1.

Sector & Company Background (Bajaj Allianz)

Insurance is an agreement between two parties under which one party undertakes specified future risk of another party and compensates the loss from that risk on payment of some consideration known as premium payable by the later. (Patterson) The insurance sector in India has come a full circle from being an open competitive market to nationalization and back to a liberalized market again. Presently there are 12 general insurance companies with 4 public sector companies and 8 private insurers. Although the public sector companies still dominate the general insurance business, the private players are slowly gaining a foothold. Overall 24 insurance companies as per IRDA (insurance regulatory development authority regulator for the insurance sector). The insurance sector in India has grown at a fast rate post-liberalization in 1999. In the last decade, total premium grew at a CAGR of 25% and reached a total of $67 billion in 2010. Indian Life insurance industry (which contributes 88% of total Life and General insurance premium in India) has emerged as the 9th largest life insurance market in the world. Yet, Insurance penetration (measured as ratio of premium underwritten to GDP) was only at 5.2 % in 2010 .With low insurance penetration levels, growth potential remains promising. (Data from Deloitte report 2012)

Figure 1.1 (Source: IRDA) Life Insurers transact life insurance business; the rest is transacted by General Insurers. No composites are permitted as per law. Bajaj Allianz General Insurance Company Limited is a joint venture between Bajaj Finserv Limited (recently demerged from Bajaj Auto Limited) and Allianz SE. Both enjoy a reputation of expertise, stability and strength. Bajaj Allianz General Insurance received the Insurance Regulatory and Development Authority (IRDA) certificate of Registration on 2nd May, 2001 to conduct General Insurance business (including Health Insurance business) in India. The Company has an authorized and paid up capital of Rs 110 crores. Bajaj Finserv Limited holds 74% and the remaining 26% is held by Allianz, SE.

As on 31st March 2010, Bajaj Allianz General Insurance maintained its premier position in the industry by achieving growth as well as profitability. Bajaj Allianz has made a profit before tax of Rs. 180 crores and has become the only private insurer to cross the Rs.100 crore mark in profit before tax in the last four years. The profit after tax was Rs. 121 crores, 27% higher than the previous year. (Latest data from company website) Allianz Group is one of the world's leading insurers and financial services providers. At the top of the international group is the holding company, Allianz AG, with its head office in Munich. Plans offered Term plans, ULIPS, Traditional plans, Life & Health Insurance plans, Pension plans, Women Insurance plans, and additional rider benefits.

2. ULIPS and Investment process

2.1 ULIPS

A type of insurance vehicle in which the policyholder purchases units at their net asset values and also
makes contributions toward another investment vehicle. (Investopedia) A unit linked insurance plan acts just like a savings vehicle, but also has the benefits of an insurance contract. When an investor purchases units in a ULIP, he or she is purchasing units along with a larger number of investors, just like an investor would purchase units in a mutual fund.

Figure 2.1.1 ULIPs are essentially competitors to investment in mutual funds, although with a small life insurance component thrown in. Because of this life insurance component, the policyholders may enjoy some additional tax benefits on their premium payments and maturity benefits through ULIPs. ULIPs offer a lot more flexibility to the policy holder in premiums, sum assured and investment choice amongst various styles of unit funds- equity, balanced, income funds etc. In return, the policyholder bears most of the investment risks. ULIPS offered (a) Regular Premium: Regular premiums give the insurers an income stream in return for covering the risk. Bajaj Allianz offers iGainIII, Life assurance plan, Max Advantage Insurance plan, Money secure insecure plan, assured protection insurance plan, Smart insurance plan III. (b) Single Premium: An insurance plan in which a lump sum of cash is paid up front to guarantee payment to beneficiaries. Bajaj Allianz offers Wealth Insurance, Shield insurance, Flexi Advantage insurance plan.

2.2 Investment Process

Figure 2.2.1

The Investment decision process consists of (a) Security Analysis: It involves study of individual securities and the factors that affect them. It is the first step which involves analyzing individual securities from various perspectives using all available information. It uses two approaches namely 1. Fundamental Analysis: Fundamental analysis is a method of forecasting the future price movements of a financial instrument based on financial statements, economic, political, environmental and other relevant factors and statistics that will affect the basic supply and demand of whatever underlies the financial instrument. It is the study of economic, industry and company conditions in an effort to determine the value of a companys stock. The fundamental analysis is to appraise the intrinsic value of a security. It is also known as top-down approach. This approach attempts to study the economic scenario, industry position and the company expectations and is also known as economic-industry-company approach (EIC approach). 2. Technical Analysis: The underlying principle of technical analysis is that the price of a market reflects all applicable information (Price movements), thus making their analysis considering the history of the trading pattern of a security more willingly than external drivers like economic, fundamental, and news events. Two most important jargons support level and resistance level. The key principles of technical analysis include: a. Market action discount everything b. Prices of a product move in trends c. History tends to repeat itself Some main methods are Bar charts, Line charts, Trend Line, Moving averages etc.

(b) Portfolio Management: After analyzing the individual securities and relating their risk return trade off an efficient portfolio is constructed. Portfolio management is dealing with the construction and maintenance of a collection of investments. For this purpose, an investor has to specify his or her investment objectives accordingly his or her tolerance for risk. It is the process of making selection between Debt Vs Equity, Growth Vs Safety, and various other tradeoffs Investment Methods: (1) Equity Shares (Variable Income Securities): They can be classified into Growth shares, Income Shares and correspondingly related as Defensive, cyclic and speculative. Infrastructure stocks mainly are growth and speculative type. (2) Fixed Income securities: Preference shares, Debentures, Bonds, Kisan Vikas Patra, Government securities, Money market securities, Non negotiable securities. Valuation Methods: (1) Intrinsic Value: It is measured through book value and P/E ratios. (2) Future Value: Predicted through price movements for e.g.: trend line etc. An equity analyst in the investment department of the company functions to cater the requirements for ULIPS. The analyst contributes stocks to the portfolio of the fund manager to minimize the portfolio risk and maximize the return of the portfolio. Analys ts have their roles divided across the market segment from FMCG, Infrastructure, IT, Telecom etc. to size of the companies from small cap to big cap. Analysts also look into the debt market segment. The fund manager after analyzing the call of the analyst takes the final decision to add or reduce the investment in the fund. The performance of the fund is closely monitored as that would affect the customer (i.e. investor) perception. The investment department looks into two categories of investment (a) Debt Funds (Bonds etc.) (b) Equity. (Shares) Get the right stock at the right price at the right time.

3. Capital markets in India, Economic Scenario & Infrastructure Sector

3.1 Capital Markets in India

Figure 3.1.1 (Source Ministry of Corporate Affairs, India) Capital Market System and Structure in India Structure Government Securities Institution Government securities market. Reserve Bank of India (RBI) controls all transactions of government securities,

Industrial securities divided into Primary market (New issues like IPO) and Secondary market (Market for trading the Equity shares through stock exchange). Industrial Securities Popular national level stock exchanges in India, National Stock Exchange (NSE) and Bombay Stock Exchange (BSE). Development Financial Institutions (DFI) Financial Intermediaries Financial institutions provide financial aid to develop special sectors. Financial institutions like IFCI ( Industrial Finance Corporation of India ), ICICI ( Industrial Credit and Investment Corporation of India), SFC ( State Finance Corporations ), IDBI ( Industrial Development Bank of India ), UTI ( Unit Trust of India ), etc. All other state controlled finance intermediaries like, Merchant banking, Mutual funds, Leasing finance companies, Venture capital funds, etc. Table: 3.1.1

Financial Market in India can be broadly classified into (a) Primary capital market ,Secondary capital market (b) Money Market (c) Debt Market

SEBI (Securities exchange board of India) is the capital market regulator in India.

There are all together 19 stock exchanges in India with NSE (National Stock Exchange (50 company NIFTY)) and BSE (Bombay Stock Exchange (30 company Sensex)) being the major ones. Indian exchanges are undiversified. Equities and commodities comprise approximately 90% of trading volume. All other markets except Hong Kong have a much more diversified mix, with interest rate futures, foreign exchange futures and corporate bonds accounting for a sizeable share of exchange trading. The equity market In India has two segments: the primary market and the secondary market. In the primary market, securities are offered to the public for subscription for the purpose of raising capital or fund. Secondary market is an equity trading avenue where already existing / pre- issued securities are traded amongst investors. Primary market and secondary market do not work independently. There is a direct link between these two markets. A well functioning stock market also generates demand for stocks by encouraging domestic savings. The stock market provides investors with an array of assets with varying degree of risk, return and liquidity. This increased choice of assets and the existence of a vibrant stock market provide savers with a wider range of saving options and instruments and thereby, induce more savings. Important dates for a stock market analyst (a) First month of every quarter April, July, October and January. It is the time quarterly results of the companies are declared. (b) Last week of February when the union budget is presented. (c) Industry specific data at the end of every month. (d) RBI review dates for credit policy. Annual policy is announced on April and midterm review takes in July, October and January. (e) GDP data (Central Statistics Office). (f) Inflation (Ministry of Commerce and Industry) and IIP data published by the government every month. Central Statistics Office (CSO) compiles and publishes the IIP numbers every month in comparison with a base year (2004-05). (g) Weekly WPI data. (h) Last Thursday of every month when derivative contracts expire. (i) Dividend dates particularly ex date and record date which affect prices. (j) U.S.A economic data release dates.

