Noida Toll Bridge Company

CMP: 33
Face Value: 10
Book Value: 29.58
Dividend Yield: 3%
Market Cap: Rs. 618 Crores
P/E: 10
(All figures are Standalone)

The best businesses are like toll bridges, which their customers have to pay to cross if they want to reach their destination. This enables them to piggyback on the growth of other, less fortunately placed businesses - Warren Buffet

Noida Toll Bridge is a special purpose vehicle promoted by IL & FS and New Okhla Industrial Development Authority (NOIDA) to operate the Delhi-Noida-Delhi flyway on a Build-Own-Operate-Transfer (BOOT) basis. The lease term is for 30 years, till 2028 and can be extended based on the terms of agreements which can be read in the annual report. It is the most used path for commuters between Delhi and Noida. 

With ever increasing traffic, one can expect it's revenues to keep increasing. Toll Bridges involve a one time capital expenditure of constructing the road and then the cash keeps flowing in. The toll rates keep increasing with the inflationary trends and the traffic keeps increasing till the 100% capacity is reached. Added to this is the advertisement revenue the company gets to keep for hardly any cost. The only major expenses to be incurred in foreseeable circumstances would be regular maintenance activities, employee costs, finance costs, etc. The toll bridge didn't see the expected traffic till 2007-08 and those were the times it had heavy debts of around Rs. 300 Crores in it's books. The traffic growth has picked up since then and the debt is down to just 8% of what it was back then as we shall be seeing in the financials. To be clear, Noida Toll won't be a big multibagger, but it has all potential to be a safe compounder of 10%-12% annually for the coming decade. We cannot expect the traffic to be growing at 10% every year. Infact, as years progress, the traffic growth will slow down. Toll bridges are a bit complicated to value as it involves a fair amount of time to dig into the lines of agreements for events that could have a major impact. 

The 5 year CAGR of revenue and profits both stands at 9.8%. The Operating Profit Margin stands at 74% for FY 13-14. Historically too, the margin has most of the time been above 70%. Increase in toll fares are usually met with resistance with protests from the common man but eventually do happen annually. The bridge is a good cash generating machine as you have to first pay and then you are allowed to pass. So virtually no debtors from the toll part. Advertisement revenue will keep increasing year on year. The company has got it's debt down to Rs. 19.5 Crores (Long Term). Management has stressed on their plans to make the company debt free and increase the dividend payout. It's a positive noting that the stock currently trades at a yield of roughly 3%.

We have performed a Discounted Cash Flow analysis for the stock by assuming a traffic growth rate of 8% till March '17, 5% till March '19 and 3% till Mar '28. Toll rate hike has been assumed to be 5% annually. Also, advertisement income increase has been assumed at 5%. Other Income has been assumed to be 3 Crores annually till Mar '28. The discount rate has been taken at 11%. Dividend payout has been assumed to be 85% from March '16. Also, going by the management's statement we have assumed the co. will be debt free by FY 15-16. Other assumptions include no major maintenance work, tax rate will be maintained at 33% till 2028 (Very conservative), OPM of 71%.
Based on the above, we derive a value of Rs. 38-39 on the stock.

Further more, by discounting future dividend payouts, we derive a fair value of Rs. 36. Thus currently trading at 33, the stock is undervalued and makes a good addition to the portfolio. We expect the stock to be a 10% compounder annually excluding the dividends. Overall, this is a good portfolio addition for the investors who have a long view of atleast 5 years. One can allocate 4% of the portfolio to this stock and hold with patience.

Important Notes:
i) The company's concession agreement assures a 20% return on the project and in case of shortfall, it gets a claim of the 99 acres land around the toll. The land is valued at Rs. 300 Crores. This point has not been taken into considertaion.
ii) Some factors which might be the reason for stagnating traffic growth: Delhi-Noida Metro which will decrease the commuters using road as Metro is much more cheaper and comfortable. However a growing industrial presence at Noida will not let the growth to go into negative.
iii) Overall, valuation has been done on a conservative basis as there is not much clarity over terms of agreement. However, we maintain our view that this company is a CASH cow and a pure dividend play.
iv) As rate of growth will be around 10%, the P/E assigned to the company from our side will be 10.

We had advised the stock personally to some people at Rs. 20-21 and maintain our bullish view even at current levels of 33.

Breakout Stocks: August 2014

Glenmark Pharma - Weekly
On the weekly charts, Glenmark Pharma was in a 490-610 range for more than a year. Recently, the stock has given a breakout above the range. In the coming days, the stock could be heading higher towards 720 levels atleast.

