PLUS Expressways Bhd’s recent proposed acquisition of a toll road concessionaire in India will not only enable the group to meet its key performance indicator (KPI) of 30% in lane kilometre growth, but also cement its growth strategy in India.
Malaysia’s biggest highway concessionaire has entered into a share purchase-cum-shareholders agreement with three Indian parties to buy up to a 74% stake in toll road concessionaire Indu Navayuga Infra Project Pte Ltd for RM74 million cash.
The acquisition will be carried out in two tranches. PLUS will initially hold a 49% stake in the concessionaire for RM50.95 million. It will pay another RM22.98 million to increase its shareholding to 74% on the third anniversary of operations sometime in April 2013.
“The acquisition is part of our strategy for growth but we can’t expect robust growth locally. Malaysian highways already have established networks and it is unlikely that more concessions will be given out here anytime soon. Therefore, we are looking beyond our shores,” PLUS’ managing director Noorizah Abd Hamid tells The Edge.
The concession includes lane expansion on the last section of the National Highway No 45 (NH-45) in the state of Tamil Nadu, which is the main connection from Chennai southwards to Trichy. The portion under the concession measures some 38.55km, stretching from Padalur to Trichy, of which 95% has been completed. The remaining work is to be done by the end of 1Q2010. Toll collection is expected to commence from April 2010 and the concession expires in 2031.
The acquisition will be financed by internally generated funds. As at end-September 2009, PLUS’ cash balance stood at RM2.7 billion while net debt was RM8.2 billion.
The project marks PLUS second venture in India. The first was for the widening, operation, maintenance and toll collection of the Bhiwandi-Kalyan-Shil-Phata (BKSP) Highway in 2006. It was estimated then that the project would cost about RM148 million over a concession period of six years and eight months. It has yet to contribute significantly to group revenue as toll collection only commenced last August.
Analysts are positive about PLUS’ new acquisition as the group will be able to benefit in the long run, given that execution risk will be minimal and the project runs on a brownfield alignment. Toll collection has already commenced on other parts of the highway.
The highway, on average, serves some 13,000 vehicles per day, comprising 65% commercial vehicles and 35% passenger vehicles. In comparison, the BKSP Highway sees about 10,000 vehicles per day, with 40% commercial vehicles.
A Maybank Investment Bank research report says the initial toll rate is believed to be 30 rupees, which is higher than BKSP’s 20. With India’s economy growing aggressively, adds the research house, the new highway will likely enjoy better toll collection than BKSP, thanks to higher toll rates, traffic volume and proportion of commercial vehicles which provide steady traffic flow.
While toll collection will start in the next few months, profit contribution will be too small to recoup initial start-up costs in the first two years. “We estimate revenue of RM30 million in the first 12 months of full operation of the Chennai-Trichy toll versus BKSP’s estimated RM20 million to RM25 million, but net profit contribution may not be significant,” says the Maybank report.
“Management’s earlier guidance is a minimum mid-teens project internal rate of return (IRR) for a brownfield venture and high-teens IRR for a greenfield investment in India. Given that the Chennai-Trichy stretch runs on a brownfield alignment — thus a potential 15% project IRR — we estimate marginal equity value enhancement for PLUS on its RM74 million investment.”
Noorizah expects PLUS’ latest acquisition to fare well as its first venture into India has shown the highway operator how the Indian infrastructure industry works.
“When we first went in, we were conscious that the experience would be a learning platform. There were a few challenges, such as land acquisition and some building issues, but they were mostly within our expectations.
“Now, we are mindful of the risks involved in the business and industry in India. This is our second project in India, so we are more comfortable to go in,” she says.
The group will continue to focus on its acquisition plans in India, going forward, as the Indian government has been rather aggressive in its plans to grow the country’s weak infrastructure — among the biggest obstacles on its path towards accelerating economic growth, she adds.
The Indian government has been vocal about its infrastructure agenda. Its Minister for Road Transport and Highways recently said India is building 20km of road a day, which adds up to slightly above 7,000km a year and represents some US$50 billion worth of works.
Apart from India, Indonesia is another country where PLUS is eyeing acquisitions. It has two highways there — Cikampek-Palimanan Expressway and Cimanggis-Cibitung Toll Road in West Java. Both are in the early stages of development.
However, notes Noorizah, India is a more viable option at the present time, given a strong and supportive government policy to spur infrastructure growth in India.
On the domestic front, from where almost all its revenue is derived, PLUS has turned in a reasonable performance thus far. For the cumulative third quarter ended Sept 30, 2009, PLUS’ net profit rose 11% to RM871.4 million on the back of RM2.3 billion in revenue — a hike of 6%.
PLUS’ major expressways in the country have reported a combined 7.1% y-o-y traffic growth for 2009.
“Domestically, we have fairly mature highways. Annual growth of 3% to 4% is very reasonable, thus it is remarkable that we turned in 7.1% growth last year. However, we can’t really go beyond that, even with the lane expansions, because that doesn’t bring in more traffic. It’s more for the comfort and convenience of road users,” Noorizah says. Thus PLUS’ expansion abroad, especially in India, will undoubtedly provide it with steady growth in the years to come.
This article appeared in Corporate page of The Edge Malaysia, Issue 792, Feb 8 – 14, 2010