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Kotak Upgrades SREI Infra

December 12, 2007

SREI proposes to capitalize on its project development business to scale-up project finance activity. SREI, along with project contractors, bids for development of infrastructure projects. It has development rights for six road projects and two ports. Srei proposes to provide a gamut of financial and advisory services for the projects under development.

SREI’s investment banking business has earned fees of Rs79 mn in 1HFY08. The focus is on emerging infrastructure companies which are tapping equity markets. The company has a reasonable pipeline for its size and expects to close the year with about 10 deals. Kotak has upgraded SREI Infra on the basis of Sum of the Parts Valuation.

SREI proposes to set up two SEZs: 1. Auto and auto ancillary SEZ in Khadakpur, West Bengal (100 hectares);Srei will hold 89% in this company, with the balance held by the Government of West Bengal. 2.Engineering sector SEZ in Raigarh, Maharashtra (81 hectares). Srei will own 50% in this company and Quipo the balance 50%. Srei’s direct and indirect holding therefore will be 58%.

SREI currently manages Rs9 bn of private equity – Rs1.5 bn in equity and Rs8 bn in debt. These investments have been fully invested and the company now proposes to raise additional Rs12 bn (US$300 mn) of equity. The management has highlighted that it has already received interest from several investors and the commitments will likely be firmed up over the next few months.

Quipo telecom, (Srei’s economic holding of 12%) has set up about 1,500 towers over the last ten months. Expect the company to have 3,000 towers by March 2009E.

Sum of the Parts Valuation of SREI Infra:
Parent company Rs 96
JV with BNP Rs 81
Asset Management Rs 8
Investment Banking Rs 8
SEZs Rs 6
Road Projects Rs 6
Telecom Projects Rs 13

Kotak has set a Target price of Rs 240 on the stock, higher than the sum of the parts valuation.

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