IRB Infrastructure- Q2 earnings lower than expected:: HSBC

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IRB Infrastructure Ltd (IRB IN)
OW(V): Q2 earnings lower than expected, but not alarming
 Q2 FY11 earnings were 16% below our estimate, mainly owing
to delayed start to new projects as approvals came in late
 Operational hurdles that impacted toll income in Q2 in
certain projects have eased; growth should pick up from Q3
 Reiterate OW(V) rating and INR355 target price; IRB remains
our preferred play on the Indian road development segment






Q2 earnings were lower than expected, but nothing alarming. IRB’s reported earnings
of INR991m, +40% y-o-y, were 16% below our estimate, mainly due to lower
construction revenues, -22% below our estimate. Net sales consequently were 18% below
our estimate at INR4.9bn, +38% y-o-y, while the EBITDA margin remained flat at 48%.
However, the weak earnings growth is not alarming, as the lower construction revenues
were primarily due to late approvals received from NHAI (Sep 2010, against our estimate
of July 2010) on its new projects, as this will be booked in subsequent quarters.
Operational hurdles out of the way; toll income should pick up from Q3. While toll
income of INR2bn was in line with our estimate, like-to-like operational assets grew only
5% y-o-y, vs. our estimate of 11%, and was made up by better-than-expected growth in
the Bharuch-Surat project, +2% q-o-q against expectation of -5% q-o-q. The lower income
from like-to-like operational assets was primarily owing to traffic diversion, which
impacted two road assets, Thane-Ghodbunder and Surat-Dahisar, and to a fall in traffic on
the Pune Sholapur corridor due to a drop in sand dredging activity. The traffic diversion in
the Thane region has been restored, and hence we expect toll income growth to pick up
from Q3 FY11.
Reiterate Overweight (V) rating and INR355 target price. Our sum-of-the-parts
method values IRB’s toll assets at INR143 (DCF-based), the construction business at
INR157 (FY12 PE of 18x), other businesses at INR10, and future growth at INR44. Our
target price implies an exit multiple of 4.1x FY12e P/BV (pre-dilution) and 21.1x FY12e
earnings. Key risks: a sharp rise in interest rates, weaker-than-estimated traffic growth,
lower-than-estimated success in project bids, and slower project execution on existing
projects under construction.