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Global Research

Media reports discuss draft proposal
from NHAI for restructuring premium
payments which we believe would be
insufficient to revive stressed assets
Most stressed projects we believe
could be cancelled and re-bid
ILFT (OW, TP lowered to INR172 from
INR260) is our preferred road asset
player. Retain N(V) on IRB (TP raised
from INR78 to INR103)
Proposal not sufficient to revive stressed assets. Media
reports (The ET: New formula for stressed road projects gets
nod, 13 December 2013) suggest that the Rangarajan Panel
has proposed to defer scheduled premium payments to National
Highway Authority of India (NHAI) at a 10.75% interest rate
with all the payments to be completed 3 years before concession
ends. Media reports also state that the planning commission has
raised objections against the low interest rate and lack of
penalties, and hence asked the panel to rethink/ redraft the
proposals. However, in our view despite the restructuring, the
majority of the stressed assets are unlikely to become profitable
as costs since the project award have escalated c10% and traffic
growth has fallen by 5-10% making them unviable.
The relief package - a boon in disguise. We believe it is only
in the interest of players who have started work on the project to
accept the restructuring proposal. For the ones which have not
yet started, we dont think lowering the loss will make them
viable and banks would still find them difficult to fund. We
expect majority of the projects which have not yet started to be
returned (with or without penalty) or litigate with the NHAI in
terms of delay in approvals/ land acquisition. NHAI may be
able to rebid these projects as smaller projects or as EPC
contracts, thereby kick-starting the project awards progress.
ILFT is our preferred pick. While we have cut our target
price on ILFT by 34% to INR172 (impacted by high interest
rates owing to low interest coverage ratio), we believe ILFT still
offers a good investment theme of multiple new projects
becoming operational over the next 12-18 months. While we
like IRBs assets, but we remain cautious until investigations
against the promoter group are behind us. ILFT is currently
trading at 0.6x FY15e price to book, while IRB is trading at
0.8x. We rate ILFT OW, and we rate IRB N(V).
Industrials
Construction & Engineering

India Infrastructure
Light at the end of the tunnel
HSBC India road coverage
Company Bbg
Ticker
Price
(INR)
New
Rating
Old
rating
New TP
(INR)
Old TP
(INR)
Potential
Return*
IRB IRB IN 91.70 N(V) N(V) 103 78 16.7%
ILFT ILFT IN 136.10 OW OW 172 260 29.3%
Priced as at 30 December 2013
Note: *Potential return equals the percentage difference between the current share price and the target
price, plus the forecast dividend yield. We forecast 2014e DY of 4.4% for IRB, and 2.9% for ILFT.
N: Neutral, OW: Overweight, V: Volatile
Source: HSBC estimates, Bloomberg
3 January 2014
Ashutosh Narkar*
Analyst
HSBC Securities and Capital Markets(India) Private Limited
+91 22 22681474 ashutoshnarkar@hsbc.co.in
Shrinidhi Karlekar*
Associate
Bangalore
View HSBC Global Research at: http://www.research.hsbc.com
*Employed by a non-US affiliate of HSBC Securities (USA) Inc,
and is not registered/qualified pursuant to FINRA regulations
Issuer of report: HSBC Securities and Capital Markets (India)
Private Limited
Disclaimer & Disclosures
This report must be read with the
disclosures and the analyst certifications
in the Disclosure appendix, and with the
Disclaimer, which forms part of it



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Background
Since 2009 NHAI awarded 48 road projects with
developers required to pay a premium (as a
successful bid). This would escalate at 5% p.a.
over the life of the asset. However, as economic
growth slowed down and liquidity conditions
became tight, developers realised that high
premium payments would make the projects
unviable. Many developers hence delayed on the
execution which prompted the Government to
review such projects and offer a restructuring
package in larger interest of the road sector. In
October 2013, the Cabinet committee of
Economic Approvals (CCEA) approved
restructuring of premium payments for such
stressed road projects. It also formed a panel
headed by Mr.C. Rangarajan to suggest the draft
restructuring regulations and conditions for
eligibility. The media (The ET: New formula for
stressed road projects gets nod, 13 December
2013) over the past 2 weeks reports that the NHAI
Chairman has recently (Dec. 30) wrote a letter to
the highway ministry asking to amicably
terminate many of these projects and the process
of re-bidding should be initiated. The NHAI
chairman has also expressed disappointment on
the fact that the final formulation has not been out
as yet despite in-principle nod from CCEA on
draft proposals on premium rescheduling.
Panel recommendations
As per the media reports (The ET: New formula
for stressed road projects gets nod, 13 December
2013), the panel submitted its draft proposal to the
finance ministry and planning commission for
approval, which has asked the panel to review
some of the suggestions made. Below we discuss
the panel proposals as reported by the media (The
ET: New formula for stressed road projects gets
nod, 13 December 2013).
Relief package - a
disguised boon
Planned relief package for distressed assets is positive for under
construction assets, though not sufficient for projects which have
not yet started, in our view
We anticipate that projects which have not yet started are likely to
get cancelled and bought back for rebid as small projects
Amongst our coverage, the potential relief, if it materialises, is
likely to be positive for IRB and L&T. ILFT is our preferred road
asset player


