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Please refer to the important disclosures shown on the back page and note that post MiFID this information is categorised as Marketing Material
Eredene Capital Transforming Indian Infrastructure
Eredene Capital PLC (‘Eredene’) is an investment company
specialising primarily in infrastructure in India.
Eredene continues its commitment to Indian infrastructure through its
most recent investments in a new container terminal and a port services
company.
Eredene‟s investments are targeted at India‟s need for the modern
infrastructure necessary in a fast growing and ever more sophisticated
economy.
The company now has investments in three critical areas:
o Ports and port related activities. The company‟s biggest
commitment to date is as part of a consortium to develop and
operate the new container terminal at Ennore.
o Container freight stations and inland container depots.
Eredene has revenue producing investments in Chennai and
Pipavav, and is building on these with follow-on investments
in Ennore and Baroda.
o Logistics parks and third party logistics. Investments in
Haldia, Kalinganagar and near Delhi.
In addition there is a low cost housing development near Mumbai and a
small office development in Bangalore.
Recorded net asset value is 23p per share. Our less conservative
estimates suggest a potential medium term value of 30p per share. We
would expect to return to these estimates at a later stage, probably with
higher numbers as investments achieve greater maturity.
Net Asset Value per share: 23.0p Share Price Target: 30p
7 September 2010
Company Details
EPIC ERE
Share price p 20
52 week High/Low p 21 / 15
Issued share cap m 280.2
Market cap £m 56.0
Major Shareholders
Caledonia & Cayzer Trust 24.47%
Ruffer LLP 23.67%
Henderson and related 10.05%
Rebelco S.A 10.22%
Ornaisons Foundation 7.26%
Share Price, p
14
15
16
17
18
19
20
21
22
23
Sep/09 Dec/09 Mar/10 Jun/10
Source: ADVFN
All our research is available at
www.equitydevelopment.co.uk
Equity Development contacts
Andy Edmond 0207 065 2691 [email protected]
Conor Fahy 0207 065 2690 [email protected]
Eredene Capital 7 September 2010
2 www.equitydevelopment.co.uk
CONTENTS
1:INTRODUCTION 3
Background 3
Eredene now 3
India as an investment target 3
Infrastructure the key 4
2:POTENTIAL VALUE 7
3:LATEST INVESTMENTS 11
Ennore container terminal 11
Ocean Sparkle („OSL‟) 13
4:EXISTING INVESTMENTS 16
CONTAINER LOGISTICS 16
Sattva CFS & Logistics („Sattva Vichoor‟) 16
Sattva Conware CFS 19
Contrans Logistic 20
Pipavav 21
Baroda 22
LOGISTICS PARKS 25
Apeejay Infra-Logistics („Infra-Logistics‟) 25
Haldia 25
Kalinganagar 27
THIRD PARTY LOGISTICS (‘3PL’) 29
MJ Logistic („MJLS‟) 29
LOW COST HOUSING 33
The Matheran project 33
Matheran Realty 35
Gopi Resorts 36
OFFICE DEVELOPMENT 38
Sribha Infrastructure Solutions 38
5:MANAGEMENT 40
6:PARTNERS IN INDIA 42
7 September 2010 Eredene Capital
www.equitydevelopment.co.uk 3
1: INTRODUCTION
Background
Eredene began to take shape when it raised a gross £57m in April 2006 for
investment in India.
Having made an initial three investments in Indian real estate, the board
determined that burgeoning real estate prices in India no longer offered returns
commensurate with the risk involved, and decided to refine its strategy to
concentrate on Indian infrastructure.
Consequently, in the first half of 2007, Eredene became a self-managed
investment company and the first three real estate developments were sold.
These realised £9.75m against equity invested of £8.17m, resulting in an IRR of
34.0%. Eredene entered H2 2007 with cash of £57.7m and embarked on the
building of its infrastructure portfolio.
Eredene now
All of this original capital has now been invested or conditionally allocated to a
series of investments primarily in infrastructure logistics.
Two investments are regarded as non-core - low cost housing and a small office
project. With the exception of these, all investments are related in one form or
another to containers and port traffic, and consist of Ports and Port Services,
Third Party Logistics („3PL‟), Container Freight Stations („CFS‟), Inland Container
Depots („ICD‟) and Logistics Parks near or connected to port facilities.
A report by Jones Lang1 identified Eredene as the most significant
investor (by number of investments) in Indian logistics.
The most recent investments continue and intensify the port-related theme – a
new container terminal at Ennore Port (Eredene‟s biggest commitment to date)
and a port services company.
India as an investment target
India is the world‟s fourth largest economy, as measured by purchasing power
parity exchange rates („PPP‟). It is also one of the fastest growing, pipped to the
post only by China.
It is the second most populous country (1.2bn), after China, and is forecast to
have more people than China by 2025 or earlier.
The country is characterised by a large emerging middle class, highly educated
and aspirational. It also boasts the world‟s largest English speaking population,
the lingua franca of the modern business world.
1 ‘Retail Distribution Warehousing – Empowering the Indian retail revolution’, by Jones Lang LaSalle® Meghraj, 11 February 2009
Eredene Capital 7 September 2010
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Between 2004 and 2008 GDP grew at an average 8.8% pa, but slipped to 6.8% in
2009 as the world recession bit. The dip was short-lived: in Q2 2010 growth was
back up to 8.8%, with industrial output up by 12%.
Infrastructure the Key
India is seriously underinvested in transport (road, rail, ports, air traffic) as well
as other aspects of infrastructure.
Bureaucratic inefficiencies and corruption had been major causes of low public
sector investment in the country‟s infrastructure. The new century, however, saw
a determined effort to redress the balance, with a move to a market led
economy. Many previously public sectors are now open to private investment,
frequently through foreign direct investment („FDI‟).
Eredene‟s investments are targeted at four principal areas, all inter-related:
Ports and port activities
Container logistics
Logistics parks
Third party logistics („3PL‟)
Ports and port activities
Most ports in India are publicly owned, but private participation is becoming more
common, either in separate ownership of new ports or of elements of existing
ports (such as the new container terminal at Ennore).
Two ports are now quoted companies on the BSE and NSE – Mundra and Pipavav.
The World Bank has said: ‘…the sector has not been able to keep pace with rising
demand and is proving to be a drag on the economy … India's ports need to
significantly ramp up their capacity and efficiency to meet this surging demand.’2
Ports are clearly a major target for expansion.
Container logistics
Container Freight Stations („CFS‟) and Inland Container Depots („ICD‟) are closely
related to port activity, but more specifically to the fastest growing part of the
sector.
The following chart illustrates the strength of the container market in India:
2 World Bank India web site: www.worldbank.org.in - ‘Transportation: India’
7 September 2010 Eredene Capital
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Container Market
Source: India Ports Association
Traffic dipped in FT 2008/09, but swiftly recovered and in the April to July 2010
period was 12% ahead of the previous year.
A CFS, as distinct from an ICD, is generally an off-dock facility close to a port,
helping to de-congest the port by shifting cargo and customs related activities
outside the port itself. It provides facilities for cross-border trade in the close
vicinity of production/consumption centres in its hinterland, with linkages to
gateway ports.
Facilities include warehousing, short and long term storage, stuffing and
unloading etc.
An ICD performs essentially the same functions as a CFS, except that it is located
inland. Whereas a CFS deals with imports and exports at the point of entry/exit to
or from the country, an ICD will mostly deal with internal traffic, and will normally
be located close to a major distribution hub with access to road and rail arterial
systems.
Logistics parks and third party logistics (‘3PL’)
These are a relatively new feature of the Indian economy, and take us a step
further along the distribution chain.
Inland distribution is a key area of concern for some of the large companies short
of warehousing facilities. Although export business may well be in bulk, inland
distribution frequently is not, because of the fragmentation of Indian industry and
commerce: individual orders are very often of a low ticket nature.
It is also a feature of Indian businesses that most business is concluded around
the end of the month, resulting in a marked „bunching‟ of orders. This is a
problem for large suppliers, who have to build up stocks throughout the month
and execute delivery in a short timeframe after that. They need external
warehousing and logistics.
Eredene Capital 7 September 2010
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Both logistics parks and 3PLs supply this. They also, in the case of a 3PL, provide
cold storage for the burgeoning retail food sector, and computerised handling
services for its clients, as well as on-site office facilities. A logistics park will
supply some or all of this, and also areas for external operators to house their
own office facilities and operate hotels.
