Friday 8th October 2010

Tuesday 27, May 2008

NSSPL RESEARCH
Srei Infrastructure Finance Ltd.
Reasonably valued financing
BUY
BSE code 532756 Srei Infra Finance Ltd standalone entity is primarily engaged in the business of project
financing and large ticket equipment financing. India has outlined large infrastructure
NSE code SREINFRA
projects for which the requirements of finance remain high. It also has a team for
Bloomberg code SREI:IN advisory on infrastructure projects generating a fee based income. It has a JV with BNP
Current price 101 Paribas 'Srei equipment finance Pvt Ltd(SEFPL)' it is financing equipment to SME
Target Price 191 across India. Srei is currently in the process of merging with a group company Quippo
Infrastructure Equipment Ltd (QIEL). QIEL is a holding company with stakes in various
MCap Rs bn 28.2 entities which include telecom towers, onshore rigs, power rentals, construction
MCap US$ mn 626.9 equipment and asset valuation and auction companies.
52 wk H/L 108/60.5
Face value 10 Hugh demand for infrastructure financing: India has recognized the acute shortage of
infrastructure and realizes if it has to maintain this growth momentum this problem
2 Wk Av vol ('000) 11060
would need to get addressed soon. In order to facilitate growth the government has
Financial Snapshot outlined large projects in all sectors of infrastructure, ranging from power, ports,
roads, mining, railways, telecom to urban infrastructure. Most of these projects are
Rs Mn FY10 FY11E FY12E large in size and need major funding during the building and operational phase. This
NII 1,396.4 1,322.2 1,618.7 throws up a large opportunity for Srei who is predominantly engaged in this vertical.
% Ch 614.3 (5.3) 22.4
OPM 622.0 724.9 847.0 Growing loan book: Srei at the end of FY10 had an outstanding loan book of Rs40bn
PAT 1,114.9 1,189.3 1,364.0 this was a growth of 228%. This growth was also due to the lower base as in FY09 they
% Ch 121.4 6.7 14.7 did not disburse many loans due to the then ongoing financial crisis. However we
EPS* 9.6 4.3 4.9 believe it would be able to post growth in excess of 30% over the next few years. This
PER 9.9 22.3 19.5 would be in line with the industry where there would be huge demand for finance to
BV** 67.9 85.7 89.1 ensure projects progress smoothly.
P/BV 1.4 1.1 1.1
Adequately capitalized: Srei FY10 had a CAR of 20%, however post the merger with
*diluted EPS post merger pre bonus for FY11E
QIEL the CAR will rise to almost 38%. This would enable them to continue to disburse
**diluted BV post merger pre bonus for FY11E
loans without restrictions. In addition it has applied to the RBI to get a status of an
Share holding pattern Infrastructure finance company (IFC).

Share holding pattern Pre merger Subsidiaries and JV's expected to post strong growth: Srei Infra had spun of its
equipment finance business to a subsidiary in which BNP Paribas lease group had
Retail, 29.9 Promoters, 30.0
acquired a 50% stake. The new entity SEFPL has captured 30% of the domestic market
Bodies
share in equipment financing. The management has indicated they would maintain
Corporate, 13.3
their market share going forward ensuring strong growth for the JV going forward. The
FII's, 25.3 DII's, 1.5
ongoing merger with QIEL would also enable it to have good investments in various
rental business owned by QIEL. These businesses are expected to grow over the years
as the demand for them increases.

Valuations: Given the various businesses Srei is engaged in we prefer valuing it as a

Sum Of The Parts (SOTP). The standalone entity post the merger with QIEL would have
a book value of Rs86/share. The joint venture with BNP Paribas would derive a value of
Rs13.4/share post a 25% holding company discount to its books. The total BV of the
financing business would be Rs99.4. Given the growth expected over the years we
Sameer Dalal believe a P/BV multiple of 1.5X a 50% discount to IDFC would be more than justified at
91-22-4213-4444 that we arrive at a price of Rs150. To this we add a value of Rs42 for its other
sameer@natverlal.com investments. Based on this we arrive at a target price of Rs191 rating the stock a BUY
with an upside of 89%.

