Friday, November 23, 2012

Noida Toll Bridge - A few (disturbing) developments

Noida Toll Bridge has been a favourite of a lot of value oriented investors for a variety of reasons. Those who are not acquainted with the company may please go through this very very detailed report on the company. Specially, as seen in the recently quarterly results, since it has become a net-debt-free company, a lot of people are sitting up and taking notice. I will not dwell upon the troubled past of the company. The company has excellent cashflows and debt is all set to be repaid over the next couple of years. The expectation that good amount of dividend payout will happen from next year onward makes this stock very interesting indeed.

However, a couple of quarters ago, this note in the quarterly result caught my attention.

Click to enlarge

It was quite odd that the Noida authorities were negotiating to modify certain conditions of the agreement. However, the company has not disclosed the details of the same.

Then came the news about 10 odd days ago that the company had hiked the toll rates for the DND flyover. This was completely legal and within the terms of the agreement that the company had with the Government. However, this decision did not go down well with the masses. (Yes, the same thing has happened before too.) There were mass scale agitations (news article) against the company by the Federation of Noida Residents Welfare Association. Other bodies have joined in the agitation too. They have also filed a PIL against the company. Broadly they think that the original MOU (agreement) which the company had with the Government itself is unfair and needs to be scrapped!!! They have "also written to the UP Chief Minister to review the MOU and take back the DND Flyover and make it free" !!!

So can the Government do this? Apparently, yes, its very much possible!! The Government can review and modify terms of an existing project like this 'in public interest'. Please go through this article in which the authors have stated that this is a common practice internationally and they have given examples of the same being done too! (To be fair, I have not come across anything like this being done in India so far.)

In the meantime, the company has succumbed to the public pressure and has rolled back the hike in toll rates.

How does this affect the investors in Noida Toll Bridge? The shareholders have waited for an awfully long time to get any sort of returns on their investment. The report that I posted in the beginning talks about the really hard time that the company went through in the initial phases. Now that good times could start for the company and its shareholders, these new developments have popped in. Few things that could happen..

  • There could be massive hue and cry about the 'unjust' and 'unfair' levy of toll on the DND Flyover with demands that the toll be scrapped. The Government could indeed play its 'in public interest' card and modify the MOU or scrap it completely. The company could then go to court, etc etc. (I think chance of this happening is remote)
  • Also, the company has rights to develop a large parcel of land near the flyover, which could be objected to for a variety of reasons by a variety of parties! :-) (I think chance of this happening is high)
  • Or of course, nothing of the above might happen. However, given the massive publicity and media coverage given to this, the company will find it extremely difficult, if not impossible to raise toll rates in future. (I think the chance of this happening is very high)
  • Of course, the Government might do some minor modifications to the MOU to appease the parties involved and then it could be life as usual for the company. (I think the chance of this happening is fairly high).

The shareholders today do face a terminal risk to their investment in the company. Even though one may argue that the possibility of this happening is remote and probability is small, the risk is such that if it materialises, the entire company and its business model will be finished. Low probability, super high risk event!! I am not at all saying that the company is a surely bad investment (whether it is good or bad is every individual investors' decision), but anyone making investment in the company's shares should keep this risk in mind for sure. The stock is surely 'cheap' and its DCF looks great in an excel sheet, but then these out-of-excel risks are also very material to note and consider in the investment decision making process.

Let us all hope for a proper and fair resolution to this whole Do Not Disturb Flyover issue!

Cheers and happy investing!!



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44 comments:

Vikas said...

Hi Neeraj,
Good that you came with this post.
On more such example.

Few months back, IRB completed the Kolhapur City Road renovation. But not only the public did huge protest, but also politicians and police have kept mum. Though IRB has court order for toll collection, it has not yet started since many months. Of course, there may be stay order from court.

But the point is we should not blindly believe in this Physical toll bridge business and as Prof. Sanjay Bakshi says, try to find toll bridges in other sectors like media / IT.

