IL&FS Transportation Networks Ltd. Analyst Conference Call - PDF

Please download to get full document.

View again

of 20
All materials on our website are shared by users. If you have any questions about copyright issues, please report us to resolve them. We are always happy to assist you.
Information Report

Business & Finance


Views: 10 | Pages: 20

Extension: PDF | Download: 0

Related documents
IL&FS Transportation Networks Ltd. Analyst Conference Call MANAGEMENT: MR. K. RAMCHAND MANAGING DIRECTOR MR. MUKUND SAPRE EXECUTIVE DIRECTOR MR. GEORGE CHERIAN CHIEF FINANCIAL OFFICER MR. HARISH MATHUR TECHNICAL DIRECTOR MR. DRUPAD UPADHYAYA VICE PRESIDENT & HEAD OF INVESTOR RELATIONS PRASHANT AGARWAL ASSISTANT VICE PRESIDENT Page 1 of 20 K. Ramchand: I think we are having a meet after maybe two years. I think we need to explain where we are, how we want to do our business, where we think we are going and lots of other things. Let me first introduce everyone. I think most of you know the people on the dais. We have Mukund Sapre who is on the Board and he is also the Executive Director. George Cherian is the Chief Financial Officer and you all may have met him at some point of time. Drupad, he is the head of Investor Relations; Harish Mathur is Chief Executive, Implementation. He also looks after our International Implementation Businesses which is his new avatar. The domestic business is looked after by Mr. Mittal who is available at the back and Prashant, who understands all the numbers that exist in the big balance sheet and asset that we own. To kick off, I am going to talk about what is happening in the sector, because I think it is critical to understand where we are going and what we think is going to happen in the sector in the next two years. The most notable incident that took place a year ago - we got a single majority rule. We have got a leader who is strong and we also have a minister who is extremely active and flush with ideas. He has got a lot of ideas on how things need to be done and is willing to listen, which is very rare in a human being. I think he has probably found the median method of going forward for projects in the highway sector. While I think the government was initially spending a lot of time and effort on solving legacy issues, and you will see that a lot of projects got terminated, cancelled and I think that took a fair amount of time. To fast forward the enterprise of road construction, they actually started off by saying that they will only do EPC. I think there is and you will find that a large number of projects which are done last year were basically awarded on an EPC route, the easiest of them are the two-laning with paved shoulders or without paved shoulders of which a large amount was awarded or tendered out last year. I think the figures show something like 4000 kilometers of awards by the MoRTH and about 3000 from NHAI. Just fairly significant as far as this country is concerned. On the BOT front, which is where we are the most active, I think the award process has been much slower. While there have been tenders, some of them have not received any bids, some of them received bids and we somehow are surprised at some of the bids which have occurred in the last few deals. It is not surprising that we have not won a single one, it also shows that some of the ills of the past in aggressive bidding seem to have come up again, it's probably newer players appearing on the field. And I think all of you all know the situation on what the bids were and how the bids formed out and how there is still a gap between people who think projects should be bid on a premium and for the same project people bidding aggressively. So Page 2 of 20 there is a thought process and there definitely will be some amount of error in a bid if you find such large differences between two players. We now have some clarity on how the government will go forward. One of the biggest casualties in this whole BOT space was that banks and lenders had almost walked out from this sector. The government has talked to them and the government feels that continuing with a toll or even an annuity may not be the most appropriate to get the lenders back on; to lend and finance these projects. And hence, I think the new model which is being proposed is the hybrid model where the government is funding 100%, - they pay you 40% during the construction period and 60% during the operating period. Earlier, they were planning to have a concession period of 10 years, the latest is that it would be about 15 years. So we believe that this is the initial step of getting lenders back on to these projects. The target is about 10,000 kilometers, we had 20 kilometers per day as a target during an earlier minister and I think now we want to get to 30 kilometers. The amount of projects for BOT varies, depending on who is speaking and which report you are reading. It varies from 30% to 50% depending on as I said where it is coming from. But even if we take the lower number of 30%, we are looking at about 3000 kilometers of awards which will probably be done during this year and which is probably more than except