Assignment 2: Vadodara Halol Toll Road

Managerial Written Communication

Prepared by, Neeraj Mehra (Roll No. 19)

Submitted to: Prof. Mukul Vasavada & Dr. Nayana Shah On 13 November 2011

Adani Institute of Infrastructure Management PGPIM Batch 2011-2012

November 6, 2006 To, Prof. Prashanth Indian Institute of Management Vastrapur, Ahmedabad 380015 Subject: Report on Analysis of Vadodara-Halol Toll Road Project Dear Professor, I am here by submitting analysis report on Vadodara Halol Toll Road. All the options have been analysed in detail. Please let me know if you have any further questions. Regards,

Neeraj Mehra Student, Adani Institute of Infrastructure Management Email: neeraj.mehra@aiim.ac.in Mobile number: 7874562352

Executive Summary

Vadodara Halol Toll Road was operated and maintained by VHTRL, a special purpose vehicle, promoted by GoG and ILF&S. The actual revenues as a proportion of the projected revenues had fallen from 63% to 34% during the three years of operation. TRC has options of increasing rates for MAV or increasing rates for all vehicles or increasing rates for MAV and restructuring finance. Each option has been evaluated in terms of impact on traffic and revenue and the cost incurred. On the basis of this evaluation, it is recommended that VHTRL should increase rates for MAV and restructure its financing.

Word Count: 100

Table of Contents

Serial Number 1 2 3 4 5 6 7 8

Title Situational Analysis Problem Statement Options Criterions for Evaluation Evaluation of Options Recommendation Action Plan Exhibits

Page Number 4 5 5 5 5 7 7 7

Situational Analysis

VHTRL was jointly promoted by GoG and IL&FS for developing and implementing Vadodara Halol Road Project. Vadodara-Halol Road had gained importance because of growing industrialization in Halol. The project attained completion on Sep 15, 2000 and the commercial operations began on Oct 24, 2000. The actual revenue has been less than the expected revenue and an appropriate action has to be taken. According to the projected cash flows, VHTRL may have to shut down their operations by mid 2003 owing to the losses they would suffer. The total debt carried is Rs 1058.3 million with the average cost of borrowing as 15.52%. (Refer Exhibit 3) The dilemma faced by Toll Review Committee is how to increase the revenue and reduce the cost so as to make the project sustainable. During the two rounds of TRC meeting, the company collected additional information and these inputs were further examined. VHTRL is currently undercharging the MAVs and hence revision of rates may be needed. (Refer Exhibits 4, 5 and 6) Exhibit 7 and 8 explains how the financing structure of the project can be improved to reduce the borrowing cost of the project.

Problem Statement VHTRL needs to increase revenue and/or reduce cost to sustain the project.

Options 1. Increase rates for MAV 2. Increase rates for All Vehicles 3. Increase rates for MAV and Financial Restructuring

Criterions for Evaluation Impact on Traffic and Revenue: How the options would affect the traffic and revenue? Impact on Cost Incurred: How much cost will be incurred after implementing the changes?

Evaluation of Options 1. Increase rates for MAV: a. Impact on Traffic and Revenue It is suggested to increase average rates for MAV to Rs 4.8205 per km. Exhibit 4 shows the average rates for MAV at different toll roads in the country. From Exhibit 5, the current average rate for MAV in Vadodara-Halol Toll Road is Rs 2.9/km, which is lesser than the average toll rates charged in the country. To achieve the average rate of Rs 4.8205 per km, the revised toll rates for MAVs are mentioned in the Exhibit 6. Since most of the MAVs are travelling long distance, there could be a possibility that the MAVs would use the alternative path NH8 after the price increase. Assuming Diesel Rate of Rs. 18/litre (2002 price) and the average fuel efficiency of MAVs at 15kms/litre, the average fuel savings of an MAV for travelling 50 kilometres lesser is Rs 60. The effective savings would be more since travelling through Vadodara-Halol road and bypassing Ahmedabad would save time and the vehicle doesnt have to go through the crowded city. The total savings on offer are more than the increase in toll rates. It is thus, safe to assume that the total traffic of MAVs will not reduce after the toll rates are increased. The total revenue would increase by 11.33%. Hence, the projected cash flow of 2003-04 would increase from Rs. 90 millions to Rs. 100.2 millions.