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NHAI will decide the eligibility of the project
for restructuring. There are overall 48 projects
(10-12 projects have started construction),
which were awarded with a premium
payment plan.
Eligible projects will have the option to pay
only 25% of the annual premium committed
for the first three years of the project
(construction phase) and have option to pay
only 50% thereafter. But if there is any cash
surplus after debt servicing and meeting
O&M expenses, then the obligations will be
adjusted against the accumulated deficit in
premium payment obligations. Developers
need to fulfil all their premium obligations
three years before the concession expires.
In case of four-laning projects, developers can
avail the policy after construction is complete
and commercial operations have begun.
In case of six-laning projects, developers can
avail the policy during construction, when
commercial operations are considered to have
begun, but would have to provide a construction
milestone-linked bank guarantee for the
premium deficit of 75% during this period.
The interest rate on the delayed premium
payment to be set at 10.75%.
The panel has dismissed issue of levying a
penalty on the projects if they avail this scheme.
Proposals in our view are
insufficient to restart projects
Our discussions with road developers and industry
experts lead us to conclude that these steps,
although they may be beneficial for developers
who have started the projects, are likely not
sufficient to convince players who have not yet
started work. We place our arguments below:
Many of these projects have been delayed
more than a year for project clearances
(mostly environment). Costs during the delay
period have escalated by c10%. NHAI, in our
view is unlikely to grant any cost escalation
beyond 4-6% (in line with inflation
expectations) and that too if it falls with the
prescribed rules of the project agreement.
HSBCs economics team have lowered
estimates of Indias GDP growth during
FY13-16e to 5% CAGR, versus the market
expectation of 7-8% at the time of bidding. In
addition, the economic slowdown over the
past 18 months has hurt traffic growth on
many road stretches. Industry meetings
suggest that for India overall, traffic growth
during FY13 was down 4-5%, while it is
expected to be down 2-3% during FY14. This
will put pressure on traffic growth, which is
the single most influential variable in a road
assets valuation (road tariff and growth is
known at the time of bidding).
Funding cost has climbed by 150-200bps and
willingness of financial institutions to lend to
not so viable projects has come
down drastically.
Hence just the deferral of premium payment at
10.75% interest (still lower than their cost of capital
of 11-13%), is unlikely to convince developers as
even if the proposals cut potential negative NPV by
50%, no developer would like to undertake a loss-
making project. Developers are likely to believe that
they would be better off by paying a penalty and
forgoing the development rights.
A boon in disguise
During the current fiscal year, NHAI could not
find takers for close to 20 projects under the
build-operate-transfer toll model. It managed to
award only 222km during FY14 as against target
of 4,000km (1,113kms in FY13 and 6,491kms in


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FY12). We believe, once the developer tenders
back these projects, these are likely to come to
NHAIs re-bidding basket and kick-start the
projects awards process.
Will there be takers when they come for re-bid?
In our view, given the circumstances, NHAI
would be unwilling to bid out large size projects
again (above 200kms). We believe that they
would probably rather break down them into
multiple projects and reassess the viability under
the toll, annuity or EPC model. We anticipate the
current premium restructuring issue to get settled
during the next 2 months (before model code of
conduct for the general elections is announced),
which might be able to kick-start the awards
process during FY15e. We forecast 4,000kms of
new project awards during FY14e and 5,000kms
during FY15e.
Implications for our coverage universe
Amongst our coverage universe L&T (LT IN,
current price INR1,064, Overweight) has the
highest numbers of projects eligible for this relief
package. The table below summarises the exposure
of the companies we cover to this scheme.
L&T during an analyst meeting recently had
stated that they are keen on starting the projects
and are waiting to see if they can get any potential
benefits along the way. Hence, the restructuring
proposal could benefit the company.
IRB has already started construction on both its
projects. So accepting the restructuring proposal
in our view is likely to be a positive outcome for
IRB as it would have in any case controlled the
asset irrespective of whether there would have
been a restructuring.
ILFT has not yet started construction on its
project. However, we note that most of ILFTs
projects have been won during a low competitive
intensity phase. Hence we would be surprised if
the company does not accept the proposal and
carry on with the project.
Reliance Infrastructure (RELI IN, current price
INR424.55, Neutral (V)) has started construction
on its concerned project and hence it would be
keen to accept the proposal in our view.
We are waiting for the official press release on this
relief package from the Ministry of Highways before
we incorporate any potential effect on our estimates.



Likely exposure of companies we cover to the relief package
Developer No of Projects Length (KM) Project Cost
(INRm)
Premium
(INRm)
Premium as a of
TPC
L&T 4 873 85,448 5,670 6.6%
IRB 2 216 32,672 4,500 13.8%
IL&FS 1 123 16,650 420 2.5%
Reliance Infrastructure 1 60 9,250 670 7.2%
TPC: total project cost
Source: The Hindu Business Line (http://www.thehindubusinessline.com/), company data, HSBC estimates


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Investment summary
Market leader IRB is a focused play in Indias
road sector and is very well placed for the
eventual turnaround in the Indian road sector. The
company, which builds and operates toll roads,
has the largest portfolio of build-operate-transfer
(BOT) toll assets (6,286km across 17 projects).
Nine of its assets are operational, which churn out
an annual FCF of INR1.9bn, making its business
self-reliant to fund new project acquisitions.
Consequently, despite the large portfolio of assets,
IRBs net debt-to-equity ratio is still comfortable
at 2.1x compared to its sector peers. Its EBITDA
coverage at 2.7x is also one of the best within the
sector, providing sufficient room for new project
acquisitions.
According to an IRB press release, the company
along with its promoters is being investigated for
discrepancies in land acquisitions for the
Mumbai-Pune Expressway. While management
has clarified its stance through regular updates,
we expect the stock to remain under pressure as
investors prefer to await the outcome of the
investigation as the persistent negative newsflow
impacts share performance.
Cut earnings estimates by 9-19%
We have cut our earnings estimates for IRB by 9-
19% over FY14e-16e for the following reasons: 1)
IRB like for like toll revenue growth for the last
two quarters (sub 6%) has been weaker than we
had estimated. 2). We factor in a delay in
execution for a few projects for e.g. Goa-
Kundapur 3). We now factor in 50bps higher
interest rates that we had previously estimated.
Our revised earnings estimates are 6% below
consensus in FY15e but are 4% ahead on FY16e.