NATVERLAL & SONS

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NSSPL RESEARCH Srei Infrastructure Finance Ltd

Investment Rationale

Demand for finance for infrastructure soaring

The Indian GDP has been growing at a strong pace over the past few years. While the
global markets declined due to the financial crisis the Indian economy grew at close to
6%. To maintain this growth rate the government has identified that the Indian
infrastructure would need to be improved. The government has planned large
projects in the various infrastructure spaces to ensure that there is no strangle hold on
the growth. It is now very well documented that the Indian government had planned
th
investments of Rs20,542bn of investments in the XI five year plan and it is estimated
th
that the investment would be in excess of Rs40,000bn in the XII 5 year plan.

6600 Planned Infrastructure Investments

7000
R 6000
s 5000
4000 3440
2920 2800
3000 2480
2000
B 2000 1440 1200 1040 1120 1280
n 1000 400
160 80360 80 4080
0

Xth plan XIth plan

Source: Infrastructure.gov.in, Srei, NSSPL

Project finance loan book growing

Srei as a standalone entity gets over 80% of its revenues from project financing and
this division is expected to be the prime focus going forward. The loan book
outstanding as of FY10 grew by a whopping 228% to Rs38.5bn. This included a bridge
loan of Rs1.2bn towards Quippo telecom this has now been repaid to it. Following this
at the end of Q1 FY11 the loan book of Srei stands at Rs31bn, the management has
indicated they would look to finish the current year with a loan book in excess of
Rs45bn, at that rate the growth on a year ending basis would be modest at 12.5%, but
post the repayment of the bridge loan would be 66%. We believe this target would be
achievable following the large demand funds required for the various ongoing
projects. In addition to this Srei has approved loans of Rs8.5bn which would be
disbursed over the current year.

The remaining income that Srei generates is from a fee based income. The bulk of it
coming from the project advisory business. This is expected to continue to grow as
more projects would be announced going forward. It is expected that almost 12-14%
of the overall revenues would continue to be generated from these activities.

Marginal decline in NIM's and interest spreads

Srei had an NIM of 5.7% in FY10, however this would not be sustainable going forward.
The higher interest spread and NIM was due to the loans given to Quippo telecom in
the form of a bridge loan. The management has indicated that these would move
down towards industry standards over the next few years. This would affect the
profitability of Srei, however given the loan book is expected to grow this would
ensure profitability would be able to continue to grow going forward.

NATVERLAL & SONS

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NATSONS
NSSPL RESEARCH
RESEARCH Srei Infrastructure Finance Ltd

Srei too is participating in a very competitive market, even though there is a very large
potential. Given this we have factored the NIM’s to gradually move back to industry
levels

Adequately capitalized to ensure growth momentum remains strong

The RBI has stipulated that NBFC maintain a CAR in excess of 20% Srei at the end of
FY10E had a CAR of 22%, this would have implied to grow they would need to raise
capital in the near future. However since then it has announced a merger with its
group company of the promoters QIEL, post this merger the capital of the organization
will increase, this will take the merged entities CAR to in excess of 55%. This would
ensure they would be able to increase their loan books without having to raise any
further capital. In addition to this Srei has written to the RBI to get approved as an
Infrastructure Finance Company (IFC), If this status gets approved this would reduce
their CAR to 15% enabling them to continue to grow for a longer period without
having to raise capital.

'SEFPL' JV a market leader in equipment financing

Srei only a few years ago was focused on the equipment financing business. In 2008
that division was spun off into a 100% subsidiary in which BNP Paribas leasing group, a
100% subsidiary of the BNP group, took a 50% stake. This subsidiary became a joint
venture and was rechristened Srei Equipment Finance Pvt Ltd. In this transaction BNP
paid a sum of Rs7.75bn of this Rs3.75bn was paid to Srei while the rest was kept by the
newly formed JV. To ensure that there is no conflict between the parent Srei and SEFPL
a structure has been put in place, SEFPL will only look at funding loans where
equipment costs are below Rs150mn. Equipment above this price would not fall into
their category and Srei the parent entity would look to fund these purchases.

SEFPL is the market leader in the equipment finance business having a market share of
30%. The management has indicated they would be keen to maintain their market
share going forward. Given this space is expected to have a growth in excess of 30% to
maintain their market share it would have to grow its loans at the same rate. Given its
strong position in the industry we are of the view they would be able to maintain their
market share. At the end of Q1 FY11 the new worth of SEFPL stood at Rs9.95bn while
the total AUM was Rs92.9bn of which Rs82bn was interest bearing. The NIM during
the period was strong at 5.5%, however we believe there would be some pressure to
this as competition in the space increases.

