IRB Infrastructure Developers Ltd

ECONOMY OVERVIEW

Economic growth in Financial Year 2010-11 has been swift and broad-based. The economyis back to its pre-crisis growth trajectory. The Gross Domestic Product, improved to 8.5%in 2010-11 from 8% in 2009-10 due to better farm output and construction activities andfinancial. The agriculture and allied sectors grew by 6.6% during the fiscal, as against0.4% in the previous year. The growth of services, including banking and insurance,improved to 9.9% in 2010-11 from 9.2% in the previous fiscal. The trade, hotels, transportand communication segment grew by 10.3% in FY10-11, as against 9.7% last fiscal, whilegrowth of the construction sector stood at 8.1%, as against 7% in the previous financialyear.

INFRASTRUCTURE INDUSTRY

The Infrastructure Industry in India has been experiencing a rapid growth in itsdifferent verticals with the development and urbanization leading to increasing interestshown by foreign as well as domestic investors and infrastructure players in this field.The Indian government has taken initiatives to develop the infrastructure sector, withemphasis on construction, engineering, IT, entertainment, food and utility to name some.

Infrastructure investment in India is set to grow dramatically. For the Indian economyto maintain its growth momentum, the provision of adequate infrastructure facilities iscritical. Unreliable services or a disruption in infrastructure facilities may restrictoutput or hinder investments in productive capital. The Eleventh Five-Year Plan(2007-2012) ("Eleventh Plan") of the Planning Commission of the Government ofIndia identifies high quality infrastructure as the most critical physical requirement forattaining faster growth in a competitive global environment and also for ensuringinvestment in less-developed regions. Moreover, the Planning Commission states that thetotal investment needed in infrastructure would have to increase to 9.3% by the final yearof the Eleventh Plan period to meet India's target GDP growth rate of 9%. Also, apreliminary assessment suggests that investment in infrastructure during the Twelfth FiveYear Plan (2012-17) would need to be of the order of about US$ 1,025 billion to achieve ashare of 9.95% as a proportion of GDP, according to the Planning Commission. The Indiangovernment is attempting to improve the country's infrastructure as a top policy priority.While presenting the Union Budget 2011-12, the Finance Minister has an allocation of overRs. 2,14,000 crores for infrastucture which is 23.3% higher than 2010-11.

ROAD AND HIGHWAYS

India has an extensive road network of 4.24 million kms - the second largest in theworld. The National Highways have a total length of 70,934 kms and serve as the arterialroad network of the country. It is estimated that more than 70% of freight and 85% ofpassenger traffic in the country is being handled by roads. While Highways/ Expresswaysconstitute only about 2% of the length of all roads, they carry about 40% of the roadtraffic leading to a strain on their capacity. The number of vehicles on roads has beengrowing at compounded annual growth rate (CAGR) of approximately 8% in the last fiveyears. The Government of India has launched major initiatives to upgrade and strengthenNational Highways through various phases of the National Highways Development Project(NHDP). NHDP is one of the largest road development programmes to be undertaken by asingle authority in the world and involves widening, upgrading and rehabilitation of about54,000 kms, entailing an estimated investment of more than Rs. 300,000 crores.

Indian roads sector has witnessed increased traction in terms of bidding activities,with National Highways Authority of India (NHAI) awarded appx. 5,000 kms length ofHighways & Roads projects in FY2010-11 (in comparison to 624 kms in FY08-09 &3,360kms in FY09-10). The accelerated pace is driven by several policy and structural reformsbeing implemented, with intent to build 20 kms of national highways every day. Revisedwork plan by NHAI now proposes to award appx. 7,300 kms of projects till end of FY11-12;this compares with project awards of 15,713 kms during FY 02-09, 3,360 kms in FY09-10& 5,000 kms in FY10-11. Government's initiatives towards awarding Mega projects (9projects each of approx. Rs. 5,000 crores), conversion of approx. 10,000 kms StateHighways to National Highways,

Expressway development in various states etc. indicates the latent opportunities forboth, infrastructure developers and construction companies.

Also, NHAI has, based on its experience and the discussions with various stakeholders,standardised essential documents involved in a typical road project award i.e. the RFQ,RFP and the MCA which are being updated continuously. Some of the important changes madein these documents are as under:

1. All applicants meeting the threshold technical and financial experience criteria setout in the RFQ shall be eligible to participate in the RFP stage.

