8 5.7 1.2 5.8 16.2 17.9 7.1 2.1 16.7 3.3 150 14.0 (2.2) 19.8 (2.2)
6.4 4.7 1.0 5.4 17.1 18.0 7.3 2.1 13.8 3.2 145 20.0 21.1 20.0 21.1
5.4 3.9 0.9 5.0 17.7 17.8 7.9 2.4 12.8 3.2 140 20.0 19.8 20.0 19.8
Fig 5 PE band
(`/share) 400 350 300 250 200 150 100 50 0 Nov-10 Jul-11 Nov-11 Mar-11 Mar-12 8x 6x 4x 10x
Fig 6 Order book vs book-to-bill

(`bn) 225
200 175 150 125 100 75 50 25 0 FY12e FY13e FY14e FY07 FY08 FY09 FY10 FY11
(x) 5.0
4.5 4.0 3.5 3.0 2.5 2.0
Orderbook
Source: Bloomberg, Anand Rathi Research Source: Company, Anand Rathi Research
Book to bill (RHS)
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9 March 2012

Ramkys diversified order book and strong developer portfolio with limited equity outlay make it one of the fastest-growing companies in the sector (40% CAGR over FY08-11). Low leverage, excellent working-capital management and good return ratios are strong positives. We initiate coverage with a Buy, and a sum-of-parts price target of `353.
Fast-growing and diversified order book

Well-diversified order book of `138bn (4.7x TTM revenues) in the segments of water, waste water, infrastructure, irrigation, buildings, power Ramkys order book has grown from `14bn in FY06 to `138bn (4.7x TTM revenues) in 3QFY12. Together with L1 projects of `21bn, this gives it good revenue visibility over FY13-14. The company has a well-diversified order book in segments such as water, waste water, transportation, irrigation, buildings, power and industry. No segment brings in more than 20% of the order book, except for transportation which accounts for 39% of the order book as it includes captive BOT projects worth `26bn. The road segments share in the order book has increased, with three bigticket BOT projects in FY11 and two large projects in FY12. Ramky has reduced its exposure to irrigation (due to an execution slowdown) from 21% of the order book in FY07, to 11% currently. It plans a foray into hydropower and mining.
Fig 7 Order-book break-up: segment-wise
Water & Waste Water 16%
Fig 8 Order-book break-up: geographically

Central 10% West 11% North 29%
Irrigation 11% Industrial 7% Power 4%
Building 17%
East 11%
Transportation 45%
South 39%
Source: Company
Source: Company
In addition to diversifying its verticals, Ramky is also expanding its order book according to geography. It has reduced its exposure in its home base, Andhra Pradesh, from 30% of orders in FY07 to ~25% currently. On the international front, it currently operates in Gabon and is exploring opportunities in select overseas territories such as Oman, Qatar and Saudi Arabia. We estimate Ramkys order inflows at `70bn and `80bn, with an order backlog of ~ `166bn and `202bn, in FY13 and FY14, respectively.
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Fig 9 Major orders of Ramky Infrastructure (`m)

Project Client Contract value Value of uncompleted work
6 Laning of Agra - Etawah. 4 Laning of Hospet - Chitradurga Rehabilitation,strengthening and 4 laniing of Srinagar - Banihal 4 Laning of Narketpalli Addanki Medarametla road Construction & design services, University of Agriculture and Technology; Banda, U.P 4 Laning of Jorabat Shillong Widening of Moradabad Bareili Improvement/Upgradation of BiharNaubatpur-Newa-Dumri-BeldarichakKansari-Daniywan and ChandiNoorsarai-Bhaganbigha-Rahui-BindGopalbad-Sarmera Road Construction of low-cost housing for urban poor / slum rehabilitation at Bawana - III (Pooth Khurd) Delhi Industrial project in Chattisgarh
Source: Company
NHAI NHAI Srinagar Banihal Expressway Limited NAM Expressway Limited UP Jal Nigam
12,070 10,337 11,750 11,968 8,641
12,070 10,337 10,303 7,961 6,078
Jorbat Shillong Expressway Limited IL & FS (NHAI) Bihar State Road Development Corporation Ltd.
5,500 5,701 3,918
4,723 4,215 3,607
Delhi State Industrial and Infrastructure Development Corporation Ltd. Chhattisgarh Energy Consortium (India ) Pvt. Ltd
2,532
2,385
2,322
2,322
Robust portfolio with low equity outlay

Ramky has 19 assets in roads, industrial parks, integrated townships and a bus terminal. Its operations in these segments (except for roads) help it reduce the burden of equity investment in the early phases through backended cash inflows. Townships and industrial parks have a business model that is self-sufficient in its equity requirement; only a small initial equity contribution is required to be pumped in. The projects are financed through upfront sale of land or lease payments for industrial parks. In roads, Ramky has focused on a mix of toll and annuity projects in order to lower risks. It has one operational annuity project, while seven are at various stages of development. Most of its projects are JVs. This reduces its equity investment but helps bag the major part of EPC contracts, thereby generating equity from the margins earned by executing EPC orders. Ramky has invested `2.1bn as equity in these subsidiaries and has a further requirement of `7.8bn (including three new road projects) over FY13-15e, which it plans to fund through internal accruals.
Invested `2.1bn as equity in subsidiaries and has a further requirement of `7.8bn (including three new road projects) over FY1315e
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Fig 10 BOT projects

Project cost (`m) Completion Equity stake % Project net worth Dec '11 (`m)
Road projects & Industrial Parks Hyderabad Ring Road (Ramky Elsamex) Narketpally-Addanky Jorbat-Shillong Srinagar-Banihal Gwalior Bypass Road Sehore Kosmi Tollways Limited Agra-Etawah Bypass Hospet-Chitradurga Industrial Parks and SEZs Ramky Pharma City MDDA Ramky IS Bus Terminal Ramky Towers Ramky Enclave Ramky Integrated Township Ramky MIDC Agro Processing Park Ramky Herbal and Medicinal Park Ramky Food Park Naya Raipur Gems and Jewellery SEZ Ramky Food Park Ramky Multi Product Industrial Park
Source: Company
3,994 17,605 8,240 16,000 3,321 962 12,070 10,336 5,205 450 4,000 2,164 468 964 875 1,834 330 6,830
Complete 2QFY14 Jul 14 3QFY15 Final stage of completion 30 months from commencement 30 months from commencement 30 months from commencement Complete Complete Apr 12 Mar 13 Aug 13 Oct 14 Oct 14 Oct 15 Mar 12 2016
74 50 50 74 50 100 100 100 100 100 51 100 51 89 29 100 100 100 100
19 2,339 411 4 693 0 0 0 1,047 107 161 7 66 14 0 29 12 0
34,244 72 months from satisfaction of certain conditions
At present, 13% and 23% of consolidated revenue and profit, respectively, comes from the developer business. The management expects to increase this to 25-30% in the next 2-3 years.
Strong financial profile

Following on its strong order book, Ramkys revenue has seen 40% CAGR over FY08-11, higher than the growth rate of most other companies in the sector. Yet, it has maintained EBITDA margins of 9-11% over FY07-11. Ramky is working towards reducing its present level of sub-contracting jobs, in order to further boost margins. Towards this end, it has made significant capex in FY11. Estimate RoE at 16-18% over FY12-14; No equity financing pressure for BOT projects and no impending dilution at parent or SPV level At 97 (FY11) days, Ramkys working-capital management is one of the best in the industry (industry range 60-200 days), mainly due to better management of receivables. Also, its low equity commitment towards BOT projects decreases its working-capital requirements. Despite the lower leverage (0.9x), it maintained RoE at over 20% till FY11. We estimate RoE at 16-18% over FY12-14. The company has no equity financing pressure for its BOT projects and has no impending dilution at parent and SPV level. This contrasts with most other operators, who would need dilution at the subsidiary/SPV level. However, given any opportunity at an attractive valuation, Ramkys management is open to diluting its stake to a minority in its two new road projects. This, we believe, should unlock value for shareholders. We believe Ramky is one of the few companies likely to post positive free-cash-flows in FY13 and FY14.
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9 March 2012
Fig 11 Working capital comparison (days FY11)

(Days) 250
200 150 100 50 0 J Kumar NCC Pratibha Simplex Ramky Supreme KNR Era
Fig 12 Net debt-to-equity comparison (FY11)

(x) 2.0
1.6 1.2 0.8 0.4 0.0 NCC Pratibha Supreme J Kumar Simplex Ramky KNR Era
Source: Company
Source: Company
Valuation
Our sum-of-parts-based price target of `353 is based on 9x FY13e PE, in line with other midcap construction companies target multiples and 1x Dec 11 P/BV of major investments. Ramkys past one-year-forward PE multiples ranged between 8x and 10x. At the ruling price of `210, the stock trades at a core PE of 4.7x and 3.9x FY13e and FY14e earnings respectively, and an EV/EBITDA of 5.4x and 5.0x.
Fig 13 Twelve-month forward PE: Mean and standard deviation
(x) 14
+2SD
12
+1SD
10 Mean 8 -1SD 6 -2SD 4 Nov-10 Mar-11 Nov-11 Mar-12 Jul-11
Risks

Project execution risk. Project execution delays and payment delays are key risks associated with construction companies. Financial risk. Given the nature of the sector, Ramky would need to take on additional debt to fund capex or working capital. A spike in interest rates could hit its bottom line. Political risk. Around 70% of its order book comes from the government. Slowing government expenditure or state elections could affect order flows.
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9 March 2012
Financials
We estimate 20% revenue CAGR over FY13-14 on the back of Ramkys robust orderbook. We expect EBITDA and net margins to be stable and hence estimate a 20% CAGR in net profit over FY13-14, inline with the industry growth rate.
Revenue to see 20% CAGR over FY13-14

Due to proven execution capabilities and a strong order backlog, we expect Ramky to post 20% CAGR in revenue over FY13-14. With a couple of big-ticket orders in FY12, the transportation segment is likely to contribute the major share of revenue.
Fig 14 Revenue growth to remain strong
(`m) 45,000
40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 FY12e FY13e FY14e
FY13e FY14e
(%) 50.0
45.0 40.0 35.0 30.0 25.0 20.0 15.0 10.0 FY08 FY09 FY10 FY11
Revenue
Revenue Growth (RHS)
Stable margins
EBITDA and net margin are likely to be stable over FY13-14. We estimate 20% CAGR in net profit over FY13-14, higher than the industry growth rate. Higher depreciation due to high capex in FY11/12 should nullify the impact of higher EBITDA margins during the next 2-3 years.
Fig 15 EBITDA and net margin
(%) 12.0
11.0 10.0 9.0 8.0 7.0 6.0 5.0 4.0 FY12e FY08 FY09 FY10 FY11
EBITDA Margin
Net Margin
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9 March 2012
Return ratios robust

Despite lower leverage, Ramky has maintained RoE of over 20%, above most of its peers till FY11. During FY12, return ratios declined on account of higher interest outgo and lower revenue growth. We expect RoE to improve from 16% in FY12 to 17.7% in FY14, with RoCE stable at ~18% over FY12-14.
Fig 16 Return ratios to be stable
(%) 28.0
26.0 24.0 22.0 20.0 18.0 16.0 14.0 FY12e FY13e FY14e FY08 FY09 FY10 FY11
RoE
RoCE
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Revenue Revenue growth (%) Less expenditure (Inc)/dec in stock and WIP Material consumed Contracting expenses Employee cost Admin & other expenditure EBITDA EBITDA margin (%) Growth (%) - Interest - Depreciation + Other income Profit before tax - Tax Tax rate (%) Reported PAT +/- Extraordinary items +/- Minority interest Adjusted PAT Adjusted PAT growth (%) Adj. FDEPS (`/share) CEPS (`/ share) DPS (`/ share)
18,613 28 16,666 (1,411) 4,324 12,730 570 452 1,946 10.5 41.1 627 105 70 1,285 257 20 1,027 1,027 51.2 20.8 22.9 -
27,305 47 24,446 212 7,230 15,291 1,065 648 2,859 10.5 46.9 684 193 139 2,122 548 26 1,574 1,574 53.2 27.5 30.9 4.5
31,128 14 27,704 (3,424) 9,961 18,054 1,712 1,401 3,424 11.0 19.8 1,032 300 205 2,297 758 33 1,539 1,539 (2.2) 26.9 33.5 4.5
37,354 20 33,245 (374) 10,085 21,105 1,494 934 4,109 11.0 20.0 1,207 325 205 2,782 918 33 1,864 1,864 21.1 32.6 40.0 4.5
44,824 20 39,894 (448) 12,103 25,326 1,793 1,121 4,931 11.0 20.0 1,432 370 205 3,334 1,100 33 2,234 2,234 19.8 39.0 47.3 5.0

Sources of funds Share capital Reserves and surplus Deferred tax liability Net worth Debt Capital employed Application of funds Gross block Less: depreciation Net block Capital WIP Investments Sundry debtors Inventories Loans & advances Current assets Current liabilities Provisions Current liabilities Working capital Cash Net current assets Capital deployed
494 3,768 (7) 4,263 4,739 8,995 1,700 348 1,352 35 601 5,744 3,309 5,634 14,686 9,061 2 9,063 5,623 1,384 7,007 8,995
572 8,318 32 8,890 6,757 15,678 3,883 539 3,344 309 2,141 10,614 3,614 10,101 24,329 15,098 346 15,443 8,885 999 9,884 15,678
572 9,556 107 10,128 8,957 19,191 4,872 839 4,033 120 2,341 12,792 5,117 12,000 29,909 18,000 350 18,350 11,559 1,138 12,697 19,191
572 11,119 207 11,691 10,957 22,854 5,417 1,164 4,253 75 6,313 14,839 5,629 13,500 33,968 22,000 370 22,370 11,598 615 12,212 22,854
572 13,018 307 13,590 14,457 28,353 5,917 1,534 4,383 75 8,847 17,193 6,140 16,000 39,333 25,500 390 25,890 13,443 1,604 15,047 28,353
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Fig 19 Cash flow statement (`m)

PAT + Non-cash items Cash profit - Incr/(decr) in WC Operating cash flow - Capex Free cash flow - Dividend + Equity raised + Debt raised - Investments - Misc. items Net cash flow + Opening cash Closing cash
1,027 129 1,157 1,046 110 126 (16) 15 840 74 765 619 1,384
1,574 231 1,805 3,262 (1,457) 2,460 (3,917) 299 3,353 2,018 1,540 (385) 1,384 999
1,539 375 1,914 2,674 (760) 800 (1,560) 301 0 2,200 200 139 999 1,138
1,864 425 2,289 38 2,250 500 1,750 301 (0) 2,000 3,972 (523) 1,138 615
2,234 470 2,704 1,845 858 500 358 335 (0) 3,500 2,534 989 615 1,604

10.1 7.3 2.4 7.1 27.5 22.9 11.4 3.4 113 27.6 51.2 41.1 51.2
7.6 5.5 1.4 6.2 23.9 21.6 9.8 2.1 16.4 2.5 142 46.7 53.2 46.9 32.3
7.8 5.7 1.2 5.8 16.2 17.9 7.1 2.1 16.7 3.3 150 14.0 (2.2) 19.8 (2.2)
6.4 4.7 1.0 5.4 17.1 18.0 7.3 2.1 13.8 3.2 145 20.0 21.1 20.0 21.1
5.4 3.9 0.9 5.0 17.7 17.8 7.9 2.4 12.8 3.2 140 20.0 19.8 20.0 19.8
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9 March 2012
Company Background
Incorporated in 1994 as Ramky Engineers, Ramky Infrastructure has since emerged as a prominent operator in segments such as water and waste water, transportation, irrigation, industrial parks, SEZs, power transmission and distribution, residential, commercial and retail property. It is the flagship company of the Ramky Group.
Brief history and business

Incorporated in 1994 as Ramky Engineers, Ramky Infrastructure has since emerged as a prominent operator in segments such as water and waste water, transportation, irrigation, industrial parks, SEZs, power transmission and distribution, residential, commercial and retail property. The Hyderabad (Andhra Pradesh)-based flagship company of the Ramky Group, which has interests in infrastructure, manages business operations through five zonal and three regional offices, apart from an overseas office in Sharjah (the UAE).
Management background
Fig 21 Key management
Key person Designation Background
Alla Ayodhya Chairman Rami Reddy
With a Masters in civil engineering, Alla Ayodhya Rami Reddy has 25 years experience in environmental services, civil works, bio-medical wasteand hazardous-waste management. He has worked on water, waste water and engineering projects for various companies. Y.R. Nagaraja Managing A Bachelor's in civil engineering, Y.R. Nagaraja has 24 years experience in Director environment and solid-waste management. His experience includes key positions with the Public Works Department of Karnataka, as well as certain private companies. Chief Executive With a P-G Management Diploma from IIM, Ahmadabad, and a B.Sc Shuvendu Engineering (Mechanical) from NIT, Rourkela, Shuvendu Sekhar Mohanty Officer (Cash Sekhar brings leadership in managing enterprises, besides being an entrepreneur Contracts) Mohanty across a spectrum of industries and functions. He joined Ramky from RSB Transmission, Pune, where he was President. He founded, and for about 12 years ran, Kaizen Auto, a vendor to Telco. This gives him entrepreneurial insight. Goutham Executive A Masters in environmental engineering from the US with waste Reddy Director, Ramky management training in Australia and environmental monitoring training in Group Sweden, Goutham Reddy brings environmental engineering skills and experience of over 16 years. He heads operations and is well known for his skills in infrastructure and waste management. R.S. Garg Chief Financial An F.C.A., A.C.S., with a B.Com from Rajasthan University, R.S. Garg Officer joined on April 21, 2011, bringing 30 years of experience in fund raising, treasury management, legal, commercial and accounting functions, having worked in India with companies like Hyderabad Industries, Usher Technologies the Nagarjuna Group, ITW India, and Rajasthan Explosives and Chemicals.
Source: Company
44
Construction
India I Equities
Initiating Coverage
9 March 2012
Pratibha Industries
Mega order book in niche segments; Buy
Pratibha Industries robust and high-quality order book, together with high operating margins, is likely to lead to industry-leading return ratios, going forward. We estimate 34% earnings CAGR over FY13-14. We initiate coverage on the stock with a Buy and a price target of `73.
Key data
PRIL IN / PRTI .BO
Well-positioned vs. peers. Pratibhas presence in the high-margin water (52%) and urban infra & building (48%) segments and its large equipment bank have led to a robust operating margin of 14-15%. It has better-thanpeer leverage (FY12e net D/E: 0.9x). In contrast to peers, it has high return ratios (FY12e RoE: 16%, RoCE: 18%) and no impending dilution at parent level, despite a high promoter stake. It hived off its SAW-pipe manufacturing division into a subsidiary (on merger with group company Pratibha Pipes & Structural), in order to focus on its core business. High-growth and quality order book. Pratibhas order book has almost doubled in a year, from `36bn in Mar 11 to `62bn in Dec 11. Together with L1 projects of `8bn, this translates to 5.5x TTM revenue, thereby giving good FY13-14 revenue visibility. Its presence in water and urban infra offers strong growth prospects (these segments account for ~18% of the XII Five-Year Plan spend). Well-diversified nationally, it now aims at select overseas projects in the water segment, its fort. High-IRR BOT projects. Pratibha bids for BOT projects with IRR of over 18% in either water (India and international) or in roads. Its portfolio includes the DMRC car-park (phase I commissioned) and the Bhopal-Sanchi road (attained financial closure). Valuation. Our target price of `73 is based on 7x FY13e earnings, at a 20% discount to other midcap construction companies target multiples (`69) and 1x book value for equity invested in BOT projects (`4/share). Risks: Slowdown in order inflows, margin squeeze.
52-week high / low Sensex / Nifty 3-m average volume Market cap Shares outstanding
`74 / `25 17173 / 5222 US$0.13m `4.4bn / US$90.3m 99.4m
Shareholding pattern (%)
Dec 11 Sep 11 Jun 11
Promoters - of which, pledged Free float - Foreign institutions - Domestic institutions - Public
52.4 0.0 47.6 16.8 5.4 25.4
52.3 0.0 47.7 17.3 5.5 24.9
52.3 0.0 47.7 17.0 5.6 25.1

75 65 55 45 35 25 Sep-11 Nov-11 Jul-11 Mar-11 Jan-12 May-11 Mar-12 PRIL Sensex
Source: Bloomberg
9,349 565 6.8 26.3 6.5 5.7 1.3 22.6 21.4 1.4 1.5
11,751 714 7.1 4.4 5.7 4.6 0.9 18.8 19.6 1.4 0.7
14,507 807 8.0 12.9 5.0 4.7 0.8 15.5 18.1 1.6 1.0
18,066 997 9.9 23.6 4.1 3.9 0.7 16.6 18.6 1.8 1.0
22,535 1,454 14.4 45.9 2.8 3.4 0.6 20.4 21.1 2.1 0.9
Manish Valecha

9 March 2012
Pratibha Industries Mega order book in niche segments; Buy


9,349 23.9 7,983 1,366 14.6 493 109 0 199 26.1 565 565 6.8 26.3
11,751 25.7 10,045 1,707 14.5 618 143 12 244 25.4 714 714 7.1 4.4
14,507 23.5 12,357 2,150 14.8 919 190 50 283 26.0 807 807 8.0 12.9
18,066 24.5 15,336 2,730 15.1 1,153 230 350 26.0 997 997 9.9 23.6
22,535 24.7 19,111 3,424 15.2 1,210 250 511 26.0 1,454 1,454 14.4 45.9
167 2,587 2,754 4,230 131 7,115 2,802 136 50 4,101 76 7,115 4,104 129 33
199 4,636 4,835 3,831 184 8,850 3,132 104 5,170 444 8,850 3,388 144 49
199 5,360 5,559 6,955 254 12,767 5,042 543 5,980 1,202 12,767 5,753 140 56
202 6,259 6,461 7,355 354 14,169 5,812 543 6,772 1,043 14,169 6,312 129 64
202 7,606 7,808 7,655 454 15,917 6,562 543 8,474 338 15,917 7,317 123 77


PAT + Non-cash items Cash profit - Incr./(decr.) in WC Operating cash-flow - Capex Free cash-flow - Dividend + Equity raised + Debt raised - Investments - Misc. items Net cash-flow + Op. cash & bank bal. Cl. Cash & bank bal.
565 178 743 1,573 (829) 965 (1,794) 59 1,876 (12) 0 36 40 76
714 196 911 1,070 (159) 473 (632) 71 1,500 (399) (32) 63 368 76 444
807 260 1,067 810 256 2,100 (1,844) 83 3,123 439 758 444 1,202
997 330 1,327 791 535 1,000 (465) 95 400 (159) 1,202 1,043
1,454 350 1,804 1,702 101 1,000 (899) 106 300 (705) 1,043 338
6.5 6.5 1.3 5.7 22.6 21.4 4.2 1.4 8.9 5.3 73 24.6 26.3 53.0 26.3
6.2 5.7 0.9 4.6 18.8 19.6 3.8 1.4 8.5 5.3 56 25.7 26.4 24.9 4.4
5.5 5.0 0.8 4.7 15.5 18.1 3.5 1.6 8.8 6.3 55 23.5 12.9 25.9 12.9
4.4 4.1 0.7 3.9 16.6 18.6 3.2 1.8 8.1 6.4 55 24.7 23.6 27.0 23.6
3.0 2.8 0.6 3.4 20.4 21.1 3.3 2.1 6.3 5.4 55 24.8 45.9 25.4 45.9
Fig 5 PE band
(`) 120 100 80 60 40

(`bn) 120 100
9x
12x
(x) 8.0 7.0 6.0 5.0 4.0 3.0 2.0 FY12e FY13e FY14e FY07 FY08 FY09 FY10 FY11
80 60
6x
40
3x
20 0 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Sep-07 Sep-08 Sep-09 Sep-10 Sep-11 Mar-12
20 0
Orderbook
Book to bill (RHS)
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9 March 2012

Pratibha Industries strong and high-quality order book, together with higher-than-peer operating margins, is likely to lead to industry-leading return ratios, going forward. We estimate 34% earnings CAGR over FY13-14. We initiate coverage on the stock with a Buy rating and a price target of `73.
Well positioned vs. peers

