IRB Infrastructure. December 24, Journey to success. Road under construction. Shailesh Kanani Aniruddha Mate

Transcription

1 IRB December 24, 2009 Journey to success Road under construction Shailesh Kanani Aniruddha Mate

2 IRB Table of Contents Investment Arguments Experience abound + Vast opportunities = Rich Benefits 2 Strong operating cash flows and execution legacy the key differentiating factors 8 Interdependent business model + Good times = Buying Opportunity 8 Robust Order Book = Revenue visibility 9 Fund-raising plans = Springboard for future growth 9 Real Estate foray and Airport development project - Venturing into alien domains 10 Concerns 11 Financial Outlook 12 Outlook and Valuation 15 SOTP Valuation 16 Company Background 17 Holding Structure of IRB 18 ANNEXURE I - Strong Portfolio of BOT assets 19 A. Operational Projects 19 Ideal Road Builders Private Limited (IRBPL) - Thane-Bhiwandi Bypass, 4-Lane Project 19 Ideal Road Builders Private Limited (IRBPL) - Kaman-Paygaon BOT Project 19 IRB Private Limited - Kharpada Bridge BOT Project 21 NKT Road & Toll Private Limited - Nagar-Karmala-Tembhurni BOT Project 22 MMK Toll Road Private Limited - Mohol-Kurul-Mandrup Kamti BOT Project 23 Aryan Toll Road Private Limited - Pune-Solapur BOT Project 24 ATR Private Limited - Pune-Nashik BOT Project 25 Mhaiskar Private Limited (MIPL) - Mumbai-Pune Expressway 26 Thane-Ghodbunder Toll Road Private Limited - Thane-Ghodbunder Road 28 IDAA Private Limited - Bharuch Surat 29 B. Under-Construction Projects 31 IRB Surat Dahisar Tollway Pvt. Ltd - Surat Dahisar 31 IRB Kolhapur Integrated Road Development Company Pvt. Ltd - IRDP-Kolhapur BOT Project 32 C. Newly secured projects 34 Goa / Karnataka to Panji Goa BOT Project of NHAI 34 Amritsar to Panthankot BOT Project of NHAI 35 Jaipur Tonk Deoli BOT Project of NHAI 36 Talegaon Amravati BOT Project of NHAI 37 ANNEXURE II - BOT Process Timeline 38 FINANCIALS 39 January December 30, 24, For Private Circulation Only - Sebi Registration No : INB

3 IRB Initiating Coverage BUY Price Rs242 Target Price Rs289 Investment Period 15 months Stock Info Sector Market Cap (Rs cr) 8,048 Beta Week High / Low 280/77 Avg. Daily Volume Face Value (Rs) 10 BSE Sensex 17,361 Nifty 5,178 BSE Code NSE Code IRB Reuters Code IRBI.BO Bloomberg Code IRB@IN Shareholding Pattern (%) Promoters 73.8 MF / Banks / Indian FIs 10.1 FII / NRIs / OCBs 11.9 Indian Public / Others 4.2 Abs. 3m 1yr 3yr # Sensex (%) (1.6) IRB (%) Note: # Since listing on Feb 25, 2008 Shailesh Kanani Tel: Ext: shailesh.kanani@angeltrade.com Aniruddha Mate Tel: Ext: aniruddha.mate@angeltrade.com Journey to success... Road under construction IRB is one of the earliest entrants in the Road BOT segment, with operations encompassing the building of roads, highways, bridges and tunnels. The re-elected UPA government is focusing on infrastructure development as one of its key action areas, and investments to the tune of >Rs3lakh crore are expected in the Roads sector over the Eleventh Five-Year Plan. Plus, the recently announced capex plans by auto majors/new entrants in India and robust auto sales numbers serve as a precursor to the dire need of developing road infrastructure. With the backdrop of such political and favourable economics shaping up, we believe that IRB is well placed, in terms of its experience, execution capabilities and funding, to make the most of the opportunity in the offing. We have valued IRB's interdependent business model on an SOTP basis and have arrived at a FY2012E-based target price of Rs289, implying a potential upside of 19.4% from the current levels. We initiate coverage on IRB with a Buy recommendation. Experience abound + Vast opportunities = Rich Benefits: IRB has some of the very high-density road stretches in Western India in its gamut - those which are strategically aligned. These high-density stretches reduce the average payback period for a typical road BOT project. The Indian Government is aggressively focused on road development and expects potential investments to the tune of Rs3lakh crore over About 34% of this proposed investment is expected to come through the private sector, with the balance being supported by the government. This is where we believe that IRB would stand to benefit. Strong operating cash flows and execution legacy the key differentiating factors: IRB has 80% of its road BOT portfolio (excluding four recently bagged projects) in the operational phase and has debt only in one road BOT project (as of FY2009), resulting in strong operating cash flows. IRB's bouquet of operational BOT assets and excellent execution capabilities go a long way in its ability to raise timely debt, especially in trying times. Fund-raising plans = Springboard for future growth: The company's net worth, coupled with other parameters like past experience, has a direct bearing on its ability to secure new road BOT projects. In a recent development, IRB has taken shareholders' approval to raise Rs1,200cr, and it plans to utilise part proceeds for funding its four recently bagged BOT projects (total debt component of around Rs2,300cr). Thus, we believe that any fund infusion would not only help the company to improve its profitability, but would also help it bid for more projects, due to the strengthening of its financial muscle. Key Financials (Consolidated) Y/E March (Rs cr) FY2009 FY2010E FY2011E FY2012E Net Sales 992 1,785 3,352 3,916 % chg Net Profit % chg FDEPS (Rs) EBITDA Margin (%) P/E (x) RoAE (%) RoACE (%) P/BV (x) EV/Sales (x) EV/EBITDA (x) Source: Company, Angel Research January December 30, 24, For Private Circulation Only - Sebi Registration No : INB

