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IRB Infrastructure (IRB)
Infrastructure
Sector remains hyperactive, IRB seems well positioned. The road sector bustles with
activity (over 3,330 km awarded in FY2012 so far, potential sell downs of earlier
projects by developers, PE investors). Recent bidding reflects some reduction in the
number of bidders, competition is unlikely to ease as new bidders are entering the pool.
We upgrade IRB to BUY (TP: Rs200 from Rs185 earlier)) on (1) about 20% upside to TP,
(2) strong balance sheet and execution, (3) reassuring data from Tumkur project and
(4) higher inflation and blending overseas borrowings aiding value.
Sector in the throes of activity with increased awards, sell downs, private equity transactions
We note the continued flurry of activities in the road sector such as (1) strong pick up in award
activity by NHAI; has already awarded over 3,300 km of road projects in FY2012 so far (targets to
award 7,300 km in FY2012), (2) several projects have not yet started construction despite being
awarded more than a year ago (Reliance Infra, Transtroy, KMC and HCC), (3) potential sell down
of several projects (may come in at reasonable valuations for acquirers) and (4) private equity
money still pouring in (Soma, Isolux, HCC, Sadbhav); may be an impediment to reducing
competition.
Recent projects had slightly fewer bidders but we do not expect overall competition to ease up
There have fewer bidders per project in the recent past (8-10 bidders per project versus over 20
previously), however, the competitive intensity may not have eased as (1) several projects which
witnessed lower interest were in relatively unattractive geographies (Orissa, Bihar, UP), (2) entry of
several new names into the bidding pool (Atlanta-Essar, Abhijit, Essel etc.) and (3) equity
requirements is lower than what it appears as construction helps generate part of the equity.
IRB seems well positioned with a strong project portfolio, balance sheet; upgrade to BUY
Upgrade to BUY (from ADD) based on (1) 18-19% upside to TP (substantial correction post
Ahmedabad-Vadodara win), (2) positive data from Tumkur-Chitradurg project reassuring us on
projected toll collections on under construction projects, (3) higher inflation aiding toll revenues,
(4) strong balance sheet and execution capability and (4) potential for lower interest cost with
likely increase in foreign borrowing being used to fund projects. TP implies 1.8X P/B (18-20%
equity IRR including construction) + value for Mumbai Pune (excess returns separately added).
Key risk is of incremental project wins at relatively lower returns. Concerns seem to be in the price
as we (1) do not ascribe any value to incremental wins, (2) construction business is valued only for
NPV of cash flows over the next four years and (3) of the seven projects which at present do not
have established cash flows, four were won in a relatively low competitive environment and
Tumkur-Chitradurg has demonstrated stronger-than-expected toll collections in 1QFY12
Upgrade to BUY with a revised target price of Rs200/share
We revise our SOTP-based target price to Rs200/share (from Rs185/share earlier). Key
changes include (1) shift of valuation to Dec-12E based (from Sept-12E earlier - 12 month
forward FCFE valuation), (2) increased value for Tumkur-Chitradurg project based on toll
collections (as seen in 1QFY12), (3) increased value for several BOT assets on higher inflation
levels in FY2010-12E and (4) inclusion of value from Ahmedabad-Vadodara project.
Our SOTP-based target price of Rs200/share is comprised of (1) Sept-12 based FCFE of
projects – Rs148/share, (2) construction value – Rs48/share based on NPV of cash flows till
FY2015E, and (3) Rs5 from real estate and net cash on standalone balance sheet (at end-
FY2011).
We believe our SOTP-based valuation is reasonable as (1) we do not ascribe any value to
incremental project wins for IRB, (2) construction business is valued only for NPV of potential
cash flows over the next five years and not as an ongoing business, and (3) of the seven
projects which at present do not have established cash flows (under construction), four were
won in relatively low competitive environment and Tumkur-Chitradurg demonstrated
stronger-than-expected toll collections in 1QFY12.
Key assumptions in our FCFE valuation are (1) 6% growth in traffic throughout the life of
the project and (2) discount rate of 13.5%.
We upgrade our rating on the company to BUY (from ADD earlier) based on (1) current
market price, which provides about 18-19% upside to our target price, (2) potential for
lower interest cost with likely increase in foreign borrowing being used to fund projects
under construction, (3) higher inflation rates aiding toll revenues across several projects, (4)
positive early data points from Tumkur-Chitradurg project (average daily collection of Rs4.4
mn/day implying full-year collections of about Rs1.6-1.7 bn), (4) strong balance sheet and
execution capability.
