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IL&FS Transportation (ILFT.BO, Buy)
Differentiated business model protects the company from the competition – attractive valuations
Driven by a robust order book of Rs94.4bn, we expect the company’s differentiated business model to be
able to generate value at the pre-construction phase of a road project to drive 35% sales CAGR over FY11-
FY13E. We reiterate our Buy rating on IL&FS Transportation (ILFT).
Strong track-record with state government agencies and geographical spread of current portfolio positions it
well to benefit from the Rs1tn worth of state road projects, in our view.
ILFT’s current project portfolio comprises a good mix of annuity (54%) and toll projects (46%) thus making
cash management more efficient leading to better risk management.
Given its strong cash generating ability, we think ILFT would be able to fund the equity requirement of
Rs10bn for its current portfolio of projects over FY12E and FY13E through internal accruals (excluding
Kazakhstan, Chhattisgarh, and Jharkhand Phase II projects).
Although competition for National Highway Road projects has continued to increase over the past 12
months, ILFT can focus more on its niche market of state highways and district roads – providing adequate
business opportunities while also preserving capital returns and IRRs.
We raise our EPS estimates on ILFT for FY12-FY14 by 0%-18% as we build in lower interest expense from
capitalized interest.
Catalyst
Achieving better finance rates and structures for upcoming projects would strengthen the company’s ability
to manage and fund multiple projects, in our view.
Continued fast pace of project awards from NHAI.
Valuation
The stock currently trades at FY12E P/E of 7X. We lower our 12-month SOTP-based target price on ILFT to
Rs260 (from Rs277) as we roll forward by 6 months and reduce our value for the services segments (from
5.5X EV/EBITDA earlier to 5X now, maintaining a 15% discount to construction sector peers).
The stock currently trades close to our ex-growth implied valuation of Rs189, thereby limiting the potential
variance from these levels.
Key downside risks
(1) Increase in interest rates, given high financial leverage, (2) heavy dependence on third-party contractors
for project execution, (3) delayed integration of Elsamex, and (4) delay in contract awards.
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