7 September 2010 Eredene Capital
www.equitydevelopment.co.uk 7
2: POTENTIAL VALUE
Eredene is essentially a long term investor in Indian infrastructure. It has to date
made twelve investments through ten companies:
Timing of investments
Project Investment announced
Matheran Realty Jul-2007
Sattva Vichoor Sep-2007
Contrans Logistic: Pipavav Oct-2007
Apeejay Infralogistics: Haldia Nov-2007
MJ Logistic Dec-2007
Gopi Resorts Apr-2008
Apeejay Infralogistics: Kalinganagar May-2008
Contrans Logistic: Baroda Aug-2008
Sribha 2008
Sattva Conware Oct-2008
Ennore consortium * Jun-2010
Ocean Sparkle Jul-2010
* Date of project announcement
Source: Eredene RNS announcements
Eredene‟s investments are shown at Fair Value in its accounts calculated
according to the International Private Equity and Venture Capital Guidelines
(„IPEV‟)3, which is defined as the price at which an orderly transaction would take
place between market participants at the Reporting Date. Eredene‟s IPEV
valuations are carried out by Grant Thornton.
The sale of an investment is its determinant of value, whether an outright sale or
by flotation on the relevant stock market – an outright sale being the final
determinant.
Not being a private equity fund, Eredene has no fixed limitation on its life, and is
not subject to a private equity requirement to exit from investments on an
inflexible timescale. It can, however, be expected to sell investments at times of
its choosing and, as a continuing company, reinvest the proceeds.
The company‟s share price on AIM is of course related to its performance in terms
of Sterling. However, the value and potential value of its investments must have
reference to values pertaining in India.
Eredene does not fit easily into any of the Bombay Stock Exchange‟s („BSE‟)
industrial sub-sectors, or those of the National Stock Exchange („NSE‟). The
company encompasses a number of different infrastructure projects – ports, port
services, CFSs and ICDs, logistics parks, office development and low cost housing
– which cross disciplines yet form a consistent whole.
At the time of writing, the average p/e ratio for the BSE 500 is 21.8x.
3 The International Private Equity and Venture Capital Valuation Guidelines were developed by the Association Française des Investisseurs en Capital (AFIC), the British Venture Capital Association (BVCA) and the European Private Equity and Venture Capital Association (EVCA) and were launched in March 2005 to reflect the need for greater comparability across the industry and for consistency with IFRS and US GAAP accounting principles.
Eredene Capital 7 September 2010
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This is a rather demanding rating, reflecting the confidence of the market in the
growth potential of the country. We are concerned, however, with companies
smaller than the average, and have looked for direct comparators.
Eredene‟s primary investments are in logistics and in ports and port related
activities, but in fact they are all in broadly the same areas of activity.
Comparators are few: there are only two quoted port companies, and few
logistics ones.
Let us start with logistics. Our comparators are as follows:
Logistics comparators
Ticker Issued Share price Mkt Cap EPS PER
BSE Shares m INR 1 £m INR
AllCargo Global Logistics ALLCARGO 130.5 168.90 301.6 8.4 20.2
Arshiya International ARSHIYA 13.4 284.70 52.1 2.9 96.8
Container Corporation of India CONCOR 130.0 1,317.95 2,344.2 59.3 22.2
Gateway Distriparks GDL 108.0 108.85 160.8 7.0 15.7
Sical Logistics SICAL 39.5 68.20 36.9 8.7 7.9
Unweighted average of all 32.6
Average of selection 2 16.5
1 At 25 August 2010, 2 Arshiya eliminated
Source: BSE, NSE, company websites
This gives us an average p/e ratio on trailing twelve months earnings, which we
have applied where appropriate, discounting our forward estimates.
The two port companies are Mundra and Pipavav, both located in Gujarat state,
and radically dissimilar in size:
Ports comparators
Ticker Issued Shares Share price Mkt Cap BV Turnover Price/BV Price/T'over
BSE m INR 1 £m £m £m Factor x Factor x
Mundra 2 MUNDRAPOR 401 815 4,469 477 191 9.4 23.5
Pipavav 3 GPPL 424 46 267 102 28 9.4 9.4
1 At 25 August 2010 2 Mundra Port & Special Economic Zone Ltd 3 Gujarat Pipavav Port Ltd. Figures are estimates based on Red Herring and issue price.
Source: BSE, NSE, company websites
Pipavav Port („GPPL‟) is a very recent entrant to the market, and has been
lossmaking to date. No earnings comparison. Mundra is not just very much
bigger, but the numbers hardly form a basis for comparison. So, for the new
investment in the Ennore container terminal we have relied on our DCF model.
Our models of the individual investments are mostly based on constant money.
This may be unduly conservative: it can be expected that initial rates charged to
clients by new ventures will inflate at a higher rate than costs as capacity is filled
and the businesses mature. This could particularly apply to ventures such as the
Baroda ICD.
7 September 2010 Eredene Capital
www.equitydevelopment.co.uk 9
The reasoning behind our valuation of the individual investments is covered later
in this report. Values are summarised as follows:
Valuation summary
Cost IPEV Allocated Total ED potential
end March 2010 Valn* Cost Value
£m £m £m £m £m
Ennore consortium 0.0 0.0 23.0 23.0 29.0
Ocean Sparkle 7.3 7.3 0.0 7.3 10.7
Sattva Vichoor 0.9 3.2 0.0 0.9 5.0
Sattva Conware 3.5 3.5 1.5 5.0 5.0
Contrans 5.4 6.9 2.4 7.8 9.9
Apeejay InfraLogistics 2.2 4.5 5.7 7.9 13.0
MJ Logistic 7.9 7.9 3.1 11.0 11.0
Matheran Realty 10.1 8.1 0.0 10.1 8.1
Gopi Resorts 2.5 3.2 0.0 2.5 3.2
Sribha 2.1 0.5 0.0 2.1 0.5
Totals 42.0 45.0 35.7 77.6 100.4
* Investment cost assumed where not otherwise indicated.
Source: Eredene financial statements and ED estimates
IPEV values are shown in comparison with investment cost to date: our „ED
potential value‟ is shown against total investment cost, including amounts yet to
be invested.
IPEV values are calculated according to strict guidelines, and by their nature tend
to be conservative. Our „ED potential value‟ is not a contradiction of the IPEV
numbers, but is intended to be a guide to possible values if investments go to
plan. By the very nature of things, any investment company of this kind will have
a few failures: equally, it can expect one or two to perform in excess of
expectations. So our „potential value‟ should be treated with some caution.
We have included the two investments made post balance sheet, so they are not
included in the IPEV valuations. Excluding their increase in value from our
numbers would mean that we would show an excess over cost of 15% compared
with the IPEV figure of 6%.
Both figures are affected by poor results from Matheran Realty and Sribha.
Net asset values are calculated as follows:
Eredene Capital 7 September 2010
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NAV Calculations
At end March 2010 £m
Property etc * 16.7
Intangibles and other 1.2
17.9
Investments at valuation 26.3
44.3
Cash & equivalent 27.6
Other net current liabilities (0.2)
71.7
Borrowings * (5.8)
Minority interest * (1.6)
Equity shareholders' funds 64.4
Net asset value per share p 23.0
Shareholders' funds 64.4
Excess of ED estimates over IPEV 18.6
82.9
Potential NAV per share 30.0
* These figures relate almost entirely to MJ Logistic and Sattva Conware, which are consolidated as subsidiaries
Source: Eredene financial statements and ED estimates
Based on this, we set a medium term price target of 30p per share.
7 September 2010 Eredene Capital
www.equitydevelopment.co.uk 11
3: LATEST INVESTMENTS
Ennore container terminal
Investment in Container terminal
Start: * Jun-2010
£m
Invested to date 0.0
Allocated 23.0
Totals 23.0
Ownership Current Ultimate
22.00% 22.00%
* Date of project award. Agreement was signed on 13 August 2010.
The consortium of which Eredene forms a part was successful in its bid for the
Build-Operate-Transfer („BOT‟) contract for the new container terminal in Ennore
in Tamil Nadu state. The project has been named Bay of Bengal Gateway
Terminal („BBGT‟).
Project cost is £207m (INR15.2bn). Eredene‟s equity investment (over a 48
month period) is currently forecast at about £23m (INR1.7bn).
Ennore port is about 24km from
Chennai port, developed as a
greenfield project to ease
congestion at Chennai. It was
commissioned in 2001, and
declared one of the 13 Major Ports
under the Indian Ports Act. It has
been consistently profitable since
its inception.
The new container terminal is only part of a massive expansion of Ennore Port,
which is designed to turn it into a major international port rivalling Chennai.