4 IRB Investment Arguments Experience abound + Vast opportunities = Rich Benefits Experience abound It is the largest road developer in India and collects toll across 800 km of road stretches, amounting to Rs1.2cr on a daily basis in FY2009 The IRB group has been in the business of road construction since It bagged the country's first-ever road BOT project, the Thane-Bhiwandi Bypass, in 1995, and has been successfully collecting toll on the same. The company also bagged the Mumbai-Pune Expressway, primarily on account of its early mover advantage into this segment. The Mumbai-Pune Expressway has turned out to be a cash cow for the company by generating a PAT of Rs50cr (>28% of the consolidated Bottom-line) in FY2009. IRB, through its BOT assets portfolio, controls 7.6% of the total stretch of the Golden Quadrilateral (GQ). It is the largest road developer in India and collects toll across 800 km of road stretches, amounting to Rs1.2cr on a daily basis in FY2009. IRB has sixteen projects in its BOT assets portfolio, of which ten are fully operational, two are under construction and four are at the preliminary stage (has received the Letter of Acceptance, LoA). Exhibit 1: BOT Project Portfolio Project Name Project Equity Debt Grant Years Traffic Growth Toll Rate Cost (Rs cr) (Rs cr) (Rs cr) (Rs cr) Rate (%) Hike (%) Frequency Thane-Bhiwandi Bypass 4 Lane BOT Project Every year Kaman-Paygaon BOT Project Every year Kharpada Bridge BOT Project Every year Nagar-Karmala Tembhurni BOT Project Every year Mohol-Mandup-Kamtee BOT Project Every year Pune-Solapur BOT Project Every year Pune-Nashik BOT Project Every year Mumbai-Pune BOT Project 1, ,181.1 (918.0) Every three years Thane Ghodbunder BOT Project (140.4) Every year Surat Dahisar BOT Project 2, , Every year Bharuch-Surat BOT Project 1, ,211.0 (504.0) Every year IRDP Kolhapur Every year Goa Karnataka Border* Every year Pathankot-Amritsar 1, Every year Jaipur Deoli 1, Every year Talegaon-Amravati Every year Source: Company, Angel Research; Note : * Awaiting Letter of Acceptance. Operational Road BOT Projects Under Construction Road BOT Projects Newly Bagged Road BOT Projects. December January 30, 24, For Private Circulation Only - Sebi Registration No : INB

5 IRB Vantage positioning IRB has some of the very high-density road stretches in Western India in its gamut, which are strategically aligned e.g. IRB collects toll on nearly all access routes to Mumbai IRB has some of the very high-density road stretches in Western India in its gamut - those which are strategically aligned. IRB collects toll on nearly all access routes to Mumbai, the Mumbai-Pune Expressway, Kharpada Bridge (Mumbai-Goa highway), the Surat-Dahisar project (Mumbai-Surat highway on the Delhi-Mumbai corridor) and the Thane Bhiwandi bypass (Mumbai-Nashik highway). Similarly, IRB collects toll on some of the key exit routes from Pune, the Pune-Nashik project (Pune-Nashik highway), the Pune-Solapur project (Pune-Hyderabad highway) and the Mumbai-Pune expressway. These high-density stretches reduce the average payback period for a typical road BOT project. The securing of key traffic corridors and timely completion of the same also stands testimony to excellent execution capabilities. Recently, IRB has bagged four road BOT projects that are outside its earlier geographies of Gujarat and Maharashtra. These recent project wins outside its home states highlight the company's move to diversify in terms of the geographic presence of its Road BOT assets. Vast Opportunities About 34% of the proposed investment is expected to come through the private sector, where we believe that IRB would stand to benefit There are various factors that necessitate an increase in road infrastructure in India, especially the country's National Highways (NH), including an increase in the number of vehicles plying on the roads, rapid urbanisation and the retail revolution. The economic losses to the national exchequer due to sub-standard and inadequate roads are estimated to be more than Rs20,000cr per annum. The country's vehicular fleet increased at a CAGR of 9.4% over , while the country's NH network posted an abysmal 2.4% CAGR over the same period. This, we believe, adequately highlights the demand-supply mismatch and points at the urgency to scale up the country's road network. Going ahead, the country's vehicular traffic is set to post a CAGR of 8-10% over the next five years, which once again highlights the urgent need to focus on setting up an adequate road infrastructure in the country. The Indian Government is aggressively focused on road development and expects potential investments to the tune of Rs3lakh crore over This is close to double the investments made in the sector during About 34% of this proposed investment is expected to come through the private sector, with the balance being supported by the government. This is where we believe that IRB would stand to benefit. The past paints a dismal picture In the past, NHAI has taken an average of three years to award a contract, after which it takes another three years for the construction to get completed The National Highway Authority of India (NHAI) launched the seven-phase integrated National Highways Development Program (NHDP) in 2001 to develop the country's roads to the tune of 54,500 km till FY2016, at an average of 10 km/day. Currently, NH constitutes a length of around 70,000 km or a mere 2% of the country's total road network of 3.3mn km. Till date, of the planned 54,500 km of National Highways to be developed, around 11,746 km of roads have been completed, 5,782 km are at the construction stage and road contracts to the extent of 36,972 km are expected to be awarded over the next the three-four years, at an average of 12,324 km per year, considering a construction period of 910 days, to achieve the target of 20 km/day. January December 30, 24, For Private Circulation Only - Sebi Registration No : INB

