Accumulate IRB Infrastructure Target: Rs 304: Construction margins up; Emkay

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IRB Infrastructure Developers

Construction margins steels the limelight

ACCUMULATE

CMP: Rs 214                                        Target Price: Rs 304

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n     PAT at Rs1331mn (+45.5% yoy) ahead of our and street expectation – driven by better than expected construction margins (24.88% v/s est of 18.0%) and MAT credit of Rs147 mn

n     Revenues at Rs6.7bn (+54.4% yoy) - aided by +94.1% yoy growth in construction segment and 3.7%yoy growth in BOT segment

n     EBITDA at Rs2.93 bn (+29.2% yoy) higher than estimates (Rs2.7 bn),  driven by 129.8% growth in construction EBIDTA & 2.1% growth in BOT EBIDTA

n     Ramp up in collections at Bharuch Surat & Surat Dahisar finally visible for BOT. Upgrade FY11E earnings by 5.8%. Retain ACCUMULATE-Target Rs304 

Construction – stealing limelight with revenues growth of 94.1%

Consolidated revenues for the quarter at Rs 6.7 bn (our est-Rs 7.3bn) have grown by

54.4%, driven by +94.1% yoy growth in revenues of construction segment and growth of

3.7% in BOT segment. Growth in construction segment was impressive although slightly

lower than our expectation driven by execution at Surat Dahisar, Amritsar-Pathankot &

Jaipur-Deoli and new concession Talegaon Amravati has only commenced operations. We

expect the construction vertical to pick further traction in Q4FY11E & FY12E led by

additional projects kicking in the topline contribution. Gross toll collections have grown 8%

yoy (Many small projects witnessed significant improvement like MMK which witnessed

38% growth in collection followed by Kharpada which grew 19% and Pune Nashik grew by

17%.Bigger projects like Surat Dahisar and Bharuch Surat have started witnessing traction

and grew 9% and 7% respectively. Mumbai Pune which accounts for 33% of the overall toll

collection grew 5%yoy.

EBIDTA margins at 43.9% beats estimate led by construction segment

Overall EBITDA at Rs 2.94 bn was better than our estimates of Rs 2.71 bn led by better

than expected construction margins including other income of 24.88% vs expectation of

18.0%. Overall EBIDTA grew by 29.2% yoy led by construction EBITDA which grew 130%

yoy to Rs 1161mn. BOT segment reported EBITDA margins inline with expectations which

witnessed 141 bps contraction and stood at 88.4%. Overall EBITDA margin stood at 43.9%

and took a hit of 855 bps yoy due to increased contribution from low margin construction

segment and contraction of share of BOT vertical

Net profit growth at 45.5% driven by margin expansion and MAT credit

Reported PAT of Rs 1331 mn includes Rs 147mn of MAT credits and a 405 bps expansion

of EBITDA margin in construction segment which led to an overall 45% yoy growth in

APAT. Although the sizeable projects in the BOT segment have started reporting traction in

revenues, however they are at nascent stages and project like Surat Dahisar & Bharuch

Surat are still short of their projected revenues. We believe the recent trends in such

concession are healthy.



Strong show on the margins front at 23.5% excluding other income

Excluding the other income from the segmental performance the EBITDA margins in the

construction segment has expanded significantly by +405 bps to 23.5%. However BOT

segment has witnessed a contraction of margins by -144 bps to 88.2%. Peak execution at

Surat Dahisar is resulting in an exorbitant performance of the construction arm. The

management is confident of completing the construction by Aug – 11.



Smaller projects steeling limelight - witnessing significant revenue traction

Smaller projects like Mahol Mandrup Kamtee, Kharpada bridge, Pune Nashik and Thane

Bhiwandi Bypass were the supreme performers in the overall portfolio which witnessed

37.5%, 19.3%, 17.2% and 16.5% respectively. Thane Bhiwandi is also due for toll hike of

6% from Jan – 11. Big projects like Surat Dahisar and Bharuch Surat have started

witnessing traction which will be a sign of relief for the company and average daily

collection have grown 9.3% and 7.3% respectively which is further leading to improved

performance of the BOT segment.

~52% of the overall toll collection for IRB in Q3FY11 is coming from Surat Dahisar &

Bharuch Surat and the management has significant faith in the performance of these patch.

Management indicated a daily collections have been close to Rs 10.5mn for Surat Dahisar

and Rs 4.0mn for Bharuch Surat which implies decent growth. We continue to monitor the

performance of these patch closely





Order backlog at Rs 89.8 bn – 8.8X FY2010 construction revenues

Construction order backlog stood at Rs 89.8 bn, out of which Rs 68.6 bn is the backlog

related for own BOT project and Rs 21.0 bn is the backlog of O&M for own BOT projects.

The backlog of funded construction projects stood at Rs 0.210 bn. The order backlog at

8.8X FY10 construction revenues of Rs 10.24 bn provides extremely strong earnings

visibility for IRB growth.

Order book details (Rs mn)

O&M 21025

Funded Projects 210

EPC 68620

Total 89855

Project wise – Order book details

Projects (Rs mn)

O&M Contracts 21026

Surat Dahisar (incl of O&M) 14521

IRDP Kolhapur 1644

Panji Goa 7287

Amritsar Pathankot 11627

Jaipur-Tonk-Deoli 14242

Talegaon Amravati 7449

Tumkur chitradurga 10351

Sindhudurg Airport 1501

Funded Works 207

Total 89855

Ramp up in Construction to gain further traction over Q4FY11E & FY12E

IRB has added 5 projects in their portfolio in the last 1.5 years totaling 497 kms. At present

the EPC arm is executing five projects actively i.e Surat Dahisar, IRDP kolhapur, Amritsar

Pathankot, Jaipur Deoli Tonk, and Talegaon Amravati which will contribute to the overall

topline of the EPC vertical in Q4FY11E. These projects have an outstanding orderbook of

Rs 42 bn as on December – 10 almost 45% of the overall orderbook which will drive the

traction in the near term. The remaining two projects i.e Tumkur Chitradurga and Goa

Karnataka will start contributing to the overall topline in FY12E which will boast the topline

of EPC vertical even further.



IRB has targeting annual accretion in orders by USD 1bn

The management highlighted that the company is targeting annual accretion in orders of

USD 1 bn. We believe the additional opportunities are opening up in the BOT space and will

offer significant growth potential to IRB. The company based on its current BOT portfolio of

10 operational projects and construction order backlog of approximately Rs 89.8bn has

significant visibility for maintaining the growth profile.

Upgrade in PAT by 6% in FY11E and no change in FY12E estimates – Target

retained at Rs 304 with Accumulate rating

Earnings projection for FY11E are upgraded by 6% to Rs 4,586 mn mainly led by rampant

growth in the Construction EBITDA margins above our expectation and MAT credit

adjustments made by the company in preceding two quarters that is leading to an upward

revision in our FY11E estimates. Simultaneously the margin outlook for the construction

segment has started looking up and the company has been able to achieve an average

EBITDA margin of ~25.92% for 9MFY11. We have raised our full year margin outlook and

we believe that the construction vertical will be able to achieve a full year EBITDA margin of

23% implying 4QFY11E margins at 19%. We maintain our Target price of Rs 304 with an

ACCUMULATE rating.