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Noida Toll Bridge

For Whom the (Cash Register’s) Bell Tolls...
Sanjay Bakshi

March 21, 2010

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From “Warren Buffett Speaks: The Wit & Wisdom from the World’s Greatest Investor” Page 2 .

At Rs 23 per share. There are no inventories.Summary The Noida Toll Bridge Company owns and operates the Noida Toll Bridge which connects South Delhi (population ge 2. This unregulated monopoly is incredibly cheap and is one of the most attractive public companies available in India. without requiring incremental investment in fixed assets or working capital. All revenues are in cash. we are paying book value and a P/E multiple of 9 for this asset which is worth at least Rs 66 per share. The current market cap is $85 million and this is one of the most liquid 250 names in India on which options and futures are traded. Large blocks from distressed sellers might be available. Page 3 .3 million) with Noida (a rid ll B modern suburb of Delhi. The toll is indexed to inflation and users are price insensitive – traffic keeps rising steadily regardless of global economic slowdown. The CEO of the company is buying stock for his own account and we are buying it because it’s a steal at Rs 23 per share after having fallen from a high of Rs 75 a year ago due to the stock market crash and also due to distressed selling by large stockholders like Citigroup.7 million) id No and East Delhi (population 4.2 million). To a population 0. The toll bridge is operating at 45% of its capacity and will reach 100% of capacity within six years.

The Delhi Noida Toll Bridge is a tolled facility connecting Noida and East Delhi to South Delhi across the Yamuna river. operate and transfer (BOOT) basis.5 meters in length across the Yamuna river and includes the approach roads on the South Delhi and Noida ends. Page 4 . DND Flyway became operational in February 2001. own.Note The Noida Toll Bridge Company Limited was set up to construct and operate the Delhi Noida Toll Bridge on a build. East Delhi Noida Toll Bridge Noida South Delhi The Delhi Noida Toll Bridge (commonly known as the DND Flyway) is an eight-lane bridge which measures 552.

We expect traffic to rise by 15% p.The Company principally generates revenues through the levy of toll charges for the use of the toll bridge by commuters. this company faced major problems arising out of overconfidence-driven-projections about expected traffic volume.000 vehicles per day in March 2001 to more than 101.000 vehicles per day in December 2008. The maximum capacity of the toll bridge is estimated to be 222. Of the total funding requirement of $92 million. Page 5 . The balance $64 million was funded with debt comprising a mix of term loans from banks and the issue of deep discount bonds. Indian commuters took time to get used to the idea of paying money to cross a bridge — time which the company did not have thanks to its leveraged capital structure.000 vehicles per day. The plight of the company in the first two years of its operations can be seen from the table on the right.a. The traffic on the bridge has grown from approximately 17. only $28 million was financed through equity. Initial Trouble In its first few years. That’s an increase of 25% p.a. over the next few years which will cause the toll bridge to operate at its full capacity within six years. Such optimistic projections resulted in the use of a highly leveraged capital structure for funding the project cost.

5% p. 30% of Delhi’s population lives Mayur Vihar Link in East Delhi. to 9. (ii) reduction in interest rate for loans (effective cost of debt was reduced from 14. The key features of the corporate debt restructuring proposal were: (i) rescheduling of interest and repayments. In March 2002.). created a new source of revenue for the company.e. Part of this money was used to reduce debt and the balance was used to construct the “Mayur Vihar Link” which connects East Delhi to South Delhi. In March 2006. Debt Restructuring In 2002. the company raised $42 million equity funds by selling GDRs in Alternate Investment Market (AIM) of The London Stock Exchange. The Mayur Vihar Link.Finance charges i. total debt on the company’s Page 6 .5% p.a. which started in January 2008. and (iii) construction of new links in order to augment the Company’s revenues to be funded by additional equity capital. interest on debt were more than four times the toll revenue! Clearly the company was headed towards bankruptcy.a. the company was forced to approach its bankers for restructuring its debt which took many years to negotiate and implement.

Every year.2 million available for debt service. the interest expense for the year was now only $3 million.6 million. this debt had shrunk to $44 million due to the debt-restructuring mentioned above and also due to debt repayments from cash flows.4 million was spent on the operation and administration expenses of the bridge. the company is allowed to raise its toll charges using consumer price index. Pricing Power Noida Toll’s business model has a built-in inflation hedge. In the meantime. For the year ended 31 March 2008.books was approximately $65 million. but is also well financed. the total income had risen to $14. leaving $11. the company is now not only out of debt-trap. By March 2008. We expect the company to be completely debt-free in less than five years. traffic volume increased substantially. of which $3. See chart below: Average Toll/Vehicle 20 Indian Rupees 18 16 14 12 10 O 2 ct -0 Ap 2 r-0 O 3 ct -0 Ap 3 r-0 O 4 ct -0 Ap 4 r-0 O 5 ct -0 Ap 5 r-0 O 6 ct -0 Ap 6 r-0 O 7 ct -0 7 Ap r-0 Page 7 .7 times. With interest coverage ratio of 3. Thanks to earlier debt-reduction as well as to corporate debt-restructuring. resulting in the company coming out of debt trap.

the toll is rounded up to the next rupee which means that toll revenues tend to rise by more than inflation. The only competition are two government owned. if the increase results in toll price involving decimals. Long Queues = Inelastic Demand Regardless of the rise in toll prices. year after year. so people choose Noida Toll Bridge because it saves them time. but poorly maintained bridges which are already operating at full capacity.Moreover. Page 8 . thanks to the growth of population on both sides of the Yamuna river. the traffic just keeps on rising. free.