Provogue, as seen on the daily charts is taking support near the 61.8% retracement levels of it's March to June rally when it shot up from 6.5 levels to 15. Currently trading around 10.65, if the stock manages to break above the falling trendline at 11.25, it could head up to 13.25 levels in the coming days.

Tata Power
Initially posted on our Facebook page, Tata Power is near crucial support zone of 98-100. BUY at current levels with SL at 98 for targets of 108-109. If the stock slips below 98, it could head towards 88 levels.

India Bulls Housing Finance
IBHF has given a strong breakout at 400 levels, the stock could be heading higher. Accumulate at 420 levels, SL at 400 and hold for higher targets in the coming time. The stock can head higher for 460 levels.


For the past many years, Purvankara has created a 55-125 range. Keep the stock on your watchlist, if any breakout comes above 125 add, further add some more above 135 and hold for 200+ levels with SL at 115.

Atlas Cycle
Buy if the stock closes above 305, SL: 285 on closing basis and hold for targets of 360/400. The stock is trading in the 225-305 range for more than a year now.

Nifty Valuation - Over valued or Under valued?

Before starting off, this article is just an update of an article we had posted last year. Read: Nifty: Over Valued or Under Valued? dated 28th November, 2013. The Nifty index was then trading 17.9

The current chart of the Nifty P/E:
Nifty P/E Ratio
Currently, Nifty trades at a P/E of 20.79 (As on 25th July, 2014). Historically, on many occasions Nifty has reached higher valuations of 23-26-28. As the above chart shows, Nifty once it starts trading above P/E of 20, it doesn't breach the 20 mark easily and does touch valuations of 22-23.5. Please remember that P/E is dependent on Earnings per share (EPS) of the Nifty and a market with rising EPS can rally without a rise in EPS, a case which we saw in the 2004-2007 period. The current EPS of the Nifty is around 374. If we assume that in this rally too like the previous ones, Nifty might go to 22-23.5, we get a minimum target of 8230 levels. So Nifty might see the range of 8230-8700 in the coming months. As EPS increases, the targets also increase. As per historical trends, we are of the view that 7480 is a mark which won't be easily breached unless there is a fall in EPS. 7480 is the levels where P/E of Nifty is 20. Fundamental analysis and technical analysis must not be confused with each other. We are analysing the index fundamentally for it's valuation. Above 20, it shows that the participants are heavily bullish and are discounting a good rise in index EPS. Currently, FII's are buying very heavily and there is a positive sentiment that the with a strong, single party government in the center, policies will be fast and beneficial for the corporate sector.

Going Forward:
The major LONG term support for Nifty is at 6700. In the current scenario, infact we don't expect the Nifty to slip below 7000. For medium term trend 7480 zone is a strong support. Any dip to this level will be used for buying. Nifty will predictably create a range of 7400-8250. We might see the index moving in this range for quite sometime. Since our earlier post on 28th November, 2013, the EPS of the Nifty has gone up from around 337 levels to 374 levels. The EPS, if compare on a year on year basis has increased by close to 11% from 334 to 374 (July '13 vs July '14). By trading at P/E of 20-21; the market is expecting the EPS to grow atleast 15% from now annually. Historically; the average EPS of the Nifty has been around 18. Whenever Nifty goes above 19, the market is discounting a fast EPS growth. With the current sentiment, the expectation can go higher and we can expect a P/E of 22.

Stocks to BUY:
In a scenario with Nifty at a P/E of 20-21, the opportunities are tough as almost all stocks are fairly valued with whatever news is available. But going for stocks with healthy margins, 20% CAGR for 5 years and trading at a P/E of 10-14 can give strong returns.

Usually, above a P/E of 20, the market is very bullish in sentiments, above a P/E of 22, it starts getting irrational and expectations of growth are of nearly 20% annually, any miss results in sharp cracks in the index till it reaches back a level of fair valuation. If Nifty where to touch a P/E of 24 now, the index could be hovering around 9000. It is not advisable to short any rise in P/E above 22 as the market can stay irrational for more time than a trader staying liquid. And if the EPS keeps increasing at the desired growth rate, the P/E might stay at 20. P/E shouldn't be looked as a technical indicator but to gauge the market expectations, sentiments and if the same is gauged with rationality, it can be used for developing a trajectory of the market and identifying profitable sectors and stocks.

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