Brief India: ITD Cementation India Ltd- Uncomplicated Pure Play Infra Service Provider with No Asset Ownership!! and more

In this briefing:

1. ITD Cementation India Ltd- Uncomplicated Pure Play Infra Service Provider with No Asset Ownership!!
2. Embassy Office Parks REIT IPO – FY19 Revised Down, Yield Propped up by Zero Coupon Bond
3. India: Weaker Growth, Benign Inflation Implies Continued Monetary Easing
4. Why Did Bank Credit to NBFCs Spurt in September, and Shrink in January?

1. ITD Cementation India Ltd- Uncomplicated Pure Play Infra Service Provider with No Asset Ownership!!

ITD Cementation India Ltd (ITDCIL) is one of the few pure-play infrastructure execution companies left in India, in the last decade the entire infra space in India has diversified into debt funded asset heavy infra ownership which has led to tremendous value destruction. The company is engaged in the construction of marine structures, highways, bridges & flyovers, metros, airports, hydro-tunneling, dams & canals, water & wastewater segment, industrial structures, buildings and specialist foundation engineering projects with presence across India. IDTCIL receives technological support from its parent company Italian-Thai Development Public Company Ltd (ITDPCL). ITDPCL has a presence across the globe and has expertise in the airport, Mass Rapid Transit System (MRTS), high-speed bullet train projects, marine projects among others.

In the last 12 months, ITDCIL has grown at 24% with revenue at INR 25.9 bn. EBITDA and PAT stood at INR 3.34 bn and INR 1.18 bn receptively with EBITDA margin and  PAT margin at 12.9% and 4.57% receptively. EBITDA margins contracted by 174 bps and PAT margin expanded by 109 bps. During the same period EBITDA grew by 9% and PAT increased by 62.4%.

The company’s order book as of Dec’18 stands at INR 95 bn with 45 bn order inflow between Jan’18 to Dec’18 its Book to Bill ratio is 3.73 times.

Drivers:
India is an infra deficit country. In 2015, India spent about 5% of GDP on Infra and this expenditure needs to cost about 8.5% (Climate adjusted investment under high growth scenario of 7.8% GDP growth) over 2016-2030 and estimated infra spending though 2030 is expected to be USD 5.5 tn. Per the Global Competitive Index, India’s infrastructure score had increased from 3.4 out of 7 in 2008 to 4.2 points out of 7 in 2017. Being the fastest growing among large economies and infra deficit country, India offers enough opportunities for investment in the infrastructure sector.

ITDCIL has proven expertise in urban infra ( especially metro rail) and marine structures which are seeing a huge impetus in India with almost all major cities either building or planning to develop metro rails and significant investments going into developing port infrastructures and inland waterways through the Sagarmala, river cleaning through Namami Gange among others. The Government of India (GOI) is expected to spend about INR 8 trillion through Sagarmala and INR 200 bn through Namami Gange. ITD Cementation India Ltd is expected to be one of the beneficiary due to its experience in metro and marine segment.

The company is expected to grow at 65% in FY19 (15-month financial year) and is expected to register EBITDA margin of 12.4% and Profit margin of 4.26% with EBITDA at INR 4.3 bn and Profit at INR 1.57 bn. The company’s shares at the current price of INR 132 are trading at a PEx 19.21x its TTM EPS, 19.12x its FY19F EPS (calculated for 12 months) and 16.31x its FY20F EPS. The company’s ROE and ROA for the previous financial year stood at 11.81% and 3.05% respectively.

2. Embassy Office Parks REIT IPO – FY19 Revised Down, Yield Propped up by Zero Coupon Bond

Embassy Office Parks REIT (EOP IN) plans to raise around US$680m in its India IPO. Of this, it has already raised around US$125m from Capital Group, who came in as a strategic investor. EOP will primarily hold office assets in Bengaluru, Pune and Noida with a total portfolio size of around US$4.5bn. 

In my previous insights I’ve covered the company background, its projected growth and compared it to its main listed peer and other yield assets in India: 

• Embassy Office Parks REIT – Good Assets but Projections Might Be a Tad Too Bullish, and
• Embassy Office Parks REIT – Comparison with AIT and a Look at the Required Yield

In this insight, I’ll cover the deal dynamics, compare the revised forecast in the RHP with the earlier one from the DRHP, comment on the yield boost from the zero coupon debt and run the deal through our framework.

3. India: Weaker Growth, Benign Inflation Implies Continued Monetary Easing

The weak January industrial production data and benign inflation data for February reinforce the belief that the economy has hit a soft patch. With the government in election mode, public spending is likely to slowdown. Monetary policy is thus likely to turn accommodative to support growth given that inflation is likely to remain well inside the MPC’s target of 4%. Indeed odds are increasing for continuation of monetary easing beyond April, especially if the forecast is for a normal monsoon.

4. Why Did Bank Credit to NBFCs Spurt in September, and Shrink in January?

For the beleaguered non-bank finance company (NBFC) sector, banks are the single largest component of external funding. This source peaked at the end of September 2018, in the aftermath of the default of IL&FS, a private unlisted infrastructure developer and financer.  However, in the beginning of the last quarter of the financial year ended March 31, 2019 (4QFY2019), when bank credit in the economy normally peaks, bank credit to NBFCs (as on January 18, 2019) has declined as compared with the previous month. The sharp spurt in bank credit at end-September probably indicates that NBFCs utilised their sanctioned limits with the banks, and top-rated NBFCs took on excessive bank loans to tide over their asset-liability mis-matches in that period. Subsequently, by early January 2019, banks may not have renewed or rolled over the NBFC bank limits, which led to a drawing down of bank credit. It therefore appears that bank finance will continue to remain tight for NBFCs in the last quarter of FY2019, as they sell their assets to banks and restrict asset growth in order to remain liquid.