Vadodara Halol Toll Road Case Analysis Managerial Written Communication

1. Vadodara Halol Toll Road
Managerial Written Communication
Prepared by,
Neeraj Mehra

2. 1
November 6, 2006
To,
Prof. Prashanth
Indian Institute of Management
Vastrapur, Ahmedabad – 380015
Subject: Report on Analysis of Vadodara-Halol Toll Road Project
Dear Professor,
I am here by submitting analysis report on Vadodara Halol Toll Road.
All the options have been analysed in detail.
Please let me know if you have any further questions.
Regards,
Neeraj Mehra
Mobile number: 7874562352
Executive Summary

3. 2
Vadodara Halol Toll Road was operated and maintained by VHTRL, a special purpose
vehicle, promoted by GoG and ILF&S. The actual revenues as a proportion of the projected
revenues had fallen from 63% to 34% during the three years of operation.
TRC has options of increasing rates for MAV or increasing rates for all vehicles or increasing
rates for MAV and restructuring finance.
Each option has been evaluated in terms of impact on traffic and revenue and the cost
incurred.
On the basis of this evaluation, it is recommended that VHTRL should increase rates for
MAV and restructure its financing.
Word Count: 100
Table of Contents

4. 3
Serial Number Title Page Number
1 Situational Analysis 4
2 Problem Statement 5
3 Options 5
4 Criterions for Evaluation 5
5 Evaluation of Options 5
6 Recommendation 7
7 Action Plan 7
8 Exhibits 7
Situational Analysis

5. 4
VHTRL was jointly promoted by GoG and IL&FS for developing and implementing Vadodara
Halol Road Project.
Vadodara-Halol Road had gained importance because of growing industrialization in Halol.
The project attained completion on Sep 15, 2000 and the commercial operations began on
Oct 24, 2000.
The actual revenue has been less than the expected revenue and an appropriate action has
to be taken. According to the projected cash flows, VHTRL may have to shut down their
operations by mid 2003 owing to the losses they would suffer.
The total debt carried is Rs 1058.3 million with the average cost of borrowing as 15.52%.
(Refer Exhibit 3)
The dilemma faced by Toll Review Committee is how to increase the revenue and reduce
the cost so as to make the project sustainable. During the two rounds of TRC meeting, the
company collected additional information and these inputs were further examined.
VHTRL is currently undercharging the MAVs and hence revision of rates may be needed.
(Refer Exhibits 4, 5 and 6)
Exhibit 7 and 8 explains how the financing structure of the project can be improved to reduce
the borrowing cost of the project.
Problem Statement
VHTRL needs to increase revenue and/or reduce cost to sustain the project.

6. 5
Options
1. Increase rates for MAV
2. Increase rates for All Vehicles
3. Increase rates for MAV and Financial Restructuring
Criterions for Evaluation
Impact on Traffic and Revenue: How the options would affect the traffic and revenue?
Impact on Cost Incurred: How much cost will be incurred after implementing the changes?
Evaluation of Options
1. Increase rates for MAV:
a. Impact on Traffic and Revenue
It is suggested to increase average rates for MAV to Rs 4.8205 per km. Exhibit 4
shows the average rates for MAV at different toll roads in the country. From Exhibit 5,
the current average rate for MAV in Vadodara-Halol Toll Road is Rs 2.9/km, which is
lesser than the average toll rates charged in the country.
To achieve the average rate of Rs 4.8205 per km, the revised toll rates for MAVs are
mentioned in the Exhibit 6.
Since most of the MAVs are travelling long distance, there could be a possibility that
the MAVs would use the alternative path NH8 after the price increase.
Assuming Diesel Rate of Rs. 18/litre (2002 price) and the average fuel efficiency of
MAVs at 15kms/litre, the average fuel savings of an MAV for travelling 50 kilometres
lesser is Rs 60. The effective savings would be more since travelling through
Vadodara-Halol road and bypassing Ahmedabad would save time and the vehicle
doesn’t have to go through the crowded city. The total savings on offer are more than
the increase in toll rates. It is thus, safe to assume that the total traffic of MAVs will
not reduce after the toll rates are increased.
The total revenue would increase by 11.33%. Hence, the projected cash flow of
2003-04 would increase from Rs. 90 millions to Rs. 100.2 millions.
b. Impact on Cost Incurred
The above rate increase would lead to an increased cash flow of around Rs10 million
per year. But the total inflow of Rs. 113.11 million is still substantially behind the

