Kotak Securties Limited - Srei Infrastructure Finance Limited

INITIATING COVERAGE 

Sarika Lohra 

sarika.lohra@kotak.com 

+91 22 6634 1480 

Stock details 

BSE code : 523756 

NSE code : SREINTFIN 

Market cap (Rs mn) : 1,832 

Free float (%) : 75 

52-wk Hi/Lo (Rs) : 164/157 

Avg. daily volume BSE : 370136 

Avg. daily volume NSE : 580914 

Shares o/s (mn) : 116.1 

Summary table 

(Rs bn) FY08E FY09E FY10E 

Int. Income 5.2 8.3 12.8 

Int. expenses 3.2 5.4 8.6 

NII 2.0 2.9 4.2 

Non-Int Income 0.3 0.4 0.5 

Total Income 2.3 3.3 4.6 

Optg Profit 1.4 2.0 2.8 

PAT 1.1 1.5 2.2 

GNPA (%) 0.6 0.7 0.6 

NNPA (%) 0.1 0.1 0.1 

NIMs (%) 4.7 4.2 4.0 

RoA (%) 2.6 2.2 2.1 

RoE (%) 15.1 13.8 16.7 

Divi. Payout (%) 20.0 20.0 20.0 

EPS (Rs) 10.1 11.5 16.4 

BV (Rs) 87.6 95.1 102.3 

Adj. BV (Rs) 83.4 91.0 97.4 

P/E (x) 15.4 13.6 9.5 

P/ABV (x) 1.9 1.7 1.6 

Source: Company, 

Kotak Securities - Private Client Research 

Shareholding pattern 

FI's and 

MF's 

11% 

FIIs 

48% 

Source: Capitaline 

One-year performance (Rel to sensex) 

Source: Capitaline 

SREI Infra 

Public 

10% 

Corporat 

es 

11% 

BSE Sensex 

SREI Infrastructure Finance Ltd 

PRICE : RS.139 RECOMMENDATION : BUY 

TARGET PRICE : RS.200 FY10E PE : 8.5X; P/ABV : 1.4X 

Srei Infrastructure Finance (Srei) is well placed to leverage on the robust 

capex requirement for infrastructure development. Srei caters to SME 

project developers. The NBFC has created a niche for itself in the 

infrastructure financing segment. This has helped Srei in capturing a 

share of around 30% of the infrastructure equipment financing space. 

The sale of the asset financing business to a 50:50 JV with BNP Paribas is 

expected to help the company in ramping up its other business. Srei 

Infrastructure would largely focus on equipment financing segment 

which is estimated to be worth Rs.150 bn and the project financing 

business. We expect the business of the NBFC to grow at a CAGR of 46% 

over FY07-10 to Rs.111 bn. 

We are extremely positive on Srei's business growth prospects. We opine 

that this will drive the NBFC's revenue growth, going forward. We have 

valued the company on an SoTP methodology to arrive at a fair price 

target of Rs.200. At the current price, the stock is trading at around 1.4x 

its FY09 ABV of Rs.97. At our price target of Rs.200, the stock offers an 

attractive upside of 28%. We recommend BUY on the stock with a 12month 

price target of Rs.200. 

Investment rationale 

PRIVATE CLIENT RESEARCH 

APRIL 15, 2008 

Substantial spend on infrastructure development: Following the 

Government's thrust on infrastructure development, the Eleventh Five Year 

Plan (FY2007-12) has laid out expenditure of $500 bn on the infrastructure 

sector. This offers huge potential to infrastructure project developers and 

contractors. In the backdrop of considerable construction activity, the demand 

for construction equipment is also likely to grow. Construction equipment 

cost accounts for approximately 20% of the total construction cost of a 

project. Thus the demand for construction equipment is expected to increase 

fivefold by 2015 from the current US$2.3 bn to about US$12-13 bn. 

Vital presence in the niche segment Srei provide services to small and 

medium scale contractors and project developers. The NBFC has efficiently 

capitalized on its strong relationship with its customers and created a 

significant place in the segment. Around 85-90% of the company’s orders are 

repeat orders, which has helped the company create a niche for itself. 

Currently, Srei controls significant market share of close to 30% of the total 

equipment financing segment. 

Higher business growth amid robust capex in infrastructure sector: 

There would be substantial infrastructure spending of $500 bn in the Eleventh 

Five Year Plan (FY07-12). Of this, over 65% would be in the construction 

sector alone. This, we believe, offers huge potential to construction 

contractors and project developers. In light of this, the overall financing assets 

of the NBFC are expected to grow at a CAGR of 46% over FY07-10 to Rs.111 

bn. 

Capitalizing on BNP Paribas JV to boost business growth: Srei has 

entered into a 50:50 JV with BNP Paribas for the equipment financing and 

leasing business. BNP Paribas has invested Rs.7.8 bn while Srei has invested 

close to Rs.25 bn in the JV. The new JV has commenced its operations from 

April 2008. With the 50% holding in the JV, Srei (the parent company) would 

get additional funds worth Rs.4 bn to capitalize on. This would facilitate rapid 

business growth for the company. 

Registered Office: Kotak Securities Limited, Bakhtawar, 1st floor, 229 Nariman Point, Mumbai 400021 India.

INITIATING COVERAGE April 15, 2008 

We recommend a BUY on 

SREI Infrastructure with a 12month 

price target of Rs.200 

Project financing and advisory to be key growth drivers: Post capital 

infusion by BNP Paribas, Srei (the parent company) would focus mainly on the 

large scale infrastructure projects above Rs.150 mn, and the project financing 

business. The NBFC has bid for various projects in consortium partnership with 

companies engaged in the development of roads, ports and SEZs. Moreover, 

Srei also gets the advantage of sharing a cordial relationship with the 

Government of India, and has been chosen as a preferred partner for various 

Government projects for advisory and execution. 

Buoyant financials supported by considerable business growth: We 

expect the earnings growth for the NBFC to continue to witness traction 

following the rapid business growth. NII of the NBFC is expected to grow at a 

CAGR of 38% over FY07-10E to Rs.3.97 bn, while we expect net profit of the 

company to grow at a CAGR of 37% over FY07-10E to Rs.2.17 bn. 