Other projects include the construction of an iron ore terminal and a new four
lane road connecting with NH 5.
Consortium partners
Eredene‟s partners in the consortium are:
Grup Marítim TCB SL (‘TCB’) (26%). TCB is Spain‟s leading terminal
operator with five in mainland Spain and two in the Canaries, as well as a
further six overseas. Ennore is its first venture in India. Total installed capacity
is about 4.5 million TEUs4.
4 TEU = Twenty foot Equivalent Unit, the standard industry measurement.
Eredene Capital 7 September 2010
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Obrascón Huarte Lain SA (26%). The OHL Group is one of Spain's leading
construction, concession, environmental development, and industrial groups.
The group has a presence in 20 countries across four continents, and can be
expected to provide services in the construction of the port.
Lanco Infratech Ltd (26%). Lanco Infratech is a major Indian
conglomerate, capitalised at about £2bn. Divisions include construction,
power, EPC, infrastructure, property development, and renewables.
Eredene‟s 22% stake is significant. Members with 26% or more are „locked in‟,
but Eredene can exit at the time of its choosing.
Tendering under BOT model
The BOT model has achieved widespread use in India. Designed for all sorts of
outsourcing such as IT projects etc, it is most prominent in Government sourced
infrastructure projects such as road, rail and ports which are ultimately owned by
public sector undertakings („PSUs‟). It is a type of arrangement in which the
private sector builds an infrastructure project, operates it and eventually transfers
ownership of the project to the government, having earned a return on its
investment.
In the case of BBGT the commissioning authority is the PSU Ennore Port Limited
(„EPL‟). The BOT is for a term of 30 years from 13 August 2010. With construction
planned to take 30 months from start in April 2011, the terminal is expected to
be commissioned in Q4 2013/14 i.e. Q1 of calendar 2014.
The tender process began in 2008 and attracted 22 applications, which were later
whittled to a short list of six. In addition to Eredene‟s consortium, the short list
consisted of:
APM Terminals (Maersk)
Consortium led by Gammon Infrastructure
Consortium led by Nippon Yusen Kabushiki Kaisha
Consortium of Larsen & Toubro and John Keells Holdings
Consortium led by Sterlite Industries (India)
Final bidding was on a simple single measure, and was defined in terms of royalty
as a percentage of gross terminal revenues.
The bidding process took two and a half years.
Capacity
The terminal will have a continuous quay length of 1,000 metres, with water
depth of 16 metres alongside. The facilities will be capable of handling three
container vessels of up to 8,000 TEUs simultaneously.
EPL itself states capacity at 1.5m TEUs pa. This is a very conservative estimate:
actual capacity is likely to be more of the order of 2.4m TEUs. It is expected that
this capacity will be taken up over a period of a few years, with full utilisation
likely to be achieved six years after commissioning.
7 September 2010 Eredene Capital
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Valuation
BBGT is a long term project (30 years), and is not likely to get into profit until the
fifth year post-commissioning (FY 2017/18), although it should be cash positive
the year before that. Full capacity utilisation will not be reached until FY 2019/20,
when we should be looking at net profit of about £34m (INR2.4bn) after royalties,
tax and all other charges. Eredene‟s 22% share of this would be about £7.5m
(INR500m), a p/e ratio of 3x against investment cost.
However, this is looking ten years out, and a market rating approach is not
appropriate. We have relied instead on our DCF model.
This has to take into account differential rates of inflation in revenues and costs –
tariffs are controlled by the Ennore Port Authority, with rate increases limited to
60% of the rise in the Wholesale Price Index movement – so we have used a
discount rate of 12% rather than the 10% we have used in constant money
models. This produces an NPV of £29m.
Total cost: £23m
Potential value: £29m
Ocean Sparkle (‘OSL’)
OSL is Eredene‟s first investment on a mature company, and marks a shift in
attitude towards its investment in Indian infrastructure.
* One of the existing investors (IFC) holds its
interest through preference shares. On conversion of these, Eredene’s effective interest
would fall to 7.66%.
The opportunity arose because one of the backers of the company (Swiss
Technology Venture Capital Fund Private Ltd) is nearing the end of its fund life
and needed to divest. Eredene has acquired from it its 8.22% holding in OSL at a
cost of about £7.3m (INR 510m). Other investors in OSL include the World Bank‟s
International Finance Corporation („IFC‟), and two Indian funds – India Equity
Partners Fund („IEP‟) and IIH.
Swiss Technology‟s planned exit was to have occurred in 2007-08 via an IPO, but
the looming world financial crisis put paid to this. With markets in somewhat
better health we would expect an IPO to be again a real possibility.
Investment in OSL
Start: Jul-2010
£m
Invested to date 7.3
Allocated 0.0
Totals 7.3
Ownership * Current Ultimate
8.22% 7.66%
Eredene Capital 7 September 2010
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Eredene‟s latest investment could become its first disposal, although we think
Eredene might hesitate before taking a profit too soon.
The price Eredene paid values the company at about £89m: the previously
planned IPO was at a valuation of £110m. The IPO, as and when it occurs, is
likely to be at the same valuation, or higher. This would imply a short term gain
to Eredene.
The business
OSL was founded in 1995, and is India‟s leading port operation and marine
services company, providing a full range of services to incoming and departing
ships. Services include pilotage, anchoring and berthing. The company also
undertakes dredging contracts. The fleet of 82 vessels comprises:
59 tugs
Five dredgers
Five barges
Five mooring boats, and
Eight pilot launches
OSL provides services to 18 ports across India:
Clients served by OSL
West Coast East Coast
Kandla Port Trust Paradip Port Trust
Reliance Port and Terminals Limited, Jamnagar Kakinada Sea Ports Limited, Kakinada
Gujarat Pipavav Port Limited Chemplast Sanmar Limited
Dahej Harbour and Infrastructure Limited, Dahej Krishnapatnam Port company Limited
Gujarat Chemical Port Terminal Company Limited, Dahej Chennai Petroleum Corporation Limited
Petronet LNG Ltd, Dahej * Ennore Port Ltd , Ennore *
Reliance Industries Limited, Hazira Karaikal Port Private Limited
Jawaharlal Nehru Port Trust
Mormugao Port Trust, Goa *
Goa Maritime Private Limited *
Cochin Port Trust
*JVs with PSA Marine (Pte) Limited, Singapore
Company
Joint ventures
There are three joint ventures with PSA Marine (subsidiary of PSA International),
which has a widespread presence in pilotage and towage throughout the Far East.
JVs with PSA Marine include operations for Mormugao Port Trust in Goa, Gujarat
Maritime, the first LNG terminal in India at Dahej in Gujarat and a twelve year
contract for port services at Ennore Port itself.
7 September 2010 Eredene Capital
www.equitydevelopment.co.uk 15
Valuation
OSL is profitable and dividend-paying. Results for the last six financial years are
summarised as follows:
OSL - abbreviated P&L
Year to end March 2005 2006 2007 2008 2009 2010
In rupees INR m INR m INR m INR m INR m INR m
Total revenue * 736 772 1,042 1,748 1,836 2,499
Profit before tax 278 242 320 513 364 599
Net after tax 280 227 274 495 342 506
Sterling equivalent £m £m £m £m £m £m
Total revenue * 10.56 11.07 14.95 25.07 26.33 35.13
Profit before tax 3.98 3.48 4.58 7.36 5.22 8.59
Net after tax 4.02 3.25 3.93 7.10 4.91 7.26
* Including JV income
Source: Eredene
FY 2008/09 results show the effects of the world recession, with revenue barely
growing and profit at the pre-tax level dropping by just over 30%. Eredene‟s
acquisition from Swiss Technology was based on those results, and represented a
p/e ratio of 18x at the acquisition price.
There was, however, a sharp rebound in FY 2009/10. Revenue jumped by 36%
and pre-tax by 65%.
Eredene is now sitting on an investment with an historic p/e ratio of 13x, with
substantial growth to come from Indian port revenues.
If we apply our benchmark logistics companies‟ p/e ratio of 16.5x we arrive at a
value of £120m for the company as a whole, which is comfortably above the
£110m assumed for the IPO. It is also close to our NPV calculation. If, however,
we apply the more broadly based BSE500 p/e ratio of 21.8x, value jumps to
£158m. OSL is a well established growth company, and its value should have
reference to the market average. We have, however, taken a straight line
between the two numbers.
Total cost: £7.3m
Potential value: £10.7m
Eredene Capital 7 September 2010
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4: EXISTING INVESTMENTS
In general, Eredene‟s investments have progressed well, but there have been
some blips.
