Case Study - Bharat Infrastructure Limited

8/12/2019 Case Study - Bharat Infrastructure Limited

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Bharat Infrastructure Limited

SOTP Valuation Case Study 1


Transaction OverviewHitarth scratched his head and took another sip of coffee. He listened to the rain splashing against

the glass building and sighed. Had he got access to the groups CFO, Hitarth wondered, he would

have received enough information to prepare a reasonable bid. Instead he was procrastinating by

checking his messages and studying the weather map of Mumbai. If only Neil were not on vacation,

Hitarth mused.

An alumnus of IIM Calcutta, Hitarths conviction on Indian growth story had made him turn down a

job offer in a London based bank during final placements in order to accept an M&A banking profile

in Mumbai. Unlike some of his less fortunate classmates, Hitarths career weathered the post-

Lehman crisis well. Having worked on over $1 billion worth of cross-border M&A deals, Hitarth

joined Firestorm Capital, an offshore private equity fund focused on India, in 2010. Firestorm Capital

was one of the best performing private equity firms in India, and Hitarth was part of its core

investment team.

Hitarths current assignment involved evaluating a potential investment in Bharat Infrastructure

Limited (BIL), a large Indian infrastructure conglomerate. Two days ago, Neil, a partner in Firestorm

Capital, had forwarded some information on the group and had requested Hitarth to prepare a

presentation on a potential private equity transaction in BIL. The transaction entailed a primary

investment of $25million in the group and a secondary purchase of 5% stake of an existing financial

investor.

Hitarths primary focus was todetermine fair equity value of the company for the purpose of the

transaction as the deadline to bid for the transaction was nearing. Hitarth picked up the phone and

called his mentor, Prof. A. Mukherjee of IIM Calcutta.

The Indian Infrastructure IndustryThe Indian Infrastructure Industry evolved from being only government funded to a public-private

partnership (PPP) model after the government opened up the sector for private investors in the

eleventh five year plan (2007-2012). This wave ended up with almost every large corporate house in

India having a significant exposure to infrastructure industry and a new crop of infrastructure funds

being raised. The twelfth five year plan (2012-2017) envisaged a requirement of USD 1 trillion of

investments (Exhibits 1 and 2) in the physical infrastructure of the country, out of which almost 50%

was planned to be funded by the private sector.

The share of private investment in the total investment in infrastructure rose from 22% in the Tenth

Plan (2002-2007) to 38% in the Eleventh Plan as large pools of foreign flows funded the balance

sheets of Indian infrastructure companies (Exhibit 3). However, as Indias GDP growthmoved from

8-9% in 2009-2010 to sub-5% in FY2013 and FY2014, inflation rose and the Indian rupee depreciated,

the effect of implementation issues in infrastructure projects and lack of required reforms in the

sector magnified and eroded returns of most private equity infrastructure funds. Equity investments

in infrastructure dipped sharply thereafter leaving most companies with fractured balance sheets


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and unfinished projects resulting in highest number of corporate debt restructuring cases in 2013.

The Indian Infrastructure sector soon became the synonym of crony capitalism.

But in 2014, as the new Modi government began laying the groundwork for structural reforms across

sectors, the infrastructure sector got rerated overnight and started witnessing huge foreign flows

into listed infrastructure companies. After a dismal performance of private equity investments ininfrastructure companies during the last wave, it was dj vu for Hitarth when he received an email

from Neil with information on BIL.

Company BackgroundBharat Infrastructure Ltd (BIL) is a unique player in the Indian infrastructure space. The group was

founded by a few premier financial institutions in 1978. Over the years, the group diversified its

shareholder base to include other prominent Indian and international entities. BIL, having

pioneered the concept of public-private partnership model, evolved into an end-to-end solution

provider in various infrastructure segments such as transportation, energy, ports and urbaninfrastructure. While the group is a sponsor and developer of projects in a wide array of

infrastructure sectors, its financial services arm continues to play an important role in the financing

of infrastructure projects. In addition, BIL is also playing an active role in the social infrastructure

sectors such as education, environment and employment generating schemes.

