IRB Infrastructure Is The Story Over ? :: Philip Capital

IRB Infrastructure reported +14% YoY growth in topline (Rs8.45bn) and +18%
YoY growth in Operating Profit (Rs3.8bn), in‐line with our and consensus
estimates. The numbers however, were better than our and street expectation at
the PAT level (Rs1.21bn, +10% YoY), mainly due to lower than expected interest
expense (FX losses being capitalized and refinancing of debt for Bharuch‐Surat
project). While the EPC division reported robust execution (+18% YoY), traffic
growth at all major projects remained muted. Overall, there were no major
surprises, and the results were along expected lines.

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IRB Infrastructure’s stock has fallen ~20% in the last one week, on the back of
allegations of its subsidiaries investing monies into a private firm, Purti Power
and Sugar Ltd, promoted by Mr. Nitin Gadkari, member of the main opposition
party at the center (BJP). IRB’s management has clarified that the money
invested in Purti Power, was invested by Mr. Dattatray Mhaiskar, member of the
promoter group, in his personal capacity. The company has also denied
allegations of being granted any undue favors, and that all the projects it won,
were awarded through transparent bidding process. The Ministry of Corporate
Affairs (MCA) and IT department have initiated an investigation into this matter.
While it is extremely difficult to deduce what the results of the investigation will
be, we note that this is not the first time that the company has come into news
for a non‐business reason. An analysis of its stock price reveals, that over the
last two years, the stock has witnessed a sharp fall seven times – with just one
of those falls being for “pure business reason” (for details, see inside).
With the results of the polygraph test conducted on the MD in May‐2012, still
awaited, this revelation comes as a major blow to the company. We believe that
in the current situation, the risk‐reward profile for the stock looks extremely
unfavorable. While there are very few positive triggers that can boost the stock
price over the next six months, the negative events, and the probability of their
occurrence is much higher. We see a maximum +20% upside from current levels
with a low probability of occurrence and a potential ‐40% downside, with a
relatively high probability of occurrence (details inside).
In wake of the unfavorable risk‐reward profile, and the recent non‐business
developments, we believe the company can no longer be valued, just by
aggregating the DCF value of its projects. A discount needs to be applied to the
fundamental value, to reflect the concerns and overhang of the non‐business
developments, and their potential impact on the stock price.
We apply a 50% discount to the fair value of the stock (arrived at valuing
individual projects using DCF and EPC division at 3.5x FY14E EV/EBITDA), to arrive
at a price target of Rs109, representing 10% downside from current levels. We
recommend investors to cut their losses at current levels, in view of the potential
downside, if the recent developments take a negative turn for the company. We
recommend NEUTRAL.