Kotak Securties Limited - Srei Infrastructure Finance Limited

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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
INITIATING COVERAGE April 15, 2008 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. Kotak Securities - Private Client Research Please see the disclaimer on the last page For Private Circulation 3
Page 1: INITIATING COVERAGE Sarika Lohra sa
Page 5 and 6: Market share HDFC Bank 9% Citicorp
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