January 10, 2011

Analysis : Noida toll bridge

I typically have a look at my current positions every 6-12 months independent of the quarterly/ annual results. This allows me to evaluate the company independent of the recent results (which would bias my thinking)

About
The Noida Toll Bridge Company Limited was incorporated as a Special Purpose Vehicle for the Delhi Noida Bridge Project on a Build, Own, Operate and Transfer (BOOT) basis. The Delhi Noida Bridge is an eight lane tolled facility across the Yamuna river, connecting Noida to South Delhi.

The company initially had financial issues after the toll bridge was completed as the initial traffic projections did not materialize. The company had a highly leveraged structure (high debt) and hence had to get the debt re-structured. In addition the company also raised equity in 2006 to improve the debt equity ratio.

The company has since then paid off substantial amount of its debt and has a low debt to equity ratio of 0.3:1.

Business model
The business model of toll bridge is quite interesting to say the least. The initial capital investment is fairly high in an infrastructure project. Once this capital is invested, the ongoing maintenance and operational costs are very low and most of the incremental revenue flows to the profit.

However if the initial revenue projections do not materialize, then the debt load can crush a company, which occurred in case of noida toll bridge, due to which the company had to undergo the re-structuring. The company was thus able to buy time for the traffic projections to come through. The toll bridge now handles around 105000 vehicles per day (ADT or average daily traffic) which is around 45% of the rated capacity.

Current financials
The company had a toll revenue of around 71 Crs in 2010. The company is also able to sell rights for outdoor advertising around the bridge and was able to earn around 8 Crs from it. There is some miscellaneous income of around 5-6 Crs in addition to the above.

The company was able to make a net profit of around 28 Crs on the above revenue base. The company has an operating expense of around 30% of which the main heads are staff costs (salary) at around 8%, depreciation at around 6% and O&M (operating and maintenance) costs at around 8.6%.

The depreciation expenses are bound to remain fixed as there is not much addition to the fixed assets. A portion of the O&M expenses are now paid as a fixed charge to a 51% subsidiary and are not based on the traffic volumes. The salary costs and some other expenses such as legal fees, travelling expense etc are variable and are bound to increase over time.

The company thus has around 40-45 Crs of pretax profits available to service the debt. The company has been paying down debt which now stands at around 145 Crs in the latest quarter. At the current profit levels, the company should be able to payoff its entire debt in less than 3 years (though it may not happen due some of the re-structuring clauses).

The valuation model
Noida toll bridge may be one of the easier companies to model to arrive at a fair value. The average daily traffic (ADT) has grown at around 15% in the past. One cannot assume that the traffic will continue to grow at that pace, however one can easily assume that the traffic will atleast grow at 3-5% annum till we reach the 100% capacity of the toll bridge.

The average fare per vehicle is around 19 Rs. One can assume atleast a 5% increase in the fare over time (slightly less than inflation). These two figures – ADR and average fare can be used to estimate the toll revenue.

The current operating costs are a mix of fixed (depreciation) and variable (staff and other costs) expenses. On an optimistic note, one may assume that these expenses may go down as percentage of revenue. However if one, wants to be conservative, then the expenses can be assumed to be around 30-35% of the revenue.

There are two additional factors to consider in the valuation. The first factor is the advertising revenue which the company can earn with minimal expenses. In addition to this, the company also has a leasehold title to around 99 acres of land which was awarded by the government as compensation for shortfall in the revenue. The company estimates this title to have a value of around 300 Crs. I have personally not ascribed full value to it as I don’t have an idea on the status of this leasehold title or what the company plans to do with it (which the company describes as a risk)

The risks
Noida toll bridge was assured a 20% return on the cost of the toll bridge through toll collection and development rights for 30 years. In the initial years, the traffic projections did not come through and hence the actual returns were much lesser than the assured returns. The shortfall in the returns has been accruing to the company and one way of compensating the company would be to extend the 30 year operation period for the company. In other words, the company may be allowed to run the toll bridge for a much longer period.

