road

INDIAN ROAD SECTOR

INDIAN ROAD SECTOR QUARTERLY REVIEW | FEBRUARY 2012

Performance review for Q3, FY2012 The Indian road sector continued to face multiple challenges in the third quarter (Q3) of the fiscal year 2011-12 (FY2012) in the form of high interest rates, reduced availability of funds, execution slowdown, and increased competitive intensity. The award of new projects picked up during the last two quarters with the National Highways Authority of India (NHAI) awarding some mega projects. However, execution on many of the projects awarded over the last one year remained slow primarily because of delays in land acquisition, clearances, and financial closure. Projects that had the requisite approvals and funding reported healthy execution. 1

While both developers and contractors are going through a rough phase over the last one and a half years, the challenges were higher in the case of companies that had recently entered the project development space. While developers with a portfolio of operational toll road projects were partly hedged from high interest rates due to inflation-linked toll rates, those with projects in the developmental phase faced challenges in achieving financial closure due to weakened project viability owing to high interest rates besides delays in land acquisition and approvals. Road construction companies continued to face long working capital cycles, which put a strain on their liquidity position and increased their indebtedness. The operating margins of several road contractors also witnessed pressure because of rising commodity prices (for fixed-price contracts) and idling of capacities as execution could not begin in many new projects.

ICRA RATING FEATURE

Corporate Ratings Anjan Deb Ghosh +91 22 3047 0006 [email protected] Contacts: Rohit Inamdar +91 124 4545 847 [email protected] Shubham Jain +91 124 4545 306 [email protected] Abhishek Gupta +91 124 4545 863 [email protected]

With NHAI increasingly awarding projects under the public-private partnership (PPP) model, engineering, procurement and construction (EPC) contractors have struggled to maintain their order-book growth and many have chosen to enter the PPP space by undertaking projects on build-operate-transfer (BOT) basis. The equity requirement for BOT projects, along with the weak capital markets that have made raising capital difficult, has increased their dependence on external borrowings. Further, many of these companies have raised debt at the parent or holding company level to meet the equity requirement in BOT projects thus significantly increasing the indebtedness at the group level. The slowdown in a few segments of the construction industry like irrigation and power, and the entry of new players has had the effect of raising the competitive intensity in the road sector. Consequently, despite the pickup in order inflow, many projects saw aggressive bidding during the first half (H1) of FY2012. However, with many developers facing difficulty in raising funds, some moderation in bidding activity was witnessed in Q3, FY2012. ICRA believes that with the pipeline of road projects to be awarded by NHAI and State governments remaining strong, there will be ample growth opportunities for both developers and contractors in the next 2-3 years. Also, key policy initiatives such as creation of Infrastructure Debt Funds and the catalysing role played by India Infrastructure Finance Company Limited (IIFCL) will assume greater importance in channelising the much needed long-term debt funds into this sector.

1

Private players in the road sector can be broadly classified into developers (who build-operate-maintain road stretches under public-private partnerships) and contractors (who do the construction for government agencies or other private players on a contractual basis).

ICRA LIMITED

PAGE 1

INDIAN ROAD SECTOR Emerging Trends in Road Sector

Projects Awarded by NHAI

Surge in projects awarded by NHAI; projects to be offered make a strong pipeline There has been a surge in project awards by NHAI during the last few years. About 4,375 km has been awarded in first 9-months of FY2012, as against 4,553 km during FY2011, 3,338 km during FY2010 and 643 km in FY2009. There has been a period of slowdown in between, but the award activity has picked up in recent months with about 1,898 km of projects awarded in Q3, FY2012. Project award is expected to remain robust over the next few years, given the number of projects in the pipeline. Under the National Highway Development Project (NHDP) itself, NHAI plans to award about 24,000 km of highway projects over the next few years. Further, many State governments have now started looking at the PPP route for awarding road projects.

Source: NHAI, ICRA research

Trend in Projects Awarded by NHAI

Recently, NHAI awarded some large road projects, including mega highway projects (over 400 km in length). Over the years, the size of projects awarded by the authority has increased, both in terms of length and project cost.

Contractors evolving into developers Given the large number of projects being awarded on PPP basis, EPC contractors are increasingly assuming the role of developers by taking up BOT projects through the special purpose vehicle (SPV) route. While an EPC contractor is exposed to execution risk, the risks involved in a BOT project also include funding and operational/market risks. Further, the upfront equity investment required for a BOT project is higher, which along with the longer gestation, increases the funding requirement for these players. In the case of a BOT-toll project, developers are also exposed to uncertainty associated with traffic projections. On the positive side, returns in a successful BOT project are also generally higher. BOT projects are usually developed through an SPV, which derisks the parent company from any major project risk. Nevertheless, proper risk assessment and management are critical for these companies as they take up more BOT projects. In some cases, developers have raised debt at the parent or holding company level to infuse equity into the project SPV, which has led to multiple leveraging.

Source: NHAI, ICRA research

Share of BOT Projects in NHDP

Source: NHAI, ICRA research

ICRA LIMITED

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INDIAN ROAD SECTOR Intense competition leads to aggressive bidding The competitive intensity in the road sector has increased during the past one year following the entry of many new players. Traditionally, road construction was the least preferred among the larger construction players because of the low margins involved. However, many of these players have now started participating in road sector projects because of the slow order inflows in other segments. Over 90 players have pre-qualified for the NHAI projects indicating highly competitive scenario prevailing in the sector. Many of the projects awarded in past few months have received more than 10 bids with large variations in the top bids; also, majority of these bids were significantly higher than NHAI’s expectation. The variation in bids is likely to be because of differences in traffic estimates and traffic growth projections for various players. However, recently there has been some moderation in the practice of aggressive bidding, probably because of the prevailing macroeconomic scenario that has made raising funds difficult. Bidding Pattern in Some Projects Awarded since April 2011 Name of Project