Valuation and recommendation 

We have a positive outlook on the stock given the favorable macro-economic 

factors. Robust business growth of the company would be the key revenue driver. 

We have valued the company on a sum of the parts (SoTP) basis, and valued the 

core business of the parent company Srei Infrastructure Finance (consolidated) on a 

dividend discount model. 

At the current market price of Rs.135, the stock is currently trading at a P/E of 8.4x 

its FY10 EPS of Rs.16.1 (post equity dilution-warrant conversion), and 1.4x its FY10 

P/ABV of Rs.97. Based on our SoTP valuation method, we have arrived at a fair 

price target for the company of Rs.200. At our target price, the stock offers a 

potential upside of around 46%. We recommend BUY on the stock with a 12month 

price target of Rs.200. 

Risk and concerns 

Competition with Banks and FIs: With banks increasing their focus on 

lending to the SME segment, particularly to small and medium size contractors 

and project developers, the competition for NBFCs like Srei has increased. 

However, the NBFC has an advantage in that it offers varied and customized 

services to customers. This has also facilitated in developing a cordial 

relationship with them. 

Risks of non-execution/delays in project implementations: Any delay in 

the execution of projects pertaining to roads, ports and SEZs following the 

NBFC's capital constraints can affect the project development related income of 

the company. 

Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 2


Infrastructure sector investment 

Sector Total 11th plan 

Electricity (incl. NCE) 6,165 

Roads 3,118 

Telecom 2,670 

Railways (incl. MRTS) 2,580 

Irrigation (Incl. Watershed) 2,231 

Water Supply and Sanitation 1,991 

Ports 739 

Airports 347 

Storage 224 

Gas 205 

Total Investment 20,272 

Total (US $ billion) 494.43 

Investment as % of GDP 7.53 

Source: Planning Commission 

Construction capex 

Particulars (Rs bn) 

Total investments 14500 

Monetary Requirements:- 

-For construction material 4950 

-For construction Equipment 1800 

-Manpower 1080 

Source: Planning Commission 

INFRASTRUCTURE DEVELOPMENT IN INDIA: 

AN OVERVIEW 

Robust capex requirement for infrastructure development 

The Eleventh Five Year Plan has outlined a massive capex requirement for infrastructure 

development in the country. During the Eleventh Five Year Plan the total 

investment in infrastructure sector is estimated to be around 7.5% of GDP. Capex 

for infrastructure development - which includes roads, airports, port, power oil & 

gas and telecom - has been pegged at around $500 bn or Rs.20,272 bn over 

FY07-12. The Eleventh Plan lays emphasis on attracting private investments 

through public private partnerships or PPP. Estimated investments under the Eleventh 

Five Year Plan are inclusive of both public and private investments for infrastructure 

development. 

Construction 

The construction sector has been the biggest beneficiary of infrastructure expansion. 

The structural infrastructure construction in all sectors together requires a 

capex of approximately Rs.14,500 bn in the 11th Five Year Plan. The major growth 

drivers in the construction sector are housing construction and surface transportation 

(roads). Considering the monetary requirement, particularly for the construction 

space, which has been detailed below, over 65% of investments would be directed 

to the construction sector. 

Roads 

Under the Eleventh Five Year Plan, the committee of members has suggested a 

capital investment requirement of Rs.3118 bn, by both public and private entities. 

The planned expansion includes development of national highways, state roads, 

expressways and widening of national highways. 

Ports 

The Government of India (GoI) has planned a capacity addition of 485 MMT in 

major ports and 345 MMT in minor ports, under the Eleventh Five Year Plan. On 

the back of the robust expansion, the Government has laid down a total investment 

of around Rs.739 bn over the Eleventh Five Year Plan. 

Power 

The power sector accounts for the largest share of the total investments required 

to be made in infrastructure development. Under the power for all program, the 

Government has targeted an addition of around 70,000 MW of power generation 

capacity. The Government has earmarked the upgradation and development of the 

transmission and distribution facility for rural electrification through the Rajiv 

Gandhi Grameen Vidyutikaran Yojana (RGGVY). 

Airports 

The Government has also finalized plans for the development and modernization 

of the four metro and 35 non-metro airports for the Eleventh Five Year Plan. The 

airport development also includes construction of seven greenfield airports and 

three airports in the North East. Based on the working committees' report, the total 

investment required for the development of airports in India would be close to 

Rs.347 bn. 



Railways 

For railway infrastructure development, GoI has planned the construction of dedicated 

freight corridors between Mumbai and Delhi and between Ludhiana and 

Kolkata. The railway infrastructure development plans also include construction of 

10,300 km of new railway lines, gauge conversion of over 10,000 km and modernization 

and redevelopment of 21 railway stations. The Government also indicated 

the introduction of private entities in container trains for rapid addition of 

rolling stock and capacity. 

Gas 

In the Eleventh Five Year Plan, an investment of around Rs.205 bn is required for 

setting up gas distribution infrastructure, which comprises LNG terminal, gas transmission 

lines and city gas distribution. 

Telecom 

Of the $500 bn of planned expenditure over FY07-12, around 13% would be 

spent on the telecom sector, which amounts to around Rs.2670 bn. Under the 

Eleventh Five Year Plan, GoI plans to achieve a telecom subscriber base of 600 mn, 

with 200 mn rural telephone connections. 

Infrastructure equipment requirement 

With the intense need for faster implementation of infrastructure projects resulting 

in increased mechanization, the demand for hi-tech construction equipment is rising. 

Given the substantial infrastructure spending, the requirement for 

infrastrastructure related equipment would be significantly higher in the Eleventh 

Five Year Plan. 