2. Equity Support under VGF has been increased to 40% of project cost.

3. Termination provisions under capacity augmentation situations modified to give morecomfort to investors and lenders. The concession period can be extended upto 5 years toyield post tax equity IRR of 16%, in the event of capacity augmentation option exercisedby the concessionaire.

4. Exit option allowed for principal promoters of road SPVs after two years fromcommercial operations date (COD).

5. Where the projects are bid out on a revenue share basis, the base premium (fixedamount) (revenue share proposed by the successful bidder) will be increased at the rate of5% year on year with respect to the immediately preceding year for the entire tenure ofthe concession.

BUSINESS OVERVIEW

IRB Infrastructure Developers Ltd. (IRB) incorporated in 1998, has strong in-houseintegrated execution capabilities. IRB is the pioneer in the road BOT business and is onethe largest road BOT operators in the country with 17 Road BOT projects under its belt.IRB also has approx. 11.07% share of the golden quadrilateral. The construction businesscomplements its BOT vertical by executing the engineering, procurement and construction(EPC) and the Operation and Management (O&M) portion of BOT concessions.

IRB's road business is conducted in two verticals viz. (1) Engineering, Procurement andConstruction, and (2) Toll Collection and Maintenance. In the road BOT business, IRBcurrently has 17 road projects, out of which 10 are operational, 7 under implementation.Also, the Company has received letter of Award from NHAI in April 2011 for AhmadabadVadodara BOT Project. The Company's major clients are government agencies undertaking roaddevelopment in India e.g. National Highways Authority of India (NHAI) and MaharashtraState Road Development Corporation Ltd (MSRDC) etc. IRB's Road Portfolio as per lane kms.comprises of 40% in Maharashtra, 31% in Gujarat, 10% in Karnataka, 9% in Rajasthan, 6% inPunjab and 4% in GOA.

(I) CONSTRUCTION AND DEVELOPMENT OF HIGHWAYS

IRB has successfully executed many BOT projects in roads and highway sector, includingimprovement of National Highway and sections of Golden Quadrilateral.

On the existing projects, 80% of construction work on Surat Dahisar Project has beencompleted. Construction on IRDP Kolhapur Project will be completed by 2nd quarter ofFY11-12 and thenafter, the Company will start collecting toll on this project.

In last financial year, your Company has won the Tumkur Chitradurga BOT project in thestate of Karnataka. The Company has started construction and tolling activities on thisproject from June 2011.

The Company has also won Project of 6 - laning of Ahmedabad to Vadodra section of NH-8from kms 6.400 to 108.700 kms (Length 102.300 kms) and improvement of existing AhmedabadVadodra Expressway from kms 0.000 to 93.302 kms in the State of Gujarat (Length 93.302kms) under Phase V on Design, Build, Finance, Operate and Transfer (DBFOT) Toll basis. Theconstruction cost is approximately Rs. 3,600 crores. Concession period of the Project is25 years. The Company will get tolling rights on Ahmedabad Vadodara expressway from theappointed date. The Company has offered premium of Rs. 309.60 crores to NHAI in the 1styear which will increase by 5% every year.

(II) OPERATIONS AND MAINTENANCE (O&M)

IRB is one of the largest BOT operators in India today with daily toll collectionnearing approx. Rs. 2.67 crores on gross basis. The Company has enjoyed escalation in tollrates around 5% ~ 7% during the year as per terms of each concession.

Your Company has in-house expertise in handling operation and maintenance of BOT roadProjects. The key example of its Operation and Maintenance activity is its experience inoperating and maintaining one of the busiest highway in the country Mumbai PuneExpressway.

(III) RELATED DIVERSIFICATION

Your Company intends to develop Integrated Township alongside the Mumbai - PuneExpressway. The land acquisition of approximately 1,200 acres is completed. Your Companywas also declared as the "Selected Bidder" for Sindhudurg Greenfield Airport BOTProject and your Company has already executed Project Development Agreement with MIDC.Upon receipt of necessary permission from MoEF, your Company will start construction onthis Project.