Pratibhas presence in the high-margin water (52%) and urban infra & building (48%) segments and its large equipment bank have led to a robust operating margin of 14-15% over FY10-12. Its order book factors in a 1416% EBITDA margin, below which it usually does not bid.
Fig 7 EBITDA margin comparison
(%) 19.0
17.0 15.0 13.0 11.0 9.0 7.0 5.0 Supreme J Kumar Pratibha NCC Era Simplex Ramky KNR 12.0 10.0 8.0 6.0 4.0 FY12e FY13e FY14e FY07 FY08 FY09 FY10 FY11
Fig 8 Margin trend

(%) 16.0
14.0
FY11
FY12e
EBITDA Margin
PAT Margin
Management is confident of sustaining its RoE at 16-18%, with gearing up to 1.5x
Pratibha has reduced gearing from 1.5x in FY10 to 1x in FY12e, through infusion of funds and is now well placed compared to its competitors. Management is confident of sustaining its RoE at 16-18%, with gearing upto 1.5x. Debt recently increased due to higher capex for two large new projects (the Delhi Jal Board and the DMRC project), returns from which will accrue in FY13-14e. It is one of the few companies in the sector with high return ratios (FY12e: RoE - 16%, RoCE - 18%) and no impending dilution at the parent level despite a high promoter stake.
Fig 9 RoE comparison
(%) 35.0
30.0 25.0 20.0 15.0 10.0 5.0 0.0 Ramky Supreme J Kumar Pratibha Simplex Era NCC KNR
FY11
FY12e
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9 March 2012
SAW pipe division The SAW-pipe division began as part of the backward integration in its contracting business. However, due to oversupply in the pipe sector and mounting competition, the company is increasingly procuring pipes from other suppliers, leading to a dip in capacity utilization at its own pipe manufacturing unit. Pratibhas board approved its merger with promoter group company, Pratibha Pipes and Structurals (PPSL); values the company at 0.93x BV (`585m) In 4QFY12, Pratibhas Board had approved its merger with promoter group company, Pratibha Pipes and Structurals (PPSL). Post the merger, the manufacturing division (PPSL + Pratibhas pipe manufacturing facility) would be transferred to a 100% subsidiary. PPSL is expanding in the (high-margin) structural division, which should result in improved net margins (from 4% to 7%) over the coming years. According to the proposed swap ratio, six PIL shares would be issued to PPSL shareholders for every one PPSL share held. The latter is valued at (`585m, @ `46.5a PIL share) 0.93x BV. On the merger, the promoter stake in PIL would increase from 51.6% to 55.2%. We believe the merger is at reasonable valuations, given the RoE (16%) generated by PPSL.
Fig 10 PPSL: Key details
Products H-SAW pipes, metal structures
Revenue - FY12e (`m) PAT - FY12e (`m) Net worth - FY12e (`m) Total debt - FY12e (`m) Gross block - FY12e (`m) Equity (`m) Face value (`) Promoter stake (%)
Source: Company
2,500 100 630 1,250 1,400 21 10 84
The rationale behind the merger is to concentrate on two businesses individually. Pratibha aims to double revenue from the manufacturing division in two years and to unlock value at a later stage by divesting part of its stake via an IPO or PE.
Fig 11 Post-merger financials
PIL + PPSL FY12e FY13e FY14e
Revenue (`m) EBITDA (`m) EBITDA margin (%) PAT (`m) PAT margin (%) New equity (`m) New EPS (`m) EPS dilution/ accretion
17,012 2,459 14.5% 923 5.4% 227 8.1
21,087 3,163 15.0% 1,151 5.5% 227 10.1 2.7%
26,176 3,944 15.1% 1,658 6.3% 227 14.6 1.4%
We have not factored in the merger in our financial estimates as we await shareholder and other approvals. However, we believe the merger is EPS accretive.
48
9 March 2012
High growth and quality order book

Current order book factors in 1516% EBITDA margins as it keeps away from low-margin segments such as roads and irrigation Pratibhas order book has almost doubled in a year, from `36bn in Mar 11 to `62bn (translating to 5.5x TTM revenue). The strong order book, along with L1 projects of `6bn, offers strong revenue visibility for FY13-14. In FY12 ytd, it bagged orders worth `35bn, including key projects from the Delhi Jal Board (`12bn) and the DMRC (`4.6bn). Pratibhas current order book factors in 15-16% EBITDA margins, even as it has deliberately kept away from low-margin segments such as roads and irrigation. We factor in a conservative ~14.5-15% margin into our FY12-14 estimates. Pratibha operates in the high-margin water (52%) and urban infra & building (48%) segments. It is well-diversified geographically (12 states) and is now selectively targeting overseas projects within its forte (water). It has a water project in Dubai, a project in Bangladesh and is bidding for orders in Sri Lanka, Saudi Arabia, Qatar, Oman, Muscat and Bangladesh. Pratibha also plans to widen its vertical base by entering verticals such as hydro/thermal power (civil construction works) and hydro-carbons (pipelines, surface facilities, onshore facilities, midstream and downstream). Its presence in the water and urban infrastructure subsegments throws up huge growth prospects (the two segments comprise ~18% of the XII Five-Year Plan expenditure). Based on the industry order inflow scenario, L1 positions and bid order pipeline, we expect an order inflow of `40bn in FY13, taking the order book to ~`87bn.
Fig 12 Order-book: segment-wise breakdown Fig 13 Order-book: geographical breakdown
Dubai 16% Building 37% Water 52% Assam 0% Bihar 12% Delhi 15%
UP 8% TN 2% Rajasthan 3%
Urban Infra 11%
Maharashtra 36%
Goa 3% Gujarat 2% J&K 0% Karnataka 3% MP 0%
Source: Company
Source: Company
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9 March 2012
Fig 14 Major orders of Pratibha (`m) as on Dec11

Project Client Contract Value Value of uncompleted work
Design and construction of Interceptor Delhi Jal Board Sewers (Yamuna River project) Design and construction of interceptor sewers Delhi Jal Board (Yamuna River project) Delhi Metro Rail Corporation Design and construction of tunnel and Janpath and Mandi House Stations for Delhi Limited MRTS project. Turnkey contract for bulk water transmission Gujarat Water Infrastructure pipeline from Dhanki to Maliya Limited Residential development at Runwal Green Runwal Homes Pvt. Ltd. Mulund (W) Mumbai Construction of Al GHAFAT Reservoir, Dubai Dubai Electricity & Water Authority Construction of ESIC Medical College National Buildings Construction Corporation Limited Construction of corporate office building for Oil and Natural Gas ONGC at BKC, Mumbai Corporation Limited Replacement of two pipes from Tansa to Municipal Corporation of Tarali by one welded pipe line Greater Mumbai Civil construction works S + 8, storied Lodha Dwellers Pvt. Ltd. residential buildings at Casa Rio at Dombivali
Source: Company
6,928 5,566
6,928 5,566
4,670 4,030 3,616 3,562
4,482 4,030 3,512 3,456
5,234 2,400 4,061 1,795
2,918 1,880 1,831 1,743
High-IRR BOT projects

Pratibha bids only for BOT projects with IRRs of over 18%. Its portfolio has two projects. One project is a DMRC car-park (phase I commissioned). Commercial space of 0.225m sq.ft. should be ready for fitouts during this quarter. Current lease rental rates are `220-250 per square foot (the underlying assumption while bidding was `130 per square foot). The company has already invested the entire equity requirement of `300m. Pratibha targets BOT projects in water (India and abroad) or in roads, where IRRs are in high double digits Financial closure has been attained for the second project: the BhopalSanchi road. No major equity has been invested as yet. Pratibha targets BOT projects in water (India and abroad) or in roads, where IRRs are in high double digits. However, its strategy is not to enter the road EPC business in a large way so that it does not dilute its margin profile.
Fig 15 BOT details
Bhopal Sanchi DMRC car park
Project type Contract period Pratibha's stake (%) Contract cost (`m) Pratibha stake of equity(`m) IRR (%)
Source: Company
Annuity 13 years 51 1,477 151 18 - 20
Parking charge / real estate leasing 30 years 100 1,200 300 20
Valuation
Our price target of `73 is based on 7x FY13e earnings, at a 20% discount to other midcap construction companies target multiples (`69) and 1x book value for equity invested in BOT projects (`4/share). Pratibhas past one-year-forward PE multiples range between 3x and 15x. At the ruling price of `44, the stock trades at a core PE of 4.1x and 2.8x
9 March 2012
FY13e and FY14e earnings respectively, and an EV/EBITDA of 3.9x and 3.4x.
Fig 16 12-month-forward PE: Mean and standard deviation
(x) 20 +2SD +1SD
10
15
Mean -1SD -2SD
-5 Sep-07 Sep-08 Sep-09 Sep-10 Sep-11 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12
Risks

Project execution. Project execution delays and payment delays are major risks associated with construction companies. Financial risk. Given the nature of the sector, Pratibha would need to take on additional debt to fund capex or working capital. A spike in interest rates could hit its bottom line. Political risk. Around 85% of its order book comes from the government. Slowing government expenditure or state elections may impact order flows.
51
9 March 2012
Financials
Pratibhas current order book and outlook for fresh orders offer revenue visibility over the next two years. We estimate 25% CAGR in revenue and 34% in net profit over FY13-14, while maintaining its EBITDA margins.
Revenue CAGR of 25% over FY13-14e

On the back of a strong order backlog and proven execution capabilities, Pratibha is likely to report robust top-line performance. We expect 25% CAGR in revenue from FY13-14. The water segment is likely to bring in the major share of revenue, with the building and urban infrastructure segments constituting the balance.
Fig 17 Revenue and revenue growth
(`m) 25,000 20,000 15,000 10,000 5,000 0 FY12e FY13e FY14e
(%) 15.5
15.0 14.5 14.0 13.5 1,500 1,000 500 0 FY12e FY13e FY14e FY07 FY08 FY09 FY10 FY11 13.0 12.5 12.0 11.5
(%) 95.0 80.0 65.0 50.0 35.0 20.0 FY07 FY08 FY09 FY10 FY11
Revenue
Stable margins
We expect margins, at 14.5-15%, to be stable over FY12-14, in line with FY11. More than 50% of the projects in the present order book comprise those in the high-margin water segment. As most of the present order book is covered under a raw-material-escalation pass-through mechanism, the risk to operating margins is likely to be low, going forward.
Fig 18 EBITDA and EBITDA margin
(`m) 3,500
3,000 2,500 2,000
EBITDA
EBITDA Margin (RHS)
52
9 March 2012
34% net profit CAGR in FY13-14e

We estimate 34% CAGR in net profit over FY13-14. The growth in net profit should be reflected in the expanded return ratios. We expect RoE to improve from 15.5% in FY12 to 20.4% in FY14, and RoCE to increase from 18.1% to 21.1%.
Fig 19 Net profit and net-profit margin
(`m) 1,600
1,300 1,000 700 400 100 FY07 FY08 FY09 FY10 FY11 FY12e FY13e FY14e
Fig 20 Return ratios

(%) 7.5
7.0 6.5 6.0 5.5 5.0
(%) 26.0
24.0 22.0 20.0 18.0 16.0 14.0 12.0 10.0 FY07 FY08 FY09 FY10 FY11 FY12e FY13e FY14e
FY14e
PAT
PAT Margin (RHS)
RoE
RoCE
Comfortable balance sheet

The net debt-equity ratio for FY12 stands at a manageable 0.9x and is in line with the industry range of 0.5x to 3x. Management is comfortable with that up to 1.5x. With the easing liquidity situation, working capital days are also likely to decrease from here on.
Fig 21 Working capital days
(Days) 150
Fig 22 Net debt-equity ratio

(x) 1.5
1.3 1.1 0.9 0.7 0.5 0.3 0.1 FY07 FY08 FY09 FY10 FY11 FY12e FY13e
140 130 120 110 100 90 80 70 60 50 FY07 FY08 FY09 FY10 FY11 FY12e FY13e FY14e
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9 March 2012

Revenue Revenue growth (%) Less expenditure Consumption of RM Employee cost Other Expenditure EBITDA EBITDA margin (%) Growth (%) - Interest - Depreciation + Other income Profit before tax - Tax Tax rate (%) Reported PAT +/- Extraordinary items +/- Minority interest Adjusted PAT Adjusted PAT growth (%) Adj. FDEPS (`/share) CEPS (`/ share) DPS (`/ share)
9,349 23.9 7,983 6,554 459 969 1,366 14.6 53.0 493 109 0 764 199 26.1 565 565 26.3 6.8 8.9 0.6
11,751 25.7 10,045 8,412 617 1,016 1,707 14.5 24.9 618 143 12 958 244 25.4 714 714 26.4 7.1 8.5 0.6
14,507 23.5 12,357 10,155 740 1,462 2,150 14.8 25.9 919 190 50 1,090 283 26.0 807 807 12.9 8.0 10.6 0.7
18,066 24.5 15,336 12,646 888 1,802 2,730 15.1 27.0 1,153 230 1,347 350 26.0 997 997 23.6 9.9 13.1 0.8
22,535 24.7 19,111 15,775 1,066 2,271 3,424 15.2 25.4 1,210 250 1,965 511 26.0 1,454 1,454 45.9 14.4 17.9 0.9

167 2,587 131 2,754 4,230 7,115 2,922 234 2,689 114 136 1,859 2,939 3,087 7,885 3,350 434 3,784 4,101 76 4,176 7,115
199 4,636 184 4,835 3,831 8,850 3,340 356 2,984 148 104 1,793 3,439 4,784 10,016 4,225 621 4,846 5,170 444 5,614 8,850
199 5,360 254 5,559 6,955 12,767 4,894 546 4,349 693 543 2,186 4,212 6,264 12,661 5,793 888 6,681 5,980 1,202 7,182 12,767
202 6,259 354 6,461 7,355 14,169 6,257 776 5,482 330 543 2,722 4,989 7,820 15,531 7,587 1,172 8,760 6,772 1,043 7,814 14,169
202 7,606 454 7,808 7,655 15,917 7,257 1,026 6,232 330 543 3,396 6,214 9,752 19,361 9,264 1,623 10,888 8,474 338 8,812 15,917
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9 March 2012

565 178 743 1,573 (829) 965 (1,794) 59 1,876 (12) 0 36 40 76
714 196 911 1,070 (159) 473 (632) 71 1,500 (399) (32) 63 368 76 444
807 260 1,067 810 256 2,100 (1,844) 83 3,123 439 758 444 1,202
997 330 1,327 791 535 1,000 (465) 95 400 (159) 1,202 1,043
1,454 350 1,804 1,702 101 1,000 (899) 106 300 (705) 1,043 338

6.5 6.5 1.3 5.7 22.6 21.4 4.2 1.4 8.9 5.3 73 24.6 26.3 53.0 26.3
6.2 5.7 0.9 4.6 18.8 19.6 3.8 1.4 8.5 5.3 56 25.7 26.4 24.9 4.4
5.5 5.0 0.8 4.7 15.5 18.1 3.5 1.6 8.8 6.3 55 23.5 12.9 25.9 12.9
4.4 4.1 0.7 3.9 16.6 18.6 3.2 1.8 8.1 6.4 55 24.7 23.6 27.0 23.6
3.0 2.8 0.6 3.4 20.4 21.1 3.3 2.1 6.3 5.4 55 24.8 45.9 25.4 45.9
55
9 March 2012
Company Background
The flagship company of the Pratibha Group, Pratibha Industries, promoted by managing director Ajit Kulkarni, builds infrastructure for water supply & management, and is involved in construction of buildings and urban infrastructure.

Since its inception in 1983, when it started with pre-cast product manufacturing, Pratibha has graduated to a multi-functional construction and infrastructure development company, with a strong engineering workforce. Its forte is in water supply and environment engineering, encompassing water tunnels, water treatment plants, distribution systems, pipelines, reservoirs and sewage plants. Other areas are urban infrastructure and roads. Most of the contracts in its present order book arise from the public sector. It has, over the years, entered into joint ventures with other companies to strengthen its pre-qualification criteria.
Fig 27 Management background
Ajit B. Kulkarni
Managing Director
Usha B. Kulkarni Vinayak Kulkarni
Executive Chairperson Whole-time Director
Rohit Katyal
Whole-time Director and COO Group Director & Head, Marketing CFO
Yogen Lal
T. R. Radhakrishnan
Source: Company
Established the Pratibha Group in 1982. Has been director since inception and is responsible for overall dayto-day management. Has extensive experience in the construction management of civil engineering projects, including overseas Primarily responsible for administrative matters and human resources Qualified mechanical engineer; director since inception. Has extensive experience in pre-cast building units. Area of expertise is in work materials management and allocation of plant and machinery Over 17 years experience in various capacities. Set up the mechanical division, eventually spun off into Pratibha Pipes and Structurals, a group company Civil engineer from the Victoria Jubilee Technical Institute, Mumbai, with over 20 years experience. Prior to joining Pratibha in 2011, was COO of Unity Infra Projects CFO for the past five years. Rich experience of over 24 years with the Bank of India in the management cadre.
56
Construction
India I Equities
Initiating Coverage
9 March 2012
KNR Constructions
Fast-growth, strong margins, attractive valuations; Buy
A road specialist with strong margins, return ratios and balance sheet, KNRs aspirations in road BOTs are restricted to EPC cash contracts. Key positives are low net gearing, no equity dilution and high return ratios. We initiate coverage with a Buy rating and a price target of `197.
Key data
KNRC IN / KNRL.BO
Road specialist; strong balance sheet. KNR specializes in road construction (48 projects, 4,000-lane-km), which comprises over 90% of its order book. Backward integration into quarries and ready mix concrete (RMC) plants, its own equipment bank and no sub-contracts have led to a robust 14-16% operating margin. This, along with a low working-capital cycle (<50 days), has resulted in low net gearing of 0.2x (Sep 11), positive free cash flow and a return ratio higher than that of its competitors. Order book rising. Order book of `27bn (3.3x TTM revenues and twice Mar 11 levels) plus L1 orders of `2bn, gives strong revenue visibility for FY13-14. Its client list includes NHAI, state bodies and private players. KNR operates mainly in MP (40%) and Rajasthan (23%). We estimate 20% revenue CAGR in FY13-14, driven by new segments: Railways, power transmission, desalination, irrigation & urban water infrastructure. Limited BOT exposure; no equity dilution plans. KNRs interest in BOT projects lies in EPC works, and it targets an exit at reasonable valuations after construction. Its present exposure is restricted to three NHAI projects. Of these, two annuity projects (in a JV with Patel Engg.) were completed on time and one has been securitized. The third project (at `4bn) was bagged recently; financial closure is underway. Valuation. Our SOTP-based price target of `197 is based on 7x FY13e earnings, a 20% discount to other midcap construction companies (`187) and 1x book value of investment (`10). Risks: Slowdown in road awards, high raw material cost, rise in working capital requirement.
`147 / `82 17173 / 5222 US$0.02m `3.7bn / US$82m 28.12m
74.0 1.6 26.0 8.0 18.0
74.0 26.0 0.1 8.0 17.9
74.0 26.0 0.1 8.0 17.9

160 140 120 100 80 Sep-11 May-11 Nov-11 Mar-11 Jan-12 Mar-12 Jul-11 Sensex KNRC
Source: Bloomberg
7,087 503 17.9 15.2 6.8 4.0 1.2 18.1 20.3 1.5 0.2
7,830 568 20.2 13.0 6.0 4.1 1.0 17.4 16.9 1.5 0.4
8,613 665 23.6 17.0 5.1 3.3 0.9 17.4 17.8 1.5 0.3
10,335 753 26.8 13.2 4.5 2.9 0.8 16.8 17.5 1.7 0.2
12,402 931 33.1 23.6 3.7 2.4 0.6 17.7 19.0 1.9 0.2
Manish Valecha

9 March 2012
KNR Constructions Fast-growth, strong margins, attractive valuations; Buy


7,087 9.5 5,995 1,092 15.4 70 262 75 332 39.8 503 503 17.9 15.2
7,830 10.5 6,635 1,195 15.3 78 406 125 268 32.0 568 568 20.2 13.0
8,613 10.0 7,168 1,445 16.8 92 460 100 328 33.0 665 665 23.6 17.0
10,335 20.0 8,709 1,626 15.7 102 520 120 371 33.0 753 753 26.8 13.2
12,402 20.0 10,451 1,951 15.7 112 570 120 458 33.0 931 931 33.1 23.6
281 2,789 3,008 1,106 69 4,183 2,205 651 1 936 391 4,183 713 33 107
281 3,292 3,520 1,616 27 5,163 2,918 686 2 1,178 381 5,163 1,234 49 125
281 3,892 4,128 1,753 27 5,909 2,958 686 2 1,550 715 5,909 1,037 58 147
281 4,571 4,817 1,903 27 6,747 3,188 686 2 2,012 861 6,747 1,041 63 171
281 5,420 5,674 2,053 27 7,755 3,368 686 2 2,551 1,149 7,755 902 67 202


PAT + Non-cash items Cash profit - Incr./(decr.) in WC Operating cash-flow - Capex Free-cash-flow - Dividend + Equity raised + Debt raised - Investments - Misc. items Net cash-flow + Op. cash & bank bal. Cl. Cash & bank bal.
503 259 762 572 190 375 (184) 66 (254) (454) (9) (41) 432 391
568 364 932 242 690 1,119 (429) 65 511 35 (9) (10) 391 381
665 460 1,125 372 753 500 253 65 137 0 (9) 333 381 715
753 520 1,273 462 811 750 61 74 150 (9) 146 715 861
931 570 1,501 539 961 750 211 82 150 (9) 288 861 1,149
P/E (x) P/E Core (x) P/B (x) EV/EBITDA (x) RoE (%) RoCE (%) Fixed Asset turnover (x) Dividend yield (%) Dividend payout (%) Interest exp./Sales Debtors (days) Revenue growth (%) PAT growth (%) EBITDA growth (%) EPS growth (%)
7.3 6.8 1.2 4.0 18.1 20.3 2.6 1.5 11.2 1.0 98 9.5 15.2 14.4 15.2
6.5 6.0 1.0 4.1 17.4 16.9 2.3 1.5 9.9 1.0 66 10.5 13.0 9.4 13.0
5.5 5.1 0.9 3.3 17.4 17.8 2.0 1.5 8.5 1.1 70 10.0 17.0 21.0 17.0
4.9 4.5 0.8 2.9 16.8 17.5 2.1 1.7 8.4 1.0 70 20.0 13.2 12.5 13.2
4.0 3.7 0.6 2.4 17.7 19.0 2.2 1.9 7.6 0.9 70 20.0 23.6 20.0 23.6
Fig 5 PE band
(`/share) 225 200 175 150 125 100 75 50 25 0 Sep-08 Sep-09 Sep-10 Sep-11 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 2x 4x 6x
Fig 6 Orderbook vs book-to-bill

(`m) 45,000 36,000 27,000 18,000 9,000 0 FY07 FY08 FY09 FY10 FY11 FY12e FY13e FY14e (x) 6 5 4 3 2 1
8x
Order book
Book to bill (RHS)
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9 March 2012

A road specialist with strong margins, return ratios and balance sheet, KNRs aspirations in road BOTs are restricted to EPC cash contracts. Key positives are low net gearing, no equity dilution and high return ratios. We initiate coverage with a Buy rating and a price target of `197. Road specialist; strong balance sheet KNR specializes in road construction (48 projects, 4,000-lane-km so far), which comprises over 90% of its order book. Based on its execution capability and strong track record in roads, it has gained a good reputation with JV partners and now works mostly through JVs. On its prequalification and balance-sheet strength, it can bid for projects up to `14bn. Built up significant execution capabilities by backward integrating into quarries and RMC plants, owning its equipment and not subcontracting work The company has built up significant execution capabilities by backward integrating into quarries and RMC plants, owning the required equipment and not sub-contracting any work. With this, it earns higher operating margins of 14-16% and gains a greater degree of control over aggregates for its projects under execution.
Fig 7 EBITDA margin comparison with peers (FY11)
(%) 20 16 12 8 4 0 Supreme Pratibha NCC Era Simplex Ramky J Kumar KNR
Capacity
Source: Company
Fig 8 Details of in-house equipment, plant and machinery