3.2 Economic Scenario in India

Figure 3.2.1 (Source: NDTV Profit) Indias economy has grown very rapidly in recent years. Since 1991 it has been among the top 10% of the worlds countries in terms of economic growth. The primary challenge for India is to sustain this growth while spreading its benefits more widely. This requires continuous effort as international experience shows that growth slows down unless reforms are pushed through when growth is high. Indian economy is expected to register GDP growth of 5% in FY 13, the lowest in a decade. The two major cause of concern are high inflation and high current account deficit (CAD) which has compounded the currency problem of late. Indian equities have reflected these as markets remained flat for the last 5 years, with record outflow by domestic investors. The finance minister in his budget speech has stressed on the facts and has promised to take steps to reduce the fiscal deficit from 5.2 % of GDP in FY 13 to 4.8 % in FY 14(E). Easing global commodity prices particularly Oil and Gold present an opportunity for some of the macro variables to self correct and the CAD in particular is expected to come down to 4% of GDP from current levels of 5% of GDP. A record high current account deficit has also restrained the Indian central bank from easing policy more aggressively. Weak consumer confidence and policy

paralysis are adding to the woes of the market. But faced with an election in 2014, the government will likely increase its spending later this year. In spite of the recent economic doldrums Indian markets have given a return of 8 % in FY 13 (YOY) with only Japan giving a return of 23 % in FY 13 (YOY) with those of China giving as low as 2 % with Russia and Brazil falling in the negative bracket. However valuations in Indian market are trading at P/E of 14x well below the long term averages of 16x.Market Capitalization to GDP ratio is at the average of 65 %. Positive triggers to market includes average to decent monsoon which could boost rural income, falling commodity prices to ease the pressure on CAD , fall in interest rate and good Index of Industrial production numbers. Foreign investment is an imperative in view of the high current account deficit (CAD).FII, FDI and ECB three main source of CAD Financing. Economic Indicators can have one of three different relationships to the economy: (a) Procyclic: A procyclic (or procyclical) economic indicator is one that moves in the same direction as the economy. The Gross Domestic Product (GDP) is an example of a procyclic economic indicator. (b) Counter cyclic: A counter cyclic (or countercyclical) economic indicator is one that moves in the opposite direction as the economy. E.g.- unemployment rate (c) Acyclic: An acyclic economic indicator is one that has no relation to the health of the economy and is generally of little use. Major obstacles to Indias growth are: Infrastructure Shortages Crippling infrastructure shortages are the leading constraint to rapid growth as well as in spreading this growth more widely. Infrastructure shortages have particularly hindered the growth of export oriented manufacturing and value-added agriculture that integrate into global supply chains, and need good roads, ports, airports, and railways as well as reliable power and water to prosper. Large Fiscal Deficit: Fiscal Deficit (FD) = {Total Expenditure (Revenue receipts + recovery of loans)} High deficits incurred by the government are detrimental for the economy, because they lead to not only higher inflation, but also higher interest rates. Financing huge deficits is a difficult task for any government. The government can finance the fiscal deficit by borrowing from the central bank or it can borrow from the domestic market by selling government bonds in the open market. If the government borrows money from the central bank, it is essentially financing deficit by printing money. If too much money gets into the system without any potential increase in output, then this increase in money supply can become inflationary. Countrys consolidated fiscal deficit has been persistently large for many years. While recent efforts to tackle the deficit have paid off in substantial progress, it remains a continuing concern. 9

Restrictive Labor Regulations Unreformed Financial Sector: Large deficits and an unreformed banking sector reduce the private sectors ability to obtain bank financing. Weak demand for Indian goods and services abroad has been a major contributor to the slowdown, in addition to lack of policy initiatives from the government.

Figure 3.2.2 (Source: Economist) Markets keep a strong watch on key macroeconomic indicators usually; inflation rates compared to short term interest rates, trends in balance of payments (good BOP numbers boost market sentiment high BOP could lead to negative market trends particularly for FIIs), levels of public debt / fiscal deficit (higher number may lead to higher taxes and low rate of growth), real GDP growth (positive numbers boost sentiment), savings rate (higher the better) and money supply. 3.3 Infrastructure Sector in India Need: In India infrastructure is recognized as a crucial input for economic development. The World Bank treats power, water supply, sewerage, communication, roads & bridges, ports, airports, railways, housing, urban services, oil/gas production and mining sectors as infrastructure. The Economic Survey of India considers power, urban services, telecommunications, posts, roads, ports, civil aviation, and railways under infrastructure sector. Developing countries like India have a significant demand for infrastructure. Yet capital is scarce. There is a need to channel the capital into the most deserving of projects. Further, the pool of capital has to be widened through involvement of private sector. Growth of the entire country can be propelled through better infrastructure. Yet, some special needs need to be addressed, before a wider non-government involvement can be expected in building infrastructure for the country.

10

The government alone cannot fulfill all the requirements hence private players are required. Spiraling demand for air travel, reliable power supply, and efficient ports, roads, and railways has not been matched by a proportionate increase in supply. It is widely acknowledged, that severe supply-side bottlenecks can retard the economys potential rate of growth. The government has been dismantling longstanding barriers and actively encouraging private investment in big public-works projects. Private-sector companies have been invited to manage airports, roads, highways which used to be exclusively government-run. The government is helping private sector developers by lowering their risk in road projects. To harness private sector efficiencies in design and construction of infrastructure projects the Planning Commission envisages that at least 75 per cent of new investment into infrastructure will come from the private sectorsome in the form of fully private ventures, others as publicprivate partnerships (PPPs). The committee for the launch of dedicated infrastructure funds (DIFs) has proposed listing options for DIFs to provide liquidity to such funds. The committee has also recommended that the proposed DIFs should operate as a closed-ended scheme with a maturity period of seven years. Major Type of Infrastructure Projects: A green-field project is set up in virgin land. Everything needs to be set up from scratch including roads, power lines etc. These take longer to implement and are costlier. A brown-field project is one that is set up in an area which is already being used for other commercial purposes. Since basic support systems would exist, it is easier and cheaper to set up brown-field projects. In a new entrepreneur project, the promoter does not have prior experience as a promoter. He may have been employed earlier, because of which general business experience may exist, but not as an entrepreneur. The skill sets required and challenges to face in entrepreneurship are quite different from those in employment. Therefore, it can get very risky. In a diversification, the company that is implementing the project is already engaged in some business. So entrepreneurial ability is not in question. However, it does not have prior experience in the goods or services or market it proposes to enter. A related diversification is a forward integration or a backward integration. In a forward integration, the company goes forward in the value chain. For example, an iron ore mining company goes into manufacture of steel products; or a company that supplies to businesses and malls starts its own retail outlets. A backward integration takes the company to an earlier stage in the value chain. For example, a trader or retailer goes into manufacture. An unrelated diversification calls for a completely different set of skills from the promoters. In an expansion project, a company is already in a particular business that has a market. The company wants to expand the scale of its operations.

11

A modernization project is aimed at improving the equipment or other capacity that is used to manufacture the product or render the service. In a replacement, some machinery is replaced with similar machinery. As in the case of modernization, increase in capacity is not an objective of replacement. Companies keep replacing the equipment they use. A privatization project is one where the government decides to associate with the private sector. Public Private Partnerships The governments finances are stretched. It cannot finance all the infrastructure projec ts that the country needs. Similar problem is faced by governments in most developing countries. This has led to implementation of projects on Public-Private Partnership (PPP) basis. In such project models, the government and the private sector work together in setting up infrastructure projects and running them. Various incentives are available for private sector involvement in infrastructure projects. For instance, 100% FDI is permitted under the approval route in many sectors within infrastructure. Further, income tax exemption is available on the profits for 10 years. Highways, Rails, Ports, Airports, Power and Telecom are infrastructure sectors that the government has been trying to boost. The Cabinet Committee on Infrastructure, under the chairmanship of the Prime Minister, approves and reviews policies, programs and projects in the infrastructure space. Secretariat for Infrastructure, in the Planning Commission, works on strengthening the policy framework for infrastructure projects in general, enhancing the role of PPP, and monitoring key infrastructure projects. Models in PPP mode: Build Transfer (BT) is the most basic model, where a party is given the contract to build the project. The party ensures the requisite financing and builds the project. Once the project is completed, it is transferred to the government, which pays the party as per an agreed schedule. The payments cover the party for the money invested and a return. Build Lease Transfer (BLT) is one where the party builds the infrastructure facility and leases it to the government for a specified period, after which it is transferred to the government. In a Build Operate Transfer (BOT) model, the party that is awarded the contract builds the project, arranges for the financing, operates the project and recovers money through a toll or other arrangement for a specified number of years or until the targeted return on investment is achieved. Thereafter, it needs to transfer the project to the government. BOT projects are awarded on the basis of bids, where the parties indicate their return expectations. The party that bids for the lowest return wins the contract, subject to technical considerations. The winning party is called a concessionaire. Some projects are offered on the basis that the Government will bear a 12