KEY COMPETITIVE ADVANTAGE

Your Company has the following key advantages to lead:

• Robust order book of over Rs. 11,170 crores (as on June 30, 2011).

• One of the largest Domestic BOT project portfolios in the Roads and Highwaysector.

• 18 BOT projects out of which 10 are operational.

• Strong financial track record and healthy relationship with leadingBanks/financial Institutions.

• Integrated and Efficient project execution capabilities.

• Professionally managed Company with qualified and skilled employee base.

UPCOMING OPPORTUNITIES

NHAI is having plans to award appx. 7,300 kms aggregate length of projects duringFY11-12. The following table shows the upcoming opportunities for IRB either on RFP stageor on RFQ stage as on March 31, 2011:

Amount in Rs. crore

RISKS AND CHALLENGES

The Company's ability to foresee and manage business risks is crucial in achievingfavorable results. While management is positive about Company's long term outlook, we aresubject to few risks and uncertainties as given below.

Competition

The Company is operating in a highly competitive environment. During the previous year,the Company has observed that; (1) relatively smaller companies have been dominating thebidding for the project-size of between Rs. 1,000 crores to Rs. 1,500 crores and (2)competition has increased significantly in comparison to earlier rounds of bidding. Onaverage, 20 to 25 companies have been submitting bid in most of the projects whichresulted into aggressive bidding by some companies.

On the basis of preliminary assessments, the Company has been submitting bids forprojects which are found viable. Also, the new projects which are offered/being offered byNHAI are substantially large with project cost of Rs. 2,000 crores or more. Your Companybelieve that such competitive intensity may continue for some more time.

Availability of Capital and Interest rates

Infrastructure projects are typically capital intensive and require high levels oflong-term debt financing. Your Company intends to pursue a strategy of continuedinvestment in infrastructure development projects. Your Company believes that though inthe past it has been able to infuse equity and also arrange for debt financing for itsinfrastructure development projects on acceptable terms at the relevant Project SPV level,its ability to continue to arrange for capital requirements is dependent on numerousfactors, like timing and generation of internal accruals; timing and size of award ofprojects as well as availability of credit from banks and financial institutions, thesuccess of its current infrastructure development projects and other factors outside itscontrol.

However, your Company's track record has enabled it to raise funds at competitiverates. Further, the Company has already hedged itself from any hardening of interestrates, by locking lower interest rates eg. for Mumbai Pune Project, the weighted averagecost of debt is 10.6% p.a. fixed for 8.5 years; for under-construction projects, the rateof interest is fixed to approx. 10.5% p.a. for a period of 3 years covering the entireconstruction period.

Toll Rates/Traffic

The Government has been implementing policy of linking increase in toll rates to changein Wholesale Price Index (WPI). The Toll rates of the Company's Bharuch Surat, SuratDahisar projects are linked to average WPI. Toll rates for the projects awarded after 2008are linked to a formula i.e. 3% + (40% of average WPI). Toll rates of all other projectsof the Company have fixed annual or periodical increase in their toll rates, as per theirConcession Agreement.

Also, vehicular traffic varies with overall economic activities in the Country,specifically in the corridors where the Company's projects are situated. However, most ofthe Company's projects e.g. Mumbai-Pune, Thane-Bhiwandi, Thane-Ghodbunder Projects arehaving fair mix of passenger and freight traffic which comparatively is less sensitive tothe level of economic activities in respective corridors.

Raw material

Continuous supply of raw materials like bitumen, stone aggregates, cement and steel areessential for timely completion of the projects. There is also a risk of escalation ofcost or shortage in the supply of raw materials.

The extensive experience of the Company, it's standing in the Industry and bulkpurchases have helped to plan and procure raw materials at competitive rates to theCompany. Also, the Company procures stone aggregates from its leased mines which, besidesensuring quality and lowering the cost as compared to bought out aggregate, also reducesevents of disruption in supply or price escalation.

Manpower

The timely availability of skilled and technical personnel is one of the keychallenges. The Company maintains healthy and motivating work environment through variousmeasures. This has helped the Company to retain and recruit skilled work force resultinginto the timely completion of the projects.