In view of the sizeable construction activity, the construction equipment industry is 

poised for a big leap. The domestic equipment market is all set to expand five-fold 

to around $13 bn by FY15 from around $2.3 bn in 2007 (Source: CII). Considering 

the following table, this indicates that the cost of infrastructure equipment would 

account for approximately 20% of the total construction cost under various 

projects 

Construction and infrastructure equipment cost (project wise) 

Construction Construction component (%) Infra equipment as percent 

of total project cost of construction cost 

Road 100 22 

Power-Thermal 20 23 

Power- nuclear 30 23 

Power-hydel 70 23 

Airports 42 8 

Ports 50 20 

Irrigation & dredging 60 20 

Urban Infrastructure 60 5 

Railways 42 7 

Source: KPMG, Company 


Market share 

HDFC Bank 

9% 

Citicorp 

14% 

ICICI Bank 

23% 


ABN Amro 

7% 

Source:Company 

GE Capital 

6% 

Others 

11% 

Srei 

30% 

COMPANY BACKGROUND 

Srei Infrastructure Finance (Srei) is a Kolkata-based infrastructure equipment 

financing and infrastructure project financing company. The company 

is owned by the Kanoria family, headed by Hemant Kanoria. The NBFC is 

India's leading player in the infrastructure financing segment with a market 

share of around 30%. Srei's unique business matrix includes financing 

infrastructure, construction and mining equipment, infrastructure projects 

and renewable energy systems. 

The NBFC has also developed strong expertise in the areas of investment 

banking and venture funds, besides insurance broking. Srei operates across 

the country with a network of 51 offices and has expanded its operations 

overseas in Russia. In addition, through its associate concern Quipo Infrastructure 

Equipment Ltd (QIEL), Srei has pioneered the concept of renting 

of construction equipment in India under the brand name of Quipo. 

Leader and niche player; well poised to capitalize 

Srei is largely catering to the financial requirement of small and medium size construction 

and infrastructure developers. The NBFC provides financial assistance to 

these contractors to help them to scale up to project developers. Srei provides asset 

financing services to companies engaged in varied infrastructure development 

activities like construction, mining, oil & gas, power, ports, telecom, railways, aviation 

and renewable energy. 

Besides this, the NBFC also offers auxiliary services to its customers along with infrastructure 

equipment financing. Srei provides customized solutions across various 

verticals to its customers. Project advisory, investment banking, debt funding and 

insurance advisory services are various services that the NBFC offers. This makes 

Srei a one-stop shop for its customers. 

Srei has efficiently capitalized on its strong relationship with its customers and created 

a niche for itself in this segment. This has facilitated Srei in capturing close to 

30% market share of the total equipment financing market. Currently, around 85- 

90% of the company’s orders are repeat orders, which has helped the company in 

creating a niche for itself. 

Recording strong growth in key business segments 

Srei is operating largely in three segments, which includes asset financing (financial 

and operating lease), project financing, and advisory and fee-based services. The 

asset financing business of the company contributes to around 90% of the total 

revenues. However, going forward, with the revamping of its business model, the 

project financing and advisory business would also start contributing a significant 

share to the total revenues of the company. Meanwhile, the asset financing business 

would continue to be the revenue growth driver for the company. 

After transferring the financial leasing business to Srei Infrastructure Development 

Finance, a 50:50 JV with BNP Paribas, the parent company would focus largely on 

big ticket equipment financing projects above Rs.150 mn. Moreover, the parent 

company would also concentrate more on the project financing and project advisory 

business. 

Asset financing business remains major revenue driver 

Srei's asset financing business consists of financial lease and operating lease. The 

major part of the NBFC's business consists of financing lease, which accounts for 

close to 90% of the financing assets. 

With the commencement of the partnership with BNP Paribas, the proportion of 

income from infrastructure equipment financing would be curtailed as the management 

would increase its focus on the project financing business and advisory 

and fee-based services. 



BNP Paribas JV to lead to significant business transformation 

Srei has sold its equipment financing business to a 50:50 JV company with the 

world's leading leasing finance company BNP Paribas Lease Group, which is a subsidiary 

of BNP Paribas Bank. The new JV is called Srei Infrastructure Development 

Finance. Srei Infrastructure Finance (the holding company) would continue to hold 

50% stake in the JV. 

BNP Paribas would pay a total consideration of Rs.7.8 bn for the asset financing 

business. The subsidiary company Srei Infrastructure Development Finance would 

largely concentrate on infrastructure equipment financing projects valued at less 

than Rs.150 mn and also on the insurance broking business under its umbrella. 

Benefits from 50:50 JV with BNP Paribas 

The 50:50 JV with BNP Paribas would give Srei (the holding company) access to 

the business know-how and expertise of the BNP Paribas management on the 

board. This would facilitate rapid business growth for the infrastructure financing 

business. 

With the receipt of Rs.7.8 bn from the sale of 50% of the equipment financing 

business to BNP Paribas, this has also provided Srei (the holding company) with 

capital, which enables the NBFC in expanding its business. 

The new JV with BNP Paribas would support speedier growth in the asset financing 

business. This would lead to higher earnings visibility and superior returns 

for investors. 

Robust business growth following positive macroeconomic environment, 

additional funds from BNP Paribas 

The strong growth in infrastructure would continue to boost demand for infrastructure 

financing. The total investment requirement for the infrastructure development 

sector has been pegged at $500 bn during the Eleventh Five Year Plan. 

These investments are mainly focused on power, transportation and road development. 

Infrastructure equipment cost would account for around 20% of the such 

project cost. 

Over FY04-07, the NBFC's disbursements to infrastructure equipment finance has 

seen a sharp surge of 53% to Rs.36.23 bn, Financial leasing would comprise 

Rs.31.65 bn. The innovative product offering in the operating lease business would 

lead to multifold growth in the NBFC's operating lease assets. 

There would be substantial infrastructure spending of $500 bn in the Eleventh Five 

Year Plan (FY07-12), of which over 65% would be in the construction sector alone. 

This, we believe, offers a huge potential to the construction contractors and 

project developers. In light of this, the overall financing assets of the NBFC are expected 

to grow at a CAGR of 46% during FY07-10 to Rs.111 bn. 