Delays appear to be normal in Indian business, and can have many different
causes. One of these is inevitably the bureaucratic process, particularly in the
area of planning permissions – although it must be said that there have been vast
improvements there.
Another is the time involved in land accumulation for greenfield projects.
Frequently agricultural land has to be acquired in individual lots or parcels and
then converted to industrial or other purposes. Conversion of use appears to be
quite rapid, but the real problem is time spent in accumulation.
Some Eredene projects have incurred delays – the exceptions being Sattva and
Contrans, where Eredene‟s partners have shown admirable skill in pushing their
projects through.
Most serious have been the delays in Matheran and MJ Logistic, both discussed
later. Developments at Matheran have been outside the company‟s control, but
MJ Logistic, having got off to what appeared to be an excellent start, seemed to
vegetate for a year. We speculate that the complexities involved in new
computerised systems and cold storage may be the root cause, but judgment on
the project must be suspended until results begin to show through.
CONTAINER LOGISTICS
Sattva CFS & Logistics (‘Sattva Vichoor’)
Investment in Sattva Vichoor
Start: Sep-2007
£m
Invested to date 0.9
Allocated 0
Totals 0.9
Ownership Current Ultimate
49.00% 49.00%
Company
Sattva Vichoor initially served two purposes: as Eredene‟s first investment in a
CFS it provided exposure to the sector with a very low financial commitment, and
also provided a foothold in the Chennai region with its rapidly expanding port
sector.
Another major advantage was the partnership forged with the successful Sattva
Business Group, which already operated a CFS in Chennai and has extensive
business connections in the area and relationships with shipping lines. For
information on the Sattva Business Group, see Appendix 2.
7 September 2010 Eredene Capital
www.equitydevelopment.co.uk 17
It is Eredene‟s smallest investment, but has proved to be by far their most
successful to date.
Business plan
Sattva Business Group had already acquired a 15 acre site at Vichoor, with plans
to expand it to 30 acres. With Eredene‟s investment the site has grown to 26
acres and the buildings and other facilities associated with CFS have been put in
place.
Development cost at Vichoor was INR23m (£5.3m), financed by a total equity
injection of INR141m (£1.76m) – 51% from Sattva Business Group, 49% by
Eredene - and debt of INR282m (£3.54m), a gearing ratio of 2.0x.
Sattva Vichoor‟s business is drawn
from the Chennai port area but,
situated just north of Chennai, it is
actually closer to the new Ennore port
than Chennai itself (12km v. 17km).
It is therefore well placed to handle
traffic from both ports: Chennai
handled 1.2m TEUs in 2009/10, with
plans to expand capacity
substantially, while the new container
terminal at Ennore (to be developed by Eredene‟s consortium) will have a
capacity of 2.4m TEUs.
Development of the CFS is planned to take place in three phases as container
traffic grows. Capacity is planned to reach 120,000 TEUs by 2015:
Sattva development phases
Time period Capacity added
TEU
April 2007 to March 2010 40,000
April 2010 to March 2012 40,000
2012 to 2015 40,000
Total capacity 120,000
Source: Eredene
The CFS provides a full range of services - bonded warehousing for exports and
imports, secured and paved stacking areas for containers, a facility for assembly
from kit parts, stacking cranes, computer-driven tracking systems and prime
office facilities.
Performance against business plan
Sattva is performing ahead of expectations. The first phase is complete. The CFS
became operational in October 2007, although Eredene‟s investment did not
begin to have an impact until H1 2008/09.
Customers include steel-maker ArcelorMittal and India's leading tyre
manufacturer MRF.
Eredene Capital 7 September 2010
18 www.equitydevelopment.co.uk
There are three warehouses, six acres of stacking yard and 100,000 square feet
of open bonded area.
Financial results
Year to end March 2008 2009 2010
£m £m £m
Profit (loss) before tax 0.036 0.755 0.393
Source: Eredene financial statements
The figures in the table above are somewhat misleading, in that FY 2008/09
benefited disproportionately from an exceptional revenue item: a large client
stored steel and coils for more than a year and revenue has returned to its
„normal‟ pattern in 2009/10.
Traffic in TEUs is a better guide to longer term performance: throughput in
2008/09 was 25,000, jumping by more than 80% to 46,000 in 2009/10. This
means that it was operating in excess of its nominal capacity of 40,000 TEUs pa.
The company paid its first dividend in March 2009, and a second in March 2010.
Eredene has stated that ‘Work on expansion of the facility continues.’ Sattva
Vichoor is currently using only nine of its 26 acres, and we assume that Phase 2 is
under construction with a consequent doubling of capacity and, ultimately,
trebling.
Sattva Vichoor valuations
Valuations recorded in Eredene‟s financial statements have moved as follows:
Eredene audited valuations
ERE year end Dec / March 2007 2009 2010 Current Value
£m £m £m v. Cost
Cost at beginning of year 0.000 0.647 0.880
Investment during year 0.647 0.233 0.000
Unrealised profit/(loss) in year 0.939 0.611 0.796
Year end cost 0.647 0.880 0.880
Valuation carried at year end 1.586 2.430 3.226 +266.6%
Source: Eredene financial statements
The IPEV valuation is already more than three and a half times the investment
cost. Our estimates suggest that there is potential for further improvement in
this.
Our NPV comes out at £4.5m, and our market based value at £5.4m, compared
with recorded value of £2.4m.
Total cost: £0.9m
IPEV: £3.2m
Potential value: £5.0m
7 September 2010 Eredene Capital
www.equitydevelopment.co.uk 19
Sattva Conware CFS
Investment in Sattva Conware
Start: Oct-2008
£m
Invested to end March 2010 2.1
Allocated 2.9
Totals 5.0
Ownership Current Ultimate
82.9% 74.00%
Company
Sattva Conware is Eredene‟s second venture in partnership with Sattva Business
Group.
Eredene‟s stake will be diluted in tranches from the initial 85% to 74%, provided
the business achieves a number of staged milestones, with the final milestone
being the payment of the first dividend to shareholders.
Business plan
The CFS in development is located on a State Highway near the town of Ponneri,
about 18km to the north of Ennore. Of the total 60 acres planned, 55 acres have
already been acquired.
This is clearly on a more substantial scale than Sattva Vichoor. With Eredene‟s
stake at a projected 74% if targets are met its commitment to equity is also
much greater (£5.0m v. £0.9m).
As a general rule of thumb, traffic of
4-5,000 TEUs pa can expect to be
processed per acre of CFS. With a
target of 60 acres, this implies
capacity when fully up and running
of 240-300,000 TEUs pa, more than
double that at Vichoor.
The new CFS is targeted more
specifically at the new container
terminal at Ennore, but is being
developed initially as a large-scale
warehousing operation to meet existing demand for warehousing services. It will
be converted into a fully fledged CFS in time for the opening of the new terminal,
which is scheduled for commissioning in Q2 2013.
Eredene Capital 7 September 2010
20 www.equitydevelopment.co.uk
Performance against business plan
The master plan is under way.
The first phase should be completed by mid-2011 and will start to receive
revenue from CFS operations.
Sattva Conware valuations
As is the case with MJ Logistic, Sattva Conware is a subsidiary of Eredene and is
not valued separately as an investment.
If it proves to be as successful as Vichoor (under the same management and in
the same region) we can expect excess value to emerge over time.
It is as yet too early, however, to place a basic value on it other than the amount
invested of £2.1m, plus the amount of £2.9m yet to be invested,
Success depends on development of the new container terminal at Ennore, and
its timing. We would expect to return to the question at a later date, possibly with
a higher value.
Total cost: £5.0m
IPEV: investment cost
Potential value: £5.0m
Contrans Logistic
Investment in Contrans
Start: Oct-2007
£m
Invested to end March 2010 5.4
Allocated 2.5
Totals 7.9
Ownership Current Ultimate
44.00% 44.00%
Company
Contrans was Eredene‟s second investment in container logistics, and the CFS at
Pipavav in Gujarat state the first project with Contrans. The model is similar to
that with Sattva Business Group.
Eredene‟s partners in the development of Contrans (Captains Niroola and Grewal)
already operate successful CFSs serving Mundra Port and Kandla Port, both also
in Gujarat.
7 September 2010 Eredene Capital
www.equitydevelopment.co.uk 21
Pipavav
Pipavav CFS began trading in January
2008, before completion of most of the
site facilities. The first privately owned
CFS at Pipavav, it occupies a 79 acre site
just 700m from the port gates.