maybe for a year when the 20 kilometer was being talked about for awards on a BOT basis. So I think there is a huge scope for the BOT players in this sector. A large number of players have announced that they are not going to be in the BOT business till they consolidate their business and get back to the EPC mode that they were in earlier. So I think that is one extremely positive step as far as our company is concerned. We are of the opinion that this is going to open up a fair amount of business for ourselves. We do have a fair amount of order book but I think we should be able to build on it with a better margins. The other point which is of significance is that we have been listening to a lot of concerns raised by a lot of people, but I think one consistent thing seems to be about a fair amount of debt overhang that was there in the books of this company. We have tried to explain that the debt is not as significant. If you break it down and look at it from what has happened to where the debt has gone, it is not really so frightening as a hard coded number looks. But I think we are also working on that - we have some plans on what we want to do with the debt in our books and I think in the long-term or in the medium-term, we probably would like to see it closer to 3x rather than what it is now. We have some plans to do that including additional equity coming in, probably sale of assets, securitizing some receivables and things of that nature. So I think there is a plan to bring that down in the medium-term to somewhere around 3x. Page 3 of 20 On the third front, which we have as far as the company is concerned, I think all of you are aware that about 2 to 3 years ago, we started looking at international opportunities in an even more focused manner. That business seems to be developing well - while our concession business today is one project in China, we have made inroads into the maintenance part of the business. The maintenance part of the business today that is being structured is mainly for multi-laterals and the multi-laterals have a new form of awarding projects or bidding out projects. Earlier they were more into rehabilitation and construction of projects and once you construct, then the local government looked after the maintenance or the asset during the life of that asset. The bank and the multi-laterals are now looking at a scheme where they actually want you to rehabilitate which takes 12 months to 15 months and maintain it over a 9-10 year period and for which you are actually paid for these services. We have been successful in these projects, we have got some in Ethiopia, we have one in Botswana, we have a smaller one in Abu Dhabi, we recently have a very small project that we have won in USA on maintenance and I think that business is growing and I think that is going to be the focus going forward as far as the international business is concerned. We will look for opportunistic concessions but that is not the focus of the international business at all. Also, recently, on the maintenance company, we are actually being short-listed or we are the lowest for two projects in Madhya Pradesh which is also on the same basis as that long-term maintenance and rehabilitation. So we think that this part of the business is going to become fairly important as far as this company is concerned and I think these are the three broad areas that I wanted to touch upon. I will let Drupad run you through the presentation. There is one more angle that keeps coming up and I think that is about how we do our accounting and so we have asked George to say a few words on our accounting standard/policy, Thank you so much. Drupad Upadhyaya: Thank you Ram. Good evening everyone. I will run you through the presentation which has been made for the meet today. This presentation is different from the one that we have on the website for the quarterly results. This is also now uploaded on the website. The idea is to capture, like Ram said, the common questions that we come across, our thoughts around them, on how we view ourselves, and what do we want to achieve in future. So it will not carry most of the usual slides on numbers and portfolio etc. which are a part of the regular quarterly presentation. In terms of our footprint, we are present across 19 countries, predominantly through Elsamex; most of it being our O&M footprint barring the Yuhe Concession that we have in China, and also the A4 Autovia that came into our fold when we acquired Elsamex. There is a new project Page 4 of 20 in Kenya where we have been declared the lowest bidder, so barring these three I think most of it is the O&M footprint that we have. In India, we have 27 road projects, 5 non-road projects and a total road portfolio of 12,838 lane kilometers; of which 8899 is operational. We have highlighted toll revenues of a few assets like Gujarat road - Ahmadabad-Mehsana- Vadodara-Halol, Noida Toll Bridge, Yuhe and RIDCOR. This is to show the past revenue growth trends on SPV basis. Noida Toll Bridge has shown a CAGR of around 8%, Yuhe about 11% since the time we acquired it, and RIDCOR 25% - predominantly because more