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Results better than expectations, driven by EPC business
IRB Infrastructure’s (IRB) Q3FY11 PAT, at INR 1,330 mn (up 45% Y-o-Y), were
16% above estimates, primarily due to higher contribution from EPC; revenues
from EPC (up 98% Y-o-Y and 58% Q-o-Q) were boosted by incremental
contribution from three new projects. EPC margins continued to surprise on the
upside at ~25% (versus 20% in previous year). BOT projects performance
remained stable with traffic growth in major projects estimated at ~5%.
EPC margins remain buoyant; interest costs under control
IRB was able to maintain 25% EBIDTA margin for its EPC business. Management
has guided for EBIDTA margin of 20+%, going ahead, despite rising raw material
prices (contracts have built-in escalation clauses). We have assumed 18%
EBIDTA margin in FY12E for EPC. Interest cost for Mumbai-Pune project is fixed
at 10.6% for the entire period. Also, interest cost for projects under construction
is fixed for the entire construction period (10.5%).
Delay in Goa project; others on track
IRB started execution on the Amravati-Talegaon project in Q3FY11. Work on the
Jaipur-Deoli and Amritsar-Pathankot projects began during the end of last
quarter. However, Goa project is facing delays due to problems related to land
acquisition, with ~50% being acquired so far by NHAI. As a result, the project
has still not been handed over to IRB for execution; execution is expected to
start in Q1FY12E. Sanction letters from banks have already come for Tumkur-
Chitradurga project, with interest rate at 10.5%.
Outlook and valuations: Bright prospects; maintain ‘BUY’
We have tweaked our estimates for FY11E and FY12E to factor in the 9MFY11
performance as well as the delay in Goa project. We note that the key to stock
performance will be new project wins. IRB has submitted its pre-qualifications for
INR 490 bn worth of projects. Financial bidding for projects is expected to pick up
pace over next few months. We have revised our SOTP-based target price for the
stock to INR 274 (INR 292 earlier), mainly due to lower EPC value on delay in
execution of the Goa project. The EPC arm contributes INR 80 to the SOTP, while
BOT projects contribute INR 186 per share; the balance comes from cash and
real estate. We maintain ‘BUY’ on the stock and rate it ‘Sector Outperformer’
on relative returns
EPC division drives strong Q3FY11 performance
Revenues from the EPC division were the major growth driver this quarter, up 98% Y-o-
Y. EBITDA margins (including other income) came in at a strong 24.9% against 21.5% in
Q3FY10. IRB expects to maintain EPC margins at 20+% for the next couple of quarters.
However, capital charges increased sharply to INR 162 mn against INR 54 mn in
Q3FY10, since IRB took short-term loans in the EPC arm during the quarter to fund its
BOT activities. This happened as the company wanted to benefit from interest rate
arbitrage (with short-term loans in EPC arm available at ~8.5% against 10.5% interest
rate for BOT projects). PAT for the quarter came at INR 577 mn, up 124% Y-o-Y and
55% Q-o-Q. PAT margins, at 12.4%, were up 140bps Y-o-Y.
BOT division’s revenues, at INR 2.1 bn, jumped 3.6% Y-o-Y and 5.3% Q-o-Q. EBITDA
margins (including other income) for the BOT division, at 88.4%, were down 140bps Y-o-
Y and were up 300bps Q-o-Q. Lower capital charges, along with lower tax rate, increased
PAT margins to 36.6% from 33.7%, Y-o-Y.
Construction on Tumkur and Goa projects to commence in Q1FY12
IRB has already received project finance sanction letters for its Tumkur project and has
submitted it to NHAI for approval. It intends to fund this project through INR 8.3 bn of
debt and equity of INR 3.1 bn. Interest rate is fixed at 10.5% for the construction period.
Since this is a NHDP phase V project, the company will be eligible to collect toll once it
achieves financial closure. IRB expects to start construction on this project by April 2011.