6 IRB It may be noted here that NHAI's past track record has not been very impressive, having achieved a mere 5-6 km/day over FY , which is much below the set revised target of 20 km/day. Moreover, it has taken NHAI an average of three years to award a contract, after which it takes another three years for the construction to get completed. The projects awarded every year also paint a dismal picture, with an average of 2,300 km per year over the last five years. Hence, it is the awarding of projects that has been a major bottleneck, rather than the execution machinery. Exhibit 2: NHAI - Dismal Track Record 3,500 3,000 3,262 8,000 7,000 6,732 2,500 2,096 1,982 2,000 1,680 1,500 1, FY2005 FY2006 FY2007 FY2008 FY2009 Additions to NH (km) Source: NHAI, Angel Research 6,000 5,000 4,000 3,000 2,000 1, ,712 1,199 1, FY2005 FY2006 FY2007 FY2008 FY2009 Projects awarded (km) but the future portrays a buoyant outlook In order to achieve the set target of building 20 km a day, the NHAI is required to award at least 21,000 km over the next three years Currently, infrastructure development has become a focal point, primarily because of the cascading effect it has on overall economic progress. Past studies reveal that every rupee spent on creating road infrastructure creates seven rupees in terms of economic benefits. In this backdrop, Mr Kamal Nath, the man at the helm of affairs at the MoRTH (Ministry of Road, Transport and Highways), has set an aggressive target of building 20 km of roads a day as against 5-6 km/day achieved till date over the past five years. Even though the target seems to be aggressive (ramping-up road development activity four-fold), the recent schedule of award activity suggests that this target is achievable, if awarding activity goes as per schedule. In the past, it was the award activity that served as a major bottleneck. Therefore, in order to achieve the set target of building 20 km a day, the NHAI is required to award at least 21,000 km over the next three years (in turn achieving the objective of constructing 7,000 km per year). As mentioned before, construction relating to about 37,000 km of NH needs to be completed by 2017, which, in turn, depends on the award activity getting completed by The modified work plan (till ) across the five-year period and across three delivery modes goes on to suggest that awarding activity can in fact be completed by 2014, thereby achieving the target of constructing 20 km per day. The recently amended Work plan by the B.K.Chaturvedi committee highlights the way awarding activity is planned to be undertaken in order to achieve the set target. December January 30, 24, For Private Circulation Only - Sebi Registration No : INB

7 IRB Exhibit 3: Work Plan schedule from the BKC report (km) FY2010 FY2011 FY2012 FY2013 FY2014 Total BOT (Toll) 4 lane - Phase III 4, ,373 4 lane - Phase II lane - Phase V 2,403 1,200-1,477 5,080 Expressways - Phase VI ,040 2 lane with paved shoulders - Phase III 1, ,977 2 lane - Phase IV - 4,086 3, ,500 4 lane - Phase VII BOT (Annuity) 4 lane - Phase III lane - Phase II J&K - Phase II lane with paved shoulders - Phase III 1, ,477 2 lane - Phase IV - 4,645 4,000 1,355 10,000 4 lane - SARDP-NE EPC 4 lane - SARDP-NE lane - Phase IV 1,161 1, ,500 2 lane with paved shoulders - Phase III Total 12,652 11,092 9,192 2,637 1,477 37,050 Source: B.K.Chaturvedi Committee Report Besides the award activity plan, modifications have also been made to key bottleneck areas in the entire awarding process, which were highlighted by us in our Road Sector report: The Wh of Road Development, dated June 27, B.K.Chaturvedi Committee recommendations sanctioned The recommendations of the B.K.Chaturvedi Committee (Part-I) were sanctioned, which we believe is bound to expedite the process of road infrastructure development The honorable Prime Minister of India had constituted a committee chaired by Mr. B.K.Chaturvedi (Member of the Planning Commission), to discuss the ramping up of the NHDP. The objective of the committee was to resolve procedural impediments to the NHDP program, to take a holistic look at the financing need and to arrive at a financing plan that balances the needs of the road sector with other priority areas of the Government. The recommendations of the B.K.Chaturvedi Committee (Part-I) were sanctioned, which we believe is bound to expedite the process of road infrastructure development. Part-I of the BKC recommendations has dealt with key issues that served as an impediment in projects getting awarded. An excerpt of the sanctioned recommendations is as follows: A parallel mode of scrutinising Road BOT projects (as against a sequential one): As per existing Government policy, all road projects are first to be awarded on a BOT Toll basis. If the threshold limits in terms of traffic intensity make the project void to be awarded on a Toll basis, then BOT (annuity) would be considered. Similarly, if the BOT (Annuity) bid works out to an equity IRR of up to 18% (equity IRR of 21% in difficult areas), then it would be awarded, otherwise it would be awarded on an EPC basis. This process of sequential screening took its own time and, January December 30, 24, For Private Circulation Only - Sebi Registration No : INB