The leasehold title is definitely a risk for the company. Anything related to land always has some kind of political risks.

One irritant for me is the staff cost. The staff cost for the company is way too high. The company has around 15 employees and wage bill of almost 6 Crs. The key management personnel (CEO and a manager) are paid a salary of around 4Crs. I think the compensation costs of the company are high.

Finally, the company will generate quite a bit of cash flow once the debt is paid off. It is not clear what the company intends to do with the excess cash, though the company has started paying dividend in the current year

Conclusion
My own valuation estimate is around 50-55 Rs per share with an assumption in traffic growth of 5% and fare rate increase of around 3-5% per annum. You have two options – either take my estimate on face value, or you can use the assumptions I have provided to estimate the value on your own.

My personal preference is to consider a range of assumptions for traffic growth, fare rate changes and cost parameters to arrive at a range of fair value.

Noida toll bridge has a much higher probability of increasing revenue, though anything can happen to prevent it (such as people will start walking instead of driving). On the flip side, there is a limit to the growth and upside as the maximum capacity of the toll bridge is fixed and once that is reached, further increases will be limited to fare increases only.

At current prices, I am not buyer of the stock as it is not very attractive yet. I have small position in the company. As always please read the disclaimer before making a decision to buy or sell the stock.

23 comments:

Aneel said...

Hi, Just want to hear your comments on below
1) Noida Toll hasn't increased its toll for past 2 yrs becoz of govt intervention to keep toll prices same during 2008 recession (Noida Toll needs govt approval for any increase in toll)
2) I read in news recently, that as competition bridge building agreement is coming to end by 2012 as per concession agreement from govt with Noida toll. If new bridge construction is approved, does it have any effect on toll price increments due to competition

I also see this as very stable, safe, slow and long term investment and waiting for a good discount in prices. The attractiveness I see is
i) as loans are being paid off its interest expense will come down and will increase net profit
ii) as it can't meet it expected returns as per concession agreement, I expect the bridge to be operated for more than 30yrs (possibly until bridge exists, due to returns deficit)
iii) Its earnings are cash collected as toll, no inventories and so.

Anonymous said...

Hi Rohit,

As per my understanding, based on my previous analysis which could be wrong, the biggest risk comes from the Metro project which was expected to connect Noida to Delhi. This could have a big impact when the fuel prices go up as many would then switch to Metra as it is cheaper with additional benefits like stress free ride ride. Also, per my understanding the expenses as high as they spend for some kind of collection agency (which is again a related party, I think ILFS subsidiary or joint venture). So, yes the biggest part of the expense goes to the promoter or insider groups.
Regards
Ravi

Pawan said...

Hi Rohit,
Two points from my side:
1. Recently Delhi Metro has started operating between Delhi-Noida and also has a link to Gurgaon. I know people from my office who have shifted to using Metro. I also know of companies in Gurgaon who have started providing pickup/drop to/from Gurgaon Metro station instead of to/from employees homes. I do not know how much percentage of vehicles would be reduced because of that.
2. When you say the estimated price is around 50-55 and current price being about half of it, why do you say there is not enough margin of safety? Is the value 50-55 current value or something realizable in future?
Regards,
Pawan

Vic said...

Thanks Rohit for a detailed analysis.

I have same concern which Aneel pointed out i.e. another bridge being constructed.

Also, there are other bridges which can be used free to get to Noida.

I'll visit Delhi this month, so will analyze the situation further.

Thanks,

Vikas

Rohit Chauhan said...

Hi aneel
I have been to delhi, but never driven through the noida toll bridge ..talk of remote investing :)

yes, the government has not increased fare and i think these issues to bound to happen in the future too as there is populist element in it.