Month of Award

Ahmedabad-Vadodra

Apr 2011

Net Present Value (NPV) of Projected Premium or Grant* Rs. crore 63

NPV of L1’s Premium/(Grant) Rs. crore

Diff. between NPV Expected and Bid Received

No. of Bidders

Variation between L1 and L2

3542

5529%

13

62%

Kota-Jhalawar

Apr 2011

-228

30

113%

9

3%

Beawar-Pali-Pindwara

May 2011

194

2032

946%

16

12%

Nagpur-Wainganga

May 2011

-102

191

286%

19

60%

Barwa Adda-Panagarh

May 2011

57

1098

1827%

9

56%

Jabalpur-Lakhnadon

July 2011

134

-37

72%

6

83%

Hospet-Bellary-AP/KNT Border

Aug 2011

-337

165

149%

10

119%

Aurang-Orissa Border

Aug 2011

-382

265

169%

10

44%

Jabalpur-Katni-Rewa

Aug 2011

-917

-341

63%

4

10%

Kishangarh-Udaipur-Ahmedabad

Sep 2011

3035

7389

143%

7

23%

Shivpuri-Dewas

Sep 2011

-422

1658

493%

14

65%

Gwalior-Shivpuri

Sep 2011

-331

602

282%

15

24%

Vijayawada-Machilipatnam

Oct 2011

-173

-209

-21%

3

1%

Rohtak-Jind

Nov 2011

-113

1

101%

5

101%

Patna-Buxar

Nov 2011

-395

-316

20%

1

0%

Angul-Sambalpur

Dec 2011

-476

-339

29%

7

6%

*Negative figures represent grant

Source: NHAI, Ministry of Road Transport

ICRA LIMITED

PAGE 3

INDIAN ROAD SECTOR Financing options to increase with the launch of infrastructure debt fund and take-out financing With more and more road projects being awarded on PPP basis, the financing requirement for private players is also increasing. Already, bank lending to the road sector has grown 200% during the last three years to stand at about Rs. 1 trillion (2.4% of total bank loans) now. As road projects have a long gestation (concession period of 15-30 years), a developer would want longer tenure debt funds so as to match the duration of the concession period; however, banks are reluctant to lend for such a long duration because its own assets and liabilities mismatch. The Central Government has taken several initiatives to improve the availability of financing for the infrastructure sector by creating the infrastructure debt fund, and also by increasing the limit of FII investments in infrastructure debt funds (from US$5 billion to US$25 billion) in the last union budget. The Government had launched a take-out financing scheme in October 2010, under which India Infrastructure Finance Company Ltd (IIFCL) can take out debt up to 20% of the Total Project Cost after the commercial operation date (COD) has been achieved for the project. Subsequently, this limit was increased to 50% by way of a memorandum of understanding (MoU) between IIFCL, LIC and IDFC wherein it was agreed to refinance the debt in the ratio of 20:20:10 respectively. Takeout financing frees up banks’ capital, which they can use to lend to new projects and also avoid asset-liability mismatches. Further, IIFCL launched a credit enhancement scheme under which IIFCL will provide guarantee to the extent of 50 per cent of the debt availed by an operational infrastructure project. Asian Development Bank (ADB) will further re-insure 50 per cent of the guarantee given by IIFCL to infrastructure companies thus raising the credit rating of the project and consequently improving the marketability of the debt/bonds issued by the project company. These initiatives are expected to help the developers in obtaining low-cost financing for road projects. However, with many players bidding aggressively, lenders are turning increasingly cautious.

Duration of high interest rate regime a concern While funding has so far not been a major problem for road projects, the cost of funding becomes a concern if interest rates remain at higher levels for a longer duration. Given that road projects are highly leveraged, their sensitivity to interest rates is high and persistently elevated rates can dampen project viability.

ICRA LIMITED

PAGE 4

INDIAN ROAD SECTOR

Performance Overview of Some Listed Companies in Road Sector

ICRA LIMITED

PAGE 5

INDIAN ROAD SECTOR IL&FS Transportation Networks Limited (ITNL)

ITNL Fact Sheet Year of Incorporation Promoter Group Major Subsectors Order Book BOT Projects Operational BOT Projects Revenues FY11 PAT FY2011 Net Worth FY2011

2000 IL&FS Roads, Metro Rail, Border Check Post Rs. 10,000 crore 21 projects with 10,343 lane km 10 projects Rs. 4,049 crore Rs. 433 crore Rs. 2,239 crore

S ource: Company data, ICRA estimates

Amounts in Rs. crore

Q3, FY2012

Q3, FY2011

Q2, FY2012

Operating Income Change (%) OPBDIT Less: Depreciation Less: Interest Charges Non-Operating Income PBT Less: Tax PAT

1268.4 320.7 16.9 185.5 29.7 148.1 46.9 101.2

733.7 72.9% 220.72 15.8 115.3 17.4 107.0 44.8 62.2

1255.5 1.0% 356.67 16.0 169.4 26.2 197.5 65.2 132.4

OPBDIT/OI (%) PAT/OI (%)

25.3% 8.0%

30.1% 8.5%

28.4% 10.5%

Operating Income: ITNL’s operating income grew 72.9% year-on-year (YoY) in Q3, FY2012 to Rs. 1,268 crore, driven primarily by strong growth in construction/EPC revenues (up 125% to Rs. 905 crore in Q3, FY2012 from Rs. 403 crore in Q3, FY2011) because of increased construction execution in its ongoing projects especially Jharkhand projects. Revenues from BOT projects during the quarter also reported strong growth (up 69% YoY) because of a combination of increase in toll rates, and higher traffic. However, revenue from its European subsidiary Elsamex S.A. continued to decline during the quarter (de-growth of 23%) because of non-renewal of some contracts in regions including the Dominican Republic. Profitability: ITNL’s operating margins at 25.3% dropped by 480 basis points (bps) on YoY basis in Q3, FY2012 primarily because of exceptional expenses/provisions and higher share of operating income from the lower-margin construction business. The decline in net profit margins was higher because of a significant increase in interest expenses on account of both higher debt and interest rate. Increase in Debt-Equity ratio: ITNL’s debt-equity ratio increased sharply in Q3, FY2012 to 3.49 times from 2.68 at the end of Q2, FY2012. The increase in debt levels was primarily due to acquisition of a Chinese toll project – Chongqing YuHe Expressway and disbursement of loans for the on-going projects.

Bloomberg Code BSE Code BSE Group NSE Symbol

ILFT@IN 533177 B IL&FSTRANS

Shareholding Pattern Promoters Foreign Institutional Investors (FIIs) Domestic Institutional Investors (DIIs) Others

Q3, FY2011 733.7 -16.9% 220.7 62.2 30.1% 8.5%

Q4, FY2011 1655.8 125.7% 411.2 170.3 24.8% 10.3%

Q1, FY2012 1093.1 -34.0% 331.2 118.5 30.3% 10.8%

Q2, FY2012 1255.5 14.9% 356.7 132.4 28.4% 10.5%

Q3, FY2012 1268.4 1.0% 320.7 101.2 25.3% 8.0%

4.0% 22.0%

Latest Price Rs. 209 Market Cap Rs. 4,061 crore 1 year High/Low Rs. 256/143

Stock Data Face Value Book Value EPS (TTM) P/E (TTM)

Rs. 10 Rs. 115.3 Rs. 24.6 8.5

Price Performance ITNL SENSEX

3Months 16.2% 11.7%

12Months -4.9% -1.2%

Stock Movement

Source: Bloomberg, BSE, NSE

Source: Company data, ICRA estimates

ICRA LIMITED

2.8%

Market Data (Feb 20, 2012)

S ource: Company data, ICRA estimates

ITNL’s Consolidated Key Financial Indicators Amounts in Rs. Crore Q1, FY2011 Q2, FY2011 Operating Income 776.1 883.3 Growth (%) 13.8% OPBDIT 261.5 261.5 PAT 106.0 111.2 OPBDIT/OI (%) 33.7% 29.6% PAT/OI (%) 13.7% 12.6%