7. 6
projected total outflow of Rs 250 million per year (projected for 2003-04). Hence, this
change alone will not help us in sustaining the business over time.
2. Increase rates for All Vehicles:
a. Impact on Traffic and Revenue
The smaller vehicles (2 wheelers, 3 wheelers, Car, etc) are much more price
sensitive and increasing the rates for the smaller vehicles would make them use the
service road more often. On one hand, increasing the rates would increase the
revenue, but on the other hand, the number of vehicles travelling would reduce
leading to reduction in total revenue. Hence, the total revenue from the smaller
vehicles would nearly remain the same.
Increasing the toll rates for the MAV would increase the revenue as discussed above.
This option is not recommended because of uncertainty of revenue involved in this
case.
b. Impact on Cost Incurred
The cost incurred would still be considerably higher than the inflows, i.e., cost
incurred as per the projected cash flows is Rs 255.45 million as compared to inflows
of Rs 130.86 million.
3. Increase rates for MAVs and Financial Restructuring:
a. Impact on Traffic and Revenue
As discussed in Option 1, there will be an increase in the total revenue when the toll
rates for MAVs are increased. It is also critical to reduce the cost of borrowing of the
project as increasing the revenue alone isn’t enough for sustaining the project. Also,
selling hoarding rights would add to the revenue.
b. Impact on Cost Incurred
The current financing structure of the project involves Debt/Equity Ratio of 1.924 and
average cost of debt if 15.52% (Exhibit 3). The total interest charges incurred by the
project forms the majority part of the total outflows of the project. It is of great
importance to restructure the financing aspect of the project to reduce the debt
burden. It should attract private equity to reduce the debt burden.
Also, refinancing the debt would help in reducing the average cost of borrowing. A
considerable amount of early debt has been picked up at more than 15% rate of
interest, e.g, ILF&S has 16% rate of interest. It is recommended to restructure
Debt/Equity ratio to 1:1 and refinance the debt which has high rate of interest. Exhibit

8. 7
7 shows the current projected interest burden and Exhibit 8 shows the projected
interest burden after the financing is restructured.
These changes will make the project profitable. (Exhibit 10)
Recommendation
VHRTC would be benefitted if they increase the toll rates for MAVs and restructure
financing. This would help them improve their financial situation and sustain the project.
Action Plan
1. Issue appropriate notifications regarding revision of toll rates.
2. Approach private equity investors to attract private investment to the project.
3. Negotiate with lenders to refinance the existing debt.
4. Float RFP for hoarding rights.
Word Count: 999
Exhibits
Exhibit 1: Abbreviations
VHTRL: Vadodara Halol Toll Road Company Limited
GoG: Government of Gujarat
IL&FS: Infrastructure Leasing & Financial Services
TRC: Toll Review Committee
MAV: Multi Axle Vehicle
RFP: Request for Proposal

9. 8
Exhibit 2: Category Wise Average Toll Revenue (Oct 2000 to Sep 2002)
Exhibit 3: Current Financing of the project
0
5
10
15
20
25
30
35
40
45
Two WheelerThree Wheeler Car LCV Bus Truck- Two Axles MAV
Vehicle % contribution to the
Toll Revenue (Oct
00 to Sep 02)
Two Wheeler 1.68
Three Wheeler 0.46
Car 15.41
LCV 8.24
Bus 14.14
Truck- Two Axles 42.65
MAV 17.42

