Please Share:: 
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
IRB Infrastructure Developers (IRBI.BO)
Valuation Comfort + Possible Roads Rebound = Upgrade to Buy
Why upgrade to Buy (from Sell)? − 1) Since September 2010, the stock is down
~37% and has underperformed the Sensex by 35%, factoring in a lot of macro
negatives 2) stock is at 21% discount to our new SOTP-based TP of Rs233, and
doesn’t factor in any growth 3) NHAI award activity is showing signs of a pick-up 4)
IRB is well-capitalized and relatively insulated from rising interest rates.
Lack of NHAI awards an overhang, recent conversations suggest a pick-up −
NHAI has awarded ~4800kms till Dec 2010 and, as per our most recent
interaction, it may award ~6000kms (50% of original target of 12000kms) in FY11
and ~7000-9000kms in FY12. Of this, NHAI plans to award ~1500-2000kms in
Q1FY12. As per IRB, the company has Rs31bn worth of projects in RFP (financial
bid stage) and Rs495bn worth of projects in RFQ (pre-qualification stage).
Well capitalized and relatively insulated from rising rates – IRB is well
capitalized in terms of investments required in various projects and does not need
to dilute at the moment. Mumbai-Pune expressway (26% of total debt) has interest
rates fixed for the entire tenure of 8 years. Debt tied up for under-construction
projects has fixed interest rates for the construction period of 3 years.
Revising up estimates by 3%-4% – We moderate our revenue expectations but
increase our margin assumptions, driven by higher than expected EBITDA margin
for the construction business.
Changing TP to Rs233 (from Rs278) – 1) BOT projects (Rs143/share): We
increase the CoE for under-construction projects to 13% (from 12%). 2) EPC
business (Rs76): Now valued at 9x June 2012E P/E, at a 18-25% discount to its
E&C peers given the captive nature of its order book. 3) Cash and investments
(Rs13). We no longer ascribe a value to future projects, given current sedate
ordering from NHAI.
Update on Construction Business
IRB currently has an order book of ~Rs90bn. Of this, Rs70bn is expected to be
executed over the next 2 years.
IRB has commenced the construction on Talegaon Amravati BOT Project in
Q3FY11, construction on Jaipur-Deoli BOT and Amritsar-Pathankot Project has
started at the end of Q2FY11. IRB plans to complete the construction on the
Kolhapur project by the end of FY11 and is targeting completion of construction
on Surat-Dahisar project as per schedule (i.e., August 2011). IRB also plans to
start construction on Tumkur-Chitradurga project by April 2011.
The company has still not started construction on the Goa-Panaji road project
as it is awaiting land to be handed over to it by NHAI. NHAI has issued notices
for 35kms out of 66kms, and the company expects this to be handed over to it
over the next 2-3months.
Update on the BOT business
Toll collections for IRB have increased by about 26%YoY in Q3FY11 and by
about 19% for 9MFY11E.
In Q3FY11, toll collections on Mumbai-Pune expressway grew by ~5%, on
Surat-Dahisar road project by ~9%, on Bharuch-Surat project by ~7%, and on
Thane-Bhiwandi project by ~17% YoY.
Fairly insulated from rising interest rates
IRB currently has ~Rs38bn of debt. Of this,
~Rs10.5bn is for the Mumbai-Pune Expressway and has a fixed interest rate
of 10.6% for the next 8 years.
Rs10bn is for the Surat-Dahisar Project where the interest rate is fixed till
August 2011, when the project construction is complete. Usually, once the
construction is over, and the commissioning starts, companies can refinance
these projects at lower interest rates due to the lower risk profile (no
construction risk) of the project.
Debt for the 5 under-construction projects has been fixed for the construction
period of 2-3 years.
Well-capitalized at the moment…
In the Q3FY11 conference call, the company mentioned that it is fairly well
capitalized in terms of investments in various projects and that it does not need
to dilute at the moment.
Update on NHAI bidding
At the beginning of FY11, NHAI had a target to award 12000kms. Actual
awards have been quite disappointing; NHAI awarded ~4800kms till
December 2010.
Our recent interaction with NHAI suggests that it may award ~6000kms (50%
of original target) in FY11 and ~7000-9000kms in FY12. Of this, NHAI plans
to award ~1500-2000kms in Q1FY12. Key projects like Beawar Pali (Rs24bn
- RFP date 28th Feb,2011) and Ahmedabad- Baroda (Rs21bn - RFP date 11th
March,2011) will be tendered shortly. As per IRB, the company has Rs31bn
worth of projects in RFP (financial bid stage) and Rs495bn worth of projects
in RFQ (pre-qualification stage)
Revising Estimates by 3%-4% over FY11E-13E
We cut our revenue estimates by 16% for FY11, 5% for FY12, 2% for FY13E
– driven by lower than expected construction revenues due to delays in
construction of the Goa-Panaji road project. We also cut our BOT revenue
assumptions due to lower than expected toll collections so far in FY11E.