Sr. No Type of equipment No. Capacity Sr. No Type of equipment No.
1 2 3 4 5 6 7 8 9 10 11 12 13 14
Crushers Hot-mix plants Wet-mix plants Graders Pavers Excavators Excavators-cum-loaders Dozers Loaders Compactors Rollers Drillers Tippers Tankers
13 7 6 20 18 76 5 8 22 29 12 6 328 10
150 to 250 tph 160 to 240 tph 160 to 200 tph 120 to 140 HP 9m 1 to 2.5 cu. metres Liugong-1.7 to 3.0 cu. metres Liugong-1.7 to 3.0 cu. metres
15 16 17 18 19 20 21 22 23 24 25 26
Tractor-trailers Weigh-bridges Generators Diesel bunks Breakers Transformers Sprayers Light sources Compressors Cranes Transit mixers Concrete pumps Batching plants Piling rigs
25 8 48 6 8 5 4 5 1 20 28 7 12 2 500 KVA 4-6 kl 50 Hz 450 HP 25 to 100 tons 6.0 cu. metres 90 Cum/hr 30 to 60 Cum/hr
12 to 20 cu. metres
27 28
Source: Company
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9 March 2012
KNRs strong execution capabilities and regular client payments have made it one of the most working-capital-efficient companies (<50 days in FY11). This, along with strong margins and timely completion, has resulted in a low net gearing of 0.2x (Sep11) vs the industry norm of 0.5x3x. It is also one of the few companies likely to post positive free-cashflow during FY12-14. Order book rising Order book of `27bn (3.3x TTM revenues) together with L1 orders of `2bn, provides good revenue visibility for FY13-14. In the last 3-4 years, KNRs order book has been stagnant, at `12bn-14bn, due to the slowdown in the roads segment. In FY12, however, it bagged orders of `18.5bn, taking its order book to `27bn (3.3x TTM revenues). This, together with L1 orders of `2bn, provides good revenue visibility for FY13-14. KNR has a strong clientele, including NHAI, state bodies and private players such as Sadbhav, GMR and Oriental. Its relationship with private parties also secures it many repeat orders.
Fig 9 Order-book breakdown: by segment
Urban water Infrastructures 5%
Fig 10 Order-book breakdown: by area

Chattisgarh TN 2.9% 0.9% Rajasthan 22.9% Karnataka 19.1%
Irrigation 1%
AP 8.4% Bihar 1.4% Orissa 5.0% Assam 0.4% MP 39.0%
Road 94%
Source: Company
Source: Company
KNRs order book is spread across India, with the largest exposure to MP (39%) and Rajasthan (23%). The road segment contributes more than 90% to the order book. We expect 20% revenue CAGR over FY13-14, driven by new segments: Railways, power transmission, desalination, irrigation and urban water infrastructure. We estimate order inflows of `21bn each in FY13 and FY14 and an order backlog of ~ `36.5bn and `45bn, respectively.
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9 March 2012
Fig 11 Major orders of KNR

Designing and constructing the project Kishangarh - Udaipur - Ahmedabad Section. Rehabilitation and up gradation to two lane Chhindwara - Linga - Umarnala Saoner 4 laning of Nagpur Saoner Betul project Upgradation of the Road from Mudgal to Gangawathi Widening and re-construction of Pichhore Chanderi Mungawali Onder Kurwai Road Balance works of widening to 4/6 - lanes Ganjam Sunakhala Upgradation of the road from Shelvadi to Mundargi Construction of 8-lane expressway as an Outer Ring Road to Hyderabad City Upgradation of the road from Magadi to Koratagere Shankarasamudaram Bal Resorvoir
Source: Company
GMR Projects Private Limited Sadbhav Engineering Limited Oriental Structural Engineers KSHIP, Bangalore MPRDC, Bhopal NHAI KSHIP, Bangalore HGCL KSHIP, Bangalore CE, I & CAD
6,200 5,802 3,330 1,526 1,459 2,313 1,213 3,380 1,168 1,464
6,200 5,802 3,330 1,526 1,409 1,355 1,213 1,191 1,168 1,058
Limited BOT exposure; no equity dilution plans Equity requirement for the BOT projects is `1bn over FY13-15; no requirement of issue of new equity KNRs interest in BOT projects is in EPC works, as it aims to exit a project at reasonable valuations upon construction. It has three projects. Of these, two annuity projects (in JVs with Patel Engineering) were completed on time and are operational. One of these projects has been securitized and the debt paid off. KNR also plans to securitize the second project at an appropriate time (softer interest-rate environment). The company secured a project in Bihar in 3QFY12 worth `4bn. The equity requirement for the project is `1bn over FY13-15, which can be met while keeping gearing at lower than 0.5x and without any issue of new equity capital.
Fig 12 BOT projects
Project (`m) % stake Project cost (`m) Equity Investment up to Dec11 Completion by
KNT-1 AP-7 Muzaffarpur - Barauni

Source: Company
40 40 100
4,429 5,920 4,000
1,129 1,480 1,000
452 592 -
Dec09 Jun10 FY15
Valuations Our sum-of-parts-based price target of `197 is based on 7x FY13e PE of the construction business (a 20% discount to midcap constructioncompany target multiples), and 1x book value of its investment in BOT projects. KNRs one-year-forward PE multiples range between 2x and 8x. At the ruling price of `131, the stock trades at a core PE of 4.9x and 4.0x FY13e and FY14e earnings, respectively, and an EV/EBITDA of 2.9x and 2.4x.
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9 March 2012

(x) 10
+2SD
8 +1SD 6 Mean 4 -1SD 2 -2SD 0 Mar-08 Mar-09 Mar-10 Mar-11 Sep-08 Sep-09 Sep-10 Sep-11 Mar-12
Risks

Project execution. Project execution delays and payment delays are major risks associated with construction companies. Financial risk. Given the nature of the sector, KNR would need to take on additional debt to fund capex or working capital. A spike in interest rates could hit its bottom line. Political risk. Most of its order book comes from the government. Slowing government expenditure or state elections might impact order flows.
62
9 March 2012
Financials
On the back of its robust order book, we expect KNR to post a strong 20% CAGR in revenue over FY13-14. We expect EBITDA and net margin to be stable and estimate 18% CAGR in net profit over FY13-14, in line with the industry growth rate. Revenue at 20% CAGR over FY13-14 On the back of its proven execution capabilities and a strong order backlog, KNR is likely to report steady revenue. We estimate 20% CAGR in revenue over FY13-14. It has bagged orders of `18bn in 9MFY12, which is expected to be reflected in strong growth over FY13/14.
Fig 14 Strong revenue growth likely
(`m) 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0 FY12e FY13e FY14e FY14e FY08 FY09 FY10 FY11 (%) 91 78 65 52 39 26 13 0
Revenue
Stable margins EBITDA and net margins are likely to be stable over FY13-14. We estimate 18% CAGR in net profit over FY13-14, in line with the industry growth rate.
(%) 18
15
12
6 FY12e FY13e FY08 FY09 FY10 FY11
EBITDA Margins
Net Margins
63
9 March 2012
Return ratios robust Low leverage has allowed the company to maintain a net margin of over 7%. In line with the strong margin, we expect the RoE and RoCE to rise from 17.4% and 17.8% in FY12, respectively, to 17.7% and 19% in FY14.
Fig 16 Return ratios to remain strong
(%) 21 20 19 18 17 16 FY12e FY13e FY14e FY08 FY09 FY10 FY11 RoE RoCE
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9 March 2012

Revenue Revenue growth (%) Less expenditure Raw material and direct exp on projects Subcontractor work bills Spreading & assortment expenses Employee cost Other expenditure EBITDA EBITDA margin (%) Growth (%) - Interest - Depreciation + Other income Profit before tax - Tax Tax rate (%) Reported PAT +/- Extraordinary items +/- Minority interest Adjusted PAT Adjusted PAT growth (%) Adj. FDEPS (`/share) CEPS (`/ share) DPS (`/ share)
7,087 9.5 5,995 1,894 2,745 743 167 446 1,092 15.4 14.4 70 262 75 835 332 39.8 503 503 15.2 17.9 27.1 2.0
7,830 10.5 6,635 1,908 2,966 818 189 754 1,195 15.3 9.4 78 406 125 836 268 32.0 568 568 13.0 20.2 33.1 2.0
8,613 10.0 7,168 3,014 1,378 1,723 284 769 1,445 16.8 21.0 92 460 100 993 328 33.0 665 665 17.0 23.6 40.0 2.0
10,335 20.0 8,709 3,669 1,757 2,067 332 884 1,626 15.7 12.5 102 520 120 1,124 371 33.0 753 753 13.2 26.8 45.3 2.3
12,402 20.0 10,451 4,403 2,108 2,480 398 1,061 1,951 15.7 20.0 112 570 120 1,389 458 33.0 931 931 23.6 33.1 53.4 2.5

281 2,789 69 3,008 1,106 4,183 2,893 793 2,100 105 651 1,901 137 2,757 4,795 3,142 717 3,859 936 391 1,327 4,183
281 3,292 27 3,520 1,616 5,163 3,990 1,178 2,812 106 686 1,405 221 2,544 4,170 2,335 657 2,992 1,178 381 1,559 5,163
281 3,892 27 4,128 1,753 5,909 4,496 1,638 2,858 100 686 1,652 283 2,600 4,535 2,335 650 2,985 1,550 715 2,265 5,909
281 4,571 27 4,817 1,903 6,747 5,196 2,158 3,038 150 686 1,982 340 2,700 5,022 2,335 675 3,010 2,012 861 2,873 6,747
281 5,420 27 5,674 2,053 7,755 5,946 2,728 3,218 150 686 2,379 408 2,800 5,586 2,335 700 3,035 2,551 1,149 3,700 7,755
65
9 March 2012

503 259 762 572 190 375 (184) 66 (254) (454) (9) (41) 432 391
568 364 932 242 690 1,119 (429) 65 511 35 (9) (10) 391 381
665 460 1,125 372 753 500 253 65 137 0 (9) 333 381 715
753 520 1,273 462 811 750 61 74 150 (9) 146 715 861
931 570 1,501 539 961 750 211 82 150 (9) 288 861 1,149

7.3 6.8 1.2 4.0 18.1 20.3 2.6 1.5 11.2 1.0 98 9.5 15.2 14.4 15.2
6.5 6.0 1.0 4.1 17.4 16.9 2.3 1.5 9.9 1.0 66 10.5 13.0 9.4 13.0
5.5 5.1 0.9 3.3 17.4 17.8 2.0 1.5 8.5 1.1 70 10.0 17.0 21.0 17.0
4.9 4.5 0.8 2.9 16.8 17.5 2.1 1.7 8.4 1.0 70 20.0 13.2 12.5 13.2
4.0 3.7 0.6 2.4 17.7 19.0 2.2 1.9 7.6 0.9 70 20.0 23.6 20.0 23.6
66
9 March 2012
Company Background
A multi-domain infrastructure development organization, with more than two decades experience, KNR constructs technically-complex and high-value projects in road segments such as state and national highways and expressways. The road segment makes up ~93% of its order book, the remaining ~7% comes from the irrigation and urban water infrastructure management segments. The company was promoted by K. Narasimha Reddy in 1979 as a partnership firm and was listed on the exchanges in Feb 08. Brief history and business A multi-domain infrastructure development organization with more than two decades experience, KNR constructs technically-complex and highvalue projects in road segments such as state and national highways and expressways. The road segment makes up ~93% of its order book, the remaining ~7% comes from the irrigation and urban water infrastructure management segments. The company has secured large projects from the NHAI, owing to its partnership with large construction players and its strong execution capabilities. It has three BOT projects, of which two are in a JV with Patel Engineering and are operational, and one which is still being developed. Management background
K. Narasimha Reddy
Managing Director
K. Jalandhar Reddy
Executive Director
J. V. Panindra Reddy
Executive Director
Founder, promoter and managing director, with over 40 years of experience in the highways sector, K. Narasimha Reddy has extensive knowledge and experience in multi-project planning, scheduling, and cost controls, in addition to overall construction and multi-project management. Promoter and executive director, K. Jalandhar Reddy has over 18 years of experience in highways and infrastructure. He started as project manager and was elevated to executive director on 1 Apr 97. He heads the tendering and bidding and is in charge of most of the projects in southern India Promoter and executive director, J.V. Panindra Reddy has over 18 years of experience in highways and infrastructure. He has been closely associated with the organisation since inception. As executive director, he is in charge of projects in the north and north-eastern states of India.
Source: Company
67
Construction
India I Equities
Initiating Coverage
9 March 2012
Simplex Infrastructures
Focus on quality orders, no dilution overhang; Buy
A high-quality order book and low exposure to BOT projects make Simplex one of the sectors more stable companies. It is one of the few companies that do not require equity dilution to fuel growth. However, high gearing is a key concern. We initiate coverage with a Buy rating, and a price target of `289.
Key data
SINF IN / SINF.BO
Quality order book. Simplex has one of the most diversified order books, both geographically and by segment. Orders during 9MFY12 amounted to `39bn, taking the order book to `144bn (2.6x TTM revenue). The company has L1 orders (to be awarded in 4QFY12) of `25bn. We expect better order inflow in FY13-14, largely from the private sector, in line with our prognosis of capex recovery in India. Not on the BOT bandwagon. Simplex is conservative in bids for BOTs due to its IRR target of <18%, in contrast to peers that also bag orders below 5%. In FY11, Simplex won two projects in roads (26% stake) and in power transmission (33% stake). It recently won a road project at Kharagpur. The equity outlay of `2.9bn is to be met via internal accrual. No impending dilution. One of the few construction companies that do not require need equity dilution to fuel growth, Simplexs internal accruals should suffice to meet its capex and BOT equity investment. Key drivers for improved return ratios during FY13-14 include strong earnings growth, low capex (asset-turnover ratio at 3.8x vs average of 5x in the past) and low investments in BOT projects. With the expected better working capital, gearing should improve. Valuation. Our sum-of-parts-based target price is `289: construction: `282 at a PE of 9x FY13e (in line with the last 10-year average); BOT projects: `7 at 1x Dec 11 BV. Risks: Pressure on margins and gearing.
`389 / `157 17173 / 5222 US$0.06m `11.5bn / US$256m 49.5m
55.0 45.0 13.8 18.8 12.4
55.0 45.0 12.2 20.4 12.4
54.7 45.3 12.2 20.6 12.5

400 360 320 280 240 200 160 Jul-11 Sep-11 Mar-11 May-11 SINF Nov-11 Jan-12 Mar-12 Sensex
Source: Bloomberg Key financials (YE Mar)
Sales (`m) Net profit (`m) EPS (`) Growth (%) PE (x) EV/EBITDA (x) PBV (x) RoE (%) RoCE (%) Dividend yield (%) Net gearing (x)
44,476 1,226 24.7 (3.3) 9.1 5.4 1.2 13.1 12.5 0.9 1.3
47,557 1,232 24.8 0.5 9.1 5.9 1.1 12.0 11.6 0.9 1.5
56,592 891 17.9 (27.7) 12.5 6.0 1.0 8.0 10.7 1.0 1.6
68,477 1,549 31.2 73.8 7.2 5.0 0.9 12.7 13.4 1.1 1.6
82,857 2,306 46.4 48.9 4.8 4.3 0.8 16.4 15.1 1.1 1.5
Manish Valecha

9 March 2012
Simplex Infrastructures Focus on quality orders, no dilution overhang; Buy


44,476 (5.13) 40,098 4,378 9.8 1,112 1,534 178 685 35.8 1,226 1,226 24.7 (3.3)
47,557 6.93 42,916 4,640 9.8 1,308 1,608 231 722 36.9 1,232 1,232 24.8 0.5
56,592 19.00 51,498 5,094 9.0 2,150 1,830 216 439 33.0 891 891 17.9 (27.7)
68,477 21.00 61,951 6,526 9.5 2,500 1,950 236 763 33.0 1,549 1,549 31.2 73.8
82,857 21.00 74,960 7,896 9.5 2,600 2,100 246 1,136 33.0 2,306 2,306 46.4 48.9
99 9,597 9,697 13,024 883 23,604 9,864 277 7 12,590 873 23,604 12,144 95 195
99 10,678 10,777 16,607 1,381 28,764 11,324 492 170 16,154 795 28,764 15,642 110 217
99 11,438 11,537 19,307 1,501 32,344 11,524 682 170 19,882 256 32,344 18,880 116 232
99 12,841 12,941 21,457 1,791 36,188 11,674 1,232 170 23,053 229 36,188 21,057 114 261
99 15,003 15,102 23,257 2,081 40,439 11,724 1,653 170 25,896 1,167 40,439 21,920 108 304


PAT + Non-cash items Cash profit - Incr./(decr.) in WC Operating cash-flow - Capex Free cash-flow - Dividend + Equity raised + Debt raised - Investments - Misc. items Net cash-flow + Op. cash & bank bal. Cl. cash & bank bal.
1,226 1,190 2,416 2,140 276 596 (320) 115 819 76 437 (129) 1,002 873
1,232 1,409 2,642 3,563 (922) 2,372 (3,294) 115 3,583 215 37 (78) 873 795
891 1,170 2,061 3,729 (1,668) 1,250 (2,918) 131 2,700 190 0 (538) 795 256
1,549 1,440 2,989 3,171 (182) 1,300 (1,482) 145 2,150 550 (0) (27) 256 229
2,306 1,540 3,846 2,843 1,004 1,300 (296) 145 1,800 421 938 229 1,167
9.4 9.1 1.2 5.4 13.1 12.5 3.6 0.9 8.1 2.5 142 (5.1) (3.3) 2.5 (3.3)
9.3 9.1 1.1 5.9 12.0 11.6 3.5 0.9 8.0 2.7 156 6.9 0.5 6.0 0.5
12.9 12.5 1.0 6.0 8.0 10.7 3.7 1.0 12.5 3.8 156 19.0 (27.7) 9.8 (27.7)
7.4 7.2 0.9 5.0 12.7 13.4 4.1 1.1 8.0 3.7 151 21.0 73.8 28.1 73.8
5.0 4.8 0.8 4.3 16.4 15.1 4.6 1.1 5.4 3.1 148 21.0 48.9 21.0 48.9
Fig 5 PE band
(`/share) 700 600 500 400 300 200 5x 100 0 Sep-07 Sep-08 Sep-09 Sep-10 Sep-11 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 15x 10x 20x

(`bn) 200 180 160 140 120 100 80 60 40 20 0
FY12e FY13e FY14e FY07 FY08 FY09 FY10 FY11
(x) 3.3
3.1 2.9 2.7 2.5 2.3 2.1 1.9 1.7 1.5
Orderbook
Book to bill (RHS)
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9 March 2012

A high-quality order book and low exposure to BOT projects make Simplex one of the sectors more stable companies. It is one of the few companies that do not require equity dilution to fuel growth. However, high gearing is a key concern. We initiate coverage with a Buy rating, and a price target of `289.
Quality order book

The quality of Simplexs order book is sound, as it has one of the most diversified order books, both geographically and across segments. International orders constitute 22% of the order book, reducing the risk of over-dependence on Indian markets. The private sector comprises 63% of the order book, helping reduce working capital days. Simplex has ~90% of its order book covered under price escalation clauses, thus protecting it from sharp moves in raw material prices. Order inflows in 9MFY12 amounted to `39bn, taking Simplexs order book to `144bn (2.6x TTM revenue). It has L1 orders (to be awarded in 4QFY12) worth `25bn. To date, in 4QFY12, it has bagged orders of `21bn. It has a bid pipeline of `300bn and another `40bn through informal negotiations. Based on the bid pipeline, we expect strong order inflow in FY13. We also expect a better order intake in FY13, largely from the private sector, in line with our prognosis of a recovery in the capex cycle in India. Internationally, the companys focus is on greater exposure to West Asia (Middle East countries) apart from Dubai. This should help improve its overall order book.
Fig 7 Order-book breakdown: by client
PPP 9%
Orders in 9MFY12 amounted to `39bn, taking total order book to `144bn (2.6x TTM revenue)
Fig 8 Order-book breakdown: by segment

Piling Marine 4% 2% Buildings and Housing 26% Urban Infrastructure 9% Industrial Construction 14%
Government 28% Private 63% Power 26%
Roads, Railways & Bridges 19%
Source: Company
Source: Company
Not on the BOT bandwagon

Simplexs bids for BOT projects are conservative due to its IRR target of over 18%. In contrast, its peers bag orders even below 5%. Simplex won two BOT projects in FY11, and one in FY12. The first was a road project from Chandikhol to Bhubaneshwar, where the expected IRR was ~23%. The company has already mobilized machinery at the site and has started the toll on this road project, as it is an expansion of the present four-lane highway. The second order in FY12 was a transmission project for the
9 March 2012
Krishnapatnam Ultra Mega-Power Project from Raichur to Solapur, for REC. The project has been awarded on an annuity basis for 35 years and has an expected IRR of 16%. In 3QFY12, Simplex won a road project from Kharagpur to Mahulia. The estimated cost is `9.4bn, with equity requirement of `2bn. Equity commitment for these three projects is `2.7bn and is likely to be funded through internal accruals.
Fig 9 BOT details
Chandikhol Bhubaneshwar (Orissa) Kharagpur - Mahulia REC Transmission Project Maharashtra - Karnataka
Project type Contract period Length Simplex's stake % Contract cost (` m) Simplex equity stake (` m)
Source: Company
Toll 26 years 69km 26 14,110 421
Toll 30 years 127km 100 9,400 2,035
Annuity 38 years 210km 33 3,000 297
No impending dilution
Equity dilution not required to fuel growth One of the few construction companies that do not require equity dilution to fuel growth, Simplexs internal accruals suffices to meet its capex and BOT equity investments. Key drivers of improved return ratios during FY13-14 are strong earnings growth, low capex requirement (current asset-turnover ratio at 3.8x vs an average 5x in the past) and low investments in BOT projects. We believe, with working capital cycle expected to improve, gearing should also reduce. No major capex required Simplexs asset-turnover ratio, at 3.5x, vs an average 5x in the past, indicates that its assets are under-utilized and that it could attain desired growth with no major capex. The company requires ~`2.7bn over the next 2-3 years for its present BOT projects. This, we believe, could be funded through internal accruals and debt, and should drive improved return ratios. Working capital under control Due to a slowdown in the private sector and reduced exposure to international projects, Simplexs working capital cycle has been lengthened. Nevertheless, its working-capital days (120 in Dec 11) are lower than that of most of its peers. However, with the managements sharper focus on debtor recovery and quicker execution, we expect working-capital days to slide to below 110 in the next two years. Gearing has risen from 1.25x in FY11 to 1.5x now. Management targets reducing this As a result of the high capex in FY12 and lengthened working-capital cycle, gearing has risen from 1.25x in FY11 to 1.5x now. Though comfortable with the present level of gearing, management plans to reduce this. We have built in a moderate softening of gearing over FY13-14.
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9 March 2012
Fig 10 Net-debt-to-equity comparison (FY12e)

(x) 2.0
1.8 1.6 1.4 1.2 1.0 0.8 0.6 0.4 0.2 0.0 J Kumar KNR NCC Simplex Ramky Pratibha Supreme Era
Fig 11 Working-capital-days comparison (FY12e)

(Days) 250
200 150 100 50 0 J Kumar NCC Simplex Ramky Pratibha Supreme KNR Era
Valuation Our sum-of-parts-based price target is `289. This includes construction: `282 at a PE of 9x FY13e earnings (based on average multiple for mid cap companies in last 10-year average) and BOT projects: `7 at 1x Dec 11 BV. At the target price of `289, the stock would trade at FY13e EV/EBITDA of 5.5x and 4.6x FY13e and FY14e, respectively.
Fig 12 One-year forward PE: Mean and standard deviation
(x) 40
30
+2SD +1SD
20 Mean 10 -1SD -2SD 0 Mar-04 Mar-05 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Sep-04 Sep-05 Sep-06 Sep-07 Sep-08 Sep-09 Sep-10 Sep-11 Mar-12
At a CMP of `232, the stock trades at a core PE of 7.2x and 4.8x FY13e and FY14e earnings, respectively, and EV/EBITDA of 5x and 4.3x. Risks