8 IRB hence, delayed the overall process of award. Now, in order to expedite the process, the recommendation that all three modes of delivery, BOT (Toll), BOT (Annuity), EPC (item rate contract), should be carried out concurrently rather than sequentially has been approved. Approving of projects having single bid (as against non-consideration): The last financial year saw NHAI placing some sixty (60) projects for bidding under the BOT (Toll) mode. However, due to the financial crisis, only 22 projects got responses. Of these 22 projects, only 12 projects were awarded - four were rejected citing reasons of demand of very high grant, and six were rejected on account of having single bidders. This point was considered in the report and the outcome was that the NHAI be empowered to accept single bids after considering reasonableness of the same. Increase in VGF for 6-laning of the present 4-lane highways: VGF (Viability-Gap Funding) for 6-laning projects is to be raised from 5% to 10% of the total project cost in high-traffic stretches. Projects in low-traffic stretches of the Golden Quadrilateral are now to be considered with VGF of 20%, with an overall cap of 500 km out of the total 5,080 km of Phase-V of the program yet to be awarded. Annuity payments: Phase-wise, annuity payments are to be as follows: Phase-I, Rs8,600cr; Phase-II, Rs31,900cr; Phase-III, Rs84,400cr; Phase-IV, Rs84,400cr; SARDP-NE, Rs9,700cr; and J&K, Rs26,600cr, all of which total to Rs2,07,500cr. Fiscal policy: Out of the proposed borrowing approval of Rs30,000cr provided to IIFCL, Rs10,000cr under the fiscal stimulus package may be transferred to NHAI as per its borrowing requirement. Termination provisions: Provisions of MCA (article ), whereby a concession agreement will be terminated if the designated capacity is exceeded for 3 years, has been removed completely. Instead, NHAI will now give an extension period of five years, after which a notice shall be issued to the concessionaire to undertake the augmentation of the capacity within six months. On a refusal to do so, NHAI shall issue a termination notice and make a termination payment. Exit policy for developer in a Model Concession Agreement (MCA): The current shareholding norms suggest that the shareholding of bidders in an SPV cannot be less than 51% through the construction period and up to 3 years of operations, after which it can be reduced to 33%, and then 26% holding is mandatory till the end of concession period. However, after the recommendations of the B.K.Chaturvedi Committee, this norm has been altered to: 51% of the holding can be reduced to not less than 26% during the construction period and for 2 years thereafter. Issue of security to lenders in an MCA: The Current RBI norms designate lenders to classify loans to highway projects as 'unsecured', increasing the interest cost and limiting overall fund availability. To take these loans into the 'secured' category, an explicit provision can now be made in the MCA permitting lenders to create a charge on the Escrow Account to the extent permissible as per their priority. Provisions of Article 40.2(b) can be amended to incorporate this explicitly. December January 30, 24, For Private Circulation Only - Sebi Registration No : INB

9 IRB Conflict of interest: At present, the Crossholding Clause seeks to prevent conflict of interests between bidders and bars parties from bidding for a project in case of a common shareholder with higher than 5% ownership through direct or indirect holding. Consider this: Even if one company of a consortium has over a 5% stake in any of the partners in a competing consortium, it is considered as conflict of interest. This was depleting the field of competent bidders. The committee has increased the 5% shareholding provision triggering conflict of interest to 25% of the paid-up and subscribed share capital of the company Technical criteria: The technical criteria of having completed projects worth 200% of the total project cost in the last five years has been changed to the old norm of 100%. Moreover, the applicant shall have: 1) over five financial years of demonstrated technical capacity and experience, and 2) collected and appropriated revenues from eligible projects for a sum total of more than Rs1,000cr. Project wise pre-qualification to be substituted with annual / periodic pre-qualification Issues relating to Land acquisition have also been sorted out separately, as given below (though not a part of the B.K.Chaturvedi Recommendations Committee): Land acquisition - bottlenecks clearing To expedite the road construction process, NHAI has decided to award the LoA only after it is in possession of 80% (as against 50% earlier) of the land required for the project In road construction, land acquisition is important and has primarily been responsible for NHAI's dismal performance over the last five years. Issues surrounding land acquisition have resulted in project cost overruns, as NHAI has had to compensate the developers for idle machinery, interest costs etc. Hence, NHAI is currently in the process of setting up 150 land acquisition wings at the state-level and special arbitration cells to reduce inordinate delays due to land acquisition problems. Further, to expedite the road construction process, NHAI has decided to award the Letter of Award (LoA) only after it is in possession of 80% (as against 50% earlier) of the land required for the project. The balance 20% would also be handed over to the contractor before financial closure of the project. In case NHAI were to delay acquiring the balance 20% of the land, it would have to pay a certain amount of penalty for every day of delay beyond the 6-month stipulated period. In continuation of the same, special dedicated units have been set up within NHAI to specifically deal in land acquisition and rehabilitation. January December 30, 24, For Private Circulation Only - Sebi Registration No : INB