stretches have become operational, while the existing stretches have also shown growth. GRICL s 10% CAGR is despite the fact that we witnessed a de-growth for the past two years in Vadodara- Halol due to local conditions. However, this is now getting normalized. Let me move on to the order book situation now - we have a total order book of about US$1.8 billion. The geographical spread of our order book shows that we are present in most of the states in India because we do not have the logistical hurdles of moving our manpower and machinery from one state to another as we outsource our construction activities. In terms of project type, about 34% of the total order book comprises of annuity projects, 55% toll projects and 11% of non-road projects. In terms of how do we source this order book, NHAI is a predominant contributor of the order book, around 52% while non-nhai portion is 37% and 11% is non-road projects. Moving onto some of the metrics on revenue side - for example, the revenue from 2011 to 2015 has shown a CAGR of around 13%, the EBITDA margins have shown a growth and similarly, the net fixed assets have also shown a growth. In terms of the broad sector outlook, like Ram was mentioning, the government plans to finish off the balance, at least the stated objective is to finish the balance NHDP awarding in the next two years. Historically, this has been the awarding activity, last year NHAI did about 3,000 kilometers odd, MoRTH awarded about 4,200 kilometer odd. This year the estimates are between 3,500 kilometers to about 9,000 kilometers depending on various media sources. A member of NHAI during a media interview in March 2015 stated that 9,000 kilometers is the awarding activity that is expected this year with about 50% coming in through the hybrid annuity model. In terms of overall progress, there is balance award of about 17,000 kilometers odd remaining, barring the ones that are being done in April and May, there is still award activity pending and which is expected to pick up in this year and next year. Page 5 of 20 Until now, 27 projects have been awarded, total expenditure was Rs. 21,000 crores for NHAI, FY16 stated target is Rs. 75,000 crores which is an increase of Rs. 55,000 crores, to be funded through increased budget allocations and borrowings. In terms of government initiatives, there has been favorable budget allocations for both MoRTH and NHAI, there is a conversion of existing excise duty on petrol and diesel of Rs.4, and this would bring in additional Rs.400 billion for roads sector. RBI rate cuts have been largely favorable, although transmission is delayed because on an average we have got about 15 to 16 bps of transmission benefit into our books until now. The announcements which have been made and that are likely to kind of benefit the sector in the long run; one is the 5:25 scheme which will obviously help the banks address the ALM concerns but will also help the concessionaire make the payments co-terminus with the revenue growth. The infrastructure investment trust is another such initiative by the government. Also, there was an announcement on Infra Bonds being exempt from SLR and CRR requirements which is likely to bring down the cost of funds in the longer run. Further, the establishment of the National Investment and Infrastructure Fund was announced in this Budget by Mr. Jaitley. The fund would draw down debt and invest it as equity which can further be leveraged to fund infrastructure projects. Just to give you a flavor of where the recent bidding activity has been, for example, what we have seen recently compared to about two-three years ago is that there has been some amount of decrease of competition specifically because there has been a separate window opened for EPC. So, a lot of competition has got transmitted to that part of the sector whereas the core BOT operators are the ones who are bidding for BOT bids. But there has been a variance in terms of wins versus the median range for bids for example, in some of these bids, like you can see the Hospet-Chitradurga, ITNL bid at grant of around Rs. 500 crores. The other players more or less, the L7, L6 were 456, 462 crores, but the pricing disconnect, is that the award happened at a premium of Rs. 18 crores. Only time will tell which way the industry bids will work out. The point we are trying to make here is that there is still some disconnect in terms of the intensity of competition as evidenced by the kind of bids. While it is going to be a window of opportunity for next 18 to 24 months to win selectively higher margin projects. At the same time, this will get mitigated if the competition has one-off players who bid out higher because of the appetite they might have to win newer projects. In terms of risk-sharing metrics the left hand side shows what is the risk sharing between the NHAI and the private sector until now and what are the proposed amendments on the right side. Land acquisition, forest clearance, environment clearance as we all know has been NHAI's prerogative, utility shifting predominantly is a responsibility of or rather shared in a practical sense. Design, construction risk is something that the concessionaire takes along with Page 6 of 20 O&M, Service performance, traffic risk and financial risk. Revenue risk, is taken by Concessionaire in a toll project unless if it is an annuity project that gets taken by NHAI. But due to lot of reasons, for example, around land acquisition clearances, etc., projects were eventually getting delayed and there was a sense that the risk pendulum should kind of, or the certain risk should be absorbed back by the government sector and this was reemphasized in the budget speech made by the Finance Minister. There are two distinct things which the government is doing, one is they are proposing the hybrid model of concession where the revenue risk is borne by NHAI because it's an annuity project. 