Work on Goa-Karnataka project is also likely to begin by Q1FY12. While work on the
under development Kolhapur project is expected to be completed by end of the current
fiscal, execution on Surat-Dahisar project is expected to be completed by its scheduled
completion date of August 2011.
Company Description
IRB is an infrastructure development and construction company with wide experience in
the roads and highways sector. Till date, it has won 18 road projects. It is primarily a
holding company; various BOT projects as well as the construction activities of the IRB
Group are handled by the company’s subsidiaries. The IRB Group started operations in
1977 when Ideal Road Builders (IRBPL) was incorporated to undertake the road
contracting business. Between 1977 and 1995, it completed several projects in the roads
and highways sector. In 1995, the group ventured into the BOT space through the
Thane–Bhiwandi bypass project. The group entered the real estate development space
through its subsidiary Aryan Infrastructure. It plans to develop a township along the
Mumbai-Pune expressway.
Investment Theme
IRB is a premier toll road developer and operator. Its projects cover highly strategic &
lucrative routes. It has 15 projects spread over 1,150kms worth INR 112 bn, of which 9
are currently operational (7 projects are debt free). The company boasts of a robust
order book which is likely to result in a strong growth in its EPC revenues. IRB’s
integrated approach enables value maximization since its operation span across
construction, operation & maintenance. While the EPC division generates over 30% RoEs
consistently, much higher than its peers, the BOT project portfolio generates substantial
operating cash flows which are likely to help the company achieve a high growth
trajectory going ahead.
Key Risks
Geographical concentration with 12 projects in two states: Of the 15 projects in IRB’s
kitty, 12 are in the states of Maharashtra and Gujarat. This exposes the company to the
risk of geographical concentration with revenues from toll projects dependent on
economic activity in these states.
Inherent risk associated with BOT-toll projects: With the company focusing on PPP
projects, it is exposed to risks like those associated with gaining right-of-way on land
stretches, execution risk, ‘force majeure’ risk, etc. Also, the focus on toll projects
exposes it to the unpredictability of traffic growth, etc.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
Results better than expectations, driven by EPC business
IRB Infrastructure’s (IRB) Q3FY11 PAT, at INR 1,330 mn (up 45% Y-o-Y), were
16% above estimates, primarily due to higher contribution from EPC; revenues
from EPC (up 98% Y-o-Y and 58% Q-o-Q) were boosted by incremental
contribution from three new projects. EPC margins continued to surprise on the
upside at ~25% (versus 20% in previous year). BOT projects performance
remained stable with traffic growth in major projects estimated at ~5%.
EPC margins remain buoyant; interest costs under control
IRB was able to maintain 25% EBIDTA margin for its EPC business. Management
has guided for EBIDTA margin of 20+%, going ahead, despite rising raw material
prices (contracts have built-in escalation clauses). We have assumed 18%
EBIDTA margin in FY12E for EPC. Interest cost for Mumbai-Pune project is fixed
at 10.6% for the entire period. Also, interest cost for projects under construction
is fixed for the entire construction period (10.5%).
Delay in Goa project; others on track
IRB started execution on the Amravati-Talegaon project in Q3FY11. Work on the
Jaipur-Deoli and Amritsar-Pathankot projects began during the end of last
quarter. However, Goa project is facing delays due to problems related to land
acquisition, with ~50% being acquired so far by NHAI. As a result, the project
has still not been handed over to IRB for execution; execution is expected to
start in Q1FY12E. Sanction letters from banks have already come for Tumkur-
Chitradurga project, with interest rate at 10.5%.