Business growth (Rs mn) 

120,000 

100,000 

80,000 

60,000 

40,000 

20,000 

- 

2007 2008E 2009E 2010E 

Source: Company, Kotak Securities - Private Client Research 



Scaling up project financing biz, key driver for revenues growth 

The project financing business of the NBFC has recorded significant growth. Srei 

has leveraged upon its strong relationship with small and medium enterprises and 

customized its disbursals. Currently, the share of revenue contribution from the 

project financing business is lower than the asset financing business. However, 

with the increase in the NBFC's focus on the project financing business the contribution 

will increase significantly. Srei Infrastructure as a consortium partner in various 

project developers has been awarded the following projects: 

Road development projects: SREI has recently bagged around seven NHAI/ 

Annuity Road Projects on build-operate-transfer (BOT) basis worth more than 

Rs.30bn. SREI in partnership with several leading construction companies 

throughout India will complete these projects. These BOT road construction 

projects will be completed over the next 18-36 months. 

Road Projects 

Capex required Equity SREI's stale Other major 

(Rs mn) (Rs mn) (%) partner 

Trissur-Angamalli 5509 1470 49 KMC Construction 

Bharatpur-Mahua 2905 596 26 Madhucon Projects 

Madhurai-Tuticorin 8970 1404 39 Madhucon Projects 

Karur-Dindigul 3640 728 26 Madhucon Projects 

Nagpur Seoni 4723 1181 49 Saddbhav Engineering 

Nagpur-Kondhali 1760 330 26 Atlanta 

Jaora-Nayagaon 4144 1243 28 Viva Infrastructure 

Source: Company 

Consortium to develop two ports. SREI has participated in 2 consortiums for 

development of Deep water sea ports on BOOT basis. A consortium of companies 

headed by Maytas Infrastructure along with SREI Infrastructure, NCC and 

SEC has been allotted the Machilipatnam Port and SEZ project in Andhra 

Pradesh. The project has already achieved financial closure and would cost 

close to Rs 12.5bn and is likely to be commission by Sept. 2011. 

The second port development project is in the state of Orissa, located in the 

hinterlands of Subarnarekha River. The project would cost close to Rs 17.4bn 

and is likely to be commissioned in three phase's over2010, 2020 and 2032 respectively. 

SREI holds ~70% equity in the SPV. 

Port Projects 

Capex required Equity SREI's stale Other major 

(Rs mn) (Rs mn) (%) partner 

Machilipatnam-Andhra Pradesh 12546 8856 38 Maytas, NCC & Sarat 

Chaterjee 

Subaranrekha Port - Orissa 17425 5125 70 - 




Propsed Ganga Expressway 

Source: UP State Government - PICUP 

Consortium partnership for development of two SEZs: Consortium of Srei 

Infrastructure along with West Bengal Industrial Development Corporation 

(WBIDC) has received an in-principle approval from the West Bengal Government 

for setting up an SEZ for auto components. Srei holds around 89% in the 

SPV while the balance is held by WBIDC. The consortium would develop 500 

acres of land in two phases each of 250 acres at Kharagpur in West Bengal. 

The project would cost Rs.28-30 bn. 

Also, the NBFC has also received in-principle approval for setting up an engineering 

and capital goods SEZ at Raigad, Maharashtra - the Quipo Engineering 

SEZ. Srei will hold 50% in the SEZ, while the balance will be held by Quipo Infrastructure 

Equipment (17% held by Srei Infrastructure). Therefore, effectively 

Srei will hold around 58.5% in the Raigad SEZ. The JV would require a total 

funding of around Rs.5 bn for developing a total land area of 180 hectares. 

The JV company has already started the land acquisition process in Raigad district 

for development. 

SEZ Projects 

Capex Equity SREI's Total Land other major 

required (Rs mn) stale (in acres) partner 

(Rs mn) (%) 

Raigadh 4428 1476 58.5 450 Engineering world SEZ 

Guptamani, Kharagpur 28280 810 89 500 Integrated auto 

industrial park 


We have valued all projects individually and assigned a book value multiple based 

on project IRR. We are of the view that since the project is in a nascent stage, the 

IRR is lower. However, going forward, as the project reaches maturity, these 

projects would generate higher IRR. This, we believe would lead to: 

Thrust on advisory and fee-based services 

Income from fee-based services acts as a buffer, in case of interest rate fluctuation. 

Srei is leveraging its advisory services to its customer. Over the period, the NBFC 

has developed expertise in infrastructure project development. This, along with its 

cordial relationships with the Government has proved vital for the company’s feebased 

income. 

Of late, Srei in partnership with RITES, was the key advisor to the Pradeshiya Industrial 

& Investment Corporation of Uttar Pradesh Ltd (PICUP) for the development of 

an expressway between Noida and Ballia (a 1047 km eight-lane highway) called 

the Ganga Expressway, which is worth Rs.300-400 bn. Usually the financial advisory 

fee for a particular project varies from 1-1.5%. Considering this, the company 

would derive significant fee income from the Ganga Expressway project spread 

over the life time of the project 

Working closely with the Government - key beneficiary of public private 

partnership 

Srei has been working on various state government projects and also is a key advisor 

to a number of crucial projects. Successful execution of these projects expected 

to help the company in getting large project to handle in future. 

Srei has been working closely with the Government of India on various projects. 

Moreover, the NBFC is a preferred partner of various state Governments for the 

development of various infrastructure development projects under the public private 

partnership ambit. This also suggests that the Government's confidence in the 

NBFC would be significantly remunerative to the NBFC. The Ganga Expressway is 

one such example of the NBFC's success in this segment. 



Strong and credible financials - higher business growth to drive 

earnings 

Substantial advancement in earning 

With the additional networth of Rs.4 bn (50% of Rs.8 bn from BNP Paribas JV) in 

the business in the wake of its 50% stake sale in the infrastructure equipment financing 

business to BNP Paribas, the NBFC is poised to witness strong earnings 

growth. Over FY04-07, the operating income of the company demonstrated a 

CAGR of 48%, while during FY07 the operating income of the company grew by 

a whopping 68% to Rs.1.5 bn. 

