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UBS Investment Research
IRB Infrastructure Developers
Upgrade to Buy post correction
IRB has underperformed the market by 38% over the last 12months
Valuations are no longer expensive in our view and we think our assumptions are
reasonable - 1) 5-7% traffic growth estimate across toll-roads versus 8% earlier and
2) construction business valuation at 6x EV/EBITDA (with 18% EBITDA
margins, ~24% in 9mFY11)- ~10% discount to our implied multiple for mid-cap
construction companies. We believe the risk-reward is favourable at current levels.
Robust cash-flow from existing assets; well-positioned to leverage growth
We expect IRB’s eight completed (and operational) toll-roads and its construction
business to generate ~US$250m over FY12-13 (post debt repayment)– which it
would re-invest in its seven under-construction projects. Also, IRB as one of the
leading toll-road operators in the country is well-positioned to leverage the sectoral
growth opportunities (our SOTP does not ascribe any separate value to new wins).
Sensitivity to interest rates relatively low; rate lock-in for existing projects
Near-term risk from rising interest rates is not high as rates are fixed for 1)
Mumbai-Pune for balance tenure of the project and 2) under-construction projects
for the construction period. New projects would anyways factor in a higher interest
rate environment. 1% higher interest rate would decrease our PT by 3%. 1% higher
traffic growth would increase our PT by 15%, assuming all else being equal. We
revise our estimates to Rs14.9/14.9/14 from Rs16.5/17/21.2 for FY11/12/13E led
by lower traffic growth.
Valuation: Buy rating with SOTP-based PT of Rs225
We revise our PT led by revision in our earnings estimates. Our PT comprises of
38/20/42% for operational/under-construction projects/construction business.
IRB has underperformed the market
IRB has underperformed the market by 34/39/38% over the last 6/9/12 months
We believe our assumptions are reasonable
We believe our assumptions for valuation of IRB’s various businesses are
reasonable-
BOT assets:
— Traffic growth- 5-7% over FY12-15: (about in-line with traffic growth
rates in FY10/9mFY11). We assume these rates to decrease by 1% in
blocks of five years thereafter across assets.
— Sensitivity to traffic growth is high: A 1% increase in the traffic growth
rate over our estimates, throughout the project life-cycle, increases our PT
by 15%.
— Interest rates- 10.5-12%: We take the current contracted rates- 10.6%
for Mumbai-Pune and 10.5-12% for other assets.
— Sensitivity to interest rates is not high: A 1% increase in interest rates
over our estimates, throughout the project’s life-cycle, decreases our PT
by 3%. Near-term risks due to hardening interest rates is not high as- 1)
rates are fixed for Mumbai-Pune (accounting for over 20% of total debt)
for the balance tenure of the project, 2) apart from Mumbai-Pune, Thane-
Godbunder is the only other fully-constructed (and operational) project
having debt- that also 1% of total outstanding debt- other six projects are
debt free, 3) rates are fixed for under-construction projects for the
construction period and 4) new project wins would anyways factor in a
high interest rate environment.
— Not factoring new project wins: We have not attributed any separate
value to new project wins- we believe the same is captured in the
valuation of the construction business.
Construction business:
— EBITDA margin estimates factor in commodity price rise impact: We
estimate EBITDA margins of about 23% in FY11- 9mFY11 margins have
been ~24%. We assume margins to decline to ~18% in FY12-13 led by
increase in commodity prices and high inflation (given the captive nature
of the order backlog, the impact will remain with the IRB group- this is in
contrast to mid-cap construction companies as a large part of their order
book is comprised of variable-priced contracts and the impact can be
passed on to the customers). The company expects to maintain margins in
the 18-20% range.
— Sensitivity of valuation to construction margins is not high: A 1%
decrease in EBITDA margins decreases our PT by 2%.
— Valuation at discount to mid-cap construction: We value the
construction business at 6x EV/EBITDA, at about a 10% discount to our
implied target multiple for the core construction business of mid-cap
construction companies. Though the order book of IRB is largely captive
and hence should be valued at a discount, we note that IRB’s margins are
substantially higher (our estimate of 18%, versus ~10% for mid-cap
construction companies) and working capital requirements are far lower
(about one-month of sales compared to three-four months for mid-cap
construction companies). This enables the construction business of IRB to
generate cash that can be invested in its toll-road projects.
Traffic growth: 5-7% over next few years
We assume 5-7% traffic growth over next few years across various assets,
decreasing by 1% in five-year blocks thereafter.
Operating projects: We assume 5-7% traffic growth over FY12-15.
Bharuch-Surat/Surat-Dahisar: Our assumptions for daily collections in
Bharuch-Surat and Surat-Dahisar projects over FY12-13 imply ~14% YoY
growth—led by 7% traffic growth and balance through WPI-led toll rate
increase.
Under-construction projects: We assume 7% traffic growth over FY12-15,
decreasing by 1% over five-year blocks thereafter.
Sensitivity of traffic growth to valuation: A 1% increase in the traffic growth
rate over our estimates, throughout the project life-cycle, would increase our PT
by 15%, assuming all else being equal. A 1% increase in the interest rate
throughout the project’s life-cycle would decrease our PT by 3%.