10 IRB Strong operating cash flows and execution legacy the key differentiating factors IRB has 80% of its road BOT portfolio (excluding four recently bagged projects) in the operational phase and has debt only in one (as of FY2009) road BOT project, resulting in strong operating cash flows IRB has 80% of its road BOT portfolio (excluding four recently bagged projects) in the operational phase and has debt only in one (read: Mumbai-Pune Expressway, as of FY2009) road BOT project (leads to savings on interest cost front), resulting in strong operating cash flows. Moreover, the inherent nature of road BOT assets is such that negligible funds get tied-up in working capital, which otherwise tends to drag operating cash flows. The quantum of investments required for owning a road BOT asset is substantial. Further, a road BOT business model is such that high financial leverage is required for the viability of project. Achieving timely financial closure is also important, given that these are time-bound assets. Any delay on these fronts would lead to a loss of revenue and have a direct bearing on the profitability. Also, for achieving growth, an asset developer cannot wait for returns from the projects under the investment phase, as the cash flows are back-ended. Thus, the high quantum of investments required, along with long gestation periods ranging between months (construction period for road projects), explains the capital intensiveness of these projects. We believe that IRB's strong brand equity, bouquet of operational BOT assets and excellent execution capabilities go a long way in its ability to raise timely debt, especially in trying times (read: FY2009). To put things in perspective, IRB's Surat-Dahisar road BOT project, a 38% revenue-sharing project (with NHAI), achieved financial closure in Jan 2009, which was amidst trying financial times, and stands testimony to its ability to raise debt. Interdependent business model + Good times = Buying Opportunity IRB captures the entire asset-development value chain, from the construction of road infrastructure to ownership of the asset and periodic maintenance of the same IRB's business model demonstrates an excellent amalgamation of the Road BOT asset ownership segment (capital intensive, high EBITDA margins, low working capital, extended revenue visibility and steady cash flows) and the Construction services segment (relatively asset-light, low EBITDA margins, high working capital and seasonal in nature), which also complements its EPC work in Road BOT projects. Moreover, once the assets are operational, the Operation and Maintenance (O&M) related work is also catered to by the Construction services arm. Such a model drives strong cash flows (from operational Road BOT projects), apart from being Order Book accretive for its Construction services arm. Thus, IRB captures the entire asset-development value chain, from the construction of road infrastructure to ownership of the asset and periodic maintenance of the same. December January 30, 24, For Private Circulation Only - Sebi Registration No : INB

11 IRB Robust Order Book = Revenue visibility The Order Book of 9.3x the construction arm's FY2010E revenues renders revenue visibility IRB's internal construction arm has a robust order book of Rs9,912cr, which comprises of EPC-related works (74%), O&M of Road Projects (24%) and a small proportion of external projects (2%). While the EPC part of the Order Book has an average execution of years, the O&M related part has an average execution period ranging between years (which render visibility to the construction arm's revenue). The Order Book of Rs9,912cr (or 9.3x the construction arm's FY2010E revenues) renders high revenue visibility. Exhibit 4: Major proportion of Order Book to be executed over next years Source: Company,Angel Research Fund-raising plans = Springboard for future growth We believe that any fund infusion would not only help IRB to improve its profitability but would also help it bid for more projects Construction projects, particularly Road BOT projects, are cash guzzlers, due to their long gestation periods and capital intensive nature. The company's net worth, coupled with other parameters like past experience, has a direct bearing on its ability to secure new road BOT projects. We believe that there exists a huge potential in road infrastructure development, in the backdrop of massive road infrastructure development plans lined up over the XIth FYP, entailing an investment of more than Rs3lakh crore.in a recent development, IRB has taken shareholders' approval to raise Rs1,200cr. The company plans to utilise part proceeds of the same for funding its four recently bagged BOT projects (total debt component of around Rs2,300cr). Thus, we believe that any fund infusion would not only help the company to improve its profitability (by debt repayment and, hence, simultaneous reduction in interest costs), but would also help it bid for more projects, due to the strengthening of its financial muscle. Diversification for future growth Diversification is at a very nascent stage and too early to be factored in; hence, we have valued IRB's diversifications into real estate and Airport development at 1x FY2009 Book Value Ownership of Road BOT assets and the related construction work happen to be the core competencies of IRB. However, going ahead, the company plans to venture into areas of real estate development (in a JV), develop competency in areas of airport-related infrastructure development, and to foray into construction-related activities in Hydro-electric plants in the North East, thereby building upon its core construction skills. We view this as a natural extension of its core competencies in construction, along with de-risking its business model from being just a pure, Road BOT play. However, this diversification is at a very nascent stage and too early to be January December 30, 24, For Private Circulation Only - Sebi Registration No : INB

12 IRB factored in. IRB is investing Rs175cr in the Sindhudurg Airport Project, which, we believe, carries inherent risks, since it is not the core competency of the company. Therefore, we have valued IRB's diversifications into real estate and Airport development at 1x FY2009 Book Value. Real Estate foray and Airport development project - Venturing into alien domains On the Real Estate front, IRB has till date acquired 1,250 acres of land adjoining the Mumbai-Pune Expressway. The company has been steadily building upon its land reserves, from 750 acres (pre IPO stage) to 900 acres (RHP stage) and to the current 1,250 acres. It plans to develop a township in Mauje Taje and Mauje Pimpoli Taluka in the Pune district of Maharashtra. IRB has acquired this land at an average acquisition price of around Rs10-11lakhs/acre. Going ahead, it plans to further acquire land to the tune of around acres in this area. The company has also secured rights for commercially exploiting 33,000 sq.mt. of land in the Kolhapur IRDP project. The land has been secured for a lease period of 99 years, which IRB would get hold of on completion of 25% of the Kolhapur IRDP Road BOT (Toll) construction work. The company is thinking of ways to commercially exploit this opportunity. This land parcel and the related plans of commercially exploiting the same have also not been factored by us. IRB has been declared as the selected bidder for the Design, Built, Finance and Operation (DBFO) of a Greenfield project in the Sindhudurg district in Maharashtra. A project development agreement to that effect has been executed between MIDC and IRB Sindhudurg Airport Private Limited. This is the first project outside the Road BOT space secured by IRB. Sindhudurg airport is strategically positioned at a distance of 120 km from the popular beaches of North Goa. Goa's current airport at Dabolim is primarily a naval base, with access to domestic usage at certain specific slots during the day. The new airport will compete with the Dabolim airport and will cater to Sindhudurg. December January 30, 24, For Private Circulation Only - Sebi Registration No : INB

