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IRB Infrastructure (IRB)
Infrastructure
Retain ADD as large opportunity is offset by competition, low toll collection. We
revise our target price on IRB to Rs185 (from Rs220) based on a higher-cost-of-capital
assumption (to reflect various risks in the environment) and shift to Sept-12E based
valuation (from March-13E based related to change in rating system). We retain our
ADD rating on the company despite reasonable valuation (1.8X FY2012E P/B) as the
large sector opportunity is offset by increasing competition and higher traffic risks.
Revise target price to Rs185 on higher discount rate and Sept-based FCFE
We have revised our target price to Rs185/share from Rs220/share based on an increase in the
discount rate for road projects to 13.5% from 12.5% earlier and shift to Sept-12-based valuation
(earlier Mar-13E based) - related to a change in the rating system (on a one-year forward DCF
valuation). We have increased our cost of capital assumption to reflect (1) higher risk on base-case
traffic growth estimates, (2) lower-than-expected base-year toll collections in new projects, (3)
aggressive bidding in recent projects and (4) higher interest rate environment
Retain ADD as competition affords low returns in incremental projects with risks
We retain our ADD rating despite large sectoral opportunity as increased competition and higher
traffic risks afford low returns in incremental projects despite the company’s strengths in terms of
balance sheet and execution capability. Key business risks include (1) low margin of safety on
several key variables (such as traffic growth) affecting project viability and (2) narrow spread and
back-ended returns on a large capital investment. IRB (at Rs160/share) is presently trading at a
reasonable valuation of about 1.8X FY2012E P/B and 1.6X FY2013E P/B.
Intense competition in the sector - demonstrated by recent aggressive bids for NHAI projects
Competition in road project bids remains very stiff with several projects going on relatively high
premium. For instance, L&T’s bid for the Beawar-Pali-Pindwara project (won at a premium of Rs3.1
bn), IRB’s bid for Ahmedabad-Vaddodara project and GMR’s Kishangarh-Udaipur-Ahmedabad
road project (won at a significant premium of Rs6.36 bn). Recent project awards have resulted in
net revenue gain of about Rs64 bn NPV to the government.
Likely to remain equity surplus though high dependence on Mumbai-Pune project continues
Even including the equity requirement of the recent project, cash flows from the operational
projects and construction arm are likely to be more than sufficient. However, new projects do not
meaningfully contribute to FCFE even till FY2018E, leading to over-dependence on Mumbai-Pune.
Toll collections (adjusted for hike in tariff rates) remains below par in key projects (Mumbai-Pune,
Surat-Dahisar and Bharuch-Surat).
Revise target price to Rs185 on higher discount rate and Sept-based FCFE
We have revised our target price to Rs185/share from Rs220/share based on (1) increase in
discount rate for road projects to 13.5% from 12.5% earlier to reflect higher risk on traffic
growth estimates, lower-than-expected base-year toll collections in new projects, aggressive
bidding in recent projects and higher interest rate environment and (2) shift to Sept-12-
based valuation (from Mar-13E based earlier) - related to change in rating system (on a oneyear
forward DCF valuation).
Our SOTP-based target price of Rs185/share comprises (1) Sept-12 based FCFE of projects –
Rs129/share, (2) construction value – Rs48/share based on NPV of cash flows till FY2015E,
and (3) Rs9 from real estate and net cash on standalone balance sheet (at end-FY2011).
Retain ADD as competition affords low returns in incremental projects with risks
We retain our ADD rating on the company as increased competition and higher traffic risks
affords low returns in incremental projects despite the company’s strengths in terms of
balance sheet and execution capability.
Margin of safety low on several key variables effecting project viability. We believe
narrow spreads provide a low margin of safety on variables such as (1) base traffic,
(2) traffic growth (7% growth till FY2020E and 6% thereafter) – several projects have
reported lower growth recently, (3) traffic shift – higher toll on NH8 can drive a morethan-
expected shift, (4) inflation related toll increase, (5) debt funding (assumed at 10.5%)
and associated costs.
Narrow spread and very back ended returns on a large capital investment. Intense
competition in recent project wins implies that returns provide narrow spreads and are
likely to be back-ended (Recent Ahmedabad-Vadodara project win at narrow spread of
13% and FCFE break-even in FY2030E). We believe the company would be able to earn
the benchmark 16-18% IRR from a project only including in-house construction, returns.