Project-execution risk. Could arise from a shortage of manpower, land-acquisition issues, or arbitration with clients. Financial risk. Given the nature of the industry, Simplex would need additional debt to fund its capex or working capital. A spike in interest rates could impact its bottom line. Political risk. About 28% of the order book arises from the government.
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Financials
Simplexs order book is likely to see fair revenue flow over the next two years. We expect 21% CAGR in revenue over FY13-14, with an estimated 61% CAGR in net profit, driven by a better operating margin and lower leverage. Robust revenue growth On the back of proven execution capabilities and a revival in orders, we estimate 21% CAGR in Simplexs revenue over FY13-14. We expect strong growth in revenue from the power and building segments, as these constitute ~55% of the present order book (~30% in FY07).
Fig 13 Robust revenue growth
(`m) 90,000
80,000 70,000 60,000 50,000 40,000 30,000 20,000 10,000 0 FY12e FY13e FY14e FY08 FY09 FY10 FY11
(%) 80.0
70.0 60.0 50.0 40.0 30.0 20.0 10.0 0.0 (10.0)
Revenue
Revenue growth (RHS)
Scope for EBITDA margin improvement The present order book comprises 35% of projects from the high-margin power and urban infrastructure segments. These have an average execution of about two-and-a-half years. This, together with strong revenue growth, is expected to lift the EBITDA margin to 9.5%, in FY13 and FY14. Any increase in the share of foreign orders (~3-4% higher margins) in its order book from current levels of 22%, would further improve operating margins.
Fig 14 EBITDA margins to improve
(`m) 8,000
7,000 6,000 5,000 4,000 3,000 2,000 1,000 FY08 FY09 FY10 FY11 FY12e FY13e FY14e
(%) 10.2
10.0 9.8 9.6 9.4 9.2 9.0 8.8
EBITDA
EBITDA Margin (RHS)
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9 March 2012
Net profit margin to rise on higher OPM, lower financing cost We expect net profit margin to improve 120bps from FY12 to FY14 following the improved operating profit margin and lower interest charges (as percent of sales). We estimate interest as a percentage of sales to fall 70bps, from 3.8% in FY12 to 3.1% two years later, and net profit to rise at 61% CAGR over FY13-14. Higher margins in FY13-14 would reflect the expanded return ratios. We expect RoE to improve from 8% in FY12 to 16.4% in FY14, and RoCE from 10.7% to 15.1%.
Fig 15 Expansion in net profit margin
(`m) 2,300
2,100 1,900 1,700 1,500 1,300 1,100 900 700 500 FY12e FY13e FY14e FY08 FY09 FY10 FY11
(%) 3.3
3.1 2.9 2.7 2.5 2.3 2.1 1.9 1.7 1.5
PAT
PAT Margin (RHS)
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9 March 2012

Revenue Revenue growth (%) Less expenditure C'tion of materials (stores) Employee cost Other expenditure EBITDA EBITDA margin (%) Growth (%) - Interest - Depreciation + Other income Profit before tax - Tax Tax rate (%) Reported PAT +/- Extraordinary items +/- Minority interest Adjusted PAT Adjusted PAT growth (%) Adj. FDEPS (`/share) CEPS (`/ share) DPS (`/ share)
44,476 (5.1) 40,098 18,126 15,263 6,709 4,378 9.8 2.5 1,112 1,534 178 1,911 685 36 1,226 1,226 (3.3) 24.7 61.7 2.0
47,557 6.9 42,916 18,975 16,268 7,673 4,640 9.8 6.0 1,308 1,608 231 1,955 722 37 1,232 1,232 0.5 24.8 59.4 2.0
56,592 19.0 51,498 23,203 19,241 9,054 5,094 9.0 9.8 2,150 1,830 216 1,330 439 33 891 891 (27.7) 17.9 57.2 2.3
68,477 21.0 61,951 28,075 23,282 10,593 6,526 9.5 28.1 2,500 1,950 236 2,312 763 33 1,549 1,549 73.8 31.2 76.3 2.5
82,857 21.0 74,960 33,971 28,171 12,818 7,896 9.5 21.0 2,600 2,100 246 3,442 1,136 33 2,306 2,306 48.9 46.4 94.6 2.5

99 9,597 883 9,697 13,024 23,604 12,509 2,832 9,677 187 277 17,928 6,593 5,205 29,726 17,020 115 17,135 12,590 873 13,463 23,604
99 10,678 1,381 10,777 16,607 28,764 14,764 3,715 11,049 275 492 22,834 7,978 5,241 36,053 19,770 129 19,899 16,154 795 16,948 28,764
99 11,438 1,501 11,537 19,307 32,344 16,039 4,765 11,274 250 682 25,583 10,853 5,500 41,936 21,904 150 22,054 19,882 256 20,139 32,344
99 12,841 1,791 12,941 21,457 36,188 17,339 5,915 11,424 250 1,232 30,955 12,194 6,000 49,150 25,947 150 26,097 23,053 229 23,282 36,188
99 15,003 2,081 15,102 23,257 40,439 18,639 7,165 11,474 250 1,653 36,321 13,620 6,400 56,341 30,295 150 30,445 25,896 1,167 27,063 40,439
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1,226 1,190 2,416 2,140 276 596 (320) 115 819 76 437 (129) 1,002 873
1,232 1,409 2,642 3,563 (922) 2,372 (3,294) 115 3,583 215 37 (78) 873 795
891 1,170 2,061 3,729 (1,668) 1,250 (2,918) 131 2,700 190 0 (538) 795 256
1,549 1,440 2,989 3,171 (182) 1,300 (1,482) 145 2,150 550 (0) (27) 256 229
2,306 1,540 3,846 2,843 1,004 1,300 (296) 145 1,800 421 938 229 1,167

9.4 9.1 1.2 5.4 13.1 12.5 3.6 0.9 8.1 2.5 142 (5.1) (3.3) 2.5 (3.3)
9.3 9.1 1.1 5.9 12.0 11.6 3.5 0.9 8.0 2.7 156 6.9 0.5 6.0 0.5
12.9 12.5 1.0 6.0 8.0 10.7 3.7 1.0 12.5 3.8 156 19.0 (27.7) 9.8 (27.7)
7.4 7.2 0.9 5.0 12.7 13.4 4.1 1.1 8.0 3.7 151 21.0 73.8 28.1 73.8
5.0 4.8 0.8 4.3 16.4 15.1 4.6 1.1 5.4 3.1 148 21.0 48.9 21.0 48.9
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Company Background
Simplex has been in the business of construction for the past eight decades. It began as a piling and ground-engineering company, and later diversified into all verticals in the sector. Brief history and business Incorporated in 1924 in Calcutta as the British-owned Simplex Concrete Piles (India), the company was taken over by the Mundhra family in 1947. The current Chairman B. D. Mundhra manages the company along with sons Amitabh and Rajiv. The Mundhra family holds about 55% stake. In 1958, the company designed and constructed the first RCC-framed structure in Asia, the 18-storey National Tower in Kolkata. In 1960, it made a foray into thermal power plants. In 1990, it bagged its first international order for piling in the UAE. In 1993, it went public, with a follow-on issue in 1996. In 2005, the name was changed to Simplex Infrastructure. In FY08, it raised funds via the warrants and a QIP.
B.D. Mundhra
Chairman and Managing Director Director
Amitabh Mundhra
Rajiv Mundhra
Director
N.K. Kakani
Executive Director, CFO
A.K. Chatterjee
Technical Director
S. Guha
Technical Director
A.K. Dutta
Technical Director
With the company since 1961. Became MD in 1987. Founder member of the National Institute of Construction Management and Research. With the company since 1995. Looks after project implementation and monitoring, business development both domestic and overseas. With the company since 1997. Looks at finance, material management, administration, site management, project planning, monitoring and control. B.Com, CA. 34 years experience in finance, growth strategies & business development. Has worked in many industries and has been associated with the company since 2005. Civil engineer, with the company since 1963. Has 46 years of experience in project planning, design and execution. Civil engineer, with the company since 1970. Has over 50 years experience in construction. Previously worked with HCC and Shib Banerjee Construction Pvt Ltd. Civil engineer, with the company since 2002. Has 42 years of experience in construction. Was previously COO of Bridge & Roof Co (I).
Source: Company
Fig 21 Equity history

Date Type Subscribers No. of shares (m) Issue Total raised Price (`) (`m)
Aug 05 Oct 07 Dec 07
Preferential issue Beethoven (Mauritius) Warrants RBS Credit and Financial Development Pvt. Ltd. (promoter group company). QIP GE Capital, Deutsche Asset Management, SBI, HSBC, Tata Mutual Fund and UTI Mutual Fund. 5.5m warrants issued to promoters @`401 each. Half a million warrants converted; balance lapsed, leading to forfeiture of initial deposit of `201m.
1.3 5.5 6.4
726 401 625
933 2,206 4,000
Jan 08
Warrants
0.5
401
401
77
Construction
India I Equities
Initiating Coverage
9 March 2012
Supreme Infrastructure
Fastest-growing topline, strong margins, attractive valuations; Buy
One of the fastest-growing companies in the sector (83% revenue CAGR over FY08-11), Supremes backward integration and strong asset base has resulted in higher OPM and return ratios than that of peers. It has de-risked its business model, diversifying its order book both geographically and in new segments of high-margin BOT projects. Its recent stake sale in a BOT subsidiary offers support to valuation. We initiate coverage with a Buy, and a sum-of-parts target price of `333. Superior OPM led by backward integration. Supreme has a robust 1618% operating margin, giving it a better-than-peers return ratio. This is due to backward integration into quarries and RMC units, own equipment bank and no sub-contracting. Its strategy to acquire quarries and bid for proximate projects gives it an edge while bidding and a higher success ratio. The strategy has a positive affect on OPM, due to savings on tariffs & taxes (captive material transfer) and uninterrupted supply of materials. Improving order book profile. Supreme has good revenue visibility with an order book of `37bn (3x TTM revenues) and L1 projects of `4.2bn. Supreme has grown from a road specialist to a multi-sector player in the last six years. In fresh forays, its focus is on high-margin projects in road BOTs and power EPC. Geographically, it has reduced orderbook concentration on Maharashtra from ~95% in FY07 to 70% now. Selective BOT exposure. Supremes exposure to road BOT projects is through nine projects, with IRRs of +15%. The equity requirement of over `4.5bn over FY12-15 will be partly funded by a 49% stake sale to 3i India (~`3bn), and partly through internal accruals or securitization of completed projects. We do not expect any dilution at the parent level. Valuation. Our sum-of-parts-based price target of `333 is based on 5x FY13e PE construction business (`289, a 45% discount to midcap target multiples) and 1x P/BV Sep11 (`44). Risks: Rise in interest rates.
Key financials (YE Mar) FY10 FY11 FY12e FY13e FY14e
Key data
SPII IN / SIIL.BO
`297 / `153 17173 / 5222 US$0.12m `3.8bn / US$86m 16.7m
56.8 22.1 43.2 6.1 6.5 30.6
56.6 17.3 43.4 6.2 6.5 30.7
56.6 17.3 43.4 6.1 5.0 32.3

300 270 240 210 180 150 Jul-11 Sep-11 Mar-11 Jan-12 May-11 Nov-11 Mar-12 Sensex SPII
Source: Bloomberg
Sales (`m) Net profit (`m) EPS (`) Growth (%) PE core (x) EV/EBITDA (x) PBV (x) RoE (%) RoCE (%) Dividend yield (%) Net gearing (x)
5,333 392 28.3 575.5 6.6 6.6 2.1 28.9 18.0 0.6 2.0
9,179 760 45.4 60.6 4.1 5.1 1.4 34.8 20.6 0.9 1.7
13,860 804 48.0 5.9 3.9 3.8 1.1 25.2 21.5 1.5 2.0
16,632 966 57.7 20.1 3.2 3.4 0.9 24.1 20.3 1.5 1.9
19,958 1,251 74.7 29.5 2.5 2.8 0.7 24.8 21.4 1.5 1.5
Manish Valecha

9 March 2012
Supreme Infrastructure Fastest-growing topline, strong margins, attractive valuations; Buy


Net revenues Revenue growth (%) - Op. expenses EBIDTA EBITDA margins (%) - Interest expenses - Depreciation + Other income - Tax Effective tax rate (%) Reported PAT +/- Extraordinary items +/- Minority interest Adjusted PAT Adj. FDEPS (`/share) Adj. FDEPS growth (%)
5,333 267.45 4,386 955 17.9 220 202 27 168 29.9 392 392 28.3 575.5
9,179 72.12 7,619 1,615 17.6 408 246 201 20.9 760 760 45.4 60.6
13,860 51.00 11,507 2,353 17.0 875 295 378 32.0 804 804 48.0 5.9
16,632 20.00 13,843 2,788 16.8 1,000 340 482 33.3 966 966 57.7 20.1
19,958 20.00 16,612 3,346 16.8 1,100 370 625 33.3 1,251 1,251 74.7 29.5
Share capital Reserves & surplus Net worth Minority interest Total debt Def. tax liab. (net) Capital employed Net fixed assets Investments - of which, liquid Net working capital Cash and bank balance Capital deployed Net debt WC (days) Book value (`/sh)
139 1,414 1,553 3,402 50 5,005 2,446 123 122 2,282 155 5,005 3,125 119 22
167 2,651 2,818 5,383 88 8,288 2,652 702 142 4,600 335 8,288 4,906 137 34
167 3,386 3,554 7,213 108 10,874 3,157 1,912 142 5,680 125 10,874 6,945 135 42
167 4,284 4,451 8,713 128 13,291 3,417 2,927 142 6,760 188 13,291 8,383 137 53
167 5,467 5,634 8,713 148 14,494 3,647 2,927 142 7,750 171 14,494 8,400 133 67


PAT + Non-cash items Cash profit - Incr./(decr.) in WC Operating cash-flow - Capex Free-cash-flow - Dividend + Equity raised + Debt raised - Investments - Misc. items Net cash-flow + Opening cash Closing cash
392 225 617 1,093 (477) 612 (1,089) 24 30 1,236 102 51 103 155
760 284 1,044 2,318 (1,274) 452 (1,726) 39 539 1,981 580 (6) 180 155 335
804 315 1,119 1,080 39 800 (761) 69 0 1,830 1,210 (209) 335 125
966 360 1,326 1,080 246 600 (354) 69 0 1,500 1,015 63 125 188
1,251 390 1,641 990 651 600 51 69 0 (17) 188 171
P/E (x) P/E Core (x) P/B (x) EV/EBITDA (x) RoE (%) RoCE (%) Fixed asset turnover (x) Dividend yield (%) Dividend payout (%) Interest exp./sales Debtors (days) Revenue growth (%) PAT growth (%) EBITDA growth (%) EPS growth (%)
8.2 6.6 2.1 6.6 28.9 18.0 2.3 0.6 5.3 4.1 95 267.4 575.5 387.1 575.5
5.1 4.1 1.4 5.1 34.8 20.6 3.2 0.9 4.4 4.4 93 72.1 93.8 69.0 60.6
4.8 3.9 1.1 3.8 25.2 21.5 3.8 1.5 7.3 6.3 86 51.0 5.9 45.7 5.9
4.0 3.2 0.9 3.4 24.1 20.3 3.8 1.5 6.1 6.0 88 20.0 20.1 18.5 20.1
3.1 2.5 0.7 2.8 24.8 21.4 4.0 1.5 4.7 5.5 84 20.0 29.5 20.0 29.5
Fig 5 PE band
(`/share) 500 450 400 350 300 250 200 150 100 50 0 Sep-08 Sep-09 Sep-10 Sep-11 Mar-08 Mar-09 Mar-10 Mar-11

(`bn) 50 (x) 4.5 4.0 3.5 3.0 2.5 2.0 FY08 FY09 FY10 FY11 FY12e FY13e FY14e
8x 6x 4x 2x
45 40 35 30 25 20 15 10 5 0
Mar-12
Order book
Book to bill (RHS)
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One of the fastest-growing companies in the sector (83% CAGR over FY08-11), Supremes backward integration and strong asset base has resulted in higher OPM and return ratios than that of peers. It has de-risked its business model, diversifying its order book, geographically and in new segments of high-margin BOT projects. Its recent stake sale in a BOT subsidiary offers valuation comfort. We initiate coverage with a Buy rating, and a sum-of-parts price target of `333. Superior OPM led by backward integration Supreme has built up significant capabilities by backward integrating into quarries, RMC plants, asphalt mixers, crushers and wet-mix plants. This not only ensures timely supply of raw material but also affords it a greater degree of control over aggregates for projects being executed. This backward integration has led to savings in tariffs and taxes due to captive material transfers. Supreme has quarrying sites at three locations and these are 100-150 km from most of its projects. Its strategy of acquiring/leasing quarries and bidding for projects in the vicinity gives it an edge in competitive bidding and a higher success ratio. Generally, most companies do not own quarrying sites due to the tedious process of acquisition and operation.
Fig 7 Quarries, RMC, asphalt and crushers
Locations Crusher Plants (TPH) Asphalt Plant (nos) RMC Plant (Cum/hr) Hot Mix Plant (MT/hr) Wet Mix Plant (MT/hr)
West India North India East India Total

Source: Company
350 200 550
3 3
240 120 60 420
490 50 540
100 50 150
In-house execution together with backward integration, has helped Supreme outstrip peers operating margins by 300-400bps and affords it higher return ratios
Over the years, Supreme has built up a huge fleet of construction equipments and executes most of the work through its in-house execution capabilities. This, together with backward integration, has helped it outstrip peers operating margins by 300-400bps and affords it higher return ratios. We expect it to maintain margins in the 16-18% range over the next two years.
Fig 8 EBITDA margin comparison with peers (FY12e)
(%) 20 16 12 8 4 0 Simplex Ramky Era NCC Supreme Pratibha J Kumar KNR
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Improving order-book profile Reduced its concentration in Maharashtra, from 95% in FY07 to 70% currently In the last three years, Supreme has posted strong growth in its order book (85% CAGR over FY10-12e). Its present `37bn order book is scheduled to be completed in the next 30 months and provides good revenue visibility over FY12-14 (3x TTM revenues). The company bagged orders of `16bn during 9MFY12 and has L1 projects of `4.2bn. Geographically, Supreme has reduced its concentration in Maharashtra, from 95% in FY07 to 70% now. It now operates in Rajasthan, West Bengal, UP, Punjab and Haryana, besides Maharashtra. Focus now on high-margin projects in road BOTs and power EPC Supreme has grown from a road specialist to a multi-sector player in the last six years. Of its fresh forays, its focus is now on high-margin projects in road BOTs and power EPC. This would help it reduce dependence on its core segments: roads and buildings. Supreme has a strong client base; 69% of its order book arises from the government, which safeguards it from payment issues.
Fig 10 Order-book break-up: by geography
West Bengal 2% Others 0.4% Punjab 5% Haryana 12% Buildings 41.6% UP 1%
Fig 9 Order-book break-up: by segment

Bridges 5.9% Power 1.9% Railways 0.4% Irrigation 0.3%
Rajasthan 10%
Roads 49.4%
Maharashtra 70%
Source: Company
Source: Company
Supreme has sharpened its focus on securing larger projects. This has resulted in an increase in the average project size, from `1bn in FY08 to `2.1bn currently. The average ticket size has drastically increased in FY11 with some big-ticket road projects. Based on L1 positions and strong pre-qualifications, we estimate order inflows of `23bn and `25bn in FY13 and FY14 and an order backlog of `42.2bn and `47.2bn for FY13 and FY14, respectively.
Acquisition to strengthen operations in water
In FY11, Supreme acquired 51% stake in Rudranee Infrastructure, an Aurangabad-based construction company, for `180m. Rudranee has a strong management and a qualified team of 124 engineers. This helps Supreme increase its exposure to water and power transmission by using the pre-qualification and expertise of Rudranee. The latters present order book is `3.5bn, translating to a book-to-bill ratio of 2.8x, based on FY11 revenue.
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Fig 11 Major orders list

4 Laning of Panvel - Indapur 4 Laning of AhmedNagar - Karmala - Tembhurni Jaipur Ring road project Sangli Shiroli road project Residential towers for Oswal Chemicals, Mumbai Supreme Housing high end villas & sevice apartments Construction of Multistorierd SKYZ Towers Complex at Gurgaon, Haryana. 4 Laning of Wada Bhiwandi Road & Manor Wada Road in Bhiwandi Flyover at Rajnoli and Mankoli Junction, Thane Ramki, Faridabad
Source: Company
Supreme BOT Supreme BOT Supreme Sanjose Supreme BOT Oswal Group Supreme Housing Ramprastha Supreme BOT MMRDA Ramki
5,940 3,950 4,600 2,730 2,700 2,000 1,413 3,300 1,240 1,350
5,940 3,950 3,939 2,730 2,614 2,000 1,376 1,276 1,240 1,180
Selective BOT exposure Supremes exposure to road BOT projects comes through nine projects. Its policy is to bid for road projects that offer IRRs of over 15%.
Fig 12 BOT projects (`m)
Project Project cost Supremes stake (%) Debt Equity Supremes equity
Manor Wada Bhiwandi Kasheli Bridge Haji Malang Ropeway Jaipur Ring Road Patiala-Malerkotla Ahmednagar Karnala Tembhurni Panvel Indapur Nagar Kopargaon Sangli Shiroli
Source: Company
4,300 3,014 850 10,450 930 4,800 12,060 2,340 3,300
74 10 51 40 100 100 64 100 90
3,225 NA 595 7,838 651 3,600 9,045 1,755 2,475
1,075 NA 255 2,613 279 1,200 3,015 585 825
1,075 100 130 1,020 280 1,350 1,960 590 830
Supreme recently acquired distressed BOT projects where construction work has been partial and projects were stalled due to non-fulfilment of contractual obligations by the concessionaire. This strategy helps early completion of projects. It also enables early collection of tolls and securitization of cash flows. At present, Supreme is not considering any dilution at the parent level Out of the total equity investment of `7.3bn, the pending equity requirement is `4.5bn over FY12-15. The company has so far invested ~`560m though investments and remaining by raising debt at the subsidiary level (as on Sep 11). Its remaining requirement will be partly funded by the stake sale to 3i India Infrastructure fund and the remaining through internal accruals or securitization of completed projects. At present, it is not considering any dilution at the parent level to fund its BOT equity commitment.
Investment by 3i India Infrastructure fund
3i India Infrastructure fund invested US$61m (~`3bn) for a 49% stake in the subsidiary, Supreme Infra BOT Holding. The subsidiary holds a stake in four projects: Ahmednagar-Karnala, Nagar-Kopargaon, Sangli-Shiroli and Panvel-Indapur. We believe the transaction values the subsidiary (Supreme infra BOT holding Ltd) at `6.2bn, which is at a premium to its
9 March 2012
book value. This stake sale would cover almost all the equity requirements of the projects in hand, thus reducing stress on the parents balance sheet.
Fig 13 Corporate structure, post stake sale
Supreme Infra
100% Supreme Infra BOT Ltd

74% 51% 100%
10% Kasheli Bridge
40% Jaipur ring road
51% Supreme Infra BOT Holding Ltd 49% 3i India Infra Fund 38%
26% Panvel Indapur
Manor Wada Bhiwandi Haji Malang Ropeway Patiala-Malerkotla
100% Ahmednagar Karnala Tembhurni 100% Nagar Kopargaon 90% Sangli Shiroli
Source: Company
Valuation Our sum-of-parts-based price target of `333 is based on 5x FY13e PE of the construction business (a 45% discount to midcap constructioncompany target multiples) and 1x Sep11 P/BV of its investment in BOT projects and Rudranee Infra.
Fig 14 12-month-forward PE: Mean and standard deviation
(x) 24 22 20 18 16 14 12 10 8 6 4 2 0 -2 -4 -6 -8
Sep-08 Sep-09 Sep-10 Sep-11 Mar-08 Mar-09 Mar-10 Mar-11
+2SD +1SD Mean -1SD -2SD Mar-12
Fig 15 Sum-of-the-parts
Basis of valuation Driver value (`m) Multiple (x) Value (`m) Value per share (`)
Core construction Road BOT projects Supreme Infra BOT Pvt. Ltd. Rudranee Infra Target price
P/E FY13
966
5.0
4,831
289
P/BV Sep'11 P/BV Sep'11
560 185
1.0 1.0
560 185
34 11 333
Supremes one-year-forward PE multiples range between 2x and 6x. At the ruling price of `222, the stock trades at a core PE of 3.2x and 2.5x FY13e and FY14e earnings respectively, and an EV/EBITDA of 3.4x and 2.8x, respectively.
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Risks