Business plan
The CFS is designed to benefit from container cargo growth at the Port of Pipavav
– Gujarat Pipavav Port Ltd („GPPL‟) – which recently floated on BSE and NSE.
Development of the CFS is in two phases, the first to install TEU capacity of
84,000 TEU, the second to raise it to 150,000.
GPPL has undertaken an expansion project involving development of a new liquid
cargo berth and expansion of the container terminal. On completion of the
expansion project, Port Pipavav will offer container handling capacity in excess of
1m TEU. This compares with Contrans‟ planned capacity of 84,000 TEU pa at the
end of Phase 1, and 150,000 at the end of Phase 2.
Pipavav serves the northern and north-
western regions of India, which have
experienced and are expected to continue
experiencing significant manufacturing and
trade growth. These regions currently
generate 66.0% of the total container
throughput in India, propelling significant
container volume growth at the ports located
on the west coast.
Performance against business plan
Acquisition of the 79 acre site is complete.
The CFS contains a 96,000 square feet bonded warehouse to handle both imports
and exports and a paved container stacking yard which is equipped with a reach
stacker, three cranes, four forklifts, nine trailers and a 100 tonne capacity
weighbridge, also an office block.
Contrans has been ready for Pipavav Port, but the port has not been ready for it.
The future for the Pipavav CFS depends on development of the port itself.
The GPPL Red Herring shows the port in loss for the six years prior to the IPO, a
period which has also shown massive expenditure on expansion and upgrading.
This has included in particular a dredging operation to deepen the main channel
to 14.5m, sufficient to accommodate large container vessels, which are currently
subject to long delays due to severe congestion at JNPT. There have been
significant delays in this programme, which means that traffic coming through to
Pipavav CFS has been lower than expected. On top of that, 2009 saw a short
lived but sharp countrywide drop in container trade, a result of the world
economic recession.
Eredene Capital 7 September 2010
22 www.equitydevelopment.co.uk
Dredging was finally completed shortly before the 2010 monsoon season, and
trade in containers, having begun to recover towards the end of 2008/09, has
more recently picked up substantially as India has overcome the „blip‟ in better
shape than the rest of the world.
Baroda
Investment in Baroda project
Start: Aug-2008
£m
Invested to date 2.5
Allocated 2.5
Totals 5.0
Ownership Current Ultimate
44.00% 44.00%
Company
Baroda is Contrans‟ second venture.
Business Plan
The Baroda project will provide all the functions with an ICD, and will be the first
such facility in eastern Gujarat.
The ICD is strategically located to feed off
the ports of Mundra, Pipavav and JNPT (the
largest container port in India), as well as
from its position straddling the arterial
connections from North India and the
western parts of the country (Mumbai, highly
industrialised Gujarat etc).
The 136 acre site is long and relatively
narrow – about 800m wide. It is sandwiched
between the two main arterial routes linking
Delhi and Mumbai: on one side is the NH 8
part of the Golden Quadrilateral highway,
and on the other is the main rail route between Delhi and Mumbai, which already
carries the highest freight traffic in India. Indian Railways plans to develop a
dedicated freight line, to which the ICD should have access.
The side immediately next to the railway line is 2,000m long, which is sufficient to
berth a full length freight train. With access on the other side to the NH 8, it
connects immediately with the two main commercial arterial routes.
The ICD will have capacity to handle 100,000 TEUs pa by FY 2014/15, with plans
to raise this to 180,000 by 2017/18 and 280,000 by 2021/22 and ultimately to
400-500,000. Clearly, the investment is of a long term nature, but it is planned to
be in profit before tax in 2013/14 and cash positive in 2014/15.
7 September 2010 Eredene Capital
www.equitydevelopment.co.uk 23
Performance against business plan
Baroda is on track.
Purchase of land for the 136 acre site has been completed, a masterplan has
been finalised and road and rail licences for the facility have been approved,
including permission for a siding from the main Mumbai-Delhi railway.
Levelling work has begun, and it is expected that revenues at an initial low level
for open storage will begin in spring 2011. FYs 2011/12 to 2013/14 should see a
rapid build-up.
Contrans valuations
Contrans‟ results to date have been as follows:
Financial Results
Year to end March 2008 2009 2010
£m £m £m
Profit (loss) before tax (0.064) (0.523) (0.487)
Source: Eredene financial statements
These figures relate principally to Pipavav at present – Baroda has not yet
impacted on the P&L – and also reflect the initial trading conditions noted above.
Valuations recorded in Eredene‟s financial statements have moved as follows:
Eredene: audited valuations
ERE year end Dec / March 2007 2009 2010 Current Value
£m £m £m v. Cost
Cost at beginning of year 0.000 1.731 4.002
Investment during year 1.731 2.271 1.403
Unrealised profit/(loss) in year 0.486 (1.706) 2.668
Year end cost 1.731 4.002 5.405
Valuation carried at year end 2.217 2.782 6.853 +26.8%
Source: Eredene financial statements
The write-down in 2008/09 reflected an appropriate degree of caution, given the
disappointing nature of the results (albeit for external reasons), but was more
than reversed the following year.
Container traffic through the Pipavav port improved in H2 2009/10: we would
expect this to begin to wash through to the CFS through 2010/11.
Our estimates show container volume at the Pipavav CFS quadrupling to about
80,000 p.a. by 2013/14. However, Pipavav Port may not achieve the
breakthrough in volumes it expects and delays mean opportunity for other
entrants to the market. There is already another (smaller) CFS located nearby. In
addition, there is potential competition from the port itself. GPPL in its Red
Herring states: ‘We are presently in discussions with parties interested in
establishing key land-related infrastructure facilities for setting up CFS
warehouses and support infrastructure for offshore business companies.’
Eredene Capital 7 September 2010
24 www.equitydevelopment.co.uk
Baroda has not yet begun to trade, but our estimates are encouraging.
Our NPV calculations suggest a value to Eredene of a much higher number than
IPEV, which we ignore for the present. Our potential value is based on market
ratings.
Total cost: £7.8 – including £2.5m yet to be spent at Baroda
IPEV: £6.9m – before spend of £2.5m at Baroda
Potential value: £14.9m
7 September 2010 Eredene Capital
www.equitydevelopment.co.uk 25
LOGISTICS PARKS
Apeejay Infra-Logistics (‘Infra-Logistics’)
Investment in Infra-Logistics
Start: Nov-2007
£m
Invested to end Mar 2010 2.2
Allocated 5.7
Totals 7.9
Ownership Current Ultimate
50.00% 50.00%
Company
Eredene has formed a partnership with Apeejay Surrendra, a major Indian
grouping of businesses prominent in the eastern states of India and in West
Bengal in particular. Eredene has the exclusive right of first refusal on projects
proposed by Apeejay in nine states of eastern India.
Two investments have so far been made through the jointly owned Apeejay Infra-
Logistics Pvt Ltd.
Haldia
Haldia is the fifth largest port in India. It is
also a major petrochemicals centre with an oil
refinery, fertiliser facilities, manufacturing
plants and various light industries, with
companies such as Indian Oil Corporation,
Tata Chemicals, Haldia Petrochemicals and
Mitsubishi Chemical Corporation.
Business plan
The 90 acre site is about 7km from the port of Haldia. Haldia itself is located 90
km downstream from Kolkata (Calcutta) where the Haldi and Hooghly rivers
meet.
The logistics park is located 6km from the NH 41, which provides a link to the NH
6 part of the Golden Quadrilateral. The NH 41 is planned to be widened soon from
two lanes to four. Also planned is a bridge over the Hooghly River, which would
provide a more direct connection with Kolkata.
Eredene Capital 7 September 2010
26 www.equitydevelopment.co.uk
Gross development cost is estimated at about INR1.99bn (£25m), funded by
equity of £10.5m shared in equal proportion between Eredene and Apeejay
Surrendra, with the remainder by debt.
The park is being developed to provide
end-to-end logistics support and will
include distribution warehousing and
transport services, as well as ancillary
facilities such as commercial offices, hotels,
shopping malls, and light processing
workshops.
The plan envisages a total of about 2m sq
ft, of which 70-75% will be developed,
owned and operated by the JV and the
remainder (principally hotels) by third
parties.