We increase our EBITDA margin assumptions, primarily driven by an
increase in margins in the construction business; IRB reported 9MFY11E
construction margins of 26% vs. our estimate of 19% for FY11E
Changing TP to Rs233 (from Rs278)
We cut our target price to Rs233, from Rs278 earlier. Our TP change is driven
by the following factors.
We increase the Cost of Equity for under-construction projects to 13% from
12% earlier.
We now value IRB’s construction business on a PE of 9x JuneFY12 EPS vs
11x Dec11E earlier. We value the EPC business at a 18%-25% discount to
peers like IVRCL and Nagarjuna in our coverage universe as most of the
EPC business for IRB is captive in nature (i.e. construction of its own BOT
road assets). To this extent, growth in this business would be driven by IRB’s
ability to win BOT road projects, which in turn is driven by its balance sheet
strength and the competitive landscape.
We no longer ascribe a value to future projects, given current sedate
ordering from NHAI. However, if we were to ascribe such a value, it would
add another Rs11 to the value.
Quants View − Contrarian
IRB currently lies in the Contrarian quadrant of our Value-Momentum map with
relatively weak momentum but strong value scores. The stock has moved from
the Unattractive quadrant to the Contrarian quadrant in the past 2 months
indicating improving valuations though momentum remains weak − possibly as
a result of improving earnings revisions. Compared to its peers in the
Industrials sector, IRB fares better on the valuation metric but worse on the
momentum metric. On the other hand, compared to its peers in its home market
of India, IRB fares better on the valuation metric and on the momentum metric.
From a macro perspective, IRB is likely to benefit from falling EM yields, and a
weaker US Dollar.
IRB Infrastructure Developers
Valuation
Our target price for IRB of Rs233 based on an SOTP approach. 1) The BOT
assets are valued at Rs143/share on a discounted FCFE basis; 2) The EPC
business is valued at Rs.76/share, set at 9x June 12E P/E by applying an 18-
25% discount to Indian construction companies in our coverage universe given
the captive nature of its order book; 3) Other investments and cash on books
are valued at Rs13/share, based on book value.
Risks
Our quantitative risk-rating system, which tracks 260-day historical share price
volatility, assigns a Medium Risk rating to IRB. We believe a Medium Risk
rating is appropriate based on a number of factors, namely the status of
projects under implementation, industry-specific risks, financial risk and
management risk. Downside risks to our target price include slower execution,
fewer than expected project wins, and greater competitive intensity in the roads
sector.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
IRB Infrastructure Developers (IRBI.BO)
Valuation Comfort + Possible Roads Rebound = Upgrade to Buy
Why upgrade to Buy (from Sell)? − 1) Since September 2010, the stock is down
~37% and has underperformed the Sensex by 35%, factoring in a lot of macro
negatives 2) stock is at 21% discount to our new SOTP-based TP of Rs233, and
doesn’t factor in any growth 3) NHAI award activity is showing signs of a pick-up 4)
IRB is well-capitalized and relatively insulated from rising interest rates.
Lack of NHAI awards an overhang, recent conversations suggest a pick-up −
NHAI has awarded ~4800kms till Dec 2010 and, as per our most recent
interaction, it may award ~6000kms (50% of original target of 12000kms) in FY11
and ~7000-9000kms in FY12. Of this, NHAI plans to award ~1500-2000kms in
Q1FY12. As per IRB, the company has Rs31bn worth of projects in RFP (financial
bid stage) and Rs495bn worth of projects in RFQ (pre-qualification stage).
Well capitalized and relatively insulated from rising rates – IRB is well
capitalized in terms of investments required in various projects and does not need
to dilute at the moment. Mumbai-Pune expressway (26% of total debt) has interest
rates fixed for the entire tenure of 8 years. Debt tied up for under-construction
projects has fixed interest rates for the construction period of 3 years.
Revising up estimates by 3%-4% – We moderate our revenue expectations but
increase our margin assumptions, driven by higher than expected EBITDA margin
for the construction business.
Changing TP to Rs233 (from Rs278) – 1) BOT projects (Rs143/share): We
increase the CoE for under-construction projects to 13% (from 12%). 2) EPC
business (Rs76): Now valued at 9x June 2012E P/E, at a 18-25% discount to its
E&C peers given the captive nature of its order book. 3) Cash and investments
(Rs13). We no longer ascribe a value to future projects, given current sedate
ordering from NHAI.
Update on Construction Business
IRB currently has an order book of ~Rs90bn. Of this, Rs70bn is expected to be
executed over the next 2 years.
IRB has commenced the construction on Talegaon Amravati BOT Project in
Q3FY11, construction on Jaipur-Deoli BOT and Amritsar-Pathankot Project has
started at the end of Q2FY11. IRB plans to complete the construction on the
Kolhapur project by the end of FY11 and is targeting completion of construction
on Surat-Dahisar project as per schedule (i.e., August 2011). IRB also plans to
start construction on Tumkur-Chitradurga project by April 2011.