Project execution. Project execution delays and payment delays are major risks associated with construction companies. Financial risk. Given the nature of the sector, Supreme would need to take on additional debt to fund capex or working capital. A spike in interest rates could hit its bottom line. Political risk. Around 69% of its order book comes from the government. Slowing government expenditure or state elections might impact order flows.
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Financials
We expect Supreme to post stable EBITDA and net margins and 20% revenue CAGR in FY13-14 on the back of its robust order book. We estimate 25% CAGR in net profit over FY13-14, higher than the industry growth rate. Revenue to see 20% CAGR over FY13-14 Due to its proven execution capabilities and a strong order backlog, we expect Supreme to post 20% CAGR in revenue over FY13-14, following on the high 61% CAGR over FY10-12. The road sub-segment is likely to be the major contributor to revenue, with a couple of big-ticket orders secured in 9MFY12.
Fig 16 Revenue to see 20% CAGR growth despite high base
(`m) 24,000 20,000 16,000 12,000 100 8,000 4,000 0 FY08 FY09 FY10 FY11 FY12e FY13e FY14e
FY13e FY14e
(%) 300 250 200 150
50 0 -50
Revenue
Stable margins We expect EBITDA and net margins to be stable over FY12-14. We estimate 25% CAGR in net profit over FY12-14, higher than the industry growth rate. The growth in net profit is lower than in previous years due to the higher interest cost that has resulted from high debt.
Fig 17 EBITDA and net margin trend
(%) 25
20 15 10 5 0 FY12e FY08 FY09 FY10 FY11
EBITDA Margin
PAT Margin
85
9 March 2012
Return ratios robust Due to the lower leverage and stable margins at the operating and net level, we expect RoE and RoCE to be stable at ~20% over FY12-14.
Fig 18 Return ratios stable
(%) 36
27
18
0 FY12e FY13e FY14e FY08 FY09 FY10 FY11 RoE

RoCE
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Revenue Revenue growth (%) Less expenditure Inc/Dec in stock in trade/WIP Consumption of RM Employee cost Other expenditure EBITDA EBITDA margin (%) Growth (%) - Interest - Depreciation + Other income Profit before tax - Tax Tax rate (%) Reported PAT +/- Extraordinary items +/- Minority interest Adjusted PAT Adjusted PAT growth (%) Adj. FDEPS (`/share) CEPS (`/ share) DPS (`/ share)
5,333 267 4,386 (244) 4,346 142 141 955 17.9 387.1 220 202 27 560 168 30 392 392 575 28 8.6 1.5
9,179 72 7,619 (294) 7,392 273 248 1,615 17.6 69.0 408 246 960 201 21 760 760 61 45 12.0 2.0
13,860 51 11,507 278 10,508 360 360 2,353 17.0 45.7 875 295 1,183 378 32 804 804 6 48 13.4 3.5
16,632 20 13,843 (167) 13,145 416 449 2,788 16.8 18.5 1,000 340 1,448 482 33 966 966 20 58 15.8 3.5
19,958 20 16,612 (200) 15,774 499 539 3,346 16.8 20.0 1,100 370 1,876 625 33 1,251 1,251 30 75 19.6 3.5

139 1,414 50 1,553 3,402 5,005 2,515 455 2,060 386 123 1,846 640 783 3,269 901 86 987 2,282 155 2,437 5,005
167 2,651 88 2,818 5,383 8,288 3,268 690 2,578 74 702 2,826 1,170 2,050 6,046 1,248 199 1,446 4,600 335 4,935 8,288
167 3,386 108 3,554 7,213 10,874 4,042 985 3,057 100 1,912 3,700 1,300 2,200 7,200 1,300 220 1,520 5,680 125 5,805 10,874
167 4,284 128 4,451 8,713 13,291 4,642 1,325 3,317 100 2,927 4,300 1,600 2,500 8,400 1,400 240 1,640 6,760 188 6,948 13,291
167 5,467 148 5,634 8,713 14,494 5,242 1,695 3,547 100 2,927 4,900 2,000 2,600 9,500 1,500 250 1,750 7,750 171 7,921 14,494
87
9 March 2012

PAT +Non-cash items Cash profit - Incr/(decr) in WC Operating cash flow -Capex Free cash flow -Dividend + Equity raised + Debt raised -Investments -Misc. items Net cash flow +Opening cash Closing cash
392 225 617 1,093 (477) 612 (1,089) 24 30 1,236 102 51 103 155
760 284 1,044 2,318 (1,274) 452 (1,726) 39 539 1,981 580 (6) 180 155 335
804 315 1,119 1,080 39 800 (761) 69 0 1,830 1,210 (209) 335 125
966 360 1,326 1,080 246 600 (354) 69 0 1,500 1,015 63 125 188
1,251 390 1,641 990 651 600 51 69 0 (17) 188 171

8.2 6.6 2.1 6.6 28.9 18.0 2.3 0.6 5.3 4.1 95 267.4 575.5 387.1 575.5
5.1 4.1 1.4 5.1 34.8 20.6 3.2 0.9 4.4 4.4 93 72.1 93.8 69.0 60.6
4.8 3.9 1.1 3.8 25.2 21.5 3.8 1.5 7.3 6.3 86 51.0 5.9 45.7 5.9
4.0 3.2 0.9 3.4 24.1 20.3 3.8 1.5 6.1 6.0 88 20.0 20.1 18.5 20.1
3.1 2.5 0.7 2.8 24.8 21.4 4.0 1.5 4.7 5.5 84 20.0 29.5 20.0 29.5
88
9 March 2012
Company Background
Supreme is a nearly three-decade-old integrated infrastructure solutions provider operating in different sub-segments of Indian infrastructure. Promoted by Bhawanishankar Sharma as Supreme Asphalts Pvt. Ltd., the name was subsequently changed to Supreme Infrastructure, India, when the company went public in 2007. Brief history and business Supreme is a nearly three-decade-old integrated infrastructure solutions provider, operating in different sub-segments of Indian infrastructure buildings, roads, highways, bridges, irrigation, power, sewage and Railways. It is backwardly integrated and has four RMC (ready-mix concrete) plants with 103 acres of quarry blocks along with crushing, wet-mix concrete and asphalt units. It also operates a similar model in other states where the units are owned by the company and land for quarrying is allotted by local bodies. Management background
Bhawanishankar Sharma
Chairman
Vikram Sharma
Managing Director
Vikas Sharma
Whole-Time Director
Graduate in Science from Rajasthan University. Been instrumental in conceptualising and executing the quarrying business. For 20 years, president of the Quarry Manufacturers Association, Bombay Bachelors degree in civil engineering from Bombay University; with the company since 1999. Instrumental in successfully commissioning the ready-mix concrete plant (2003) along with Supreme Infrastructure India. Responsible for material procurement and end-to-end project execution. Masters degree in Management (Finance) from Bombay University; with the company since 1998. Instrumental in ensuring timely funds and enhanced credit facilities commensurate with companys growth. Responsible for accounts, administration and finance
Source: Company
89
Construction
India I Equities
Initiating Coverage
9 March 2012
J. Kumar Infraprojects
Strong order inflow and balance sheet; Buy
J. Kumars increased focus on the urban infra segment and its diversification out of Maharashtra have led to a `26bn-strong order book, with L1 projects at `2bn. Positives include healthy margins and return ratios and a lack of exposure to BOT projects (low IRR), which has resulted in lower gearing. We initiate coverage with a Buy rating, and a price target of `239.
Key data
JKIL IN / JKIP.BO
Robust ytd FY12 order inflow. J. Kumar has a strong order book at `26bn (2.8x trailing 12-month revenue), led by `18bn in inflows in FY12 ytd. It has L1 projects worth `2bn. Orders worth `8bn are from outside its core area of Maharashtra, indicating diversification. A focus on cash contracts in urban infra is likely to raise inflow in FY13-14. Over FY1314, we estimate revenue and PAT CAGR of 20% and 19%, respectively. Superior margin profile. J. Kumars strong operating margin of ~15% (sector range: 8-13%) results from its large fleet of machinery and its escalation clause that covers most contracts. Lower interest charge (due to low gearing) has led to a net profit margin of over 7%, which is better than that of peers. Low gearing, high RoE, no BOT exposure. J. Kumars current gearing of 0.3x and working capital of 110 days provide strong scope for growth. Further, its EBITDA margin is a robust ~15% in FY12e, with high return ratios (20% RoE and 24% RoCE in FY12e). The company does not bid for road BOTs with low internal rate of interest (IRR), which is a further positive. Valuation. Our target price of `239 is based on a PE of 7x FY13e, implying a 20% discount to our target PE of mid-cap construction companies; the implied target EV/EBITDA is 4x. We initiate with a Buy. Risks: Fewer order-flows, delay in project execution.
`181 / `79 17173 / 5222 US$0.18m `4.8bn / US$106bn 27.8m
54.5 14.4 45.5 2.2 0.1 43.2
54.5 14.4 45.5 2.9 0.1 42.5
54.5 14.4 45.5 3.6 3.6 38.3

190 160 130 100 70 Sep-11 Nov-11 Jul-11 Mar-11 Jan-12 May-11 Mar-12 Sensex JKIL
Source: Bloomberg
Key financials (YE: Mar)
Sales (`m) Net profit (`m) EPS (`) Growth (%) PE (x) EV/EBITDA (x) PBV (x) RoE (%) RoCE (%) Dividend yield (%) Net gearing (x)
7,496 700 21.7 36.5 7.9 4.3 1.6 30.9 35.3 1.5 (0.1)
9,492 739 26.6 22.6 6.5 4.4 1.3 21.7 28.0 1.7 0.3
10,484 798 28.7 8.0 6.0 4.0 1.1 19.5 23.8 1.7 0.3
12,711 950 34.2 19.0 5.0 3.3 0.9 19.4 24.4 1.9 0.2
15,062 1,135 40.8 19.6 4.2 2.6 0.8 19.5 25.1 2.0 0.1
Manish Valecha

9 March 2012
J. Kumar Infraprojects Strong order inflow and balance sheet; Buy


7,496 84.4 6,357 1,138 15.2 148 145 59 301 33.3 700 (97) 603 21.7 36.5
9,492 26.6 8,057 1,434 15.1 277 159 71 330 30.9 739 739 26.6 22.6
10,484 10.5 8,880 1,604 15.3 314 193 60 359 33.0 798 798 28.7 8.0
12,711 21.2 10,767 1,944 15.3 369 274 75 427 33.0 950 950 34.2 19.0
15,062 18.5 12,761 2,301 15.3 409 337 90 510 33.0 1,135 1,135 40.8 19.6
278 2,838 3,068 565 32 3,665 1,029 9.50 9.50 1,840 786 3,665 1,056 71 110
278 3,504 3,747 1,674 36 5,457 1,738 0.95 0.95 3,250 468 5,457 1,749 111 135
278 4,205 4,458 1,904 56 6,418 2,095 0.20 0.20 3,553 770 6,418 2,104 135 160
278 5,048 5,312 1,904 81 7,297 2,221 0.20 0.20 4,143 933 7,297 2,206 128 191
278 6,070 6,343 1,904 111 8,358 2,284 0.20 0.20 4,683 1,390 8,358 2,574 123 228


PAT + Non-cash items Cash profit - Incr./(decr.) in WC Operating cash-flow - Capex Free cash-flow - Dividend + Equity raised + Debt raised - Investments - Misc. items Net cash-flow + Op. cash & bank bal. Cl. cash & bank bal.
603 152 754 1,132 (377) 163 (541) 82 1,087 80 (0) 1 544 242 786
739 163 902 1,410 (508) 868 (1,375) 98 25 1,109 (9) (13) (318) 786 468
798 213 1,011 303 709 550 159 98 230 (1) (10) 302 468 770
950 299 1,249 590 658 400 258 106 (10) 162 770 933
1,135 367 1,502 540 962 400 562 114 (10) 458 933 1,390
7.9 7.9 1.6 4.3 30.9 35.3 5.8 1.5 10.1 2.0 33 84.4 83.1 88.5 36.5
6.5 6.5 1.3 4.4 21.7 28.0 6.3 1.7 11.3 2.9 39 26.6 22.6 26.0 22.6
6.0 6.0 1.1 4.0 19.5 23.8 5.6 1.7 10.5 3.0 45 10.5 8.0 11.8 8.0
5.0 5.0 0.9 3.3 19.4 24.4 4.8 1.9 9.5 2.9 45 21.2 19.0 21.2 19.0
4.2 4.2 0.8 2.6 19.5 25.1 4.5 2.0 8.6 2.7 45 18.5 19.6 18.4 19.6
Fig 5 PE band
(`) 380 10x 330 280 230 180 130 80 30 Mar-08 Mar-09 Mar-10 Mar-11 Sep-08 Sep-09 Sep-10 Sep-11 Mar-12 4x 2x J Kumar 8x 6x

(`m) 40,000 (x) 3.4
30,000
2.8
20,000
2.2
10,000
1.6
0 FY12e FY13e FY14e FY07 FY08 FY09 FY10 FY11
1.0
Orderbook
Book to bill (RHS)
91
9 March 2012

An increased focus on the urban infra segment and diversification out of Maharashtra has led to J. Kumars `26bn-strong order book, with L1 projects at `2bn. Other positives are healthy margins, return ratios and its lack of exposure to BOT projects, which has resulted in better-than-peer gearing. We initiate coverage with a Buy rating, and a price target of `239.
Robust YTD FY12 order inflow

J. Kumar bagged orders worth `18bn in FY12 ytd, taking its order book to `26bn (2.8x TTM revenue), with L1 projects (mainly roads) worth `2bn. This is a sharp rise from FY11, when a mere `7bn in orders were bagged due to reduced orders in road cash contracts and the intense competition in other states. The order book composition is changing, with greater exposure to jobs outside Maharashtra. In ytd FY12, J. Kumar bagged multiple orders worth `8bn from Rajasthan, Gujarat and Delhi. The company is taking up highmargin sub-contracts to build up its credentials for pre-qualification bids and is also raising the ticket size of its projects. J. Kumar has submitted bids worth `100bn across segments and states. Strong inflows are likely in FY13-14, as a result of the increased focus on cash contracts in the urban infrastructure and road sub-segments. We estimate an order inflow of `21bn during FY13, taking its order book to `32bn by end-FY13. Over FY13-14, we expect a 20% CAGR in revenue and 19% CAGR in PAT.
Fig 7 Order book break-up (by segment)
Piling & Irrigation 10%
Picking up high-margin sub-contracts to build up pre-qualification criteria and raise the ticket size of projects
Fig 8 Order book break-up (by region)

Gujarat 4%
Civil 20% Rajasthan 20%
Delhi 6%
Maharashtra 70% Transportation 70%
Source: Company
Source: Company
92
9 March 2012
Fig 9 Major orders of J. Kumar (`m)

Project Client Contract value Value of uncompleted work
Widening & improvement of Sion Panvel Special CIDCO State Highway Construction of a building in Rajasthan UPRNNL Design and construction of viaduct and two elevated stations for Delhi MRTS Work Order from CIDCO Construction of Eastern Freeway Panjarapol to Chembur Mankurd Link Road DMRC
6,000 5,200 1,530
6,000 5,200 1,530 1,427 1,357 923 917 915 904 880
CIDCO MMRDA
1,450 2,400 926 1,600
Lower Wardha Mail Canal construction of barrage Pipri Construction of flyover at Kapurwadi Junction, Thane Construction of Phase -II-BRTS Corridors for Ahmedabad Construction of ROB at Jogeshwari (South) Mono rail projects
Source: Company
TMC AMC (Ahmedabad Municipal Corporation) MCGM L&T
1,160 1,982 900
Superior margin profile

High operating margin arises from large fleet of machinery, strategy of not bidding for sub-contracts J. Kumar has a high operating margin of ~15% (sector range: 8-13%), which arises from its large fleet of machinery, its strategy of not bidding for sub-contracts and the escalation clause that covers most of its contracts. It also owns eight ready mix concrete (RMC) units in and around Mumbai (capacity 300 cu. mt.) and hires out idle equipment. We estimate 200-300bps benefit in operating margins, compared to other companies, as a result of using its own machinery and not sub-contracting its projects. Lower interest charge (due to low gearing) has led to better NPM (+7%) than peers.
(%) 40.0
35.0 30.0 25.0 20.0 15.0 FY10 FY11 FY12e FY13e
FY12e FY13e FY14e
Fig 10 OPM and NPM

(%)
16.0 15.0 14.0 13.0 12.0 11.0 10.0 9.0 8.0 7.0 FY10 FY11
OPM
NPM
RoE
RoCE
FY14e
93
9 March 2012
Fig 12 J. Kumars fleet of machinery and equipment

Type of equipment Description
Excavators and Loaders Rollers Hydraulic Piling Rigs Concrete Pump Complete Set Dozer Transit Mixers
Source: Company
14 from Tata Hitachi and Komatsu 1 Front-end Loader from Escorts 5 Backhoe Loaders from JCB 6 Mechanical (static) rollers 5 Vibratory rollers 7 HR-180 Piles of Mait, Italy 3 HR-130 Piles of Mait, Italy 1 1,800mm diameter Pile of Soilmec 2 Stationery pumps from Schwing Stetter 1 Mobile Boom Placer Pump from Putzmiester 1 from Caterpillar 33 from Greaves CIFA 14 from Schwing Stetter
Low gearing; high RoE; No BOT exposure

With net gearing of just 0.3x, J. Kumar is expected to be free-cashflow positive during FY12-14 J. Kumar is one of the few companies in the sector with a gearing of 0.3x. It is also likely to be free-cash-flow positive during FY12-14 due to a reduction in leverage, and improvement in working capital days. The companys strong balance sheet has resulted in lower interest costs and also increased leverage in its bids for big-ticket projects. In addition, owing to its strong EBITDA and net profit margins, it has one of the best return ratios (FY12e RoE: 21%, RoCE: 25%) in the industry. The company has working capital of 110 days, which provides enough room for growth. Another positive is its strategy of selective bidding in the low-IRR segment of road BOTs. It has not bagged any BOT projects yet, as the projects do not match up to its internal IRR benchmarks.
Fig 13 Comfortable net debt-to-equity
(x) 0.80
0.70 0.60 0.50 0.40 0.30 0.20 0.10 0.00 (0.10) FY12e FY13e FY14e FY07 FY08 FY09 FY10 FY11

(days) 160
140 120 100 80 60 40 20 0 FY12e FY13e FY14e FY07 FY08 FY09 FY10 FY11
Valuation
Our target price of `239 is based on a PE of 7x FY13e, implying a 20% discount to our target PE of mid-cap construction companies. At our target price, the implied EV/EBITDA is 4x. J. Kumars past one-year-forward PE multiples range between 3x and 10x. At the CMP of `172, the stock trades at a PE of 5.0x and 4.2x FY13e and FY14e earnings, respectively, and an EV/EBITDA of 3.3x and 2.6x.
94
9 March 2012

(x)
12 10 8 6 4 2 -2SD 0 Sep-08 Sep-09 Sep-10 Sep-11 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12 P/E Mean -1SD +2SD +1SD
Risks

Project execution. Project execution delays and payment delays are major risks associated with construction companies. Financial risk. Given the nature of the sector, J. Kumar would need to take on additional debt to fund capex or working capital. A spike in interest rates could hit its net profit. Political risk. Around 90% of its order book comes from the government. Slowing government expenditure or state elections may impact order flows.
95
9 March 2012
Financials
J. Kumars order book offers good visibility of revenue for the next two years. Over FY13-14, we expect the company to post strong revenue growth of 20% and PAT CAGR of 19%. We expect the EBITDA margin to be constant at ~15% in the same period.
Revenue to see 20% CAGR

On the back of its execution capabilities and strong order backlog, we estimate 20% CAGR over FY13-14. Transportation and civil construction are expected to remain the major contributors (~70% and 20%, respectively) to revenue.
Fig 16 Strong revenue growth
(`m) 16,000
14,000 12,000 10,000
(%) 100.0
90.0 80.0 70.0 60.0 50.0 40.0 30.0 20.0 10.0 FY12e FY13e FY14e FY07 FY08 FY09 FY10 FY11
Transportation and civil construction are expected to remain the major contributors (~70% and 20%, respectively) to revenue
8,000 6,000 4,000 2,000 0
Revenue
Stable margin ahead

J. Kumars large fleet of owned machinery, its strategy of not bidding for sub-contracts, the escalation clause that covers most of its contracts and the hiring out of its idle equipment should help the company maintain its EBITDA margin in this competitive environment. We expect the EBITDA margin to be stable at ~15% over FY12-14.
(`m) 2,500
2,000 1,500 1,000 500 0 FY12e FY13e FY14e FY07 FY08 FY09 FY10 FY11
(%) 19.0
18.0 17.0 16.0 15.0 14.0
EBITDA
EBITDA Margin (RHS)
96
9 March 2012
Net profit to register 19% CAGR over FY13-14e

We estimate net profit CAGR of 19% over FY13-14 and expect stable return ratios (operating and net margins). We expect RoE to stay constant at 20% over FY12-14 and RoCE to increase from 23.8% in FY12 to 25.1% in FY14.
Fig 18 PAT and PAT margin
(`m) 1,200
1,000 800 8.5 600 8.0 400 200 0 FY12e FY13e FY14e FY07 FY08 FY09 FY10 FY11 7.5 7.0
(%) 9.5
9.0
PAT
PAT Margin (RHS)
97
9 March 2012

Revenue Revenue growth (%) Less expenditure Construction & other cost Labour wages Employee cost Other expenditure EBITDA EBITDA margin (%) Growth (%) - Interest - Depreciation + Other income Profit before tax - Tax Tax rate (%) Reported PAT +/- Extraordinary items +/- Minority interest Adjusted PAT Adjusted PAT growth (%) Adj. FDEPS (`/share) CEPS (`/ share) DPS (`/ share)
7,496 84.4 6,357 4,923 411 156 867 1,138 15.2 88.5 148 145 59 1,001 301 33 700 (97) 603 83.1 21.7 27.1 2.5
9,492 26.6 8,057 6,237 452 225 1,144 1,434 15.1 26.0 277 159 71 1,070 330 31 739 739 22.6 26.6 32.3 3.0
10,484 10.5 8,880 7,339 550 281 710 1,604 15.3 11.8 314 193 60 1,157 359 33 798 798 8.0 28.7 36.4 3.0
12,711 21.2 10,767 8,881 675 351 860 1,944 15.3 21.2 369 274 75 1,376 427 33 950 950 19.0 34.2 44.9 3.3
15,062 18.5 12,761 10,657 735 439 930 2,301 15.3 18.4 409 337 90 1,645 510 33 1,135 1,135 19.6 40.8 54.0 3.5

278 2,838 32 3,068 565 3,665 1,369 339 1,029 9 673 1,133 2,093 3,899 1,193 866 2,058 1,840 786 2,626 3,665
278 3,504 36 3,747 1,674 5,457 1,628 487 1,141 598 1 1,018 1,562 2,728 5,308 863 1,196 2,059 3,250 468 3,718 5,457
278 4,205 56 4,458 1,904 6,418 2,126 681 1,445 650 0 1,293 2,011 3,012 6,315 1,204 1,559 2,763 3,553 770 4,323 6,418
278 5,048 81 5,312 1,904 7,297 3,176 955 2,221 0 1,567 2,333 3,597 7,498 1,386 1,968 3,355 4,143 933 5,076 7,297
278 6,070 111 6,343 1,904 8,358 3,576 1,292 2,284 0 1,857 2,765 4,103 8,725 1,585 2,457 4,041 4,683 1,390 6,074 8,358
98
9 March 2012