part of the project cost. In such cases, the party that bids for the lowest contribution from the government wins the contract. In a Build Operate Lease Transfer (BOLT) model, the party that is awarded the contract builds the project, arranges for the financing, operates the project and recovers money through lease rentals as per an agreed schedule. Thereafter, it needs to transfer the project to the government. In Build Transfer Operate (BTO), the asset is transferred when complete, but the concessionaire continues to operate it for the concession period. Design Construct Maintain (DCM) is one where the concessionaire designs and constructs the project; thereafter, it has to maintain it. However, operation of the facility and recovery of toll or other revenue is not in the hands of the concessionaire. Design Build Finance and Operate (DBFO) is another model. Here, the concessionaire does not need to transfer the project at the end; however it is responsible to operate the project as per specifications stipulated by the government. PPP contracts can also be structured as Design Build Finance Operate Transfer (DBFOT), where the project is transferred to the government at the end of the concession period. In a Build Operate Share Transfer (BOST) model, the concessionaire shares a part of its revenue with the government, even as it operates it. At the end of the concession period, it transfers the facility to the government. Build Rehabilitate Operate Transfer (BROT) models pass on the rehabilitation role also to the concessionaire.

13

Parties to a PPP model:

Figure 3.3.1 Source: NSE (NCFM) It is normal to promote a Special Purpose Vehicle (SPV) for every PPP project. The benefits of a separate SPV are: The parties can protect themselves by making various conditions of the contract, a part of the incorporating documents of the SPV (such as, memorandum of association and articles of association). For example, the number of directorships representing each party, and the limitations on the powers of the company can be incorporated in the articles. The SPVs are restricted from taking up any other commercial activities. Thus, the financials of the SPV would be a complete reflection of the project activities. This ensures transparency in operating as per the terms of the concession. Since the SPV will have its own capital structure, the promoter who has won the concession does not expose his other activities directly to the risks in the new project. Most projects are finalized through competitive bidding. This ensures transparency and is a protection against potential litigation on the award of the contract. The competitive bids are invited through a Request for Proposal (RFP) which is advertised in various media. Bids are received from interested parties as two separate documents technical bid and financial bid. There is also an earnest money requirement to keep out non-serious bidders. The technical bid is evaluated first, to ensure that the bidder fulfils the technical requirements specified in the bid document. For example, number of years in business, experience of handling similar projects, turnover and net worth requirement and foreign collaboration arrangements. A letter of intent is issued to the party that has won the bid. Based on the letter of intent, the successful party creates the SPV and goes about fulfilling the conditions prescribed. 14

When all the conditions are fulfilled, the successful party approaches the government for signing the concession agreement. This agreement, signed between the government and the SPV (the concessionaire), includes the relative responsibilities of each party and the sharing of risk and returns in the project. After the concession agreement is signed, the concessionaire goes about signing the project implementation contract with the technical partner / Engineering Procurement Construction (EPC) Contractor, resource mobilization agreement with the investors and lenders etc. The loans themselves will be backed by specific corporate guarantee or letter of comfort or escrow structures. Corporate guarantee, if any, would be from the promoter or other company in the promoting group that has strong financials. Letter of comfort is weaker than a guarantee from the point of view of protection from lenders. Escrows are commitments to deposit receipts in a specific bank account, over which the lenders have a lien. Tri-partite agreements are not possible in the case of toll payments by users of a highway. In such cases, lenders go by the commitment of the promoters to deposit their cash collections in the specified bank account. The four critical elements that determine the financial viability of a highway project are traffic volumes, user fee, concession period and capital costs. The concession period depends on the volume of present and proposed traffic using the project. Toll-users cannot be expected to pay for congested roads. Therefore, the toll will stop when full capacity is reached, unless the concessionaire expands the capacity. Concession period is typically 15 years. The commercial and technical risks relating to construction, operation and maintenance are the responsibility of the concessionaire. Thus, risks such as traffic volume and growth belong to the concessionaire. Maximum upfront capital grant from the government is 20% of the project cost. If this grant is not adequate to make the project viable, a further grant of 20% of the project cost may be provided for operations and maintenance-support during the period after the highway is commissioned. The user fee (toll) is linked to Whole-sale price index to the extent of 40%. Thus for any road / highway project three essential elements are: Traffic Volume. User fee Concession period.

FINANCING INFRASTRUCTURE PROJECTS The Government proposes to spend $1 trillion during the 12th five year plan (2012-17) [Interim Report of the High Level Committee on Financing of Infrastructure].Financing of this order is not possible without novel financing structures. Also equity financing from private parties will not be able to match such a huge gap. It is on account of these issues that focused infrastructure financing institutions were created, such as Infrastructure Leasing & Financial Services Ltd (IL&FS), Infrastructure Development Finance Company Ltd (IDFC) and India Infrastructure Finance Company Ltd (IIFCL). Take-out financing is one such structure. Take-out financing involves three parties: Borrower, Original Lender & take out financer. Securitization is a structure where illiquid loans can be taken out of the books of a lender and converted into tradable debt securities. Trading in those securities facilitates price discovery and enhances the 15

vibrancy of the bond market. Certain infrastructure projects are inherently unviable in financial terms. An example of airports in new locations. The traffic will take several years to build up, while the capital investment requirement is large. Therefore, the IRR of such projects can be very low, or even negative. In the normal course, private sector may not take up such projects. In such situations, the government incentivizes the private sector through a capital grant. Projects that come under Viability Gap financing are: Roads and bridges, railways, seaports, airports, inland waterways, Power; Urban transport, water supply, sewerage, solid waste management and other physical infrastructure in urban areas; Infrastructure projects in Special Economic Zones; and International convention centers and other tourism infrastructure projects. VGF is disbursed only after the private sector company has subscribed and expended the equity contribution required for the project. Infrastructure Debt Fund: The sources of debt financing have traditionally been banks and financial institutions. Banks have limitations in extending long term financing because of asset-liability mismatches. IIFCL has been set up to provide long term debt finance for infrastructure projects. However, it can take a maximum of 30% exposure in a project. One suggestion proposed in government circles is the creation of a debt fund that would raise low-cost long-term resources for re-financing infrastructure projects that are past the construction stage and associated risks. The Finance Minister, in his budget speech for 2011-12 announced such a fund. The fund will invest in infrastructure projects that are backed by a buy-out guarantee from the government. The project sponsors will benefit with cheaper re-finance. The gains can be shared with the government or the users. The re-financing will release capacity in the banks to invest in newer infrastructure projects. Other than the modes discussed above some other important modes are: Capital markets. International Banks. External commercial borrowing. International Bond Markets. World Bank / IMF / ADB.

16

SOURCES OF FINANCING:

Table 3.3.1 (Source: NHAI Report) Challenges: India needs to invest 3-4% more of its GDP on infrastructure to sustain 8% growth. (Source Planning Commission). The private sector can play an important role in investing in infrastructure, including through public private partnerships. Improving the countrys capacity to implement infrastructure projects will be as important as increasing the amount of investment available. Emphasis should be placed on maintaining existing assets. 17

Reforms need to be accelerated in all sectors. Difficult issues such as rationalizing user fees for services need to be faced. Land acquisition, funding constraints, Post award change in scope of projects, delays in clearances should be looked into. Delhi Gurgaon expressway got delayed due to land acquisition, Vadodra Halol toll road faced problem due to improper assessment of traffic usage. PPPs have remained a luxury for rich states. Contract management and monitoring needs to done. Proper dispute management must be in place. Decline in interest Rates, revival in order inflow & alternate long term fund arrangements will be beneficial for infrastructure sector. Recent Changes: Recently, environmental clearance has been delinked from forest clearance. Further, Reserve Bank of India has given dispensation to treat the loan to the toll projects as secured loan. Compared to previous 5year plans, there is an immense opportunity for the XIIth Plan (2012-17) with overall investment in infrastructure to be at Rs 51,464 bn. However, the investment realized will be the key thing to observe as the Government has often over-promised and under-delivered.

Major Infrastructure Stocks (Equities) Large Cap: Reliance Infra L&T Adani Ports Jaypee Infratec GMR Infra Mid Cap: Supreme Infra Shriram EPC Gammon Infra MSR India Unity Infra J Kumar project Pratibha Industries Small Cap: Tantia Constr. Sunil Hi Tech Rs 55 (Floating mcap Rs 24) Rs 71 (Floating mcap Rs 35) Rs 351 (Floating mcap Rs 158) Rs 256 (Floating mcap Rs 76) Rs 794 (Floating mcap Rs 198) Rs 251 (Floating mcap Rs 62) Rs 241 (Floating mcap Rs 96) Rs 542 (Floating mcap Rs 243) Rs 397 (Floating mcap Rs 198) Market Capitalization (in Rs. Crores) as on 22/04/13 BSE. Rs.9504 (Floating mcap Rs 5227 ) Rs 92480 (Floating mcap Rs 83232) Rs 29039 (Floating mcap Rs 7259) Rs 5361 (Floating mcap 1062) Rs 8524 (Floating mcap 2557)

The open market shares that are free for trading by anyone are called the free-float shares and constitute the floating mcap. 18

The study for the equities of the above three companies (italicized) has been done.

