Noida Toll Bridge Co. Ltd. - Limited Downside and Annuity Potential

Stock Opportunities Not-so-Hidden Gems
1

I heard about this stock several years ago (2006-07 period), when I worked in the real estate finance sector. Many people including me were skeptical and arguing how a small company that built roads toll can list on LSE as well as on NSE/BSE and become a large public limited company.

The business model is simple - you build a large infrastructure facility (road, flyover), and it can cost billions of rupees and can take time to get built. Once the structure is ready in a couple of years or so, you will be allowed by Govt. to collect Toll from all passing vehicles after certain procedures and approvals. The Toll income will be the main source of income, and you need some people to run the day-to-day operations, accounting, etc. After all the administration and internal overhead, all profits are yours. The profit may be a small number initially and may hardly pay the interest on Loan Borrowed for the project, but in later years, the story changes.

Recently when I read about it in some forums that recommended the stock as a good value pick, I wanted to dig deeper and verify if its true or how things have changes over the years. The broad numbers are given below.

CMP: Rs.21.7 (NSE closing june 12, 2013)

MARKET CAP (RS CR)

404.97

*P/E

9.62

*BOOK VALUE (RS)

27.41

DIV (%)

10.00%

MARKET LOT

1

INDUSTRY P/E

20.59

*EPS (TTM)

2.26

*P/C

9.22

*PRICE/BOOK

0.79

DIV YIELD.(%)

4.60%

FACE VALUE (RS)

10.00

Source: Moneycontrol.com

Disclaimer: i’M NOT RECOMMENDING THIS STOCK, JUST SHARING IT FOR INFORMATION AND DISCUSS

The stock is available at a PE of 10x and 0.8 PB. The dividend yield appears high but dont get carried away - its based on the dividend on Rs.1 (10% dividend) recommend by the Board subject to approval at the AGM. Even if we assuming a conservative dividend equal to Rs.0.5 (assuming the same as last year), the yield works out to 2.3%, which is decent.

Given a Book Value of about Rs.27, the current market price around Rs.22 appears attractive and provides good margin of safety (downside protection).

Recently the stock has been falling due to some protests and opposition against toll hikes. Several people opposed to it. Further, recently the company has been upgrading and resurfacing roads in the last few days. (sourcehttp://articles.timesofindia.indiatimes.com/2013-06-11/noida/39898027_1_dnd-flyway-anwar-abbasi-ntbcl)

Now looking at the margins, the NPM has been so high and stay at around 40% or higher barring few years when it was in 30’s.

As I mentioned earlier the first phase (the initial years) of the project will have negative cash flows, as most of the revenues or cash inflows will have to go towards operating expenses as well as interest costs which are high. NOida Toll was facing such a situation in the first few years post 2001 when it started operations. But today its a company generating free cash flow.

Lets put it in context - see the ratios below for FY12

Debt Equity : 0.16,

Interest cover: 4.41

ROCE: 12.72%

ROE: 9.67%

In FY 11 and earlier ROCE and ROE were mere single digits. Not surprising to me because its a business where the cost of infrastructure is more or less limited, while revenues will gradually increase over the years. As the traffic increases, so does revenues assuming the Toll Rate is constant, but increase in rates will provide further boost to margins and cash flows.

There are risks in terms of Govt. controlling or overseeing the toll rate, however given the trends seen so far, even if toll rate increases moderately, we can expect upsides from higher traffic.

Noida Toll bridge is a clear case of a decent or good MOAT though alternatives or competition exists. Its location, infrastructure and land area cannot be easily replicated in nearby areas as the land costs and project costs are now astronomically high.

One can expect this company to provide a kind of return similar to annuity or fixed deposit in future. In this case the returns will gradually go up in future. This may not become a multibagger, but remain like a steady and consistent performer. If its available at a good value, its worth looking at!