The company has still not started construction on the Goa-Panaji road project
as it is awaiting land to be handed over to it by NHAI. NHAI has issued notices
for 35kms out of 66kms, and the company expects this to be handed over to it
over the next 2-3months.
Update on the BOT business
Toll collections for IRB have increased by about 26%YoY in Q3FY11 and by
about 19% for 9MFY11E.
In Q3FY11, toll collections on Mumbai-Pune expressway grew by ~5%, on
Surat-Dahisar road project by ~9%, on Bharuch-Surat project by ~7%, and on
Thane-Bhiwandi project by ~17% YoY.
Fairly insulated from rising interest rates
IRB currently has ~Rs38bn of debt. Of this,
~Rs10.5bn is for the Mumbai-Pune Expressway and has a fixed interest rate
of 10.6% for the next 8 years.
Rs10bn is for the Surat-Dahisar Project where the interest rate is fixed till
August 2011, when the project construction is complete. Usually, once the
construction is over, and the commissioning starts, companies can refinance
these projects at lower interest rates due to the lower risk profile (no
construction risk) of the project.
Debt for the 5 under-construction projects has been fixed for the construction
period of 2-3 years.
Well-capitalized at the moment…
In the Q3FY11 conference call, the company mentioned that it is fairly well
capitalized in terms of investments in various projects and that it does not need
to dilute at the moment.
Update on NHAI bidding
At the beginning of FY11, NHAI had a target to award 12000kms. Actual
awards have been quite disappointing; NHAI awarded ~4800kms till
December 2010.
Our recent interaction with NHAI suggests that it may award ~6000kms (50%
of original target) in FY11 and ~7000-9000kms in FY12. Of this, NHAI plans
to award ~1500-2000kms in Q1FY12. Key projects like Beawar Pali (Rs24bn
- RFP date 28th Feb,2011) and Ahmedabad- Baroda (Rs21bn - RFP date 11th
March,2011) will be tendered shortly. As per IRB, the company has Rs31bn
worth of projects in RFP (financial bid stage) and Rs495bn worth of projects
in RFQ (pre-qualification stage)
Revising Estimates by 3%-4% over FY11E-13E
We cut our revenue estimates by 16% for FY11, 5% for FY12, 2% for FY13E
– driven by lower than expected construction revenues due to delays in
construction of the Goa-Panaji road project. We also cut our BOT revenue
assumptions due to lower than expected toll collections so far in FY11E.
We increase our EBITDA margin assumptions, primarily driven by an
increase in margins in the construction business; IRB reported 9MFY11E
construction margins of 26% vs. our estimate of 19% for FY11E
Changing TP to Rs233 (from Rs278)
We cut our target price to Rs233, from Rs278 earlier. Our TP change is driven
by the following factors.
We increase the Cost of Equity for under-construction projects to 13% from
12% earlier.
We now value IRB’s construction business on a PE of 9x JuneFY12 EPS vs
11x Dec11E earlier. We value the EPC business at a 18%-25% discount to
peers like IVRCL and Nagarjuna in our coverage universe as most of the
EPC business for IRB is captive in nature (i.e. construction of its own BOT
road assets). To this extent, growth in this business would be driven by IRB’s
ability to win BOT road projects, which in turn is driven by its balance sheet
strength and the competitive landscape.
We no longer ascribe a value to future projects, given current sedate
ordering from NHAI. However, if we were to ascribe such a value, it would
add another Rs11 to the value.
Quants View − Contrarian
IRB currently lies in the Contrarian quadrant of our Value-Momentum map with
relatively weak momentum but strong value scores. The stock has moved from
the Unattractive quadrant to the Contrarian quadrant in the past 2 months
indicating improving valuations though momentum remains weak − possibly as
a result of improving earnings revisions. Compared to its peers in the
Industrials sector, IRB fares better on the valuation metric but worse on the
momentum metric. On the other hand, compared to its peers in its home market
of India, IRB fares better on the valuation metric and on the momentum metric.
From a macro perspective, IRB is likely to benefit from falling EM yields, and a
weaker US Dollar.
IRB Infrastructure Developers
Valuation
Our target price for IRB of Rs233 based on an SOTP approach. 1) The BOT
assets are valued at Rs143/share on a discounted FCFE basis; 2) The EPC
business is valued at Rs.76/share, set at 9x June 12E P/E by applying an 18-
25% discount to Indian construction companies in our coverage universe given
the captive nature of its order book; 3) Other investments and cash on books
are valued at Rs13/share, based on book value.
Risks
Our quantitative risk-rating system, which tracks 260-day historical share price
volatility, assigns a Medium Risk rating to IRB. We believe a Medium Risk
rating is appropriate based on a number of factors, namely the status of
projects under implementation, industry-specific risks, financial risk and
management risk. Downside risks to our target price include slower execution,
fewer than expected project wins, and greater competitive intensity in the roads
sector.
No comments:
Post a Comment