Given its large loan book of individual loans below Rs150mn they have managed to
keep their net NPA's low at 1.18%. This too we don't see as much of a concern as the
assets purchased against the loans are pledged ensuring repayment on sale of assets.

Merger with Quippo Infrastructure Equipment Ltd

In FY10 Srei decided to merge a promoter group company QIEL with itself. The merger
was done with a price of Rs102 for Srei, in the deal for every 2 shares held in QIEL 3
shares of Srei would be given. Post this merger the share capital of Srei will rise to
Rs2.79bn an increase of 140%. With this the net worth of the company too would rise
by almost 200%. Once the merger is complete the subsidiaries and investments of
QIEL would come onto the books of Srei. The four major holding of that would come
into the Srei fold are

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NSSPL RESEARCH Srei Infrastructure Finance Ltd

Quippo Telecom Infrastructure limited: QTIL was incorporated with an objective of

providing “shared passive telecom infrastructure”. Since then it has come a long way
to become one of the largest business in the space. Along the way QTIL bought out the
telecom towers of Spice and just recently acquired the telecom towers of Tata
Teleservices. QTIL has now been rechristened Viom, where Srei would have a stake of
11%. Viom presently has 38000 towers spread across India and enjoy an occupancy
rate of 2.2 per tower. The management has indicated they would be looking to add
another 20000 towers over the next few years. Funding of these expansions is
expected to be a mix of internal accruals. Debt and further equity dilution. This time
however the equity dilution is expected to be in the form of an IPO, this would help
determine the value of investment of Srei.

Quippo Construction Equipment Ltd: QCEL offers a range of equipment for the real
estate, Infrastructure, industrial construction and mining space. It offers a unique
opportunity of renting of equipment instead of purchasing this equipment. This is a
unique business model at a very nascent stage, but given the growth in infrastructure
activity this business has the possibility of generating strong earning going forward.
The biggest issues concerning this business are logistics for moving the equipment to
different sites and having equipment at times when required.

Quippo Energy Pvt ltd: QEPL is another innovative business model that was initiated
by QIEL. QEPL has 60MW of portable power generation, these generation sets run on
gas. The capacity can be made to the required amount and then sent to a customer to
fill the gap faced by organizations.

Quippo Oil & Gas Infrastructure Ltd: QOGIL currently owns 5 onshore rigs which are
leased out to E&P companies. Currently 2 of the 5 rigs have already been contracted
while the negotiations are ongoing for the other 3 rigs. The management has
indicated they too would soon be contracted.

Treasury stock creation:

Srei prior to the merger with QIEL owned 17% stake in QIEL. Post the merger Srei for
the stake held in QIEL would be given shares in Srei. As per Indian guidelines a
company cannot own stock in itself. To adjust for these shares a trust would be created
which in turn would hold the stock for Srei. This stock would be classified as treasury
stock. When fund requirements would be there for Srei we could see this being sold to
large investors ensuring funding without dilution of fresh equity.

Bonus Issue
Srei board had approved a bonus issue post the merger with QIEL. The bonus ration
was set to 4 additional shares for every 5 shares held of the company. Since this would
be done post the merger the owners of QIEL would be eligible for this bonus as well.
There has been no date set for the bonus shares as this would be done post the
merger.

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 NSSPL RESEARCH Srei Infrastructure Finance Ltd

Valuations:

On a standalone basis prior to the merger with QIEL, Srei is trading at a P/BV of 1.4X
and a P/E of 9.9X for FY10. Post the merger with QIEL Srei is trading at a P/BV of 1.1X for
and a P/E of 20.4X for FY11E.

Since Srei has various businesses they operate in through JV’s and subsidiaries we
prefer to value it on the Sum Of The Parts(SOTP) basis. The main operation of the
standalone Srei will be project financing. For this business we would prefer to use a
P/BV. At present we would prefer to take a conservative P/B of 1.5X over a 50%
discount to IDFC. This discount though large we believe is justifiable as the EPS would
decline in FY11E post the merger with QIEL. QIEL being an holding company with
investments in various rental businesses does not generate much profitability.

The tie up with BNP for its equipment finance business is a large entity. Srei has a 50%
stake in this business which has a total net worth of Rs9.95bn at the end of Q1FY11.
This too is a financing organization for small and medium enterprises and we value this
on a P/BV basis as well. Since Srei is a holding company of this business we are going to
take a 25% discount to the value of the net worth owned by Srei. Even though it is a
market leader in this space we maintain a conservative P/BV of 1.5X for this business
and arrive a t a price of Rs19.5.