Going ahead, in view of the strong business growth (both asset financing and 

project financing), we expect the interest income of the NBFC to record a CAGR of 

50% of FY07-10 to Rs.12.75 bn. Subsequent to the attractive yields on advances, 

the net interest income (NII) of the NBFC is expected to surge at a CAGR of 40% 

over FY07-10 to Rs.4.16 bn. 

We expect the growth in Srei's net profit to remain buoyant, going forward, on 

the back of rising business growth and attractive margins. We expect a 30% 

growth in net profit of the NBFC during FY08 to Rs.1.10 bn, a 39% growth in 

FY09 to Rs.1.54 bn and a 43% growth in FY10E to Rs.2.21 bn. 

NIMs remain attractive, notwithstanding abbreviation due to increased 

leverage and higher business growth 

The NIMs of the NBFC remained significantly buoyant in the past following its prudent 

asset liability management (ALM). Besides this, the longer duration of loans 

to SME project developers also supported the NBFC's margins. We opine that the 

NIMs of the company are likely to witness some pressure in the backdrop of strong 

growth in the loan book and increased leverage. During FY08, Srei's NIMs are likely 

to remain firm following its efforts to contain cost of funds. We believe that with 

the surge in the large scale project financing business and thrust on project financing 

business, the net spreads of the NBFC are likely to witness marginal contraction 

to 2.9% & 3.0% in FY09 & FY10 respectively. 

Prudent credit risk mitigation efforts 

Srei has a sound credit appraisal mechanism, which assesses the creditworthiness 

of all its customers and projects across various regions. The NBFC also has strong 

collection and repossession capability. This has helped the NBFC in containing possible 

slippages. Besides this, a prudent selection of assets and customers also helps 

the NBFC in keeping check on its asset quality. 

Srei's gross NPA for FY07 stood at Rs.380 mn or 0.82% of advances while the net 

NPA of the company stood at Rs.75 mn or 0.19% of advances. Given the strong 

credit risk mitigation system in place the NBFC is likely to maintain strong asset 

quality going forward. 

Attractive return ratio 

Return ratios of the NBFC are likely to remain buoyant; we expect a RoE of 17.8% 

and RoA of 2.4% in FY10. The strong return ratios would drive the valuations for 

the company. 

Warrant issued to Promoters 

The NBFC has issued and allotted 25mn warrants of Rs 100 each to Promoters 

group of companies each warrant convertible into equity share of Rs 10 each in 

one of more tranches at a price of Rs 100 per share, with in a period of 18 months 

from the date of allotment of warrants. We have factored in the conversion of 

warrant falling due in FY10. This would lead to an equity dilution around 23% for 

the company. 


Performance 


9MFY08 Results Highlights 

For the Q3FY08, SREI’s interest income doubled to Rs 1,819mn. The Net interest 

income of the NBFC grew by 119% to Rs802mn. 

Operating expenses of the NBFC increased significantly due to higher employee 

cost. The company also created provision against bad loans amounting to Rs 

82.5mn on a consolidated basis. 

Business volumes remained higher for the 9MFY08. Financing assets (financial 

and operating lease) of the NBFC clogged an excellent growth of 47% to 

Rs46,787mn against Rs31,767mn. Disbursements of the company for the 

9MFY08 surged by 18% to Rs 13,221mn. 

Yield on loans during the 9MFY08 stood at 14.6%, while cost of funds stood 

at 8.8%, the net spread of the company increased to ~5.8%. Net Profit of the 

company for 9MFY08 leaped by 67% to Rs 844mn. The NBFC reported an EPS 

of Rs 7.72 for the 9MFY08. 

(Consolidated Rs mn) Q3FY07 Q3FY08 % chg 9MFY07 9MFY08 % chg 

Income 913.7 1844.1 102 2671.8 4540.4 70 

‘-From operating activities 907.2 1819.3 101 2661.0 4497.4 69 

‘-Other Income 6.5 24.8 282 10.8 43.0 298 

Financial expenses 539.9 1016.7 88 1552.9 2592.6 67 

Net Interest Income 367.3 802.6 119 1108.1 1904.8 72 

Total Income 373.8 827.4 121 1118.9 1947.8 74 

Total Expenditure 164.6 422.9 157 459.9 840.4 83 

Expenditure 

Operating profit 209.2 404.5 93 659.0 1107.4 68 

Provision for Bad and doubtful debts 0.0 82.5 0.0 149.4 

PBT 209.2 322.0 54 659.0 958.0 45 

Provision for Taxes 22.5 24.2 8 164.1 88.6 -46 

PAT (before adjustment for minority interest 

& profit/ loss of associates 186.7 297.8 60 494.9 869.4 76 

Less: share of profit/(loss) of minority interest 1.4 7.5 436 -0.4 4.6 -1250 

Add: Share of profit/loss of associate 6.4 -11.2 -275 9.5 -20.7 -318 

PAT 191.7 279.1 46 504.0 844.1 67 

EPS (Rs) 1.75 2.55 4.61 7.72 

Cost to income ratio (%) 44.0 51.1 41.1 43.1 

Effective Tax rate (%) 10.8 7.5 24.9 9.2 

Disbursements 11197 13,221 18 

Financing Assets 31767 46787 47 




Attractive return ratio 

NPAs 

700 

525 

350 

175 

- 


Net profit growth 

2500 

2000 

1500 

1000 

500 

0 


Attractive Return Ratios 

20.0 

16.0 

12.0 

8.0 

4.0 

0.0 

GNPA (Rs mn - LHS) 

NNPA (Rs mn - RHS) 

Provision coverage (% - RHS) 

2007 2008E 2009E 2010E 

CAGR 41% 

2007 2008E 2009E 2010E 

RoE (% - LHS) RoA (% - RHS) 

2007 2008E 2009E 2010E 


95 

85 

75 

65 

55 

3.0 

2.5 

2.0 

1.5 

1.0 

0.5 

0.0 

NII & NIM 


Operating efficiency 


Earning ratios 


Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 11 

4500 

3600 

2700 

1800 

40 

39 

38 

37 

36 

35 

34 

33 

13.4 

13.2 

13.0 

12.8 

12.6 

12.4 

12.2 

12.0 

900 

0 

NII (Rs mn - LHS) Net Spreads (% - RHS) 

