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IRB Infrastructure (IRBI.BO, Buy, add to Conviction List)
Stock close to ex-growth valuations, attractive risk-reward, and limited interest rate risk
We reiterate our Buy rating on IRB, and add it to our Conviction Buy List, given the company’s continued
strength in cash generation with limited direct risk to the global macroeconomic environment, solid hedge to
domestic interest rates (through WPI-linked toll rates), and attractive price.
We prefer the road segment within all the infrastructure segments due to a stable policy regime, transparent
bid mechanism, and long-term linkage of the sector’s growth to India’s GDP.
We expect IRB to register a strong sales CAGR of 27% between FY11-FY13E through a combination of higher
toll and traffic increases plus on-schedule execution of 4 of its under construction projects.
The National Highways Authority has markedly improved awarding of national highways since last year
(4,000km awarded over the past year vs. an average of 1,600km per year over the previous 3-4 years). We see
a strong pipeline of awards developing (about 15,000km over the next 20 months, valued at US$27bn.
This improved ordering and the lack of orders in the general construction space has attracted many new
names to the roads sector, increasing the risk of lower IRRs on incremental project wins. However, for IRB,
given its cost advantages over other construction companies, we factor a lower risk of IRR dilution (please
see our report: Higher construction segment margins sustainable; reiterate Buy, published June 19, 2011).
We estimate that IRB would be able to fund the equity requirement of Rs17bn for its current portfolio of
projects through internal accruals, in our view, given its strong cash generation ability (21% CAGR for cash
flow from operations over FY11-FY13E).
The recent price correction in the stock ensures a good risk-reward, in our view, with the stock trading close
to our ex-growth valuation (no future projects/no value for construction past current order book) of Rs154.
Catalyst
(1) New project wins over the next 6-12 months, (2) strong traffic growth at key operational projects leading
to better realizations from toll roads, and (3) strong pick-up in execution in 3Q and 4QFY12E leading to onschedule
execution of the projects currently under construction.
Valuation
12-month forward P/E of 8.5X and P/B of 1.5X – a discount of 48% and 44% to its historical median – while
still generating ROEs of 19% for the next two years, which is in line with its trading history. We lower our 12-
month SOTP-based target price to Rs200 (from Rs221) as we remove the value of the Karnataka-Goa project
(currently awaiting environmental clearance) and roll forward our target price by 6 months on the back of our
revised FY12-FY14 EPS estimates (changing by -2% to +32% to include Ahmedabad project win in estimates).
Key downside risks
(1) Aggressive bidding impacting profitability, (2) higher interest rates, (3) slower awarding of road contracts,
and (4) delay in bringing road segments under tolling.
Read about other companies in sector recommended by Goldman Sachs and top picks in link below:
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
IRB Infrastructure (IRBI.BO, Buy, add to Conviction List)
Stock close to ex-growth valuations, attractive risk-reward, and limited interest rate risk
We reiterate our Buy rating on IRB, and add it to our Conviction Buy List, given the company’s continued
strength in cash generation with limited direct risk to the global macroeconomic environment, solid hedge to
domestic interest rates (through WPI-linked toll rates), and attractive price.
We prefer the road segment within all the infrastructure segments due to a stable policy regime, transparent
bid mechanism, and long-term linkage of the sector’s growth to India’s GDP.
We expect IRB to register a strong sales CAGR of 27% between FY11-FY13E through a combination of higher
toll and traffic increases plus on-schedule execution of 4 of its under construction projects.
The National Highways Authority has markedly improved awarding of national highways since last year
(4,000km awarded over the past year vs. an average of 1,600km per year over the previous 3-4 years). We see
a strong pipeline of awards developing (about 15,000km over the next 20 months, valued at US$27bn.
This improved ordering and the lack of orders in the general construction space has attracted many new
names to the roads sector, increasing the risk of lower IRRs on incremental project wins. However, for IRB,
given its cost advantages over other construction companies, we factor a lower risk of IRR dilution (please
see our report: Higher construction segment margins sustainable; reiterate Buy, published June 19, 2011).
We estimate that IRB would be able to fund the equity requirement of Rs17bn for its current portfolio of
projects through internal accruals, in our view, given its strong cash generation ability (21% CAGR for cash
flow from operations over FY11-FY13E).
The recent price correction in the stock ensures a good risk-reward, in our view, with the stock trading close
to our ex-growth valuation (no future projects/no value for construction past current order book) of Rs154.
Catalyst
(1) New project wins over the next 6-12 months, (2) strong traffic growth at key operational projects leading
to better realizations from toll roads, and (3) strong pick-up in execution in 3Q and 4QFY12E leading to onschedule
execution of the projects currently under construction.
Valuation
12-month forward P/E of 8.5X and P/B of 1.5X – a discount of 48% and 44% to its historical median – while
still generating ROEs of 19% for the next two years, which is in line with its trading history. We lower our 12-
month SOTP-based target price to Rs200 (from Rs221) as we remove the value of the Karnataka-Goa project
(currently awaiting environmental clearance) and roll forward our target price by 6 months on the back of our
revised FY12-FY14 EPS estimates (changing by -2% to +32% to include Ahmedabad project win in estimates).
Key downside risks
(1) Aggressive bidding impacting profitability, (2) higher interest rates, (3) slower awarding of road contracts,
and (4) delay in bringing road segments under tolling.
Read about other companies in sector recommended by Goldman Sachs and top picks in link below:
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