2

U r correct, it is a decent company, but in today’s market, where many stocks have been battered, whose potential is much higher in terms of returns, one should not look at stable stocks i think. Companies which have got bad outlook/views in short term are better picks, like SAIL, Power companies etc. NTBL can be a good pick if markets are doing good and not many stocks are available at decent valuations i believe

Ashish

3

I think the stock is extremely cheap and can provide more than decent returns over the long term. The key is that most of incremental revenue will flow into the bottomline. So increase in dividend is a given

But lets work on a few issues

1). Protests against toll hikes - It is basically by one body, namely the Bhartiya Kisan Union (public will obviously join against any hikes). My sense is that protests may stop it for a year or two but ultimately in the next year, the hike will cover up for the lost year

2). The note which says that the 20% return contract is being re-negotiated - What i hear is that NTBCL is demanding some land and the 20% will come down (that would have never happened anyway). At this price I think, as long as the toll hikes are as per inflation, returns will be more than good

3). Can the bridge be made free in public interest? - Probability is extremely low, since protests are not by everybody. Also at about Rs. 25, the base is very low

4). The extention of the Barapulla bridge right upto Mayur-Vihar, as stated by Sheila Dixit. Again unlikely since 2 bridges right next to each other does not make sense.

Personally I think that this business is exposed to negative black swan events, while the upside though maybe high and consistent, but still not high enough to take the plunge. Multi-bagger here is unlikely

Views Invited

1 Like
4

Hi Sridhar,

I have gone through this co over last few weeks and I feel that it can be a very good short term bet (6 months to 1 year) too…reasons:

1). The toll rates have increased by about 15% since April, 2013 and hence we should see good growth in coming qtrs

2). The debt has been coming down very quickly. If one looks at the balance sheet of last 2 years, it has reduced significantly.

3). The co is increasing the dividend payout every year due to free cash flow. I think soon, the co would start paying out 15% div and hence the stock can get re-rated quickly.

Despite so much of improvement in performance, the near to all time lows.

Negative: There have been talks of cancelling the gurgaon toll centre. If that happens, it will be a very negative expample.

Views Invited

Ayush

1 Like
5

the company looks like a inflation indexed bond - coupon rising with inflation (toll adjustments) with a free call option on the 20% contracted returns.

so its quite likely that with the debt paid off, the market will price the bond part of it. the call option is the more diffcult part - we dont know when and how much, if any come through.

so as ayush says, we may a get some re-pricing in the next few months. after that it is question of comparing the call option with the political risks in the stock

6

I believe the political risk is in favour of NTBCL.

Think about this; N number if toll plazas yet running in the entire country inspite if all the political interference. The biggest example is the Vashi toll plaza connecting Navi mumbai to Vashi. Its been there forever and yet raking in money.

So, why would the gov officials want to play around with a public listed company. Because it will become a HUGE news and thus spoil the name of a PPP model in the future. Live and let live will be the bottomline I reckon for NTBCL.

Also as Ayush mentioned 3 good points above that a steady company does to keep progressing.

Meanwhile the stock will remain low as uncertainty prevails and accumulate it while it is low. It might race up anytime there is a hint of certainty.

7

Hi all

I am highlighting what I think are some of the positives and negatives of this company

Positives

1). Reducing debt

2). Increasing dividend â It is mentioned in the annual report that this is how they intend to pay back the shareholders

3). Valuation

4). Incremental profits to move towards the bottom-line

5). High Free cash

6). One may expect a positive surprise in the medium term â I think in exchange for lowering the guaranteed 20% return, NTBCL may be allocated some land on either side of the bridge

7). Work has started to decongest the entry point near Ashram â Ring road â Minor positive

Negatives

1). Widening of the Okhla barrage â This could directly impact the traffic as this is a free bridge going towards Noida

2). Phase 3 of the delhi metro â when completed will give people better access to Noida â Though the management feels that only 2 wheeler traffic may reduce

3). The extention of the Barapullah bridge towards east delhi â Another free bridge â though a small percent of people use DND to take the Mayur-Vihar diversion

4). Protests â not significant at the current valuations

5). Making the toll bridge free â Again, Donât see it as a serious threat

I think it would be great if we can assign probabilities to events happening and the impact of those events on the business model â Like a chance-impact analysis. I think it can be a interesting play, for the medium term if we think that the dividend increase can play out before any of the risks mentioned above materialize.