Porter Five Forces Analysis on Infrastructure Industry Threat of new competitors: High capital requirements - A company must spend a lot of money in order to compete in the market. High capital requirements positively affect Infrastructure industry. High sunk costs - It makes difficult for a competitor to enter a new market, because they have to commit money up front with no guarantee of returns in the end. High sunk costs positively affect Infrastructure industry. Economies of scale - It help producers to lower their cost by producing the next unit of output at lower costs. When new competitors enter the market, they will have a higher cost of production, because they have smaller economies of scale. Economies of scale positively affect Infrastructure industry. Bargaining Power Of customers: Low buyer price sensitivity: When buyers are less sensitive to prices, prices can increase and buyers will still buy the product. Inelastic demand positively affects Infrastructure industry. For example NHAI projects. Large number of customers: When there are large numbers of customers, no one customer tends to have bargaining leverage. Limited bargaining leverage helps Infrastructure industry. For example multiple government projects both at the state and central level. Limited buyer choice: When customers have limited choices they end up paying more for the choices that are available. Limited buyer choices are a positive for Infrastructure industry.

Competition in Industry:
Relatively few competitors (Infrastructure industry) have a significant impact, so an analyst should put more weight into it. Relatively few competitors (Infrastructure industry) will have a long-term positive impact on the entity, which adds to its value. This will lead to an increase in profits for this entity. Government limiting competition (Infrastructure industry) has a significant impact, so an analyst should put more weight into it. Government limits competition (Infrastructure industry) will have a long-term positive impact on the entity, which adds to its value. Fast Growth Rate - When industries are growing revenue quickly, they are less likely to compete, because the total industry size is also growing. The only way to grow in slow growth industries is to steal marketshare from competitors.

19

Bargaining Power of suppliers Low / High concentration of suppliers - It ensures steady and competitive scene if there are high concentration of suppliers. Large number of substitute inputs - When there are a large number of substitute inputs, suppliers has less bargaining leverage over producers. This is due to competition among substitutes. Greater competition positively affects Infrastructure industry. Diverse distribution channel - The more diverse distribution channels become the less bargaining power a single distributor will have. This positively affects Infrastructure industry. Threat of Substitutes Customer here is mainly government and government bodies. Substitute here refer to companies. Substitute has lower/higher performance - A lower/higher performance product means a customer is less/more likely to switch from one product/service of an industry to another product/service of an industry. Substitute has lower/higher quality - A lower/higher quality product means a customer is less/more likely to switch from one product or service to another product or service. Number of substitutes - Less / More number of substitutes ensures more negative/positive impact for investment. Budget 2013 Union Government (Govt. Of India) Key highlights for Infrastructure Sector Road Construction (a) A regulatory authority for road sector. (b) 3000 kms of road projects in Gujarat, Madhya Pradesh, Maharashtra, Rajasthan and UP will be awarded in first six months of 2013-14. (c) Companies investing 100 crore or more in plant and machinery during the period 1.4.2013 to 31.3.2015 will be entitled to deduct an investment allowance of 15 per cent of the investment. Industrial Corridors (a) Plans for seven new cities have been finalized and work on two new smart industrial cities at Dholera, Gujarat and Shendra Bidkin, Maharashtra will start during 2013-14. (b) Delhi Mumbai Industrial Corridor (DMIC) to be provided additional funds during 2013-14 within the share of the Government of India in the overall outlay, if required. (c) Chennai Bengaluru Industrial Corridor to be developed. Preparatory work has started for Bengaluru Mumbai Industrial Corridor.

20

Recent News (1). In a major step towards removing hurdles to implementing national highway projects, the Cabinet
Committee on Investment (CCI) today relaxed forest clearance norms for these projects. It decided to give special exemptions on forestry clearances. For linear projects, it said it would de-link the grant of environment clearances from forest clearances.CCI has also raised the ceiling of 4,000 km of four-laning under the National Highways Development Project (NHDP) phase-IV to 8,000 km on a build, operate and transfer (BOT-toll) mode. It also allowed the upgrade of 4,000 km of roads on an engineering, procurement and construction (EPC) basis. For public-private partnership projects, the debts due would be considered as secured loans. (24/05/13) (2). Government's approval to delink environment clearance from forest nod has paved the way for launch of 20 stalled road projects involving investment of Rs 27,000 crore.The Cabinet Committee on Infrastructure (CCI) yesterday announced that major bottlenecks impeding the growth of highways sector, including de-linking environment clearance from forest nod, have been cleared. (24/05/13) (3). A meeting of senior officials at the Prime Ministers Office (PMO) is likely to discuss on Monday the ministrys proposals that suggest reducing the number of approvals required to open bids for road building projects awarded through competitive bidding after the National Highways Authority of India (NHAI) clears them.Currently, every proposed project has to go through several layers of clearances even before it can be opened for bidding. We are working on ways to speed up projects off-take as there is a significant slump in the projects being awarded, a roads ministry official said on condition of anonymity. The proposal is to streamline and rationalize the pre-tendering approvals required to open bids for a project. We are trying to bring down the number or stages of approvals needed both for projects above Rs.500 crore and below Rs.500 crore. A concessionaire currently cannot exit a project until two years after starting commercial operations. This (the new proposals) will, however, be subject to approvals from NHAI and the project lenders consortium, said the ministry official. The idea is to free up the concessionaires capital for future projects, the official said.A final view might be taken on these suggestions when senior officials from the Planning Commission, the environment and forests ministry and finance ministry meet at the PMO.(28/05/13) (4).Construction Sector grew by 4.4 % against 5 % Y-O-Y and manufacturing grew by 2.6 % with services at 6.6 % as per the latest GDP update with FY 13 GDP at 5 %.(31/05/13)

21

4. SUPREME INFRASTRUCTURE INDIA Ltd.

May 08th 2013 CMP: Rs 210 Mcap Full / Free Float: Rs 351 crores / Rs 157 crores BSE Group (B) / NSE 52 Week High / Low: Rs 324 / Rs 174 Beta: 1.26 (Source: Bloomberg) Face value: Rs 10. Background: Supreme Infrastrutre started its operation in 1983. Started as a supplier to construction companies with its own quarries and crusher plants,the company has moved up the value chain with forward integration in the construction segment. The company changed its name Supreme Infrastructure India Private Limited in 2002.It became a public limited company by the name Supreme Infrastructure India Limited in 2007. The Chairman of this company is Mr.Bhawanishankar Sharma, Managing Director Mr. Vikram Sharma, Whole time director Vikas Sharma, which makes the board a family dominated one. Current Scenario: In the Union Budget 2013-14 it was announced that during H1FY14 (first half of FY 14) over 3,000 km of new road projects will be awarded which has come as a breather to many infrastructure firms particularly in the EPC segment.Supreme Infrastructure (Supreme) is an integrated and diversified EPC player present across segments and geographies. From last few years the company has entered into road BOT segment and has ten BOT projects under its portfolio. It has established itself as a leading BOT player which places it favorably in the road construction segment. It has executed projects across EPC segments like roads, bridges,buildings, railways, sewages/ irrigation and power. Four of its BOT projects are already operational. Due to its expertise in raw material sourcing (backward integration) the margin for its EPC segment is superior to that of competitors. Mode of operation: Identifying opportunity for its business segments, the company acquires quarries for captive use in a particular region. It has been able to contain its sourcing cost as the major cost is for transportation of raw material (aggregates) to the project site which otherwise needs to be sourced from third parties. After securing a quarry, the company bids aggressively for the projects offered in the same cluster. This gives a sizable cost advantage to the company and higher probability of securing newer projects offered in the region. This backward integration entails savings in tariffs and taxes due to captive material transfer in the same state. The company also has an advantage in swifter execution of its projects due to uninterrupted raw material supply and proximity to the project site apart from no fluctuations in input prices.Supreme benefits from sharing of execution and project management bandwidth due to close proximity to the projects in the same cluster. The company has adopted a strategy to enter into states where the government is keen on infrastructure development with no serious funding issues (thus reasonable working capital cycle), and in states where it has amicable relations with the local government bodies. 22

Over aperiod of time, the company has built good working relationships with these state governments which have benefitted Supreme with repeat orders.

