IRB Infrastructure-Reinitiate coverage with BUY :: Kotak Sec

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IRB Infrastructure (IRB)
Infrastructure
Reinitiate coverage with BUY as correction provides opportunity. We reinitiate
coverage on IRB Infrastructure with a BUY rating (TP: Rs270) based on (1) strong
operational and development project pipeline, (2) ability to win incremental projects,
(3) likely strong near-term growth and (4) recent underperformance, which provides
26% upside to our target price. Lower-than-expected traffic growth and base-year
traffic assumptions remain the key risks to our valuation. Rs1 tn opportunity likely to
unfold, however, traffic disappointments, competition and delays can play spoilsport.




Recent correction provides opportunity as the sector holds potential
We reinitiate coverage on IRB Infrastructure Developers with a BUY rating and an SOTP-based
target price of Rs270/share. IRB’s market price has corrected steeply by 18.8% (under performing
by 14.5%) over the past month. IRB has underperformed by about 31% over the last three and
six-month periods. The recent correction provides a 26% upside to our target price. We believe
this provides opportunity as the sector still holds immense potential (10,000 km of projects remain
to be awarded from phases III and V of the NHDP, an opportunity of about Rs1 tn. However,
strong competition, traffic disappointments and project delay risks could limit potential returns.

Lower-than-expected traffic growth & base traffic is key risk; L&T’s Bharuch project doing better
Lower-than-expected traffic growth and base-year traffic assumption remains the key risk. A 1%
lower traffic growth for the full concession period results in 27% lower value for current portfolio
and a 15% impact on our target price. IRB reported disappointing toll revenues of Rs2.03 bn in
2QFY11 (versus Rs1.6 bn in 2QFY10), up about 5.4% yoy on projects held consistently over the
period (such as Surat-Dahisar and Mumbai-Pune). Note that revenue per Rupee of capital
employed is much better for L&T’s Vadodara-Bharuch (Rs4.5 mn/day - 80 Km) versus IRB’s
Bharuch-Surat (Rs3.5-3.8 mn/day - 65 Km) for similar capital employed of Rs14.5 bn.

Reinitiate with BUY and TP of Rs270; does not net off construction earnings from SPVs in consol
Our SOTP-based (March-12 FCFE) target price of Rs270 is based on of projects with (1) 6% traffic
growth across projects and (2) 12.5% cost of equity. We attribute Rs20/share to incremental
projects based on 0.5X incremental P/B on projects of 400 km. Our BUY rating is based on (1)
strong operational and development pipeline, (2) ability to win incremental projects with a strong
balance sheet, (3) likely strong near-term revenue growth led by construction and (4) recent
underperformance. We highlight that IRB does not net off construction earnings from SPVs with
its auditor SR Batliboi arguing that IRB does not own the road but only toll collection rights.
Construction cost is considered as exchanged against toll collection rights and profit thereon is
consolidated as realized.