40% of the total project cost will be funded by NHAI, the concessionaire will fund their balance 60% with suitable debt to equity mix. In terms of other changes in the concession agreement like earlier there was a condition precedent (CP) where 80% of the land had to be acquired and given to the concessionaire, but at times this CP was mutually waived. I think some of the proposed amendments are that this 80% land CP will be made not waivable, the exit norms will be eased further, the total project cost definition will be rationalized so that there is less ambiguity in case there is a termination; and the amounts that the banks will end up funding versus receiving from NHAI. I will take a pause now and request George to explain the ITNL accounting FAQs and then I will come back for the road ahead. George Cherian: Thank you Drupad and good evening everybody. The accounting in ITNL is spread amongst the standalone and the consolidated accounts. As far as the standalone is concerned, what we follow is exactly what everybody else does in the following IGAAP. Since we do not have any projects domiciled in the standalone, the accounting is straightforward and simple. When it comes to the consolidated accounts, you have a choice to go through the IGAAP consolidation which basically involves representing your assets at book value and then going through the elimination process and then you have a consolidated set of accounts. So what we had done about seven years ago when we first started consolidation was to look at how best to represent our assets which are service concession agreements through the accounting mechanism and to make sure that it is appropriately presented in the consolidated statements so that people understand how these two classes of assets which we have, the annuity and the toll can be differentiated and how these can be correctly portrayed. So what I am going to take you through is some background material which explains what is the service concession agreement, it is essentially a contract entered into between a government body and a private party who actually execute the contract. And what we have chosen to do is follow the guidance note issued by the Institute of Chartered Accountants of India. Page 7 of 20 This came about in November 2008 and it essentially followed some principles outlined in the IFRS and the IFRIC 12 which differentiated between two classes of assets. You have contracts which are awarded to you, which are paid for either through an annuity route where the granter of the contract gives you a certain sum of money at periodic intervals and therefore you recover your cost and your margins through the annuity route. There as you know there is a limitation in terms of what your upside is. The other is where you create the asset and then you have an opportunity to collect user fee from the users of the facility and there you could have an upside in terms of how much extra money you can make depending on the extent of users you have for the facility. So the differentiation here is that the first asset, which is an annuity asset is considered as an asset which you receive in return for cash that you are to receive in future from somebody who has awarded the contract. And therefore it takes the form of a receivable in your books, you create the asset on behalf of somebody, you finance the asset and then you spend the money on behalf of somebody else and you then have a right to receive it over a period of time, a specific sum of money at periodic intervals and you receive the money and set it off against the value of the asset that you have created. So it sits in your books as a receivable. So the definition here is the financial asset where you have an unconditional contractual right to receive cash for a pre-determined period, this is recognized as a financial asset. As opposed to this, you have assets created where you do not get a periodic payment from any granter, instead you are given a right to collect a fee and recover your cost and make your margins. And therefore it is indeterminate as to what exactl
We Need Your Support
Thank you for visiting our website and your interest in our free products and services. We are nonprofit website to share and download documents. To the running of this website, we need your help to support us.

Thanks to everyone for your continued support.

No, Thanks