Key business risks include (1) competition affords low returns in incremental project wins
and (2) lower-than-expected traffic growth and base-year traffic levels.
Likely to generate average annual cash surplus of Rs5 bn+ over the next 9 years
IRB now has 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
Rs22 bn over FY2012-20E. We believe this would be more than met by the cash flows from
the operational projects (FY2012-20E cumulative FCFE of Rs50 bn) and the construction arm
(FY2012-15E cumulative FCFE of Rs17.7 bn) of the company.
Even including cash flows into the Ahmedabad-Vadodara project, we believe the company
could potentially generate a net cash surplus of about Rs5.1 bn every year (average) over the
next 9-10 years.
Sector remains in throes of activity with awards, sell downs, PE transactions
We note a strong pick up in award activity by NHAI in the past few months. NHAI has
already awarded projects to the tune of about 3,370 km with a total project cost of close to
Rs300 bn in FY2012 so far (NHAI targets to award 7,300 km of projects in FY2012).
Some projects not started despite being awarded more than a year ago
Based on NHAI data, we have attempted to track projects which have not started execution.
We note that several projects that were awarded over a year ago have still not yet started
construction. For instance, projects of Reliance Infrastructure (Pune-Satara, Delhi Agra and
Kandla Mundra), HCC (Three west Bengal projects), Transtroy (Trichy Bypass, Tirupathi-
Tiruthani, Kerala border-Kannur) and KMC Constructions (Kannur Vengalem two packages
and Cuddapah Kurnool) have not started as per NHAI data, despite these projects having
been awarded more than a year ago. Similarly a couple of one-off projects of IRB (Panji-
Goa/Karnatka Border) and ITNL (Muradabad-Bareilly and Pune-Solapur) do not seem to have
started
Note that this comment is based purely on NHAI data and we have no direct knowledge of
specific underlying causes, direct physical observation etc.
Several projects up for sale; IRB would evaluate when expectations are reasonable
(equity wiped out)
IRB management suggests that there may be 100 projects that are available for sale as the
developers want to sell them. However, valuation expectations are still unreasonable and IRB
would wish to evaluate these projects at much lower valuations (i.e. probably when invested
equity value is wiped out). We have received a similar feedback from several other
developers as well.
PE money still pouring in (Soma, Isolux, HCC, Sadbhav); may be an impediment
to reducing competition
We have seen several private equity transactions in the roads space with JP Morgan investing
in Soma Highways about US$100 mn recently. Interestingly, Isolux Corsan of Spain and
Morgan Stanley Infrastructure Partners (Global fund with US$4 bn corpus) invested US$200
mn each in Isolux Indian subsidiary to finance equity for under construction as well as new
projects in India. Recently, HCC and Sadbhav also announced private equity transactions.
These transactions are still extremely selective, but they do have the potential to postpone
the consolidation (competition comes down in terms of number of bidders and some
projects are sold off to stronger players) process in the roads space.
Recent projects had slightly fewer bidders but do not expect overall competition
to ease
Based on recent project awards, it appears that the number of bidders per project has
started to come down, to about 8-10 bidders per project versus about 20 bidders previously
(refer Appendix 1). Some of the recent projects have in fact had only a single bid. Even some
reasonable projects such Rohtak-Jind (5 bidders), Vijaywada-Machlipatnam (3 bidders)
attracted fewer bids than what may have been expected.
But competition may not ease as several new names enter the bidding pool
We believe that while there is some evidence of lowered number of bidders per project in
the recent past the competitive intensity in the industry may not ease as (1) several of the
projects which witnessed lower interest were in relatively unattractive geographies (Orissa,
Bihar, Uttar Pradesh), (2) several relatively new names have entered into the bidding pool
such as Atlanta-Essar, Abhijit, Essel, Tata Realty-Autostrade etc. and (3) capital requirements
for project may be lower than what it appears as construction returns help generate a part
of the equity requirement for the project.
NHAI seems geared up for award of at least 6,000 km of projects this year
IRB management seems satisfied with pace of NHAI award activity and believes that this year
the awarding activity may certainly cross 6,000 Km and may actually touch about 7,000 Kms
i.e. NHAI target. IRB itself has one bid (Hospet-Chitradurga adjacent to existing portfolio
project i.e. Tumkur Chitradurga) which has been submitted and is awaiting opening of that.
