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IRB Infrastructure (IRB)
OW(V): Q3 higher margins support lower execution
Better margins made up for the lower top line growth to help
post 29% earnings growth (in line with HSBC estimates)
While we expect few project delays to hurt execution in the
near term, higher margins should support earnings
Reiterate OW(V) with TP of INR309 (INR355); IRB remains our
preferred road development sector play
Q3 results in line with estimates. IRB’s earnings of INR1.2bn (+29% y-o-y) were in line
with estimates, as higher EBITDA margins of 43.9% (HSBCe 41.5%) made up for the 7%
lower-than-estimated top line of INR6.7bn (+54% y-o-y). The high margins were a result of
lower raw material costs on its fixed priced contracts (in-house orders) from its toll assets. Toll
income also surprised us positively with 8% y-o-y growth on like-to-like operational assets.
Better margins should support slower than expected execution. Delay in the financial
closure of the Tumkur Chitradurga project, along with slower than anticipated execution on its
under construction projects, have prompted us to cut our top line estimates by 8-14% over
FY11-13. However, IRB’s fixed priced construction contracts have a 10-15% cushion at the
existing bitumen prices. Hence, EBITDA margins on its construction business could remain
high (we have factored a 230-270bps hike over FY12-13 and 620bps in FY11), thereby
offsetting most of the execution hit. Our earnings estimates are unchanged over FY12 and
FY13 at INR5.6 and INR6.4bn, respectively, while we raise them 3% to INR4.7bn in FY11.
OW(V) with TP of INR309 (INR355). We expect margin supported earnings growth to
command a lower valuation than a top line driven one. IRB’s earnings growth over FY11-13 is
now supported by better margins against top line growth previously. We also expect IRB’s
construction business PE premium to realign with its mid cap peers (valuations have fallen by
c30% over past three months). In line, we have reduced our target PE for its construction
business to 9x one-year fwd (13x earlier). Our revised target price of INR309 includes toll
assets of INR143 (DCF-based), construction business of INR110 (INR157 earlier), other
businesses of INR10, and future growth of INR44. IRB remains our preferred road
development sector play and the recent stock price correction offers investors a good entry
opportunity. Catalyst: Revival in national highways road development project awards over the
next three to six months.
Revise sales and EBITDA margin estimates, keep earnings constant
We have lowered our top line estimates by 8-14% over FY11-13 (Figure 7) to factor in slower than
expected execution on new under construction projects and delay in the financial closure of Tumkur
Chitradurga (INR12bn). However, we have revised our EBITDA margin expectation sharply by 600bps
in FY11 and 230-270bps over FY12-13 to factor in sustained benefits from lower input costs on its fixed
priced construction contracts. Consequently, our earnings growth has remained unchanged during FY12 and FY13 and increased marginally by 3% in FY11.
Retain OW(V) with a TP of INR309 (INR355)
We believe margin supported earnings growth will command a lower valuation compared to a top line
driven growth. We now expect IRB’s earnings over FY12-13 to be supported by better margins (+230-
270bps revision over FY12-13) against better top line growth earlier (lowered c8-9% over FY12-13). We
also expect IRB’s construction business PE premium to get realigned with its mid cap peers, which have
seen a c30% fall over the past 3 months. We expect valuation for mid cap players to remain benign in the
backdrop of weak order inflows and growing earnings risk from rising interest rates. In line, we have
reduced our target PE for its construction business to 9x one-year fwd (13x previously). Our revised
target price of INR309 (INR355) includes toll assets of INR143 (DCF-based), construction business of
INR110 (INR157 earlier), other businesses of INR10, and future growth of INR44. We prefer a DCFbased valuation of IRB’s toll assets to capture the benefit of a defined concession period (typically 10-25
years). We use the free cash flow-to-equity method of DCF to account for the varying degree of gearing
for project assets across the asset life. Key parameters in our valuation of BOT assets are a cost of equity
of 13%, a risk-free rate of 7.5%, an equity risk premium of 5.5%, and interest cost of 11%.
Our target price implies an exit multiple of 3.0x FY13e P/BV and 16x FY13e earnings. Under our
research model, for stocks with a volatility indicator, the Neutral band is 10ppts above and below our
hurdle rate for Indian stocks of 11%, or 1-21% around the current share price. Our INR309 target price
implies a potential return, including an expected 1.2% dividend yield, of 46%, which is above the Neutral
band; thus, we retain our Overweight (V) rating.
Downside risks, in our view, include a sharp rise in interest rates, weaker-than-estimated traffic growth,
lower-than-estimated success in future project bids, and slower-than-expected project execution on
existing projects under construction. Catalysts that we see over the next 3-6 months include any success
in project tenders submitted, which are at the final bidding stage (INR50bn for IRB).