Exhibit 4contains a brief presentation on the group.

Business ModelThe group started its operations with two main verticals: financial services and infrastructure. As the

infrastructure segment developed across various sectors, projects were initially domiciled inindividual special purpose vehicles (SPVs). As an increasing number of projects came into its fold, the

management decided to restructure these projects into sector verticals. After a period of time, such

sector verticals, having achieved meaningful scale and critical mass, were spun off into independent

legal entities in the form of sector holding companies e.g. most road SPVs were grouped under a

road company and most energy SPVs were housed under a power holding company. This was an on-

going restructuring exercise and some of the sector projects were still held by BIL at present.

Exhibit 5 contains the holding structure details and BILs shareholding in underlying companies.

Exhibit 6 contains the abridged financial statements of the company. The groups strategic

investments into projects and sector platforms are available in Exhibit 7.

On closer scrutiny of BILs FY2014 annual report, Hitarth found that the group also owns an office

complex and a retail mall, from which it generates a rental income of INR 532mn and INR 657mn

respectively. In addition, BIL recently started the practice of charging royalty for its brand from its

operating subsidiaries and generated an income of INR 875mn from it in FY2014.

Roads Sector: Bharat Roads LimitedBharat Roads Limited (BRL) is one of the largest BOT road operators in India with 6,000 km under its

management worth INR 150bn across 20 projects, 35% of which are operational, while the majority

of the remaining projects are expected to be operational in the next 2-3 years. Each project is


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housed in an independent SPV. The company charges 3-4% of project cost for project advisory and

management services, which is paid by the SPV developing the project.

BRL has a good mix of annuity and toll projects, which positions it well to benefit from any upside in

toll collection due to accelerated economic growth; at the same time, the company is able to enjoy

stable cash flows from annuity projects. The momentum in road project awards is expected to pickup, given the ambitious target of 25 km/day of road construction set by the government. BRL is

expected to be a key beneficiary of this.

BRL is listed on Indian bourses with a market capitalization of INR 58 billion as of July 31, 2014. A

road analyst had mentioned to Hitarth that the SOTP valuation of the companys BOT projects

coupled with the value of its engineering, procurement and construction (EPC) services business

(8xFY16E P/E) estimates the companys intrinsic value range from INR 75 to 82 billion.

The following is a summary of consensus estimates of the companys valuation parameters.

Exhibit 8contains the consensus valuation estimates of BRLs peers.

Power Sector: Bharat Energy LimitedBIL created Bharat Energy Ltd (BEL) to house all energy related activities and investments to build a

platform that can be deployed to quickly agglomerate power generation capacities to become a

significant player in the Indian power market.

BEL is engaged in development of a number of power projects across the country on a variety of fuel

sources.

Capacity Fuel Source COD Project Cost D/E BELs Stake

MW FY INR million %

Project 1 600 Gas 2016 28,341 75% 50%

Project 3 400 Coal 2016 15,429 70% 5%

Project 4 1400 Coal 2018 74,328 80% 26%

Project 5 600 Coal 2018 31,295 80% 26%

Project 6 1800 Coal 2019 93,943 80% 26%


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Project 7 400 Gas 2018 18,561 75% 50%

Project 8 80 Hydro 2016 6,048 70% 33%

Project 9 500 Coal 2017 26,000 80% 5%

Project 10 55 Hydro 2019 4,025 70% 100%

Project 11 20 Biomass 2016 1,093 70% 100%

Project 12 20 Biomass 2016 1,039 70% 100%

Project 13 60 Wind 2015 3,346 75% 100%

Project 14 80 Wind 2015 4,573 75% 100%

Project 15 150 Wind 2016 8,476 75% 100%

Project 16 400 Wind 2017 22,350 75% 100%

Project 17 300 Wind 2018 18,101 75% 100%

The status update of projects as of July 31, 2014 is mentioned in Exhibit 9.

