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IRB Infrastructure Dev.
Reuters: IRBI.BO Bloomberg: IRB IN Exchange: BSE Ticker: IRBI
Is the long wait finally over?
Another fallout of pushback in capex cycle; cutting TP to INR 185 (INR 250)
IRB Infrastructure’s view of overall capex slowdown seems to replicate that of
industry leader Larsen. The only difference was IRB’s expectation of benign
competition, as credit is tight, and its continued hope for revival in order inflow
sooner rather than later. However, given the pushback on new order wins coupled
with delays in execution at existing sites, we have cut our estimates especially on
the E&C leg, resulting in a 9% fall in EPS in FY11E and 18% in FY12E. At our
revised target price at INR 185/sh, we reiterate Hold.
NHAI to finally start ordering new projects in the near future?
Management seems positively inclined, but so far the YTD order inflows for IRB
are down c80% yoy. For Q3FY11, IRB’s net sales at INR 6.8bn drove a PAT of INR
1.33bn. Within the two important segments, the EPC division reported topline of
INR 4.7bn (+98% yoy) driving an EBITDA of INR 1.16bn (+130% yoy). The total toll
revenues at INR 2.14bn (+4% yoy) were primarily driven by tolls from the three big
projects Mumbai-Pune, Surat-Bharuch and Surat-Dahisar.
We await greater clarity on new awards and competitive intensity
Our assessment after seeing the corporate results, suggests that EPC players are
struggling in their assessment on whether they would like to focus on volumes or
margins. While the jury on sector trends is still out, we have cut our estimates for
IRB to factor in the slowdown in road sector awards so far. Our revised EPS is
below consensus by 4% and 22% for FY12E and FY13E, respectively.
At our revised target price of INR 185/sh, we reiterate our Hold rating; risks
Our revised 12-month target price assumes a target EV/EBITDA at 6x (in line with
EPC division for peers Lanco and JPA) for EPC business, the toll road operations
valued as per the NPV value (CoE at 12.5%). Key upside risks: a) strong pick-up of
new order inflows which also reduces competitive intensity, and b) continued WPI
inflation over and above our estimates as they have an impact on higher toll rates.
Important downside risks are continued slowdown in road project awards and
further push back in implementation over and above our estimates.
Investment thesis
Outlook
Our Hold on IRB is premised on the following: (1) On the positive side, IRB enjoys a better
competitive landscape than its peers as IRB has tolling operations in the busiest corridors in
India (Delhi-Mumbai-40% of India's CV traffic) and this corridor sees a lot of seasonal uptick
in the second half of the fiscal year. Also in the medium term, with most of the new ports
coming on the western corridors, we think that the probability of the company meeting our
volume growth estimates of 4-6%, in line with historical estimates, looks achievable. (2)
Pickup in execution with most projects achieving financial closure and IRB following the PMC
model for monitoring, which provides improved scalability in execution capabilities, and (3)
revision in tariffs for projects for key projects during Q2FY11 and early FY12E, with full
benefits showing in FY12E. However, what seems to be a drag is that new road awards have
so far seen a lull in FY11 and the government announcement suggests that there could be
big pickup in the awards for new road projects especially from Q4FY11E onwards. IRB is one
of the largest toll road developers, and it is likely to benefit from this pick-up (if it materializes)
as they have the balance sheet to take in new orders. IRB needs ~INR 40bn of road projects
to sustain the construction business growth guidance.
Valuation
We use SOTP to value the three segments of the company-BOT, EPC, and Real Estate. For
the toll road division, we have discounted the cash flows from the toll operations of various
road stretches that are currently under operation as well as under construction. Our model
uses a cost of equity of 12.5% (same as earlier).
For the EPC division, we have used an exit multiple of 6x 1-year forward EV/EBITDA (residual
net value of developers business. Lowered from 8x, in line with other peers like Jaiprakash
Associates). This multiple is justified, in our view, by IRB's competitive position as well as
improved visibility on the earnings of the EPC division due to pick up in execution of road
projects. For the real estate business, we have valued it at the cost of investments.
This methodology gives a consolidated value of INR 185 per share (rounded off). Our target
price would imply an exit P/E multiple of 11.6x FY12E earnings.
Risks
Company-specific downside risks are: 1) the timely execution of projects, 2) the ability to
raise a large amount of long-term debt on a non-recourse basis, and 3) the failure to expand
beyond the Western region. A 1ppt rise in traffic growth can affect our valuation by +5% and
vice versa. A 1ppt lower-than-expected margin in the construction business could affect
FY12E earnings by 3.5%. Additional risk in the stock valuations could be if management
decides to use the cash in the books for any acquisition that is not earnings-accretive. On the
positive side, significant wins by the company versus our estimates as a result of a buoyant
demand environment for road projects is a potential upside risk.