It would be great if someone, especially living in Delhi, can give an update the happenings on the ground in concern to the Okhla bridge, Ashram road decongestion, Barapullah bridge and Phase 3 â the line going from Janapuri towards Noida Botanical gardens

I agree â the political scenario looks in favour of NTBCL â The renegotiation of the concession agreement should get them some Land parcel, which along with the dividend increase could re rate this stock

Disc â Small position initiated

8

Good to see the positive responses. Yes, this one seems to be a interesting short-medium term bet.

9

Dear ValuePickrs,

Thanks for your responses and for sharing your analysis and views. Its been quite interesting to see different dimension to this company which is a simple bridge connecting Noida to Delhi.

To be fair to this discussion, I also like to share a blog post I came across recently. Please visithttp://neerajmarathe.blogspot.in/2012/11/noida-toll-bridge-few-disturbing.html

It talks about some issues, protests, etc. However, at the current price the potential downside may be less, but its fair to look at all risks and concerns before taking a decision.

I don’t personally hold this stock currently, but having it on my radar to see how the developments unfold.

10

Are we finally there when this name would start paying?

They have almost paid down their debt. The free cash flow yield should see a jump this year and next.

The company had already doubled its dividend and now yields around 5% and the FCF story has not even started.

The icing on the cake is the toll hike in April which they were able to pass through.

11

Oops I posted without reading the thread and repeated whatever had already been described in detail

12

Hello,

While I have been lurking and reading valuepickr for a long time, I have registered only recently. NTBCL is one of my long term picks and I’d like to share my thought process on why I think its a long term winner.

My thought process

  1. The company is pretty much debt free. of the ~INR 75 crores of gross debt (vs. about INR 55 crores of Cash and current investments) they started the year with, they need to repay about INR 54 crores in FY14. the last debt repayment (which is the deep discount bonds) is repaid in November 2015. But for all practical purposes, the company will be debt free from 31 March 2014 onwards.

  2. The company has gone through a CDR process many years ago and is still required to go to the CDR cell/council for approval of key decisions (such as dividend payments). This approval requirement will obviously drop away once the debt is repaid.

  3. The management has stated clearly that their intention is to distribute higher dividends as cashflows grow.

  4. The company had an FY13 EPS of 2.2 and is well on track to achieve an EPS of 2.6 to 2.8 for FY14. This is after taking into account about 9 crores of overlay expenditure (which occurs once in a few years). Given the large debt repayment this year, I expect the company to pay a final dividend of between INR 1.1 and INR 1.25 for FY14.

  5. The company is well on track for FY15 EPS of INR 3 to INR 3.25 odd. Given debt repayments aren’t going to be high in FY15 (about 20 crore odd which should easily be taken care of by cash reserves), the company can start paying higher dividends from FY15 onward.

  6. I expect a DPS of INR 2+ in FY15 and then 75% to 85% of EPS from thereon (so INR 3+ from FY16 onward)

  7. Even if the company trades at a 7% dividend yield (which is really high for an operating company with no debt), the shares should trade at INR 28 based on FY15 dividend (2 years from now) and for INR 42 based on FY16 dividend (~3 years from now) - If you ask me, this is not the right way to value a limited life infrastructure asset (Since the cashflows are for a limited period of time), however, the yield is a metric that the market definitely does look at.

  8. There is latent upside in the shares with the renegotiation of the Concession Agreement terms. The existing concession agreement had a base concession term that ended in 2028. However, the concession agreement offers a 20% ROCE to the concessionaire and in the event that is not achieved, the concession period keeps getting extended. Based on performance to date (since signing the concession agreement), the 20% ROCE will not be achieved for a LONG LONG time and this becomes a perpetual concession for all practical purposes.

I think the company is in discussions with the NOIDA government on this renegotiation and that is what explains the note to the accounts (re: rengotiation of concession terms). If anything, the company has a stronger hand in this since they have a signed concession agreement and it is the government seeking to renegotiate. In my opinion, this can only bring in an upside for the company.

