Noida Toll Bridge

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

March 21, 2010

Page 1

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

This unregulated monopoly is incredibly cheap and is one of the most attractive public companies available in India.3 million) with Noida (a rid ll B modern suburb of Delhi. At Rs 23 per share. The toll is indexed to inflation and users are price insensitive – traffic keeps rising steadily regardless of global economic slowdown. Large blocks from distressed sellers might be available. Page 3 . All revenues are in cash.7 million) id No and East Delhi (population 4. 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. 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 toll bridge is operating at 45% of its capacity and will reach 100% of capacity within six years. 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.Summary The Noida Toll Bridge Company owns and operates the Noida Toll Bridge which connects South Delhi (population ge 2. To a population 0. without requiring incremental investment in fixed assets or working capital. There are no inventories.2 million).

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

Such optimistic projections resulted in the use of a highly leveraged capital structure for funding the project cost. Page 5 .000 vehicles per day in December 2008. Initial Trouble In its first few years.000 vehicles per day. over the next few years which will cause the toll bridge to operate at its full capacity within six years.a.a. That’s an increase of 25% p. this company faced major problems arising out of overconfidence-driven-projections about expected traffic volume. The traffic on the bridge has grown from approximately 17. Of the total funding requirement of $92 million. The plight of the company in the first two years of its operations can be seen from the table on the right. The balance $64 million was funded with debt comprising a mix of term loans from banks and the issue of deep discount bonds.The Company principally generates revenues through the levy of toll charges for the use of the toll bridge by commuters.000 vehicles per day in March 2001 to more than 101. We expect traffic to rise by 15% p. The maximum capacity of the toll bridge is estimated to be 222. only $28 million was financed through equity. 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.

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

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

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

Apparently. Not this company though. Even though India is facing an economic slowdown.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 . Assuming an inflation rate of 5%.Thousands) Vehicles/day Valuation We expect the Noida Toll Bridge to reach full capacity of 222.Thousands) Vehicles/Day . 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. the world is experiencing a recession.000 vehicles per day within six years. This means that six years from now revenues will be approximately Rs 2 billion or $39 million. the traffic numbers keep on rising every month. 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 . See chart below and excerpt from management’s report on December 2008 quarterly performance: Noida Toll .

operating expenses as percentage of revenues will decline. so the estimated value of the operating business is $293 million. operating and maintenance charges were paid to another company which was operating the bridge and was being paid on the basis of traffic volume. we are left with equity value of $249 million. or Rs 67 per share.a.a. 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. in six years. The following table shows how this has happened in the past: Until August 2007. and (b) the future during which we presume they will grow at 4% per year as a result of inflation. 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. As traffic rises. Our estimate of (a) is $85 million. the company will be generating an operating cash flow of $33 million p.flow will rise as the bridge reaches peak capacity. 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. See section on Page 10 . To value this operating business. and that of (b) is $208 million. Assuming they rise by 5% p. After reducing debt of $44 million.

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

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

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