NHAI plans to commission projects to the tune of about 7,300 km in FY2012
Right of substitution of concessionaire protects lenders
Lenders have a right to substitute the concessionaire in case of financial default. Financial
default (along with other operational default conditions) is one of the events listed under
concessionaire default conditions and lenders can trigger the right to substitute the
concessionaire in this case. By this stick of lender enforced substitution, equity of the
concessionaire can be wiped out and a more effective concessionaire can be brought in.
NHAI guarantees 90% of the dent of the project but only in case of force majeure events.
GMR, GVK’s bids in recent project wins were way above L&T/IRB bids (large gap
with L2 as well)
GVK has quoted a premium of Rs1.81 bn in the Shivpuri-Dewas (Rs28 bn project cost) road
project versus L2 bid of Rs1.1 bn. L&T and IRB had both almost nil premium in that project
with IRB’s bid being marginally higher than L&T’s.
Similarly, GMR has bid Rs6.36 bn of premium for Kishangarh-Udaipur-Ahmedabad (Rs54 bn)
versus L&T’s bid of Rs3 bn.
IRB’s Surat-Dahisar project facing temporary issue of forced heavy traffic
diversion
IRB management suggested that there is a forced shift of commercial traffic going to
Gujarat to Nashik, Dhule route versus the Surat-Dahisar route due to flyover construction
activity in the Thane-Ghodbunder road which connects these two routes. As this problem
gets addressed over the course of next six months or so, the traffic patterns may revert to
normal. However, the Surat-Dahisar project is a short duration project with only 12 years of
tolling and thus this negative development could potentially affect the return expectations
from this project in a significant manner.
Foreign borrowings to fund projects; borrowed US$175 mn to reduce interest
cost in under construction projects
IRB is evaluating the option of blending foreign loans with domestic borrowing to reduce
the overall interest cost. IRB has already borrowed about US$175 mn from ICICI Bank in
three road projects (Jaipur-Deoli, Amritsar Pathankot and Tumkur-Chitradurg) towards this
objective. IRB has replaced about 25% of the total debt of these projects and may evaluate
a similar mix in other projects as well. Borrowing cost is about 475 bps, to this, we add the
hedging cost (both coupon as well as principal hedging) of about 350-400 bps, leading to
an overall cost of about 8-9% p.a. versus 11-12% or so that may be available from the
domestic market.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
IRB Infrastructure (IRB)
Infrastructure
Sector remains hyperactive, IRB seems well positioned. The road sector bustles with
activity (over 3,330 km awarded in FY2012 so far, potential sell downs of earlier
projects by developers, PE investors). Recent bidding reflects some reduction in the
number of bidders, competition is unlikely to ease as new bidders are entering the pool.
We upgrade IRB to BUY (TP: Rs200 from Rs185 earlier)) on (1) about 20% upside to TP,
(2) strong balance sheet and execution, (3) reassuring data from Tumkur project and
(4) higher inflation and blending overseas borrowings aiding value.
Sector in the throes of activity with increased awards, sell downs, private equity transactions
We note the continued flurry of activities in the road sector such as (1) strong pick up in award
activity by NHAI; has already awarded over 3,300 km of road projects in FY2012 so far (targets to
award 7,300 km in FY2012), (2) several projects have not yet started construction despite being
awarded more than a year ago (Reliance Infra, Transtroy, KMC and HCC), (3) potential sell down
of several projects (may come in at reasonable valuations for acquirers) and (4) private equity
money still pouring in (Soma, Isolux, HCC, Sadbhav); may be an impediment to reducing
competition.
Recent projects had slightly fewer bidders but we do not expect overall competition to ease up
There have fewer bidders per project in the recent past (8-10 bidders per project versus over 20
previously), however, the competitive intensity may not have eased as (1) several projects which
witnessed lower interest were in relatively unattractive geographies (Orissa, Bihar, UP), (2) entry of
several new names into the bidding pool (Atlanta-Essar, Abhijit, Essel etc.) and (3) equity
requirements is lower than what it appears as construction helps generate part of the equity.
IRB seems well positioned with a strong project portfolio, balance sheet; upgrade to BUY
Upgrade to BUY (from ADD) based on (1) 18-19% upside to TP (substantial correction post
Ahmedabad-Vadodara win), (2) positive data from Tumkur-Chitradurg project reassuring us on
projected toll collections on under construction projects, (3) higher inflation aiding toll revenues,
(4) strong balance sheet and execution capability and (4) potential for lower interest cost with
likely increase in foreign borrowing being used to fund projects. TP implies 1.8X P/B (18-20%
equity IRR including construction) + value for Mumbai Pune (excess returns separately added).