Potential threats

  1. The management (basically IL&FS), decides to keep the cash for itself by doing destructive capex or investments and not grow dividends as much as they should. - In my mind, this is the KEY risk. However, given IL&FS is a board managed company run by professionals, I believe the risk of this happening is low.

  2. Competing bridges - The Concession Agreement prevented the government from doing any work on competing bridges till 10 years from when NTB opened (till 2011). However, this seems to still be in design phases and will take a fair bit of time to develop. ->http://articles.timesofindia.indiatimes.com/2013-01-22/noida/36483434_1_new-bridge-kalindi-kunj-bridge-parallel-bridge)- This is a significant risk and affects the long term cashflows of the company. However, the longer the bridge takes to come up, better for NTBCL.

  3. Toll rate hikes not being passed - This feeds into point 7 above and the 20% ROCE. The lower the tolls, the longer it will take NTBCL to achieve the 20% ROCE and hence higher is the compensation that they can seek from the government.

I have built a small model tha projects the cashflows for this company. It indicates acquisition at the current share price of INR 21 will provide a 16% annualised return over the next 15 years, assuming that the concession period expires in March 2028 and there will be no extension of the concession period to achieve the 20% ROCE and there will be no compensation from the government either. Happy to share the model if there is interest.

I’d be happy to hear your thoughts on my investment thesis above.

13

Hi Ayush

If remember correctly you once said this could be a 20% free cash flow yield stock.

Now as they have repaid most of their debt how many quarters would it take for the name to deliver the above yield?

Thanks in advance

14

After going through the details, I realised that the reduction in loans wasn’t due to actual repayment…rather it was due to re-classification of long term loans to current liabilities as on March, 13. Hence I felt the story may take some more time and exited.

Perhaps the higher cash flow should start accruing down 1 year or so but at the same time there are several variables - 1. Risk of policy change by Govt. 2. Low promoter holding and hence I fear if things will be done for benefit of minority 3. Very low growth.

Ayush

15

Thanks Hardik for the detailed and insightful analysis. I was not very familiar with the concession agreement but after reading your notes I’m able to understand it.

Can you share the model here if you dont mind?

http://articles.timesofindia.indiatimes.com/2013-01-22/noida/36483434_1_new-bridge-kalindi-kunj-bridge-parallel-bridge Link: http://articles.timesofindia.indiatimes.com/2013-01-22/noida/36483434_1_new-bridge-kalindi-kunj-bridge-parallel-bridge -

16

Thanks Hardik. Pls share your model

Ayush,

Can you pls explain on reclassification of long term loans to current liabilities. My assumptions was company will be debt free by 2013 march

17

Please refer the FY13 annual report and look into the sub-segment current liabilities of balance sheet. It says current maturities of long term debt is 53.64 Cr.

18

Thanks for the pointer Ayush. Do you read too much negative into this? Is it a financial humbug or general reporting?

The risk Hardik has posted in terms of competing bridge seems to be far away as of now. Hardik can u share your model with us?

I quote from the annual report regarding the concession agreement. Can we read this as positive from the management?

“In order to facilitate the recovery of the project cost and 20% designated returns through collection of toll anddevelopment rights, the grantor has guaranteed extensions to the terms of the Concession, initially set at 30years. The Company has received an âin-principleâ approval for development rights from the grantor. However,the Company has not yet entered into any agreement with the grantor which would constitute an assurance fromthe grantor to facilitate the recovery of shortfalls. Management recognises that the development right agreementwhen executed will give rise to ï¬nancial assets in their own right. At present, development rights have not beenrecognised.”

“The Company considers that they will not be able to earn the assured return under the Concession Agreementover 30 years. The Company has an assured extension of the concession as required to achieve project costand designated returns. An independent engineer has certiï¬ed the useful life of the Bridge as 100 years”

19

Its general reporting as per the latest accounting norms.

20

In that case 53.64 cr is not a significant amount of debt. Compared to the yearly sales of 110 cr and with a high OPM of 70%. They are constantly reducing it every year.

Also, no more debt can possibly get added to this as there is no capital expenditure except for maintenance which is operating expense.

Its general reporting as per the latest accounting norms.