Each power project is housed in a separate SPV and BEL acts as a holding company of all SPVs. BEL

also provides project advisory, bidding and development services in the power sector from which

BEL generated revenue of INR 500mn in FY2014, of which 70% is attributable to projects of its own

SPVs.

BEL had a debt of INR 20bn in its stand-alone balance sheet as of March 31, 2014 and is looking to

improve its debt-equity ratio in order to achieve financial closure for remaining projects. The

company is in the process of raising funds at the holding company level as well as at the SPV level.

The management of BEL told Hitarth that the company has already received bids from several

private equity players valuing the company between INR 25bn-30bn and the transaction is nearing

closure. Hitarth noted that it may be useful to compare valuation parameters of the companys

peers listed on Indian bourses mentioned in Exhibit 10.

Financial Services Sector: Bharat Finance LimitedBharat Finance Limited (BFL) is a financial services company engaged in brokerage services, project

debt syndication, structured finance and corporate advisory services. BFL acts as a nodal agency for

BIL group for financing of all its infrastructure projects. Exhibit 11contains key financials of BFL and

Exhibit 12 contains its peer comparison matrix. Hitarth wondered how he could use the given

information to value BFL.

Ports Sector: Bharat Ports LtdBharat Ports Ltd (BPL) has been set up with the objective of consolidating existing port segment

assets in the group and to create a port sector platform. BPL is creating a diversified portfolio ofassets, services and strategic alliances through development and implementation of port


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infrastructure assets. As per Maritime Agenda 2020, the traffic at Indian ports is expected to grow at

a CAGR of around 14% in the next 10 years due to strong demand led by infrastructure and trade

growth.

Exhibit 13contains the investments in the port sector made by BPL.

BPL had total assets of INR 4.1bn, net worth of INR 1.2bn and borrowings of 2.7bn as of March 31,

2014.

By the time Hitarth finished the phone call with Prof Mukherjee, he had formulated a framework to

value BIL. He opened his laptop and began examining the comps sheet for the infrastructure sector

prepared by a leading research house (Exhibit 14).


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Exhibit 1: Projected Investment in Infrastructure during the Twelfth Five Year Plan

Exhibit 2: Sector-wise Investment Pattern: Eleventh and Twelfth Plan (INR Billion at current prices)

Source: Planning Commission

Exhibit 3: FDI in infrastructure over past few years (INR billion)


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Exhibit 4: Investment Presentation


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Exhibit 5: Holding Structure of BIL Group

Company Sector BILs Stake BILs Investment (INR mn)

BEL Power 90% 7,500BFL Financial Services 90% 15,000

BRL Roads 45% 5,600

BPL Ports 85% 1,320

Exhibit 6: Abridged Financials of BIL as of Mar 31 , 2014

INR mn

Net Assets 3,700

Net Investments 69,680

Current Assets (ex cash) 6,238Cash and Cash Equivalents 6,764

Net Worth 24,760

Secured Loans 48,325

Unsecured Loans 5,625

Current Liabilities 7,672

Revenue 12,355

PAT 3,245


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Exhibit 7: BILs Strategic Equity Investments

Name of Company Sector Cost as of Mar 31, 2014 (INR mn)