Regards,
Vikas

Neeraj Marathe said...

Totally agreed Vikas.
cheers!
Neeraj

Mahendra said...

Same thing happen with different reason with Ashoka Buildcon Ltd.

"Ashoka Buildcon Ltd has informed BSE that the PWD, Government of Maharashtra has withdrawn the toll collection rights for the project viz. "Improvements to the Ahmednagar- Karmala Road State High Way No. 141 Km 0/0 To 80/600 Ahmednagar District Border under BOT Scheme (with toll rights )" prematurely, which were to expire on November 04, 2015. The notification states that the lending interest rates have been changed by the Reserve Bank of India and consequently as per contract provisions, the concession period in view of new lending rates reworked, has ended before November 14, 2012 and therefore considered it expedient to cease the effect and operation of the notification dated May 15, 2002 authorizing toll collection upto November 04, 2015.

The Company is proposing to take remedial action as permissible under law."

http://www.bseindia.com/corporates/anndet_new.aspx?newsid=2769fce8-148d-4d5c-a1c5-c2f4cd32b145

Mokhtar said...

Hi Neeraj,
All this is really a worrying sign. It all looked so rosy prior to this and NTBCL looked like such a risk free company to invest in with high returns. But this political trouble spoilt the party.

In any case, I assume the NTBCL knew what they are getting into before getting into this PPP BOT model. This toll business is not an easy business in India; local issues arise, people avoid paying toll, so one has to deal with a lot of law and order issues. They won the contract, they borrowed the money, they laid the road, they repay the debt and after years they begin to earn; so it is not easy to take away this from them. It would be a big blot on NHAI and other government bodies if this PPP fails because our country needs these roads for its progress. About 7,100 km (about 80-85 projects) of BOT highway projects are due to be completed by the end of this year. If anything, the size of the pie will only get larger in the years to come.

Anonymous said...

"NTBCL looked like such a risk free company to invest in with high returns"

Are you serious?

We are a poor country reeling under inflation! Toll fees are really seen as a Jiziya tax by the commoner, who thinks he is already being looted by the govt in many ways (and he is right). ALL toll bridges in India will eventually be FREE. Its a given! Politician-builder nexus can last long, but not forever. Courts are also on the side of common man.

Under such circumstances, what on earth made you guys think of road toll companies as sustainable investments in the first place. Such black swan events are bound to happen for most/all these companies.

Rohit Chauhan said...

Any private investor would expect a 10%+ something more for the risk undertaken. 8-10% is the risk free return...so in indian context any BOT project would need to earn 12-14% to be viable.
now as anon says, this is loot and unfair to the public misses the point completely - that private capital will flow into a sector only when the risk adjusted returns compensate the investor for it. if it does not happen, then this PPP model will not work and goverment will have to build the infra (as it has done in the past). ofcourse 20% returns are not fair returns in begin with

from the hue and cry in the media against all such projects on the greed of the operators, i think the tide is turning. the goverment has never been one to practise sound economics - protect the public and also ensure adequate returns.so we will see some populist measures and NTB type companies will take a hit.

the end game is that we will see private capital will shy from such projects and we will wonder 10 years later why we continue to have poor infrastructure.

we already see this playing out in the power sector

Neeraj Marathe said...

Hello Mahendra,
Thnx for the info. I was not aware of it..

Hello Mokhtar,
Yes, i agree that the risk is very remote.

Hello Anon,
Yes, i am serious!

Hello Rohit,
Yes, completely agree with you..


cheers!
Neeraj

shri said...

I agree with Anonymous. I really wonder what made value investors consider Noida toll bridge for investment. This was not a black swan event. Anybody reading newspaper over 2-3 years could see it coming.

Neeraj Marathe said...

Its really great that you saw it coming Shri. Hats off.
Neeraj

Rohit Chauhan said...

