This article provides in-depth fundamental analysis of Noida Toll Bridge Company Ltd, the company owning & operating the DND Flyway, connecting New Delhi (ring road) and NOIDA (sector 15).
Noida Toll Bridge Company Ltd Research Report by Reader
Q: Dr. Vijay Sir, it seems to me that Noida Toll Bridge Company Ltd is very attractive valuation with strong potential. Kindly discuss:
- Current Price: INR 25.50
- Book Value: INR 30.72
- Stock P/E: 5.71 <10 Very Good
- Dividend Yield: 9.80%
- Face Value: INR 10.00
- 52 Week High/Low: INR 38.40 / INR 23.25 <2 Very Good
- PEG Ratio: 0.60 <1 Very Good
- Debt to equity: 0.05 < 0.5 Very Good
- Interest Coverage Ratio: 11.01 >3 Excellant
- Current ratio: 0.13 >1.25 Bad
- Price to Sales: 3.78 <1.5 Bad
- Promoter holding: 26.37% >20%
- Pledged percentage: 0.00%
- Average dividend payout 3years: 58.93%
- Inventory turnover ratio: 530.53 . Higher value is healthy sign
- Inventory turnover ratio 3Years back: 1,093.53
- Inventory turnover ratio 5Years back: 664.48
- Price to book value: 0.83 <1 Good
- Dividend Payout Ratio: 70.02%
- Industry PE: 25
- Debtor days: 4.05 Excellant
- Debtor days 3years back: 8.14
- Debtor days 5years back: 14.89
Dr Vijay Malik’s Response
Thanks for writing to me! Let us first analyse the financial performance of Noida Toll Bridge Company Ltd over last 10 years.
Financial Analysis of Noida Toll Bridge Company Ltd:
Noida Toll Bridge Company Ltd has been growing its sales at a modest rate of 8-10% year on year since last 10 years (FY2006-15). Operating profit margins (OPM) of Noida Toll Bridge Company Ltd have been consistent at 70-73% throughout the last decade. This is expected looking at its business operations, which involves running a road bridge and collecting toll for it. High operating margins are typical for such projects.
However, net profit margins (NPM) have also been fluctuating wildly between 33-66% over the years. The major factor leading to such fluctuating margins is tax rate, which has been varying from 1% to 36% over the years. An investor should study the reason for such fluctuations in the tax rate. A reading of key clauses of the concession/allotment agreement of the DND Flyway project (included in the annual reports) should provide the investor a fair idea about its tax incentives.
Another factor that leads to change (improvement) in net profit margin is the reduction in interest expense that has resulted from the company paying off its debt over the years.
Operating Efficiency Analysis of Noida Toll Bridge Company Ltd:
Standard operating efficiency parameters, like net fixed asset turnover, inventory turnover and receivables days are not much helpful in analyzing Noida Toll Bridge Company Ltd, as it has one major asset, which is the toll bridge. Receivables days are low at 4 days, which is expected as most of the earnings are toll collections, which are collected upfront in cash from the toll bridge users.
Noida Toll Bridge Company Ltd has been able to convert its profits into cash from operations. It has PAT for last 10 years (FY2006-15) of INR 363 cr. whereas the CFO over the similar period is INR 661 cr. Again, the cash conversion is not expected to be an issue in a business situation where customers pay the company in cash every time they use the road.
Free Cash Flow Analysis of Noida Toll Bridge Company Ltd:
During FY2006-15, Noida Toll Bridge Company Ltd realized total CFO of INR 661 cr. and out of it Noida Toll Bridge Company Ltd has to spend INR 242 cr. into capital expenditure, thereby releasing free cash flow (FCF) of INR 419 cr. This cash has been promptly utilized by the company to repay its debt that stood at INR 218 cr in FY2008 and to pay dividends to shareholders of INR 149 cr.
Company is not doing any further capex since last 5-6 years as the project DND Flyway is already company. It is therefore, paying regular increasing dividend to shareholders since last 5 years. This behavior indicates that the management of Noida Toll Bridge Company Ltd is shareholder friendly.
