Noida Toll Bridge has just received a shocker from the Allahabad High Court. The court, hearing a PIL from Noida Resident Welfare Associations, has produced a judgement that Noida Toll Bridge Company can no longer charge a toll to users for driving on the bridge.
This is a big problem because this is nearly all of the income the company makes, and the stock is therefore down 20%.
What Really Has Happened?
That judgement is a ludicrous 121 pages long and so we have to decode it for you.
Noida Toll Bridge is an IL&FS promoted company that wanted to build a bridge between NOIDA and Delhi. In 1992.
The deal was to Build, Own, Operate and Transfer (BOOT) to the NOIDA authority, for a period of 30 years.
They built it and delivered in 2001, and since then have been charging a toll.
They spent approximately 377 cr. in the whole thing including the Ashram Flyover.
Note that the cost here is only 325 cr. – the interest charges are 51 cr. This was as of 2001.
Since then the company has, till 2014, collected around 800 cr. of toll, with a surplus (pre-interest, but after expenses) of about 577 cr.
There is a further Rs. 300 cr. of toll collected since 2014, till Sep 2016. (We think this means the surplus would have gone up by another 200 cr.)
There’s a 20% return that was “guaranteed” to the company. The court has decided the 20% applies on the cost of the project i.e 325 cr. so they should get 400 cr. or so.
The judge has noted that the company gets full leeway to put whatever costs it wants – auditors, legal, consultants etc. – without any limitation, as part of ongoing project costs, which is basically illegal because they can keep stuffing excessive costs forever.
And, it seems, they have kept adding costs this way. The judges don’t like this.
They also say that look, if you say you haven’t recovered the costs so far then why are you paying such high dividends to your shareholders?
So the judges have decided that the surplus shows the costs are recovered. Which is likely to be defensible – if the interest costs are Rs. 50 cr. per year, then the 15 year period since would be about Rs. 750 cr. in interest, and that seems to be a realized surplus even after tax.
Therefore, the judges say, there will be no more user fees for Noida Toll Bridge. This cuts off nearly all the revenue for the company.
There is a “total cost” of the project including some risk premium, which has ballooned to over Rs. 2,000 cr. so far. This is only for the purpose of ensuring the company is paid if NOIDA arbitrarity cancels the company’s contract.
If NOIDA Authority should terminate the Noida Toll Bridge company’s contract prematurely for any reason, then it is entitled to recover that cost (2,000 cr.) minus any tolls etc. recovered already. This part still remains valid. So regardless of anything, if NOIDA says we’ll forcibly take over the project, the company will get compensated for the loss.
There will be no extension to the concession period (which the company thought would extend beyond 2031). The project will be handed over to NOIDA in 2031.
What Happens to the Company?
For one, they will stop charging any toll on the bridge. That reduces their income substantially. 80% of revenue is from tolls. (They make about 12% from ads, and some other miscellaneous items)
They will also appeal the order, according to their official statement. This will go to the Supreme court, which could overturn the HC order.
They will have only Ad and other income, which probably add up to only about Rs. 30 cr. or so. That doesn’t pay for much of the expenses they incur so they better find some other way to pay for it (or get NOIDA to reimburse it).
The company, as a dividend paying entity, is in trouble. Unless the Supreme Court gives a stay on this order, it means the company will bleed cash and have nothing more for itself. The assets it currently owns (the bridge) has to be transferred – by contract – in fifteen years, so it has really nothing in terms of assets. Disclosure: This stock is part of one of the Capital Mind Premium portfolios. Yes, we’ve lost some 20% on it. At the moment, however, even if we assume a loss of 50%, the total portfolio gain would be 17.91%, since other stocks have more than made up such a loss. But yes, a loss is a loss, no two ways about it.