Valuation appears reasonable at about 1.8X FY2012E P/B
IRB (at Rs152/share) trades at reasonable valuation at about 1.8X FY2012E P/B and 1.6X
FY2013E P/B. This is versus our target price implied valuation of 2.1X FY2012E P/B and 1.9X
FY2013E P/B.
Lower-than-expected traffic growth and base traffic is a key risk
Lower-than-expected traffic growth and base-year traffic assumption remains a key risk to
the value of BOT projects. A 1% lower traffic growth assumption for the full period of the
concession period results in 27% lower value for road projects versus our target value and a
15% impact on our target price.
Equity surplus even including recent project; however over-dependence on
Mumbai-Pune remains significant
IRB would now have a total project portfolio of 16 road project (including the Ahmedabad-
Vadodara project) of which nine are operational and seven are under construction/
development. The under construction/development projects are likely to have a total equity
requirement of Rs35 bn over FY2011-18E. We believe this would be more than met by the
cash flows from the operational projects (FY2011-18E cumulative FCFE of Rs22 bn) and the
construction arm (FY2011-15E cumulative FCFE of Rs19 bn) of the company. A majority of
the cash flows from the operational projects is derived from the Mumbai-Pune project (Rs15
bn). The new projects do not meaningfully contribute to the cash flows of the company till
FY2018E, leading to continued over-dependence on the Mumbai-Pune project.
Competition remains stiff with several recent projects won at high premiums
Competition in the road project bids remains very stiff with several projects going on
relatively high premium basis. Several smaller, local players have also started bidding,
especially for small-sized projects. Intense competition was demonstrated by recent
aggressive bids for NHAI projects. For instance, L&T’s bid for the Beawar-Pali-Pindwara
project (won at a premium of Rs3.1 bn), IRB’s bid for Ahmedabad-Vaddodara project and
GMR’s Kishangarh-Udaipur-Ahmedabad road project (won at a significant premium of
Rs6.36 bn).
NHAI management itself surprised by aggressive bids; IRB’s Ahmedabad-Vaddodara
project premium is highest ever received by NHAI
NHAI management had indicated that they themselves were a bit surprised by the recent
aggressive bids placed by several players. For the recent Ahmedabad-Vaddodara project win
by IRB, NHAI had expected the project to be awarded at a premium of about Rs1.75-2 bn
versus IRB’s bid of a premium of Rs3 bn. NHAI indicated that recent project awards have
resulted in a net revenue gain of about Rs64 bn NPV to the government
Traffic growth at key projects still remains below par
While Bharuch-Surat toll collections picked up in 1QFY12 (though boosted only by toll rate
hike), toll collections across the other two key stretches viz. Mumbai-Pune (adjusted for 18%
tariff hike) and Surat-Dahisar still remains below par. Toll collections for key stretches were
as follows:
Mumbai-Pune: Toll collections at Mumbai-Pune increased by 23% yoy. Adjusting for the
18% toll rate hike (from April 1, 2011), this implies that traffic growth for the project
remained stuck around the 5% mark (in fact reaching sub-5% range) at about 4.2%
Surat-Dahisar: This project reported toll collections of Rs942 mn, up 6.8% yoy. This
implies an average per day toll collection of Rs10.4 mn versus about Rs9.7 mn in 1QFY11.
Surat-Dahisar project received a 3.84% toll rate hike in September 2010. Adjusted for this,
the toll collections imply a traffic growth of just 2.9% yoy in 1QFY12. The management
has stated that this project has received a 10% toll rate hike in Sept-2012 - which would
reflect in the toll collections of 3QFY12-onwards.
Bharuch-Surat: This project recorded a pick up in toll collections, up 12.8% yoy to Rs336
mn in 1QFY12, implying daily collections of Rs3.7 mn/day versus Rs3.3 mn/day in 1QFY11.