Bharat Education Ltd. Education 175

Bharat Engineering Ltd Engineering 1495

Bharat Finance Ltd (BFL) Financial Services 10,960

Bharat Brokerage Services Ltd Financial Services 985

Bharat Investments Ltd Financial Services 2,525

Bharat Capital Ltd Financial Services 530

Bharat Consulting Ltd Infra Advisory 125

Bharat Ports Ltd (BPL) Ports 1,320

Supreme Ports Ltd Ports 350

Highpoint Shipyard Ltd Ports 565

Bharat Logistics Ltd Ports 224

Bharat Energy Ltd (BEL) Power 2,560Bharat Wind Power Ltd Power 965

Global Power Ltd Power 1,850

Gujarat Power Company Ltd Power 1,330

Orissa Power Ltd Power 795

Bharat Roads Ltd (BRL) Roads 4,530

North East Highway Ltd Roads 355

J&K Expressway Ltd Roads 11

Pune Metro Rail Ltd Roads 704

Bharat Technologies Limited Technology 60

Bharat Water Ltd Water 700

Exhibit 8: Peer Valuation Matrix for BRL

Road Company 13 11.6 1 0.9 8.2 8

Hindustan

Construction

NA NA 2.1 2.3 NA NA

IVRCL Infra NA NA 0.6 0.7 NA NA

Nagarjuna

Construction36.5 13.9 0.7 0.7 1.9 4.9

Simplex Infrastructure 19.9 11.4 1 0.9 5.3 8.7

AVERAGE 10.7 2.2 1.1 1.1 NA NA


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Exhibit 9: Status of BELs Power Projects

Project # Environmental Clearance? PPA Signed? Fuel Source Tied Up? Financial Closure?

1 Y Y Y Y

2 Y N N Y

3 Y N Y N

4 Y N Y N

5 N N N N

6 Y Y Y N

7 Y Y Y Y

8 Y N Y Y

9 N N N N

10 Y Y Y Y

11 Y Y Y Y12 Y Y Y Y

13 Y Y Y Y

14 Y Y Y Y

15 Y N Y N

16 Y N Y N

Exhibit 10: Peer Valuation Matrix for BEL


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Exhibit 11: Key Financials of BFL

INR million FY2011 FY2012 FY2013 FY2014

Net Worth 6,304.0 6,481.1 7,248.7 8,010.5

YoY growth (%) 3% 12% 11%

Total Assets 41,888.5 33,306.5 33,810.2 42,809.0

YoY growth (%) -20% 2% 27%

PBT 904.9 2,337.2 2,353.5

Taxes 287.9 764.1 725.2

PAT 842.0 617.0 1,573.0 1,628.4

YoY growth (%) -27% 155% 4%

Dividends 366.0 805.5 866.5

YoY growth (%) 120% 8%

Shares Outstanding (mn) 131.6 132.8 132.8 132.8

Exhibit 12: Peer Valuation Matrix for BFL

Exhibit 13: Investments in Port Sector by BPL

SPV Investment (INR million) Stake (%)

Highpoint Shipyard Ltd 565 51%

Dahej Port Ltd* 125 25%

Khambat Port Ltd 1374 100%

Dahej SEZ 849 100%

*Listed on Indian stock exchange with a market cap of INR 1.2 bn as of July 31, 2014.


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Exhibit 14: Infrastructure Sector Valuation Matrix

P/E (x) EV/EBITDA (x) P/B (x) ROE (%)

2015E 2016E 2015E 2016E 2015E 2016E 2015E 2016E

Highways

Sadbhav Engineering 27 20.2 11.3 9.7 2.8 2.4 11 12

IL&FS Transportation 9.8 9.1 9.7 8.4 0.9 0.8 9 10

IRB Infrastructure 11.4 10.6 7 6 1.6 1.4 14 14

Ashoka Buildcon 20.5 18.3 10.1 7.3 1.7 1.5 8 9

Diversified Infra

GMR - - 12.8 9.3 1.7 1.7 -11 -3

JPA 68.2 15.7 9.8 8.5 1.2 1.2 3 8

JSPL 11.5 9.4 8.2 7 1.2 1.1 11 12

EPC

Punj Lloyd - - 6 5.5 0.6 0.6 -3 -4

KEC International 15.8 11.9 7.4 6.3 2.2 1.9 15 17

Kalpataru Power 12.7 11 7.3 6.2 1.1 1 9 10

Engineers India 20.1 16.5 18.7 11.9 3.6 3.2 19 20

Logistics

Adani Ports 20.9 16.4 15.4 12.9 4.3 3.5 23 23

Concor 19.9 17.3 15 12.8 2.9 2.6 15 15

Case Study - Bharat Infrastructure Limited

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