Development is in three phases:
Haldia development phases
Phase 1 Phase 2 Phase 3 Total
INR m £m INR m £m INR m £m INR m £m
Land acquisition 288 3.9 - - - - 288 3.9
Infrastructure 127.3 1.7 140.4 1.9 154.8 2.1 422.5 5.7
Construction
Retail 54.6 0.7 24.1 0.3 26.6 0.4 105.3 1.4
Offices 54.7 0.7 96.4 1.3 106.3 1.4 257.4 3.5
Warehousing & storage 218.1 2.9 241 3.3 265.7 3.6 724.8 9.8
Transport & logistics 8.2 0.1 9 0.1 10 0.1 27.2 0.4
Common/public facilities 50.2 0.7 55.4 0.7 61.1 0.8 166.7 2.2
385.7 5.2 426 5.7 469.6 6.3 1,281.40 17.3
Total capex 801.1 10.8 566.4 7.6 624.4 8.4 1,991.90 26.9
Company, ED
Performance against business plan
Phase 1 is well advanced. The perimeter wall has been completed, and 20 acres
has been surfaced. A contract has been placed for 140,000 sq ft of warehousing,
which is due for completion in calendar 2010.
Cash flow from open storage has begun, to be followed in Q4 2010 / Q1 2011
with revenue from warehousing.
7 September 2010 Eredene Capital
www.equitydevelopment.co.uk 27
Kalinganagar
The 30 acre site is in the village of Khurunti
in the state of Orissa, 129km from the
major port of Paradip and 86km from
Dhamra, where a new port is due to be
operational in Q3 2010.
Dhamra Port is a JV between Tata Steel and
L&T, and will be the deepest in India with a
draft of 18m, capable of berthing super cape
size vessels of up to 180,000 DWT. There
will be thirteen berths with an annual capacity of 83m tonnes pa dry bulk, liquid
bulk, break bulk and containerised cargo.
Business plan
The planned park will be the first fully
purpose-built transport and warehouse facility
to serve the Kalinganagar region in Orissa.
It is close to the 13,000 acre Kalinganagar
industrial complex, and targets inbound and
outbound cargo centred round the steel
industry.
Kalinganagar is becoming one of the largest
steel clusters in India. Steel projects in the
area include:
Tata Steel – 6m tonnes plant
Posco (South Korea) – 12m tonnes
ArcelorMittal – 12m tonnes, in Keonjhar nearby.
Other iron and steel producers include SAIL (Nilachal Ispat), Jindal Stainless
Steel, Mesco Steel.
Although smaller than Haldia (30 acres as opposed to 90), the business plan for
Kalinganagar is broadly similar.
Performance against business plan
Kalinganagar is at a similar stage of development to Haldia, with perimeter wall
complete and 20 acres of the 30 surfaced. A contract has been placed for a
100,000 sq ft warehouse.
Infra-Logistics has signed a joint marketing MOU with Gateway Rail Freight Ltd (a
subsidiary of the BSE quoted Gateway Distriparks Ltd) for transporting road and
rail cargo to and from the facility.
Eredene Capital 7 September 2010
28 www.equitydevelopment.co.uk
Infra-Logistics valuations
Valuations recorded in Eredene‟s financial statements have moved as follows:
Eredene audited valuations
ERE year end Dec / March 2007 2009 2010 Current Value
£m £m £m v. Cost
Cost at beginning of year 0.000 0.000 1.937
Investment during year 0.000 1.937 0.259
Unrealised profit/(loss) in year 0.000 0.229 2.059
Year end cost 0.000 1.937 2.196
Valuation carried at year end 0.000 2.166 4.484 +104.2%
Source: Eredene financial statements
These valuations are for the company, combining both projects, as are our
following estimates:
Total cost: £7.9m
IPEV: £10.2m (including £5.7m yet to be invested)
Potential value: £13.0m
7 September 2010 Eredene Capital
www.equitydevelopment.co.uk 29
THIRD PARTY LOGISTICS (‘3PL’)
MJ Logistic (‘MJLS’)
Eredene investment in MJLS
Start: Dec-2007
£m
Invested to end Mar 2010
7.9
Allocated 3.1
Totals 11.0
Ownership Current Ultimate
90.00% 74.00%
Company
MJLS was a profitable logistics company which lacked the capital to take
advantage of the opportunity the owners perceived for the business. Eredene‟s
equity injection secured an initial 90% of the company, reducing to 74% on
achievement of targets over a four year period.
Targets have not been met, so the ultimate split of ownership may be open to
question.
Business plan
The business in its entirety requires investment of about £25m (INR 2.0bn or
INR200 crore), of which equity is about 44% and debt (non-recourse to Eredene)
about 56%.
The plan involves the construction of a
complex of three new logistics centres,
designed with the latest handling
technologies and IT systems.
The planned complex consists of a „hub‟
and two „spokes‟ serving North India,
centred on National Capital Region
Delhi („NCR Delhi‟). Each logistics
centre is planned to have two
warehouses, one for dry storage and
the other for temperature controlled
cargoes (00 to +100). All three sites will
offer:
Warehousing/cold rooms equipped
with modern material handling and
storage equipment, including heavy duty racks, reach stackers and fork lift
trucks for faster receipt and retrieval of goods
Transportation and online tracking services
Eredene Capital 7 September 2010
30 www.equitydevelopment.co.uk
Customer order management, office infrastructure support and back office
services, such as packing, labelling, debulking and kitting
The hub and spokes provide similar services, but have important differences in
their purpose. Because of this they vary in size, with the hub accounting for about
50% of total capacity.
Cold storage is significant. With different stacking requirements and higher value,
it is expected to account for about 50% of gross revenue at full operation.
The two spokes are planned to be located in rapidly developing industrial areas.
They will take in raw materials and finished and part finished goods: some will be
distributed back to the areas from which they came in the first place for further
processing: others will be distributed further into local areas, or sent on to the
hub at Palwal for storage and distribution further into North India or elsewhere.
The hub at Palwal is the key to widespread distribution – some cargoes from
there will go to the spokes, others into the metropolitan district of New Delhi,
some elsewhere in India. Spokes are basically local: the hub is general.
Hub at Palwal
Access to major interconnecting routes is therefore key to the success of the hub.
In addition to established rail routes, the chosen site is favoured by existing and
planned roads, and by its proximity to major manufacturing centres,
demonstrated by the following map:
The hub is located on a 21 acre site located next to the NH 2, on the Golden
Quadrilateral 60km south of Delhi. It is within a 15km radius of three CFS/ICD
operations: two major automobile manufacturing hubs are within two hours
driving distance; and it can serve NCR Delhi, which is the largest FMCG and retail
market in India.
7 September 2010 Eredene Capital
www.equitydevelopment.co.uk 31
Spokes
The spoke at Uttaranchal is on a twelve acre site in the Haridwar Industrial Area
approximately 220km from Delhi: the spoke in Punjab is five acres in area, but
acquisition of this has been postponed.
The MJLS management believes that a single hub can support 6-8 spokes; while
the concept can also be transferred to other major centres within India, e.g. to
Mumbai, Calcutta, Chennai, Bangalore etc.
Performance against business plan
Financial results
Year to end March 2008 2009 2010
£m £m £m
Profit (loss) before tax (0.020) (0.179) (1.046)
Source: Eredene financial statements
Progress has been much slower than expected. The business plan envisaged a
three phase development of the hub at Palwal, Ambient 1, the first zone (220,000
sq ft), to be followed by Ambient 2 and then by Cold Store, with the whole
complex fully operational by the beginning of March 2009. Construction of the
spoke at Uttaranchal was expected to begin at the end of Q2 2009 and that at
Punjab in Q3.
It was also intended that the old site at Mandoli would be phased out over a
period of about twelve months and its business transferred to Palwal.
In the event, revenues from Palwal did not really kick in until January 2010,
almost a year behind schedule, and have been well below original targets. Delays
in construction and kitting out have been the principal cause. Furthermore, the
premises at Mandoli are still operational – presumably clients have been reluctant
to transfer until the Palwal operation has been proved.
There is still work to be completed at Palwal, and maintaining two sites has
resulted in overstaffing – the Eredene group accounts5 for 2009/10 show an
average 15 employed in management and administration (against eight the
previous year) and 28 in warehousing (18).
So the business plan has changed. Development of the spoke at Uttaranchal has
been put on hold until Palwal is fully operational and has filled more of its
capacity. Similarly, the land in Punjab has not been acquired.
The last few months have, however, seen a marked improvement, with Palwal
revenues beginning to match those of the site at Mandoli and the company
reaching breakeven at the EBITDA level. There is evidence of some clients
beginning to transfer to the new concept, and major new clients include
companies such as Tata Motors, McCain Foods and Danisco.
