IRB Infra: Need to cut more debt ::Business Line

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At Rs 119, the stock of IRB Infrastructure Developers, which builds and maintains toll roads, trades at a low of seven times the estimated earnings for FY-14.

IRB owns a portfolio of 12 road projects on which it is collecting toll, with three more set to turn operational soon. Four more are under construction. Lower debt compared to peers, prompt tying up of funds, strong margins and steady pace of execution add to the appeal.

IRB’s order book at Rs 9,115 crore is sizeable and covers its annual revenues by 2.6 times. With an execution time-frame of two-three years, it offers good medium-term revenue visibility. IRB executes higher value projects of over Rs 1,000 crore where competition has dried up with smaller players facing funding and execution issues. Further, the company’s refusal to compromise on project returns below 18-20 per cent prevented it from snapping up unviable projects.

Order inflow may also get a leg-up from road maintenance contracts, a lucrative segment with many road stretches coming up for such contracts soon. Positive action on the regulatory and approval front is another positive which may quicken project awarding and execution.

Strong construction revenue growth of 38 per cent for the nine months to December 2012 suggests that IRB has not faced the execution hiccups affecting some peers. While IRB’s projects are on toll basis, toll collections rose 11 per cent for the nine-month period ending December last year. Slower traffic in some stretches such as Tumkur-Chitradurga and Surat-Dahisar were compensated by hike in toll charges.

But traffic has been picking up in key stretches, and three more roads will move into the operational portfolio shortly, propping up the toll revenues. IRB’s acquisition of a company owing and operating a toll road in Tamil Nadu has also begun revenue contribution.

Consolidated revenues for the nine months ending December 2012 grew 20 per cent over the same period last year. Operating margins are strong at 46 per cent, owing to construction cost controls. The construction segment’s margins improved to 30 per cent in the April-December 2012 period, compared to the 27 per cent in the year-ago period.

Depreciation and interest outgo weighed, with net profits expanded 10 per cent in the nine-month period to December 2012. Net profit margins stood at 15 per cent, down from the 17 per cent in the year-ago period.

Still, IRB has a debt-equity ratio of 2.1 times, low for a player its size as well as compared to peers. The company has reduced debt through takeout financing in projects such as the Mumbai-Pune and Bharuch-Surat, bringing down its interest burden. More debt reduction could be brought about this way and an interest rate cycle turning down could also aid interest savings. Interest cover is reasonable at 2.9 times.