2007 2008E 2009E 2010E 

C/I (% - LHS) Cost/Avg Assets (% - RHS) 

2007 2008E 2009E 2010E 

Yield on loans (%- LHS) 

Cost of funds (%- RHS) 

2007 2008E 2009E 2010E 

4.3 

3.8 

3.3 

2.8 

2.3 

9.2 

9.1 

9.1 

9.0 

9.0 

8.9 

8.9 

2.5 

2.0 

1.5 

1.0

Subsidiaries 



SREI 

Venture Capital 

100% 

SREI Insurance 

Services 

100% 

SREI Venture Capital 

SREI Infra Finance 

SREI 

Capital Mkts 

100% 

Quipo 

Oil & Gas 

SREI Quipo 

Infrastructure 

17% 

Quipo 

Tele Infra's 

ZAO SREI 

Leasing Russia 

NAC 

Infrastructure 

Equip 

Srei Venture Capital is a 100% subsidiary of Srei Infra. The company is currently 

operating four schemes that focus on the growth sector of the economy. The venture 

capital business currently has asset under management of around Rs.8.42 bn. 

We have valued the company at 6% of the AUM for Srei's 100% stake. 

SREI Capital Markets 

The capital market subsidiary of the NBFC offers services from infrastructure advisory, 

investment banking, infrastructure project conceptualization, development, 

implementation and management to financial structuring, resource mobilization 

and capital market issues. It also offers financial advisory services as well as services 

in the domain of privatization, to Government enterprises and departments. We 

have valued the company at 20x its FY10 EPS. 

Quipo - a unique matrix in infrastructure equipment renting 

Quipo is an equipment bank, which the company has set up in assistance with 

domestic and international equipment manufacturers. Quipo is an equipment renting 

company, wherein Srei Infrastructure holds around 17% stake. Along with Srei, 

other investors in the business are IDFC Private Equity, SwedFund, GIC, and 

Ingersoll-Rand. 

The company provides equipment on a rental basis to various infrastructure companies 

in the construction, mining, oil & gas, telecom and energy. The company's 

subsidiaries - Quipo Construction, Quipo Oil & Gas, Quipo Energy, Quipo Mining, 

and Quipo Telecom cater to the requirement of customers in their respective segments. 

The company has plans to invest around Rs.8-9 bn in its telecom business. 

Quippo Telecom 

Srei holds around 12% in the company. Quipo Telecom contributes the largest part 

of the Quipo infrastructures revenue. Recently, Quipo Telecom also bought Spice 

Telecom's tower business, which has around 875 telecom towers for Rs.6 bn. Currently, 

the company has close to 3,200 towers, operating in 10 circles with approximately 

1.4 tenants per tower. The company plans to have a network in place 

of around 5,000 towers by FY08, and 12,000 by FY10E. The company is looking 

forward to have a tower infrastructure in place of 25,000 by FY12E. 



Project financing business 

Rodad project 

Credible Valuations 

We expect Srei’s EPS to record a CAGR of ~37% over FY07-10E to Rs.16.1. Meanwhile, 

we expect an EPS of Rs.9.7 in FY08E and Rs.11.3 in FY09. We have also factored 

in the potential equity dilution following the issue of 25 mn shares on conversion 

of 9608 warrants issue to the promoters at Rs.100 per share. This lead to 

an equity dilution of 23% in FY09. 

We have valued the company on a sum of the part (SoTP) basis, and valued the 

core business of the parent company Srei Infrastructure Finance (consolidated) on a 

dividend discount model. We have assumed cost of equity of 15% and terminal 

growth rate of 5%, RoE 18% for high growth period and 15% for stable growth 

period. We have valued the road projects with the NBFC at Rs.23.2, after assigning 

a book value multiple (at various IRRs) to each project. 

In case of the port project we have considered a discount of 20%. This is because 

the project is at quite a nascent stage and has not yet achieved financial closure, 

while valuing it at P/BV multiple. The SEZ development business is esteemed at per 

acre value of land. Going forward, with the maturity of these projects, the 

growth in revenues would be significantly higher and would also lead to a 

re-rating of the stock. 

Capex required Equity SREI's stale IRR P/BV Per share value 

(Rs mn) (Rs mn) (%) (%) (x) for SREI 

Trissur-Angamalli 5509 1470 49 17 1.3 7.0 

Bharatpur-Mahua 2905 596 26 18.5 1.45 1.7 

Madhurai-Tuticorin 8970 1404 39 16 1.2 4.9 

Karur-Dindigul 3640 728 26 18.5 1.45 2.0 

Nagpur Seoni 4723 1181 49 12 0.8 3.4 

Nagpur-Kondhali 1760 330 26 17 1.3 0.8 

Jaora-Nayagaon 4144 1243 28 17 1.3 3.4 

Value of SREI Infrastructure Finance (Rs) 23.2 

Port Projets 

Machilipatnam- Andhra Pradesh 12546 8856 38 17 1.04 3.2 

Subaranrekha Port - Orissa 17425 5125 70 17 1.04 3.4 


SEZ Projects 

Capex required Equity SREI's stale Total land Per acre Per share value 

(Rs mn) (Rs mn) (%) (in acres) (Rs Lakh) for SREI 

Raigadh 4428 1476 58.5 450 20 4.82 

Guptamani, Kharagpur 28280 810 89 500 20 8.14 


Total Value from projects for SREI Infrastructure (Rs) 42.8 

Assumed terminal growth rate (%) 4 

Source: Company; Kotak Securities - Private Client Research 


Valuation 


SREI Infrastructure 133.7 

Project (Road, Port, SEZs) 42.8 

Quipo 17.3 

SREI Venture Capital 4.6 

SREI Capital 2.9 

Fair value of SREI Infrastructure 201.4 

Source: 

Because of the recent correction in the markets, the stock had come down by 

around 50% from its 52-week high of Rs.280. While the fundamentals of the 

company remain strong, the correction in stock price has provided an attractive opportunity 

to BUY the stock. 