I am not aware of any new bridges being sanctioned, but considering the log jam in delhi and the traffic situation, i think it is likely that the traffic growth will slow. however i dont think fare will be an issue as both would be decided by the government. also the cost of making a bridge in 2011 and onwards will be much higher than for the current one ..so noida toll bridge company should have that advantage

rgds
rohit

Rohit Chauhan said...

Hi ravi
there is a substitution impact for sure. the metro has been operational in various parts of the city and i dont think the traffic has gone down.

taking a broader view, i dont think i have ever seen in india where any key infrasturture has been under utilized. we have a problem too little infrastructure.

i have been going to delhi for last 20+ yrs and at any point of time never felt that the traffic / congestion has gone down.

in the 80s there was a lot of construction due to the asiad games and then since then delhi has been ahead in adding infrastructure, but with migration and rising standard, the demand has only exploded

also if you see the sales numbers of auto companies and the expected GDP growth, is it not probable more people with travel - more will drive, more will take the metro ?

rgds
rohit

Rohit Chauhan said...

Hi pawan
refer to my comment to ravi. i think i have never seen anytime in india where traffic, congestion has come down. i used to visit bangalore in mid 90s and there was very little traffic and now the whole city is a traffic jam
even smaller cities are facing the same problem

if you agree with the following 3 factors, then traffic growth is not going to be a serious issue in the long run

- migration from villages to cities (the case in almost all developing countries)
- rising GDP growth and affluence
- rising standard of living leading to more vehicles and higher income to travel

if these factors, work - is it not likely that traffic grow over time. maybe not 10%, but 3-4% is likely

a metro will hopefully just relieve the pressure for some time. look at mumbai metro ...20 yrs back it was possible to travel, now its a nightmare

rgds
rohit

Rohit Chauhan said...

hi vikas
there are 2 more bridges already and that too free. people still use noida toll bridge after paying money

i think we should expect new bridges to come...it may be required with growth of the city, new cars and traffice - look at my previous comment to that effect

think this way - if car companies grow at 10% + rate, where will the cars go ?

rgds
rohit

Anonymous said...

Hi Rohit,

In the intrinsic value calculation, have you taken land value into account. If yes, how much?

Amreesh

Pawan said...

Hi Rohit,
Looking at it another way, if I were to buy this company today then I have to spend 500 crores approx. Plus lets say the buyer also pays down the debt right away of approx 170 crores.
In this case, we have a company which is a giving us cash post tax about 45-50 crores. This will go up with inflation and also due to traffic increase and this equation holds for say 20 years. This equation means we get returns of about 7.5% to begin with.
There may be profit realizable from the extra land they have but I don't know how much would that be.
I am not sure if I am doing this right but by these calculations there is not much value to it.
Hoping for your comments.
Regards,
Pawan

Rohit Chauhan said...

Hi pawan
if you take the pre-tax profit of around 45-50 crs and value is as a government bond for 20 years ..you will get roughly around 500 crs as the value. thats the current market cap of the company. that is what the market is valuing it as

this ofcourse does not taking into account any traffic growth, value of lease title, and advertising into it

another point to remember is that the agreement with goverment means that noida toll bridge is entitled to 20% on investment from first date of operation. now for last 10 yrs that has not happened ..so these returns have accured to the company and that compensation can come via increase in duration of BOT agreement beyond 30 yrs and the title lease which i referred to earlier.

another way to look at -

so contractually the company make 20%+ for another 30 yrs so that the agreement terms are fullfilled - which also is the risk element in the stock

how will we value a fixed bond which pays 20% per annum for 30 yrs ? i would say roughly around 2 times book value if return on a government bond is 10% ?

plus the company makes money on ads etc.

so in a perfect world if everything goes fine, the company is valued at 50% of its theorotical value.

but not everything will go perfect ..government can change the contracts, the expenses can rise faster than revenue etc. so the current price is at best 30% below fair value. anything below 26 becomes a much better value

hope i have not confused the issue more

rgds
rohit

Anonymous said...

