Noida Toll Bridge Ltd - An Attractive bet

About the Company – The Noida Toll Bridge Company Limited was promoted by IL&FS for the implementation of the Delhi Noida bridge project on a build, own, operate and transfer (BOOT) basis. The Concession Agreement (Concession) executed between the Company, Promoter and New Okhla Industrial Development Authority (NOIDA) in November 1997, allows the company to earn 20% compounded return for a period of 30 years. Also if company has losses, then losses are added to the project cost. Lower than expected traffic in early years and high leverage meant company had losses in early years. Company had to go for corporate Debt restructuring in 2002. Company came with GDR (Global Depositary Receipts) in 2006 to raise money to repay some debt and to connect Mayur Vihar with DND. GDR are listed in Alternative Investment market of London Stock Exchange. Losses in early years meant that Shortfall as of Mar 31, 2012 is 2339 Cr. As per concession agreement, if the company is able to earn the designated return (20%) at the end of 30 years, NOIDA authority can extend the concession period by 2 years at a time till the designated return is recovered.  So as per the original concession agreement, company should be able to keep the bridge much longer than 30 years (Note - Original concession agreement is being renegotiated, so cannot rely on extension)

Risks

1. NCR is earthquake prone. Even though the bridge is earth quake proof, there still remains a slim possibility of complete loss if bridge collapses due to earth quake. 
2. PIL has been filed to take the bridge from company and make it toll free. India is struggling for infrastructure investment, so I don’t think government will want to harm infrastructure spending by making the bridge toll free. So probability of this scenario playing out is also low. 
3. Going by the current agreement, management expects that company will keep the bridge for 70 years. But there is discussion going on to renegotiate the concession agreement. Considering this I would not like to consider any extension in my valuation. 
4. Average Toll Per vehicle has increased by 5% over last 10 years. It was allowed to increase toll index with inflation. But it has not been able to increase toll prices with the same rate. Also there was public outcry when it increased toll in Dec 2012 and it had to roll back the toll hike. My guess is that it should be able to do some nominal increases over a period of time. If people pay Rs22 as toll for car now, I think they won’t object to paying Rs33 after 15 years (which is equal to 3% hike per year). 
5. Delhi Metro open in Noida in 2009 and it did impact the two wheeler traffic. I don’t think it will impact traffic materially in few years as people won’t leave private transport till they get feeder buses and good metro connectivity. So risk is low in short term, but reasonable in 15 years’ time span. 
6. Is the management working for shareholders? I couldn't understand the rationale of creating a subsidiary company to manage the Operations. Operations and maintenance of the toll bridge is managed by ITNL Toll Management services Ltd. This is the subsidiary with 51% holding by Noida Toll Bridge Company and 49% by promoter Group ILFS Transportation Networks. ILFS Transportation networks’ holding is 25% in the NTLBC. So ILFS stands to gain more if inappropriate amount of servicing fee is charged by ITNL Management services.

Risk Summary - Risk No. 1-2 are company specific low probability risk. They should be handled by diversification in portfolio. Risk No. 3-5 can be taken care of by valuation. Risk No. 6 needs to be monitored. Management has indicated that they are aiming the policy to increase the dividend. Need to monitor if company starts giving most of its earning as dividend or not(even better if it does buyback if share is undervalued).  Also need to keep an eye on how the profit is split between Noida Toll Bridge and its subsidiary.

Positives

1. Company has Stable Revenues. As per concession agreement, Non toll bridge cannot be constructed near the vicinity of DND till it reaches peak capacity ( peak capacity is about 2 Lakhs vehicles per day, Average Annual Day traffic currently is 1.06 lakhs).Commuters save both time and money by using DND, so they will most likely continue using it. Company also earns advertising revenue which is about 20% of total revenue. Both of these are very stable sources of revenue. 
2. High free cash flows. Major expense has already been carried out in constructing the bridge. Company now only needs to maintain the bridge and pay salaries to employees. Rest of the money can be returned as dividend. Company should pay all its debt in FY 2014 and should have about Rs3 Free cash flow per share. 
3. Traffic growth rate has been 12% for the past 10 years. Similar growth rate cannot be expected in future as past growth coincided with good growth in Indian automobile industry and also high increases in prices of petrol and diesel. 
4.  Company has leasehold right on the land around DND. NOIDA authority can give development right to the company in case of revenue shortfall from toll bridge. This can have considerable value. But probability of this working out is very slim.

Corporate Governance

1. Management compensation was Rs4 Cr till Financial Year 2010.  This was way too high for a company whose operations can be run by almost anybody.  This has been reduced to Rs60 lakhs now. But there is nothing to ensure it won’t be repeated again. 
2. Finance department head retired and he has been made CFO of the company. He is related to the director nominated by promoter group. But to be fair, I think Compensation of Rs30 lakhs I think though is reasonable. 
3. Chairman owns around 70000 shares which is a positive thing. 
4. Ownership is distributed and promoter has only 25% stake. This is positive as any shareholder unfriendly activity is comparatively less easy to be passed by board

Valuation

If I take assumption of around 5% traffic growth rate (traffic growth rate has been 12% for last 10 years) and 3% growth rate for toll hike (toll hike growth rate has been 5%for past 10 years) and assuming 13% discount rate( high in my view as business doesn’t have high risk), value comes around Rs40 per share.