However, the company has been plagued by certain issues related to visibility of its business growth:
- There are two competing bridges across Yamuna connecting New Delhi with NOIDA in near vicinity: Sarai Kale Khan bridge and Kalindi Kunj bridge. These bridges take away a lot of traffic from DND Flyway and with every increase in toll at DND, these bridges provide easy alternative to commuters. This limits the extent to which DND can grow its revenue from toll collections.
- There is another issue that the company has highlighted in its shareholder’s communications that Delhi govt. is planning to extend existing Barapullah flyover in its phase III, connecting Sarai Kale Khan to Mayur Vihar across Yamuna river. L&T has won the order from PWD to build this phase III of Barapullah flyover. The proposed flyover would be a big competition to existing DND Flyway.
As per company, the alignment of Barahpullah phase III contravenes the concession agreement for DND Flyway, where the govt has agreed not to build any competing bridge between existing Salari Kale Khan bridge and Kalindi Kunj bridge across Yamuna. However, the future developments on this front are uncertain about whether Noida Toll Bridge Company Ltd would be compensated for the traffic loss it would have due to Barapullah bridge phase III, and if yes then when.
Such uncertainties about the future business environment of Noida Toll Bridge Company Ltd have weighed heavy on its share price. The market capitalization of the Noida Toll Bridge Company Ltd has declined by INR 189 cr. against retained earnings of INR 214 cr. over last 10 years (FY2006-15). This is effectively wealth erosion of shareholders. However, with many uncertainties surrounding it future business potential, the concerns of market are well placed.
Margin of Safety in the market price of Noida Toll Bridge Company Ltd:
Noida Toll Bridge Company Ltd is currently available at a P/E ratio of 5.6, which though offers good amount of margin of safety as described by Benjamin Graham in his book The Intelligent Investor. However, this seems to be a case of value trap, where the stock price might not recover until there is clarity about the competing road projects and the compensation, if any, to be awarded to the company.
High dividend yield provided by Noida Toll Bridge Company Ltd, currently at about 12%, though seemingly attractive if seen in isolation, does not seem that attractive, if an investor looks it in conjunction with the capital loss the investors have suffered over last 10 years by their investments in Noida Toll Bridge Company Ltd.
However, we recommend that an investor may read the following articles to assess the PE ratio to be paid for any stock, takes into account the strength of the business model of the company as well. The strength in the business model of any company is measured by way of its self-sustainable growth rate and the free cash flow generating the ability of the company.
In the absence of any strength in the business model of the company, a low PE ratio of the company’s stock may be signs of a value trap where instead of being a bargain; the low valuation of the stock price may represent the poor business dynamics of the company.
- 3 Principles to Decide the Ideal P/E Ratio of a Stock for Value Investors
- How to Earn High Returns at Low Risk – Invest in Low P/E Stocks
- Hidden Risk of Investing in High P/E Stocks
Overall, Noida Toll Bridge Company Ltd appears to be a company growing at a modest pace, with sustained operating margins. It has been able to meet its capex requirements from its cash flow from operations and able to generate free cash flows, which it has utilized for debt repayment and payment of dividends to shareholders.
An investor should analyse the tax payouts of the company further to understand the reasons for fluctuating tax payout rates over the years. She should also keep a close tab on the developments related to the competing road bridges to DND Flyway. Unless there is clarity and favourable development on this front, the investor may not be able to get good returns from her investments in Noida Toll Bridge Company Ltd.
These are my views about Noida Toll Bridge Company Ltd. However, you should do your own analysis before taking any investment related decision about Noida Toll Bridge Company Ltd.
You may use the following steps to analyse the company: “How to do Detailed Analysis of a Company“
Additionally, the investor should keep track of the future performance of the company for signs of improvement or worsening as part of their monitoring exercise. She may use the steps explained in the following article for monitoring stocks in her portfolio.
Hope it helps!
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- The above discussion is only for educational purpose to help the readers improve their stock analysis skills. It is not a buy/sell/hold recommendation for the discussed stocks.
- I am registered with SEBI as an Investment Adviser under SEBI (Investment Advisers) Regulations, 2013.
- Currently, I do not own stocks of the companies mentioned above in my portfolio.