Srei has investments in various different business of this the largest is Viom Networks.
Post the merger of Srei and QIEL the passive telecom infrastructure arm came into the
investment fold of Srei with a 11% stake in it. Recently SBI-Macquire invested Rs14bn
into Viom for a 11% stake. This values the overall entity at Rs127bn. To value this we
are taking a conservative approach of a 25% discount to the price as a listed entity with
similar number of towers is trading at a lower valuation. However Viom does
command a higher valuation due to the higher occupancy per tower. Based on the
25% discount we arrive at a price of Rs37/share. For the other business which are
smaller in size and yet growing we take a total value of Rs5 per share.

Adding the value of the various businesses we arrive at a price target of Rs191/share.
We are initiating coverage on Srei with a BUY recommendation with a this is an upside
of 90% from the current levels.

Sum Of The Parts Valuation

Total BV/share Srei owned BV Discount % Discounted BV Target P/BV Target price
Srei Standalone FY11E 86.1 86.1 0.0 0.0 1.5 129.1
Srei BNP FY10 34.6 17.3 25.0 13.0 1.5 19.5
Value @ recent
No of towers placement Srei Stake % Srei value Discount%
Viom Networks 37,300 127,272 11.0 13,999.9 25.0 37.6
Other Business 5.0
Target 191.1

NATVERLAL & SONS

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NSSPL RESEARCH Srei Infrastructure Finance Ltd

Risks

Increasing competition in the financing space

With larger projects being implemented with certain backing by the government we
see more funds looking to lend to the infrastructure sector. There is also a lot of keen
interest being shown by overseas investors. With this the competition in the space is
increasing. However given the size of these projects it is usually a consortium of banks
and NBFC that look at these individual projects. We expect this to remain a trend going
forward. This ensures enough room for the new and old players in the industry
without having a very significant impact on the interest spreads.

Raising funds at reasonable rates

Interest rates have been on the rise over the past quarters in line with the central bank
raising the repo and reverse repo rate. The rising rates coupled with banks lending
directly to projects could pose some problems for Srei in raising money at reasonable
rates. It will be key to see how Srei is able to manage raising funds and remain
competitive. Most of the loans given out by Srei are on a floating terms, they would be
able to pass on any increase in interest cost to them. This would ensure some stability
to the interest spread going forward.

Delay in large projects

We have seen over time large infrastructure projects in India keep getting delayed.
There could be various reasons, environmental clearance, land acquisition or changes
to the project. These delays in projects could affect them either with postponement of
loan disbursement or if loans are dispersed delay in receipts of income. Fortunately no
single project is financed by a single institution and with them diversifying into various
projects it does reduce the risk. However this is a concern not only to Srei but to the
overall industry.

Change in regulations

The Indian government is central to the infrastructure development of India. Indian

politics ensure many problems to this development and these political concerns will
linger. In addition we may see some changes in the guidelines from the central bank on
CAR requirements. However given the strong CAR that Srei has presently this would
not be a serious cause of concern.

NATVERLAL & SONS

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NSSPL RESEARCH Srei Infrastructure Finance Ltd

Company background
Srei Infrastructure was initially engaged in equipment financing, following
spinning that off into a subsidiary it now focuses on project financing. It has
recently announced a merger with a unlisted promoter group company though
this it will get have large investments in various rental business.

Srei was promoted the calcutta based Kanoria Family. Mr. Hemant Kanoria is
currently the CMD and has had over 27 years of experience in the field. He is
assisted by Mr. Sunil Kanoria, the Vice Chairman of the board with over 17
years of experience. Both of the promoters do participate in the overall growth
and strategy of the organization. Srei has multiple divisions and for each of
these there is a professional with good experience looking after the day to day
needs.