IRB Infrastructure Ltd
IRB offers quality existing portfolio and comfortable leverage
should help in new asset acquisition
However, we remain cautious in the absence of clarity on the
outcome of the legal investigation
Reiterate N(V) and raise TP to INR103 (up 32% from INR78)

HSBC IRBs earnings estimate summary
_____ New forecasts _________ y-o-y change _____ _____ Change vs old ____ ____ HSBCe vs. cons ___
INRm (except EPS) FY13a FY14e FY15e FY16e FY14e FY15e FY16e FY14e FY15e FY16e FY14e FY15e FY16e
Revenue 36,872 44,669 46,543 55,593 21.1% 4.2% 19.4% -4.3% -7.0% -12.6% 10.7% 7.4% 18.8%
EBITDA 16,333 18,629 20,167 23,059 14.1% 8.3% 14.3% -2.8% -4.5% -8.6% 2.0% -1.5% -3.1%
EBITDA margin 44.3% 41.7% 43.3% 41.5% -260 160 -180 60 110 180 -360 -390 -940
HSBC PAT 5,567 4,989 4,699 5,096 -10.4% -5.8% 8.4% -5.3% -8.8% -18.9% 3.2% -5.6% 4.2%
HSBC PAT margin 15.1% 11.2% 10.1% 9.2% -390 -110 -90 -10 -20 -70 -80 -140 -130
Adj. EPS 16.7 15.0 14.1 15.3 -10.4% -5.8% 8.4% -5.3% -8.8% -18.9% 3.7% -5.2% 11.1%
Source: Bloomberg, Company data, HSBC estimates


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Valuation and risks
Reiterate N (V) though increase our TP to
INR103 (INR78 earlier)
The company along with its promoters are being
investigated for discrepancies in land acquisitions
along the Mumbai-Pune Expressway. While
management has clarified its stance through
regular updates, we expect the stock to remain
under pressure as investors prefer to await the
outcome of the investigation, as persistent
negative news flow impacts the shares.
We have cut IRB's earnings forecasts by 9-19%
over FY14-16 as toll traffic has been lower than
expected and due to delays in construction
progress in some of its projects. However, the
business environment for Industrial stocks has
improved on the back of expected new project
awards and improving macro data points, which is
now reflected in our target price revision (TP at
20% discount to NAV against 40% earlier).
However, we refrain from getting more
constructive on the stock and valuing it at its
NAV until we get more clarity on the ongoing
investigation against its promoters.
We continue to value IRB using a sum-of-the-
parts (SOTP) approach, comprised of the
standalone BOT (Build Operate and Transfer) and
in-house construction businesses. We prefer a free
cash flow to equity (FCFE based) DCF valuation
for IRBs toll assets to capture the benefit of a
defined concession period (typically 10-25 years).
We have maintained our Cost of Equity (CoE)
assumptions for IRB constant. We use a 13%
COE for its operational toll assets (Risk free rate
of 8.3%, market risk premium of 5.0% and beta of
1.0x). We use a 50bps higher CoE for its under-
development assets to factor in the development
and traffic risk.
We currently do not accord any value to its EPC
business. We believe the stocks valuation will be
capped at the value of its subsidiaries (project
assets), given that if the outcome of the
investigation turns out to be negative, projects
could remain quarantined, while the holding
company could face issues.
IRB valuation changes
INR/ share New Old
Road Projects 130 130
EPC Business - -
Fair Value 130 130
Target project NAV disc 20% 40%
Target Price 104 78
Source: HSBC estimates
Under our research model, for stocks with a
volatility indicator, the Neutral band is 10ppts
above and below the hurdle rate for India stocks
of 11%. Our target price implies a potential return
of 16.7% (including a forecast dividend yield of
4.4%), which is within the Neutral band;
therefore, we are reiterating our Neutral (V)
rating. Potential return equals the percentage
difference between the current share price and the
target price, including the forecast dividend yield
when indicated.


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Key downside risks:
Sustained negative newsflow on the
investigation against the promoters
Sustained high interest rates
Execution risk impacting project timelines
and profitability
Key upside risks:
Restart of new project awards from NHAI
An earlier resolution to the investigation
against the promoter


IRB one-year forward PE chart IRB one-year forward PB chart



Source: Bloomberg, HSBC Estimates Source: Bloomberg, HSBC Estimates
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Financials & valuation: IRB Infrastructure Ltd Neutral (V)

Financial statements
Year to 03/2013a 03/2014e 03/2015e 03/2016e
Profit & loss summary (INRm)
Revenue 36,872 44,669 46,543 55,593
EBITDA 16,333 18,629 20,167 23,059
Depreciation & amortisation -4,415 -5,229 -5,816 -8,373
Operating profit/EBIT 11,918 13,400 14,351 14,686
Net interest -6,153 -7,585 -9,141 -8,871
PBT 7,066 7,031 7,096 7,992
HSBC PBT 7,066 7,031 7,096 7,992
Taxation -1,530 -2,079 -2,417 -3,086
Net profit 5,567 4,989 4,699 5,096
HSBC net profit 5,567 4,989 4,699 5,096
Cash flow summary (INRm)
Cash flow from operations 8,811 5,885 6,678 6,826
Capex -28,668 -23,017 -14,448 -23,111
Cash flow from investment -27,848 -21,801 -12,562 -20,933
Dividends 1,569 1,523 1,569 1,569
Change in net debt 20,056 17,703 6,903 14,978
FCF equity -19,857 -17,132 -7,771 -16,285
Balance sheet summary (INRm)
Intangible fixed assets 100,991 117,270 127,216 140,633
Tangible fixed assets 3,257 4,765 3,452 4,772
Current assets 27,812 25,085 30,271 18,682
Cash & others 15,317 7,513 11,201 -3,766
Total assets 132,073 147,133 160,952 164,100
Operating liabilities 7,296 12,000 12,000 12,000
Gross debt 87,761 97,660 108,250 108,261
Net debt 72,444 90,147 97,049 112,027
Shareholders funds 32,556 35,278 38,538 41,843
Invested capital 109,447 127,606 137,738 155,853