603 152 754 1,132 (377) 163 (541) 82 1,087 80 (0) 1 544 242 786
739 163 902 1,410 (508) 868 (1,375) 98 25 1,109 (9) (13) (318) 786 468
798 213 1,011 303 709 550 159 98 230 (1) (10) 302 468 770
950 299 1,249 590 658 400 258 106 (10) 162 770 933
1,135 367 1,502 540 962 400 562 114 (10) 458 933 1,390

7.9 7.9 1.6 4.3 30.9 35.3 5.8 1.5 10.1 2.0 33 84.4 83.1 88.5 36.5
6.5 6.5 1.3 4.4 21.7 28.0 6.3 1.7 11.3 2.9 39 26.6 22.6 26.0 22.6
6.0 6.0 1.1 4.0 19.5 23.8 5.6 1.7 10.5 3.0 45 10.5 8.0 11.8 8.0
5.0 5.0 0.9 3.3 19.4 24.4 4.8 1.9 9.5 2.9 45 21.2 19.0 21.2 19.0
4.2 4.2 0.8 2.6 19.5 25.1 4.5 2.0 8.6 2.7 45 18.5 19.6 18.4 19.6
99
9 March 2012
Company Background
J. Kumar Infraprojects started as a proprietary concern under the name of J. Kumar & Co. The company, which is promoted by Jagdishkumar Gupta (chairman and MD), has completed projects in a variety of construction sub-segments: civil, transportation, irrigation and piling. Brief history and business J Kumar has been a preferred government contractor for the past few years. A major portion of contracts in its current order book comes from the public sector Incorporated in 1980 as a proprietary concern, J. Kumar and Co. was converted into a public limited company in 2007. It came out with its maiden issue in Feb 08 at `110 a share. It has been a preferred government contractor for the past few years. A major portion of contracts in its current order book comes from the public sector. It has, over the years, entered into JVs with others to strengthen its prequalification credentials. It now qualifies to bid for large orders independently.
Key management
Fig 23 Management background
Jagdishkumar M. Gupta Kamal J. Gupta Nalin J. Gupta

Source: Company
Founder, Chairman, with ~3 decades of experience in Chairman and Managing construction. Director Executive Director Executive Director Promoter, Director and member of The Indian Institute of Bridge Engineers. More than 12 years of experience in construction Promoter, Director and civil engineer. More than 12 years of experience in construction
100
Construction
India I Equities
Initiating Coverage
9 March 2012
Era Infra Engineering

Rise in capital need; fund raising a trigger for stock performance
Era Infra Engineering (Era) has a strong presence in the high-margin EPC and equipment rental segments. Yet, an increase in slow-moving BOT projects, a drop in RoE and NPM (FY09-12e) and rise in gearing are short-term concerns. We also expect FCF to remain negative. Fund raising via equity dilution in the infra subsidiary could be a stock price trigger. We initiate coverage with a Hold and a price target of `164.
Rating: Hold Target Price: `164 Share Price: `140
Order book up 50%, mainly slow BOT projects. Despite a 50%+ rise over FY09-12e, 25-35% of the order book involves slow-moving captive road BOT projects that require equity funding. This hit sales in the last eight quarters. Respite is unlikely in the short-term. Strong third-party orders in power, urban infra and industrials would be stock price triggers. We expect the `105bn-strong order book (2.6x TTM rev) and `350bn in pre-qualification orders to drive 13% sales CAGR over FY13-14e. High capital need. Era Infra (India), a 100% subsidiary, has seven BOT projects under construction, most facing time and cost over-runs. It has infused `6.5bn in equity and requires another `7.3bn in the next three years. If funded by loans from the parent companys balance sheet, this will keep gearing at a high 1.7x. Fund-raising via equity dilution at infra subsidiary level at attractive valuations would be a stock-price trigger. RoE to rise. Despite industry-leading operating margins in EPC and equipment rental, FY09-12e NPM and RoE shrunk due to high working capital, high interest rates and low sales growth. We expect a marginal rise in RoE in FY12-14, due to low interest rates, stable OPM & working capital. Valuation. Our sum-of-parts-based price target is `164. This comprises construction: `110 at 9x FY13e PE and BOT: `54 at 1.5x Dec 11 BV. Risks: OPM down/up, execution slippages/ramp-up.
Key data 52-week high / low Sensex / Nifty 3-m average volume Market cap Shares outstanding
ERIE IN / ERCI.BO `209 / `134 17173 / 5222 US$1m `25.4bn / US$565m 181.8m
Shareholding pattern (%) Dec 11 Sep11 Jun 11 Promoters 58.9 58.9 58.9 - of which, pledged 45.4 47.7 46.7 Free float 41.1 41.1 41.1 - Foreign institutions 1.9 1.7 1.3 - Domestic institutions 4.8 5.2 5.6 - Public 34.4 34.2 34.2

230
210 190 170 150 130 Jul-11
Sensex
Sep-11
Nov-11
Mar-11
Jan-12
Source: Bloomberg
34,155 2,311 12.0 (2.2) 5.5 6.9 1.7 19.9 17.0 0.3 1.4
38,289 2,468 12.8 6.8 6.3 7.1 1.5 15.5 14.1 0.3 1.5
41,602 2,069 11.4 (11.0) 9.2 7.3 1.4 11.6 13.2 0.3 1.7
46,147 2,226 12.2 7.6 7.0 7.0 1.2 11.4 13.1 0.4 1.8
52,894 2,648 14.6 19.0 5.9 6.5 1.1 12.1 13.4 0.4 1.8
May-11
Manish Valecha

Mar-12
ERIE
9 March 2012
Era Infra Engineering Rise in capital need; fund raising a trigger for stock performance


Net revenues Revenue growth (%) - Op. expenses EBIDTA EBITDA margins (%) - Interest expenses - Depreciation + Other income - Tax Effective tax rate (%) Reported cons. PAT +/- Extraordinary items +/- Minority interest Adjusted PAT Adj. FDEPS (`/share) Adj. FDEPS growth (%)
34,155 43.7 27,630 6,525 19.1 2,564 715 250 1,184 29.8 2,794 (483) 2,311 12.0 (2.2)
38,289 12.1 31,115 7,174 18.7 3,188 840 427 1,104 30.9 2,468 2,468 12.8 6.8
41,602 8.7 33,724 7,877 18.9 4,323 970 401 917 35.0 1,703 366 2,069 11.4 (11.0)
46,147 10.9 37,297 8,850 19.2 5,001 1,070 401 954 30.0 2,226 2,226 12.2 7.6
52,894 14.6 42,713 10,181 19.2 5,630 1,170 401 1,135 30.0 2,648 2,648 14.6 19.0
Share capital Reserves & surplus Net worth Minority interest Total debt Def. tax liab. (net) Capital employed Net fixed assets Investments - of which, liquid Net working capital Cash and bank balance Capital deployed Net debt WC (days) Book value (`/sh)
358 14,207 14,565 24,820 1,584 40,970 14,786 2,853 18,670 4,661 40,970 20,159 164 81
364 17,013 17,377 29,811 1,862 49,050 15,160 5,549 23,958 4,384 49,050 25,427 203 96
364 18,058 18,422 34,454 2,562 55,438 16,790 8,211 27,716 2,721 55,438 31,733 227 101
364 20,178 20,542 39,354 3,262 63,158 18,220 10,075 32,097 2,766 63,158 36,588 237 113
364 22,699 23,063 43,954 3,962 70,979 19,550 12,223 36,149 3,057 70,979 40,896 235 127


PAT + Non-cash items Cash profit - Incr./(decr.) in WC Operating cash-flow - Capex Free-cash-flow - Dividend + Equity raised + Debt raised - Investments - Misc. items Net cash-flow + Opening cash Closing cash
2,311 1,389 3,700 6,679 (2,979) 3,491 (6,470) 85 3,070 6,857 1,091 (590) 2,871 1,791 4,661
2,468 1,118 3,586 5,288 (1,702) 1,214 (2,916) 85 420 4,991 2,696 (8) (278) 4,661 4,384
2,069 1,670 3,739 3,758 (19) 2,600 (2,619) 85 4,643 2,663 939 (1,663) 4,384 2,721
2,226 1,770 3,996 4,381 (386) 2,500 (2,886) 106 4,900 1,863 (0) 45 2,721 2,766
2,648 1,870 4,518 4,052 466 2,500 (2,034) 127 4,600 2,148 (0) 291 2,766 3,057
P/E core (x) P/E (x) P/B (x) EV/EBITDA (x) RoE (%) RoCE (%) Fixed asset turnover (x) Dividend yield (%) Dividend payout (%) Interest exp./sales Debtors (days) Revenue growth (%) PAT growth (%) EBITDA growth (%) FDEPS growth (%)
5.5 9.0 1.7 6.9 19.9 17.0 2.5 0.3 3.1 7.5 100 43.7 31.6 57.8 (2.2)
6.3 10.3 1.5 7.1 15.5 14.1 2.4 0.3 2.9 8.3 129 12.1 6.8 9.9 6.8
9.2 14.9 1.4 7.3 11.6 13.2 2.3 0.3 3.5 10.4 120 8.7 (16.2) 9.8 (11.0)
7.0 11.4 1.2 7.0 11.4 13.1 2.3 0.4 4.1 10.8 125 10.9 7.6 12.3 7.6
5.9 9.6 1.1 6.5 12.1 13.4 2.3 0.4 4.1 10.6 125 14.6 19.0 15.0 19.0
Fig 5 PE band
(`) 240 220 200 180 160 140 120 100 80 60 40 20 0 Sep-07 Sep-08 Sep-09 Sep-10 Sep-11 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11

(`bn) 160 (x) 5.0 4.5 4.0 3.5 3.0 2.5 2.0 FY12e FY13e FY14e FY08 FY09 FY10 FY11
14x 11x 8x 5x
140 120 100 80 60 40 20 0
Mar-12
Orderbook
Book to bill (x)
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9 March 2012

Eras presence in the high-margin EPC and equipment rental segments gives it a strong advantage. However, the increase in slow-moving BOT projects (which require equity funding), drop in RoE and NPM (over FY09-12e) and rise in gearing are short-term concerns. We expect FCF to remain negative, going forward. Fund raising via equity dilution in the infra subsidiary would be a trigger for stock price performance. We initiate coverage with a Hold rating, and a price target of `164. Order book up 50%, but mainly slow-moving BOT projects Eras order book has grown 50%+ over FY09-12 and is now at `105bn. However, despite the growth in order book, its high share (25-35%) of slow-moving, captive road BOT orders (regulatory delays) has impacted sales growth in the past eight quarters. Revenue in the contracts division in the last nine months has grown just 1% due to the higher proportion of slow-moving orders. We do not expect any respite in the near term. Strong third-party orders would be the key stock price triggers Strong third-party orders from power, urban infra and industrials (Era has a two-decade-long presence in these verticals) would be key stock price trigger. The `105bn order book (2.6x TTM revenue) and `350bn of prequalification stage orders are likely to drive 13% sales CAGR over FY1314e. The public sector (including NHAI projects) comprises 80% of Eras present order book. This shields it from any slowdown in the private sector. On the other hand, this also increases Eras working capital cycle as compared to companies that work mainly with private clients.
Fig 7 Order-book break-up: verticals
Power 19% Industrials, Social Infra 37%
Fig 8 Order-book break-up: government vs. private

Pvt 20%
Infra 44%
Public 80%
Source: Company
Source: Company
Eras order book is well diversified by verticals and geographies. It covers the major verticals of power, urban infra and industrials, while its 70 project sites span 20 Indian states.
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Fig 9 Major orders of Era

Project Client Order Size (`m)
4 Laning of Bareilly-Sitapur 4 laning of Rampur Kathgodam section in the state of U.P. 4 Laning of Muzaffarnagar-Haridwar Construction of Group Housing project at the Arena, Bengaluru 4 Laning of Haridwar Dehradun Section
Bareilly Highways Projects Limited Rampur Highways Projects Limited Haridwar Highways Projects Limited Parinda Buildcon Pvt Ltd Dehradun Highways Projects Limited Golden Glow Estate Pvt Ltd
17,230 10,250 10,070 9,067 6,520 3,777 3,841 3,285
Construction of Group Housing project SKYVILLE at Gurgaon-68 Construction of Group Housing project at Gurgaon-103 Headway Buildcon Pvt Ltd
Design, Construction, Development, Finance, Operation Hyderabad Ring Road Project Private Limited & Maintenance Of 8 Lane Access From Narsingi To Kollur Construction of Group Housing project at Gurgaon-86 Resolve Estate Pvt Ltd New Four Lane Gwalior Bypass in MP
Source: Company
3,296 2,970
Gwalior Bypass Project Limited
Industry-leading operating margin in core business
Industry-leading margins in the core construction division (~15%)
Eras overall operating margin is a healthy 18-20%, due to its industryleading margin in the core construction division (~15%) and its high margins in the equipment hiring division (~75%). The strong margin in its core construction division is due to 100% use of in-house machinery and equipment, in-house technical expertise and strong project management capabilities (these ensure timely execution within budgeted costs while maintaining quality).
Fig 10 Peer comparison: EBITDA margins (FY12e)
(%)
20 16 12 8 4 0 Simplex Ramky Supreme Era Pratibha NCC J Kumar KNR
Equipment rental business, no more high returns
During FY08/09, the equipment rental business commanded an RoCE of 25%+. Due to lower demand and high competition, it registered 16% RoCE in FY11. We expect this to further drop to 14% in FY12e
The infrastructure boom has generated the need for technologicallyadvanced machinery and equipment. Eras leasing out of idle machinery has led to the emergence of a full-fledged division under the brand Era Machine Mart. With reliable and timely key deliverables, the business characteristically commands high margins and had few large competitors till FY10. Era has an equipment bank worth `11bn (40% used in-house) and plans further investment over the next three years. During FY08/09, the business commanded an RoCE of 25%+. However, in FY11, due to lower demand and high competition, it registered 16% RoCE in FY11. We expect this to further drop to 14% in FY12e.
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9 March 2012
High capital need Era capitalizes on the large opportunities in the road sector through public-private partnerships. Era Infra (India), a 100% subsidiary, has seven BOT projects under construction. However, most of these face time and cost over-runs. The target IRRs from the projects are 16-18%. The company has submitted several pre-qualifications bids for road BOT projects and expects to secure at least one over the next 3-6 months. Era has invested `6.5bn equity in a road BOT subsidiary and needs to invest another `7.3bn in the next three years. If funded by loans from the parents balance sheet, this would keep gearing at a high 1.7x Three road projects are nearing completion, while four will be completed in the next three years. Era has invested `6.5bn equity in the road BOT subsidiary; and needs to invest another `7.3bn in the next three years. If funded by loans from the parents balance sheet, this would keep gearing at a high 1.7x one of the highest in our coverage universe. The company is also looking at fund-raising options at the subsidiary or BOT-SPV level to fund the pending equity requirement. Any fund raising via such dilution at an attractive valuation would be a stock price trigger.
Fig 11 BOT details
Economic Project cost Debt equity Investment till Road Projects interest % (`m) (x) Mar 12e (`m) Nature Completion date
Gwalior Bypass Hyderabad Ring Road West Haryana Highway Haridwar Highway Dehradun Highway Bareilly Highway Rampur-Kathgodam
99.9 99.9 99.9 99.9 99.9 99.9 99.9
3,320 3,900 5,860 11,010 6,910 19,520 10,250 60,770
2.6 2.8 3.0 3.5 3.3 4.7 3.1
918 858 1,457 1,199 974 1,781 7,188
Annuity Annuity Toll Toll Annuity Toll Toll
Mar'12 Mar'12 Mar'12 Mar'13 Oct'12 Aug'13 Mar'15
RoE to rise Era has one of the best operating margins in the EPC and equipment rental segments. However, high working-capital days (over 225 in FY12e), higher interest cost due to high leverage (1.7x) and high interest rates have led to a decline in net margins and, hence, RoE . from 30.6% in FY08 to 11.5% in FY12e. Slowing revenue growth due to execution slippages has added to concerns. We believe that, with stable operating margins and working capital days, and some respite from a reduction in interest rates, the declining trend in RoE should stop with marginal improvement likely over FY12-14.
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(%) 35 28 21 14 7 0 FY12e FY13e FY14e
+2SD +1SD Mean -1SD -2SD Mar-12
FY08
FY09
FY10
RoE
FY11
RoCE
Valuations We value Era on a sum-of-parts basis at `164, with its core construction business at a target PE of 9x FY13e earnings (`110), in line with the target multiples of other construction companies. We value the road BOT projects at 1.5x Dec 11 BV (`54).
Fig 13 One-year forward PE: Mean and standard deviation
(x) 20
18 16 14 12 10 8 6 4 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11
At the ruling price of `138, the stock trades at core PEs of 7x and 5.9x and EV/EBITDA of 7x and 6.5x, respectively, for FY13e and FY14e earnings.
Fig 14 Sum-of-parts valuation
Basis of valuation Multiple (x) Value (`m) Value per share (`)
Core business Road BOT projects Era Infra (India) Fair value
P/E FY13e P/BV Dec '11
9.0 1.5
20,032 9,750
110 54 164
Risks
Project execution. Project-execution delays and payment delays are major risks associated with construction companies. Improvement regarding payments and execution delays would be positives. Financial risk. Given the nature of the sector, Era would need to
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take on additional debt to fund capex or working capital. A spike in interest rates could hit its bottom line. Any delay in raising capital to fund BOT equity would be negative for the company. A successful stake sale in the BOT projects would be a positive.
High gearing risk. Eras net gearing of 1.7x in Mar 11, is one of the highest in the industry, and is particularly high considering the companys plans of aggressively bidding for BOT projects. However, a drop in interest rates and the repayment of debt would be positive for the company.
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Financials
We estimate 13% CAGR in revenue over FY13-14, with stable margins and earnings at 13% CAGR over the same time frame. We expect Eras net debt-equity ratio to inch up in FY13/14, in the event it does not successfully raise funds for its BOT projects. Revenue estimated at a mere 13% CAGR over FY13-14e Slow-moving captive BOT projects constitute 25-30% of Eras order book. We believe this would impact revenue growth in the next two years. We expect 13% CAGR in revenue growth over FY13-14.
Fig 15 Revenue and revenue growth
(`m) 55,000 44,000 33,000 22,000 11,000 0 FY12e FY13e FY14e
(%) 20.5 19.5 18.5 17.5 16.5 FY12e FY13e FY14e FY08 FY09 FY10 FY11
(%) 100 80 60 40 20 0 FY08 FY09 FY10 FY11
Revenue
Stable margins We expect stable EBITDA and net margin over FY13-14. We estimate 13% CAGR in net profit over FY13-14, lower than the industry growth rate. Higher interest cost due to increasing leverage would nullify the impact of higher EBITDA margins earned during the next 2-3 years.
(`m) 12,000
9,000
6,000
3,000
EBITDA
EBITDA margin (RHS)
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9 March 2012
Net debt-equity ratio to remain high We expect Eras net debt-equity ratio, currently at 1.7x, to inch higher over FY13-14, to 1.8x. Any further funding requirement for its BOT projects would further add to its leverage. Eras working-capital days too are likely to remain among the highest in the industry.
(days) 250
Fig 18 Net debt-to-equity

(x) 2.5
200
2.0
150
1.5
100
1.0
50
0.5
0 FY12e FY13e FY14e FY08 FY09 FY10 FY11
0.0 FY12e FY13e FY14e FY08 FY09 FY10 FY11
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Revenue Revenue growth (%) Less expenditure Direct expenses Employee cost Other expenditure EBITDA EBITDA margin (%) Growth (%) - Interest - Depreciation + Other income Profit before tax - Tax Tax rate (%) Reported PAT +/- Extraordinary items +/- Minority interest Adjusted PAT Adjusted PAT growth (%) Adj. FDEPS (`/share) CEPS (`/ share) DPS (`/ share)
34,155 43.7 27,630 26,223 1,004 403 6,525 19.1 57.8 2,564 715 250 3,978 1,184 29.8 2,794 (483) 2,311 31.6 12.0 20.6 0.4
38,289 12.1 31,115 29,175 1,326 614 7,174 18.7 9.9 3,188 840 427 3,572 1,104 30.9 2,468 2,468 6.8 12.8 19.7 0.4
41,602 8.7 33,724 31,617 1,591 516 7,877 18.9 9.8 4,323 970 401 2,619 917 35.0 1,703 366 2,069 (16.2) 11.4 20.6 0.4
46,147 10.9 37,297 35,072 1,909 316 8,850 19.2 12.3 5,001 1,070 401 3,180 954 30.0 2,226 2,226 7.6 12.2 22.0 0.5
52,894 14.6 42,713 40,200 2,291 222 10,181 19.2 15.0 5,630 1,170 401 3,782 1,135 30.0 2,648 2,648 19.0 14.6 24.8 0.6

358 14,207 1,584 14,565 24,820 40,970 15,270 1,469 13,800 985 2,853 9,337 9,083 5,789 24,210 5,411 129 5,540 18,670 4,661 23,331 40,970
364 17,013 1,862 17,377 29,811 49,050 16,444 2,295 14,149 1,011 5,549 13,540 12,042 6,934 32,515 8,141 417 8,557 23,958 4,384 28,342 49,050
364 18,058 2,562 18,422 34,454 55,438 19,055 3,265 15,790 1,000 8,211 13,677 12,537 10,500 36,715 8,839 160 8,999 27,716 2,721 30,437 55,438
364 20,178 3,262 20,542 39,354 63,158 21,555 4,335 17,220 1,000 10,075 15,804 14,539 12,000 42,343 10,086 160 10,246 32,097 2,766 34,864 63,158
364 22,699 3,962 23,063 43,954 70,979 24,055 5,505 18,550 1,000 12,223 18,114 17,390 12,000 47,504 11,195 160 11,355 36,149 3,057 39,207 70,979
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9 March 2012

2,311 1,389 3,700 6,679 (2,979) 3,491 (6,470) 85 3,070 6,857 1,091 (590) 2,871 1,791 4,661
2,468 1,118 3,586 5,288 (1,702) 1,214 (2,916) 85 420 4,991 2,696 (8) (278) 4,661 4,384
2,069 1,670 3,739 3,758 (19) 2,600 (2,619) 85 4,643 2,663 939 (1,663) 4,384 2,721
2,226 1,770 3,996 4,381 (386) 2,500 (2,886) 106 4,900 1,863 (0) 45 2,721 2,766
2,648 1,870 4,518 4,052 466 2,500 (2,034) 127 4,600 2,148 (0) 291 2,766 3,057

P/E core (x) P/E (x) P/B (x) EV/EBITDA (x) RoE (%) RoCE (%) Fixed asset turnover (x) Dividend yield (%) Dividend payout (%) Interest exp./sales Debtors (days) Revenue growth (%) PAT growth (%) EBITDA growth (%) EPS growth (%)
5.5 9.0 1.7 6.9 19.9 17.0 2.5 0.3 3.1 7.5 100 43.7 31.6 57.8 (2.2)
6.3 10.3 1.5 7.1 15.5 14.1 2.4 0.3 2.9 8.3 129 12.1 6.8 9.9 6.8
9.2 14.9 1.4 7.3 11.6 13.2 2.3 0.3 3.5 10.4 120 8.7 (16.2) 9.8 (11.0)
7.0 11.4 1.2 7.0 11.4 13.1 2.3 0.4 4.1 10.8 125 10.9 7.6 12.3 7.6
5.9 9.6 1.1 6.5 12.1 13.4 2.3 0.4 4.1 10.6 125 14.6 19.0 15.0 19.0
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Company Background & Management

