Documents

Infra Emkay 151014

Description
share
Categories
Published
of 113
All materials on our website are shared by users. If you have any questions about copyright issues, please report us to resolve them. We are always happy to assist you.
Related Documents
Share
Transcript
  © Your success is our success Emkay       S  e  c   t  o  r   R  e  p  o  r   t Emka Global Financial Services Ltd. 1 Infrastructure India Infrastructure Sector ……Crossing the Chasm October 13, 2014 Company Rating TP IRB Infrastructure Buy 288Sadbhav Engineerin Buy 285 Ashoka Buildcon Buy 166ITNL Hold 223 Adani Ports Buy 315Gujarat Pipavav Hold 160L&T Buy 1675NCC Accumulate 45Simplex Infrastructure Accumulate 293J kumar Infrastructure Buy 412 Ahluwalia Contracts Accumulate 181   With the formation of a stable–pro investment-oriented government, we expect investor focus to shift from near term earnings/orders to long-term cycle recovery prospects. We believe that the potential for a cycle recovery is high but the will commence by FY16E only, given the constraints of fuel, land acquisition and weak balance sheets of the infrastructure players. However, these issues are being addressed and we see concerns gradually subsiding. We have identified three major investment themes within the infrastructure sector - Highways/Roads, Ports and Core construction. Highway/Road sector: §   Expect the road development sector to see pick up in tendering - immediately from EPC and post FY16E, from BOT §   NHAI plans to tender 2,300 kms via the EPC route, which will revive tendering activity in the road sector. It has already tendered 2000 kms through EPC route till date §   Redrafting of the Model Concession Agreement (MCA) to be a major game changer. New MCA to provide NHAI with more authority on handling stalled bids, inviting re-bids and terminating projects that fail to meet necessary criteria. §   Pursuant to the redrafted MCA coming into play (by end-FY15E), we expect a sharp upsurge in re-bidding activity in the BOT space alongwith reduced competitive bidding. §   Prefer large BOT players like IRB Infrastructure, Sadbhav Engineering, Ashoka Buildcon because of their strong road-asset portfolio, stable order-books, no cash flow mismatch and capacity to generate growth capital. We retain a hold rating on ITNL due to leverage issues. Port Sector: §   Expect container volumes to grow at 8.1% CAGR over FY14-16E on the west coast mainly due to a) improvement in the overall exim cycle, and b) large shipping lines MSC and Maersk developing Indian ports as a trading hub. §   Private ports to continue their growth trajectory and garner a larger share of the incremental container traffic due to a) inability of the major ports to take on additional container traffic due to capacity constraints and b) traffic diversion from NSCIT terminals (NhavaSheva)/GTI terminal at JNPT. §   We expect Adani Port and Gujarat Pipavav to benefit immensely from the estimated 1.33mtues incremental container volumes and gain incremental market share of 3.6% and 1.6% over FY14-16E. We recommend a BUY on Adani Port and Hold on Gujarat Pipavav Core Construction Sector: §   Expect the new government to focus on reviving stalled projects. However, expect tendering to gain momentum with a lag (from FY16E onwards) §   Expect highways, railways (Dedicated freight corridor and metro projects ) and defense sectors to be the major contributors to fresh tendering. In the highway segment, we estimate USD 4.9bn worth projects to come for re-bidding (BOT Mode), USD 2-3bn from fresh tendering under BOT mode and around USD 3.4bn under EPC mode. In the defense sector, orders above USD15-20 bn to be lined up for tendering, largely under the 'Buy and Make Indian' category. §   The construction companies who have taken proactive steps during the last 3 years of stress by way of a)selling the assets (NCC) b) focusing on the core construction business(not participated in the bids of the asset business (NCC, simplex Infrastructure ) c)correcting capital structure – L&T d)not bidding aggressively (J Kumar Infrastructure,  Ahluwalia contracts) will remain immediate beneficiaries of any revival. Our top pick in the sector are L&T, Jkumar Infra while we have accumulate rating on NCC, Simplex Infrastructure, Ahluwalia Contracts.  © Your success is our success Emkay       S  e  c   t  o  r   R  e  p  o  r   t Emka Global Financial Services Ltd. 1 September 25, 2014 Road Sector Structural issues getting addressed We expect 1) Redrafting of the Model Concession Agreement (MCA), 2) premium restructuring and 3) using the EPC route; to revive tendering activity in the road development sector. Pursuant to the redrafted MCA (expected by end FY15E), we see a sharp upsurge in re-bidding of BOT projects (Rs295 bn). NHAI's plans to tender 2,300 kms via the EPC route will separate the contractors from the developers and ease competitive bidding in the BOT segment. We prefer companies like IRB Infrastructure, Sadbhav engineering, Ashoka Buildcon owing to their strong road-asset portfolio, stable order-books, no cash flow mismatch and capacity to generate growth capital. With a minimal funding requirement, these companies remain well-funded for exploiting new opportunities as and when the NHAI awarding activity picks up. Redrafting of the MCA (Model concession agreement) - A key game changer NHAI is redrafting the MCA in order to - address the various setbacks it has faced in the past, enable faster decision making and ensure that it provides relevant solutions for problems faced by the road development sector. We believe that reworking the Model concession agreement at this juncture will address the actual ground risk the road project faces with respect to the land acquisition, equity infusion/financial closure, event risk which ultimately will help avoiding the mismatch in the project cash flows. We expect the redrafted MCA to come into play by end FY15E.  