Key risk is of incremental project wins at relatively lower returns. Concerns seem to be in the price
as we (1) do not ascribe any value to incremental wins, (2) construction business is valued only for
NPV of cash flows over the next four years and (3) of the seven projects which at present do not
have established cash flows, four were won in a relatively low competitive environment and
Tumkur-Chitradurg has demonstrated stronger-than-expected toll collections in 1QFY12
Upgrade to BUY with a revised target price of Rs200/share
We revise our SOTP-based target price to Rs200/share (from Rs185/share earlier). Key
changes include (1) shift of valuation to Dec-12E based (from Sept-12E earlier - 12 month
forward FCFE valuation), (2) increased value for Tumkur-Chitradurg project based on toll
collections (as seen in 1QFY12), (3) increased value for several BOT assets on higher inflation
levels in FY2010-12E and (4) inclusion of value from Ahmedabad-Vadodara project.
Our SOTP-based target price of Rs200/share is comprised of (1) Sept-12 based FCFE of
projects – Rs148/share, (2) construction value – Rs48/share based on NPV of cash flows till
FY2015E, and (3) Rs5 from real estate and net cash on standalone balance sheet (at end-
FY2011).
We believe our SOTP-based valuation is reasonable as (1) we do not ascribe any value to
incremental project wins for IRB, (2) construction business is valued only for NPV of potential
cash flows over the next five years and not as an ongoing business, and (3) of the seven
projects which at present do not have established cash flows (under construction), four were
won in relatively low competitive environment and Tumkur-Chitradurg demonstrated
stronger-than-expected toll collections in 1QFY12.
Key assumptions in our FCFE valuation are (1) 6% growth in traffic throughout the life of
the project and (2) discount rate of 13.5%.
We upgrade our rating on the company to BUY (from ADD earlier) based on (1) current
market price, which provides about 18-19% upside to our target price, (2) potential for
lower interest cost with likely increase in foreign borrowing being used to fund projects
under construction, (3) higher inflation rates aiding toll revenues across several projects, (4)
positive early data points from Tumkur-Chitradurg project (average daily collection of Rs4.4
mn/day implying full-year collections of about Rs1.6-1.7 bn), (4) strong balance sheet and
execution capability.
Key business risks include (1) competition affords low returns in incremental project wins
and (2) lower-than-expected traffic growth and base-year traffic levels.
Likely to generate average annual cash surplus of Rs5 bn+ over the next 9 years
IRB now has 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
Rs22 bn over FY2012-20E. We believe this would be more than met by the cash flows from
the operational projects (FY2012-20E cumulative FCFE of Rs50 bn) and the construction arm
(FY2012-15E cumulative FCFE of Rs17.7 bn) of the company.
Even including cash flows into the Ahmedabad-Vadodara project, we believe the company
could potentially generate a net cash surplus of about Rs5.1 bn every year (average) over the
next 9-10 years.
Sector remains in throes of activity with awards, sell downs, PE transactions
We note a strong pick up in award activity by NHAI in the past few months. NHAI has
already awarded projects to the tune of about 3,370 km with a total project cost of close to
Rs300 bn in FY2012 so far (NHAI targets to award 7,300 km of projects in FY2012).
Some projects not started despite being awarded more than a year ago
Based on NHAI data, we have attempted to track projects which have not started execution.
We note that several projects that were awarded over a year ago have still not yet started
construction. For instance, projects of Reliance Infrastructure (Pune-Satara, Delhi Agra and
Kandla Mundra), HCC (Three west Bengal projects), Transtroy (Trichy Bypass, Tirupathi-
Tiruthani, Kerala border-Kannur) and KMC Constructions (Kannur Vengalem two packages
and Cuddapah Kurnool) have not started as per NHAI data, despite these projects having
been awarded more than a year ago. Similarly a couple of one-off projects of IRB (Panji-
Goa/Karnatka Border) and ITNL (Muradabad-Bareilly and Pune-Solapur) do not seem to have
started
Note that this comment is based purely on NHAI data and we have no direct knowledge of
specific underlying causes, direct physical observation etc.
Several projects up for sale; IRB would evaluate when expectations are reasonable
(equity wiped out)
IRB management suggests that there may be 100 projects that are available for sale as the
developers want to sell them. However, valuation expectations are still unreasonable and IRB
would wish to evaluate these projects at much lower valuations (i.e. probably when invested
equity value is wiped out). We have received a similar feedback from several other
developers as well.
