IRB Infrastructure :: Stick to the seasoned ::BNP Paribas

Please Share:: India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��


Stick to the seasoned
ƒ Remains best proxy on highway spending, in our view
ƒ Concerns about project profitability seem overdone
ƒ Existing cash flows sufficient to see through challenging times
ƒ Reducing TP to factor in new projects and revised scenario
Best proxy on highway spending
We reiterate that IRB is the best proxy on
highway spending. About 24,000kms is
yet to be developed under the NHDP
programme. The NHAI has identified 100
projects measuring 11,151kms to be
awarded in the next 1-2 years. The FY12
target is 7,300kms. Our checks with NHAI
indicate that all the necessary processes
(including land acquisition) for roughly
50% of this opportunity have been taken
care of. We believe these projects will be
bid out in the next 3-4 months.

Competition a spoilsport
Aggressive competition in the industry has
spoiled the game for serious bidders. IRB is focusing on only select
projects that are fewer in number (5-7). The other major opportunity
would be Expressways – roughly INR450b opportunity. Separately, the
sector’s profitability has declined due to aggressive bidding. For future
projects we expect equity IRR to slip to below 14-15%.
Concerns on recent project’s profitability overdone
We believe IRB’s shares have corrected because of concerns about its
Ahmedabad-Vadodara project (INR36b). Due to the complexity in the
project, there is a large difference in the two best bids (60%). IRB’s
experience in its Mumbai-Pune project, which has similar dynamics,
places it in a better position than peers in terms of predicting traffic
movement. IRB claims that its bid could result in equity IRR of 16-17%.
Our base-case assumptions yield an equity IRR of 12%. In the worst
case, equity IRR could be 9%. We believe upside to our base estimates
is possible due to lower cost of financing and higher traffic growth. A
100bp reduction in interest rate would increase the net asset value to
(INR2), from (INR6). We have also assumed only 5% traffic growth;
three-stage traffic growth (viz. 7-6-5%) could bring back the IRR in line
with the company’s estimate.
Valuation
We reduce our TP to INR250, from INR301, mainly due to the
postponement of construction earnings and future opportunity. These are
offset by the increase in our value estimates of BOTs due to roll over to
FY13. We also reduce our target multiple for future projects owing to
reduction in profitability. Our BOT portfolio now contributes INR187 to our
TP, construction business INR42, real estate INR8, and future projects
INR13 (Exhibit 2). Risks to our TP include lower-than-expected traffic
growth, execution delays and lower-than-expected project wins.