Expect upsurge in re-bidding (Rs295 bn) as 72% of projects tendered in FY12 yet to commence construction Of the 47 projects which were tendered in FY12, 53% (25 projects) were tendered out in premium mechanism, of which two projects are allowed for premium restructuring and 13 (27%) projects have started construction (which includes the two projects given principle approval for premium restructuring), which we believe, are likely to come for re-bidding from FY16E onwards post the revision of MCA. We also see scope for new orders to emerge, which are likely to push tendering activity upwards in FY16E. Premium restructuring - Short-term measure to revive stalled projects NHAI has adopted premium restructuring in a bid to revive stalled projects. The premium restructuring is a short-term measure to kick-start stuck projects on the assumption that traffic will improve in the later part of the concession period, which will not benefit under-construction projects, as it gives no incentives for the developers to start their projects. We believe the solution to kick-start these projects that are weighed down due to financial closure is to re-invite them for re-bidding, which would attract serious developers and discover a new premium or a grant base. EPC to propel current tendering; BOT project tendering from FY16E Given the slowdown in the awarding activity NHAI tendered 1200 km on EPC basis. Given the prevailing financial and structural challenges in the sector, the NHAI aims to tender projects worth Rs2300km via the EPC route, and we see scope of new orders to emerge through the EPC route and potential re-bidding of stalled contracts, as well as some new projects, which are likely to keep push tendering activity upwards in FY16E.We also see that projects which got tendered in FY12 and currently might come for tendering under EPC route (opportunity size Rs203 bn).    Road Sector Sector Report Emkay Research October 13, 2014 3 Redraft of the Model Concession Agreement- a key positive The NHAI (National Highway Authority of India) is reworking the Model Concession  Agreement (MCA) for highway projects with respect to the following issues - §   Appointed Date :  Assigning the official date for the commencement of a project or the appointed date,,after environmental clearances are in place, at least 80% of the land required (ROW) is acquired and the concessionaire has tied up required funds §   Deemed termination  in case of non-fulfilment of CPs (conditions precedent) by either parties after the first anniversary of the date of signing of CA (concession agreement) §   Revenue shortfall loan:  Non-political event to also be included for purpose of revenue shortfall loan versus current mechanism, which includes indirect political event or political event and entire surplus cash after meeting the subsistence expenditure to be used for repayment of revenue shortfall loan as against 50% of the profit before tax (PBT).  As per the current concession agreement, if the Realisable Fees in any accounting year during the concession period falls below the subsistence revenue level as a result of an indirect political event, or a political event, NHAI agrees to provide to the Concessionaire such shortfall support, by way of a loan ( Revenue Shortfall Loan ) with interest thereon @ SBI PLR per annum. Provided, however, that any reserves of the Concessionaire and any sums received or likely to be received by the Concessionaire through insurance claims (to exclude insurance payments for physical loss used to carry out requisite repairs) or payments by NHAI shall first be deducted and only the balance remaining shall be disbursed as the Revenue Shortfall Loan. In terms of repayment of the Revenue Shortfall Loans disbursed by NHAI pursuant hereto and the interest thereon shall be repaid by the Concessionaire in a sum equal to 50% of the Net Cash flow of the Concessionaire as and when made and such repayments shall be made in one or more years as necessary. §   Making lenders a party to the concession agreement that is currently between the concessionaire and NHAI, enabling quicker equity transfer, updation of the total project cost at the time of inviting bids and mechanism to address cost escalation after signing the concession agreement. NHAI has attempted to make a National Highways Construction Cost Index (NHCCI) to overcome limitations of WPI. §   Back ending of quoted premium payments from the 4 th  year of COD and escalating it by 3% upto 10th Year of COD and 8% thereafter, to solve mismatch of cash inflows and outflows of the Concessionaire in initial years. We believe that reworking the Model concession agreement at this juncture will help providing the solution to the actual ground risk the road project faces with respect to the land acquisition, equity infusion/financial closure, event risk which ultimately will help avoiding the mismatch in the project cash flows.    Road Sector Sector Report Emkay Research October 13, 2014 4 Announcements made by the Union Government over the last 2-3 months §   Bidding to begin after 100% land acquisition §   Banks allowed to raise long-term funds for infrastructure sector §   55 stalled highway projects covering 15,000 km to be revived §   Premium payment rescheduling cleared for 9 projects §   NHAI to have more power to make changes in the MCA and standardbidding documents §   Proposal – allow a project’s lender to substitute developer before project achieves COD. §   Eased out clearances: MOEF has launched e-clearance system for infrastructure projects; exempted road projects located within adistance of 100 km of international borders from EC (Environment clearance ) §   Setting up of Finance Corporation with Japanese investors proposed. §   Formulation of Infrastructure Investment Trusts to act as analternate avenue of long-term project finance; proposed setting up of asset reconstruction company §   NHAI formulated a scheme under which future toll flows to the extent of 30%of the Total Project Cost can be securitized subject to these amounts being invested in road sector projects. This was initiated to improve the cash flows into road projects.
We Need Your Support
Thank you for visiting our website and your interest in our free products and services. We are nonprofit website to share and download documents. To the running of this website, we need your help to support us.

Thanks to everyone for your continued support.

No, Thanks