Construction business: factoring commodity price rise
Construction margins: We now estimate EBITDA margins of about 23/18% in
FY11/FY12-13 (~16% earlier; the increase in our estimate is led by higher
margins so far- 9mFY11 margins have been ~24%). We assume a decline in
margins in FY12 led by increase in commodity prices and high inflation.
Our revenue estimates are based on the order backlog of Rs68.9bn (excluding
O&M order book of Rs21bn), comprising of Rs49.5bn of under-construction
BOT projects, Rs19.1bn of BOT projects under award and third-party projects
of Rs210m.
Sensitivity of valuation to construction margins: A 1% change in the
EBITDA margins would increase our price target by 2%
Changes in estimates: led by lower traffic growth estimate
We revise our earnings estimates to factor in: 1) lower traffic growth of 5-7%
(8% earlier); 2) lower construction revenues than earlier estimates; and 3) higher
construction margins of ~23% for FY11 and ~18% thereafter (~16% earlier).
Valuation: SOTP-based PT of Rs225
Our sum-of-the-parts valuation is based on DCF of individual projects, with
discounting rates of 12/13% for operational/under construction projects.
Our estimates (and valuation) do not include 1) the Sindhudurg airport, with a
total project cost of Rs1,750m (potential equity requirement of Rs500m at 70:30
debt-equity ratio), 2) the Kolhapur hotel project and 3) new project wins- we
believe the same is captured in the valuation of the construction business.
IRB Infrastructure Developers
IRB Infrastructure Developers (IRB) is one of the large BOT toll road operators
in India, managing 14 road projects through 11 subsidiaries. It is vertically
integrated with its construction subsidiary undertaking most aspects of BOT
road development. Its road assets are in the high economic-activity states of
Maharashtra and Gujarat. Its construction business caters primarily to in-house
projects with few third-party contracts. It has recently ventured into real estate
development through a township project near Pune.
Statement of Risk
Any slowdown in traffic growth will severely dent cash generation in IRB’s
assets. As toll roads are typically financed at a 70:30 debt equity ratio, any
interest rate increase will significantly increase cash outflows. Surat-Dahisar is
the largest project undertaken by IRB till date and may pose its own execution
challenges. IRB’s township project is unlikely to generate returns in near term
and therefore any further investment will depress return ratios. Any slowdown in
ordering activity of NHAI will affect IRB’s growth opportunities as it is
leveraged only to the road sector in India.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
IRB Infrastructure Developers
Upgrade to Buy post correction
IRB has underperformed the market by 38% over the last 12months
Valuations are no longer expensive in our view and we think our assumptions are
reasonable - 1) 5-7% traffic growth estimate across toll-roads versus 8% earlier and
2) construction business valuation at 6x EV/EBITDA (with 18% EBITDA
margins, ~24% in 9mFY11)- ~10% discount to our implied multiple for mid-cap
construction companies. We believe the risk-reward is favourable at current levels.
Robust cash-flow from existing assets; well-positioned to leverage growth
We expect IRB’s eight completed (and operational) toll-roads and its construction
business to generate ~US$250m over FY12-13 (post debt repayment)– which it
would re-invest in its seven under-construction projects. Also, IRB as one of the
leading toll-road operators in the country is well-positioned to leverage the sectoral
growth opportunities (our SOTP does not ascribe any separate value to new wins).
Sensitivity to interest rates relatively low; rate lock-in for existing projects
Near-term risk from rising interest rates is not high as rates are fixed for 1)
Mumbai-Pune for balance tenure of the project and 2) under-construction projects
for the construction period. New projects would anyways factor in a higher interest
rate environment. 1% higher interest rate would decrease our PT by 3%. 1% higher
traffic growth would increase our PT by 15%, assuming all else being equal. We
revise our estimates to Rs14.9/14.9/14 from Rs16.5/17/21.2 for FY11/12/13E led
by lower traffic growth.
Valuation: Buy rating with SOTP-based PT of Rs225
We revise our PT led by revision in our earnings estimates. Our PT comprises of
38/20/42% for operational/under-construction projects/construction business.
IRB has underperformed the market
IRB has underperformed the market by 34/39/38% over the last 6/9/12 months
We believe our assumptions are reasonable
We believe our assumptions for valuation of IRB’s various businesses are
reasonable-
BOT assets:
— Traffic growth- 5-7% over FY12-15: (about in-line with traffic growth
rates in FY10/9mFY11). We assume these rates to decrease by 1% in
blocks of five years thereafter across assets.
— Sensitivity to traffic growth is high: A 1% increase in the traffic growth
rate over our estimates, throughout the project life-cycle, increases our PT
by 15%.
— Interest rates- 10.5-12%: We take the current contracted rates- 10.6%
for Mumbai-Pune and 10.5-12% for other assets.