13 IRB Concerns Traffic Risk The feasibility of any Road BOT (Toll) project is dependent on traffic intensity and toll hike criteria. Although the toll hike criteria are fixed as per contractual terms, traffic intensity is a function of the overall health of the economy. Hence, below-expectation traffic growth (7-9% for all the projects) can serve as a spoilsport in the overall dynamics of the project, rendering it financially unviable. Thus, any economic slowdown and/or any other factor having a direct negative impact on the presumed traffic intensity could affect the earnings estimate of the respective project, thereby affecting the company's performance. However, it should be noted that the management has given a guidance of 1.25x factor to GDP growth and we have conservatively assumed a lower figure, at 1.17x. Interest rate and liquidity risk Road BOT projects are highly leveraged assets. Thus, any surge in interest rates can have a negative impact on the earnings of the respective Road BOT project. Moreover, financial closure of road BOT projects is dependent on the prevailing economic and liquidity conditions, and any delay can have a negative impact on the project's returns. Commodity price risk Any unexpected surge in commodity prices may have an adverse impact on the margins of IRB. Such adversity would either hit the EBITDA margins of the construction arm or increase the project cost for the SPV, which would impact the profitability in either case, and suppress the RoEs. Promoter group companies Certain entities in the promoter group are engaged in business activities similar to IRB's businesses, such as toll collection, labour contracting for construction projects and construction, which could lead to a conflict of interest. We would also like to highlight that IRB's real estate subsidiary, Aryan Investments Private Limited, has entered into an agreement with Aryan Constructions, a promoter group entity, pursuant to which Aryan Infra has awarded Aryan Constructions the lump sum turnkey contract, for the development of the proposed township at a consideration of Rs2,260cr. Aryan Infra has also paid an interest-free mobilisation advance of Rs200cr to Aryan Constructions, despite the fact that the construction work on the site is not expected to start in the near future. January December 30, 24, For Private Circulation Only - Sebi Registration No : INB

14 IRB Financial Outlook Consolidated Top-line to register a CAGR of 58.0% over FY E We expect IRB to post robust growth for the in-house construction segment, albeit at a relatively lower pace (CAGR of 72.5%), and for Toll road operations (CAGR of 35.9%) over FY E, translating in an overall consolidated CAGR of 58.0% The in-house construction segment and the income from BOT projects are the two main revenue streams for IRB. The growth in revenues from the BOT operations is dependent on toll rate hike clauses, growth in traffic and increase in Road BOT assets. The in-house construction arm derives its revenues by undertaking engineering, procurement and construction (EPC) related works for the company's road BOT projects, and Operation and Maintenance (O&M) related works of the same (once operational). IRB has been on the high growth path (>80%) during FY , mainly on account of robust growth in the construction segment, which grew at a staggering pace of nearly 108% for the same period (mainly attributable to the robust order book). Going ahead as well, we expect the company to post robust growth for the in-house construction segment, albeit at a relatively lower pace (CAGR of 72.5%) and for Toll road operations (CAGR of 35.9%) over FY E, translating in an overall consolidated CAGR of 58.0%. Exhibit 5: Construction Revenues to lead overall Top-line growth 4,500 4,000 3,500 3,000 2,500 2,000 1,500 1, FY2008 FY2009 FY2010E FY2011E FY2012E Road BOT Revenues (Rs cr) Construction Revenues (Rs cr) Total Income (Rs cr) Source: Company, Angel Research Top-line from the Construction Segment to post a CAGR of 72.5% This robust order book and average execution mix - skewed towards the next years - dictates the Top-line growth The Total order Book size of IRB's construction segment is Rs9,912cr % is accounted by EPC-related works (average execution period of 27 months), 23.8% is accounted by O&M-related works (average execution period of 12.5 years) and 2.0% is accounted by external cash contracts (average execution period of months). This robust order book and average execution mix - skewed towards the next years - dictates the Top-line that IRB's construction arm has to comply with. While the company has got the flexibility to space out the EPC-related revenues over the average execution period, any excessive slack on this front could result in delays on BOT projects getting operational, thereby inviting expenditure overruns. Further, IRB has a track record of completing the projects on time/ahead of schedule. Hence, we believe that revenue visibility becomes even clearer for IRB's construction arm. Accordingly, we estimate the construction arm to post a robust CAGR of 72.5% over FY E to Rs2,790cr. This growth would be mainly driven by the four recently bagged road BOT projects December January 30, 24, For Private Circulation Only - Sebi Registration No : INB