This is broadly in line with our base-case expectation of inflation + traffic growth of at
least 12-13% in NHAI projects. However, adjusted for the 9% hike in toll rates received in
Sept 2012, this project saw an implied traffic growth of only about 3.4% - below our
base-case assumption of 6% traffic growth.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
IRB Infrastructure (IRB)
Infrastructure
Retain ADD as large opportunity is offset by competition, low toll collection. We
revise our target price on IRB to Rs185 (from Rs220) based on a higher-cost-of-capital
assumption (to reflect various risks in the environment) and shift to Sept-12E based
valuation (from March-13E based related to change in rating system). We retain our
ADD rating on the company despite reasonable valuation (1.8X FY2012E P/B) as the
large sector opportunity is offset by increasing competition and higher traffic risks.
Revise target price to Rs185 on higher discount rate and Sept-based FCFE
We have revised our target price to Rs185/share from Rs220/share based on an increase in the
discount rate for road projects to 13.5% from 12.5% earlier and shift to Sept-12-based valuation
(earlier Mar-13E based) - related to a change in the rating system (on a one-year forward DCF
valuation). We have increased our cost of capital assumption to reflect (1) higher risk on base-case
traffic growth estimates, (2) lower-than-expected base-year toll collections in new projects, (3)
aggressive bidding in recent projects and (4) higher interest rate environment
Retain ADD as competition affords low returns in incremental projects with risks
We retain our ADD rating despite large sectoral opportunity as increased competition and higher
traffic risks afford low returns in incremental projects despite the company’s strengths in terms of
balance sheet and execution capability. Key business risks include (1) low margin of safety on
several key variables (such as traffic growth) affecting project viability and (2) narrow spread and
back-ended returns on a large capital investment. IRB (at Rs160/share) is presently trading at a
reasonable valuation of about 1.8X FY2012E P/B and 1.6X FY2013E P/B.
Intense competition in the sector - demonstrated by recent aggressive bids for NHAI projects
Competition in road project bids remains very stiff with several projects going on relatively high
premium. For instance, L&T’s bid for the Beawar-Pali-Pindwara project (won at a premium of Rs3.1
bn), IRB’s bid for Ahmedabad-Vaddodara project and GMR’s Kishangarh-Udaipur-Ahmedabad
road project (won at a significant premium of Rs6.36 bn). Recent project awards have resulted in
net revenue gain of about Rs64 bn NPV to the government.
Likely to remain equity surplus though high dependence on Mumbai-Pune project continues
Even including the equity requirement of the recent project, cash flows from the operational
projects and construction arm are likely to be more than sufficient. However, new projects do not
meaningfully contribute to FCFE even till FY2018E, leading to over-dependence on Mumbai-Pune.
Toll collections (adjusted for hike in tariff rates) remains below par in key projects (Mumbai-Pune,
Surat-Dahisar and Bharuch-Surat).
Revise target price to Rs185 on higher discount rate and Sept-based FCFE
We have revised our target price to Rs185/share from Rs220/share based on (1) increase in
discount rate for road projects to 13.5% from 12.5% earlier to reflect higher risk on traffic
growth estimates, lower-than-expected base-year toll collections in new projects, aggressive
bidding in recent projects and higher interest rate environment and (2) shift to Sept-12-
based valuation (from Mar-13E based earlier) - related to change in rating system (on a oneyear
forward DCF valuation).
Our SOTP-based target price of Rs185/share comprises (1) Sept-12 based FCFE of projects –
Rs129/share, (2) construction value – Rs48/share based on NPV of cash flows till FY2015E,
and (3) Rs9 from real estate and net cash on standalone balance sheet (at end-FY2011).
Retain ADD as competition affords low returns in incremental projects with risks
We retain our ADD rating on the company as increased competition and higher traffic risks
affords low returns in incremental projects despite the company’s strengths in terms of
balance sheet and execution capability.
Margin of safety low on several key variables effecting project viability. We believe
narrow spreads provide a low margin of safety on variables such as (1) base traffic,
(2) traffic growth (7% growth till FY2020E and 6% thereafter) – several projects have
reported lower growth recently, (3) traffic shift – higher toll on NH8 can drive a morethan-
expected shift, (4) inflation related toll increase, (5) debt funding (assumed at 10.5%)
and associated costs.
Narrow spread and very back ended returns on a large capital investment. Intense
competition in recent project wins implies that returns provide narrow spreads and are
likely to be back-ended (Recent Ahmedabad-Vadodara project win at narrow spread of
13% and FCFE break-even in FY2030E). We believe the company would be able to earn
the benchmark 16-18% IRR from a project only including in-house construction, returns.
