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How to value BOT projects?

Oct 7, 2010

It has been a well known fact for some time now that the state of infrastructure in India has been abysmally poor. There have been myriad of reasons for this persistent underperformance, with the primary one being shortfall in funding. In order to tide over the funding woes, government has taken various steps to encourage private sector participation in the infrastructure sector. One of them being awarding projects on PPP basis. This has lead to the evolution of Build Operate Transfer (BOT) projects. Before getting in to the details of valuing BOT projects, let us try and understand the basic mechanics underlying a BOT project. As the name suggests, BOT projects are typically handed over to the government (project awarding entity) after the end of the concession period. The company who has won the bid undertakes the responsibility of building the project, owns the asset till the expiry of the concession period, has the right to collect the cash flow accruing over the life of the project, and finally transfers the project to the awarding entity at the end of the concession period.

Now let us shift our focus back to the valuation of the BOT project. We hereby present a hypothetical example of a road BOT project to understand the valuation dynamics:-

Name of the project ABC
Length40 kms
Concession agreement date 7-Oct-10
Concession period20 years
Commercial operation date 5-Apr-11
Project cost500 crs
Equity165 crs
Debt335 crs
Revenue streamToll
Toll IndexationWPI
Economic interest75%

BOT projects typically have a concession period of 15-20 years and are funded through a mixture of debt and equity. A typical D/E mix is in the range of 70:30. The revenue stream for a road BOT project could either be toll or an annuity.

In a toll based project there is a certain amount of risk involved as far as traffic projections are concerned. If the actual traffic is below estimates, it can impact the cash flow. Hence, the company has to undertake a detailed traffic study exercise before bidding for a project on toll basis. However, for an annuity project, the company typically receives a fixed sum over the life of the project from the government (project awarding entity) for managing and building the asset. As the cash flow is assured, the risk involved is comparatively lower.

In case of toll based projects, the toll rates are either indexed to WPI or CPI. Toll rates are increased/decreased after certain period of time with respect to an increase/decrease in WPI/CPI. Thus pricing for a toll based project is not as flexible as deemed to be. For an annuity project, cash flow is assured, so pricing does not assume any importance.

Now when it comes to valuing a toll based road BOT project, the first thing one needs to know is whether the project has achieved financial closure or not. If the financial closure (how the project is going to be funded) is done one can either value the project on a P/BV or DCF basis. If financial closure is not achieved, it would be wise to NOT assign any value to the project.

If the financial closure is achieved and the project is on a toll basis, undertaking DCF analysis to value the project is slightly tricky. This is because toll projections are subjective in nature and any changes with respect to actual numbers can upset the valuation. In such a situation, P/BV multiple comes as handy.

While valuing a company on P/BV basis, one needs to assign a multiple to the equity invested in the project rather than the total equity committed in the project. The multiple could be high or low depending upon the progress and location of the project (gives an overview of traffic estimates). The final value has to be adjusted for the stake in the project. Then dividing that value by the total number of shares will give you per share valuation of a BOT project. Following table (continuation from the previous table) explains the same:-

Total Equity commitment165 crs
Equity invested100 crs
Equity Valuation120 crs
Economic interest75%
Adjusted Equity Valuation90 crs
O/S shares10 crs
Per share Value9

However, if the BOT project is on annuity basis, DCF would be the best way to value the same. This is because we are assured of the cash flow to be received by the company. The final DCF value after adjusting for cash and debt is to be divided by the outstanding shares to get the per share value of the annuity BOT project.

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2 Responses to "How to value BOT projects?"

Ashwini Modi

Dec 17, 2015

Many times while valuing BOT toll based projects using DCF method, the key issue faced is arriving at the cost of equity. Selecting a beta for a toll project which is already operational since past 3-4 years and linking its beta with the industry beta of comparable companies (having various toll projects at different stages based on mixture of toll and/or annuity based revenues) seems to be difficult to justify. For example if we take Infra companies exclusively into roads and highway construction and say the average unlevered beta comes to 0.7. If our project's D/E is quite high around 90:10 it gives very high beta of say 1.9-2 leading to a very high cost of equity. This is the problem which we face while doing equity valuation of BOT projects. How do we conclude on beta for a BOT toll based project.

Like (2)


Jun 2, 2013

The received project(technical Proposal For 500 TPD Waste To Energy Plant In The
Hashemite Kingdom Of Jordan) explain the mechanism of action only,what about :
-The location,where possible apply this project? Amman, Zarqa, Other?
-The reference of MSW study at 2010?
-The cost

Like (2)
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