Hi neeraj
I think this a great learning experience. if a business earns barely 10% on equity (as noida toll does now , forget the 20% they have on paper which is meaningless) and the customer (common man) thinks they are being looted versus a business like titan or ITC which earns 50%+ on equity and the customer likes the company ...then investors and capital will move to those kinds of businesses.

this story has a lot of implications beyond noida toll ...a company like ILFS transport and a host of companies which are building roads on BOT, will re-think if goverment goes back on the contract.

what stops a local government from asking the operator to get lost after 10 years , so that they can appease their voters

rgds
rohit

Neeraj Marathe said...

:-) Excellent perspective..totally agree..
cheers!
Neeraj

Akash Parmar said...

Thank you so much for bringing this to light. Without your post I would not have noticed this development and the absurd logic behind it.

:)

Vidyanshu Pandey said...

Hi Neeraj, Rohit -
Thanks for doing such a rational and unbiased assessment. I agree with Rohit, India has a history of being populist, the tata group lost their airlines to Indira Gandhi. We are nearing elections in 2014, so populist measures can be increasingly expected. I think Rohit's comments have a lot of merit in terms of baking these populist considerations into your qualitative assessment scorecard while buying such companies. BTW, I was thinking of buying NTB if the price touched around 21 again ;) so, Thanks I will be looking at this aspect a lot more closely.

Best, Vidyanshu.

Sachin said...

Neeraj,
We should think from peoples perspective who have to pay toll daily. Peoples in Noida/Delhi who commute daily on that bridge has different perspective and they put more pressure (political) on business as no one likes to pay money.

And as you know Indian politics is more driven towards appeasement than what is good for long term.
This is like a fight between LONG term view of value investor vs SHORT term view of politicians. And in the end politics will mostly win unless promoters have political backing (which ultimately means politics always wins).

Sachin

Neeraj Marathe said...

Hello Akash,
Glad that the post added some value. Hope the post itself was not absurd! :-D

Hi Vidhyanshu,
Yes, Rohit has been tracking the stock since quite a long time. His thought process has always been wonderful.

Hello Sachin,
Well, i would disagree with the 'we should think from people's perspective' part. Nobody is making it compulsory to go on the bridge. The company has spent money building it and should be fairly compensated. But i agree on the 'politics always wins' part..its just that i cannot write these things in the blog post! :-D

cheers!
Neeraj

Anonymous said...

'Do Not Disturb' was really funny.

Ninad Kunder said...

I think the the definition of the aam aadmi is stretched to suit everyone. If a guy driving a airconditioned car is the common man then I wonder who is the rich in this country.

Personally I think there are a different set of variables at play than what appears on the surface. I wonder what Bhartiya Kisan Union has to do with a toll road. I m sure the poor farmer isnt the one who is driving his car everyday and paying toll.

Neeraj Marathe said...

Hi Ninad,
Ya, completely agree with you. However, these 'different set of variables' cannot be discussed on a public forum since they r too much controversial, right..lets do that the next time u invite me for a drink or two. :-)
cheers!
Neeraj

Anonymous said...

This bridge was conceived in the 90s when lending money at 15% would be considered a favor. Also this was to be a show case project at that time and hence crazy 20% return. If lenders are allowed to be repaid with security why should equity holders be not allowed to earn a fair return?

If we are not to become a Banana Republic politics should not be allowed to prevail over market forces.

Rohit Chauhan said...

neeraj
i think your post is very educating ..more so from the comments we have got.
i think it will be smarter to sell the stock :) ..this company will never make money. its customers (common man) will always think they are being cheated.

better to buy a under garment company which makes 50% return on capital which the customers like :)

rgds
rohit

Mokhtar said...

Why the fuss about paying for a toll road. As Neeraj said nobody is making it compulsory to travel on that road. Whenever we travel to Mumbai we have to travel on the vashi bridge, which seems like such a waste paying for the toll there, but we still do and it has been there forever. Still to figure why we still pay 30 bucks toll after so many years.. The toll collection has been over 4 times the bridge cost ever. In comparison to Noida toll which is more sophisticated than the Vashi bridge, which is cheaper (Rs23 i guess)and which is only 10 years into earning just doesnt seem fair. I differ on the polical thoughts and I see politics on the side of NTBCL.