PE money still pouring in (Soma, Isolux, HCC, Sadbhav); may be an impediment
to reducing competition
We have seen several private equity transactions in the roads space with JP Morgan investing
in Soma Highways about US$100 mn recently. Interestingly, Isolux Corsan of Spain and
Morgan Stanley Infrastructure Partners (Global fund with US$4 bn corpus) invested US$200
mn each in Isolux Indian subsidiary to finance equity for under construction as well as new
projects in India. Recently, HCC and Sadbhav also announced private equity transactions.
These transactions are still extremely selective, but they do have the potential to postpone
the consolidation (competition comes down in terms of number of bidders and some
projects are sold off to stronger players) process in the roads space.
Recent projects had slightly fewer bidders but do not expect overall competition
to ease
Based on recent project awards, it appears that the number of bidders per project has
started to come down, to about 8-10 bidders per project versus about 20 bidders previously
(refer Appendix 1). Some of the recent projects have in fact had only a single bid. Even some
reasonable projects such Rohtak-Jind (5 bidders), Vijaywada-Machlipatnam (3 bidders)
attracted fewer bids than what may have been expected.
But competition may not ease as several new names enter the bidding pool
We believe that while there is some evidence of lowered number of bidders per project in
the recent past the competitive intensity in the industry may not ease as (1) several of the
projects which witnessed lower interest were in relatively unattractive geographies (Orissa,
Bihar, Uttar Pradesh), (2) several relatively new names have entered into the bidding pool
such as Atlanta-Essar, Abhijit, Essel, Tata Realty-Autostrade etc. and (3) capital requirements
for project may be lower than what it appears as construction returns help generate a part
of the equity requirement for the project.
NHAI seems geared up for award of at least 6,000 km of projects this year
IRB management seems satisfied with pace of NHAI award activity and believes that this year
the awarding activity may certainly cross 6,000 Km and may actually touch about 7,000 Kms
i.e. NHAI target. IRB itself has one bid (Hospet-Chitradurga adjacent to existing portfolio
project i.e. Tumkur Chitradurga) which has been submitted and is awaiting opening of that.
NHAI plans to commission projects to the tune of about 7,300 km in FY2012
Right of substitution of concessionaire protects lenders
Lenders have a right to substitute the concessionaire in case of financial default. Financial
default (along with other operational default conditions) is one of the events listed under
concessionaire default conditions and lenders can trigger the right to substitute the
concessionaire in this case. By this stick of lender enforced substitution, equity of the
concessionaire can be wiped out and a more effective concessionaire can be brought in.
NHAI guarantees 90% of the dent of the project but only in case of force majeure events.
GMR, GVK’s bids in recent project wins were way above L&T/IRB bids (large gap
with L2 as well)
GVK has quoted a premium of Rs1.81 bn in the Shivpuri-Dewas (Rs28 bn project cost) road
project versus L2 bid of Rs1.1 bn. L&T and IRB had both almost nil premium in that project
with IRB’s bid being marginally higher than L&T’s.
Similarly, GMR has bid Rs6.36 bn of premium for Kishangarh-Udaipur-Ahmedabad (Rs54 bn)
versus L&T’s bid of Rs3 bn.
IRB’s Surat-Dahisar project facing temporary issue of forced heavy traffic
diversion
IRB management suggested that there is a forced shift of commercial traffic going to
Gujarat to Nashik, Dhule route versus the Surat-Dahisar route due to flyover construction
activity in the Thane-Ghodbunder road which connects these two routes. As this problem
gets addressed over the course of next six months or so, the traffic patterns may revert to
normal. However, the Surat-Dahisar project is a short duration project with only 12 years of
tolling and thus this negative development could potentially affect the return expectations
from this project in a significant manner.
Foreign borrowings to fund projects; borrowed US$175 mn to reduce interest
cost in under construction projects
IRB is evaluating the option of blending foreign loans with domestic borrowing to reduce
the overall interest cost. IRB has already borrowed about US$175 mn from ICICI Bank in
three road projects (Jaipur-Deoli, Amritsar Pathankot and Tumkur-Chitradurg) towards this
objective. IRB has replaced about 25% of the total debt of these projects and may evaluate
a similar mix in other projects as well. Borrowing cost is about 475 bps, to this, we add the
hedging cost (both coupon as well as principal hedging) of about 350-400 bps, leading to
an overall cost of about 8-9% p.a. versus 11-12% or so that may be available from the
domestic market.
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