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
IRB Infrastructure (IRB)
OW(V): Q3 higher margins support lower execution
Better margins made up for the lower top line growth to help
post 29% earnings growth (in line with HSBC estimates)
While we expect few project delays to hurt execution in the
near term, higher margins should support earnings
Reiterate OW(V) with TP of INR309 (INR355); IRB remains our
preferred road development sector play
Q3 results in line with estimates. IRB’s earnings of INR1.2bn (+29% y-o-y) were in line
with estimates, as higher EBITDA margins of 43.9% (HSBCe 41.5%) made up for the 7%
lower-than-estimated top line of INR6.7bn (+54% y-o-y). The high margins were a result of
lower raw material costs on its fixed priced contracts (in-house orders) from its toll assets. Toll
income also surprised us positively with 8% y-o-y growth on like-to-like operational assets.
Better margins should support slower than expected execution. Delay in the financial
closure of the Tumkur Chitradurga project, along with slower than anticipated execution on its
under construction projects, have prompted us to cut our top line estimates by 8-14% over
FY11-13. However, IRB’s fixed priced construction contracts have a 10-15% cushion at the
existing bitumen prices. Hence, EBITDA margins on its construction business could remain
high (we have factored a 230-270bps hike over FY12-13 and 620bps in FY11), thereby
offsetting most of the execution hit. Our earnings estimates are unchanged over FY12 and
FY13 at INR5.6 and INR6.4bn, respectively, while we raise them 3% to INR4.7bn in FY11.
OW(V) with TP of INR309 (INR355). We expect margin supported earnings growth to
command a lower valuation than a top line driven one. IRB’s earnings growth over FY11-13 is
now supported by better margins against top line growth previously. We also expect IRB’s
construction business PE premium to realign with its mid cap peers (valuations have fallen by
c30% over past three months). In line, we have reduced our target PE for its construction
business to 9x one-year fwd (13x earlier). Our revised target price of INR309 includes toll
assets of INR143 (DCF-based), construction business of INR110 (INR157 earlier), other
businesses of INR10, and future growth of INR44. IRB remains our preferred road
development sector play and the recent stock price correction offers investors a good entry
opportunity. Catalyst: Revival in national highways road development project awards over the
next three to six months.
Revise sales and EBITDA margin estimates, keep earnings constant
We have lowered our top line estimates by 8-14% over FY11-13 (Figure 7) to factor in slower than
expected execution on new under construction projects and delay in the financial closure of Tumkur
Chitradurga (INR12bn). However, we have revised our EBITDA margin expectation sharply by 600bps
in FY11 and 230-270bps over FY12-13 to factor in sustained benefits from lower input costs on its fixed
priced construction contracts. Consequently, our earnings growth has remained unchanged during FY12 and FY13 and increased marginally by 3% in FY11.
Retain OW(V) with a TP of INR309 (INR355)
We believe margin supported earnings growth will command a lower valuation compared to a top line
driven growth. We now expect IRB’s earnings over FY12-13 to be supported by better margins (+230-
270bps revision over FY12-13) against better top line growth earlier (lowered c8-9% over FY12-13). We
also expect IRB’s construction business PE premium to get realigned with its mid cap peers, which have
seen a c30% fall over the past 3 months. We expect valuation for mid cap players to remain benign in the
backdrop of weak order inflows and growing earnings risk from rising interest rates. In line, we have
reduced our target PE for its construction business to 9x one-year fwd (13x previously). Our revised
target price of INR309 (INR355) includes toll assets of INR143 (DCF-based), construction business of
INR110 (INR157 earlier), other businesses of INR10, and future growth of INR44. We prefer a DCFbased valuation of IRB’s toll assets to capture the benefit of a defined concession period (typically 10-25
years). We use the free cash flow-to-equity method of DCF to account for the varying degree of gearing
for project assets across the asset life. Key parameters in our valuation of BOT assets are a cost of equity
of 13%, a risk-free rate of 7.5%, an equity risk premium of 5.5%, and interest cost of 11%.
Our target price implies an exit multiple of 3.0x FY13e P/BV and 16x FY13e earnings. Under our
research model, for stocks with a volatility indicator, the Neutral band is 10ppts above and below our
hurdle rate for Indian stocks of 11%, or 1-21% around the current share price. Our INR309 target price
implies a potential return, including an expected 1.2% dividend yield, of 46%, which is above the Neutral
band; thus, we retain our Overweight (V) rating.
Downside risks, in our view, include a sharp rise in interest rates, weaker-than-estimated traffic growth,
lower-than-estimated success in future project bids, and slower-than-expected project execution on
existing projects under construction. Catalysts that we see over the next 3-6 months include any success
in project tenders submitted, which are at the final bidding stage (INR50bn for IRB).
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