I also tried to reverse engineer the price and determine what it means. If the company is not able to increase its profit from now wards ( Assuming no toll hike for 16 years, 3% traffic growth rate and 9% expense growth rate), company should give 8.8% compounded return at current share price of Rs 21. In my view, this definitely seems to be very exciting opportunity at this price. But I will limit to 6-7 % of my portfolio due to the risks outlined above.

Disclaimer – I have this stock in my portfolio. I have just tried to present my views here and its purpose is not to give any buy or sell recommendation. Please do your own analysis before taking any investment decision.

ILFS Investment Managers - Is it a free lottery yet

I got the idea of this stock from Prof. Sanjay Bakshi discussion on Safal Niveshak.

About the Company

IL&FS Investment Managers is listed private equity which invests in Real Estate and Infrastructure sectors.

It raises funds from Institutional Investors to invest primarily in India. They have many funds and each fund has separate mandate to invest in Real Estate, Private Equity and Infrastructure sectors.

Its Revenue is made of two parts - AUM fee and carry. Growth and Private equity funds have higher fee in the range of 2%. Infrastructure funds have lesser fee which is in the range of 1.5%. Future fund raises might have some pressure on Fees

Each Fund has a threshold. If the management is able to deliver over and above the threshold, then 6% of the return above threshold accrues for the shareholders.

Al the funds have threshold in the range of 9-11% in USD (except Leverage India Fund which has threshold in Indian rupees).

Company has been able to generate carry on one of its funds in the past. Probability of carry seems to be remote (Except Leverage India Fund) currently because of capital market situation as well as INR depreciation.

For LIF Fund, company should be able to generate some carry as it has retuned most of its capital and more importantly its threshold is in Rupee which is beneficial for company in current scenario.  Amount of carry though is difficult to quantify now as it depends upon fund exits

Positives

• It is biggest Private Equity based in India. It has been listed from 1996, so has seen complete business cycles. Also it has the experience of three fund exits which no other private equity has in India. So if investment capital starts flowing to India again, it is one of the better placed PE to benefit from it.
• Company needs very less capital to grow. If AUM grows, it only has to hire new employees. Only other major expense apart from employee’s salary is admin expenses. As expense will not increase in same proportion as AUM, most of the AUM increase will flow to PAT.
• Also it pays very good dividend. Dividend yield 6.7% at current price. Also its dividends should increase if the company is able to maintain its AUM

Negatives

 

• Saffron was acquired at 8.75% of AUM. Acquisition though not very pricey, but it was not cheap either. Management can fritter cash away in further acquisitions - probability low.
• Employee salaries are high. But I think that is part and parcel of PE industry.
• Company is facing difficulties in raising new capital and exits for 1-2 years now.  Company will probably face DE growth for 1-2 years.
• Company might liquidate or move into losses if it could not raise meaningful AUM in next 3-4 years. Probability very low but possible

Financials –

Company had grown very fast from 2004-2008. But it cannot see the heady growth seen at that time as it was from lower base of 300M USD.Employee expense and other administrative expenses constitute majority of expenses ( Almost  45-50%).

Company should be able to pay off its entire loan by Sep 2013. Also company charges 24cr in depreciation/amortization, major part of it is due to its acquisition of saffron.

This would continue for at least  3-4 years and it also would accrue to shareholders as company doesn't need to replace any asset

 Valuation

There are 3 possible scenarios facing this company

 

• First Scenario - Company is able to maintain its AUM in long term with some short term pain. I think possibility of this is high. In this scenario, it seems cheap by any valuation metrics at current Market Cap of 470Cr. Its PE is 6.5 and P/Free Cash Flow is less than 5. Enterprise value less than 4% of AUM.
• Second Scenario - Heaven smiles and we have bull market in India. Company will be able to earn carry as it will be able to exit faster and at good valuations. If it earns carry, it will act as a positive feedback loop on AUM. So AUM also will most likely increase. Apart from that company PE re rating will happen. In short , valuation could multiply a few times.  Probability of this happening is less but can not be ruled out as fund has 3-4 years’ time at least.
• Third Scenario – Company is not able to raise AUM and not able to earn carry on any of the funds.  Valuation for this scenario is below.

         
         Assumptions

• EBITDA will remain constant at 52% ( it can vary due to USD-INR rate, but I am presuming a constant conversion rate of 50%). It means company will fire employee timely as its AUM faces de growth.
• Discount rate of 6% ( after tax Fixed deposit return)
• There could be other costs (liquidation costs) , but some of the funds have extension feature also. So they can possibly negate other negative factors. Also LIF can get some carry for which I am not ascribing any value.

I foresee Free Cash Flow for the company as 98 cr, 60 cr, 48 cr, 31 cr, 12cr for next 5 years.  Current cash is of around 100 cr. if I don't consider time value of money , then value comes at 350cr.

If I use discount rate of 6%(opportunity cost of Fixed deposit), then value comes around 320 cr.

So if i buy the stock when its Market Cap is less than 320cr it will at least return my Capital with the possibility of big upside if the scenario 2 materializes.  Worst case – I don’t win lottery (But I get my money back).  Best case – I win lottery (I get handsome return on my capital.)

Disclosure – I have just invested a token amount in this stock for tracking perspective.