Order Book : Rs crores Order Book Roads Buildings Others % Growth Roads Buildings Others % to total Roads Buildings Others % execution BOT NON BOT FY 10 1603 528.99 561.05 512.96 FY 11 3117 1215 1482 420 130 164 -18 FY 12 3900 2050.5 1674.6 174.9 69 13 -58

33 35 32 57

39 48 13 48 416 2701

53 43 4 46 865 1185

Table 4.1 (Workings in EXCEL (Source: Annual Report)) Supreme has built an order book which has grown at steady pace and the company has diversified its presence over the years into different segments so as to reduce its reliance over one particular segment which can be observed in the order book above. Governments focus on infrastructure investments will provide impetus to Supremes order book growth in future. Strong and expanding order book gives confidence on the revenue visibility of the company whose current order book would be executed (with near to fifty percent average execution) over the next couple of years. The order book has been diversified mainly into North and West regions. The company has also started new projects in South and East regions. More diversification is expected as the company has a joint venture in Oman through which orders are expected from the middle east.

23

Financials: (Source Annual Report data)

Balance Sheet Year End March Share Capital Reserves & Surplus Net Worth Debt Total Liabilities Fixed Assets Investments Inventories Debtors Cash & Other Cash Equivalents Loans & Advances Current Assets Current Liabilities Net Current Assets Miscellaneous Total Assets P&L Net Revenues EBIDTA Other Income Interest Depreciation Tax PAT Rs crores FY 12 19.2 352 371 699 1,081 283 132 141 496 68 563 1269 591 660 1081

FY 13 19.2 457 476 901 1,387 306 224 170 678 129 553 1530 661 853 1386 FY 13 1986 308 4 119 34 50 110

FY 14 E 19.2 582 601 1,251 1,862 306 224 823 818 40 617 2299 947 1327 1862 FY 14 E 2468.6 370 4 150 37 58 129

FY 15 E 19.2 746 765 1,651 2,427 331 224 1058 1,052 212 794 3116 1,217 1867 2427 FY 15 E 3174 460 4 182 39 76 168

Table: 4.2
FY 12 1505 243 3 92 28 35 91

Table: 4.3

24

Key Ratios Year End March EPS Book Value P/E P/BV D/E ROE % ROCE % EV/ EBIDTA EV/Sales

FY 12 54 222 5 1.3 1.9 25 20 5 0.75 Valuation

FY 13 65 284 3 0.7 1.9 23 20 4 0.56

FY 14E 77

FY 15E 100

21 18

22 17

Table:4.4
Rs Crores FY 13 351 319 332 651 901 438 188 163

Mcap as on 08/05/13 Value of projects Equity Infused in other projects Total value of projects Total Debt Working Debt with( Loans & advances assumed 50% in Equity infused) Value Accretion Remaining Value

Table: 4.5 Sales growth: The company has recorded a healthy average sales of Rs 699 crores with an average increase of 78 % over the last five years. The recent order book status appears to give more growth potential for the company in near future. Interest cost: The company has seen a rise in interest cost over the last few years as it has expanded its operations but in the last couple of years due to high interest rate regime the companys borrowing cost has gone up marginally. Over the last five years the average interest cost has been Rs 35 crores and of last fiscal at Rs 92 crores. EBIDTA Margin: The companys EBIDTA margin has remained healthy at an average of 18 % over the last five years. The higher the EBITDA margin, the less operating expenses eat into a company's bottom line, leading to a more profitable operation,because EBITDA excludes depreciation and amortization, EBITDA margin can provide an investor with a cleaner view of a company's core profitability. PAT growth: The companys bottom line has grown at an average of 50% over the last five years indicating a better translation of its top line. 25

Cash flow growth: The cash flow of the company has been healthy with average 55 % growth in the last five years reinforcing the faith in the companys better financials. Employee expense as sales %: The companys employee expense has been stable and reflects its manpower efficiency. Raw materials expense as sales %: Raw material expense has been static at 28 % year on year reflecting a proper backward integration advantage to the company in the market

Ratio Analysis: a. Liquidity Ratios Supreme has a constant current ratio of 3 for past five years which in infrastructure sector is above average. Net Debt to equity ratio of the company has been around 1.7 for the past five years, being an infrastructure company its debt is more but cases of not repaying the debt has not been observed signifying healthy cash flows and operational practises.Net debt has been increasing at the rate of 64 % over the past five years but consequently a sales growth of 78 % has also been achieved over the past five years. b. Turnover Ratio Supreme has a fixed asset turnover ratio of 3 over the last five years which is a reasonable performance. The fixed-asset turnover ratio measures a company's ability to generate net sales from fixed-asset investments - specifically property, plant and equipment (PP&E) - net of depreciation. A higher fixedasset turnover ratio shows that the company has been more effective in using the investment in fixed assets to generate revenues. c. Working Capital A company needs just the right amount of working capital to function optimally.Changes in working capital are proportional to revenue growth in supremes case. Working capital to sales percentage has been observing a growth of 41% over the past five years.The average working capital days over past 5 years is 149. Working capital days is used to describe how many days it will take for a company to convert its working capital into revenue. The faster a company does this, the better. In supremes case it is good with respect to infrastructure sector. d. Inventory Inventory turnover for supreme has been at average of 3 for past five years thus indicating no serious inventory pile up. Inventory turnover days has been at 134 over past years. A ratio showing how many times a company's inventory is sold and replaced over a period. The days in the period can then be

26

divided by the inventory turnover formula to calculate the days it takes to sell the inventory on hand or "inventory turnover days." Which is 365 in this case. e. Return on equity and Return on capital employed has been at 24 % and 17 % over the past five years indicating a good return being generated by the company. f. Valuations The Price to earning has been at an average of 5x and in FY 09 at 1x with a Price Earning to growth at .04 in the same year indicating a better entry point then. The PEG of supreme has been at 0.17 over the last five years indicating an undervalued position for the stock. The price to book value of the company has been at an average of 1.14 over the past 5 years. The lower the PEG ratio, the more the stock may be undervalued given its earnings performance. The enterprise value of the company of late is Rs 1123 crores with over 25 % growth on average in the last five years. Enterprise value is an indicator of how the market attributes value to a firm as a whole. Enterprise value is a term coined by analysts to discuss the aggregate value of a company as an enterprise rather than just focusing on its current market capitalization. It measures how much you need to fork out to buy an entire public company. EV/EBIDTA of the company of late is 5 and has an average of 5 over the past few years , The enterprise multiple looks at a firm as a potential acquirer would, because it takes debt into account - an item which other multiples like the P/E ratio do not include. EPS has been growing fairly at 35 % over the past five years. Dividend per share is constant at Rs 1.3 per share. Valuations of two projects (Manor-Bhiwandi) and (Nagar-Kopergaon) has been done (Excel sheet Supreme Valuation) and the projects have positive free cash flow to equity and firm. Manor-Bhiwandi project has NPV (Net Present Value) of Rs 452 crores and IRR (Internal rate of return) of 20 % thus boosting the future forecasts of Supreme.

27

Technicals As on RSI (14) Williams %R (14) MACD (12,26) EMA (9) Fast Sto (%K) Slow Sto (% K) OBV SMA (50) SMA (200) (08/05/13) 52.01 -41.56 (.8,1.03,0.18) 58.44 57.82 12625636 206.2 251.6

Table 4.6(Source: Moneycontrol.com) The stock is range bound between Rs 200 and Rs 210 in the past five weeks. (1). Relative Strength Index (14 weeks (Neutral)) : RSI is a momentum oscillator generally used in sideways or ranging markets where the price moves between support and resistance levels.Technical momentum indicator that compares the magnitude of recent gains to recent losses in an attempt to determine overbought and oversold conditions of an asset. The RSI ranges from 0 to 100. An asset is deemed to be overbought once the RSI approaches the 70 level, meaning that it may be getting overvalued and is a good candidate for a pullback. Likewise, if the RSI approaches 30, it is an indication that the asset may be getting oversold and therefore likely to become undervalued. (2) Stochastic Indicator ( % K) (Neutral): The value of stochastic oscillator near to zero signifies that todays close is near to lowest price security traded over a selected period and similarly value of stochastic oscillator near to hundred signifies that todays close is near to highest price security traded over a selected period. (3) On Balance Volume (Uptrend): OBV provides a running total of volume and shows whether this volume is flowing in or out of a given security. Traders will use an upward sloping OBV to confirm an uptrend, while a downward sloping OBV is used to confirm a downtrend. (4) Moving Average Convergence / Divergence (Negative Trend): The MACD comprises two lines, the fast line and the slow or signal line. These are easy to identify as the slow line will be the smoother of the two. The MACD fluctuates above and below the zero line as the moving averages converge, cross and diverge. The MACD is not particularly good for identifying overbought and oversold levels. The MACD indicator is a popular technical indicator used to produce or confirm buy and sell signals in the stock market. It's a great confirming indicator for online options trading. Positive MACD indicates that the 12day EMA is above the 26-day EMA. (5) SMA (50) & SMA (200) : Both are above the current price trends indicating a buy signal.