Ratio, growth and per share analysis
Year to 03/2013a 03/2014e 03/2015e 03/2016e
Y-o-y % change
Revenue 17.7 21.1 4.2 19.4
EBITDA 19.3 14.1 8.3 14.3
Operating profit 11.1 12.4 7.1 2.3
PBT 8.5 -0.5 0.9 12.6
HSBC EPS 12.2 -10.4 -5.8 8.4
Ratios (%)
Revenue/IC (x) 0.4 0.4 0.4 0.4
ROIC 9.6 8.0 7.1 6.1
ROE 18.2 14.7 12.7 12.7
ROA 8.6 7.4 7.0 6.4
EBITDA margin 44.3 41.7 43.3 41.5
Operating profit margin 32.3 30.0 30.8 26.4
EBITDA/net interest (x) 2.7 2.5 2.2 2.6
Net debt/equity 215.3 248.4 245.6 264.0
Net debt/EBITDA (x) 4.4 4.8 4.8 4.9
CF from operations/net debt 12.2 6.5 6.9 6.1
Per share data (INR)
EPS Rep (fully diluted) 16.75 15.01 14.14 15.33
HSBC EPS (fully diluted) 16.75 15.01 14.14 15.33
DPS 4.00 4.00 4.00 4.00
Book value 97.95 106.14 115.95 125.90


Valuation data
Year to 03/2013a 03/2014e 03/2015e 03/2016e
EV/sales 2.8 2.7 2.7 2.6
EV/EBITDA 6.3 6.5 6.3 6.2
EV/IC 0.9 0.9 0.9 0.9
PE* 5.5 6.1 6.5 6.0
P/Book value 0.9 0.9 0.8 0.7
FCF yield (%) -65.2 -56.2 -25.5 -53.5
Dividend yield (%) 4.4 4.4 4.4 4.4
Note: * = Based on HSBC EPS (fully diluted)


Issuer information
Share price (INR)91.70 Target price (INR)103.00
1
2
.
3
Reuters (Equity) IRBI.NS Bloomberg (Equity) IRB IN
Market cap (USDm) 493 Market cap (INRm) 30,478
Free float (%) 26 Enterprise value (INRm) 120611
Country India Sector CONSTRUCTION &
ENGINEERING
Analyst Ashutosh Narkar Contact +91 22 22681474


Price relative
Source: HSBC


Note: price at close of 30 Dec 2013
31
81
131
181
231
281
31
81
131
181
231
281
2011 2012 2013 2014
IRB Infrastructure Ltd Rel to BOMBAY SE SENSITIVE INDEX


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Investment summary
ILFT is poised to make seven projects operational
over next year. Three of these are among ILFTs top
four assets (of the 26 road assets). With the delivery
of these seven projects, we expect ILFTs average
daily cash collection to increase 3x to c. INR60m by
FY15e. The beginning of cash collection will likely
reduce investors biggest concern regarding the
sector delayed cash flow generation limiting
developers ability to cut leverage.
High leverage is manageable. ILFTs
consolidated net debt to equity (DE) is likely to
rise from 3.5x in FY13 to 4.8x by FY16e as it
funds new projects. However, the holding
companys net DE is still modest at 1.8x (FY13a).
Hence, we do not foresee high leverage impacting
the pace of project execution. While we expect the
projects to return free cash flow to ILFT only by
FY17e, it must close a funding gap of INR11bn of
equity required for its under construction
projects. Our analysis suggests it can comfortably
raise funding of INR4-5bn in its operational
assets.
We cut FY15e-16e earnings forecasts
by 18-20%
Although we cut revenue and EBITDA forecasts
for FY15e-16e by only 1-4%, we cut earnings
forecasts by 18-20%. This is primarily due to
slightly higher interest rates assumptions than we
had previously estimated. Due to very high
leverage (3.5x), the earnings are sensitive to the
interest rate assumptions.
Our revised earnings estimates are 5% below the
current consensus in FY15e, but are 5% above
in FY16e.
ILFT Transport
Expect seven projects becoming operational over next year to act
as share price catalysts
Investors concerns surrounding high leverage and equity dilution
seem overdone, in our view
Remain OW with a lower TP of INR172 (down from INR260)

HSBC ILFTs earnings estimate summary
_____ New forecasts _________ y-o-y change _____ _____ Change vs old ____ _____ HSBC vs. cons ____
INRm (except EPS) FY13a FY14e FY15e FY16e FY14e FY15e FY16e FY14e FY15e FY16e FY14e FY15e FY15e
Revenue 66,448 79,803 76,469 77,179 20.1% -4.2% 0.9% 12.4% -3.7% -4.3% 14.6% 0.3% -16.7%
EBITDA 18,379 23,274 25,165 28,255 26.6% 8.1% 12.3% 7.8% -1.3% -2.3% 9.4% 0.6% -11.0%
EBITDA margin 27.7% 29.2% 32.9% 36.6% 150 370 370 -120 80 80 -140 10 230
HSBC PAT 5,202 6,246 5,450 6,744 20.1% -12.7% 23.7% 8.3% -20.2% -17.7% 21.7% -4.8% 4.8%
HSBC PAT margin 7.8% 7.8% 7.1% 8.7% 0 -70 160 -30 -150 -150 40 -40 180
Adj. EPS 26.8 32.1 28.1 34.7 20.1% -12.7% 23.7% 8.3% -20.2% -17.7% 21.4% -3.2% 12.4%
Source: Bloomberg, Company data, HSBC estimates