71.2%

PAGE 6

INDIAN ROAD SECTOR IL&FS Transportation Networks Limited (ITNL): Business Overview Incorporated in 2000, ITNL has been promoted by Infrastructure Leasing & Financial Services Limited (IL&FS). It is the market leader in the road infrastructure space with the largest BOT portfolio of about 10,343 lane km in 21 projects across 14 States. Apart from road development, ITNL is also into areas like metro rails, border check posts and bus transportation systems, which serve to diversify its revenue streams. Table: BOT Projects of ITNL Update on Operations Project Type Lane km ITNL’s Project New Orders Inflows: Order inflow during Q3, FY2012 remained subdued as no new Share Cost NHAI order was won by the company primarily because of the aggressive bidding Operational Projects witnessed in many projects. However, in January 2012, ITNL has won a sizeable Belgaum-Maharashtra Border Annuity 472 94% 600 Thiruvananthapuram Phase 1 Annuity 51 50% 110 order (Rs. 1,818 crore) from NHAI for development of Kiratpur to Ner-Chowk Kotakatta bypass - Kurnool Annuity 328 100% 863 (Himachal Pradesh) on BOT—Toll basis. ITNL’s current order book is strong at around Rs. 10,000 crore, a major part of which would be executed in the next three Gujarat Toll (AhmedabadToll 523 84% 466 Mehasana, Vadodara-Halol) years. Noida Toll Bridge Toll 60 25% 589 Toll Collection: The average toll collection in the six operational toll-based projects RIDCOR, Phase 1 Toll 2,106 50% 1,618 reported healthy YoY growth in Q3, FY2012 because of a combination of growth in Rajkot-Jetpur Toll 389 100% 276 traffic and increase in user fees. Hyderabad Outer Ring Road Annuity 152 26% 399 Beawar-Gomti Toll 248 100% 355 Avg. Daily Toll Collection* Q3, Q3, Growth Q2, Growth Total Operational 4,329 5,276 FY2012 FY2011 (%) FY2012 (%) Projects under development Jharkhand Ph 1 Chhattisgarh -1,2,3 Thiruvananthapuram Phase 2,3 East Hyderabad Exp. Ltd Hazaribagh Ranchi RIDCOR, Ph 2 Warora Chandrapur Pune Sholapur Moradabad Bareilly Narketpalli Addanki Jorbat Shillong Chenani Nashri Kiratpur-Ner Chowk Total Under Development Grand Total

Annuity Annuity Annuity Annuity Annuity Toll Toll Toll Toll Toll Annuity Annuity Toll

466 1,368 107 173 319 698 275 571 522 888 262 38 327 6,014 10,343

Source: Company data, ICRA estimates; Amounts in Rs. crore

ICRA LIMITED

100% 74% 50% 74% 74% 50% 35% 100% 100% 50% 50% 100% 100%

1,408 2,347 263 428 869 813 700 1,403 1,984 1,760 824 3,720 1,818 18,337 23,613

Ahmedabad-Mehsana Vadodara-Halol Noida Toll Bridge RIDCOR, Phase 1 Rajkot-Jetpur Beawer-Gomti

0.161 0.130 0.217 0.436 0.109 0.048

0.131 0.109 0.186 0.303 0.097 0.042

23% 19% 17% 44% 12% 14%

0.161 0.121 0.197 0.399 0.099 0.046

0% 7% 10% 9% 10% 4%

Source: Company Data, ICRA estimates; Amounts in Rs. crore * Not adjusted for ITNL’s stake

Annuity Receivable: ITNL has four operational annuity-based projects, a stable revenue stream for the company. Accrued Annuity from operational projects* Q3, FY2012 Maharashtra Border to Belgaum Thirvananthapuram City Roads (Phase 1) Kotakatta bypass to Kurnool Hyderabad Outer Ring Road Total Annuity

25.3 3.0 28.3 16.7 73.1

Source: Company Data, ICRA estimates; Amounts in Rs. crore * Not adjusted for ITNL’s stake

PAGE 7

INDIAN ROAD SECTOR IRB Infrastructure Developers Limited (IRB)

Operating Income: IRB’s operating income grew 11.5% YoY in Q3, FY2012 to Rs. 745.5 crore, driven primarily by healthy traction in construction execution in Jaipur-Deoli, Talegaon-Amravati, and AmritsarPathankot projects.

IRB Fact Sheet Year of Incorporation Promoter Group Major Subsectors Order Book BOT Projects Operational BOT Projects Revenues FY2011 PAT FY2011 Net Worth FY2011

1998 Mhaiskar Family Roads, Airport, Real Estate Rs. 9,128 crore 17 projects with 5,777 lane km 10 projects Rs. 2,438 crore Rs. 452 crore Rs. 2,433 crore

Revenues from BOT projects during the quarter also reported healthy growth (up 18.4% to Rs. 253.5 crore in Q3, FY2012 from Rs. 214.0 crore in Q3, FY2011) because of a combination of increase in toll rates, higher traffic and commencement of toll on new project.

S ource: Company data, ICRA estimates Amounts in Rs. crore Operating Income Change (%) OPBDIT Less: Depreciation Less: Interest Charges Non-Operating Income PBT Less: Tax PAT OPBDIT/OI (%) PAT/OI (%)

Q3, FY2012

Q3, FY2011

Q2, FY2012

745.5

668.8 11.5% 293.6 58.5 82.0 11.7 164.8 28.8 136.0

735.9 1.3% 321.5 62.9 141.2 30.1 147.5 36.7 110.9

341.7 72.4 142.0 33.8 161.1 29.1 132.0 45.8% 17.7%

43.9% 20.3%

43.7% 15.1%

Profitability: IRB’s operating margins at 45.8% improved by 194 bps YoY in Q3, FY2012 primarily because of improvement in construction business margins. However, higher interest and depreciation resulted in decline in net profit margins; the interest was higher because of both higher debt for on-going projects and higher interest rate. New Orders Inflows: Order inflow during Q3, FY2012 remained subdued as no new NHAI order was won by the company primarily because of the aggressive bidding witnessed in these projects. While IRB’s order book is robust at Rs. 9,128 crore, a major part of this consists of operations and maintenance (O&M) projects (Rs. 2,058 crore) and projects that are yet to start (Rs. 3,678 crore). Thus, effectively only about Rs. 3,392 crore worth of projects are under execution. However, the AhmedabadVadodara project has recently achieved financial closure and the execution is expected to enhance the revenue growth.

Source: Company data, ICRA estimates

ICRA LIMITED

IRB@IN 532947 A IRB

Shareholding Pattern Promoters FIIs DIIs Others

67.55% 17.37% 6.53% 8.55%

Market Data (Feb 20, 2012) Latest Price Rs. 207.65 Market Cap Rs. 6,902 crore 52-W High/Low Rs. 230/121

Stock Data Face Value Book Value EPS (TTM) P/E (TTM)

Rs. 10 Rs. 73.2 Rs. 14.4 14.4

Price Performance IRB SENSEX

3M 49.5% 11.7%

12M 12.9% -1.2%

Stock Movement

S ource: Company data, ICRA estimates

Table: IRB’s Consolidated Key Financial Indicators Q1, FY2011 Q2, FY2011 Amounts in Rs. crore Operating Income 512.0 490.3 Growth (%) -4.2% OPBDIT 249.3 236.4 PAT 120.8 101.8 OPBDIT/OI (%) 48.7% 48.2% PAT/OI (%) 23.6% 20.8%