Business structure

SREI Quippo
Merged

JV's subsidaries

Viom Quippo Oil Quippo Quippo

Go Industries Mumbai
SREI BNP Networks Quippo Valuers Futuristic
and Gas Construciton Energy and Auctioner Economic zone
Ltd

Share holding pattern Pre merger Share holding pattern post merger
Bodies
corporate, 3.5
Retail, 9.6
Retail, 29.9 Promoters, 30.0
FII's, 14.5 Promoters, 46.2

Bodies
Corporate, 13.3 DII's, 16.5

FII's, 25.3 Treasury

DII's, 1.5
stock, 9.7

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NSSPL RESEARCH Srei Infrastructure Finance Ltd

Financials

Profit & Loss Balance Sheet

In Rs million FY09 FY10 FY11E FY12E In Rs million FY09 FY10 FY11E FY12E
Interest Income 2,134.8 3,884.2 5,524.5 7,033.1 Equity capital 1,162.9 1,162.9 2,792.9 2,792.9
YoY (%) (50.5) 81.9 42.2 27.3 Reserves 5,785.7 6,738.1 21,242.5 22,347.3
Interest Expense 1,939.3 2,487.8 3,945.7 5,126.5 Net worth 6,948.6 7,901.0 24,035.4 25,140.2
YoY (%) (35.8) 28.3 58.6 29.9 Total borrowings 13,426.1 35,432.7 44,003.8 57,746.3
Net Interest income 195.5 1,396.4 1,578.8 1,906.6 Deferred tax 0.0 344.0 386.7 435.9
YoY (%) (84.8) 614.3 13.1 20.8 Total liabilities 20,374.7 43,677.7 68,425.9 83,322.3

Total expenses 735.6 622.0 736.0 858.8 Net block 803.5 831.1 922.8 1,003.8
YoY (%) 28.0 (15.4) 18.3 16.7 Investments 4,805.1 7,073.3 24,468.2 24,468.2
PBDT (540.1) 774.4 842.8 1,047.8
Other income 1,129.5 817.1 1,004.8 1,077.9 Current assets 15,161.5 36,543.7 44,002.7 58,979.8
Depreciation 76.9 101.4 108.3 119.0 Inventories 10.7 9.5 11.4 13.7
PBT before provision 512.5 1,490.1 1,739.3 2,006.7 Debtors 72.2 36.5 40.0 40.0
Provisions 8.8 8.8 13.6 18.3 Cash 2,970.8 525.5 468.9 450.7
PBT 503.7 1,481.3 1,725.6 1,988.3 Loans and advances 12,107.8 35,972.2 43,482.4 58,475.4
(-) Tax 0.1 366.4 426.8 491.8
PAT 503.6 1,114.9 1,298.8 1,496.5 liabilities & provisions 395.4 770.4 967.8 1,129.4
Extra-ordinary expenses 0.0 0.0 0.0 0.0 Net current assets 14,766.1 35,773.3 43,034.9 57,850.4
Net Profit 503.6 1,114.9 1,298.8 1,496.5 Misc expenses 0.0 0.0 0.0 0.0
YoY (%) (53.4) 121.4 16.5 15.2 Total assets 20,374.7 43,677.7 68,425.9 83,322.3

Key Ratios Valuations

FY09 FY10 FY11E FY12E FY06 FY10 FY11E FY12E
EPS (Rs) 4.3 9.6 4.7 5.4 PE (x) 23.3 10.5 21.7 18.8
CEPS (Rs) 5.0 13.4 5.2 6.0 Cash PE (x) 20.2 7.5 19.5 16.9
Book value (Rs) 59.8 67.9 86.1 90.0 Price/book value (x) 1.7 1.5 1.2 1.1
DPS (Rs) 1.0 1.2 1.2 1.2
NIM 1.7 5.7 4.0 3.7
Interest spread 0.1 7.6 5.1 4.5
CAR 57.4 20.0 38.0 32.0
ROE 7.4 15.0 8.1 6.1

Disclaimer

The information provided in the document is from publicly available data and other sources, which we believe are reliable. It also includes analysis and views
expressed by our research team.
The report is purely for information purposes and does not construe to be investment recommendation/advice. Investors should not solely rely on the
information contained in this document and must make investment decisions based on their own investment objectives, risk profile and financial position.
Efforts are made to try and ensure accuracy of data however, Natverlal & Sons Stockbrokers Pvt Ltd. And / or any of its affiliates and / or employees shall not
be liable for loss or damage that may arise from any error in this document. Natverlal & Sons Stockbrokers Pvt Ltd and / or any of its affiliates and / or
employees may or may not hold positions in any of the securities mentioned in the document.
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Natverlal & Sons Stockbrokers Pvt Ltd. Fairy Manor, 13 Rustom Sidhwa Marg Fort Mumbai 400001 Tel 91-22-22658737 Email research@natverlal.com

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