Sir
how is the quality of management ? since the CEO salary is very high & most of the expenses are going to subsidary company ?

Pawan said...

Hi Rohit,
I get your point. The net block in the balance sheet on 31st March shows 585 crores. If they are expected to make 20% on that then as and when they start doing that, this company can be huge.
Still, I don't get the 50% or 30% undervaluation part. If the company was making those 20% on investments then yes it is undervalued by 50%. The only possibility for revenues to double from here would be from traffic increase. And if traffic grows at 7% then it will take 10 years for traffic to double.
In such a case, even if govt. allows it to run the company for another 10 years I don't see how it appeals to the investors.
Regards,
Pawan

iqbal said...

hi rohit,
excellent analysis..balanced and sharp... i am invested in this company from 2005 and hold a very large position in it (so try to get all info i can on the stock :))...agree fully with ur projections...though i feel that getting the land sale/use approval and toll hike approval required a bit of political management, which was badly botched up by the previous CEO mr puri -(however his contribution in building this world class facility cannot be overlooked) - who has now been replaced….
I find your revenue projections very reasonable and achievable…
Fully agree with you on the staff cost…6 crs is a very large figure for a lean organization with only 15 employees..after all how highly qualified does the staff have to be to run a toll bridge operation…this should worry all shareholders…
A parallel bridge to the southern side has been sanctioned by the NOIDA authority..though when this will be constructed remains to be seen..your point about infrastructure costs applies here too..though governments hardly care about costs and costs overruns…in fact they thrive on them…if you know what I mean!....our people too hate to pay tolls…so we hear protests of all sorts when a toll hike is announced…as was done in april 2009 and rolled back almost immediately….
A more worrisome comment I read somewhere is a suggestion that all is not hunky-dory with the toll collection process…since most of it is collected in cash…wonder if there are electronic records of the number of vehicles that pass through and their types…
Another dampener was MAT which was increased last year and affected profits…this year corporate India has made a representation to the FM to have it reduced or rationalized…let us see…if it happens profits should improve…
Above all…the management has not been very investor friendly in the last five years I have been invested…their media faces are shy and ill-informed particularly an accounts guy who has spoken telephonically to news channels…except for the interim dividend not much has been returned to the shareholders…dividend policy implemented earlier would have given a better discounting from the markets…though maybe the future will be better!
Would you or any of ur esteemed commentators hazard a guess to its current year EPS?..i estimate a conservative rs. 1.98…comments, please?!

Anonymous said...

hi rohit,
excellent analysis..balanced and sharp... i am invested in this company from 2005 and hold a very large position in it (so try to get all info i can on the stock :))...agree fully with ur projections...though i feel that getting the land sale/use approval and toll hike approval required a bit of political management, which was badly botched up by the previous CEO mr puri -(however his contribution in building this world class facility cannot be overlooked) - who has now been replaced….
I find your revenue projections very reasonable and achievable…
Fully agree with you on the staff cost…6 crs is a very large figure for a lean organization with only 15 employees..after all how highly qualified does the staff have to be to run a toll bridge operation…this should worry all shareholders…
A parallel bridge to the southern side has been sanctioned by the NOIDA authority..though when this will be constructed remains to be seen..your point about infrastructure costs applies here too..though governments hardly care about costs and costs overruns…in fact they thrive on them…if you know what I mean!....our people too hate to pay tolls…so we hear protests of all sorts when a toll hike is announced…as was done in april 2009 and rolled back almost immediately….
A more worrisome comment I read somewhere is a suggestion that all is not hunky-dory with the toll collection process…since most of it is collected in cash…wonder if there are electronic records of the number of vehicles that pass through and their types…
Another dampener was MAT which was increased last year and affected profits…this year corporate India has made a representation to the FM to have it reduced or rationalized…let us see…if it happens profits should improve…
Above all…the management has not been very investor friendly in the last five years I have been invested…their media faces are shy and ill-informed particularly an accounts guy who has spoken telephonically to news channels…except for the interim dividend not much has been returned to the shareholders…dividend policy implemented earlier would have given a better discounting from the markets…though maybe the future will be better!
Would you or any of ur esteemed commentators hazard a guess to its current year EPS?..i estimate a conservative rs. 1.98…comments, please?!

iqbal ujjainwalla iqbu1966@gmail.com

rayhaan said...

hi rohit
wot r ur views on empire industries?
regards

Rohit Chauhan said...