15 IRB (expected to start construction from April 2010 onwards), the Surat-Dahisar Project (road widening from 4 lanes to 6 lanes has commenced with a simultaneous collection of toll on the existing road) and the Kolhapur IRDP project (construction on the project has commenced on January 9, 2009, and is expected to be completed by January 8, 2011). Additionally, it should be noted that we have factored in orders worth Rs2,000cr in the next few quarters for IRB's construction arm, which would start contributing to the Top-line from 2HFY2011E. Thus, work related to these orders contributes 5.1% and 20.6% to our Construction Top-line estimates for FY2011E and FY2012E, respectively. Income from BOT projects to post a CAGR of 35.9% Income from BOT projects is expected to register a robust CAGR of 35.9% over FY E to Rs1,125cr, on account of the recent commencement of tolling activity on Surat-Dahisar Project, Bharuch-Surat Project and Kolhapur IRDP Project in 3QFY2011E On the Income from BOT projects front, we expect IRB to register a robust CAGR of 35.9% over FY E to Rs1,125cr. This robust growth is expected primarily on account of the recent commencement of tolling activity on the Surat-Dahisar Project # (Rs80-90lakh of gross revenues per day), the Bharuch-Surat Project (Rs35-40lakh per day) and the Kolhapur IRDP Project in 3QFY2011E (Rs12-14lakh of revenues per day). These new projects would lessen the revenue dependence on Mumbai-Pune Expressway (from 65% of overall BOT income in FY2009 to around 39% in FY2012E). EBITDA margins to decline on account of higher contribution from the Construction segment Consolidated EBITDA Margins for IRB are a function of the proportion of revenues from the Construction segments (at 17-20%, higher compared to the construction industry) and Income from BOT projects (at 82-89%, in line with the industry). We expect the proportion of revenues from the construction segment to rise from 54.8% (FY2009) to 71.3% (FY2012E). Against this backdrop, we expect the overall EBITDA margins to come down at 38.0% in FY2012E from 44.1% in FY2009. Moreover, going ahead, we have factored for the low value-added work to be subcontracted by IRB, leading to an increase in Contract expenses and thereby diluting its EBITDA margins. Exhibit 6: Increasing proportion of Const. revenues lower EBITDA margins FY2008 FY2009 FY2010E FY2011E FY2012E - Const. segment (%,LHS) Road BOT segment (%,LHS) EBITDAM (%,RHS) Source: Company, Angel Research # Revenue sharing with NHAI, with 38% share in the first year and additional 1% yoy till the end of the Concession period January December 30, 24, For Private Circulation Only - Sebi Registration No : INB

16 IRB Pertinently, it should be noted that IRB's construction segment outperforms its peers on the EBITDA margin front, owing to Ownership of aggregate mines: Aggregates (basic raw materials required for road construction) generally constitute 40-50% of the Total raw material cost in any road project. IRB has aggregate mines, leading to savings of approximately 4-5% in raw material costs. Large equipment bank: IRB has a strong in-house equipment bank, including crushers, grades, batching plates and sensor pavers. This results in substantial savings, as IRB does not have to incur significant rentals for construction equipment. Minimal Sub-contracting: The in-house construction arm of IRB - MRMPL (Modern Road Project Pvt. Ltd) caters to the EPC as well and O&M related work orders for IRB, with only a minimal amount of low, value-added work being sub-contracted. This leads to higher margins, as it aids in savings on the sub-contracting expenses front. Bottom-line to register a CAGR of 42.7% over FY E We expect IRB to post a subdued CAGR of 42.7% over FY E on the Bottom-line front, owing to EBITDA margin suppression (over FY E) and an increase in interest costs over the same period We expect IRB to post a CAGR of 42.7% to Rs514.4cr over FY E on the Bottom-line front. This relatively subdued performance comes in on account of EBITDA margin suppression (over FY E) and an increase in interest costs over the same period. The EBITDA margin suppression is expected to set in because of an increasing proportion of construction revenues, a relatively lower margin business, and an increase in interest costs as a consequence of rising debt levels. We expect the company's debt levels to rise to Rs6,261cr (FY2012E) from Rs2,486cr (FY2009) on the back of funding requirements for the Surat-Dahisar and Kolhapur city road projects in FY2010E, and the commencement of construction-related work of four new road BOT projects in FY2011E (which necessitate funding). Moreover, we have factored in debt requirements for order additions as well. Exhibit 7: Financial Indicators 1,400 1,200 1, FY2008 FY2009 FY2010E FY2011E FY2012E - PAT(Rs cr,lhs) EBITDA (Rs cr,lhs) EBITDAM(%,RHS) Source: Company, Angel Research December January 30, 24, For Private Circulation Only - Sebi Registration No : INB

17 IRB Outlook The re-elected UPA government is focusing on infrastructure development as one of its key action areas. Investments to the tune of Rs3lakh crore are expected in the Roads sector over the Eleventh Five-Year Plan. While such a sectoral allocation, coupled with Kamal Nath's ambitious target of constructing 20 km of roads a day, brings forth the seriousness of the task at hand, the recently announced capex plans by global auto majors and robust auto sales numbers serve as a precursor to the dire need of developing road infrastructure. With the backdrop of such political and corporate actions shaping up, we believe that IRB is well placed, in terms of its experience, execution capabilities and funding, to make the most of the opportunity in the offing. Valuation We have valued IRB's interdependent business model on an SOTP basis. The company's individual Road BOT SPVs have been valued on a NPV basis (FY2012E estimates) using the Free Cash Flow to Equity (FCFE) approach, the construction segment has been valued on a target EV/ EBITDA of 8x on FY2012E basis, while the company's investments in land (adjoining Mumbai- Pune expressway) and its equity stake in the Sindhudurg Airport project have been valued at 1x FY2009 Book value. In order to estimate the Net Present Values (NPV), we have discounted the individual SPVs FCFE using Cost of Equity (CoE). We have factored in cost of equity at 12.7% for computation of individual NPVs. The value of IRB's stake in various road BOT SPVs is summed up to arrive at IRB's road BOT segment, thereby contributing Rs165/share to our Target price. The construction arm has been valued at a target EV/EBITDA multiple of 8x on an FY2012E basis, contributing Rs116/share. Investments in Land and Airport projects have been valued at 1x FY2009 Book Value and contribute Rs8/share. Thus, we have arrived at a FY2012E-based target price of Rs289, implying a potential upside of 19.4% from the current levels. We initiate coverage on IRB with a Buy recommendation. January December 30, 24, For Private Circulation Only - Sebi Registration No : INB