b. Impact on Cost Incurred The above rate increase would lead to an increased cash flow of around Rs10 million per year. But the total inflow of Rs. 113.11 million is still substantially behind the projected total outflow of Rs 250 million per year (projected for 2003-04). Hence, this change alone will not help us in sustaining the business over time. 2. Increase rates for All Vehicles: a. Impact on Traffic and Revenue The smaller vehicles (2 wheelers, 3 wheelers, Car, etc) are much more price sensitive and increasing the rates for the smaller vehicles would make them use the service road more often. On one hand, increasing the rates would increase the revenue, but on the other hand, the number of vehicles travelling would reduce leading to reduction in total revenue. Hence, the total revenue from the smaller vehicles would nearly remain the same. Increasing the toll rates for the MAV would increase the revenue as discussed above. This option is not recommended because of uncertainty of revenue involved in this case. b. Impact on Cost Incurred The cost incurred would still be considerably higher than the inflows, i.e., cost incurred as per the projected cash flows is Rs 255.45 million as compared to inflows of Rs 130.86 million.

3. Increase rates for MAVs and Financial Restructuring:

a. Impact on Traffic and Revenue As discussed in Option 1, there will be an increase in the total revenue when the toll rates for MAVs are increased. It is also critical to reduce the cost of borrowing of the project as increasing the revenue alone isnt enough for sustaining the project. Also, selling hoarding rights would add to the revenue. b. Impact on Cost Incurred The current financing structure of the project involves Debt/Equity Ratio of 1.924 and average cost of debt if 15.52% (Exhibit 3). The total interest charges incurred by the project forms the majority part of the total outflows of the project. It is of great importance to restructure the financing aspect of the project to reduce the debt burden. It should attract private equity to reduce the debt burden. Also, refinancing the debt would help in reducing the average cost of borrowing. A considerable amount of early debt has been picked up at more than 15% rate of 6

interest, e.g, ILF&S has 16% rate of interest. It is recommended to restructure Debt/Equity ratio to 1:1 and refinance the debt which has high rate of interest. Exhibit 7 shows the current projected interest burden and Exhibit 8 shows the projected interest burden after the financing is restructured. These changes will make the project profitable. (Exhibit 10)

Recommendation VHRTC would be benefitted if they increase the toll rates for MAVs and restructure financing. This would help them improve their financial situation and sustain the project.

Action Plan 1. 2. 3. 4. Issue appropriate notifications regarding revision of toll rates. Approach private equity investors to attract private investment to the project. Negotiate with lenders to refinance the existing debt. Float RFP for hoarding rights.

Word Count: 999

Exhibits

Exhibit 1: Abbreviations

VHTRL: Vadodara Halol Toll Road Company Limited GoG: Government of Gujarat IL&FS: Infrastructure Leasing & Financial Services TRC: Toll Review Committee MAV: Multi Axle Vehicle RFP: Request for Proposal

Exhibit 2: Category Wise Average Toll Revenue (Oct 2000 to Sep 2002)

45 40 35 30 25 20 15 10 5 0

Vehicle

% contribution to the Toll Revenue (Oct 00 to Sep 02) 1.68 0.46 15.41 8.24 14.14 42.65 17.42

Two Wheeler Three Wheeler Car LCV Bus Truck- Two Axles MAV

Exhibit 3: Current Financing of the project

Creditor GoG Equity IL&FS GoG Preference AIG Punj Llyod Limited Total Equity Sub Ordinate Loan Term Loans Deep Discount Bond Total Debt