28

Summary: 4 out of 5 trends are positive indicating an entry point (BUY) subject to fundamentals of the stock discussed earlier. Price Movement:

Figure 4.1 SOURCE BSE Returns: Closing (prior) 216 210 279 210 Table 4.7 Key Risks and Concerns: (1) High Interest Rates (2) Policies of Government: As per the order book most contracts are government contracts and policy changes can affect order book execution and sales. Closing (present) 210 210 210 210

DURATION 3 months (OPEN-MAR,CLOSEMAY) 6 months(OPEN-NOV,CLOSEMAY) 1 Year 2 Year

Returns in % -3 0 -25 0

29

(3) Slowdown in economy: It can hamper toll revenues in BOT projects thus affecting the cashflow forecasts.

Risk Mitigation: The company has diversified into many segments and subsequently into geographies other than western India mitigating the risk elements. Investment Rationale: (1). Supreme has shown good execution rate at an average of 50 % through the last few years which makes it better positioned in the Infrastructure space. (2). Supreme has the highest EPS growth amongst the infrastructure players. (Net Sales EPS data sheet) (3). It has a good EBIDTA margin percentage. (4).It has a good order book growth and current government stance on faster clearance of infrastructure projects will benefit supreme immensely along with expected ease in borrowings. Supreme has also got into a JV with Khemji in Oman which will help it step into international operations. Recent News: (1). Supreme Infrastructure India Ltd. has completed the construction of "Manor to Wada Road SII-34 in Km 29/550 to 53/800 and Wada to Bhiwandi Road SII-35 in Km 49/00 to 89/070 Tahsil Wada, Bhiwandi and Palghar, District Thane, aggregating to approximately 64 kms. Under the Build, Operate, Transfer (BOT) scheme" at a project cost of INR 4,300 million. SM WBIPL has commenced tolling operation on March 4, 2013. The project was awarded by public Works department, Maharashtra (PWDM). The concession period is 22.10 years. Supreme Infrastructure India Ltd. executed the EPC work of the project. With this, the company has achieved operational status of its 3rd Road BOT project in India. (04/03/13) (2). The world's largest India-dedicated infrastructure fund, UK-based 3i, is pulling out of India and exiting all its portfolio companies as the country has failed to meet investors' expectations due to slowing growth and a volatile policy environment worsened by a depreciating currency. (04/05/13)

30

5. SADBHAV ENGINEERING LIMITED

May 08th, 2013 CMP: Rs 116.50 Mcap Full / Free Float :Rs 1761 crores / Rs 968 crores BSE GROUP (B) / NSE 52 Week High / Low : Rs 156 / Rs 103. Beta: 0.83 (Source: Bloomberg) Face Value : Rs 1.00 Background: Sadbhav Engineering Limited (SEL), is a leading Gujarat based ISO-9001-2000 certified company was incorporated on 3rd October 1988 as a private limited company after taking over the running business of M/s Bhavna Construction Co. The core areas of operations of the company comprise Construction of Roads & Highways, Irrigation and Mining Operations. The Company was awarded the first Sardar Sarovar Narmada Nigam Limited (SSNNL) Canal Project during the year 1989-90. Sadbhav ventured into the road sector in 1995 and has established a good name for itself in the industry. The first mine excavation project of the company was executed in the year 1992-93. The Company went public and listed on the bourses (BSE / NSE) in the year 2006.The managing director of the company is Mr. Vishnu .M.Patel.The joint managing director of the company is Mr.Shashin Patel.The executive director of the company is Mr.Nitin Patel, which makes the board a closely family held one. Current Scenario: In the Union Budget 2013-14 it was announced that during H1FY14 (first half of FY 14) over 3,000 km of new road projects will be awarded which has come as a breather to many infrastructure firms particularly in the EPC segment. The mining sector is witnessing slowdown due to regulatory and policy concerns from the government front. Irrigation projects particularly in Gujarat are not witnessing any large scale operations or expansion, however the national waterways project declared in the recent union budget could offer new avenue on this front. So,Sadbhavs dependence on roads and highways has been more and recent positive steps from government and NHAI are positive for Sadbhav. Sadbhav has been associated with HCC,Punj Loyd,L&T and Gammon India. Mode of Operation: Sadbhav bids for road projects of NHAI,PWD and other government agencies. Sadbhav also bids for irrigation projects like widening of canals of water resources and irrigation department of state and central government. Sadbhav bids for mines like coal mines for industrial units and power plants.

31

Order Book: Total (Rs Crores) Roads & Highways (%) 48 69 76 71 72 Mining(%) 19 15 15 12 13 Irrigation (%) 33 16 9 17 15 % Growth Roads & Highways (%) 44 10 -7 1 Mining(%) -23 0 -19 8 Irrigation (%) -50 -44 87 -12 Value in Rs Crores Roads & Highways 1324 2990 4961 4676 5193 Mining 531 642 964 790 938 Irrigation 910 707 591 1120 1082 % Execution 19 34 37 Table 5.1 (Workings in EXCEL (SOURCE: ANNUAL REPORT)) FY 08 2765 FY 09 4339 FY 10 6516 FY 11 6586 FY 12 7213

Sadbhav has built an order book which has grown at steady pace and though the company has not been able to diversify its presence over the years into different segments so as to reduce its reliance over one particular segment which can be observed in the order book above. Governments focus on infrastructure investments particularly on roads and highways will provide impetus to Sadbhavs order book growth in future. Expanding order book gives revenue visibility of the company whose current order book would be executed (with near to thirty percent average execution) over the next couple of years. The order book has entries mainly from western region thus posing regional fall back threat. The company has also started new projects in South and North regions. More diversification is expected from the company on the investor front

32

Financials: (Source Annual Report data)

Rs crores FY 11 15 610 625 396 1037 230 326 69 687 85 593 1434 1518 482 1037

Balance Sheet Year End March Share Capital Reserves & Surplus Net Worth Debt Total Liabilities Fixed Assets Investments Inventories Debtors Cash & Other Cash Equivalents Loans & Advances Current Assets Current Liabilities Net Current Assets Miscellaneous Total Assets

FY 12 15 747 762 402.7 1188 288 332 88 792 56 606 1542 2204 568 1188

Table : 5.2
P&L Net Revenues Total Expense EBIDTA Other Income Interest Depreciation Tax PAT FY 11 2209 1983 226 20 42 27 57 119 FY 12 2676 2386 290 11 65 27 67 142

Table: 5.3

33

Key Ratios Year End March EPS P/E P/BV D/E ROE % ROCE % EV/ EBIDTA EV/Sales

FY 12 8 16 3.0 0.63 19.1 11.7 9.6 0.98

FY 13 9 16 3.1 0.53 18.6 12.2 9.2 1.0

Table : 5.4 Sales growth: The company has recorded a healthy average sales of Rs 1801 crores with an average increase of 38 % over the last four years. The recent order book status appears to give more growth potential for the company in near future. Interest cost: The company has seen a rise in interest cost over the last few years as it has expanded its operations but in the last couple of years due to high interest rate regime the companys borrowing cost has gone up marginally. Over the last four years the average interest cost has been Rs 40 crores and of last fiscal at Rs 65 crores. EBIDTA Margin: The companys EBIDTA margin has remained at an average of 10 % over the last four years which is a bit on the downside. The higher the EBITDA margin, the less operating expenses eat into a company's bottom line, leading to a more profitable operation, because EBITDA excludes depreciation and amortization, EBITDA margin can provide an investor with a cleaner view of a company's core profitability. PAT growth: The companys bottom line has grown at an average of 42% over the last four years with a major one time earnings in the year 2011. Cash flow growth: The cash flow of the company has been healthy with average 35 % growth in the last four years. Employee expense as sales %: The companys employee expense has been stable at 1.5 % of sales and reflects its manpower efficiency. Raw materials expense as sales %: Raw material expense has been static at 16 % year on year which is due to slower execution of order book. Ratio Analysis: a. Liquidity Ratios Sadbhav has an average current ratio of 1.9 for past four years which in infrastructure sector is above average. Net Debt to equity ratio of the company has been around 0.63 for the past four years, being an 34

infrastructure company its debt is less than its peers.Net debt has been increasing at the rate of 25 % over the past four years . b. Turnover Ratio Sadbhav has a fixed asset turnover ratio of 7.9 over the last four years which is a good performance. The fixed-asset turnover ratio measures a company's ability to generate net sales from fixed-asset investments - specifically property, plant and equipment (PP&E) - net of depreciation. A higher fixed-asset turnover ratio shows that the company has been more effective in using the investment in fixed assets to generate revenues. c. Working Capital A company needs just the right amount of working capital to function optimally. Changes in working capital are proportional to revenue growth in sadbhavs case. Working capital to sales percentage has been observing a growth of 27% over the past four years. The average working capital days over past 4 years are 98 which is better than its peers. Working capital days is used to describe how many days it will take for a company to convert its working capital into revenue. The faster a company does this, the better. In sadbhavs case it is good with respect to infrastructure sector. d. Inventory Inventory turnover for sadbhav has been at average of 4.9 for past four years thus indicating no serious inventory pile up. Inventory turnover days has been at 97 over past years. A ratio showing how many times a company's inventory is sold and replaced over a period. The days in the period can then be divided by the inventory turnover formula to calculate the days it takes to sell the inventory on hand or "inventory turnover days." Which is 365 in this case. e. Return on equity and Return on capital employed has been at 17 % and 10 % over the past four years indicating average return being generated by the company. f. Valuations The Price to earning has been at an average of 17.3x and in FY 09 at 6x indicating a better entry point then. The PEG of sadbhav has been at -0.2 over the last four years indicating an undervalued position for the stock. The price to book value of the company has been at an average of 2.85 over the past 4 years . The lower the PEG ratio, the more the stock may be undervalued given its earnings performance, which is going at a snail slow pace and downhill. The enterprise value of the company of late is Rs 1868 crores with over 67 % growth on average in the last four years. Enterprise value is an indicator of how the market attributes value to a firm as a whole. Enterprise value is a term coined by analysts to discuss the aggregate value of a company as an enterprise rather than just focusing on its current market capitalization. It measures how much you need to fork out to buy an entire public company. EV/EBIDTA of the company of late is 5 and has an average of 5 over

