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Noida Toll Bridge

For Whom the (Cash Registers) Bell Tolls...


Sanjay Bakshi

March 21, 2010

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From Warren Buffett Speaks: The Wit & Wisdom from the Worlds Greatest Investor

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Summary
The Noida Toll Bridge Company owns and operates the Noida Toll Bridge which connects South Delhi (population ge 2.3 million) with Noida (a rid ll B modern suburb of Delhi, To a population 0.7 million) id No and East Delhi (population 4.2 million). This unregulated monopoly is incredibly cheap and is one of the most attractive public companies available in India. All revenues are in cash. There are no inventories. The toll is indexed to ination and users are price insensitive trafc keeps rising steadily regardless of global economic slowdown. The toll bridge is operating at 45% of its capacity and will reach 100% of capacity within six years, without requiring incremental investment in xed assets or working capital. The CEO of the company is buying stock for his own account and we are buying it because its 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. At Rs 23 per share, 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.

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Note
The Noida Toll Bridge Company Limited was set up to construct and operate the Delhi Noida Toll Bridge on a build, own, operate and transfer (BOOT) basis. The Delhi Noida Toll Bridge is a tolled facility connecting Noida and East Delhi to South Delhi across the Yamuna river.

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 552.5 meters in length across the Yamuna river and includes the approach roads on the South Delhi and Noida ends. DND Flyway became operational in February 2001.
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The Company principally generates revenues through the levy of toll charges for the use of the toll bridge by commuters. The maximum capacity of the toll bridge is estimated to be 222,000 vehicles per day. The trafc on the bridge has grown from approximately 17,000 vehicles per day in March 2001 to more than 101,000 vehicles per day in December 2008. Thats an increase of 25% p.a. We expect trafc to rise by 15% p.a. over the next few years which will cause the toll bridge to operate at its full capacity within six years.

Initial Trouble
In its rst few years, this company faced major problems arising out of overcondence-driven-projections about expected trafc volume. Such optimistic projections resulted in the use of a highly leveraged capital structure for funding the project cost. Of the total funding requirement of $92 million, only $28 million was nanced through equity. 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. The plight of the company in the rst two years of its operations can be seen from the table on the right.
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Finance charges i.e. interest on debt were more than four times the toll revenue! Clearly the company was headed towards bankruptcy.

Debt Restructuring
In 2002, the company was forced to approach its bankers for restructuring its debt which took many years to negotiate and implement. The key features of the corporate debt restructuring proposal were: (i) rescheduling of interest and repayments; (ii) reduction in interest rate for loans (effective cost of debt was reduced from 14.5% p.a. to 9.5% p.a.); and (iii) construction of new links in order to augment the Companys revenues to be funded by additional equity capital. In March 2006, the company raised $42 million equity funds by selling GDRs in Alternate Investment Market (AIM) of The London Stock Exchange. 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. 30% of Delhis population lives Mayur Vihar Link in East Delhi. The Mayur Vihar Link, which started in January 2008, created a new source of revenue for the company. In March 2002, total debt on the companys
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books was approximately $65 million. By March 2008, this debt had shrunk to $44 million due to the debt-restructuring mentioned above and also due to debt repayments from cash ows. In the meantime, trafc volume increased substantially, resulting in the company coming out of debt trap. For the year ended 31 March 2008, the total income had risen to $14.6 million, of which $3.4 million was spent on the operation and administration expenses of the bridge, leaving $11.2 million available for debt service. Thanks to earlier debt-reduction as well as to corporate debt-restructuring, the interest expense for the year was now only $3 million. With interest coverage ratio of 3.7 times, the company is now not only out of debt-trap, but is also well nanced. We expect the company to be completely debt-free in less than ve years.

Pricing Power
Noida Tolls business model has a built-in ination hedge. Every year, the company is allowed to raise its toll charges using consumer price index. 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

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Moreover, if the increase results in toll price involving decimals, the toll is rounded up to the next rupee which means that toll revenues tend to rise by more than ination.

Long Queues = Inelastic Demand


Regardless of the rise in toll prices, year after year, the trafc just keeps on rising, thanks to the growth of population on both sides of the Yamuna river. The only competition are two government owned, free, but poorly maintained bridges which are already operating at full capacity, so people choose Noida Toll Bridge because it saves them time.

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Apparently, the world is experiencing a recession. Not this company though. Even though India is facing an economic slowdown, the trafc numbers keep on rising every month. See chart below and excerpt from managements report on December 2008 quarterly performance:
Noida Toll - Growth over years
100000 90000 80000 70000 1800 1600 1400 1200 1000 50000 800 40000 30000 20000 10000 0 600 400 200 0

60000

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Revenue/Day (INR - Thousands)

Vehicles/day

Valuation
We expect the Noida Toll Bridge to reach full capacity of 222,000 vehicles per day within six years. Assuming an ination rate of 5%, average toll per vehicle will rise from Rs 18 to Rs 24 by the end of six years. This means that six years from now revenues will be approximately Rs 2 billion or $39 million. Because the cost of operating and maintaining the bridge are xed, margins and free cash
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Dec-07

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Revenue/Day (INR - Thousands)

Vehicles/Day

ow will rise as the bridge reaches peak capacity. 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 trafc volume. The company changed this system in 2007 and now a 51% subsidiary is paid a xed sum (regardless of trafc volume) to operate the bridge. As trafc rises, operating expenses as percentage of revenues will decline. Assuming they rise by 5% p.a, in six years, the company will be generating an operating cash ow of $33 million p.a. To value this operating business, we discount the operating cash ows at 12% per annum for: (a) the next six years when the trafc ramps up from 45% to 100% of capacity; and (b) the future during which we presume they will grow at 4% per year as a result of ination. Our estimate of (a) is $85 million; and that of (b) is $208 million, so the estimated value of the operating business is $293 million. After reducing debt of $44 million, we are left with equity value of $249 million, or Rs 67 per share. 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. See section on
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advertisement revenue in the table on the right. 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. See extract from companys prospectus below:

The current book value per share is Rs 23. Based on expected earnings for FY09, we are paying less than 9 times earnings. 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. Citigroup, which owned 4% in June 2008 has been a consistent seller. Credit Suisee, which owned 3% in September 2008 is another consistent seller.
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Conclusion
Noida Toll Bridge is an asset having wonderful economic characteristics, 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 major costs of the project have already been incurred. Running costs are low and going to become lower as a proportion of revenue because they are relatively xed. All sales are in cash so there are no receivables. 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. How many businesses are out there which can quadruple their earnings without deploying additional capital in xed assets, receivables, and inventories? Very few. This is one of such businesses. Noida Toll Bridge also has tremendous pricing power toll revenues are indexed to ination, and the users are price insensitive. They huff and they puff but in the end they pay up. The trafc keeps on growing regardless of terrorist attacks, recessions, large government decits, climate change, fuel price change, fads and fashions in markets etc. The company has recently come out of a debt-trap and is now not only conservatively nanced, but is also paying down its remaining debt aggressively. Management is very competent, and is also owner oriented. The CEO is buying the stock for his own account. So are we.

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