Bloomberg Code BSE Code BSE Group NSE Symbol

Q3, FY2011 668.8 36.4% 293.6 136.0 43.9% 20.3%

Q4, FY2011 767.0 14.7% 314.7 105.5 41.0% 13.7%

Q1, FY2012 801.3 4.5% 329.4 135.7 41.1% 16.9%

Q2, FY2012 735.9 -8.2% 321.5 110.9 43.7% 15.1%

Q3, FY2012 745.5 1.3% 341.7 132.0 45.8% 17.7% Source: Bloomberg, BSE, NSE

PAGE 8

INDIAN ROAD SECTOR IRB Infrastructure Developers Limited (IRB): Business Overview Incorporated in 1998, IRB has been promoted by the Mumbai-based Mhaiskar family and is a leading player in the road infrastructure space with one of the largest BOT portfolio of 5,777 lane km in 17 projects across the country. Apart from road development, IRB is also into other areas like airport and real estate development. Table: BOT Projects of IRB Project

Length km

Lane km

Project Cost

Operational Thane Bhiwandi Bypass

24

96

104

Pune –Sholapur

26

104

63

Pune –Nashik

29.8

119

74

Mumbai –Pune

206

824

1,302

Thane –Ghodbunder

14.9

60

246

Bharuch –Surat

65

260

1,409

Ahmednagar–Tembhurni

60

240

37

Operational Update Order Book Status and Execution: Execution of ongoing projects remained on track in Q3, FY2012 with major revenue derived from Jaipur Deoli Talegaon Amravati Amritsar Pathankot. The Surat-Dahisar project got completed during the quarter and Kolhapur project is nearing completion. The Goa-Karnataka project, which has been facing land acquisition related delays, has been removed from the order book. Toll Collections: The gross toll collection in operational projects reported robust YoY growth of 29.6% in Q3, FY2012 primarily led by higher toll collections in Mumbai—Pune, Surat-Dahisar projects and addition of toll collections from Tumkur—Chitradurga.

Kharpada Bridge

1.4

6

32

Mohol- Mandrup

33.4

134

18

Surat –Dahisar

239

956

2,537

Thane Bhiwandi Bypass

699.5

2,799

5,822

Total Operational Under Development Tumkur –Chitradurga

114

456

Toll Collection

Q3, FY2012 15.9

Q3, FY2011 13.8

Growth

Growth

15.2%

Q2, FY2012 14.5

Pune –Sholapur

4.2

3.5

20.0%

3.9

7.7%

Pune –Nashik

5.8

5.5

5.5%

5.5

5.5%

100.0

80.9

23.6%

99.7

0.3%

7.5

7.3

2.7%

6.9

8.7%

37.2

34.8

6.9%

34.7

7.2%

Ahmednagar–Tembhurni

3.5

3.6

-2.8%

3.5

0.0%

1,142

Mumbai –Pune Thane –Ghodbunder

9.7%

Pathankot –Amritsar

102.4

410

1,445

Talegaon –Amravati

66.7

267

888

Jaipur –Deoli

146.3

585

1,733

Panaji –Goa

69.1

276

833

Kharpada Bridge

2.0

1.9

5.3%

1.9

5.3%

Mohol- Mandrup

1.9

1.9

0.0%

1.9

0.0%

106.3

95.5

11.3%

93.9

13.2%

38.7

-1.8%

305.1

5.6%

Kolhapur

Bharuch –Surat

50

200

500

Ahmedabad –Vadodara Total Under Development

196 744.5

784 2,978

4,880 11,422

Surat –Dahisar

Grand Total

1,444

5,777

17,243

Total

Source: Company data, ICRA estimates; Amounts in Rs. crore

ICRA LIMITED

Tumkur –Chitradurga

38.0 322.3

248.7

29.6%

Source: Company Data, ICRA estimates; Amounts in Rs. crore

PAGE 9

INDIAN ROAD SECTOR IVRCL Limited (IVRCL)

IVRCL Fact Sheet Year of Incorporation CMD Major Subsectors Order Book BOT Projects Operational BOT Projects Revenues FY2011 PAT FY2011 Net Worth FY2011

1987 Mr. E. Sudhir Reddy Roads, Irrigation, Water, Real Estate Rs. 25,000 crore 9 projects with total cost ~Rs. 9,342 cr 4 projects Rs. 5,617 crore Rs. 158 crore Rs. 1,987 crore

S ource: Company data, ICRA estimates

Operating Income Change (%) OPBDIT Less: Depreciation Less: Interest Charges Other Income PBT Less: Tax PAT OPBDIT/OI (%) PAT/OI (%)

Q3, FY2012

Q3, FY2011

Q2, FY2012

1202.5

1417.5 -15.2% 139.7 19.1 59.2 1.0 62.5 20.2 42.3

1046.1 15.0% 93.8 25.0 65.2 5.3 8.9 0.7 8.1

94.8 22.9 66.1 1.0 6.9 0.1 6.8 7.9% 0.6%

9.9% 3.0%

Operating Income: IVRCL’s operating income continued to decline in Q3, FY2012 with the company reporting de-growth of 15.2% YoY for the quarter to Rs. 1,202 crore despite holding a large order book. The pace of execution was impacted by delays in the pickup of some projects on account of clearance and land acquisition related hurdles, besides slow execution. Profitability: IVRCL’s operating margins declined by 198 bps to 7.9% in Q3, FY2012. Further, because of significant increase in interest cost on account of both higher debt and interest rates, its net profit margin declined to a meager 0.6% in Q3, FY2012 from 3.0% in Q3, FY2011. Merger of Asset Holding Subsidiary: IVRCL’s board has approved the merger of its subsidiary IVRCL Assets & Holding Limited (IAHL) with itself, and demerger of the tower manufacturing and real estate businesses into separate subsidiaries. IAHL is a listed company and IVRCL holds 75.7% equity stake in it. Under the share swap ratio, IAHL’s shareholders will receive five shares of IVRCL for every six of IAHL on the record date.

Bloomberg Code BSE Code BSE Group NSE Symbol

IVRC@IN 530773 B IVRCLINFRA

ICRA Ratings Long Term Short Term Outlook

[ICRA]A [ICRA]A1 Stable

Shareholding Pattern Promoters FIIs DIIs Others

11.18% 37.11% 5.4% 46.31%

Market Data (Feb 20, 2012) Latest Price Rs. 58.8 Market Cap Rs. 753 Cr 52-W High/Low Rs. 136/27

Stock Data Face Value Book Value EPS (TTM) P/E (TTM)

Rs. 2 Rs. 101.7 Rs. 3.1 18.8

Price Performance IVRCL SENSEX

9.0% 0.8%

3M -83.6% 11.7%

12M -26.0% -1.2%

Stock Movement

S ource: Company data, ICRA estimates; Amounts in Rs. crore

Table: IVRCL’s Standalone Key Financial Indicators Q1, FY2011 Q2, FY2011 Operating Income 1106.8 1074.5 Growth (%) -2.9% OPBDIT 101.1 95.9 PAT 28.1 23.3 OPBDIT/OI (%) 9.1% 8.9% PAT/OI (%) 2.5% 2.2% Source: Company data, ICRA estimates; Amounts in Rs. crore