Vishal Mittal said...

Hi,

I have a contrary view on Noida Toll.

1. As residents of Delhi know, there are few good alternatives to go to Noida from Delhi and vice versa. So theoretically people can opt for other alternatives, there is no real choice. Unlike toothpaste, where Colgate has to work hard to compete with Pepsodent to earn its RoE, Noida is a quasi monopoly.

2. Why should a monopoly/ utility be allowed to earn 20% RoE when risk free bond rate is around 8-9%. The government goofed here and it should have linked the RoE to some premium over risk free bond rate at the initial stage. Don’t know what should be the way forward?

3. The company went into CDR. I supposed it must be public owned PSU banks who would have to take the haircut.

4. Is the 20% RoE calculated after or before management compensation? :) The company paid Rs. 1.3 cr as salary to CEO and 1 manager in 2006, 3 cr in 2007, 2 cr in 2008 !! Is the business of running the toll so great as to require such great talent? Now thankfully that is reduced to 80 lacs only :) But look at Board of Director sitting fees. Typical fees is around rs. 2 lacs in FY 2012, while same for HDFC Ltd is Rs. 1 lac in FY 2012. I would to love to run noida toll for 2 lac while hate to run hdfc for just 1 lacs !!

Cheers
Vishal Mittal

Neeraj Marathe said...

Thnx for ur perspective anon..

Rohit! :-) Sarcastic as usual!

Thnx for the perspective Mokhtar. Vishal has offered excellent counter-arguments here i think..

Thnx Vishal,
Very interesting perspective..i totally agree that the govt goofed up in the first place, at the time this contract was conceived. Now, the question is..who shud suffer for this? The govt or the common man who goes up and down the bridge every day or the shareholders of the company?
I am very sure that everyone will have a different opinion about this. Its quite relative, i totally agree.
Btw, until coupla years ago, they used to pay something like 4 cr bucks to the ceo/MD as remuneration. Wonder exactly what he did to deserve this much! :-)

cheers!
Neeraj

Vishal Mittal said...

The MD deserved it. You see, the office is right up the toll gate. The poor fellow used to peep out of the window the whole day and night counting and checking out no. of vehicles passing by! 365 days a year * 24 hours a day, and you grouse piddly 3 cr renumeration on 10 cr PAT then !!

Neeraj Marathe said...

Hahaha! i was just imagining the MD's head bobbing in and out of his office window, counting cars. :-)
cheers!
Neeraj

Sachin said...

Vishal Mittal,
LOL...Where is your blog man ....
Excellence sense of humor...still i am laughing... MD's head in and out...
Sachin

Vishal Mittal said...

Thanks Sachin. My blog is
http://altaisadvisors.com/blog/

endlesszest said...

Hi,

I was just checking about corporate bonds listed on BSE and found that bonds of Noida Toll Bridge Co. are listed. Face value of Rs.5000. BSE code - 912453.

Here is what one of the circulars say, "The date of maturity for the DDB shall be 3.11.2015 and the maturity value per bond calculated at the revised interest would be Rs.20,715/- per bond (subject to deduction of tax, if applicable)."

Link - http://www.bseindia.com/markets/MarketInfo/DispNewNoticesCirculars.aspx?page=20051213-28

Now the last traded price is around Rs.9301. I was wondering how they are trading at such discount? Is it because of the concerns you mentioned in the post or am I missing something? I am new to bonds.

Regards,
Varun

Neeraj Marathe said...

Hi Varun,
I had chkd it out..but thr is virtually no liquidity. If i remember right, the parent (ILFS) holds most of these..
cheers!
Neeraj

Anonymous said...