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Valuation and risks
We continue to value ILFT using a sum of the parts
valuation across 2 business segments-road assets and
EPC business using a free cash flow to equity
(FCFE) discounted cash flow method (DCF).
With varied risk profile we use differential cost of
equity for projects which are already operational
and under development. The risk profile of an
annuity road asset is also lower than a toll asset,
which is reflected in our cost of equity
assumptions. Below table highlights our cost of
equity assumptions. We have not made any
changes to our base cost of equity assumptions for
an annuity asset (risk free rate of 8.3%, market
risk premium of 5.0% and beta of 0.9x). We use a
50bps higher CoE for under development annuity
asset to factor the development risk. Similarly we
use a 50bps higher CoE (above base annuity CoE)
for operational toll asset and an additional 100bps
CoE of 14.3% for an under construction toll asset
to compensate for the higher traffic risk.
Cost of equity assumptions
Annuity- Operational 12.8%
Annuity- Under development 13.3%
BOT- Operational 13.3%
BOT- Under development 14.3%
BOT: Build Operate Transfer
Source: Bloomberg, HSBC estimates


We have cut our target price sharply by 34%.
This is owing to a combination of 2 key changes.
1) We have increased our interest cost assumption
by 100bps to 11.5%. However due to high net
equity of 3.5x and interest coverage of mere 2.0x,
the impact on our target price is severe (60% of
the target price reduction). 2) We have also
adjusted our traffic growth outlook for yet to start
projects to factor the weak macro conditions.
Lower revenues again have a similar impact on
long term cash flows owing to the low interest
coverage ratio. Consequently our target price has
fallen by 34% to INR172 (refer table below).

ILFT valuation change
INR/ share New Old
Projects NPV 204 288
EPC value 66 60
Elsamex 21 21
Additional equity required (54) (38)
Net debt (68) (75)
Option value for new projects 5 5
Total 172 260
Source: Company data, HSBC
Under our research model, for stocks without
volatility indicator, the Neutral band is 5ppts above
and below the hurdle rate for India stocks of 11%.
Our target price implies a potential return of 29.3%
(including a forecast dividend yield of 2.9%), which
is above the Neutral band; therefore, we are
reiterating our Overweight rating. Potential return
equals the percentage difference between the current
share price and the target price, including the
forecast dividend yield when indicated.
ILFT one-year forward PE chart ILFT one-year forward PB chart



Source: Bloomberg, HSBC Estimates Source: Bloomberg, HSBC Estimates
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Key downside risks: 1) weak macro environment
impacting traffic growth and real estate, 2) high
interest rates, 3) execution risk, 4) competitive
pressures from large players, and 5) regulatory
risk impacting new project awards.


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Financials & valuation: IL&FS Transportation Netw Overweight

Financial statements
Year to 03/2013a 03/2014e 03/2015e 03/2016e
Profit & loss summary (INRm)
Revenue 66,448 79,803 76,469 77,179
EBITDA 18,379 23,274 25,165 28,255
Depreciation & amortisation -944 -1,842 -1,881 -2,989
Operating profit/EBIT 17,435 21,432 23,284 25,267
Net interest -9,750 -12,822 -15,800 -15,894
PBT 7,731 8,756 7,330 9,238
HSBC PBT 7,731 8,756 7,330 9,238
Taxation -2,274 -2,583 -2,021 -2,531
Net profit 5,202 6,246 5,450 6,744
HSBC net profit 5,202 6,246 5,450 6,744
Cash flow summary (INRm)
Cash flow from operations 19,039 14,842 26,590 44,098
Capex -49,388 -52,137 -46,838 -44,658
Cash flow from investment -50,554 -52,137 -46,838 -44,658
Dividends -907 -909 -909 -2,108
Change in net debt 39,618 50,952 37,253 35,355
FCF equity -41,073 -50,810 -37,990 -34,914
Balance sheet summary (INRm)
Intangible fixed assets 7,098 7,131 7,131 7,132
Tangible fixed assets 96,578 136,672 179,784 218,644
Current assets 31,653 43,209 40,792 41,075
Cash & others 4,552 5,000 5,000 5,001
Total assets 205,903 266,754 307,493 347,646
Operating liabilities 17,297 21,864 20,950 21,145
Gross debt 143,591 194,991 232,244 267,599
Net debt 139,039 189,991 227,244 262,598
Shareholders funds 36,398 41,735 46,275 50,912
Invested capital 113,479 160,149 201,757 240,705

Ratio, growth and per share analysis
Year to 03/2013a 03/2014e 03/2015e 03/2016e
Y-o-y % change
Revenue 18.5 20.1 -4.2 0.9
EBITDA 25.4 26.6 8.1 12.3
Operating profit 25.5 22.9 8.6 8.5
PBT -1.9 13.3 -16.3 26.0
HSBC EPS 4.7 20.1 -12.7 23.7
Ratios (%)
Revenue/IC (x) 0.7 0.6 0.4 0.3
ROIC 12.4 11.0 9.3 8.3
ROE 16.2 16.0 12.4 13.9
ROA 7.5 6.9 6.2 5.9
EBITDA margin 27.7 29.2 32.9 36.6
Operating profit margin 26.2 26.9 30.4 32.7
EBITDA/net interest (x) 1.9 1.8 1.6 1.8
Net debt/equity 347.8 420.0 457.8 484.1
Net debt/EBITDA (x) 7.6 8.2 9.0 9.3
CF from operations/net debt 13.7 7.8 11.7 16.8
Per share data (INR)
EPS Rep (fully diluted) 26.78 32.15 28.05 34.71
HSBC EPS (fully diluted) 26.78 32.15 28.05 34.71
DPS 4.00 4.00 4.00 5.00
Book value 187.36 214.83 238.20 262.07


Valuation data
Year to 03/2013a 03/2014e 03/2015e 03/2016e
EV/sales 2.4 2.6 3.2 3.7
EV/EBITDA 8.6 9.0 9.8 10.0
EV/IC 1.4 1.3 1.2 1.2
PE* 5.1 4.2 4.9 3.9
P/Book value 0.7 0.6 0.6 0.5
FCF yield (%) -209.9 -259.7 -194.1 -178.4
Dividend yield (%) 2.9 2.9 2.9 3.7
Note: * = Based on HSBC EPS (fully diluted)