ICRA LIMITED

Q3, FY2011 1417.5 31.9% 139.7 42.3 9.9% 3.0%

Q4, FY2011 2052.7 44.8% 177.9 64.3 8.7% 3.1%

Q1, FY2012 1124.3 -45.2% 85.6 4.2 7.6% 0.4%

Q2, FY2012 1046.1 -7.0% 93.8 8.1 9.0% 0.8%

Q3, FY2012 1202.5 15.0% 94.8 6.8 7.9% 0.6%

Source: Bloomberg, BSE, NSE

PAGE 10

INDIAN ROAD SECTOR IVRCL Limited (IVRCL): Business Overview Incorporated in 1987, IVRCL is an engineering and construction company promoted by Mr. E. Sudheer Reddy. IVRCL has been executing projects in the road sector and in segments of the water sector including irrigation, desalination, and sewerage. The company has also undertaken projects on BOT basis for road and desalination works, and has interests in real estate projects as well. Table: BOT Road Projects of IVRCL Project

Length km

Project Cost

IVRCL’s Stake

Operational Jalandhar - Amritsar

49

343.6

100%

Salem - Kumarapalayam

53.5

502.0

100%

Kumarapalayam – Chenagmpalli

48.5

421.5

100%

151.0

1,267.1

25

1,450

51%

77.9

382

75%

42

1,125

100%

Indore - Gujarat

155

1,550

100%

Mumbai-Goa

122

3,100

100%

80

736

100%

Total under development

501.9

8,343

Grand Total

652.9

9,610

Total Operational Under Development Sion - Panvel Baramati - Phaltan Chengapalli - Walayar

Karanji-Chandrapur

Performance Update Order Book and Execution: IVRCL’s order book stood at about Rs. 25,000 crore as on December 2011. The order book to revenue at 4.4 times is on the higher side and will require faster execution. About 29% of IVRCL’s order book of Rs. 25,000 crore is accounted for by the road sector. The rest is spread across water and irrigation (37%), power (7%), building and industrial (21%), and oil & gas and mining (5%). IVRCL currently has a portfolio of nine BOT projects, of which seven are in the road sector. Revenues from Operational BOT Projects: Revenue collections from three operational road BOT projects—Kumarapalyam-Chenagmpalli, Jalandhar-Amritsar and the SalemKumarapalyam tollway project—are in the range of Rs. 0.3 crore per day. There has not been any significant growth in the toll revenues from previous quarter.

Source: Company data, ICRA estimates; Amounts in Rs. crore

ICRA LIMITED

PAGE 11

INDIAN ROAD SECTOR Ashoka Buildcon Limited (ABL)

Operating Income: ABL’s operating income increased from Rs. 236.4 crore in Q3, FY2011 to Rs. 352.9 crore in Q3, FY2012. The operating income is not comparable because of two changes in accounting policy that the company made in Q4, FY2012. Since Q4, FY2011, ABL has not eliminated the EPC revenue derived from its BOT SPVs. Further, the accounting method of amortization of intangible assets has been changed from straight line to proportion of traffic volumes. On QoQ basis, ABL’s operating income grew by 23.2% in Q3, FY2012.

ABL Fact Sheet Year of Incorporation Promoter Major Subsectors Order Book BOT Projects Operational BOT Projects Revenues FY2011 PAT FY2011 Net Worth Mar 2011

1993 Mr. Ashok M. Katariya Roads, Power T&D Rs. 4,312 crore 18 projects with 4,766 lane km 11 projects Rs. 1,302 crore Rs. 210 crore Rs. 893 crore

ABL’s revenues from BOT projects increased from Rs. 50.96 crore in Q3, FY2011 to Rs. 66.28 crore in Q3, FY2012.

S ource: Company data, ICRA estimates Q3, FY2012

Q3, FY2011

Q2, FY2012

Operating Income Change (%) OPBDIT Less: Depreciation Less: Interest Charges Other Income PBT Less: Tax PAT

352.9 69.2 29.0 27.3 13.8 26.6 11.2 15.4

236.4 49.3% 56.5 24.3 16.0 11.2 27.4 11.0 16.4

286.5 23.2% 66.9 27.9 24.6 5.2 19.5 4.5 15.0

OPBDIT/OI (%) PAT/OI (%)

19.6% 4.4%

23.9% 6.9%

23.3% 5.2%

Profitability: ABL’s operating margins during Q3, FY2012 stood at 19.6%. The operating profitability was lower primarily on account of major maintenance expenditure incurred in one of its BOT project (IndoreEdalabad).

Bloomberg Code BSE Code BSE Group NSE Symbol

ASBL@IN 533271 B ASHOKA

Shareholding Pattern Promoters FIIs DIIs Others

67.23% 1.3% 17.23% 14.24%

Market Data (Feb 20, 2012) Latest Price Rs. 209 Market Cap Rs. 1,099 crore 52-W High/Low Rs. 308/180

Stock Data Face Value Book Value

Rs. 10 Rs. 167.6

Price Performance ABL SENSEX

3M -12.7% 11.7%

12M -21.4% -1.2%

Stock Movement

S ource: Company data, ICRA estimates; Amounts in Rs. crore

Table: ABL’s Key Financial Indicators Q1, FY2011 Q2, FY2011 Operating Income 279.7 182.8 Growth (%) -34.6% OPBDIT 67.6 48.6 PAT 30.6 19.3 OPBDIT/OI (%) 24.2% 26.6% PAT/OI (%) 10.9% 10.6%

Q3, FY2011 236.4 29.4% 56.5 16.4 23.9% 6.9%

Q4, FY2011 603.2 155.1% 76.8 144.1 12.7% 23.9%

Q1, FY2012 388.4 -35.6% 91.2 30.9 23.5% 8.0%

Q2, FY2012 286.5 -26.2% 66.9 15.0 23.3% 5.2%

Q3, FY2012 352.9 23.2% 69.2 15.4 19.6% 4.4%

Source: Bloomberg, BSE, NSE

Source: Company data, ICRA estimates; Amounts in Rs. crore

ICRA LIMITED

PAGE 12

INDIAN ROAD SECTOR Ashoka Buildcon Limited (ABL): Business Overview Incorporated in 1993, ABL is a Nashik (Maharashtra)-based infrastructure company with focus on road projects. Prior to the company’s incorporation, its promoters were into civil construction. In 1997, ABL entered the business of developing toll roads and bridges on BOT basis. Table: BOT Road Projects of ABL Project Lane km

