I typically have a look at my current positions every 6-12 months independent of the quarterly/ annual results. This allows me to evaluate the company independent of the recent results (which would bias my thinking)

About
The Noida Toll Bridge Company Limited was incorporated as a Special Purpose Vehicle for the Delhi Noida Bridge Project on a Build, Own, Operate and Transfer (BOOT) basis. The Delhi Noida Bridge is an eight lane tolled facility across the Yamuna river, connecting Noida to South Delhi.

The company initially had financial issues after the toll bridge was completed as the initial traffic projections did not materialize. The company had a highly leveraged structure (high debt) and hence had to get the debt re-structured. In addition the company also raised equity in 2006 to improve the debt equity ratio.

The company has since then paid off substantial amount of its debt and has a low debt to equity ratio of 0.3:1.

Business model
The business model of toll bridge is quite interesting to say the least. The initial capital investment is fairly high in an infrastructure project. Once this capital is invested, the ongoing maintenance and operational costs are very low and most of the incremental revenue flows to the profit.

However if the initial revenue projections do not materialize, then the debt load can crush a company, which occurred in case of noida toll bridge, due to which the company had to undergo the re-structuring. The company was thus able to buy time for the traffic projections to come through. The toll bridge now handles around 105000 vehicles per day (ADT or average daily traffic) which is around 45% of the rated capacity.

Current financials
The company had a toll revenue of around 71 Crs in 2010. The company is also able to sell rights for outdoor advertising around the bridge and was able to earn around 8 Crs from it. There is some miscellaneous income of around 5-6 Crs in addition to the above.

The company was able to make a net profit of around 28 Crs on the above revenue base. The company has an operating expense of around 30% of which the main heads are staff costs (salary) at around 8%, depreciation at around 6% and O&M (operating and maintenance) costs at around 8.6%.

The depreciation expenses are bound to remain fixed as there is not much addition to the fixed assets. A portion of the O&M expenses are now paid as a fixed charge to a 51% subsidiary and are not based on the traffic volumes. The salary costs and some other expenses such as legal fees, travelling expense etc are variable and are bound to increase over time.

The company thus has around 40-45 Crs of pretax profits available to service the debt. The company has been paying down debt which now stands at around 145 Crs in the latest quarter. At the current profit levels, the company should be able to payoff its entire debt in less than 3 years (though it may not happen due some of the re-structuring clauses).

The valuation model
Noida toll bridge may be one of the easier companies to model to arrive at a fair value. The average daily traffic (ADT) has grown at around 15% in the past. One cannot assume that the traffic will continue to grow at that pace, however one can easily assume that the traffic will atleast grow at 3-5% annum till we reach the 100% capacity of the toll bridge.

The average fare per vehicle is around 19 Rs. One can assume atleast a 5% increase in the fare over time (slightly less than inflation). These two figures – ADR and average fare can be used to estimate the toll revenue.

The current operating costs are a mix of fixed (depreciation) and variable (staff and other costs) expenses. On an optimistic note, one may assume that these expenses may go down as percentage of revenue. However if one, wants to be conservative, then the expenses can be assumed to be around 30-35% of the revenue.

There are two additional factors to consider in the valuation. The first factor is the advertising revenue which the company can earn with minimal expenses. In addition to this, the company also has a leasehold title to around 99 acres of land which was awarded by the government as compensation for shortfall in the revenue. The company estimates this title to have a value of around 300 Crs. I have personally not ascribed full value to it as I don’t have an idea on the status of this leasehold title or what the company plans to do with it (which the company describes as a risk)

The risks
Noida toll bridge was assured a 20% return on the cost of the toll bridge through toll collection and development rights for 30 years. In the initial years, the traffic projections did not come through and hence the actual returns were much lesser than the assured returns. The shortfall in the returns has been accruing to the company and one way of compensating the company would be to extend the 30 year operation period for the company. In other words, the company may be allowed to run the toll bridge for a much longer period.

The leasehold title is definitely a risk for the company. Anything related to land always has some kind of political risks.

One irritant for me is the staff cost. The staff cost for the company is way too high. The company has around 15 employees and wage bill of almost 6 Crs. The key management personnel (CEO and a manager) are paid a salary of around 4Crs. I think the compensation costs of the company are high.

Finally, the company will generate quite a bit of cash flow once the debt is paid off. It is not clear what the company intends to do with the excess cash, though the company has started paying dividend in the current year

Conclusion
My own valuation estimate is around 50-55 Rs per share with an assumption in traffic growth of 5% and fare rate increase of around 3-5% per annum. You have two options – either take my estimate on face value, or you can use the assumptions I have provided to estimate the value on your own.

My personal preference is to consider a range of assumptions for traffic growth, fare rate changes and cost parameters to arrive at a range of fair value.

Noida toll bridge has a much higher probability of increasing revenue, though anything can happen to prevent it (such as people will start walking instead of driving). On the flip side, there is a limit to the growth and upside as the maximum capacity of the toll bridge is fixed and once that is reached, further increases will be limited to fare increases only.

At current prices, I am not buyer of the stock as it is not very attractive yet. I have small position in the company. As always please read the disclaimer before making a decision to buy or sell the stock.