Hi pawan
yes, the deficeit in returns is huge..i think the management talks about it in the AR and is 1000+ crs.

i think to recover this the management expects the lease term to be of 70 yrs ..so it is much higher than the 20 yrs as per. so either the government will extend the lease or provide land dev rights - and this is not as per some politicians wish ..it is a contractual agreement. hence you have to consider this in the DCF calculation

Rohit Chauhan said...

hi iqbal
i agree ..the management is not really great to talk about. good part is that you dont need smart management to run this
again this company is not a multi-bagger. it will give above average returns ..thats all

on competing bridge ...i agree it will come in time considering the traffic and although it may hurt the voluem growth, in a way it will help too. toll for a new bridge in 2013 or later will have to be higher than what Noida toll is charging ..that will either divert the traffic or allow NTBL to charge higher toll

rgds
rohit

Rohit Chauhan said...

Hi rayhaan
had a cursory look ..seems to be doing well ..and growing rapidly. what biz is it in ?

at 15 times earnings does not appear too cheap ..but then i dont know enough about the biz yet

rgds
rohit

Sachin Purohit said...

Hi Rohit, This is an interesting business. But there is a risk, I don't know if the comments above have covered it...Crude price inflation. Not sure how many car-owners will continue to drive that too, along toll-roads when petrol continues to rise Rs 1-2 twice every month. There may be a reduction in LCV traffic along this bridge especially since a cheaper public transport - Metro is available.

Manish Jain said...

Hi Rohit,

Incidentally I was also analyzing the company for investment.

Few Concerns I think of :

* Competition from Metro
* Increasing fuel prices
* Toll increase is sensetive issue and more so with increasing inflation.

Comapny is taliking about land development rights since last 7/8 years in annual reports but nothing has materialized yet.

Regarding Intial Project cost + Revenue shortfall is Rs. 1700 Cr with 20% ROI does not seems probable for at least 15-20 more years.

* Last it does not seems multibagger and may test investor patiance for dividend atleast till 2015 till it pays off its debt.

seshu kumar said...

Dear Rohit,

I am not able to understand the fixed life cycle part of this company.
What happens after completing the 30 years of lease period?
Do they close the company and share the cash equally among all share holders?
Will the company be allowed to get into a new business?
Can the company get into new businesses within the 30 years once it pays off the loan?
What will it do with its cash profit after paying the loan?
Will it distribute the entire amount other than maintenance expense , let us say, 10% of Profit as Dividend?
What should an investor look forward from a company like this - Increase in share price or Dividend income?
Some of these questions may be too basic - appreciate if you can take some time out and answer them.

Raja said...

Hi Rohit,

This is with respect to your comment that a government bond would pay 10% per annum over 30 years, while NTBC (at current price) would pay about 20% per annum over 30 years.

But a government bond would return the principal that was invested upon maturity. In the case of NTBC, it has to transfer the bridge to the NOIDA authority. When this happens, the company will hardly have any assets, except the cash it generated (not sure what it will do with this, assuming it is not paid out as dividends). So I think we need to discount an additional factor here, which is that whatever principal we invest has to be returned to us annually, since in the end (after 30 years), the company will not have any real tangible assets. So I would conservatively value the company at about 15 to 20, based on its current cash flows, and assuming very little growth in traffic/toll collection (due to metro and the new bridge).

Rajaram