ABL’s Stake

Project Cost

Operational Projects Chhattisgarh - Bhandara

376.8

51.0%

535

Indore - Edalabad

406.6

100.0%

165

Waiganga Bridge

26.0

50.0%

41

Pune - Shirur

216.0

100.0%

161

Dewas Bypass

39.6

100.0%

61

Katni Bypass

35.2

99.9%

71

Nagar - Karmala

160.0

100.0%

50

Nagar - Aurangabad

168.0

100.0%

103

Nasirabad ROB

8.0

100.0%

15

Sherinallah Bridge

7.0

100.0%

14

11.8

100.0%

6

Dhule Bypass Operational Projects

1,455

1,222

Projects under Development

BOT Project Portfolio: ABL has portfolio of eighteen BOT roads and BOT bridge projects, of which eleven are operational and seven are under various stages of development. While the projects under development are fewer in number than the operational projects, the size of these projects is larger. However, two of the ongoing projects—Jaora-Nayagaon and DurgChhattisgarh—are nearing completion (~100% work done), and once completed will make the portfolio of operational projects stronger. Order Book and Execution: The size of the EPC order book of ABL is around Rs. 4,312 crore, most of which (~85%) is from its own road projects. Project execution remained subdued during Q3, FY2012 because of delays in getting clearances and achieving financial closure. Toll Collections: All the BOT projects of ABL are on toll basis, and toll collection has reported healthy growth in most projects. Collections from Pune-Shirur have however suffered following discontinuation of one toll plaza in Q3-Q4, FY2011. The gross toll collections jumped by 70.5% due to inclusion of new tolls. Toll Collection

Dhankuni - Kharagpur

841.0

100.0%

2,200

Sambhalpur - Baragarh

407.6

100.0%

1,142

Belgaum - Dharwad

454.1

100.0%

694

Jaora - Nayagaon

340.2

37.5%

835

Pimpalgaon-Nasik-Gonde

451.9

26.0%

1,691

Durg - Chhattisgarh

368.2

51.0%

587

448

100%

1,100

Cuttak-Angul

Performance Update

Total Under Development

3,311

8,249

Grand Total

4,766

9,471

Source: Company data, ICRA estimates; Amounts in Rs. crore

Indore -Edalabad Ahmednagar -Aurangabad Wainganga Bridge Dewas Bypass Katni Bypass Pune - Shirur Nagar - Karmala Jaora-Nayagaon Chhattisgarh - Bhandara Belgaum - Dharwad Others Total

Q3, FY2012 16.36 4.02 5.68 4.75 4.58 5.42 6.25 16.27 11.97 12.73 11.62 99.65

Q3, FY2011 14.65 4.26 4.74 4.51 4.21 5.9 3.34 3.91 8.2

Growth

4.72 58.44

146.2% 70.5%

11.7% -5.6% 19.8% 5.3% 8.8% -8.1% 87.1% 316.1% 46.0%

Q2, FY2012 15.52 4.16 5.03 4.83 4.62 4.73 6.32 15.61 10.48 13.18 1.12 85.6

Growth 5.4% -3.4% 12.9% -1.7% -0.9% 14.6% -1.1% 4.2% 14.2% -3.4% 937.5% 16.4%

Source: Company data, ICRA estimates; Amounts in Rs. crore

ICRA LIMITED

PAGE 13

INDIAN ROAD SECTOR Madhucon Projects Limited (MPL)

Operating Income: MPL’s operating income grew 77.5% YoY in Q3, FY2012 to Rs. 624.9 crore from Rs. 352.1 crore in Q3, FY2011, driven mainly by the better execution of power projects. The share of road projects in the operating income of MPL stood at 19% in Q3, FY2012.

MPL Fact Sheet Year of Incorporation Promoter Major Subsectors Order Book BOT Projects Operational BOT Projects Revenues FY2011 PAT FY2011 Net Worth FY2011

1990 Mr. N. Nageswara Rao Roads, Irrigation, Mining Rs. 6,870 crore 8 projects 4 projects Rs. 1,713 crore Rs. 32 crore Rs. 609 crore

Profitability: MPL’s operating margins declined to 8.4% in Q3, FY2012 from 12.7% in Q3, FY2011. Further, because of the increase in interest cost on account of both higher debt and interest rate, the net profit margin declined to a low 1.2% in Q3, FY2012

S ource: Company data, ICRA estimates

Operating Income Change (%) OPBDIT Less: Depreciation Less: Interest Charges Non-Operating Income PBT Less: Tax PAT OPBDIT/OI (%) PAT/OI (%)

Q3, FY2011

Q2, FY2012

624.9

352.1 77.5% 44.8 11.9 15.4 0.9 18.4 6.9 11.5

416.0 50.2% 54.0 12.7 31.8 1.0 10.4 4.4 6.0

8.4% 1.2%

MDHPJ@IN 531497 B MADHUCON

ICRA Ratings Long Term Short Term Outlook

[ICRA]A+ [ICRA]A1 Stable

Shareholding Pattern Promoters FIIs DIIs Others

57.8% 9.21% 12.42% 20.57%

Market Data (Feb 20, 2012)

Q3, FY2012

52.7 11.9 29.8 1.6 12.5 5.0 7.5

Bloomberg Code BSE Code BSE Group NSE Symbol

12.7% 3.3%

Latest Price Rs. 71.3 Market Cap Rs. 526 crore 52-W High/Low Rs. 112/46

Stock Data Face Value Book Value EPS (TTM) P/E (TTM)

Rs. 1 Rs. 91.3 Rs. 5.5 12.9

Price Performance MPL SENSEX

13.0% 1.5%

3M 39.5% 11.7%

12M -35.1% -1.2%

Stock Movement

S ource: Company data, ICRA estimates; Amounts in Rs. crore

Table: MPL’s Key Financial Indicators Q1, FY2011 Q2, FY2011 Operating Income 407.4 351.6 Growth (%) -13.7% OPBDIT 43.5 34.1 PAT 13.5 6.7 OPBDIT/OI (%) 10.7% 9.7% PAT/OI (%) 3.3% 1.9% Source: Company data, ICRA estimates; Amounts in Rs. crore

ICRA LIMITED

Q3, FY2011 352.1 0.1% 44.8 11.5 12.7% 3.3%

Q4, FY2011 593.4 68.5% 62.6 19.3 10.6% 3.3%

Q1, FY2012 329.2 -44.5% 46.3 8.0 14.1% 2.4%

Q2, FY2012 416.0 26.4% 54.0 6.0 13.0% 1.5%

Q3, FY2012 624.9 50.2% 52.7 7.5 8.4% 1.2% Source: Bloomberg, BSE, NSE

PAGE 14

INDIAN ROAD SECTOR Madhucon Projects Limited (MPL): Business Overview Incorporated in 1990, MPL is a Hyderabad (Andhra Pradesh)-based construction and infrastructure company, with focus on roads and irrigation projects. It has also undertaken projects in other sectors such as power, mining, and real estate. Table: BOT Road Projects of MPL Project Length km Operational

Project Cost

Type

Bharatpur-Mahua

58

340

Toll

DK Expressway

73

370

Toll

Trichy-Thanjavur

57

390

Toll

Madurai-Tuticorin

129

920

Toll

Total Operational

317

2,020

65

813

Annuity

Under Development Chhapra-Hazipur Barasat-Krishnagar

84

980

Annuity

Ranchi-Jamshedpur

164

1655

Annuity

Vijayawada-Machilipatnam

63

730

Toll

Total under development

376

4,178

Grand Total

693

6,198

Performance Update Order Book and Execution: MPL’s order book, as of Q3, FY2012, stood at Rs. 6,870 crore (4x FY2011 revenue), and was dominated by the roads (55.0%) and irrigation (23.0%) segments, with the contribution of the power, real estate, mining and other segments being smaller. MPL’s BOT portfolio in the road sector has eight projects, of which four are operational. The BOT portfolio covers a length of 693 km and has a mix of toll and annuity projects. The execution of road projects remained subdued during Q3, FY2012 because of issues related to land acquisition, clearances and financial closure. Financial closure for the Barasat-Krishnagar and Ranchi-Jamshedpur projects was achieved during the quarter. Revenues from Operational BOT Projects: The total toll collections in the four operational BOT projects of MPL were in the range of Rs. 0.45 crore per day during Q3, FY2012.

