How many businesses do you know that in ten years, quintupled unit volume while tripling unit price?
How many of those did it without increasing (capital) expenditures, inventory or headcount?
Noida is a growing industrial satellite city that is separated from Delhi by the Yamuna river. The Noida toll bridge was built in 2000 for $100 million and has a maximum daily capacity of roughly 225,000 vehicles. The bridge is 500 meters long and has eight lanes.
Commuters can opt for the (free and congested) modernized Nizzamuddin bridge that’s 5 km upstream. There is also a four-lane barrier/bridge about 5 km downstream. There are plans for a new bridge at this site. Alternatively, you can get to Noida by metro.
As it is, only the Noida Toll bridge has capacity to spare. The other bridges operate at full capacity, particularly during peak hours.
IBM (NYSE:IBM), LG, Fujitsu, CSC, Fiserv, TCS, Adobe, DELL (DELL) and Accenture have their offices in Noida. If you want to get there in a hurry from say Indira Ghandi airport, the Noida Toll Bridge is your best option.
Not surprisingly, traffic across the bridge has grown from approximately 17,000 vehicles in 2001 to more than 100,000 vehicles today. Meanwhile, the average toll rate has tripled from about Rs 10 to Rs 32.
It's simple. You pay Rs 32 ($ 0.70) to avoid driving at least an extra 5 km. In India, Rs 32 will get you half a litre of petrol. An average car will burn more than that driving 5 km in Delhi. Any time saved is free.
I believe the bridge will be fully utilized in five years and have 200,000 cars per day. Assuming the rate stays at Rs 32, revenue will double as costs stay flat.
Of course, management could make the bridge asymmetric. Six lanes up in the morning and six down in the evening to increase capacity at peak hours.
In short, this is one of the most attractive public companies available in India. The stock trades on the BSE and in London.
The cost of operating and maintaining the bridge does not rise with its utilization. A 51% subsidiary is paid a fixed sum to operate the bridge. As traffic rises, operating expenses as percentage of revenue will decline.
We (conservatively) estimate traffic doubles within the next five years. For the sake of simplicity, we keep the rate at Rs 32. The result is a company with revenue of $35 million (now $17m) by 2016. Expenses (including interest) are less than $9 million. As the company retires its debt, interest expense should decline; we ignore this.
We have a pessimistic estimate of owner earnings of $25 million by 2016.
There are three additional factors to consider.
1) The company has started selling advertising rights on the bridge; now 15% of revenue.
2) The company has a leasehold title to 100 acres of land near the bridge. Most of this is on the Delhi side.
3) Noida toll bridge was assured a 20% return on the cost of the toll bridge for 30 years. The shortfall in the returns to date, has been accruing to the company. One way of compensating the company would be to extend the 30 year operation period for the company. This could be acceptable to those politicians who aren't worrying about 2030 elections yet.
The market cap of Noida Toll is roughly CRs 500 => Rs 5B => $ 100 million.
Once the debt is paid off, it's not clear what the company intends to do with the excess cash, though the company has started paying a dividend.
The company has 15 employees and spends about Rs 60m (6 Crs) on wages. Key management (CEO and a manager) together earn 4Crs. In my opinion, this CEO is overpaid.
The company took on too much debt to build the bridge. Estimates of traffic growth were too optimistic and in 2006, the company needed to raise $42 million by selling GDRs on the Alternate Investment Market (AIM) in London. Part of this money was used to strengthen the balance sheet. Traffic volume is now such that the company is retiring the remaining debt. Nevertheless, the company was almost run into the ground; people remember.
The Yamuna river has its share of floods.
This is not a recommendation to buy or sell anything. I had no position in any of the stocks mentioned at the time of writing.
http://www.ntbcl.com/ntbcl/UploadedFiles/file/Noida%20Toll%20Bridge%20AR-2009-10.pdf - 2010 report
http://www.ntbcl.com/ntbcl/UploadedFiles/file/Annual%20Report%20-%202003-04.pdf - 2003 report
http://www.dndflyway.com/tariff.html - tariff
http://www.moneycontrol.com/financials/noidatollbridgecompany/balance-sheet/NTB - five year financials
http://www.scribd.com/doc/57517115/Noida-Toll-Bridge - Analysis by Sanjay Bakshi
Any and all questions welcome as usual.