— Sensitivity to interest rates is not high: A 1% increase in interest rates
over our estimates, throughout the project’s life-cycle, decreases our PT
by 3%. Near-term risks due to hardening interest rates is not high as- 1)
rates are fixed for Mumbai-Pune (accounting for over 20% of total debt)
for the balance tenure of the project, 2) apart from Mumbai-Pune, Thane-
Godbunder is the only other fully-constructed (and operational) project
having debt- that also 1% of total outstanding debt- other six projects are
debt free, 3) rates are fixed for under-construction projects for the
construction period and 4) new project wins would anyways factor in a
high interest rate environment.
— Not factoring new project wins: We have not attributed any separate
value to new project wins- we believe the same is captured in the
valuation of the construction business.
Construction business:
— EBITDA margin estimates factor in commodity price rise impact: We
estimate EBITDA margins of about 23% in FY11- 9mFY11 margins have
been ~24%. We assume margins to decline to ~18% in FY12-13 led by
increase in commodity prices and high inflation (given the captive nature
of the order backlog, the impact will remain with the IRB group- this is in
contrast to mid-cap construction companies as a large part of their order
book is comprised of variable-priced contracts and the impact can be
passed on to the customers). The company expects to maintain margins in
the 18-20% range.
— Sensitivity of valuation to construction margins is not high: A 1%
decrease in EBITDA margins decreases our PT by 2%.
— Valuation at discount to mid-cap construction: We value the
construction business at 6x EV/EBITDA, at about a 10% discount to our
implied target multiple for the core construction business of mid-cap
construction companies. Though the order book of IRB is largely captive
and hence should be valued at a discount, we note that IRB’s margins are
substantially higher (our estimate of 18%, versus ~10% for mid-cap
construction companies) and working capital requirements are far lower
(about one-month of sales compared to three-four months for mid-cap
construction companies). This enables the construction business of IRB to
generate cash that can be invested in its toll-road projects.
Traffic growth: 5-7% over next few years
We assume 5-7% traffic growth over next few years across various assets,
decreasing by 1% in five-year blocks thereafter.
Operating projects: We assume 5-7% traffic growth over FY12-15.
Bharuch-Surat/Surat-Dahisar: Our assumptions for daily collections in
Bharuch-Surat and Surat-Dahisar projects over FY12-13 imply ~14% YoY
growth—led by 7% traffic growth and balance through WPI-led toll rate
increase.
Under-construction projects: We assume 7% traffic growth over FY12-15,
decreasing by 1% over five-year blocks thereafter.
Sensitivity of traffic growth to valuation: A 1% increase in the traffic growth
rate over our estimates, throughout the project life-cycle, would increase our PT
by 15%, assuming all else being equal. A 1% increase in the interest rate
throughout the project’s life-cycle would decrease our PT by 3%.
Construction business: factoring commodity price rise
Construction margins: We now estimate EBITDA margins of about 23/18% in
FY11/FY12-13 (~16% earlier; the increase in our estimate is led by higher
margins so far- 9mFY11 margins have been ~24%). We assume a decline in
margins in FY12 led by increase in commodity prices and high inflation.
Our revenue estimates are based on the order backlog of Rs68.9bn (excluding
O&M order book of Rs21bn), comprising of Rs49.5bn of under-construction
BOT projects, Rs19.1bn of BOT projects under award and third-party projects
of Rs210m.
Sensitivity of valuation to construction margins: A 1% change in the
EBITDA margins would increase our price target by 2%
Changes in estimates: led by lower traffic growth estimate
We revise our earnings estimates to factor in: 1) lower traffic growth of 5-7%
(8% earlier); 2) lower construction revenues than earlier estimates; and 3) higher
construction margins of ~23% for FY11 and ~18% thereafter (~16% earlier).
Valuation: SOTP-based PT of Rs225
Our sum-of-the-parts valuation is based on DCF of individual projects, with
discounting rates of 12/13% for operational/under construction projects.
Our estimates (and valuation) do not include 1) the Sindhudurg airport, with a
total project cost of Rs1,750m (potential equity requirement of Rs500m at 70:30
debt-equity ratio), 2) the Kolhapur hotel project and 3) new project wins- we
believe the same is captured in the valuation of the construction business.
IRB Infrastructure Developers
IRB Infrastructure Developers (IRB) is one of the large BOT toll road operators
in India, managing 14 road projects through 11 subsidiaries. It is vertically
integrated with its construction subsidiary undertaking most aspects of BOT
road development. Its road assets are in the high economic-activity states of
Maharashtra and Gujarat. Its construction business caters primarily to in-house
projects with few third-party contracts. It has recently ventured into real estate
development through a township project near Pune.
Statement of Risk
Any slowdown in traffic growth will severely dent cash generation in IRB’s
assets. As toll roads are typically financed at a 70:30 debt equity ratio, any
interest rate increase will significantly increase cash outflows. Surat-Dahisar is
the largest project undertaken by IRB till date and may pose its own execution
challenges. IRB’s township project is unlikely to generate returns in near term
and therefore any further investment will depress return ratios. Any slowdown in
ordering activity of NHAI will affect IRB’s growth opportunities as it is
leveraged only to the road sector in India.
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