Source: Company data, ICRA estimates; Amounts in Rs. crore

ICRA LIMITED

PAGE 15

INDIAN ROAD SECTOR Sadbhav Engineering Limited (SEL)

Operating Income: SEL’s operating income reported a sharp 52% YoY growth in Q3, FY2012 to Rs. 723.7 crore on the strength of faster execution of road projects. Road projects contributed about 90% to the total operating income.

SEL Fact Sheet Year of Incorporation Promoter Major Subsectors Order Book BOT Projects Operational BOT Projects Revenues FY2011 PAT FY2011 Net Worth FY2011

1988 Mr. Vishnubhai M Patel Roads, Irrigation Rs. 5,940 crore 9 4 Rs. 2,209 crore Rs. 119.6 crore Rs. 625.7 crore

Profitability: SEL’s operating margins declined marginally from 11.1% in Q3, FY2011 to 10.4% in Q3, FY2012. The net profit margin increased to 5.8% in Q3, FY2012. The interest expenses reduced QoQ due to lower working capital borrowings.

S ource: Company data, ICRA estimates Q3, FY2012

Q3, FY2011

Q2, FY2012

Operating Income Change (%) OPBDIT Less: Depreciation Less: Interest Charges Non-Operating Income PBT Less: Tax PAT

723.7 75.2 6.9 10.6 4.6 62.4 20.6 41.7

476.2 52.0% 52.9 6.8 9.7 4.3 40.6 14.2 26.4

430.4 68.1% 45.3 7.0 15.4 5.2 28.1 10.0 18.1

OPBDIT/OI (%) PAT/OI (%)

10.4% 5.8%

11.1% 5.5%

10.5% 4.2%

New Orders Inflows: Order inflow during Q3, FY2012 remained weak with the company winning only one mining project of Rs. 325 crore. The order book stood at Rs. 5,940 crore as of December 2011.

Bloomberg Code BSE Code BSE Group NSE Symbol

SADE@IN 532710 B SADBHAV

Shareholding Pattern Promoters FIIs DIIs Others

47.46% 20.46% 18.52% 13.56%

Market Data (20 Feb 2012) Latest Price Rs. 143.9 Market Cap Rs. 2,163 crore 52-W High/Low Rs. 156/94

Stock Data Face Value Book Value EPS (TTM) P/E (TTM)

Rs. 1 Rs. 57.9 Rs. 9.8 14.6

Price Performance SEL Sensex

3M -24.4% 11.7%

12M -16.5% -1.2%

Stock Movement

S ource: Company data, ICRA estimates; Amounts in Rs. crore

Table: SEL’s Key Financial Indicators Q1, FY2011 Operating Income 425.3 Growth (%) OPBDIT 50.7 PAT 25.5 OPBDIT/OI (%) 11.9% PAT/OI (%) 6.0%

Q2, FY2011 260.9 -38.7% 31.4 13.7 12.0% 5.3%

Q3, FY2011 476.2 82.5% 52.9 26.4 11.1% 5.5%

Q4, FY2011 1046.7 119.8% 90.8 53.9 8.7% 5.2%

Q1, FY2012 612.9 -41.4% 67.8 33.8 11.1% 5.5%

Q2, FY2012 430.4 -29.8% 45.3 18.1 10.5% 4.2%

Q3, FY2012 723.7 68.1% 75.2 41.7 10.4% 5.8%

Source: Bloomberg, BSE, NSE

Source: Company data, ICRA estimates; Amounts in Rs. crore

ICRA LIMITED

PAGE 16

INDIAN ROAD SECTOR Sadbhav Engineering Limited (SEL): Business Overview Incorporated in 1988, SEL is a construction and infrastructure company with focus on roads and irrigation projects. Till March 2011, it had successfully completed 20 road & highway projects, 21 irrigation projects, and 5 mining projects. The 20 road projects completed correspond to around 3,738 lane km of national and state highways. Table: BOT Road Projects of SEL Project

SEL’s stake

Lane km

Project Cost

Type

Mumbai Nashik Expressway

20%

398

790.1

Toll

Ahmedabad Ring Road

80%

304

500.8

Toll

Aurangabad Jalna Tollway

51%

276

277.0

Toll

Nagpur Seoni Expressway Total Operational

51%

226 1,204

489.7 2057.6

Annuity

Maharashtra Border Check Post

90%

422

1,426.4

Fees

Dhule Palesner Tollway

27%

392

1,420.0

Toll

Operational

Performance Update Order Book and Execution: SEL’s order book is spread across the road (66.3%), irrigation, and mining segments. Execution of road projects remained healthy during Q3, FY2012 with many projects running ahead f schedule. Revenues from Operational BOT Projects: SEL has nine BOT road projects. Of these, eight are toll-based BOT projects, while one is based on the annuity model (Nagpur Seoni Expressway). The annuity project is partly complete as of date. The Dhule Palesner project received partial COD (68.3 km out of 96 km stretch).

Under Development

Hyderabad Yadgiri Tollway Rohtak Panipat Tollway Bijapur Hungund Tollway Total under development Grand Total

60%

143

480.2

Toll

100%

323

1,213.4

Toll

77%

389 1,669

1,257.1 5,797.1

Toll

2,873

7,854.7

Source: Company data, ICRA estimates; Amounts in Rs. crore

ICRA LIMITED

PAGE 17

INDIAN ROAD SECTOR

Annexure

ICRA LIMITED

PAGE 18

INDIAN ROAD SECTOR Background The Indian road network consisting of national highways, State highways, major district roads, and urban and rural roads is one of the largest in the world with a cumulative stretch of about 3.3 million km. The network carries 65% of the country’s freight and 80% of its passenger traffic. National highways/expressways, which comprise about 2% of the total road length, carry about 40% of the total road traffic. On their part, State highways and major district roads, which together account for about 13% of the total road length, carry another 40% of the total road traffic. Currently, about 27% of the national highway stretch is single/intermediate lane, while about 54% is double lane. The capacity of the highways is increasingly becoming a constraint, given the rapid growth in the number of vehicles (compounded annual growth rate, or CAGR, of more than 8% over the last five years). Given the scenario, the Indian Government has taken many initiatives to improve the country’s road infrastructure, the most prominent of which is the National Highway Development Project (NHDP) launched in 1999.