Issuer information
Share price (INR)136.10 Target price (INR)172.00
2
6
.
4
Reuters (Equity) ILFT.NS Bloomberg (Equity) ILFT IN
Market cap (USDm) 428 Market cap (INRm) 26,440
Free float (%) 29 Enterprise value (INRm) 209559
Country India Sector Construction & Engineering
Analyst Ashutosh Narkar Contact +91 22 22681474


Price relative
Source: HSBC


Note: price at close of 30 Dec 2013
75
125
175
225
275
325
75
125
175
225
275
325
2011 2012 2013 2014
IL&FS Transportation Netw


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Appendix 1: List of the road projects likely to be considered as stressed
Road projects of coverage companies
Project Name Developer Length (KM) Project Cost (INRm)
Barwa Adda- Panagarh IL&FS Transportation 123 24,199
Tumkur- Chitradurga IRB Infrastructure 114 11,420
Ahmedabad- Vadodara IRB Infrastructure 196 48,800
Hosur- Krishnagiri Reliance Infrastructure 60 9,250
Maharashtra/Karnataka Border-Sangareddy L&T 145 12,730
Jalgaon-Gujarat/ Maharashtra Border L&T 209 23,000
Amravati- Jalgaon (four laning) L&T 275 25,380
Beawar- Pali- Pindwara L&T 244 27,720
Road projects of non-coverage companies
Project Name Developer Project Detail Developer
Belgaum- Dharwad Ashoka Buildcon Raipur-Bilaspur IVRCL
Cuttack-Angul Ashoka Buildcon Rajahmundry- Gundugolanu IVRCL
Dankuni- Kharagpur Ashoka Buildcon Nagpur- Wainganga Bridge JMC
Sambalpur- Bargarh Ashoka Buildcon Kota-Jhalawar Keti Construction
Odisha border- Aurnag- Saraipalli BSCPL Aurangabad- Barwa Adda KMC Construction
Solapur-Maharashtra/ Karnataka Border Coastal- Srei Rohtak- Jind NKG
Indore- Dewas DLF- Gayatri Etawah- Chakeri Oriental Structures
Engineers
Rampur-Kathgodam Era Infra Hospet-Bellary-Karnataka/A.P. Border PNC Betul construction
Lucknow-Sultanpur Essar- Atlanta Agra- Etawah Bypass (Six laning) Ramky Infrastructure
Gwalior- Shivpuri Essel Infra Hospet-Chitradurga Ramky Infrastructure
Ludhiana- Talwandi Essel Infra Gomti ka chauraha- Udaipur Sadbhav Engineering
Walajapet- Poonamallee Essel Infra Solapur-Bijapur Sadbhav Engineering
Vijayawada-Eluru-Gundugolanu Gammon Solapur-Maharashtra/ Karnataka
Border
Sadbhav Engineering
Kishangarh-Udaipur-Ahmedabad GMR Infrastructure Panvel- Indapur Supreme
Deoli- Kota GVK Anandapuram- Visakhapatnam-
Anakapalli
Transtroy- OJSC
Shivpuri-Dewas GVK Obedullaganj-Betul Transtroy- OJSC
Vadodara- Surat section HCC Jind- Punjab/ Haryana Border Unity Infra Projects
Jetpur- Somnath IDFC- Plus Coimbatore- Mettupalayam --
Source: The Hindu Business Line (http://www.thehindubusinessline.com/), company data, HSBC estimates


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Disclosure appendix
Analyst Certification
The following analyst(s), economist(s), and/or strategist(s) who is(are) primarily responsible for this report, certifies(y) that the
opinion(s) on the subject security(ies) or issuer(s) and/or any other views or forecasts expressed herein accurately reflect their
personal view(s) and that no part of their compensation was, is or will be directly or indirectly related to the specific
recommendation(s) or views contained in this research report: Ashutosh Narkar
Important disclosures
Equities: Stock ratings and basis for financial analysis
HSBC believes that investors utilise various disciplines and investment horizons when making investment decisions, which
depend largely on individual circumstances such as the investor's existing holdings, risk tolerance and other considerations.
Given these differences, HSBC has two principal aims in its equity research: 1) to identify long-term investment opportunities
based on particular themes or ideas that may affect the future earnings or cash flows of companies on a 12 month time horizon;
and 2) from time to time to identify short-term investment opportunities that are derived from fundamental, quantitative,
technical or event-driven techniques on a 0-3 month time horizon and which may differ from our long-term investment rating.
HSBC has assigned ratings for its long-term investment opportunities as described below.
This report addresses only the long-term investment opportunities of the companies referred to in the report. As and when
HSBC publishes a short-term trading idea the stocks to which these relate are identified on the website at
www.hsbcnet.com/research. Details of these short-term investment opportunities can be found under the Reports section of this
website.
HSBC believes an investor's decision to buy or sell a stock should depend on individual circumstances such as the investor's
existing holdings and other considerations. Different securities firms use a variety of ratings terms as well as different rating
systems to describe their recommendations. Investors should carefully read the definitions of the ratings used in each research
report. In addition, because research reports contain more complete information concerning the analysts' views, investors
should carefully read the entire research report and should not infer its contents from the rating. In any case, ratings should not
be used or relied on in isolation as investment advice.
Rating definitions for long-term investment opportunities
Stock ratings
HSBC assigns ratings to its stocks in this sector on the following basis:
For each stock we set a required rate of return calculated from the cost of equity for that stocks domestic or, as appropriate,
regional market established by our strategy team. The price target for a stock represents the value the analyst expects the stock
to reach over our performance horizon. The performance horizon is 12 months. For a stock to be classified as Overweight, the
potential return, which equals the percentage difference between the current share price and the target price, including the
forecast dividend yield when indicated, must exceed the required return by at least 5 percentage points over the next 12 months
(or 10 percentage points for a stock classified as Volatile*). For a stock to be classified as Underweight, the stock must be
expected to underperform its required return by at least 5 percentage points over the next 12 months (or 10 percentage points
for a stock classified as Volatile*). Stocks between these bands are classified as Neutral.
Our ratings are re-calibrated against these bands at the time of any 'material change' (initiation of coverage, change of volatility
status or change in price target). Notwithstanding this, and although ratings are subject to ongoing management review,
expected returns will be permitted to move outside the bands as a result of normal share price fluctuations without necessarily
triggering a rating change.