35

the past few years , The enterprise multiple looks at a firm as a potential acquirer would, because it takes debt into account - an item which other multiples like the P/E ratio do not include. EPS has been growing fairly over the past four years. Dividend per share has increased at Rs 6 per share over the past two years considering FV split.

Technicals: CMP Rs 116.50 Indicators 8/5/2013 Type Slow Sto (%K)(14)(%D)(3) 65.13,65.51 Neutral Williams % R -32.99 Neutral MACD (12,26) -0.09 Sell Divergence 0.13 Neutral OBV 326678906 Neutral RSI (14) 50 Neutral SMA (50) 114.06 Neutral SMA (200) 128.01 Buy Table 5.5(Source:Moneycontrol.com) The stock has been range bound in the past five weeks in Rs 120 to Rs 116 range . (1). Relative Strength Index (14 weeks (Neutral)): RSI is a momentum oscillator generally used in sideways or ranging markets where the price moves between support and resistance levels. Technical momentum indicator that compares the magnitude of recent gains to recent losses in an attempt to determine overbought and oversold conditions of an asset. The RSI ranges from 0 to 100. An asset is deemed to be overbought once the RSI approaches the 70 level, meaning that it may be getting overvalued and is a good candidate for a pullback. Likewise, if the RSI approaches 30, it is an indication that the asset may be getting oversold and therefore likely to become undervalued. (2) Stochastic Indicator ( % K) (Neutral): The value of stochastic oscillator near to zero signifies that todays close is near to lowest price security traded over a selected period and similarly value of stochastic oscillator near to hundred signifies that todays close is near to highest price security traded over a selected period. (3) On Balance Volume (Neutral): OBV provides a running total of volume and shows whether this volume is flowing in or out of a given security. Traders will use an upward sloping OBV to confirm an uptrend, while a downward sloping OBV is used to confirm a downtrend. (4) Moving Average Convergence / Divergence (Negative Trend): The MACD comprises two lines, the fast line and the slow or signal line. These are easy to identify as the slow line will be the smoother of the two. The MACD fluctuates above and below the zero line as the moving averages converge, cross and diverge. The MACD is not particularly good for identifying overbought and oversold levels. The MACD 36

indicator is a popular technical indicator used to produce or confirm buy and sell signals in the stock market. It's a great confirming indicator for online options trading. Positive MACD indicates that the 12day EMA is above the 26-day EMA. (5) SMA (50) & SMA (200): Both are above the current price trends with positive divergence indicating a positive signal. Summary: 6 out of 8 trends are Neutral indicating a neutral (NEUTRAL) subject to fundamentals of the stock discussed earlier. Price Movement:

Source:BSE

Figure 5.1 Source: BSE

37

Returns: RETURNS % 3 months 3.6 6 months -18 1 Year -14.3 2 Year -12.2 Table 5.6 Source:BSE

Key Risk and Concerns: (1) Slow order book execution. (2) High Interest Rates. (3) Policies of Government: As per the order book most contracts are government contracts and policy changes can affect order book execution and sales. (4) Slowdown in economy: It can hamper toll revenues in BOT projects thus affecting the cash flow forecasts. Risk Mitigation: The company has not diversified into many segments making it risk prone to government policies in roads and highways. Investment rationale: (1) Sadbhav has a slow order book execution when compared to Supreme its EPS has also been on the lower side. (2) Sadbhavs order book is less diversified and depends mainly on the roads and highway segment which in recent years has experienced fall in traffic which would adversely affect Sadbhav. Any government policy paralysis would result in Sadbhav growth being hampered, so Sadbhav does not compares in positive with Supreme. Recent News: (1). National Highways Authority of India (NHAI) has cancelled the bid process of a road project in Tamil Nadu, for which the company was declared successful bidder. The estimated cost of the 80 km project was Rs 319 crore. (15/04/13) (2). Sadbhav Engineering has won a INR 133 crore project in Uttar Pradesh for deepening and widening of a canal.The company said in a statement that "The company has been declared successful bidder for earthwork for deepening and widening of parallel lower Ganga canal.It said the bid was invited by the Irrigation Department, Uttar Pradesh for the contract valued at INR 133 crore.(18/04/13)

38

6. UNITY INFRAPROJECTS LIMITED

May 08th 2013 CMP : Rs 33.40 Mcap Full / Free Float : Rs 247.45 crores / 98 crores BSE Group (B) / NSE Beta: 1.56 (Source: Bloomberg) 52 week High / Low : Rs 52 / Rs 25.55 Face Value: Rs 2. Background: Unity Infraprojects Limited (UIL) was incorporated in 1979. Headquartered in Mumbai, mainly engaged in construction and allied activities, company operates in 4 verticals: buildings and housing; transportation; water supply and irrigation.Unity Infraprojects Limited (UIL) is a leading player in infrastructure segment since last 33years. Company has grown from an EPC contractor to a full fledged infrastructure company, specializing in civil construction and infrastructure segments namely transportation and irrigation & water supply. It became a public limited company by the name Unity Infraprojects Limited in 2006. The managing director of the company is Mr.K .K. Avarsekar, vice chairman and MD of the company is Mr. Abhijit Avarsekar, director of the company is Mr.Anil Joshi, which makes the board a family held one. Current Scenario: The road development schemes discussed in the previous report in the budget of 2013-14 will be helpful for the company in addition to that the National water policy 2012 will also provide new avenues (Water Resources projects). With economic slowdown bottoming out and interest rates expected to ease in the wake of RBIs new monetary policy real estate demand is expected to go up in major metros. As per CRISIL research Mumbai and NCR alone are expected to generate 55 % of supply in the real estate market by 2015. Moreover its major presence in government building construction space provides it a safety from major market fluctuations. Most of the companys road projects are currently in DBFOT form. Though Unity has faced project delays in Bangalore in buildings segment its growth will remain on the flip side. Water segment projects in Mumbai area are well on towards the completion path. Mode of operation: The company bids for projects mainly in Building space, Irrigation and Road transport where it has acquired excellence in the past few decades of it existence.

39

Order Book:
Order Book in Rs Cr. Building Water Transport % Growth Buildings Water Transport % to total Building Water Transport 2008 1482.64 NA NA NA NA NA NA NA NA NA 2009 1232.68 NA NA NA NA NA NA NA NA NA 2010 3477.5 NA NA NA NA NA NA NA NA NA 2011 3501.1 1871 1158 470.7 NA NA NA 53 33 13 2012 4771.65 2380.3 1146.29 1245.05 27 -1 165 50 24 26

Table:6.1 SOURCE:Annual Report (NA:Data not available in annual report) Unitys order book has shown healthy growth year on year at average of 18 % in the past four years with a dip during 2009. Unitys order book also contains government project in Bangladesh and Nepal and buildings section is well diversified in different regions of India. Unitys less exposure in road segment isolate it from recent downfall observed in traffic across the country. Meanwhile unity has faced regulatory problems in Bangalore in its building segment, recent decrease in demand in building space are concerns in the order book but Unity has bagged most of the contracts in the building space from the government which makes it a bit comfortable. Financials: (Source Annual Report data)
Balance Sheet Year End March Share Capital Reserves & Surplus Net Worth Debt Total Liabilities Fixed Assets Investments Inventories Debtors Cash & Other Cash Equivalents Loans & Advances Current Assets Current Liabilities Net Current Assets Miscellaneous Total Assets Rs crores FY 11 15 636 651 848 1500 121 62 78 730 222 640 1671 365 1305 1500

FY 12 15 731 746 742 1490 132 54 200 676 288 794 1958 654 1304 1490

40

P&L Net Revenues Total Expense EBIDTA Other Income Interest Depreciation Tax PAT

FY 11 1703 1472 231 15 83 18 48 97

FY 12 1975 1699 277 17 121 20 46 107

Table 6.3
Key Ratios Year End March EPS P/E P/BV D/E ROE % ROCE % EV/ EBIDTA EV/Sales

FY 11 13 5 0.72 1.3 15 14 5 0.64

FY 12 14 3 0.48 1 14 17 3 0.41

Table 6.4 Sales growth: The company has recorded a healthy average sales of Rs 1571 crores with an average increase of 20 % over the last four years. The recent order book status is healthy. Interest cost: The company has seen a rise in interest cost over the last few years as it has expan ded its operations but in the last couple of years due to high interest rate regime the companys borrowing cost has gone up marginally. Over the last four years the average interest cost has been Rs 75 crores and of last fiscal at Rs 121 crores. EBIDTA Margin: The companys EBIDTA margin has remained at an average of 13 % over the last four years. The higher the EBITDA margin, the less operating expenses eat into a company's bottom line, leading to a more profitable operation, because EBITDA excludes depreciation and amortization, EBITDA margin can provide an investor with a cleaner view of a company's core profitability. PAT growth: The companys bottom line has grown at an average of 16% over the last four years indicating a reasonable translation of its top line. Cash flow growth: The cash flow of the company has been healthy with average 14 % growth in the last four years reinforcing the faith in the companys financials. Employee expense as sales %: The compnays employee expense at 3% of its sales has been stable and reflects its manpower efficiency.