The flagship company of the Era Group, promoted by H.S. Bharana, a civil engineer, Era Infra Engineering was established as a private limited company in 1990. It was converted to a public limited company in 1992 and listed in 1995. Brief history and business Launched as a mere construction company, Era today has a fairly diversified business mix of roads, power, urban infrastructure, buildings and housing, and caters to clients in the public and private sectors, besides its foray into BOT projects. Its clients include leading private groups such as Adani, Aditya Birla, Dalmia and Lanco and PSUs such as BHEL, NTPC, SAIL and IOC. Era ventured into real estate in FY08 but exited in FY09 sold to the promoters (of Era Infra) at a `269m profit (on investment of `1.27bn) in order to concentrate on its core construction business. Capitalizing on upcoming opportunities in infrastructure, the company has created three strategic divisions (EPC, Design & Engineering, and Equipment Management) and two subsidiaries: Era Infra (Road BOT), Era T&D (tower manufacturing & EPC).
Eras clients include leading private groups such as Adani, Aditya Birla, Dalmia and Lanco and PSUs such as BHEL, NTPC, SAIL and IOC
H S Bharana J L Khushu
Chairman and MD CEO, Whole-time director
R K Gupta
Group President
Yogesh Verma
President and CEO
Raj Sharma
Source: Company
Group HR Head
Promoter and civil engineer. Over three decades of experience in construction and infrastructure Civil engineer (Masters in Structural Engineering); retired chief engineer, Ministry of Urban Development, GoI; with 45 years of experience Civil engineer with 34 years of experience with NTPC in managing design, execution and engineering of gas and thermal power plants Post-graduate electronics engineer with over 20 years of senior management experience across sectors and industries. Handles business operations, T&D and preengineered buildings PGDM with more than 20 years of experience, specialising in HR functions

Date Type # shares (m) Issue price (`) Amount raised (`m)
Jul 05 Feb 06 Jun 07 Dec 08 Feb 09 Jun 09 Oct 09 Oct 09 Feb-10 Mar 10 Apr 10 May 10 May 10 Jun 10
Source: Company
FPO GDR Warrants Warrants Bond conversion Bond conversion Warrant conversion Warrant conversion Bond conversion Bond conversion Bond conversion Bond conversion Bond conversion Bond conversion
34.2 26.3 22.5 27.5 0.6 0.1 21.0 14.0 0.30 0.15 0.05 2.50 0.05 0.05
14 51 27 85 159 159 85 85 159 159 159 159 159 159
492 1,334 606 2,338 87 24 1,785 1,190 47.6 23.8 7.9 396.5 7.9 7.9
Note: Based on face value = `2 /share
112
Construction
India I Equities
Initiating Coverage
9 March 2012
NCC
Balance sheet stress, low returns, expensive valuations; Sell
Following renewed interest in the sector, NCC outperformed indices in Jan-Feb12, in line with other infra stocks. However, a stressed balance sheet, waning OPM and low return ratios are causes for concern. Value unlocking by equity dilution in subsidiaries would be a positive trigger. We initiate coverage with a Sell, and a SOTP price target of `56.
Rating: Sell Target Price: `56 Share Price: `55
Key data
NJCC IN / NCCL.BO
New order margin-dilutive. NCCs order book (standalone: `202bn, consolidated: 220bn, at 3.9x TTM revenue) offers strong revenue visibility over FY13-14e. However, the recent `52bn order from NCC Power (a 100% subsidiary) is likely to be slow-moving and low margin (~6%) due to the Boiler Turbine Generator (BTG) component. Funding concerns for captive projects. NCCs three power projects under construction require further equity of `9.4bn over FY13-15. This is likely to be met through dilution at the sub/SPV level and internal accruals, which is likely to be time-consuming and/or not at lucrative valuations. Yet, due to its strategy of bidding for only high IRR projects, NCC did not add BOT projects in FY11/12 to its five operational road projects (likely cash inflow of `3.3bn p.a. from toll and annuities). Balance-sheet stress. NCCs balance sheet has been under stress due to rising need to fund equity for power BOT projects. In the core business, too, it has been under pressure due to high working-capital requirement (~200 days), deteriorating operating margin and high leverage, leading to low return ratios. Slow-moving projects in international markets and AP still constitute 11% and 7%, respectively, of its order book. Valuation. Our sum-of-parts based price target works out to `56 construction: `15 at a PE of 5x FY13e EPS; five road BOTs: `15 at 1x Dec11 BV; three power BOTs: `19 at BV; realty: `7 at 0.5x BV. Risks: Value-unlocking from stake sale in subsidiaries, ramp-up in execution.
`118 / `32 17173 / 5222 US$0.9m `14.2bn / US$315m 256.6m
19.5 10.4 80.5 44.1 12.5 23.9
19.5 7.4 80.5 44.1 12.5 23.9
19.6 5.7 80.4 42.3 13.2 25.0

130 110 90 70 50 30 Jul-11 Sep-11 Mar-11 May-11 NJCC Nov-11 Jan-12 Mar-12 Sensex
Source: Bloomberg
Key financials (YE: Mar)
47,778 1,929 7.5 11.8 1.6 5.7 0.6 9.8 12.8 2.4 0.6
50,737 1,635 6.4 (15.2) 1.7 7.7 0.6 7.1 9.6 1.8 1.0
51,245 602 2.3 (63.2) 5.3 10.1 0.6 2.5 6.7 0.7 1.2
57,907 652 2.5 8.3 4.9 8.7 0.6 2.7 7.4 0.7 1.2
66,592 887 3.5 36.0 3.6 8.1 0.6 3.5 8.1 1.0 1.3
Manish Valecha

9 March 2012
NCC Balance sheet stress, low returns, expensive valuations; Sell


47,778 15.1 42,937 4,841 10.1 1,322 525 48 1,113 32.3 2,333 (404) 1,929 7.5 11.8
50,737 6.2 45,861 4,876 9.6 1,682 685 146 1,021 38.5 1,635 1,635 6.4 (15.2)
51,245 1.0 46,949 4,295 8.4 2,664 820 87 297 33.0 602 602 2.3 (63.2)
57,907 13.0 52,846 5,060 8.7 3,244 950 107 321 33.0 652 652 2.5 8.3
66,592 15.0 60,773 5,819 8.7 3,523 1,100 127 437 33.0 887 887 3.5 36.0
513 21,943 22,457 15,302 255 38,013 5,972 9,412 20,633 1,997 38,013 13,305 139 88
513 23,274 23,787 24,841 308 48,935 7,215 12,008 28,315 1,397 48,935 23,444 176 93
513 23,765 24,278 30,841 308 55,426 7,895 16,942 29,042 1,547 55,426 29,293 204 95
513 24,297 24,810 31,241 308 56,358 8,445 17,012 29,672 1,230 56,358 30,011 185 97
513 25,018 25,531 34,641 308 60,480 8,845 18,012 31,957 1,666 60,480 32,975 169 100


PAT + Non-cash items Cash profit - Incr./(decr.) in WC Operating cash-flow - Capex Free-cash-flow - Dividend + Equity raised + Debt raised - Investments - Misc. items Net cash-flow + Op. cash & bank bal. Cl. cash & bank bal.
1,929 593 2,521 4,771 (2,250) 1,624 (3,875) 389 3,673 2,863 2,009 (388) 652 1,345 1,997
1,635 738 2,373 7,683 (5,310) 1,928 (7,238) 298 9,539 2,596 6 (600) 1,997 1,397
602 820 1,422 726 696 1,500 (804) 111 6,000 4,934 (0) 150 1,397 1,547
652 950 1,602 630 972 1,500 (528) 120 400 70 0 (318) 1,547 1,230
887 1,100 1,987 2,285 (299) 1,500 (1,799) 165 3,400 1,000 0 436 1,230 1,666
P/E* (x) P/E core (x) P/B (x) EV/EBITDA (x) RoE (%) RoCE (%) Fixed asset turnover (x) Dividend yield (%) Dividend payout (%) Interest exp./sales Debtors (days) Revenue growth (%) PAT growth (%) EBITDA growth (%) EPS growth (%)
5.8 1.6 0.6 5.7 9.8 12.8 6.9 2.4 14.3 2.8 99 15.1 25.3 29.6 11.8
6.4 1.7 0.6 7.7 7.1 9.6 6.0 1.8 15.7 3.3 105 6.2 (15.2) 0.7 (15.2)
20.0 5.3 0.6 10.1 2.5 6.7 5.1 0.7 15.8 5.2 110 1.0 (63.2) (11.9) (63.2)
18.3 4.9 0.6 8.7 2.7 7.4 4.9 0.7 15.7 5.6 105 13.0 8.3 17.8 8.3
13.5 3.6 0.6 8.1 3.5 8.1 5.0 1.0 15.9 5.3 110 15.0 36.0 15.0 36.0
Source: Company, Anand Rathi Research *incl. International business
Fig 5 PE bands
(`/share) 300 250 200 150 100 50 0 Mar-06 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 20x 16x 12x 8x Mar-12

(`bn) 250 200 150 100 50 0 FY07 FY08 FY09 FY10 FY11 FY12e FY13e FY14e (x) 4.0 3.6 3.2 2.8 2.4 2.0
Orderbook
Book to bill (RHS)
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9 March 2012

Following renewed interest in the sector, NCC outperformed indices in Jan-Feb12, in line with other infra stocks. However, stressed balance sheet, waning OPM and low return ratio are causes for concern. Value-unlocking by equity dilution in subsidiaries would be a positive trigger. We initiate coverage with a Sell, and a SOTP price target of `56.
New orders margin-dilutive

Government orders comprise a dominant 63% of the domestic orderbook (worth `202bn). This has led to the delays in payments and hence increased stress on working capital. Government orders comprise a dominant 63% of the domestic orderbook. This has led to delays in payments and hence increased stress on working capital In the power segment, the company added orders from its own subsidiary, NCC Power, to construct a 1,320 MW plant for `52bn. However, these orders, which constitute ~24% of the order book would be margindilutive (6% EBITDA margin) and slow-moving (4-5 years to complete) as it has a high BTG component (50%) that would earn less than 2% EBITDA margin. Management has highlighted some execution slippages in ytd FY12 on account of the prolonged monsoons, delay in client payments and delay in land acquisition and other clearances at the client level. It has lowered its FY12 revenue guidance to `51bn/65bn from `56bn/72bn, standalone and consolidated, respectively.
Fig 7 9MFY12 Order-inflow breakdown by segment

Oil & Gas & others 3% International 1% Buildings & Housing 22%
Fig 8 Order-book breakdown by segment

Metals 2% Oil & Gas & others 4% International 8% Buildings & Housing 30%
Roads 1%
Power 51%
Water & Env 13%
Power 30%
Roads 2% Water & Env 12%
Irrigation / HEP 4%
Electricals 5%
Irrigation / HEP 9%
Electricals 3%
Source: Company
Source: Company
NCCs order book (standalone: `202bn, consolidated: 220bn, at 3.9x TTM revenue) offers strong revenue visibility over FY13-14e. The order book is well diversified across the major verticals of buildings and housing, transportation, irrigation, water, electricals, oil & gas, metals, power, mining and roads. Orders during the year amounted to `99bn, mainly driven by the power, building & housing and transportation segments. However, orders in most segments such as power, oil & gas, metals and irrigation have slowed down in FY12.
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Funding concerns for captive projects

Following its strategy of bidding for only high-IRR projects, NCC did not add BOT projects in FY11/12. It has five operational road projects, which are likely to yield `3.3bn in cash p.a. from toll and annuities. NCC requires further equity of `9.5bn over FY13-15 However, the company has three power projects under construction, for which it requires the remaining equity of `9.5bn over FY13-15. Of this, the NCC Power project (Nelcast: 1,320 MW) alone would require `6.2bn in the next 3-4 years. Management has highlighted that the power purchase agreement (PPA) with the Karnataka government has been cancelled and the company is now looking to sign new PPAs with other state governments. It does not even have coal linkages for the project. NCC is looking at funding options at the subsidiary/SPV level on both the roads and power segments. We estimate this to be time consuming and/or low on valuations.
Fig 9 BOT portfolio
Project (`m) % stake Proj. cost Equity Investment up to Dec 11 Completion date
The company is looking at funding options at the subsidiary/SPV level in the roads and power segments
Roads Brindavan Infra OB Infra Western UP BETL Puducherry Tindivanam Power Himachal Sorang Himalayan Green NCC Power Total
Source: Company
33 64 100 38 48 67 54 55
2,475 5,930 7,462 9,903 3,626 7,560 19,600 68,640 125,196
150 941 795 1,610 329 1,200 3,626 9,691 18,342
150 940 796 1,391 428 1,130 315 3,500 8,650
Jun 06 May 11 Apr 11 Oct 09 Jun 11 Mar 12 Dec 15 Feb 15
Fig 10 BOT asset-ownership structure
NCC Ltd NCC Infra

Roads
Brindavan Infrastructure (~63 km) Western UP Tollway (~79 km) Bangalore Elevated Tollway (~50km) OB Infra (~63 km) Pudicherry Tindivanam (~36 km)
Source : Company
Power
Himachal Sorang (100 MW) Himalayan Green (280 MW) NCC Power Project (1,320 MW)
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Apart from its BOT portfolio, NCC also operates in real estate, through its subsidiary NCC Urban Infra (an 80% stake) and three real estate SPVs (special-purpose vehicles). It is executing projects in Hyderabad, Ranchi, Bangalore, Cochin and Dubai. Its 50m sq. ft. projects have yet to commence. The Dubai project covers 1.5m sq. ft. spread over two towers. The construction of tower 1 is completed up to six floors so that the company can ask the buyers to pay a milestone payment and can avoid defaulter status. The equity invested in the project is `700m, loans amount to `1bn. It plans to cap any further equity investment in the business and focus on new project launches when the market revives.
Balance-sheet stress
NCCs balance sheet has been under stress due to its ever-increasing requirements to fund equity for its power BOT projects. It has been under pressure in its core business too, due to the high working-capital requirement. Working capital has constantly deteriorated in the last 3-4 years, from 120 days in FY09 to 220 days now. High exposure to government orders and Andhra Pradesh-based orders has led to increased debt collection days. NCCs interest outgo is one of the highest in the sector as a percent of sales (5.3% in FY12). The operating margin has also been deteriorating, from 10.1% in FY10 to 8.5% in FY12e (6.1% in 3QFY12) due to lower revenue booking leading to higher cost absorption. NCC has one of the highest interest outgo as percent of sales (5.3% in FY12). High leverage and lower operating performance are leading to the sharp decline in return ratios.
Fig 11 Return ratios: peer comparison (FY12e)
(%) 30
25
200
Fig 12 High working capital days: peer comparison (FY12e)

(days)
250
20 15 10 5
50 150
100
0 Ramky NCC Simplex Supreme J Kumar Pratibha KNR Era

0 Supreme J Kumar Simplex Ramky Era Pratibha NCC KNR
RoE
RoCE
Valuation
Our sum-of-parts-based price target is `56. This comprises construction: `15 at a PE of 5x FY13e EPS; five road BOTs: `15 at 1x Dec 11 BV; three power BOTs: `19 at BV; realty: `7 at 0.5x BV.
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Fig 13 12 month-forward PE: Mean and standard deviation

(x) 50
+2SD
40
+1SD 30 Mean 20 -1SD 10 -2SD 0 Mar-07 Mar-08 Mar-09 Mar-10 Mar-11 Mar-12
Source : Company, Anand Rathi Research
At the ruling price of `55, the stock trades at a core PE of 4.9x and 3.6x FY13e and FY14e earnings, respectively, and an EV/EBITDA of 8.7x and 8.1x FY13e and FY14e, respectively.
Fig 14 Sum-of-parts valuation
Basis of valuation Driver value (`m) Multiple (x) Value (`m) Value per share (`)
Core construction Road BOT projects - Brindavan Infrastructure - OB Infrastructure - Western UP Tollway - Bangalore Elevated Tollway - Puducherry-Tindivanam Power BOT projects - Himachal Sorang - Himalayan Green - NCC Power Real estate - NCC Urban - Jubilee Hills - Tellapur Techno City Pvt. Ltd. - NCC Vizag Urban Infra Fair value
P/E FY13
776
5.0
3,880
15
P/BV Dec '11 P/BV Dec '11 P/BV Dec '11 P/BV Dec '11 P/BV Dec '11
150 940 796 1,391 428
1.0 1.0 1.0 1.0 1.0
150 940 796 1,391 428
0.6 3.7 3.1 5.4 1.7
P/BV Dec '11 P/BV Dec '11 P/BV Dec '11
1,130 315 3,500
1.0 1.0 1.0
1,130 315 3,500
4.4 1.2 13.6
P/BV Dec '11 P/BV Dec '11 P/BV Dec '11 P/BV Dec '11
1,200 962 848 500
0.50 0.50 0.50 0.50
600 481 424 250
2.3 1.9 1.7 1.0 56
Risks

Better project execution. Availability of manpower, land acquisition issues or arbitration with clients sorted out earlier than expected. Financial risk. NCC is looking to raise capital at the SPV/subsidiary level. Any success could improve its financial position. Raw material risk. A significant dip in raw material costs could raise margins.
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Financials
We expect NCC to post revenue CAGR of just 14% over FY13-14, due to slower execution and a long-gestation order book. We estimate a decline in EBITDA and net margin, mainly due to higher fixed-cost absorption and high interest expenses, and 21% CAGR in net profit over FY13-14.
Revenue growth to be subdued

Slow execution of several projects, long gestation period of the order book and working capital limitations are likely to limit NCCs revenue growth. We estimate a low 14% CAGR in revenue over FY13-14, despite CAGR of just 4% over FY11-12. The major contributors of revenue are likely to be the building and power segments, with a couple of big-ticket orders in FY12.
Fig 15 Revenue growth likely to be subdued
(`m) 70,000 (%) 25 20 15 10 5 0 FY08 FY09 FY10 FY11 FY12e FY13e FY14e FY14e
We estimate a low 14% CAGR in revenue over FY13-14, despite CAGR of just 4% over FY11-12
56,000 42,000 28,000 14,000 0
Revenue
Revenue growth (RHS)
Margins to remain low

We expect a decline in EBITDA and net margin, mainly due to higher fixed-cost absorption and high interest expenses. We estimate 21% CAGR in net profit over FY13-14. Higher growth is likely to follow the 63% decline in earnings during FY12e.
(%) 12 10 8 6 4 2 0 FY08 FY09 FY10 FY11 FY12e FY13e
EBITDA Margin
Net Margin
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Return ratios at record low

High leverage and working-capital days and lower operating margins have led to the decline in return ratios. We expect the company to report 2.5% RoE and 6.7% RoCE in FY12. We do not expect any major improvement in return ratios in the next two years.
Fig 17 Return ratios not likely to see much improvement
(%) 16
12
0 FY08 FY09 FY10 FY11 FY12e FY13e FY14e
RoE
RoCE
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Revenue Revenue growth (%) Less expenditure Consumption of RM Sub contract work Other construction exp Labour cost Employee cost Other expenditure EBITDA EBITDA margin (%) Growth (%) - Interest - Depreciation + Other income Profit before tax - Tax Tax rate (%) Reported PAT +/- Extraordinary items +/- Minority interest Adjusted PAT Adjusted PAT growth (%) Adj. FDEPS (`/share) CEPS (`/ share) DPS (`/ share)
47,778 15.1 42,937 18,070 12,714 4,849 4,501 1,841 963 4,841 10.1 29.6 1,322 525 48 3,445 1,113 32 2,333 (404) 1,929 25.3 7.5 9.6 1.3
50,737 6.2 45,861 17,564 13,786 4,847 6,024 2,438 1,201 4,876 9.6 0.7 1,682 685 146 2,656 1,021 38 1,635 1,635 (15.2) 6.4 9.0 1.0
51,245 1.0 46,949 18,704 13,324 5,124 5,637 2,682 1,478 4,295 8.4 (11.9) 2,664 820 87 899 297 33 602 602 (63.2) 2.3 5.5 0.4
57,907 13.0 52,846 20,788 15,056 5,791 6,428 3,085 1,699 5,060 8.7 17.8 3,244 950 107 973 321 33 652 652 8.3 2.5 6.2 0.4
66,592 15.0 60,773 23,973 17,314 6,659 7,325 3,547 1,954 5,819 8.7 15.0 3,523 1,100 127 1,323 437 33 887 887 36.0 3.5 7.7 0.6

513 21,943 255 22,457 15,302 38,013 7,561 2,023 5,538 434 9,412 12,995 7,539 18,552 39,086 17,497 957 18,453 20,633 1,997 22,629 38,013
513 23,274 308 23,787 24,841 48,935 9,231 2,485 6,745 469 12,008 14,536 8,960 24,562 48,058 19,031 712 19,743 28,315 1,397 29,712 48,935
513 23,765 308 24,278 30,841 55,426 11,000 3,305 7,695 200 16,942 15,444 9,126 30,000 54,569 24,828 700 25,528 29,042 1,547 30,589 55,426
513 24,297 308 24,810 31,241 56,358 12,500 4,255 8,245 200 17,012 16,658 10,312 31,000 57,970 27,399 900 28,299 29,672 1,230 30,901 56,358
513 25,018 308 25,531 34,641 60,480 14,000 5,355 8,645 200 18,012 20,069 12,771 31,500 64,340 31,183 1,200 32,383 31,957 1,666 33,623 60,480
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1,929 593 2,521 4,771 (2,250) 1,624 (3,875) 389 3,673 2,863 2,009 (388) 652 1,345 1,997
1,635 738 2,373 7,683 (5,310) 1,928 (7,238) 298 9,539 2,596 6 (600) 1,997 1,397
602 820 1,422 726 696 1,500 (804) 111 6,000 4,934 (0) 150 1,397 1,547
652 950 1,602 630 972 1,500 (528) 120 400 70 0 (318) 1,547 1,230
887 1,100 1,987 2,285 (299) 1,500 (1,799) 165 3,400 1,000 0 436 1,230 1,666

P/E Core (x) P/E core (x) P/B (x) EV/EBITDA (x) RoE (%) RoCE (%) Fixed asset turnover (x) Dividend yield (%) Dividend payout (%) Interest exp./sales Debtors (days) Revenue growth (%) PAT growth (%) EBITDA growth (%) EPS growth (%)
1.6 1.6 0.6 5.7 9.8 12.8 6.9 2.4 14.3 2.8 99 15.1 25.3 29.6 11.8
1.7 1.7 0.6 7.7 7.1 9.6 5.9 1.8 15.7 3.3 105 6.2 (15.2) 0.7 (15.2)
5.3 5.3 0.6 10.1 2.5 6.7 4.8 0.7 15.8 5.2 110 1.0 (63.2) (11.9) (63.2)
4.9 4.9 0.6 8.7 2.7 7.4 4.7 0.7 15.7 5.6 105 13.0 8.3 17.8 8.3
13.5 3.6 0.6 8.1 3.5 8.1 4.9 1.0 15.9 5.3 110 15.0 36.0 15.0 36.0
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Company Background
Established by A.V.S. Raju in 1978 as a partnership firm, NCC was converted into a public limited company in 1990 and went public in 1992. It has a fairly diversified business mix that includes roads, buildings, water, irrigation and hydro-power.

