Road Developers -Get, Set, Go… :: Emkay

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Road Developers

Get, Set, Go…

We believe India's road PPP (Public Private Partnership) program is on a sustainable uptrend following the positive convergence of the 3 Ps -1) PRIVATE PARTICIPATION-driven by strained public finances, 2) POTENTIAL- Massive PPP opportunity of ~35000 kms or USD 51bn and 3) POLICY INITIATIVES - driven by strong political will. The positive convergence of the 3 Ps mentioned above have propelled India's road development to a structural growth trajectory. This is clearly reflected in the awarding activity of ~5,100 kms in FY11E as compared to 3,361 kms awarded in FY10. We expect project awarding to gain momentum and estimate ~12,700 kms of new road BOT concessions to be awarded over FY12-13E as compared 8,400 kms awarded over FY10-11.

Though the competitive intensity in national highways has picked up significantly, as is visible from the top 15 players losing 17% market share, they  still command more than 60% share. With total highway (PPP) opportunity at ~35,000 kms or Rs2,200 bn, and assuming ~60% market share of top 15 players, we estimate the annual opportunity per player over the next 5 years to still remain at an impressive 280 kms or Rs18 bn for the top 15 players. With subdued capital markets, rising cost of funding, larger ticket size projects likely to deter smaller players from participating aggressively, we expect competitive intensity to peak out in latter half of FY12, thereby benefiting large players. 

We initiate coverage on the road infrastructure sector with a positive stance on private road developers IRB Infrastructure (IRB) and IL&FS Transportation Networks (ITNL). We expect both the companies to be significant beneficiaries of the sustained momentum in NHAI's new award activity. The balance sheet strength along with the execution track record of these industry leaders provides significant comfort in their ability to fund growth. We upgrade our rating on IRB to BUY (Accumulate earlier) with price target of Rs280 and initiate coverage on ITNL with an ACCUMULATE rating and a target of Rs275. We expect IRB and ITNL to bag project awards of Rs60 bn and Rs100 bn over FY12-13 respectively. Current valuations implying no new order wins for IRB and just Rs 38.5bn wins for ITNL, lend scope for positive surprises. Our SOTP based targets offer 30% and 15% upsides from current levels for IRB and ITNL respectively.