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*A stock will be classified as volatile if its historical volatility has exceeded 40%, if the stock has been listed for less than 12
months (unless it is in an industry or sector where volatility is low) or if the analyst expects significant volatility. However,
stocks which we do not consider volatile may in fact also behave in such a way. Historical volatility is defined as the past
month's average of the daily 365-day moving average volatilities. In order to avoid misleadingly frequent changes in rating,
however, volatility has to move 2.5 percentage points past the 40% benchmark in either direction for a stock's status to change.
Rating distribution for long-term investment opportunities
As of 31 December 2013, the distribution of all ratings published is as follows:
Overweight (Buy) 45% (34% of these provided with Investment Banking Services)
Neutral (Hold) 37% (33% of these provided with Investment Banking Services)
Underweight (Sell) 18% (28% of these provided with Investment Banking Services)

Share price and rating changes for long-term investment opportunities
IL&FS Transportation Netw (ILFT.NS) Share Price performance INR Vs HSBC
rating history
Recommendation & price target history
From To Date
N/A Overweight 08 February 2012
Target Price Value Date
Price 1 267.00 08 February 2012
Price 2 231.00 01 November 2012
Price 3 265.00 08 January 2013
Price 4 260.00 03 July 2013
Source: HSBC

Source: HSBC

IRB Infrastructure Ltd (IRBI.NS) Share Price performance INR Vs HSBC rating
history
Recommendation & price target history
From To Date
Overweight (V) Neutral (V) 26 November 2012
Target Price Value Date
Price 1 309.00 28 January 2011
Price 2 281.00 11 July 2011
Price 3 235.00 10 November 2011
Price 4 139.00 26 November 2012
Price 5 109.00 03 July 2013
Price 6 78.00 11 August 2013
Source: HSBC

Source: HSBC

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HSBC & Analyst disclosures
Disclosure checklist
Company Ticker Recent price Price Date Disclosure
IL&FS TRANSPORTATION NETWORKS ILFT.NS 136.10 30-Dec-2013 2, 6, 7
IRB INFRASTRUCTURE LTD IRBI.NS 91.70 30-Dec-2013 4
Source: HSBC
1 HSBC has managed or co-managed a public offering of securities for this company within the past 12 months.
2 HSBC expects to receive or intends to seek compensation for investment banking services from this company in the next
3 months.
3 At the time of publication of this report, HSBC Securities (USA) Inc. is a Market Maker in securities issued by this
company.
4 As of 30 November 2013 HSBC beneficially owned 1% or more of a class of common equity securities of this company.
5 As of 30 November 2013, this company was a client of HSBC or had during the preceding 12 month period been a client
of and/or paid compensation to HSBC in respect of investment banking services.
6 As of 30 November 2013, this company was a client of HSBC or had during the preceding 12 month period been a client
of and/or paid compensation to HSBC in respect of non-investment banking securities-related services.
7 As of 30 November 2013, this company was a client of HSBC or had during the preceding 12 month period been a client
of and/or paid compensation to HSBC in respect of non-securities services.
8 A covering analyst/s has received compensation from this company in the past 12 months.
9 A covering analyst/s or a member of his/her household has a financial interest in the securities of this company, as
detailed below.
10 A covering analyst/s or a member of his/her household is an officer, director or supervisory board member of this
company, as detailed below.
11 At the time of publication of this report, HSBC is a non-US Market Maker in securities issued by this company and/or in
securities in respect of this company

HSBC and its affiliates will from time to time sell to and buy from customers the securities/instruments (including derivatives)
of companies covered in HSBC Research on a principal or agency basis.
Analysts, economists, and strategists are paid in part by reference to the profitability of HSBC which includes investment
banking revenues.
For disclosures in respect of any company mentioned in this report, please see the most recently published report on that
company available at www.hsbcnet.com/research.
Additional disclosures
1 This report is dated as at 03 January 2014.
2 All market data included in this report are dated as at close 30 December 2013, unless otherwise indicated in the report.
3 HSBC has procedures in place to identify and manage any potential conflicts of interest that arise in connection with its
Research business. HSBC's analysts and its other staff who are involved in the preparation and dissemination of Research
operate and have a management reporting line independent of HSBC's Investment Banking business. Information Barrier
procedures are in place between the Investment Banking and Research businesses to ensure that any confidential and/or
price sensitive information is handled in an appropriate manner.