NCC has a fairly diversified business mix that includes roads, buildings, water, irrigation and hydro-power. It has a portfolio of road and power BOT projects and operates in real estate development. It has offices in Muscat (Oman) and Dubai (UAE) and has projects from these geographies.
Management background
Dr A.V.S. Raju A.A.V. Ranga Raju J.V. Ranga Raju A.G.K. Raju A.V.N. Raju
Source: Company
Chairman Managing Director Whole-time Director Executive Director Whole-time Director
Founder chairman and director One of the chief promoters; over 35 years of experience in construction Over 25 years of experience in construction. Masters in commerce One of the chief promoters; over 25 years of experience in construction One of the promoter-directors; graduate in arts; over 20 years of experience in construction

Date Type Subscribers m shares Issue Price ` `m
Mar 04 Nov 04 Nov 04 Dec 04 Dec 06 Oct 07 Aug 09
Preferential issue Individuals, companies, NRIs Preferential issue Warrants Warrants GDR issue Preferential issue Blackstone QIP Promoters Rakesh Jhunjhunwala, ICICI Ventures
10.0 14.8 4 3.5 23.5 20.2 27.7
27 55.6 27 55.6 233.2 202.5 132.5
270 820 108 195 5,476 4,100 3,673
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Annexures
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Annexure
Annexure 1: Tackling structural issues- Power Sector Based on our discussion with industry experts, we believe there are multiple channels through which Coal India could meet its commitment. Some of them are drawing down from current inventory (provided evacuation facilities are in place), lower sales through e-auctions, raising production at mines (settling rehab issues in forest areas), increasing investment in developing more mines, reducing supplies to plants where the PLF is over 90%, long-term contractual agreements with leading miners in world, and finally through need-based short-term imports. The Prime Minister has entrusted the task of sorting out environmentclearance issues (to fast-track development of new mines) to a ministerial panel headed by the Finance Minister. The Group of Ministers would ensure that Coal Indias ability to ramp up production (100 new projects stuck) is not restricted by various clearances, including those concerning the environment. The environment ministry had in 2009 classified 203 coal blocks as no-go areas, prohibiting mining there, and impacting 660m tons of coal production p.a. The figure is huge, considering that Coal Indias production target for FY12 is 440m tons. Recently, the PMO, in consultation with the environment ministry, decided that all coal projects that are expanding up to 25% of their capacity would no longer have to wait for environment clearances before they begin work. Also, the environment ministry has assured the PMO that all pending clearances of the XIth Plan period (ending 31 Mar 12) would be cleared by then. The PMO is also looking at the industry request to set up an expert body to evolve mechanisms to review contracts (power tariff hikes) impacted due to changes in the law in other countries such as Indonesia, fall in supply by Coal India and delay/denial in environment clearances to captive coal blocks. Other requests made by the Association of Power Producers (APP) are the signing of long-tem gas-supply agreements, reallocation of gas supply meant for steel and fertilizer units to power plants, bulk coal and LNG imports, privatization of distribution firms, fast-track regulatory clearances, speeding up of hydro-power plants in the NorthEast and reviewing documentation to bid for power projects. Annexure 2: Budget sops expected Some expected announcements:

Higher planned expenditure on infrastructure from FY12 budgeted levels of `2.14trn Increase in government outlay on various schemes such as the RAPDRP, NREGA, RGGVY, Bharat Nirman, especially on roads and urban infrastructure Formation of a coal regulator to bring transparency in pricing and allocation Implementation of the Maira Committee recommendation of 14% import duty on power-plant equipment from China Improved availability and mechanism of financing infrastructure projects by creating an infrastructure debt fund, and allowing further
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issue of tax-free bonds from government agencies such as the NHAI, IRFC, etc.
Single-window of clearances and a high-level body to co-ordinate between Central and state agencies in order to expedite processes and award projects quicker Extension of tax-free infrastructure bonds, and a possible increase in the investment limit, from the current `20,000 Increase in the limit for tax deductions for interest on housing loans, from the present `150,000 Increase in the deduction limit under Sec 80C on principal repayment of housing loans, from `100,000 now Continuation of the proposed issue of tax-free bonds (`300bn in FY12) by raising the limits of current agencies and allowing new agencies.
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Annexure 3 Delhi Mumbai Industrial Corridor
Source: DMIC
Annexure 4 Mumbai Metro Phase I (Line 1 to 3)
Source: MMRDA
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Annexure 5 Dedicated freight corridors (Eastern)
Source: DFC
Annexure 6 Dedicated freight corridors (Western)
Source: DFC
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Annexure 7 Key metro projects pipeline #

Upcoming Projects Investment (`bn) Execution period Details Funding Status
Mumbai: Charkop-Bandra-Mankhurd
115
FY13-16
Mumbai: Colaba-Bandra-SEEPZ
210
FY14-18
Mumbai Metro- Balance Phases *
320
FY16-25
Mumbai Monorail
210
FY10-21
Delhi- Phase III
350
FY12-16
Delhi- Phase IV
500
FY14-21
Greater Noida
50
FY12-14
Ghaziabad Pune
70 100
FY14-17 FY14-17
Chennai- Phase II
200
FY14-18
Bangalore- Phase II
270
FY15-18
Ahmedabad-Gandhinagar
120
FY13-17
Jaipur
70
FY12-17
Chandigarh
120
FY14-18
Ludhiana Kochi
90 50
FY14-18 FY14-18
Lucknow
130
FY14-18
Patna
80
FY14-18
Nagpur Kanpur Indore
80 70 85
FY14-18 FY14-18 FY14-18
Bhopal
80
FY14-18
Others (10 cities)
700
FY14-20
Awarded to Reliance Infra led JV (SNC Lavalin of Financial Closure Casting yard at both end Canada); 32km fully elevated corridor done RoW on some area, railway & Juhu Aero clearance pending Scope extended till SEEPZ via domestic and Central, State State, Central, MIAL international Airport; 33km of India's first fully govt & Japanese approval given underground metro line Intl Coop. Agency Planning stage Central, State Total 65km; Line IV: Charkop-Dahisar; Line V: Ghatkopar-Mulund ;Line VI: Dahisar (E)-Andheri (E); govt, Japanese Line VII: CST-Ghatkopar; Line VIII: Prabhadevi-Sewri agencies & PPP 9 lines of 190km over 2 phases planned; Currently State govt Planning stage Line 1 under construction: Chembur-Wadala-Jacob Circle Central, State Approvals in place; 2016 112km covering New Lines (Mukundpur to Yamuna completion target govt & Japan Vihar and Janakpuri (West) to Noida Botanical Bank for Intl. Garden) and extension of three lines Cooperation Central, State Faridabad approval in Extensions to Sonia Vihar, Reola Khanpur, Palam, govt & Japan place; Others in pipeline; Najafgarh, Narela, Ghazipur, Noida Sector 62, Bank for Intl. 2021 completion target Gurgaon and Faridabad Cooperation Central, State Approvals in place; 2014 Start from the Noida (City Centre) and move towards govt completion target Noida-Greater Noida Expressway and touch Knowledge Park 4 via Pari Chowk and end at Badoki. Develop metro lines within the city Central, State Seeking approvals govt Three phases covering 32km; After two yrs of delay, Central, State Approvals in place; In Maharashtra govt cleared project for underground govt, others process of completing network; DMRC is consultant financial closure Three lines covering 63km: Moolakadai Thiruvanmiyur Central, State Seeking approvals (19 km); Moolakadai Thirumangalam (22 km); govt, Japanese Mylapore Poonamallee (22 km) agency Central, State Construction argeted to High powered committee & Karnataka government start from 2014 & given Clearance; Urban Development Ministry nod govt, Japanese complete by 2017 agency expected by Jun12. To link old & New Ahmedabad, airport and State govt Final approval & st Gandhinagar; 70km stretch with 1 phase of 24km Financial Closure elevated pending Financial bids to be Two corridors: East-West (12km) under construction State govt, PPP invited ; 4 players by state govt; North-South (23km) through PPP; selected post technical $ completion target is Jun15 Phase I to have 3 corridors of 41km and Ph II another Haryana & Planning com approved; 4 corridors Punjab state govt, DPR complete; Work UT of Chandigarh should start end 2012 Two corridors in Phase I of 29km of which 22km will PPP State govt approved be elevated; Work to start in 6 months time DPR done by DMRC 25km stretch Central, State DPR completed by govt & Japanese DMRC; Central nod Intl Coop. Agency expected soon Phase I of 41 km of which 19km will be elevated: Central, State DPR submitted by North-South- 14km; East-West- 27km govt & Japanese DMRC; Awaiting Intl Coop. Agency approvals Fully elevated; Two lines totalling 40km PPP Planning com approved; DPR & RFP under preparation 45km over two phases State govt, PPP DPR under preparation by DMRC Total stretch of 76km of which 27km to be developed State & Central DPR under preparation in Phase I govt by DMRC First phase of 32km Central, State Planning comm. govt & JBIC approval awaited; DPR under preparation First phase of 29km Central, State Planning comm. govt & JBIC approval awaited; DPR under preparation Total of 26 cities plan to have metro line besides Delhi
* MMRDA estimates +Rs1trn spent on Mumbai Metro Rail till 2031; to cover 450km in the MMR region # Yet to be awarded $ Consortium led by Reliance Infra, Essar Projects, Soma Enterprises, Gammon Infra Source: Anand Rathi Research
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Annexure 8 Big ticket urban infra project pipeline

Upcoming Projects Investment (`bn) Execution period Details Funding Status
Dedicated Freight Corridor
800
FY13-16
Railway Modernisation
8200
Delhi-Mumbai Industrial Corridor
4050
Inter-linking of rivers
5000
Sewri-Nhava Trans-Harbour Link Nhava to Chirle (near Panvel) Virar-Alibaug Multi-Modal Corridor
90 5 150
Pinjal (Maha.)-Damanganga (Guj.) river linking Virar-Versova Versova-Bandra Worli-Haji Ali Navi Mumbai International Airport Greater Noida International Airport
80 40 15 30 140 120
Majority land in 3,328 km rail freight corridor with two armsDadri to World Bank, Mumbai and Ludhiana to Howrah; new lines will take the Japanese possession; Part funding completed; Tenders load off the existing corridors where passenger and and Indian being floated freight trains run government Pitroda Committee FY14-20 Track modernization, Bridge strengthening, Signaling Gross systems, Stations & terminals, freight corridor Budgetary recent suggestions to Railway Ministry Support, Internal accruals, PPP FY14-20 100-150km wide band to be developed along 1500km Japanese & All approvals in place; major land in Indian corridor; 9 mega industrial zones and 7 cities along the corridor government, possession; order rollout underway PPP Committee to frame FY14-20 Link 30 rivers to control floods & have equitable Central and guidelines for timely states distribution of water; Increase area under irrigation, up implementation hydro-electric generation; Increase water storage and budgetary support supply FY14-18 Expected to be awarded by Nov12; 22km six lane, two PPP Tenders already floated carriageway bridge with a metro line FY14-16 28km extension of Trans-Harbour link to Mumbai-Pune State govt Tender to be floated expressway shortly PPP Planning stage; TechnoFY14-18 140km high speed corridor linking Thane, Mumbai and Economic Feasibility Raigad districts in 2 phases; Dedicated lanes for traffic, study report submitted buses, 2 wheelers and non motorized transport FY14-18 Form a link to share water of two river basins across Central & DPR completed; Central Maharashtra & Gujarat State govts approval pending FY14-18 Coastal road and bridges; Stretch of 54km State govt Planning stage FY14-17 FY13-16 FY14-18 Coastal road and sea link; Stretch of 11km Sea Link; 3.6km stretch PPP PPP PPP PPP Planning stage Rel. Infra to award contract works Planning stage Planning stage
Greenfield Airport spread over 2020 hectares (1600 hectares in possession) FY14-18 Greenfield Airport spread over 1000 hectares; Part of the proposed Taj Economic Zone (2500 hectares)
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Annexure 9 NHAI order pipeline for next two years

Sr. No. Road Section Opportunities for Investment Under NHDP Phase II* Length (Km) State (INR Crore) (USD Million)
1 2 3 4 5 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30
Ramban - Banihal Udhampur-Ramban Walayar-Vadekancherry** Agra Bypass Ghoshpukur-Salsalabari Khagaria-Bakhtiyarpur** Ambala-Kaithal UP / Haryana Border Yamunanagar-Panchkula** Rohtak-Hissar** Parwanoo-Solan Shimla-Solan Mulbagal-Karnataka/AP Border** Thiruvananthapuram-TN/Kerala Border Kuttipuram-Edapally Cherthalai-Ochira Bhopal-Bareily,Bareily-Rajmarg Crossing,Rajmarg Crossing-Jabalpur Jowai-Meghalaya/Assam Border** Chandikhole-Dubari-Talchar** Madurai-Parmakoti-Ramanathapuram** Nagapattnam-Thanajavur Kerala/TN Border-Kanyakumari Coimbatore-Mettupalayam** Karaikkudi-Ramanathapuram Barasat-Petrapole Yadagiri-Warangal Chhapra - Rewaghat -Muzzaffarpur Biharsharif - Barbigha -Mokama Ekangarsarai- Jehanabad - Arwal Maheshkhut - Saharsa - Purnea Raipur-Dhamtari Chilpi-Simga Ghamtari-Jagdalpur Ambikapur-Pathlgaon Bilaspur-Ambikapur Pathalgaon-Gumala Punjab/ Haryana Border - Jind** Hissar-Dabwali Kaithal-Haryana/Rajasthan Border Bilaspur-Ner Chowk** Ner Chowk-Manali Kiratpur- Bilaspur Chas- Ramgarh Junction with NH-2 at Govindpur-Chas-Upto JHR/WB Border Ranchi - Birmitrapur Ranchi- Nagar Untari Jamshedpur-Kharagpur Kundapur-KNT/Goa Border** Shimoga-Mangalore Hasan-BC Road Gulbarga-Bijapur-Homnabad Hospet-Hubli-Ankola Gundlupet-TN/KNT Border Hoskote-Dobespet** Tamil Nadu/KNT Border- Bangalore
36 43 54 33 163 120 86 104 100 41 60 22 43 116 84 290 102 133 116 77 65 54 80 60 96 75 52 54 171 72 128 222 85 190 130 70 160 160 54 119 63 85 71 210 260 150 192 188 130 200 271 27 89 204
Jammu & Kashmir Jammu & Kashmir Kerala UP West Bengal Bihar Haryana Haryana Haryana Himachal Pradesh Himachal Pradesh Karnataka Kerala Kerala Kerala Madhya Pradesh Meghalaya Orissa Tamil Nadu Tamil Nadu Tamil Nadu Tamil Nadu Tamil Nadu West Bengal Andhra Pradesh Bihar Bihar Bihar Bihar Chhattisgarh Chhattisgarh Chhattisgarh Chhattisgarh Chhattisgarh Chhattisgarh Haryana Haryana Haryana Himachal Pradesh Himachal Pradesh Himachal Pradesh Jharkhand Jharkhand Jharkhand Jharkhand Jharkhand Karnataka Karnataka Karnataka Karnataka Karnataka Karnataka Karnataka Karnataka
1,444 1,725 682 457 1,549 420 300 938 950 387 570 231 409 1,102 798 2,755 391 1,287 1,102 268 618 567 280 570 912 225 156 162 513 684 384 666 255 570 390 439 1,520 1,520 902 1,131 599 255 213 630 780 1,425 1,965 1,786 1,235 1,900 2,575 81 844 612
289 345 136 91 310 84 60 188 190 77 114 46 82 220 160 551 78 257 220 54 124 113 56 114 182 45 31 32 103 137 77 133 51 114 78 88 304 304 180 226 120 51 43 126 156 285 393 357 247 380 515 16 169 122
Opportunities for Investment Under NHDP Phase III *
Opportunities for Investment Under NHDP Phase IV*
*As on December 31, 2011 **Targeted to be awarded in FY 2011-12 Source: NHAI
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Annexure 9 Cont. NHAI order pipeline for next two years

Sr. No. Road Section Opportunities for Investment Under NHDP Phase IV* Length (Km) State (INR Crore) (USD Million)
31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80 81
Shahganj Junction -Budhni-Betul Obdullaganj-Shahganj Biaora- MP/Rajasthan Border Jabalpur-Mandla-Chilpi Khed-Sinner Vedishi-Osmanabad-Solapur Kalyan-Andhra Pradesh Border (km442 to km591) Kalyan-Andhra Pradesh Border (km232 to km284) Dhule-Aurangabad Amravati-Dhule-Gujarat Border** Kalyan-Andhra Pradesh Border (km 0.0 to km232) Kalyan-Andhra Pradesh Border (Km284 to km 337 Jn.with NH-211) Kalyan-Andhra Pradesh Border (Km 342 Jn. With NH-211 to km 442) Aurandabad-Vedishi Solapur-Mah/KNT Border** Bahargora-Sambalpur Birmitrapur-Barkote** Baleashwar-Baripada- Jharpokhria (Jn. of NH-5 with NH-6) Sriganganagar- Rajasthan/Punjab Border Karauli-Dholpur Jhalawar-Rajasthan MadhyaPradesh Border Rajasthan Border-Fatehpur Padhi-Dahod Vikravandi-Kumbakonam-Thanjavur** Thanjavur - Pudukkotai -Sivaganga - Manamadurai Tiruchirapalli-Lalgudi- Chidambaram & Meenusuriti- Jayamkondam-Kootu Road Viluppuram-Pondicherry-Nagapattinam Coimbatore-TN/KNT Border Dindigul-KNT/TN Border Ghaghra Bridge-Varanasi Indo Nepal Border-Ghaghra Bridge Unnao - Lalganj Varanasi-Sultanpur** Meerut - Nazibabad Raibareilly - Jounpur Ambedkar Nagar - Banda Varanasi-Hanumanha Barabanki-Bahraich-Nanapara-Rupaidiha Gorakhpur-Ferenda-Nautanwa-Sonauli MP/UP Border-Allahabad Varanasi-Gorakhpur Bharatpur-Mathura-Hathras Moradabad-Aligarh** Bareilly-Sitarganj Sitarganj-Kashipur Kashipur-Haridwar Dehradun-Chutmalpur-Roorkee Sitarganj - Tanakpur Chutmalpur-Saharanpur-Yamunanadar-Haryana/UP Border Pundlbari - Baxirhat JHR/WB Border-Purliya-Balarampur-JHR/WB border-upto junction with NH-33
107 26 66 189 150 85 149 51 140 480 232 53 100 175 126 370 128 90 124 72 71 135 85 165 122 135 194 103 266 177 122 68 142 139 169 287 125 152 99 41 206 90 145 87 97 167 70 52 50 46 83
Madhya Pradesh Madhya Pradesh Madhya Pradesh Madhya Pradesh Maharashtra Maharashtra Maharashtra Maharashtra Maharashtra Maharashtra Maharashtra Maharashtra Maharashtra Maharashtra Maharashtra Orissa Orissa Orissa Rajasthan Rajasthan Rajasthan Rajasthan Rajasthan Tamil Nadu Tamil Nadu Tamil Nadu Tamil Nadu Tamil Nadu Tamil Nadu Uttar Pradesh Uttar Pradesh Uttar Pradesh Uttar Pradesh Uttar Pradesh Uttar Pradesh Uttar Pradesh Uttar Pradesh Uttar Pradesh Uttar Pradesh Uttar Pradesh Uttar Pradesh Uttar Pradesh Uttar Pradesh Uttar Pradesh Uttarakhand Uttarakhand Uttarakhand Uttarakhand Uttarakhand West Bengal West Bengal
1,017 247 198 567 1,425 808 447 153 1,330 1,079 696 159 300 1,663 1,236 3,515 778 855 1,178 216 213 405 255 1,172 366 405 1,843 309 798 1,682 1,159 204 1,349 417 507 861 375 456 297 123 619 270 679 261 291 1,587 210 156 475 138 248
203 49 40 113 285 162 89 31 266 216 139 32 60 333 247 703 156 171 236 43 43 81 51 234 73 81 369 62 160 336 232 41 270 83 101 172 75 91 59 25 124 54 136 52 58 317 42 31 95 28 50
132
9 March 2012
Annexure 9 Cont. NHAI order pipeline for next two years

Sr. No. Road Section Opportunities for Investment Under NHDP Phase V* Length (Km) State (INR Crore) (USD Million)
1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 1
Vijaywada-Elluru-Rajamundry** Rajamundary-Gundugulanu Ichhapuram-Srikakulam-Anandpuram Anandpuram-Vishakhapatnam-Ankapalli** Ankapalli-Tuni Tuni-Dharmavaram Dharmavaram-Rajahmundary Nellore Bypass Tada - Nellore Aurangabad-Barwa Adda** Khagal - Belgaum Neelamangala-Tumkur Dharwad-Haveri Haveri-Chitradurga Tumkur & Chitrdurga Bypass Satara-Kagal Chandikhole-Paradeep** Bhubaneshwar-Icchapuram Balasore-Chandikhole Kharagpur-Baleshwar** Ludhiana-Chandigarh** Walahajapet -Poonamallee** Tambaram - Tindivanam Allahabad Bypass-Varanasi** Chakeri-Allahabad** Hapur-Moradabad Agra-Gwalior Delhi-Hapur Panagarh - Palsit Palsit-Dhankuni Eastern Peripheral Expressway**
103 121 213 59 59 47 53 17 111 220 77 35 95 135 31 133 77 135 140 119 60 92 93 160 150 110 85 52 64 65 135
Andhra Pradesh Andhra Pradesh Andhra Pradesh Andhra Pradesh Andhra Pradesh Andhra Pradesh Andhra Pradesh Andhra Pradesh Andhra Pradesh Bihar/Jharkhand Karnataka Karnataka Karnataka Karnataka Karnataka Maharashtra Orissa Orissa Orissa Orissa Punjab Tamil Nadu Tamil Nadu Uttar Pradesh Uttar Pradesh Uttar Pradesh Uttar Pradesh Uttar Pradesh West Bengal West Bengal UP/Haryana
1,743 1,210 2,130 590 590 470 530 170 1,110 2,200 770 350 950 1,350 310 1,330 809 1,350 1,400 487 600 930 930 1,520 1,425 1,100 850 520 640 650 2,699
349 242 426 118 118 94 106 34 222 440 154 70 190 270 62 266 162 270 280 97 120 186 186 304 285 220 170 104 128 130 540
Opportunities for Investment Under Other Projects *
133
Appendix 1
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Anand Rathi Research Ratings Distribution (as of 18 February 2012) Buy Anand Rathi Research stock coverage (138) 76% % who are investment banking clients 6%
Hold 12% 6%
Sell 12% 0%
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Indian Construction Sector Breaking The Gridlock Anandrathi March 2012

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Indian Construction Sector Breaking The Gridlock Anandrathi March 2012

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Construction

India Construction Sector

Overweight Sensex: 17173 Nifty: 5222

Jaspreet Singh Arora

India Construction Sector

Overweight Sensex: 17173 Nifty: 5222

Jaspreet Singh Arora

Source: Anand Rathi Research

Note : Price as on 6 March 2012

India Construction Sector Breaking the gridlock

India Construction Sector

Anand Rathi Research

India Construction Sector Breaking the gridlock

Investment Argument and Valuation

Policy action to revive order flows

Easing monetary policy to aid turnaround

Rising access to capital

India Construction Sector Breaking the gridlock

5.7 4.7 3.9 1.2 1.0 0.9 5.8 5.4 5.0

5.5 4.4 3.0 0.8 0.7 0.6 4.7 3.9 3.4

5.1 4.5 3.7 0.9 0.8 0.6 3.3 2.9 2.4

12.9 7.2 5.0 1.0 0.9 0.8 6.0 5.0 4.3

3.9 3.2 2.5 1.1 0.9 0.7 3.8 3.4 2.8

6.0 5.0 4.2 1.1 0.9 0.8 4.0 3.3 2.6

9.2 7.0 5.9 1.4 1.2 1.1 7.3 7.0 6.5

5.3 4.9 3.6 0.6 0.6 0.6 10.2 8.8 8.2

Source: Anand Rathi Research

Anand Rathi Research

India Construction Sector Breaking the gridlock

Fig 3 Anand Rathi Research (ARG) vs consensus (`m)

Source: Bloomberg, Anand Rathi Research

Anand Rathi Research

India Construction Sector Breaking the gridlock

Anand Rathi Research

India Construction Sector Breaking the gridlock

Policy action to revive orderflows

Tackling structural issues: a step in the right direction

Anand Rathi Research

India Construction Sector Breaking the gridlock

Anand Rathi Research

India Construction Sector Breaking the gridlock

Order-flow boost; real leg-up in 2HFY13

Order inflow growth (RHS)

Anand Rathi Research

India Construction Sector Breaking the gridlock

Fig 6 Infra spending in the XII Five-Year Plan

Key themes: urban infra, roads and water

Anand Rathi Research

India Construction Sector Breaking the gridlock

Fig 8 Project mix: Dec 11

44.0 37.0 19.0 100.0

28.0 26.5 14.0 25.5 6.0 100.0

16.4 10.8 44.3 17.3 7.5 3.7 100.0

52.0 11.0 37.0 100.0

1.4 3.9 94.7

Anand Rathi Research

India Construction Sector Breaking the gridlock

Fig 9 Status of various metro projects

In operation Metro Systems

Elevated rail systems

Source: Anand Rathi Research

Anand Rathi Research