Friday, March 14, 2014

Noida Toll Bridge - The Alternate View

There is a lot that an investor can learn from this fine looking gentleman. Harvey 'Two Face' Dent is one of Batman's most interesting villains. Its not that he has a split personality, but his personality gets changed completely due to some events. The point is, he represents both sides of the coin. And that's what an investor should always try to look at, in my opinion.
I too try to do the same with every company i invest in (or reject). The bull case as well as the bear case should be thoroughly investigated, without any bias or preconceived notion. I agree its something difficult to do, but once you leave your ego aside, its is surely not at all impossible.

I had written about Noida Toll Bridge quite some time ago. By and large, investors have been quite negative on it due to a variety of reasons, one of which I had also written about. Also, since the price has not moved since years, it is perceived to be a value-trap. Well, so far, it has been just that, but interesting things are now happening. Looking at the other side of the story would be an excellent idea.
I would recommend that one should go through this extremely detailed report to get a proper background on the company, its agreement with NOIDA authorities and the unique aspects of the agreement, difficulties it faced in earlier times etc. The report will give excellent background to anyone who wants to understand the company better (and also reduce my writing efforts. Yesss, i am lazy!)

A fascinating set of numbers..

Over the past few years, everything other than the stock price has improved!!
Of course, this has happened due to inherent risks attached to the business as well as lack of clarity on several key aspects of the agreement and its proposed changes. The stock price just kept drifting down.

So has anything changed which will cause the stock price to not drift down? Or better still, to go up?!

Let us invert the entire thought process.

The standard investment arguments made in favour of the company include;
  • Large shortfall in recovery of more than Rs.2400 cr, which will result in the bridge staying with the company for a substantial long period of time.
  • Possibility of a one-time settlement to settle this shortfall.
  • Huge margin of safety due to development rights to 99 acres of land, whose value is much more than the current enterprise value of NTBC.
  • Good growth in traffic, plus increase in toll rate, leading to substantially high cashflow for the company.
While all these seem quite yummy, there is absolutely no guarantee that anything of these may really happen. So let us completely drop them all!!

Let us make some really depressed (and depressing) assumptions..
  • The company will get no extension for operating the bridge. The bridge will only last with the company till 2028, post which it will be handed over to the Government.
  • The company will get zero compensation for the shortfall (to which it is entitled to, as per the agreement).
  • The company will not any development rights to the land (to which it is entitled to, as per the agreement).
  • There will be zero growth in traffic and zero growth in toll henceforth, till 2028!!
  • The company will have to spend Rs.5 cr on maintenance of the bridge every 5 years
I totally agree that these are unreasonably 'conservative' assumptions, but thats the point!
  • Currently, the company generates roughly Rs.70 cr free cash. We are assuming that it will remain the same till 2028, minus Rs.5 cr maintenance capex every fifth year.
  • If we simply discount this cashflow from 2014 till 2028 at 12% discounting rate, the value per share comes to Rs.28. Discounting the same at 15% gives Rs.25/share and at 18% gives Rs.22.4/share.
  • In effect, it appears that the market doubts whether the company will be able to operate the bridge until 2018 itself, which appears too depressed.

Value, without a value-trigger is a value trap!

Well, what i have stated above is a well known fact. But what has changed now?
The trigger has come in the form of the company exiting CDR. As per the annual report, the company will pay the last installment of its CDR-subjected debt and will exit CDR before the end of FY14. After CDR exit, the company management have full flexibility and autonomy to utilise the cash generated as per what they think fit. So they can give substantial dividends, do a buyback, etc.(This is already visible if we look at the recent interim dividend, which has been doubled, compared to last year).

The risks...

In case of Noida Toll, many risks such as competing bridge, metro, etc are well known. But other risks which i think are material are;
  • With elections round the corner, the public will force the bridge to be immediately made toll-free: Although this event is a possibility, totally stripping the company of all its rights would set a very bad precedent, besides being illegal. I view this as lower probability event.
  • NTBC will alter its Memorandum of Association and take up another project, thus diverting cash: Alteration of MOA requires a special resolution, which, in our opinion will not be successful, given the current shareholding pattern. I view this as a low probability event.
  • NTBC will divert cash to other group companies through inter-corporate loans or advances: ILFS group has not been known to engage in such activities. I view this as a low probability event.
  • There will be radical changes in the original concession agreement: In its quarterly results, NTBC itself has disclosed that NOIDA authorities are in talks with the company to change the terms of the agreement. I view this as a very high probability event. However, we have factored in the same in our assumptions.
  • The toll itself is significantly cut: This is a huge risk and if it materializes, the stock should be exited immediately. I view this as a low probability event.
  • The company will not distribute any cash to its shareholders: In case there is absolutely no distribution of cash, either through dividend/buyback/bonus debentures etc over the next one and half years, one should surely think of exiting the stock.

Positioning yourself for luck...

In the meantime, there is a possibility of various corporate actions such as bonus debentures, buyback, sell-off to a PE investor, one-time settlement with NOIDA etc. Since there is currently no basis to any of these possibilities, we should totally disregard them. But if anything along these lines does happen, we would get damn lucky!!

All in all, this seems like an interesting event-based workout. For some, it would also qualify to be a decent long term investment. Fair enough! However, looking at the risks involved as well as the sensitive nature of the business in recent times (toll = evil), I would not look at it as a longer term compounding story. I am a mere opportunist here and not a "value investor" :-)

Cheers and happy investing!!!

Disclosure: Most of what i have written above is from a presentation i had made last month on the company. I am a one month old (approx) shareholder of the company. Stock price has moved a bit in the recent past and hence I would not be recommending the same (or otherwise). As usual, this is just a presentation of my thoughts and not an recommendation. (Neither am I promoting the stock, simply because I have bought it before and I now hope that your buying will take it even higher!!!). :-)

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