Why Noida Toll Bridge is a multi bagger despite valued at just 23% of Regulatory Asset Base
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November 30, 2012by Anandh Sundar
Noida Toll Bridge
Noida Toll Bridge’s present enterprise value is around Rs 550 crores, but it has a regulatory asset base recoverable of Rs 2339 crores, which increases by 20% CAGR. How many of you can say that about your stocks? Yet it is valued at low rates, let us explore why:
- About the project:- As the planning commission working paper puts it, The Delhi-Noida expressway is is the only toll road in the country listed on the national stock exchange. Pargal The Delhi Noida bridge project is often presented as a path-breaking project which showed that private capital could indeed be attracted to provide public infrastructure services in India – despite having to deal with multiple authorities and a fragile political environment. The project was completed within budget and ahead of schedule. It was also successful in raising investment funds from capital markets (including an issue of GDRs overseas). Following significant shortfalls in projected traffic and revenues, it was also successful in restructuring its debt after the first year of operation. The same working paper however (http://infrastructure.gov.in/pdf/NOIDA.pdf) is showcasing the defects in the tendering process, that permitted guaranteed returns and shifting of capacity/traffic risk on the public sector.
- Project Economics:- Recently, the company has been in the news for seeking toll hikes, which has also been contested in court. But to understand why, let us see the below table which shows the cost buildup over time. The concessionaire is guaranteed a return on the Total Cost of the Project, which is defined as the aggregate of (i) Project Cost; (ii) Major Maintenance Expenses; and (iii) shortfalls in the recovery of Returns in a specific financial year. Since any deficit in returns significantly increases the total cost of the project, this has created a vicious cycle in which the shortfall in achievement of required returns and the compounding thereof results in a repeated need to lengthen the concession period and/or raise toll rates or grant Development Rights. That recoverable amount is ‘Regulatory Asset Base’.
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- Limitations of business as usual:- Now, the vehicle carrying capacity is around 220000 vehicles/day. The blended average toll rate is Rs 20.72, taking into account traffic mix of 75% cars, 22% two wheelers and 3% commercial vehicles; and the existing toll rates of Rs 22/car, Rs 11/two wheeler and Rs 60/commercial vehicle. Hence, even if the expressway operates at 100% capacity at the current rates, it will only earn Rs 167 crores toll revenue. Add another 20% for advertising etc, and still maximum revenue hardly touches Rs 200 crores.
As above tables show, to achieve the guaranteed EBIT of 20%*2339 next year, DND toll bridge needs to hike the toll 3x-4x of present levels AND achieve enormous capacity utilization, both of which are not likely to happen in the present political framework/economic condition. Hence, the regulatory asset base only increases.
- Termination impact- Though a widely discussed article in the Economic Times(http://articles.economictimes.indiatimes.com/2012-09-27/news/34127573_1_concession-period-development-rights-ntbcl ) took the view that contract re-negotiations have happened in 30% of cases, there being absence of malafide intent unlike that in the 2G spectrum allocation scam, it is unlikely that courts will permit a bargain purchase price/unilateral contract termination without compensation. Hence, the termination clause of the contract is relevant.
The termination clause states that if the Noida Toll Bridge defaults and the bridge is taken over, the government will make good the debt obligations, but not compensate equity holders.
But if termination happens for no fault of Noida Toll Bridge (they have NOT violated any agreement terms so far), then the agreement states that NOIDA shall be obligated to pay the Concessionaire, the aggregate of (i) all sums due and owing to the Lenders under the respective Financing Agreements, including any interest accrued thereon and any other amounts due and payable; (ii) an amount equal to the Total Cost of Project and the Returns thereon. In short, both debt and regulatory asset base will be paid off in full.
No wonder then, that as disclosed in the FY11-12 annual report in subsequent reports, the Noida-Okha public authority is attempting to renegotiate the concession agreement for early termination.
- Competing Projects risk: There is fear about competing infrastructure projects, as explained in this article (http://www.valueresearchonline.com/story/h2_storyview.asp?str=18834) but I think it is overstated, as if it gets too bad, then force majure can be invoked, and contract terminated. And even if they allow it to happen (un tolled road), the project can continue in perpetuity and development rights value of land is good. In fact, NTBCL has already received ‘in-principle’ approval for development rights over 30.5 acres of prime urban land in Noida on this account. Since this could be a concession in perpetuity, NTBCL can potentially claim the entire land around the toll bridge for development in lieu of the return shortfalls!
Conclusion:- The project if valued on a standalone basis is merely another PPP where demand was overestimated. But thanks to the guaranteed returns clause allowing perpetuity and development rights, the book value should be considered as regulatory asset base. And this is where Mr Market has made a mistake in my view.
(Anandh Sundar is a Chartered Accountant and MBA from IIM Ahmedabad. He writes on financial and investing matters at http://financeandcapitalmarkets.blogspot.com/ and http://specialsituationsindia.blogspot.com/)