Category of Roads in India Category National Highways/Expressways State Highways Major District Roads Rural and other Roads

Length 71,134 km 131,899 km 467,763 km 2,650,000 km

Source: NHAI, ICRA research

Status of National and State Highways Under Upgrade National Highways State Highways

20000

Planned to be upgraded

33000

Length in km 15000

40000

Major road development programmes Source: MORTH, ICRA research

NHDP: The National Highways Authority of India (NHAI), which is the nodal agency for development, maintenance and management of the national highways, is implementing the NHDP. The programme involves upgrade/strengthening of about 54,000 km of highways in several phases at a planned investment of Rs. 300,000 crore (around US$60 billion), a major part of which is envisaged to come from the private sector. NHDP includes four-laning of the Golden Quadrilateral (GQ) with a total length of 5,846 km, and the North-South East-West (NS-EW) corridor, which involves development of 7,300 km of expressways connecting Srinagar (Kashmir) to Kanyakumari (Tamil Nadu), and Silchar (Assam) to Porbandar (Gujarat). Substantial progress has been achieved under NHDP with the four-laning of about 31% of the stretch already complete and another 24% under implementation; four-laning of GQ is almost complete.

Status of NHDP

Other Development Programmes: Many States are also planning to upgrade their State highways. Around 77 projects with 7,800 km of State highway have been approved for development under the PPP mode. Further, development of rural roads is being undertaken through the Pradhan Mantri Gram Sadak Yojna (PMGSY). Source: NHAI, ICRA research

ICRA LIMITED

PAGE 19

INDIAN ROAD SECTOR Industry Structure and Role of Private Sector Road development in India is undertaken by the Central and State Governments and implemented through agencies like NHAI, Border Roads Organisation (BRO), State public works departments (PWDs) and municipal corporations. Historically, development and maintenance of road infrastructure has been funded by the Government. Private sector interest in funding road projects has been lacking historically because of the large investment requirement, long gestation period, and uncertainty of returns. However, the private sector has played an important role in the road sector by taking up construction. Traditionally, construction and maintenance of Government funded roads has been executed by private contractors on EPC or item rate contract basis. Due to relatively low capital requirement in the construction business, many players both in the organised and unorganised sectors have been engaged in this business, resulting in high competitive intensity. However, many large construction players have stayed away from road construction because of the relatively low margins involved, and smaller project size in the sector. The road sector has witnessed significant changes over the last decade, with the policy framework being reworked and major development initiatives like NHDP being undertaken, thereby opening up opportunities for greater private sector participation. The enormous investment requirement of NHDP necessitates private sector participation for successful completion. Government initiatives have so far been successful in attracting foreign investment into the sector. Private sector funding of road projects usually takes the BOT route in which the private developer invests in the road development project and earns returns in the form of annuity or user fees (toll) over the concession period (which can range up to 30 years). The maintenance of the road during the concession period is the responsibility of the private developer. After the concession period the road is to be transferred back to the Government.

Typical Highway Development Models Model Description EPC Government funds the entire project cost. Contract Contractor builds roads for Govt. SPV Government sets up SPV, invests a part of project cost as equity. SPV raises loans to finance the project. SPV collects user fees and repays the loans. BOT (Toll) Developer builds and maintains the road. Developer gets toll from users during concession period. BOT Developer builds and maintains the road. (Annuity) Developer gets fixed annuity payments from Government during concession period. Source: ICRA research

Break-up of Projects Awarded by NHAI (Length in km)

Over the last five years, NHAI has been increasingly awarding projects on the BOT—toll model, which has reduced the funding pressure on the Government and increased the pace of development as well. Projects that are not commercially viable on the BOT—toll model are considered for other alternatives like viability gap funding (which involves providing an upfront grant to the developer), and BOT—annuity model (fixed annuity payments thereby eliminating traffic risk). Source: NHAI, ICRA research

ICRA LIMITED

PAGE 20

INDIAN ROAD SECTOR Key Risks Associated with BOT Projects Funding Risk: The responsibility of arranging funding for the project lies with the developer. Further, the equity investment made by the developer towards the project gets blocked for a long period of time. Implementation Risk: Delay in project implementation results in loss of revenues and cost-overruns, thereby impacting the liquidity of the project SPV and returns from the project. Some of the factors that can cause project delay include: Land acquisition: The acquisition of land or right of way (RoW) remains the major drag in the implementation of road projects. Environment and forest clearances Clearances for rail over-bridges (ROBs) and rail under-bridges (RUBs) Shifting of Utilities like electrical lines, water pipelines, sewer lines, and telecommunication lines calls for the assistance of the utility owning agencies concerned, and coordination takes time. Law and order problems Equipment/manpower constraints: Given the large number of projects awarded recently and planned to be awarded, the capacity of the construction industry could also become a constraining factor.

Major Clearances Clearances Pollution Clearance Environmental Clearance Forest Clearance Rehabilitation, Resettlement of Displaced Families

Authority Central Pollution Control Board Ministry of Environment & Forests Ministry of Environment & Forests MoRTH, State Government, NHAI

Source: MORTH, ICRA research

Traffic Risk: BOT projects are highly sensitive to traffic growth and any swing in traffic can have a significant impact on the project’s return indicators and debt servicing capability. Traffic could be impacted by factors such as economic growth in the region, existence/ development of alternative routes, and leakage of traffic. Volatility in traffic can be relatively higher in cases where there is concentration of traffic related to any particular industry.

ICRA LIMITED

PAGE 21

INDIAN ROAD SECTOR

ICRA Limited An Associate of Moody's Investors Service CORPORATE OFFICE Building No. 8, 2nd Floor, Tower A; DLF Cyber City, Phase II; Gurgaon 122 002 Tel: +91 124 4545300; Fax: +91 124 4545350

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Email: [email protected], Website: www.icra.in Branches: Mumbai: Tel.: + (91 22) 24331046/53/62/74/86/87, Fax: + (91 22) 2433 1390 Chennai: Tel + (91 44) 2434 0043/9659/8080, 2433 0724/ 3293/3294, Fax + (91 44) 2434 3663 Kolkata: Tel + (91 33) 2287 8839 /2287 6617/ 2283 1411/ 2280 0008, Fax + (91 33) 2287 0728 Bangalore: Tel + (91 80) 2559 7401/4049 Fax + (91 80) 559 4065 Ahmedabad: Tel + (91 79) 2658 4924/5049/2008, Fax + (91 79) 2658 4924 Hyderabad: Tel +(91 40) 2373 5061/7251, Fax + (91 40) 2373 5152 Pune: Tel + (91 20) 2552 0194/95/96, Fax + (91 20) 553 9231 © Copyright, 2012 ICRA Limited. All Rights Reserved. Contents may be used freely with due acknowledgement to ICRA. ICRA ratings should not be treated as recommendation to buy, sell or hold the rated debt instruments. ICRA ratings are subject to a process of surveillance, which may lead to revision in ratings. Please visit our website (www.icra.in/www.icraratings.com) or contact any ICRA office for the latest information on ICRA ratings outstanding. All information contained herein has been obtained by ICRA from sources believed by it to be accurate and reliable. Although reasonable care has been taken to ensure that the information herein is true, such information is provided 'as is' without any warranty of any kind, and ICRA in particular, makes no representation or warranty, express or implied, as to the accuracy, timeliness or completeness of any such information. All information contained herein must be construed solely as statements of opinion, and ICRA shall not be liable for any losses incurred by users from any use of this publication or its contents.

ICRA LIMITED

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