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India Equity Research Reports, IPO and Stock News
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In past 1 year, IRB has corrected by ~40% and underperformed BSE Sensex by ~20%. We believe most of the concerns have been largely priced-in and valuations now appear reasonable. We have valued IRB at Rs180 using the SOTP methodology with (1) BOT business valued at Rs114 based on discounted FCFE basis (COE–13%, Avg. Traffic Growth–5%, Interest Cost–11%) (2) EPC business valued at Rs56 based on 7x FY13 EPS (construction margins–20%) (3) Investments in real estate and cash on books contribute Rs10. Initiate coverage with an ACCUMULATE rating. Our assumptions relating to traffic, interest cost and EPC margins are conservative. Another project win based on aggressive bidding is the key downward risk to our recommendation.
Investment Highlights
Valuations reasonable post correction
Since Sep-2010, IRB has corrected by ~40% and underperformed BSE Sensex by ~20% over concerns of (1) increased competitive intensity in road sector (2) lower than expected traffic in key projects (3) aggressive bidding in the Ahmedabad - Vadodara project (4) high interest rate environment. In our view, the aforesaid negatives have been largely priced-in and the valuations now appear reasonable. With the stock currently available at 10% discount to our SOTP-based TP of Rs180, we initiate coverage on IRB with an ACCUMULATE rating.
Interest cost pressure manageable
~55% of current outstanding BOT debt (Rs41 bn) is due for interest rate reset by April 2012. Also, interest outgo (as a % of revenue) for EPC business is expected to increase from 3.2% in FY11 to 5.2% in FY12E. Consequently, IRB’s consolidated interest expense is expected to increase by 27%/16% in FY12/13E to Rs4.5/5.3 bn. However, given the strong operating cash flow generation (Rs7.3/10.3 bn in FY12/13E), we believe the interest cost pressure is manageable and the company will be able to comfortably meet the equity commitments of its under-construction projects.
Our traffic assumptions conservative v/s consensus
Optimistic traffic forecast by road developers is a global phenomenon. Traffic growth rate for IRB’s major road projects like Surat - Dahisar and Mumbai - Pune have averaged 4-5% in the past four quarters, against street estimates of ~7% growth. Also, year-one traffic volumes (base traffic) in case of Surat - Dahisar and Bharuch - Surat projects were significantly lower than management estimates. Our projections assume (1) an average annual traffic growth of 5% v/s consensus estimate of 6-7% and (2) base traffic volumes of non-operational projects at 20% discount to its forecasted values (to adjust for ‘optimism bias’).
Intense competition = no new projects; another aggressive win downward risk to our reco
Lack of opportunities in other infrastructure sectors has led to construction companies aggressively targeting road projects to boost their order book. Competition intensity in roads sector has increased significantly (20-40 bids for most road projects and widening gap between L1 and L2 bidder), resulting in lower returns for developers. We believe new project wins in current scenario can only come at the cost of profitability, as in the case of Ahmedabad - Vadodara. This is the key downward risk to our recommendation.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
In past 1 year, IRB has corrected by ~40% and underperformed BSE Sensex by ~20%. We believe most of the concerns have been largely priced-in and valuations now appear reasonable. We have valued IRB at Rs180 using the SOTP methodology with (1) BOT business valued at Rs114 based on discounted FCFE basis (COE–13%, Avg. Traffic Growth–5%, Interest Cost–11%) (2) EPC business valued at Rs56 based on 7x FY13 EPS (construction margins–20%) (3) Investments in real estate and cash on books contribute Rs10. Initiate coverage with an ACCUMULATE rating. Our assumptions relating to traffic, interest cost and EPC margins are conservative. Another project win based on aggressive bidding is the key downward risk to our recommendation.
Investment Highlights
Valuations reasonable post correction
Since Sep-2010, IRB has corrected by ~40% and underperformed BSE Sensex by ~20% over concerns of (1) increased competitive intensity in road sector (2) lower than expected traffic in key projects (3) aggressive bidding in the Ahmedabad - Vadodara project (4) high interest rate environment. In our view, the aforesaid negatives have been largely priced-in and the valuations now appear reasonable. With the stock currently available at 10% discount to our SOTP-based TP of Rs180, we initiate coverage on IRB with an ACCUMULATE rating.
Interest cost pressure manageable
~55% of current outstanding BOT debt (Rs41 bn) is due for interest rate reset by April 2012. Also, interest outgo (as a % of revenue) for EPC business is expected to increase from 3.2% in FY11 to 5.2% in FY12E. Consequently, IRB’s consolidated interest expense is expected to increase by 27%/16% in FY12/13E to Rs4.5/5.3 bn. However, given the strong operating cash flow generation (Rs7.3/10.3 bn in FY12/13E), we believe the interest cost pressure is manageable and the company will be able to comfortably meet the equity commitments of its under-construction projects.
Our traffic assumptions conservative v/s consensus
Optimistic traffic forecast by road developers is a global phenomenon. Traffic growth rate for IRB’s major road projects like Surat - Dahisar and Mumbai - Pune have averaged 4-5% in the past four quarters, against street estimates of ~7% growth. Also, year-one traffic volumes (base traffic) in case of Surat - Dahisar and Bharuch - Surat projects were significantly lower than management estimates. Our projections assume (1) an average annual traffic growth of 5% v/s consensus estimate of 6-7% and (2) base traffic volumes of non-operational projects at 20% discount to its forecasted values (to adjust for ‘optimism bias’).
Intense competition = no new projects; another aggressive win downward risk to our reco
Lack of opportunities in other infrastructure sectors has led to construction companies aggressively targeting road projects to boost their order book. Competition intensity in roads sector has increased significantly (20-40 bids for most road projects and widening gap between L1 and L2 bidder), resulting in lower returns for developers. We believe new project wins in current scenario can only come at the cost of profitability, as in the case of Ahmedabad - Vadodara. This is the key downward risk to our recommendation.
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