Thanks Neeraj for the blog. This is very useful. I was wondering what happened to the share price of the company. But what is happening is really not fair for the development of the Country. Without profit how the companies could sustain and who will invest the money. Also the renumeration for the MD is too high...

Neeraj Marathe said...

Hi Anon,
Yes, disturbing developments for sure..
If i remember right, the MD's remuneration has been lowered since the last couple of years. Gotta confirm that of course..
cheers!
Neeraj

Vishal Bhatia said...

At the expense of being classified anti national - We as a country do not like to follow rules. Our favorite game is cricket and we have highest number of recorded traffic deaths.
Businesses serving public or (quasi)government are prone to having voting interest taking preference over economic interest. I club fiscal profligacy with voting interest.
Value investors in their quest for profitability, sustainability and predictability may overlook this fact.
Until you find your roads safer and improvement in medals tally at the olympics such businesses are best avoided.

Rishit said...

The way I see it is this. Yes there can be agitations on toll hikes in the short term. But ultimately prices always increase to adjust for inflation or no business can ever happen. So traffic numbers will increase along with the toll hikes (assuming only adjusted to inflation). Now the argument about it becoming free while it maybe a possibility, but in that case the company along with its shareholders have to be compensated for their initial investment adjusted to present value along with a number for running the business. If this does not happen then its a case of out and out cheating by the government. Forget the 20% return but even if i assume a 10% return, safety is sufficient as per my thinking

Mokhtar said...

Hi Neeraj,

The results of third quarter have been as expected showing positivity.
But again there is this same note u pointed towards in ur blog in the quarterly results; Noida authorities were negotiating to modify certain conditions of the agreement. However, the company has not disclosed yet again if they have reached an agreement.
Do u have any further updates or any information to share with us regarding Noida Toll Bridge.

Mokhtar said...

Hi Neeraj,

The results of third quarter have been as expected showing positivity.
But again there is this same note u pointed towards in ur blog in the quarterly results; Noida authorities were negotiating to modify certain conditions of the agreement. However, the company has not disclosed yet again if they have reached an agreement.
Do u have any further updates or any information to share with us regarding Noida Toll Bridge.

Neeraj Marathe said...

Sorry for the late response Mokhtar. I do not have any further updates on the company, other than the ones you yourself have written.
cheers!
Neeraj

Mokhtar said...

Latest news I heard is of toll being free during peak hours till February 22. From Noida to Delhi route only; following a request by the Noida police. This seems to have good and bad implications. Bad being that NTBCL has to bend to political pressure in terms of its business(wonder how often will it happen in the future).
Good being that more commuters would travel on this toll bridge now since its free and they would realise its worth in terms of time saved;which could bring business in the future(hopefully).

Girish Deshpande said...

Hi,
Do you think this may become good Cigar butt kind of investment. The debt is almost paid and now the company may start generating FCF. Those who buy now at the depressed price ...will they get benefit at the cost of old timers selling out? Has any one done worst case analysis...for example if they company cannot raise the toll for next 5 years and if we assume moderate growth in traffic on this road...what would be the intrinsic value for new investor entering now? If any one has done such analysis pl let me know. After all every investment is good investment at right price.

Neeraj Marathe said...

Deshpande saheb, namaskar :)
Yes, i totally agree with your line of thought. Every company can be a good investment at a price.
So if you think about Noida Toll, with the assumptions you have stated, it can be a decent investment at cmp.
The only problem here is that there are some unknowns which can really screw up the investment in the company. If you are comfortable with the same and dont think these will materialise, the stock is attractive at present prices.
cheers!
Neeraj

Mokhtar said...

Hi Neeraj,

News:

"Two wheelers toll rates have been increased from Rs 11 to Rs 12, for cars from Rs 22 to Rs 25, LCVs from Rs 45 to Rs 55, bus and truck will now shell out Rs 70 from earlier Rs 55. Large vehicles will pay Rs 100 from existing Rs 75 and extra large vehicles from Rs 95 to Rs 135. The hiked rates are effective from today," said Anwar Abbasi, spokesperson, NTBCL.

