IL&FS Transportation (ILFT IN, INR 175, Buy)
Our meeting with the senior management of IL&FS Transportation (ITNL) reinforces our bullish view on the company. While the award target of 9,500 km in FY13 is good news for the sector, the company sounded a note of caution regarding availability of DPRs for the same. It expects competitive intensity to moderate driven by difficulties in achieving financial closures. ITNL expects the use of innovative financial structures to enhance returns on projects to pick up in future. It believes project buyouts will be driven by lenders’ pressure since high valuation expectation of existing promoters is still a stumbling block. Maintain ‘BUY’.
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Road project award in FY13 contingent on DPR availability
The government has set a target of 9,500 km of road project award in FY13. ITNL expressed concern regarding availability of Detailed Project Report (DPRs) for such a large shelf of projects. Preparation of DPRs for all these projects in time will be a challenging task taking into account availability of consultants to prepare the same.
Competitive intensity to moderate
In light of difficulties faced by some players in financial closures and project cancellation by NHAI due to the same, ITNL expects some moderation in competition going ahead. However, it believes that some amount of aggression will still remain in the space. At the most, smaller players who had won BOT projects through aggressive bidding over the last year and are now facing financial difficulties may go back to cash contracts in the short term.
Outlook and valuations: Bullish; maintain ‘BUY’
We expect momentum in road project award to continue, given the ambitious target set by the government; ITNL will be a key beneficiary of this. Ability to build portfolio without dilution, healthy return ratios (ROE>20%) and attractive valuations (FY13E P/BV of 1x) underpin our bullish stance on ITNL. Our SOTP‐based target price stands at INR287/share, valuing BOT projects on DCF and EPC on P/E. A 100bps decline in interest rates increases our SOTP 12%. We maintain ‘BUY’ recommendation.< /P>
Regards,
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