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We recently met the management of IRB Infra to get an insight
into existing projects as well as scenario going ahead.
n Company believes that competition has increased immensely in bidding for NHAI
projects
n Interest rates continue to stay high but may not impact company's existing
projects adversely
n We reduce our revenue estimates to factor in delays in Goa Karnataka project.
Margins are likely to remain strong but mark to market provisioning for interest
rate currency swap for Mumbai-Pune BOT may impact profits during Q1FY12
also.
n We thus arrive at a revised price target of Rs 246 based on sum of the parts
methodology on FY12 estimates (Rs 265 earlier). We continue to remain positive
on the company and maintain BUY recommendation due to attractive valuations.
Key highlights about the company
Heightened competition witnessed in recent project bids
Due to lower than expected order inflows during FY11, competition has increased
significantly for the new project bids. Company specified that there are at least 20+
bidders for smaller projects from NHAI while for bigger projects of nearly Rs 50 bn,
bids are coming from at least 10-12 players. Higher competition is likely to put pressure
on overall project IRRs. Among the upcoming opportunities, phase III projects
are diversified across Tamilnadu, UP, Haryana while MP and Bihar region form significant
proportion of Phase IV projects. Upcoming Phase V projects are diversified
across MP, AP, Rajasthan and Tamilnadu. Bidding for Kishangarh-Udaipur-
Ahmedabad section is expected to be invited around August first week where IRB is
bidding along with Reliance Infra.
Company management mentioned that after bagging Ahmedabad-Vadodara
project, company doesn't need to aggressively bid for projects. We expect company
to bag one more project during FY12.
Project specific details
Mumbai-Pune project
Company SPV for Mumbai-Pune project had entered into a 6 year Interest Rate
Currency Swap in August 2005 for hedging interest rate risk on its then underlying
outstanding Rupee Loan. Company was fully hedged against any risk on Yen appreciation
as long as the yen did not appreciate beyond 1USD = JPY 77 during the
contract period. But during March, 2011, due to Tsunami crisis, yen touched the levels
of 1USD = 76.54. Due to this, the protection available to the company got
knocked out and it had to provide for a mark-to-market loss of Rs 549.7 mn during
Q4FY11. This provision was provided when 1USD = 83 Yen. Since then, yen has
appreciated and at the end of Q1FY12, 1USD = 80 Yen. So we expect company to
provide further mark to market provision of nearly Rs 80-90 mn during Q1FY12.
Along with this, toll rates for Mumbai-Pune project have increased by 18% during
April, 2011 so we expect a jump in toll revenues for the company during Q1FY12 in
comparison with Q1FY11.
Surat-Dahisar project
Construction work on Surat-Dahisar project is expected to complete in Aug, 2011.
We expect this project to contribute nearly Rs 4 bn to the construction revenues in
this financial year. We expect that it will take some time for the toll revenues to
increase from this project post completion.
Kolhapur project
Commissioning of this project has got delayed due to land availability issues so company
has requested for partial completion certificate and begin the toll collections by
Sep, 2011.
Tumkur-Chitradurg project
Tolling on this project has commenced from Jun, 2011 and company is collecting toll
of nearly Rs 42 lakh per day as against its estimate of Rs 44-45 lakh per day.
Ahmedabad-Vadodara project
Construction on Ahmadabad-Vadodara project is expected to start by FY13. Toll
collection from expressway would begin from the date of financial closure while toll
on NH-8 would begin on completion of 6-laning from FY16. Company expects toll
of nearly Rs 1.4 bn from expressway while Rs 5.3 bn from both the projects post
completion of 6-laning of NH-8 from FY16 with a revenue share of Rs 3.09 bn from
first year itself, escalated by 5% every year.
Thane-Ghodbunder
Toll revenues were impacted in Thane-Ghodbunder project since construction work
on three flyovers is going on near that and there is a restriction on heavy vehicles
during day time. This may continue to impact for few more quarters.
Financial outlook
Revenue growth
Based on delays associated with Goa-Karnataka project, we reduce our revenue
growth estimates going forward. We had earlier expected construction to commence
from Q2FY12 and expected revenues of nearly Rs 2 bn in FY12 from this project. We
now expect project to commence from FY13. We also tweak our execution assumptions
for Amritsar-Pathankot project downwards. However we believe that growth is
expected to ramp up significantly in FY13 with higher execution from Jaipur-Deoli,
Amritsar Pathankot and Talegaon-Amravati project. Work on Ahmedabad-Vadodara
project is also expected to commence from FY13 which will aid construction revenues.
We thus expect consolidated revenues to grow at a CAGR of 36% between
FY11-FY13.
Operating margins
We had earlier expected operating margins to decline in the EPC segment due to
higher commodity prices. But management is quite confident of maintaining margins
at FY11 levels in the EPC division due to higher costs of raw materials such as cement
and bitumen factored in at the time of bidding in the under construction
projects such as Surat-Dahisar, Amritsar-Pathankot, Jaipur-Deoli and Talegaon-
Amravati project. We thus revise our operating margins upwards for the EPC division
and expect consolidated margins to be 44.1% and 37% for FY12 and FY13 respectively.
Net profit growth
Net profit growth is expected to grow at a CAGR of 17% between FY11-FY13. This
is expected to be impacted by higher interest and depreciation charges going forward.
Valuation and recommendation
n At current price of Rs 169, stock is trading at 11.8x and 9.1x P/E and 7.3x and
7.1x EV/EBITDA on FY12 and FY13 estimates.
n We tweak our valuations to factor in delays in execution of Goa-Karnataka
project. Due to lack of clarity in commissioning of construction work, we presently
don't consider valuations from this project in our sum of the parts valuations.
n We thus arrive at a revised price target of Rs 246 based on sum of the parts
methodology on FY12 estimates (Rs 265 earlier).
n We continue to remain positive on the company and maintain BUY recommendation
due to attractive valuations.
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