INTERNAL CONTROL SYSTEMS

Your Company maintains adequate internal control systems, which provide, among otherthings, reasonable assurance of recording the transactions of its operations in allmaterial respects and of providing protection against significant misuse or loss ofCompany assets. The Company has a strong and independent internal audit function. TheInternal Auditor reports directly to the Chairman of the Audit Committee. Professionallyqualified, technical and financial personnel of the internal audit function conductperiodic audits to ensure that the Company's internal control systems are adequate and arecomplied with.

FINANCIAL ANALYSIS

The total consolidated income for FY10-11 has gone up to Rs. 2,503 crores from Rs.1,754 crores for FY09-10, registering a growth of 43%. The consolidated total tollrevenues for FY10-11 has gone up to Rs. 832 crores from Rs. 730 crores for FY09-10registering a growth of 14%, while the consolidated total construction revenues for FY10-11 have gone up to Rs.1,670 cores from Rs.1,024 crores for FY09-10 registering a growth of63%.

Earning Before Interest Tax Depriciation and Amortisation (EBITDA) for FY10- 11 hasgone up to Rs.1,158 crores from Rs.848 crores for FY09-10 registering a growth of 37%.

Interest costs for FY10-11 has gone up to Rs.357 crores from Rs.249 crores for FY09-10resulting in an increase of 43% mainly because of increase in interest expense in SuratDahisar Projects and Mark to market provision for interest rate derivative contract.

Depreciation/amortization for FY10-11 has gone up to Rs.225 crores from Rs.182crores for FY09-10 resulting in an increase of 24% due to full year's amortisation forBharuch Surat Project in FY 10-11.

Profit before tax (PBT) for FY10-11 has gone up to Rs.576 crores from Rs.417crores for FY09-10 registering a growth of 38%.

Profit after tax (PAT) for FY10-11has gone up to Rs.464 crores from Rs.403crores for FY09-10 registering a growth of 15%.

Post minority interest, PAT for FY10-11 has gone up to at Rs.452 crores from Rs.385crores for FY09-10 registering a growth of 17%.

Earnings per share on basic and diluted basis for the year FY10-11 have gone up toRs.13.61 from Rs.11.60 for FY09-10, registering growth of 17%.

The Company has raised project term loans to meet construction cost of BOT project. ItsNet debt as on March 31, 2011 is Rs.3,425 crores compared to Rs.2,405 croresas on March 31, 2010. The increase is primarily due to disbursement of loans in SuratDahishar Project and IRDP Kolhapur Project. Out of total Net debt, Rs.922 crores isfor Mumbai Pune Project, Rs.1,080 crores for Surat Dahishar, Rs.155 croresis for Kolhapur Project, Rs.515 crores for Bharuch Surat project and balance debtis for other BOT Projects. The average cost of debt is around 10.75%.

HUMAN RESOURCE MANAGEMENT

Your Company has a large pool of experienced and trained technical manpower with whichyour Company executes world-class and high quality projects - qualities which have becomesynonymous with the name IRB. Company remains committed on providing high level technicaltraining from institutions of world repute like NICMAR to its employees to continuouslybuild upon their expertise as well as to provide growth avenues to the employees.Employees are also nominated to attend other professional skill building programms.

Your Company is also associated with international professional bodies in its quest tocontinually excel in all its endeavors. The reputation of your Company as the one withfavourable work environment that encourages innovation and superior performance, acts as astrong magnet to attract new talent from the industry. Human resources continue to be oneof the core focus areas of the Company. Respect for individual, open work culture,effective communication, fair and equitable treatment and welfare of employees aresignificant. Employee Value Propositions which help your Company to retain a pool of largenumber of highly engaged professionals and generate high level of trust amongst itsemployees. Your Company remains 'employer of choice' with one of the lowest attrition rateof employees of less than 1% in the infrastructure sector since last three consecutiveyears.

CAUTIONARY STATEMENT

Statements in the Management Discussion and Analysis describing the Company'sobjectives, projections, estimates, expectations may be "forward lookingstatements" within the meaning of applicable securities, laws and regulations. Actualresults could differ materially from those expressed or implied. Important factors thatcould influence the Company's operations include economic developments within the country,demand and supply conditions in the industry, input prices, changes in Governmentregulations, tax laws and other factors such as litigation and industrial relations.

Note : 1 Billion = 100 crore, 1 Million = 10 Lakh, 1 US $ = Rs.45