This means that six years from now revenues will be approximately Rs 2 billion or $39 million. Assuming an inflation rate of 5%. Not this company though. the world is experiencing a recession. margins and free cash Page 9 Dec-07 Feb-08 Oct-02 Oct-03 Oct-04 Oct-05 Oct-06 Apr-02 Apr-03 Apr-04 Apr-05 Apr-06 Apr-07 Oct-07 Revenue/Day (INR .Growth over years 100000 90000 80000 70000 1800 1600 1400 1200 1000 50000 800 40000 30000 20000 10000 0 600 400 200 0 60000 Jun-02 Feb-03 Jun-03 Feb-04 Jun-04 Feb-05 Jun-05 Feb-06 Jun-06 Feb-07 Jun-07 Aug-02 Aug-03 Aug-04 Aug-05 Aug-06 Aug-07 Dec-02 Dec-03 Dec-04 Dec-05 Dec-06 Revenue/Day (INR .Thousands) Vehicles/Day . Even though India is facing an economic slowdown.Apparently.Thousands) Vehicles/day Valuation We expect the Noida Toll Bridge to reach full capacity of 222. the traffic numbers keep on rising every month.000 vehicles per day within six years. See chart below and excerpt from management’s report on December 2008 quarterly performance: Noida Toll . average toll per vehicle will rise from Rs 18 to Rs 24 by the end of six years. Because the cost of operating and maintaining the bridge are fixed.

Our valuation is conservative because it ignores advertising revenues the company is generating by sale of outdoor advertising on both the Delhi and the Noida side of the toll bridge.a.flow will rise as the bridge reaches peak capacity. The company changed this system in 2007 and now a 51% subsidiary is paid a fixed sum (regardless of traffic volume) to operate the bridge. and (b) the future during which we presume they will grow at 4% per year as a result of inflation. The following table shows how this has happened in the past: Until August 2007. operating and maintenance charges were paid to another company which was operating the bridge and was being paid on the basis of traffic volume. See section on Page 10 . and that of (b) is $208 million. or Rs 67 per share. operating expenses as percentage of revenues will decline. in six years. To value this operating business. Our estimate of (a) is $85 million. Assuming they rise by 5% p. After reducing debt of $44 million. we discount the operating cash flows at 12% per annum for: (a) the next six years when the traffic ramps up from 45% to 100% of capacity.a. so the estimated value of the operating business is $293 million. As traffic rises. we are left with equity value of $249 million. the company will be generating an operating cash flow of $33 million p.

we are paying less than 9 times earnings. We have also ignored the value of land the company was allotted by the government as compensation for shortfall in promised returns for the project. which owned 3% in September 2008 is another consistent seller.advertisement revenue in the table on the right. See extract from company’s prospectus below: The current book value per share is Rs 23. Based on expected earnings for FY09. which owned 4% in June 2008 has been a consistent seller. Credit Suisee. Only 26% of the stock is held by the promoters and the balance is held by institutional and individual investors. Page 11 . Citigroup. The stock has fallen from a high of Rs 75 in January 2008.

large government deficits. receivables. Page 12 . and the users are price insensitive. The major costs of the project have already been incurred. So are we. The traffic keeps on growing regardless of terrorist attacks. How many businesses are out there which can quadruple their earnings without deploying additional capital in fixed assets. All sales are in cash so there are no receivables.Conclusion Noida Toll Bridge is an asset having wonderful economic characteristics. recessions. They huff and they puff but in the end they pay up. but is also paying down its remaining debt aggressively. fads and fashions in markets etc. The CEO is buying the stock for his own account. climate change. and inventories? Very few. but selling at a ridiculously low price of less than book value and less than 9 times current earnings which are expected to grow very rapidly over the next six years. The toll bridge is operating at 45% of its capacity and no incremental capex or incremental working capital is required for it to operate at 100% of its capacity. which is expected to happen in six years. This is one of such businesses. Running costs are low and going to become lower as a proportion of revenue because they are relatively fixed. The company has recently come out of a debt-trap and is now not only conservatively financed. and is also owner oriented. Management is very competent. Noida Toll Bridge also has tremendous pricing power — toll revenues are indexed to inflation. fuel price change.