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IRB INFRASTRUCTURE DEVELOPERS LTD
PRICE: RS.224
RECOMMENDATION: BUY
TARGET PRICE: RS.304
CONS. FY12E P/E: 14.3X
IRB Infrastructures is a leading player in the transportation segment with
expertise in constructing and operating large BOT projects. Company
complements its BOT vertical by executing EPC and O&M (operation and
maintenance) portion of its BOT projects. IRB has second largest BOT
portfolio in the country with a total length of around 1250km as BOT
operator. With its dominant position in the road BOT projects, company is
well equipped to benefit from upcoming order inflows in the road segment
from NHAI. Along with maintaining and operating road assets, going
forward company would also be developing and operating a Greenfield
airport and will also diversify into real estate development.
We expect company to benefit from strong order book of Rs 95.1 bn and
expected increase in traffic flow as well as toll rate across its existing
projects. This is likely to drive revenue growth on a consolidated basis at a
CAGR of 51% between FY10-FY12. Operating margins of the company are
also much ahead of industry peers due to larger share of BOT projects.
Strong revenue growth and excellent margins are likely to drive growth in
net profits at a CAGR of 16% between FY10-FY12.
At current price of Rs.224 stock is trading at 16.4x and 14.3x P/E and 9.5x and
8.3x EV/EBITDA on FY11 and FY12 estimates. We value the company on sumof-the-parts valuation methodology and arrive at a target price of Rs.304 on
FY12 estimates. We remain positive on the company due to its robust
business model, excellent operating cash flows and expertise to capitalize
on the upcoming opportunities in the road BOT segment. We thus
recommend BUY on the stock
Key investment positives
q Experienced player in road BOT segment. IRB has been the early entrant in
road BOT segment and has an experience of constructing, operating and maintaining around 1250 kms of road projects. Company currently has 16 BOT
projects in its portfolio and has successfully completed various challenging
projects such as four laning of NH-4, construction of 890 metre tunnel on the
Khambatki Ghat, construction of bridges and flyovers etc. We expect company
to leverage this experience to capitalize on the upcoming opportunities in the
road BOT segment.
q Strong order book to drive growth in revenues going forward. Order
book of IRB stands at Rs.95.1 bn and is comprised of Rs.71.6 bn of EPC projects,
Rs 23.1 bn of O&M related projects and Rs.0.3 bn from funded projects. This
provides a revenue visibility for next 2.5 years. Going forward, revenue growth is
primarily going to be led by construction of Surat-Dahisar, Kolhapur IRDP,
Talegaon-Amravati, Jaipur-Deoli, Amritsar-Pathankot, Goa-Karnatka and
Tumkur Chitradurg project and increase in toll collection revenues from
Bharuch-Surat and Surat-Dahisar projects. Commissioning of Kolhapur project by
Jan, 2011 is likely to increase BOT revenues going forward. With a strong order
book, we expect company revenues on a consolidated basis to grow at a CAGR
of 51% between FY10-FY12.
q Strong operating margins. Operating margins of company on a consolidated
basis stood at 48.3% for FY10 led by 88.7% operating margins in BOT projects
and 19.6% in the EPC division. Company has been able to maintain very high
margins in the EPC division due to large fleet of owned equipment as well as inhouse construction. We thus expect margins in the EPC division to remain
around 25% for FY11 and 22% for FY12 going forward. Due to higher proportion of revenues from EPC segment going forward, margins on a consolidated
basis are likely to come down from FY10 levels. We expect operating margins
for the company on a consolidated basis to be 45.6% and 38.8% for FY11 and
FY12 respectively.
q BOT project portfolio contain high traffic density projects yielding
strong operating cash flows. IRB’s portfolio contains very high density
projects where company gets a significant amount of toll collection revenues. In
case of Mumbai-Pune project, daily toll collection is in the range of Rs 85-90
lakh while in case of Bharuch-Surat project, toll collection ranges from Rs 35-40
lakh per day. Company expects average toll per day to rise to Rs 10 million for
Surat Dahisar project by end of FY11. Along with excellent traffic growth and
strong operating margins, company has also repaid debt in most of its projects.
Thus we expect that strong operating cash flows from the BOT projects can be
utilized for under-construction as well as upcoming projects.
q Growth in traffic flow coupled with increase in toll rates to lead to improvement in revenues from toll collection. We believe that projects located on key highways such as Mumbai-Pune, Surat-Dahisar, Bharuch-Surat,
Pune-Nasik and Pune-Sholapur are likely to witness increased economic activity,
thereby maintaining a healthy traffic growth rate. Along with the traffic growth
rates, toll rates are likely to increase inline with WPI for most of the projects
which will lead to improvement in toll collection revenues. We expect traffic to
grow by 6-7% every year and expect toll rates to move in line with WPI except
for Mumbai-Pune expressway where tolls increase by 18% every 3 years. We
thus expect BOT toll revenues to grow at a CAGR of 22% between FY10-FY12.
q Sufficient funds for ongoing projects while fund raising approvals in
place for upcoming projects. Company has achieved financial closure for four
projects awarded to it during FY10. Existing cash flows of IRB are sufficient to
meet equity funding requirements of its projects while for new projects, we expect company to raise funds going forward.
q Diversification in airport and real estate segment. IRB has also diversified
into real estate segment. Company has bought land to build a mega township
along Mumbai-Pune expressway. Company has till now bought 1250 acres of
land and balance acquisition is under progress. Along with this, it would also be
developing a Greenfield Airport in Sindhudurg district of Maharashtra on Design,
Built, Finance and Operate (DBFO) basis.
q Excellent earnings growth going forward. We expect revenues of the company to grow at a CAGR of 51% between FY10-FY12. Net profit is expected to
grow at a CAGR of 16% between FY10-12 led by strong growth in revenues
and excellent margins. However, net profit growth is likely to be impacted by
higher depreciation and interest charges on commissioning of projects.
Valuation and recommendation
At current price of Rs.224, stock is trading at 16.4x and 14.3x P/E and 9.5x and 8.3x
EV/EBITDA on FY11 and FY12 estimates. We value the company on sum-of-the-parts
valuation methodology and arrive at a target price of Rs.304. Construction business
of the company is valued at 6x EV/EBITDA inline with other construction peers due
to its high margins, robust order book as well as excellent RoE and translates into
value of Rs.115 per share. We value BOT projects by using FCFE approach using cost
of equity of 12-12.3% and arrive at a value of Rs.163 per share for all the existing
projects. We value the upcoming order inflow opportunities for the company at
Rs.21 per share taking into account NHAI project award of 7200 km going forward
and correspondingly taking IRB’s share in the market opportunity. We assume
debt:equity to be around 75:25 and expected equity IRR of nearly 13-14%. Investment in real estate and airport business are valued at current market value and
book value respectively. We thus recommend BUY on the stock.
Key risks and concerns
q Slowdown in traffic growth may impact BOT toll revenues adversely
q Increase in interest rates can reduce overall equity IRR from these projects.
q Geographical concentration can impact the revenue growth or future order
inflows in case of slowdown in particular state.
q Increase in commodity prices may impact operating margins negatively
q Delay in award of new projects from NHAI can impact revenue growth
negatively
q Aggressive bidding by the company can impact overall returns from a project
q Parallel road network can divert the traffic flow from the tolled road and can
impact toll collection from the project.
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