10. 9
Creditor Rs (Millions)
GoG Equity 50
IL&FS 150
GoG Preference 100
AIG 100
Punj Llyod
Limited
150
Total Equity 550
Sub Ordinate
Loan
100
Term Loans 658.3
Deep Discount
Bond
300
Total Debt 1058.3
Current Debt/Equity Ratio= 1058.3/550= 1.924
Average Cost of Borrowing (Debt)= 15.52%
Exhibit 4: Toll Rates for MAVs of other Projects

11. 10
Serial
No.
Name of the Project Project Length
(kilometres)
Toll Rate
(Rs/km)
1 Mumba-Pune Expressway 95 6.255
2 Jaipur Kishangarh 90.3 4.26
3 Moradabad Bypass 18 3.97
4 Watrak Bridge 9 8.33
5 Coimbatore Bypass 28 3.39
6 Mahi Bridge 1 -
7 Ankali River Bridge 8 5.00
8 Nashirabad RoB 5 6.00
9 Sheirnalla River Bridge 8 5.00
10 Bina-Sirnoj-Goona 144 3.00
11 Jabalpur-Patan-Shahpura 38.4 3.00
-Average Toll Rates for MAVs: 4.8205 Rs/Km
Exhibit 5: Determine the ratios of Three-Axle, Four-Axle and Five-Axle vehicles
Percentage of revenue which comes from these vehicles is as follows (Exhibit 2):
Three-Axle: 71.2%
Four-Axle: 21.5%
Five-Axle: 7.3%
Present Toll Rates (Rs):
Three-Axle: 85
Four-Axle: 105
Five-Axle: 125
If we solve using the above information, we get the average ratio of the MAVs as:
Three-Axle : Four-Axle : Three-Axle :: 24 : 6 : 1
E.g. For every Three-Axle MAV, we have 6 numbers of Four Axle MAV and 24
numbers of Three-Axle MAV.
Current Average Toll Rate for MAVs: (85*24+105*6+125*1)/31= Rs 90.16
Current Average Toll Rate per km: 90.16/31= Rs 2.9 per km.
Exhibit 6: Proposed revised rates

12. 11
Current Average Toll Rate per km: Rs 2.9 per km
Proposed Average Toll Rate per km: Rs 4.8205 per km
To achieve the above rates per km the required increase in rates are as follows:
Three Axle Four Axle Five
Axle
Current Toll Rates Rs 85 Rs 105 Rs 125
Raise Rs 55 Rs 70 Rs 80
Revised Toll Rates Rs 140 Rs 175 Rs 205
Exhibit 7: Current Projected Interest Outflows
Debt/Equity Ratio: 1.924 and Average Cost of Debt: 15.52%
(Rs million)
2002-03 2003-04
Total Interest 112.72 122.01
Exhibit 8: Projected Interest Outflows (in Rs million) after financial restructuring
Debt/Equity Ratio: 1 and Average Cost of Debt: 14%
Average Cost of Debt will reduce because of two factors:
1) Refinancing debt which is taken at high rates. E.g. ILF&S debt at 16%
2) Also, since the overall debt will reduce because of restructuring, companies will readily
issue more debt at a lower cost. If a company has low debt, additional debt is cheap.
However, if a company has high debt, additional debt is more costly.
2002-03 2003-04
Reduction in interest
because of restructuring of
Finance
59.97 64.91
Total Interest 52.75 57.1

13. 12
Reduction in Interest has been calculated as follows:
For 2002-03: 112.72 will be reduced by 48% owing to change in the Debt to Equity Ratio.
This will further reduce by 10% because of reduction in cost of debt.
Exhibit 9: Revenue from hoarding rights
Total Area per hoarding 600 sq ft
Rent per sq ft per year Rs 3000 (2002 price)
Revenue per hoarding per year Rs 1.8 million
Number of hoardings (minimum) 30
Total Revenue from hoardings Rs 54 million
Exhibit 10: Sustainability of the project after the changes (2003-04)
Particulars
Total Outflows 140.09
Total Inflows 113.11
Inflows from hoarding rights 54
Net Surplus /Deficit 27.02
*Figures in Rs Million
*Total repayment of principal for year 2003-04 has been assumed to be at Rs 10 million.