Rs (Millions) 50 150 100 100 150 550 100 658.3 300 1058.3

Current Debt/Equity Ratio= 1058.3/550= 1.924 Average Cost of Borrowing (Debt)= 15.52%

Exhibit 4: Toll Rates for MAVs of other Projects Serial No. 1 2 3 4 5 6 7 8 9 10 11 Name of the Project Mumba-Pune Expressway Jaipur Kishangarh Moradabad Bypass Watrak Bridge Coimbatore Bypass Mahi Bridge Ankali River Bridge Nashirabad RoB Sheirnalla River Bridge Bina-Sirnoj-Goona Jabalpur-Patan-Shahpura Project Length (kilometres) 95 90.3 18 9 28 1 8 5 8 144 38.4 Toll Rate (Rs/km) 6.255 4.26 3.97 8.33 3.39 5.00 6.00 5.00 3.00 3.00

-Average Toll Rates for MAVs: 4.8205 Rs/Km

Exhibit 5: Determine the ratios of Three-Axle, Four-Axle and Five-Axle vehicles Percentage of revenue which comes from these vehicles is as follows (Exhibit 2): Three-Axle: 71.2% Four-Axle: 21.5% Five-Axle: 7.3% Present Toll Rates (Rs): Three-Axle: 85 Four-Axle: 105 Five-Axle: 125 If we solve using the above information, we get the average ratio of the MAVs as: Three-Axle : Four-Axle : Three-Axle :: 24 : 6 : 1 E.g. For every Three-Axle MAV, we have 6 numbers of Four Axle MAV and 24 numbers of Three-Axle MAV. Current Average Toll Rate for MAVs: (85*24+105*6+125*1)/31= Rs 90.16 Current Average Toll Rate per km: 90.16/31= Rs 2.9 per km. 10

Exhibit 6: Proposed revised rates

Current Average Toll Rate per km: Rs 2.9 per km Proposed Average Toll Rate per km: Rs 4.8205 per km To achieve the above rates per km the required increase in rates are as follows: Three Axle Current Toll Rates Raise Revised Toll Rates Rs 85 Rs 55 Rs 140 Four Axle Rs 105 Rs 70 Rs 175 Five Axle Rs 125 Rs 80 Rs 205

Exhibit 7: Current Projected Interest Outflows Debt/Equity Ratio: 1.924 and Average Cost of Debt: 15.52%

(Rs million) Total Interest 2002-03 112.72 2003-04 122.01

Exhibit 8: Projected Interest Outflows (in Rs million) after financial restructuring Debt/Equity Ratio: 1 and Average Cost of Debt: 14% Average Cost of Debt will reduce because of two factors: 1) Refinancing debt which is taken at high rates. E.g. ILF&S debt at 16% 2) Also, since the overall debt will reduce because of restructuring, companies will readily issue more debt at a lower cost. If a company has low debt, additional debt is cheap. However, if a company has high debt, additional debt is more costly. 2002-03 Reduction in interest because of restructuring of Finance Total Interest 59.97 2003-04 64.91

52.75 11

57.1

Reduction in Interest has been calculated as follows: For 2002-03: 112.72 will be reduced by 48% owing to change in the Debt to Equity Ratio. This will further reduce by 10% because of reduction in cost of debt. Exhibit 9: Revenue from hoarding rights

Total Area per hoarding Rent per sq ft per year Revenue per hoarding per year Number of hoardings (minimum) Total Revenue from hoardings

600 sq ft Rs 3000 (2002 price) Rs 1.8 million 30 Rs 54 million

Exhibit 10: Sustainability of the project after the changes (2003-04) Particulars Total Outflows Total Inflows Inflows from hoarding rights Net Surplus /Deficit

140.09 113.11 54 27.02

*Figures in Rs Million *Total repayment of principal for year 2003-04 has been assumed to be at Rs 10 million.

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