5 As a 90% owned subsidiary, MJ Logistic is consolidated into the group accounts, as is Sattva Conware. Other investments are shown at valuation.
Eredene Capital 7 September 2010
32 www.equitydevelopment.co.uk
MJLS valuations
MJLS is a 90% owned subsidiary of Eredene, and the investment is included in
the consolidated accounts at cost.
The original rationale still looks good, but Eredene has so far invested equity of
£7.9m. Taking into account loans (non-recourse to Eredene) of £5.8m, this
means that a total of £13.7m has been put into the project to date, and the
management of MJLS has yet to demonstrate the longer term strength of the
business and its wider potential.
We would expect it to be able to achieve this, but it would be incautious at this
stage to assign value to the project at a figure higher than the amount invested
and conditionally allocated so far. Results over the next year will provide a better
guide to underlying value and long term potential.
Total cost: £11.0m
Potential value: £11.0m
7 September 2010 Eredene Capital
www.equitydevelopment.co.uk 33
LOW COST HOUSING
The Matheran project
Investment in the Matheran project
Start: Jul-2007
£m
Invested to date 12.7
Ownership Effective
63% to 75% - see text
Company
There are two operating companies, Matheran Realty („MRPL‟) and Gopi Resorts
(„Gopi‟).
Ownership of the project is complex, best illustrated by the following schematic:
Project ownership
Company / ED
Eredene has effective ownership of 63% of MRPL and of 75% of Gopi but, as
neither direct holding is 50% or more, they are not consolidated as subsidiaries
and are valued separately as investments.
Gopi owns and is the vehicle for development of the first 100 acres to be
developed, at Karjat Central. Eredene therefore owns an effective 75% interest in
the first site to be developed, falling to 63% for the remainder of the project.
Business plan
The prime target market for the development is the seven million lower middle
class occupants of the Mumbai (Bombay) region, who at present live in slums –
and their numbers are increasing.
The first phase has been named Tanaji Malusare City („TMC‟).
The following map of the Mumbai Metropolitan region places the location in
relation to Greater Mumbai and Navi Mumbai (New Bombay):
Eredene Capital 7 September 2010
34 www.equitydevelopment.co.uk
Mumbai Metropolitan area
Map source: Eredene
Indian infrastructure is notoriously poor, but is now the subject of major
investment. The recent extension of the Mumbai rail system to both Karjat and
Khardi is shown in the following rail map:
Mumbai rail system
Company
To Pune
Khardi
7 September 2010 Eredene Capital
www.equitydevelopment.co.uk 35
Housing units will be affordable to lower income groups, at a typical cost to the
buyer of about INR560,000 (£7,000), with a target market of a household income
of about INR8,500 per month (£1,250 pa) or less. Some units may go to those
earning up to R30,000 per month (£4,500 pa).
Performance against business plan
Initial marketing took place in August 2008, off plan. 65,000 people applied.
About 3,000 deposits have been taken against the first phase of development.
Work is taking place on about 80 acres, and a cluster of ten apartment blocks is
scheduled for completion and occupation during calendar 2010, with a planned
5.7 million square feet of residential buildings, retail and commercial units. The
project also includes provision of associated infrastructure for the township,
including internal roads, water and sewage treatment plants, street lighting, and
water and electricity supply. Some 2.5km of roads have been constructed and the
rest of the infrastructure is well advanced.
Development has, however, been severely limited by lack of funds. Eredene has
already invested about £13m of equity, but Gopi Resorts has been constrained
from borrowing by litigation undertaken by a shareholder: it has been prevented
from changing membership of the board and from raising the debt necessary for
implementation of the business plan.
The first consequence of this is a slowing of the project.
The second is the risk that Matheran, although continuing to operate on minimum
funding, may have to slow drastically. The court case could take another year
before it is resolved.
The two operating companies need to be looked at separately.
Matheran Realty
Investment in MRPL
Start: Jul-2007
INR m £m
Invested to date 820 10.1
Ownership Effective
63.00% - see earlier
Company
Financial results
Year to end March 2008 2009 2010
£m £m £m
Profit (loss) before tax (0.221) (0.081)
Source: Eredene financial statements
Eredene Capital 7 September 2010
36 www.equitydevelopment.co.uk
Eredene : audited valuations
ERE year end Dec / March 2007 2009 2010 Current Value
£m £m £m v. Cost
Cost at beginning of year 0.000 5.992 10.128
Investment during year 5.992 4.136 0.000
Unrealised profit/(loss) in year 0.363 (5.504) 3.099
Year end cost 5.992 10.128 10.128
Valuation carried at year end 6.355 4.987 8.086 -20.2%
Source: Eredene financial statements
MRPL has acquired land development rights, but has undertaken no development
so far. Land rights acquired to date amounts to about 230 acres (not including
the Gopi Resorts 100 acres).
So valuations represent only value of land, and have been affected by, in the first
instance, the fall in land prices in the downturn in FY 2008/09, and then by the
recovery in 2009/10.
Gopi Resorts
Investment in Gopi Resorts
Start: Apr-2008
INR m £m
Invested to date 200 2.5
Ownership Effective
75.00% - see earlier
Company
Financial results
Year to end March 2008 2009 2010
£m £m £m
Profit (loss) before tax (0.033) (0.222)
Source: Eredene financial statements
Eredene: audited valuations
ERE year end Dec / March 2007 2009 2010 Current Value
£m £m £m v. Cost
Cost at beginning of year 0.000 0.000 2.542
Investment during year 0.000 2.542 0.000
Unrealised profit/(loss) in year 0.000 1.748 (1.090)
Year end cost 0.000 2.542 2.542
Valuation carried at year end 0.000 4.290 3.200 +25.9%
Source: Eredene financial statements
Gopi has been valued as a trading entity. It has constructed assets which have
potential value on sale, reflected in the carried valuation at year end which is
26% over cost.
7 September 2010 Eredene Capital
www.equitydevelopment.co.uk 37
Valuations
Eredene appears to be confident about the result of the court action. The problem
is that the litigation could take another year for resolution, with obvious risks for
the project.
The following table shows valuations for the project as a whole, treating the two
companies as a combined entity:
Eredene audited valuations (combined)
ERE year end Dec / March 2007 2009 2010 Current Value
£m £m £m v. Cost
Cost at beginning of year 0.000 5.992 12.670
Investment during year 5.992 6.678 0.000
Unrealised profit/(loss) in year 0.363 (3.756) 2.009
Year end cost 5.992 12.670 12.670
Valuation carried at year end 6.355 9.277 11.286 -10.9%
Source: Eredene financial statements
We can envisage a much higher value for Matheran than this. Given a clear run,
the Gopi development should be capable of substantial returns, and the MRPL
land (more than twice the size of Gopi) has yet to come into the frame. There is
also scope for further expansion by a phased acquisition of land for similar
developments at various sites on or close to the Mumbai suburban rail network.
At present, everything is more or less on hold and, for our purposes, it would be
risky to deviate from the IPEV valuation.
Progress on the court case should enable us return to the topic with a higher
estimate of potential value.
Total cost: £12.7m
IPEV: £11.3m
Potential value: £11.3m
Eredene Capital 7 September 2010
38 www.equitydevelopment.co.uk
OFFICE DEVELOPMENT
Sribha Infrastructure Solutions
Investment in Sribha
Start: 2008
£m
Invested to date 2.1
Allocated 0.0
Totals 2.1
Ownership Current Ultimate
36.50% 36.50%
Company
Sribha is developing high end
dedicated IT office space in Bangalore
and construction has taken place on
the first 70,000 sq ft office tower in
Bangalore.
Total development cost is estimated to
be INR920m (£11.5m), 50% to be
provided by debt.
Bangalore is the centre of the IT
industry in India. The planned office space is aimed at that market, in which
Eredene‟s investment partner is heavily involved.
SGT is a US-based company with headquarters in Houston and additional offices
in Boston, Detroit, and multiple offices in Bangalore and Chennai. It is a global
provider of IT, business process outsourcing, call centre and engineering services.
More than 50% of the space in Bangalore has been pre-let to Symcon‟s sister
companies in India.
The project is currently on hold pending further funding from the investment
partner, Eredene having fulfilled its commitment.