At the current market price of Rs.139, the stock is trading at a P/E of 8.4x its FY10 

EPS of Rs.16.1 (post equity dilution-warrant conversion), and 1.4x its FY10 P/ABV 

of Rs.97. Based on our SoTP valuation method, we have arrived at a fair price target 

for the company of Rs.197. At our target price, the stock offers a potential 

upside of around 46%. We recommend BUY on the stock with a 12-month price 

target of Rs.200. 

Historical PBV multiple 

300 

250 

200 

150 

100 

50 

Price 1x 1.5x 2x 2.5x 

0 

Mar-05 Aug-05 Jan-06 Jun-06 Nov-06 Apr-07 Sep-07 Feb-08 

Source: Capitaline, Kotak Securities - Private Client Research 



ANNEXURE 1: ASSET FINANCING 

What is Asset financing? 

Asset financing is characterized as a structured line of credit secured by a specific 

asset or across a combination of existing assets. Usually this includes: accounts receivables, 

finished goods inventory, real estate, and/or equipment. With asset financing, 

a company uses its assets as collateral to obtain capital. The financing institution 

does not own the companies’ assets, but the assets can be seized if the 

business does not make its required payments on the loan. Besides working capital, 

asset financing can be used for many other purposes. 

Usually asset backed loans are suitable for: 

Financing a business expansion 

Business acquisitions and mergers 

Management buy outs 

Turnaround finance 

Refinancing of existing business loans 

Types of Asset Finance 

There are three major types of leasing: finance leasing, operating leasing and contract 

hire. However, hire purchase is not a type of leasing but is type of asset financing. 

Finance Leasing: A lessee effectively acquires all financial benefits and risks 

without actually acquiring the legal title of the assets. The asset is owned by a 

lessor. The leasing rate (lease rental) is computed to collect the full value of the 

asset (plus finance charges or interest) during the contract period. At the end 

of lease period asset is returned back to the lessor. If the asset is sold to a third 

party, then the lessee can receive a share of the sale proceeds (if the lease is not 

being extended). Generally, the title of ownership of the asset is not transferred 

to the lessee at any time - unless a private arrangement is made with the third 

party. However, a lessee usually has the option to extend your lease and as he 

has paid for almost the full value during his initial lease period; the rental payments 

for subsequent periods will be minimal. 

Operating Lease: Operating lease is often structured for a shorter time frame 

than financial leasing (always significantly shorter than the working life of the 

asset), operating leasing is more like a regular rental. The lessor expects to be 

able to either sell the asset in the second-hand market or to lease it again and 

will therefore not need to recover the total asset value through lease payments. 

There may be an option to extend the leasing period at the end (this negotiation 

can only take place at the end of the initial rental period). As with finance 

leases, lessee would not be owner of the asset at any time but, contrary to financial 

leases, you will not share in the sale proceeds. 

Contract Hire: A form of operating lease (often used with cars and other vehicles) 

that includes a number of additional services such as maintenance, management 

or replacement if asset is in repair. 

Hire Purchase. This is an agreement for the hiring of an asset with an option 

to purchase. The legal title will pass to buyer when all payments have been 

made. The term of a hire purchase must be significantly shorter than the working 

life of the asset. A purchaser of the asset can claim capital allowances as if 

he had purchased the asset outright, gaining immediate use of it. Hire Purchase 

agreements are typically written for domestic users, not so much for business 

users. 



FINANCIALS 

Income Statement (Rs mn) 

2007 2008E 2009E 2010E 

Interest income 3,667 5,228 8,340 12,751 

Growth % 68.2 42.6 59.5 52.9 

Interest expenses 2,166 3,237 5,416 8,587 

Net Interest Income 1,502 1,991 2,924 4,164 

Growth % 34.9 32.6 46.9 42.4 

Other Income 229 304 373 463 

Total Income 1,730 2,295 3,298 4,627 

Growth % 41.5 32.7 43.7 40.3 

Operating expenses 671 869 1,300 1,804 

Depreciation on fixed assets 23.8 28.1 35.2 43.9 

Operating profit 1,036 1,398 1,962 2,779 

Growth % 35.9 34.9 40.4 41.6 

Provisions & Contingencies 123 140 146 182 

PBT 913 1,258 1,816 2,597 

Provisions for Taxes 67 151 272 389 

PAT 846 1,107 1,544 2,207 

Growth % 68.0 30.9 39.4 43.0 


Key Data (Rs mn) 

Valuation 

2007 2008E 2009E 2010E 

EPS 7.8 10.1 11.5 16.4 

BV 46.4 87.6 95.1 102.3 

ABV 42.9 83.4 91.0 97.4 

P/E 17.9 13.7 12.1 8.5 

P/BV 3.0 1.6 1.5 1.4 

P/ABV 3.2 1.7 1.5 1.4 

Asset quality 

Gross NPAs 380.3 456.4 547.6 657.1 

Gross NPA ratio (%) 0.8 0.6 0.7 0.6 

Net NPA 75.8 91.0 109.1 131.0 

Net NPA ratios (%) 0.2 0.1 0.1 0.1 

Dividend 

DPS (Rs) 1.2 2.3 3.2 4.5 

Dividned Payout Ratio 15.1 20.0 20.0 20.0 


Balance Sheet (Rs mn) 

2007 2008E 2009E 2010E 

Share Capital 1,091 1,093 1,343 1,343 

Reserve ans Surplus 3,972 8,484 11,423 12,387 

Total Shareholders Fund 5,062 9,576 12,765 13,730 

Minority interest 40 40 40 40 

Deferred Tax 638 638 638 638 

Mezzanine capital (Tier II) 1,235 1,235 1,235 1,235 

Secured loans 23,697 26,066 69,075 88,071 

Unsecured loans 8,536 7,682 10,371 12,445 

Total Borrowings 32,232 33,748 79,446 100,516 

Total Liabilities 39,208 45,238 94,124 116,159 

Application of funds 

Financing Assets 36,152 41,992 89,742 111,512 

Investments 1,438 1,654 1,819 2,001 

Current Assets, Loans and adv 3,107 3,015 3,905 3,882 

Current Liabilities 1,820 1,820 1,820 1,820 

Net current Assets 1,287 1,195 2,085 2,063 

Net fixed assets 269 335 417 521 

Miscellaneous Assets 61 61 61 62 

Total Assets 39,208 45,238 94,124 116,159 


Key Ratios (%) 