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Disclaimer
* Legal entities as at 8 August 2012
UAE HSBC Bank Middle East Limited, Dubai; HK The Hongkong and Shanghai Banking Corporation Limited,
Hong Kong; TW HSBC Securities (Taiwan) Corporation Limited; 'CA' HSBC Bank Canada, Toronto; HSBC
Bank, Paris Branch; HSBC France; DE HSBC Trinkaus & Burkhardt AG, Dsseldorf; 000 HSBC Bank (RR),
Moscow; IN HSBC Securities and Capital Markets (India) Private Limited, Mumbai; JP HSBC Securities
(Japan) Limited, Tokyo; EG HSBC Securities Egypt SAE, Cairo; CN HSBC Investment Bank Asia Limited,
Beijing Representative Office; The Hongkong and Shanghai Banking Corporation Limited, Singapore Branch; The
Hongkong and Shanghai Banking Corporation Limited, Seoul Securities Branch; The Hongkong and Shanghai
Banking Corporation Limited, Seoul Branch; HSBC Securities (South Africa) (Pty) Ltd, Johannesburg; HSBC Bank
plc, London, Madrid, Milan, Stockholm, Tel Aviv; US HSBC Securities (USA) Inc, New York; HSBC Yatirim
Menkul Degerler AS, Istanbul; HSBC Mxico, SA, Institucin de Banca Mltiple, Grupo Financiero HSBC; HSBC
Bank Brasil SA Banco Mltiplo; HSBC Bank Australia Limited; HSBC Bank Argentina SA; HSBC Saudi Arabia
Limited; The Hongkong and Shanghai Banking Corporation Limited, New Zealand Branch incorporated in Hong
Kong SAR
Issuer of report
HSBC Securities and Capital Markets
(India) Private Limited
Registered Office
52/60 Mahatma Gandhi Road
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Telephone: +91 22 2267 4921
Fax: +91 22 2263 1983
Website: www.research.hsbc.com
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Industrials
Colin Gibson
Global Sector Head, Industrials
+44 20 7991 6592 colin.gibson@hsbcib.com
Sean McLoughlin
Analyst
+44 20 7991 3464 sean.mcloughlin@hsbcib.com
Michael Hagmann
Analyst
+44 20 7991 2405 michael.hagmann@hsbcib.com
Mark Webb
Analyst
+852 2996 6574 markwebb@hsbc.com.hk
Parash Jain
Analyst
+852 2996 6717 parashjain@hsbc.com.hk
Shishir Singh
Analyst
+852 2822 4292 shishirkumarsingh@hsbc.com.hk
Walden Shing
Analyst
+852 2996 6751 waldenshing@hsbc.com.hk
Stephen Wan
Analyst
+852 2996 6566 stephenwan@hsbc.com.hk
Thomas Zhu, CFA
Analyst
+852 2822 4325 thomasjzhu@hsbc.com.hk
Carrie Liu
Analyst
+ 8862 6631 2864 carriecfliu@hsbc.com.tw
Julie Wang
Associate
+8862 6631 2870 juliecywang@hsbc.com.tw
Brian Cho
Head of Research, Korea
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Paul Choi
Analyst
+822 3706 8758 paulchoi@kr.hsbc.com
Yeon Lee
Analyst
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Analyst
+822 3706 8772 jenahan@kr.hsbc.com
Thilan Wickramasinghe
Analyst
+65 6658 0609 thilanw@hsbc.com.sg
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Analyst
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Analyst
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Analyst
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Analyst
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Juergen Siebrecht
Analyst
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Christophe Quarante
Analyst
+ 33 1 56 52 43 12 christophe.quarante@hsbc.com
Autos
Niels Fehre
Analyst
+49 211 910 3426 niels.fehre@hsbc.de
Horst Schneider
Analyst
+49 211 910 3285 horst.schneider@hsbc.de
Carson Ng
Analyst
+852 2822 4397 carsonksng@hsbc.com.hk
Yogesh Aggarwal
Analyst
+91 22 2268 1246 yogeshaggarwal@hsbc.co.in

Transportation
Andrew Lobbenberg
Analyst
+44 20 7991 6816 andrew.lobbenberg@hsbcib.com
Julia Winarso
Analyst
+44 20 7991 2168 julia.winarso@hsbcib.com
Joe Thomas
Analyst
+44 20 7992 3618 joe.thomas@hsbcib.com
Wei Sim
Analyst
+852 2996 6602 weisim@hsbc.com.hk
Luciano T Campos
+55 11 3371 8192 luciano.t.campos@hsbc.com.br
Shishir Singh
+852 2822 4292 shishirkumarsingh@hsbc.com.hk
Achal Kumar
Analyst
+91 80 3001 3722 achalkumar@hsbc.co.in
Rajani Khetan
Analyst
+852 3941 0830 rajanikhetan@hsbc.com.hk
Jingyuan Zhai
Associate
+852 3941 7009 jocelynzhai@hsbc.com.hk
Construction & Engineering
Neel Sinha
Head of Equity Research, South East Asia
+65 6658 0606 neelsinha@hsbc.com.sg
Pierre Bosset
Head of French Research
+33 1 56 52 43 10 pierre.bosset@hsbc.com
Tarun Bhatnagar
Analyst
+65 6658 0614 tarunbhatnagar@hsbc.com.sg
John Fraser-Andrews
Analyst
+44 20 7991 6732 john.fraser-andrews@hsbcib.com
Jeffrey Davis
Analyst
+44 207 991 6837 jeffrey1.davis@hsbcib.com
Claudia Navarrete
Analyst
+52 55 5721 2422 claudia.navarrete@hsbc.com.mx
Anderson Chow
Analyst
+852 2996 6669 andersonchow@hsbc.com.hk
Lesley Liu
Analyst
+852 2822 4524 lesleylliu@hsbc.com.hk
Raj Sinha
Analyst
+ 971 4423 6932 raj.sinha@hsbc.com
Levent Bayar
Analyst
+90 212 376 46 17 leventbayar@hsbc.com.tr
Ashutosh Narkar
Analyst
+91 22 2268 1474 ashutoshnarkar@hsbc.co.in
Tobias Loskamp
Analyst
+49 211 910 2828 tobias.loskamp@hsbc.de
Specialist Sales
Rod Turnbull
+44 20 7991 5363 rod.turnbull@hsbcib.com
Oliver Magis
+49 21 1910 4402 oliver.magis@hsbc.de
Billal Ismail
+44 20 7991 5362 billal.ismail@hsbcib.com

Global Industrials Research Team