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)
*BOOK VALUE (RS)
FACE VALUE (RS)
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
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!