Sribha valuations
Valuations recorded in Eredene‟s financial statements have moved as follows:
Eredene: audited valuations
ERE year end Dec / March 2007 2009 2010 Current Value
£m £m £m v. Cost
Cost at beginning of year 0.000 0.000 2.126
Investment during year 0.000 2.126 0.000
Unrealised profit/(loss) in year 0.000 (0.503) (1.132)
Year end cost 0.000 2.126 2.126
Valuation carried at year end 0.000 1.623 0.491 -76.9%
Source: Eredene financial statements
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www.equitydevelopment.co.uk 39
Total cost: £2.1m
IPEV: £0.49m
Potential value: £0.49m
Eredene Capital 7 September 2010
40 www.equitydevelopment.co.uk
5: MANAGEMENT
The following details are taken from the Eredene web site:
Chairman (non-executive)
David Coltman has over 40 years of international experience in major and
complex logistics projects, including recently in India. After 14 years at British
Airways (BA), David moved to British Caledonian where he became Chief
Executive. After its acquisition by BA he moved to United Airlines, where from
1995 to 2001 he was Chief Marketing Officer and Executive Officer of the UAL
Corporation, based in Chicago. David is the Chairman of Edinburgh Worldwide
Investment Trust PLC, and the Senior Independent Director of John Menzies PLC,
a leading international logistics company with significant interests in India. David
read Chemical Technology at Edinburgh University.
Chief executive
Alastair King qualified as a solicitor and practised in London and Central Asia
with Baker & McKenzie. From 1999 to 2002, he held several senior positions
within NewMedia SPARK PLC, an early stage technology venture capital investor.
From February 2002, he was Managing Director of Galahad Capital PLC, then an
AIM-quoted cash shell, which completed the acquisition of Shambhala Gold
Limited in December 2003 and changed its name to Galahad Gold PLC. Alastair
King left the board of Galahad Gold in December 2004. He holds an MSc in
finance from London Business School and founded Eredene Capital plc in January
2005. Alastair King is a part of the executive team and a board member with
main responsibilities including management of the company's investment
strategy, capital raising, and investor relations.
Executive director
Gary Varley is a Chartered Accountant with board level experience in sectors
including private equity and real estate development. He joined
PricewaterhouseCoopers in 1994, where he practised in the firm's audit,
management consultancy and forensic accounting divisions. As well as a number
of board level commercial roles, he was previously a Principal with the AIM
quoted venture capital investor NewMedia SPARK PLC where he sat on the fund's
investment committee. Mr Varley was most recently Finance Director of Nicholas
King Homes PLC, a UK residential property developer. Gary Varley is the Finance
Director and a core member of the executive team with responsibilities including
investment analysis, structuring and execution
Non-executive directors
Sir Christopher Benson has been involved in real estate investment and
development throughout his career. He gained significant development
experience when with Arndale, which was followed by his appointment as
Managing Director of MEPC. He has previously been Chairman of MEPC, Royal and
Sun Alliance, Boots the Chemist, Costain and Albright & Wilson. He was also
Chairman of the London Docklands Development Corporation. Sir Christopher
Benson sits on the audit and remuneration committees.
7 September 2010 Eredene Capital
www.equitydevelopment.co.uk 41
Charles Cayzer is an Executive Director of Caledonia Investments plc, one of the
largest Investment Trusts listed on the London Stock Exchange. Having gained
experience of merchant banking, commercial banking and corporate and project
finance with Baring Brothers, Cayzer Irvine & Co and Cayzer Ltd, Charles was
appointed a director of Caledonia in 1985, where he has responsibility for
Caledonia's real estate investments. He is also a director of The Varun Shipping
Company Limited in India and several private companies.
Nikhil Naik was until March 2006 Regional Director of P&O in India and has a
successful record in sourcing and managing large infrastructure projects
throughout South Asia. An Indian national, Nikhil led P&O's activities in South
Asia for two years. He was an employee of P&O for 10 years during which he held
a number of senior positions, including that of CEO of Mundra International
Container Terminal at Mundra Port, a substantial port operator in Western India.
Nikhil is a core member of the executive team and heads Eredene Capital PLC's
investment analysis and execution advisory teams in India.
Nikhil Naik is not allowed to vote on any investment proposal that he and his
team put forward to the Eredene Board.
Principal
Ranveer Sharma has been with Eredene since 2005 and is a member of the
investment committee with investment analysis, execution and monitoring
responsibilities. He has more than ten years experience in consulting and
investment roles. Ranveer previously worked with Citicorp in New York, Los
Angeles and Mumbai at various Citigroup entities including Citibank and Citigroup
private bank on development and implementation of financial services software
solutions. Prior to this, Ranveer worked at ING's Indian arm, ING Vysya Bank,
where his role mainly focused on managing and implementation of the bank's IT
platform. Ranveer holds an MBA in private equity and corporate finance from
London business school and an MS in computer science from Jiwaji University,
Gwalior, India.
Eredene Capital 7 September 2010
42 www.equitydevelopment.co.uk
6: PARTNERS IN INDIA
Apeejay Surrendra – Haldia and Kalinganagar Logistics Parks
Apeejay Surrendra is one of India‟s largest and most profitable privately owned
family businesses, founded in 1910. Its influence within India spreads beyond
Calcutta to West Bengal and the whole of the east of India. Its activities include:
Real Estate and Hospitality: real estate development in the retail and
hospitality sectors. Developed and manages the Park boutique hotels, located
in Bangalore, Chennai, Navi Mumbai, New Delhi, Kolkata, and Visakhapatnam
Shipping: Apeejay Shipping Limited is India's largest privately owned
shipping company, with a fleet of modern dry bulk carriers operating
worldwide & in the Indian coastal trade. Total DWT capacity is 0.363m tonnes
with the average age of the fleet under 14 years
Tea: Apeejay Tea is among the largest producers in India with a workforce of
over 40,000 and 17 estates producing over 21m kilograms of tea from a
plantation area of more than 30,000 acres. In 2005 Typhoo Tea was acquired
from Premier Foods plc for £80m
Financial Services: Apeejay Insurance Broking Services caters to corporate
and retail segments. The stockbroking and retail finance businesses were sold
to ILFS Investmart India and Société Générale, France in 2006 and 2007
respectively.
MJ Logistic
Anil Arora, founder and MD, transformed his family‟s traditional warehousing
business from a landlord-tenant model into a third party logistics („3PL‟)
company. He built and managed the warehousing and distribution business over
the past twelve years.
Sugato Chandra has 25 years of experience in multinational companies (Philips,
Semcorp Logistics and TAKE Solutions – a Level 5 supply chain solutions
company), with 15 years in different aspects of the supply chain, and has
designed and implemented logistics centre projects in India.
Sarvjit Singh (President) is a past chairman of Central Warehousing Corporation,
the leading public sector warehousing company in India, and has been Advisor to
the India Trade Promotion Organisation of the Ministry of Commerce.
Contrans Logistic and Gujarat ICD
Both Captain Niroola and Captain Grewal are former sea captains, with more
than 40 years of combined experience in the industry. They have a successful
track record in the CFS and shipping sectors and have been operating CFSs at
Mundra Port (serving a DP World owned terminal) and Kandla Port (one of India‟s
Major Ports), both in Gujarat state.
Sattva CFS Vichoor and Ennore CFS
Sattva Business Group is a family owned group with diversified trading
interests ranging from the processing and export of cashew nuts to construction,
7 September 2010 Eredene Capital
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IT services and courier services. It is active in logistics, embracing warehousing,
shipping services, Inland Container Depots („ICD‟) and container freight stations.
The company‟s first CFS in Chennai is ranked third in the Chennai region by traffic
handled.
Matheran Realty and Gopi Resorts
Joe Silva is an entrepreneur with a background in Telecoms (as a main
contractor for the construction of telecom towers: in Cal Tiger, the first large
scale ISP in India); and in food manufacture and processing. In the latter capacity
he has built up relationships with the farming communities around Mumbai -
through his company Silvex he has more than 25 years of land and property
development experience in the Mumbai market and is a key agent in the
acquisition of the land MRPL needs for its development.
Sales Contacts
Research Services Investor Access
Darren Mitchell
Direct: 0207 065 2698
Tel: 0207 065 2690
email: [email protected]
Hannah Crowe
Direct: 0207 065 2692
Tel: 0207 065 2690
email: [email protected]
Analyst Contacts
Consumer
Peter Temple – Senior Analyst
Financials
John Borgars – Senior Analyst
Media
Derek Terrington – Senior Analyst
Mining / Infrastructure
Conor Fahy – Senior Analyst
Oil & Gas
Samantha Dobbin – Senior Analyst
Pharmaceuticals / Biotechnology
Lorenza Castellon – Senior Analyst
Renewables
Denis Gross – Senior Analyst
Technology
John Walter – Senior Analyst
Telecoms
Philip Carse – Senior Analyst
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