Return Ratios (%) 

2007 2008E 2009E 2010E 

RoA 2.8 2.6 2.2 2.1 

RoE 18.3 15.1 13.8 16.7 

PPP/Avg Assets 3.4 3.3 2.8 2.6 

Operating Ratio (%) 

Cost/Income 38 38 39 39 

Cost/Average Assets 2.2 2.0 1.9 1.7 

Debt-Equity ratio (x) 7.74 4.72 7.37 8.46 

Earning assets (%) 

Yield on Assets 12.5 13.3 12.6 12.6 

Cost of funds 8.9 9.1 9.1 9.1 

Net Interest Income 5.0 4.7 4.2 4.0 

Net Spreads 3.3 3.3 2.9 3.0 



Research Team 

Dipen Shah 

IT, Media, Telecom 

dipen.shah@kotak.com 

+91 22 6634 1376 

Disclaimer 


Sanjeev Zarbade 

Capital Goods, Engineering 

sanjeev.zarbade@kotak.com 

+91 22 6634 1258 

Teena Virmani 

Construction, Cement, Mid Cap 

teena.virmani@kotak.com 

+91 22 6634 1237 

This document is not for public distribution and has been furnished to you solely for your information and must not be reproduced or redistributed to any 

other person. Persons into whose possession this document may come are required to observe these restrictions. 

This material is for the personal information of the authorized recipient, and we are not soliciting any action based upon it. This report is not to be construed 

as an offer to sell or the solicitation of an offer to buy any security in any jurisdiction where such an offer or solicitation would be illegal. It is for the 

general information of clients of Kotak Securities Ltd. It does not constitute a personal recommendation or take into account the particular investment objectives, 

financial situations, or needs of individual clients. 

We have reviewed the report, and in so far as it includes current or historical information, it is believed to be reliable though its accuracy or completeness 

cannot be guaranteed. Neither Kotak Securities Limited, nor any person connected with it, accepts any liability arising from the use of this document. The 

recipients of this material should rely on their own investigations and take their own professional advice. Price and value of the investments referred to in 

this material may go up or down. Past performance is not a guide for future performance. Certain transactions -including those involving futures, options 

and other derivatives as well as non-investment grade securities - involve substantial risk and are not suitable for all investors. Reports based on technical 

analysis centers on studying charts of a stock's price movement and trading volume, as opposed to focusing on a company's fundamentals and as such, may 

not match with a report on a company's fundamentals. 

Opinions expressed are our current opinions as of the date appearing on this material only. While we endeavor to update on a reasonable basis the information 

discussed in this material, there may be regulatory, compliance, or other reasons that prevent us from doing so. Prospective investors and others are 

cautioned that any forward-looking statements are not predictions and may be subject to change without notice. Our proprietary trading and investment 

businesses may make investment decisions that are inconsistent with the recommendations expressed herein. 

Kotak Securities Limited has two independent equity research groups: Institutional Equities and Private Client Group. This report has been prepared by the 

Private Client Group . The views and opinions expressed in this document may or may not match or may be contrary with the views, estimates, rating, target 

price of the Institutional Equities Research Group of Kotak Securities Limited. 

We and our affiliates, officers, directors, and employees world wide may: (a) from time to time, have long or short positions in, and buy or sell the securities 

thereof, of company (ies) mentioned herein or (b) be engaged in any other transaction involving such securities and earn brokerage or other compensation 

or act as a market maker in the financial instruments of the company (ies) discussed herein or act as advisor or lender / borrower to such company (ies) or 

have other potential conflict of interest with respect to any recommendation and related information and opinions. 

The analyst for this report certifies that all of the views expressed in this report accurately reflect his or her personal views about the subject company or 

companies and its or their securities, and no part of his or her compensation was, is or will be, directly or indirectly related to specific recommendations or 

views expressed in this report. 

No part of this material may be duplicated in any form and/or redistributed without Kotak Securities' prior written consent. 

Analyst holding in stock: Nil 

Awadhesh Garg 

Pharmaceuticals, Hotels 

awadhesh.garg@kotak.com 

+91 22 6634 1406 

Apurva Doshi 

Logistics, Textiles, Mid Cap 

doshi.apurva@kotak.com 

+91 22 6634 1366 

Saurabh Gurnurkar 

IT, Media, Telecom 

saurabh.gurnurkar@kotak.com 

+91 22 6634 1273 

Saurabh Agrawal 

Metals, Mining 

agrawal.saurabh@kotak.com 

+91 22 6634 1291 

Saday Sinha 

Banking, Economy 

saday.sinha@kotak.com 

+91 22 6634 1440 

Sarika Lohra 

NBFCs 

sarika.lohra@kotak.com 

+91 22 6634 1480 

Siddharth Shah 

Telecom 

siddharth.s@kotak.com 

+91 22 6634 1261 

Shrikant Chouhan 

Technical analyst 

shrikant.chouhan@kotak.com 

+91 22 6621 6360 

Kaustav Ray 

Editor 

kaustav.ray@kotak.com 

+91 22 6634 1223 

K. Kathirvelu 

Production 

k.kathirvelu@kotak.com 

+91 22 6634 1557 

Kotak Registered Securities Office: - Private Kotak Client Securities Research Limited, Bakhtawar, Please see 1st the floor, disclaimer 229 Nariman on the last Point, page Mumbai 400021 India. For Private Circulation 17

Kotak Securties Limited - Srei Infrastructure Finance Limited

You also want an ePaper? Increase the reach of your titles

Delete template?

Save as template?