Valuation appears reasonable at about 1.8X FY2012E P/B
IRB (at Rs152/share) trades at reasonable valuation at about 1.8X FY2012E P/B and 1.6X
FY2013E P/B. This is versus our target price implied valuation of 2.1X FY2012E P/B and 1.9X
FY2013E P/B.
Lower-than-expected traffic growth and base traffic is a key risk
Lower-than-expected traffic growth and base-year traffic assumption remains a key risk to
the value of BOT projects. A 1% lower traffic growth assumption for the full period of the
concession period results in 27% lower value for road projects versus our target value and a
15% impact on our target price.
Equity surplus even including recent project; however over-dependence on
Mumbai-Pune remains significant
IRB would now have a total project portfolio of 16 road project (including the Ahmedabad-
Vadodara project) of which nine are operational and seven are under construction/
development. The under construction/development projects are likely to have a total equity
requirement of Rs35 bn over FY2011-18E. We believe this would be more than met by the
cash flows from the operational projects (FY2011-18E cumulative FCFE of Rs22 bn) and the
construction arm (FY2011-15E cumulative FCFE of Rs19 bn) of the company. A majority of
the cash flows from the operational projects is derived from the Mumbai-Pune project (Rs15
bn). The new projects do not meaningfully contribute to the cash flows of the company till
FY2018E, leading to continued over-dependence on the Mumbai-Pune project.
Competition remains stiff with several recent projects won at high premiums
Competition in the road project bids remains very stiff with several projects going on
relatively high premium basis. Several smaller, local players have also started bidding,
especially for small-sized projects. Intense competition was demonstrated by recent
aggressive bids for NHAI projects. For instance, L&T’s bid for the Beawar-Pali-Pindwara
project (won at a premium of Rs3.1 bn), IRB’s bid for Ahmedabad-Vaddodara project and
GMR’s Kishangarh-Udaipur-Ahmedabad road project (won at a significant premium of
Rs6.36 bn).
NHAI management itself surprised by aggressive bids; IRB’s Ahmedabad-Vaddodara
project premium is highest ever received by NHAI
NHAI management had indicated that they themselves were a bit surprised by the recent
aggressive bids placed by several players. For the recent Ahmedabad-Vaddodara project win
by IRB, NHAI had expected the project to be awarded at a premium of about Rs1.75-2 bn
versus IRB’s bid of a premium of Rs3 bn. NHAI indicated that recent project awards have
resulted in a net revenue gain of about Rs64 bn NPV to the government
Traffic growth at key projects still remains below par
While Bharuch-Surat toll collections picked up in 1QFY12 (though boosted only by toll rate
hike), toll collections across the other two key stretches viz. Mumbai-Pune (adjusted for 18%
tariff hike) and Surat-Dahisar still remains below par. Toll collections for key stretches were
as follows:
Mumbai-Pune: Toll collections at Mumbai-Pune increased by 23% yoy. Adjusting for the
18% toll rate hike (from April 1, 2011), this implies that traffic growth for the project
remained stuck around the 5% mark (in fact reaching sub-5% range) at about 4.2%
Surat-Dahisar: This project reported toll collections of Rs942 mn, up 6.8% yoy. This
implies an average per day toll collection of Rs10.4 mn versus about Rs9.7 mn in 1QFY11.
Surat-Dahisar project received a 3.84% toll rate hike in September 2010. Adjusted for this,
the toll collections imply a traffic growth of just 2.9% yoy in 1QFY12. The management
has stated that this project has received a 10% toll rate hike in Sept-2012 - which would
reflect in the toll collections of 3QFY12-onwards.
Bharuch-Surat: This project recorded a pick up in toll collections, up 12.8% yoy to Rs336
mn in 1QFY12, implying daily collections of Rs3.7 mn/day versus Rs3.3 mn/day in 1QFY11.
This is broadly in line with our base-case expectation of inflation + traffic growth of at
least 12-13% in NHAI projects. However, adjusted for the 9% hike in toll rates received in
Sept 2012, this project saw an implied traffic growth of only about 3.4% - below our
base-case assumption of 6% traffic growth.
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