18 IRB Exhibit 8: SOTP Valuation (FY2012E) Business Segment Methodology Rs cr IRB's Rs/share % to Target stake(%) Price IRBPL FCFE Kharpada Bridge BOT Project FCFE Nagar-Karmala Tembhurni BOT Project FCFE Mohol-Mandup-Kamtee BOT Project FCFE Pune-Solapur BOT Project FCFE Pune-Nashik BOT Project FCFE Mumbai-Pune BOT Project FCFE 1, Thane Ghodbunder BOT Project FCFE Surat-Dahisar BOT Project FCFE Bharuch-Surat BOT Project FCFE IRDP Kolhapur FCFE Goa Karnataka Border FCFE Pathankot-Amritsar FCFE Jaipur-Deoli FCFE Talegaon-Amravati FCFE Modern Road Makers Pvt.Ltd EV/EBITDA (8x) 3, Land Parcel Valuation Book Value (1x) Sindhudurg Airport Book Value (1x) Total Source: Company, Angel Research December January 30, 24, For Private Circulation Only - Sebi Registration No : INB

19 IRB Company Background IRB's gamut of operations encompasses the building of roads, highways, bridges and tunnels IRB is one of the earliest entrants in the Road BOT segment and has significant experience in the sector. IRB was involved in tolling on the behalf of government agencies, even when private operations of roads were not a prevalent practice, and carried the traffic risks. The IRB group has been in the business of road construction since It bagged the country's first-ever road BOT project, the Thane-Bhiwandi Bypass, in 1995, and has been successfully collecting toll on the same. IRB was also the first company to bag a Road BOT project on a revenue-sharing basis* in Phase-V of the NHDP program. IRB undertakes development of various infrastructure projects in the road sector, through various Special Purpose Vehicles (SPVs). The Company's gamut of operations encompasses the building of roads, highways, bridges and tunnels. Initially, IRB's projects were concentrated in its home state of Maharashtra and the neighboring State of Gujarat; however, IRB's recent four projects, which are located across the country, highlight the company's ambitious future plans. Exhibit 9: IRB's Journey till date Source: Company, Angel Research The road BOT projects are housed in individual SPVs, with 100% holding vested with IRB (except for the Surat-Dahisar highway, where IRB holds 90% while 10% is held by Deutsche Bank). This holding is held through inter-subsidiary holdings. *: IRB bagged the Surat-Dahisar road BOT project on a revenue-sharing basis. This is the first of its kind, with a revenue share of 38% in the initial year and an incremental share of 1% every year till the end of concession. January December 30, 24, For Private Circulation Only - Sebi Registration No : INB

20 IRB Exhibit 10: Holding Structure of IRB IRB INFRASTRUCTURE Road Projects Modern Road Makers [MRMPL] (Engg & Construction arm) - 100% Real Estate Ideal Road Builders [IRBPL] (BOT projects + EPC) Aryan Investments (66%) Thane Bhiwandi Bypass BOT Kaman Paygaon BOT SPV Investments MIPL - 26% NKT - 47% TGTRPL - 26% IRB Infra - 20% IDAA - 12% MMK - 100% IRB [IRB Infra] (Patalganga bridge) - 100% NKT Road and Toll [NKT] (Ahmednagar Temburni BOT) - 100% MMK Toll Road [MMK] (Mohol Mandrup Road) - 100% Aryan Toll Road [ATRPL] (Pune Solapur BOT) - 100% ATR [ATR Infra] (Pune Nashik BOT) - 100% Mhaiskar [MIPL] (Mumbai Pune BOT) - 100% Thane Ghodbunder Toll Road [TGTRPL] (Thane Ghodbunder BOT) - 100% IRB Surat Dahisar Tollway Pvt Ltd (IRBSDTPL) (Surat Dahisar Road) - 90% IDAA [IDAA] (Bharuch Surat BOT) - 100% IRB Kolhapur Integ. Road Develop. Co Pvt Ltd. (IRBKIRDCPL) Road Develop. In Kolhapur - 100% Source: Company, Angel Research December January 30, 24, For Private Circulation Only - Sebi Registration No : INB

21 IRB ANNEXURE I. Strong Portfolio of BOT assets A. Operational Projects Ideal Road Builders Private Limited (IRBPL) - Thane-Bhiwandi Bypass, 4-Lane Project Project Description: Improvement and maintenance of the Thane-Bhiwandi Bypass, including the widening of the existing 2-lane road to 4-lanes and the construction of a new 2-lane bridge on Kasheli Creek (Phase I and II, on a BOT Basis). The total length of the project spans over 24 km. Project Details: The construction work relating to this project commenced on January 1, 1999, and was completed on December 31, The concession period expires on May 13, The total cost of the project stood at Rs104cr, with debt of Rs70cr and equity of Rs34cr. IRB collected toll of Rs14lakh on a daily basis on this SPV level in FY2009. Ideal Road Builders Private Limited (IRBPL) - Kaman-Paygaon BOT Project Project Description: Road and bridge widening activities, road alignment and strengthening services for the Chinchoti Naka-Kaman-Paygaon-Bhiwandi Road, in Vasai and Bhiwandi Taluka Project Details: The construction work relating to this project commenced on December 7, 1998 and was completed on March 25, The concession period expires on Dec 6, The total length of the Project measures 22 km. The total cost of the project stood at Rs14.4cr, with debt of Rs10.0cr and equity of Rs4.4cr. Key assumptions: Traffic growth rate p.a.: 7% Toll hike p.a.: 6% Interest rate: Not material Note: This particular SPV had four concessions housed under it. Two of the road projects (viz. Bhiwandi-Wada and Khambatki Ghat project) have finished their concession periods and have been returned back to the Government. January December 30, 24, For Private Circulation Only - Sebi Registration No : INB