41

Raw materials expense as sales %: Raw material expense has been static at 45 % year on year reflecting a a higher cost to the company in the market

Ratio Analysis: a. Liquidity Ratios Unity has a constant current ratio of 4 for past four years which with some concerns on this number. Net Debt to equity ratio of the company has been around .84 for the past four years, being an infrastructure company its debt is less and sound as compared to other companies.Net debt has been decreasing at the rate of 8 % over the past four years with a sales growth of 20 % has also been achieved over the past four years indicating good operational practices. b. Turnover Ratio Unity has a fixed asset turnover ratio of 14 over the last four years which is a good performance. The fixed-asset turnover ratio measures a company's ability to generate net sales from fixed-asset investments - specifically property, plant and equipment (PP&E) - net of depreciation. A higher fixed-asset turnover ratio shows that the company has been more effective in using the investment in fixed assets to generate revenues. c. Working Capital A company needs just the right amount of working capital to function optimally.Changes in working capital are proportional to revenue growth in Unitys case. Working capital to sales percentage has been observing a growth of 103.2 % over the past four years.The average working capital days over past 4 years is 377 and is a red signal. Working capital days is used to describe how many days it will take for a company to convert its working capital into revenue. The faster a company does this, the better. In Unitys case it is not in line with respect to infrastructure sector. d. Inventory Inventory turnover for Unity has been at average of 7 for past four years thus indicating no serious inventory pile up. Inventory turnover days has been at 59 over past years. A ratio showing how many times a company's inventory is sold and replaced over a period. The days in the period can then be divided by the inventory turnover formula to calculate the days it takes to sell the inventory on hand or "inventory turnover days." Which is 365 in this case. e. Return on equity and Return on capital employed has been at 15 % and 15 % over the past four years indicating an average return being generated by the company.

42

f. Valuations The Price to earning has been at an average of 2.7x and in FY 09 at .3x indicating a better entry point then. The PEG of Unity has been at 0.16 over the last four years indicating an undervalued position for the stock. The price to book value of the company has been at an average of .39 over the past 4 years . The lower the PEG ratio, the more the stock may be undervalued given its earnings performance and other fundamentals. The enterprise value of the company of late is Rs 814 crores with over 38 % growth on average in the last four years but cautious on the 25 % decline from 2011 to 2012. Enterprise value is an indicator of how the market attributes value to a firm as a whole. Enterprise value is a term coined by analysts to discuss the aggregate value of a company as an enterprise rather than just focusing on its current market capitalization. It measures how much you need to fork out to buy an entire public company. EV/EBIDTA of the company of late is 4 and has an average of 4 over the past few years, the enterprise multiple looks at a firm as a potential acquirer would, because it takes debt into account - an item which other multiples like the P/E ratio do not include. EPS has been at an average of Rs 34 over the past four years (split in Face Value over last couple of years). Dividend per share is constant at Rs 5 per share considering the split causing share multiples. Technicals:
Indicators RSI (14) William % R (14) MACD (12,26) EMA (9) Fast Sto (%K) Slow Sto (%K) OBV SMA (50) SMA (200) Unity Infra (08/05/13) 51.92 -91.64 .12,.01,.11 8.36 8.29 84516716 30.68 40.59

Table: 6.5 (Source: Moneycontrol.com) (1). Relative Strength Index (14 weeks (Neutral)): RSI is a momentum oscillator generally used in sideways or ranging markets where the price moves between support and resistance levels. Technical momentum indicator that compares the magnitude of recent gains to recent losses in an attempt to determine overbought and oversold conditions of an asset. The RSI ranges from 0 to 100. An asset is deemed to be overbought once the RSI approaches the 70 level, meaning that it may be getting overvalued and is a good candidate for a pullback. Likewise, if the RSI approaches 30, it is an indication that the asset may be getting oversold and therefore likely to become undervalued. (2) Stochastic Indicator ( % K) (Sell): The value of stochastic oscillator near to zero signifies that todays close is near to lowest price security traded over a selected period and similarly value of stochastic oscillator near to hundred signifies that todays close is near to highest price security traded over a selected period. 43

(3) On Balance Volume (Downtrend): OBV provides a running total of volume and shows whether this volume is flowing in or out of a given security. Traders will use an upward sloping OBV to confirm an uptrend, while a downward sloping OBV is used to confirm a downtrend. (4) Moving Average Convergence / Divergence (Neutral): The MACD comprises two lines, the fast line and the slow or signal line. These are easy to identify as the slow line will be the smoother of the two. The MACD fluctuates above and below the zero line as the moving averages converge, cross and diverge. The MACD is not particularly good for identifying overbought and oversold levels. The MACD indicator is a popular technical indicator used to produce or confirm buy and sell signals in the stock market. It's a great confirming indicator for online options trading. Positive MACD indicates that the 12-day EMA is above the 26-day EMA.

(5) SMA (50) & SMA (200) (Neutral): In short run (past three weeks) the stock has shown gains but on the long run it is trading below average. Summary: 3 out of 5 trends are neutral indicating a wait period before entering / buying the stock subject to fundamentals of the stock discussed earlier.

44

Price Movements :

Source : BSE

Figure 6.1 (Source : BSE) Returns:

DURATION 3 months 6 months 1 Year 2 Year Closing (prior) 34.75 31.2 48.5 67 Closing (present) 32 32 32 32 Returns in % -8 3 -34 -52

Table 6.6 (Source BSE)

Key Risk and Concerns: (1) High Interest Rates (2) Policies of Government: As per the order book most contracts are government contracts and policy changes can affect order book execution and sales. (3) Slowdown in economy: It can hamper revenues in Building segment thus affecting the cash flow forecasts.
45

(4) Order inflow from Rajasthan, MP and New Delhi may slow down after first six months of this calendar year due to election schedule in these regions in December 2013.

Risk Mitigation: The company has diversified into many segments and subsequently into geographies other than western India mitigating the risk elements. Going ahead, in terms of various states, company expects
order inflow to boost from state like Gujarat, UP and Bihar while it may remain subdued from Maharashtra. Investment rationale: (1). Unity is trading near to 52 weeks low some of the factors for which would be slow order book growth and overall margins remaining sluggish. (2). Unity is having three road projects (BOT) which are expected to improve its numbers meanwhile regulatory problems related to real estate in Bangalore has caused it a trouble. (3). Unitys low price makes it attractive with government gearing up to take positive steps in infrastructure, it can recover the lost pace.

46

7. Learning from the Internship experience

1. The internship experience at Bajaj Allianz provided me an opportunity to see how investment department functions and the way in which investment decisions are made. 2. In investment world every decision involves risk associated with it , the whole purpose is to study the impact of the risk and relate it to the fundamentals and technicals so that returns are maximized. 3. Investments are diversified to mitigate systemic risk as far as possible by maintaining a well balanced portfolio where the role of the fund manager becomes very crucial. 4. I also got an opportunity to learn about various asset classes as equities in various sectors and market size, bonds and forex. 5. Interacting with the management at various positions gave me an exposure to the decision making processes followed in the department.

47

8 Bibliography
1.www.nseindia.com (NCFM) 2.www.bseindia.com 3.www.supremeinfra.com 4.www.sadbhaveng.com 5.www.unityinfra.com 6.www.hindubusinessline.com 7.www.business-standard.com 8.www.profit.ndtv.com 9.www.investopedia.com 10.www.investing.businessweek.com 11.www.economictimes.com 12.www.indiainfoline.com 13.Bajaj Allianz Investment reports . 14.Union Budget Speech 2013. (finmin.nic.in) 15.Ministry of Corporate affairs.(www.mca.gov.in) 16. Bloomberg Terminal 17.Annual Report of companies. 18.www.bajajallianz.com

48