Outlook and valuations: Bright prospects; maintain ‘BUY’
We have tweaked our estimates for FY11E and FY12E to factor in the 9MFY11
performance as well as the delay in Goa project. We note that the key to stock
performance will be new project wins. IRB has submitted its pre-qualifications for
INR 490 bn worth of projects. Financial bidding for projects is expected to pick up
pace over next few months. We have revised our SOTP-based target price for the
stock to INR 274 (INR 292 earlier), mainly due to lower EPC value on delay in
execution of the Goa project. The EPC arm contributes INR 80 to the SOTP, while
BOT projects contribute INR 186 per share; the balance comes from cash and
real estate. We maintain ‘BUY’ on the stock and rate it ‘Sector Outperformer’
on relative returns
EPC division drives strong Q3FY11 performance
Revenues from the EPC division were the major growth driver this quarter, up 98% Y-o-
Y. EBITDA margins (including other income) came in at a strong 24.9% against 21.5% in
Q3FY10. IRB expects to maintain EPC margins at 20+% for the next couple of quarters.
However, capital charges increased sharply to INR 162 mn against INR 54 mn in
Q3FY10, since IRB took short-term loans in the EPC arm during the quarter to fund its
BOT activities. This happened as the company wanted to benefit from interest rate
arbitrage (with short-term loans in EPC arm available at ~8.5% against 10.5% interest
rate for BOT projects). PAT for the quarter came at INR 577 mn, up 124% Y-o-Y and
55% Q-o-Q. PAT margins, at 12.4%, were up 140bps Y-o-Y.
BOT division’s revenues, at INR 2.1 bn, jumped 3.6% Y-o-Y and 5.3% Q-o-Q. EBITDA
margins (including other income) for the BOT division, at 88.4%, were down 140bps Y-o-
Y and were up 300bps Q-o-Q. Lower capital charges, along with lower tax rate, increased
PAT margins to 36.6% from 33.7%, Y-o-Y.
Construction on Tumkur and Goa projects to commence in Q1FY12
IRB has already received project finance sanction letters for its Tumkur project and has
submitted it to NHAI for approval. It intends to fund this project through INR 8.3 bn of
debt and equity of INR 3.1 bn. Interest rate is fixed at 10.5% for the construction period.
Since this is a NHDP phase V project, the company will be eligible to collect toll once it
achieves financial closure. IRB expects to start construction on this project by April 2011.
Work on Goa-Karnataka project is also likely to begin by Q1FY12. While work on the
under development Kolhapur project is expected to be completed by end of the current
fiscal, execution on Surat-Dahisar project is expected to be completed by its scheduled
completion date of August 2011.
Company Description
IRB is an infrastructure development and construction company with wide experience in
the roads and highways sector. Till date, it has won 18 road projects. It is primarily a
holding company; various BOT projects as well as the construction activities of the IRB
Group are handled by the company’s subsidiaries. The IRB Group started operations in
1977 when Ideal Road Builders (IRBPL) was incorporated to undertake the road
contracting business. Between 1977 and 1995, it completed several projects in the roads
and highways sector. In 1995, the group ventured into the BOT space through the
Thane–Bhiwandi bypass project. The group entered the real estate development space
through its subsidiary Aryan Infrastructure. It plans to develop a township along the
Mumbai-Pune expressway.
Investment Theme
IRB is a premier toll road developer and operator. Its projects cover highly strategic &
lucrative routes. It has 15 projects spread over 1,150kms worth INR 112 bn, of which 9
are currently operational (7 projects are debt free). The company boasts of a robust
order book which is likely to result in a strong growth in its EPC revenues. IRB’s
integrated approach enables value maximization since its operation span across
construction, operation & maintenance. While the EPC division generates over 30% RoEs
consistently, much higher than its peers, the BOT project portfolio generates substantial
operating cash flows which are likely to help the company achieve a high growth
trajectory going ahead.
Key Risks
Geographical concentration with 12 projects in two states: Of the 15 projects in IRB’s
kitty, 12 are in the states of Maharashtra and Gujarat. This exposes the company to the
risk of geographical concentration with revenues from toll projects dependent on
economic activity in these states.
Inherent risk associated with BOT-toll projects: With the company focusing on PPP
projects, it is exposed to risks like those associated with gaining right-of-way on land
stretches, execution risk, ‘force majeure’ risk, etc. Also, the focus on toll projects
exposes it to the unpredictability of traffic growth, etc.
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