IL&FS Transportation Networks – 2QFY2011 Result Update- Angel Broking

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   IL&FS Transportation Networks – 2QFY2011 Result Update

Angel Broking maintains an Accumulate on IL&FS Transportation Networkswith a Target Price of Rs358.

For 2QFY2011, IL&FS Transportation Networks (ITNL) posted mixed numbers on a
qoq basis, with moderate top-line growth; normalised EBITDA margins, as
expected; and flat earnings. Outstanding order book for the company currently
stands at `11,960cr (6.6x FY2011E revenue), which lends decent revenue visibility.
Owing to the robust order book, diversified portfolio and favourable industry
dynamics, we believe ITNL is well placed to leverage on the upcoming
opportunities in the road sector. Hence, we maintain Accumulate on the stock with
a Target Price of `358.


Mixed set of numbers: ITNL reported decent top-line growth of 13.8% qoq to
`883.3cr (`776.1cr). Operating margins stood, as expected, at 29.6% v/s 33.7%
in 1QFY2011, given the increasing share of the low-margin C&EPC segment in the
company’s consolidated top line. On the earnings front, net profit increased
marginally on a qoq basis to `107.5cr (`104.6cr) due to lower EBITDA margins
despite decent top-line growth.

Outlook and valuation: There has been a strong focus on re-vitalising the road
sector, particularly since the re-election of the UPA government in May 2009.
Further, improvement in liquidity scenario and the emergence of a more realistic
risk-sharing system have positively contributed to the sector. Hence, we are
optimistic on the road segment, despite a lull in awarding activity in the recent
months. We have valued ITNL on an SOTP basis – by assigning 7.5x EV/EBITDA to
its standalone business and have valued its investments on DCF/Mcap/BV basis –
and have arrived at a target price of `358, which implies an upside of 13.9% from
current levels. Hence, we maintain Accumulate on the stock.


Outlook and valuation
There has been a strong focus on re-vitalising the road sector, particularly since
the re-election of the UPA government in May 2009. The MORTH has set itself the
target of constructing 20km/day and has introduced policy reforms to encourage
more private participation in the sector. Further, improvement in liquidity scenario
and the emergence of a more realistic risk-sharing system have positively
contributed to the sector. Also, states have been tracking the centre’s initiatives of
lending a boost to the sector. Consequently, there has been a spate of awards,
and projects have shown visible movement at the ground level.

We believe all such positive developments have encouraged more participation
from the private sector, which was visible in the last few months. Such enthusiasm
has been witnessed both at the developers’ and lenders’ end alike, thus resulting
in an improvement in overall lending in the infrastructure sector. Clearly, we
believe private participation and the public private partnership (PPP) model is the
way forward.

We have valued ITNL on an SOTP basis – by assigning 7.5x EV/EBITDA to its
standalone business and have valued its investments on DCF/Mcap/BV basis –
and have arrived at a target price of `358, which implies an upside of 13.7% from
current levels. Hence, we maintain an Accumulate rating on the stock.