Does this change your unknowns to certain extent? This seems to be a big positive considering independent decision making by the company leaving apart political interference and mass protests.How do u see it after this decision?

Neeraj Marathe said...

Hello Mokhtar,
Well, they increased toll on April 1st..so lets hope it was not an April Fools day joke! :D
On a serious note, lets hope the hike stays..heres a news article fwded by a friend...


BKU gives DND flyway 24 hours to kill toll hike
Agitated over the toll rate hike on the Delhi-Noida Direct (DND) flyway, representatives of the Bharatiya Kisan Union (BKU) staged a protest and submitted a memorandum to roll back the prices on Tuesday.
BKU representatives also threatened to remove the boom barrier and make the flyway toll free if the prices are not rolled back.
On Tuesday morning, as many as 40 farmers forcefully lifted the boom barrier at DND toll plaza. The Noida Toll Bridge Company Ltd, the operator of the flyway that connects Noida to Delhi, had increased the toll rates by up to 15 per cent from April 1.
"We are giving them 24 hours time. If they don't roll back the increased toll then we will forcefully make the DND toll free on Wednesday. In November, when the DND collected increased toll for eight days, we demanded them to deposit the extra money with the district administration, but we are not sure if that has been done," Mahinder Singh Chaudhary, a BKU member said.
City magistrate Sanjay Chauhan along with circle officer Shivram Yadav also reached the DND flyway to pacify the farmers and negotiate with them. Police force from sectors 20 and 24 police stations along with a team of PAC was deployed to check any untoward incident.- Bunty Tyagi

Mokhtar said...

Yes lets hope positive things happen for the shareholders.

You can also read this;

http://www.hindustantimes.com/News-Feed/Noida/Farmers-lift-boom-bars-seek-DND-toll-rollback-in-24-hours/Article1-1037519.aspx

http://www.business-standard.com/article/pti-stories/bku-demands-withdrawal-of-toll-on-dnd-flyway-113040200509_1.html

Mokhtar said...

Yes lets hope things get better from here on for the company and shareholders.

You can read this too;

http://www.business-standard.com/article/pti-stories/bku-demands-withdrawal-of-toll-on-dnd-flyway-113040200509_1.html

http://www.hindustantimes.com/News-Feed/Noida/Farmers-lift-boom-bars-seek-DND-toll-rollback-in-24-hours/Article1-1037519.aspx

Mokhtar said...

Read below the CM's message; If he wants to accomplish all of this then any political interference in the functioning of this PPP with NTBCL will be ridiculous.



In a move to develop the infrastructure of the state, Uttar Pradesh CM, Akhilesh Yadav is planning to set up an infrastructure development fund from parts of profits from Noida, Greater Noida, GDA, LDA and other agencies. He also assured that the farmers’ interest will be protected.
The CM announced this move at the inaugural program of Noida, Greater Noida and Yamuna Expressway Industrial Development Authority’s project which is worth Rs. 3,337 crore.
Rural development is necessary for the development of the state and Government will emphasis on the policies and also will address the issues of farmers.
CM informed that the state government has withdrawn the cases against farmers at Bhatta Parsaul and other places. It is also affirmed by him that justice will be provided to them and will also seek their contribution to the state’s growth.
He also mentioned about the Amul for dairy development to benefit farmers. Amul has been doing business worth Rs. 40 to Rs. 50 crore monthly in villages in other states. He assures to open such centers in UP and also declares interest-free loan scheme for dairy development.
While launching OPD services at Greater Noida hospital, he contacts the chief medical superintendent through video conference and asked him to make sure all the patients are getting proper treatments at the OPD.
He also assures that the state government is taking all necessary steps for the progress of the state. He says few industrial units have already been installed in Noida and Greater Noida and expects to open few more as well.
He is planning to pull more investors to the state. He also instructs the Noida officers to solve the traffic problems in the area.