Q3FY11–EPC margins surprise
Results above both Street and Deutsche Bank estimates
IRB Q3FY11 results were above both the Street and our estimates, largely on the back of the
c25% EBITDA margin (vs. our estimate of 19%) seen in the EPC business. Net revenues at
INR 6.69bn drove an EBITDA of INR 2.94bn and a net income of INR 1.33bn. BOT revenues
at INR 2.1bn and EBITDA of INR 1.9bn were largely inline with expectations
Revenues below expectations
While revenues from BOT projects saw a marginal 4% YoY growth to INR 2.14bn, on the
back of a tariff increase in Surat Dahisar and Surat Bharuch projects, the revenue pickup from
the new projects bagged in FY10 (Talegaon-Amravati, Panaji-Goa and Tumkur-Chitradurga)
failed to see much traction. Surat-Dahisar continued to form a bulk of the overall construction
revenues at nearly INR 3bn for the quarter while Kolhapur project contributed to cINR 300m.
Amritsar-Pathankot and Jaipur-Deoli, the two new projects for which construction started in
FY11E saw INR c850m of revenues being booked during the quarter.
But EPC margins continued to surprise for the third quarter in a row
Construction segment margins at 24.9% remained above the 24% levels for the third quarter
in a row. Management acknowledged that these margins came largely on the back of the
company tying up raw materials at lower costs but they are unlikely to be sustained in the
longer term. Management expects margins to settle around the FY10 levels of 19-20% in the
longer term.
Management call – Key takeaways
We believe management was more hopeful for a pickup in order inflows especially now that
NHAI has added on its website a set timeline for processing requests for qualification as well
as a bidding date. According to management, this gives some clarity on the pickup of order
inflows that has been plaguing the sector despite so many attempts by the government to
set in motion a process which would allow for transparent and clear bidding practices.
Management was not unduly concerned given that the project slowdown was hurting
revenue pickup as they believe a lot of completion can pick up sooner rather than later as
most of the projects (barring Tumkur Chitradurga) have already achieved financial closure.
The important highlights of the call were:
„ Reiterating their view that orders for the sector should now pick up. There seems to
be clarity regarding approximately 5,000kms of projects that could be awarded over
the next six months.
„ Management expects that competition may not be as aggressive especially as the
cost of finance has gone up significantly and so has the capital cost for building
roads. As far as IRB goes, they are hoping that with their assumptions of not so
aggressive competition they should be able to get orders worth USD 1bn in the road
space. Furthermore these orders would have a targeted equity IRR of 18-20%.
„ According to the project scheduling work being done by IRB, they believe the
revenue booking could see a significant pickup in 1QFY12. Our estimates are 41%
revenue growth in the EPC segment in FY12 as a whole to INR 23bn.
„ Figure 2 gives a snapshot of important milestones/details highlighted by
management for a few of the projects.
Figure 2: Important milestones for select projects
Project Remarks
Thane Bhiwandi 6% tariff hike taken on 1 January 2011
IRDP Kolhapur Expecting completion in FY11E end
Amritsar Pathankot Mobilisation is completed
Tumkur Chitradurga Targeting to start construction on 1 April 2011. Financial closure by February 2011.
Mumbai – Pune 18% tariff hike on 1 April 2011
Goa Panaji Hoping to start construction in 1QFY12
Surat Dahisar Targeting to complete by August 2011
Our new target price of INR 185 (from INR 250) is based on SOTP
We use SOTP as a valuation methodology to value the three segments of the company-BOT,
EPC, and Real Estate. For the toll road division, we have discounted the cash flows from the
toll operations of various road stretches that are currently under operation as well as under
construction. Our model uses a cost of equity of 12.5% (same as earlier).
For the EPC division, we have used an exit multiple of 6x 1-year forward EV/EBITDA (residual
net value of developers’ business. Lowered from 8x, in line with other peers like Jaiprakash
Associates). This multiple is justified, in our view, by IRB's competitive position as well as
improved visibility on the earnings of the EPC division due to pickup in execution of road
projects. For the real estate business, we have valued it at the cost of investments.
This methodology gives a consolidated value of INR 185 per share (rounded off). Our target
price would imply an exit P/E multiple of 11.6x FY12E earnings.
Risks and sensitivity
Company-specific downside risks are: 1) the timely execution of projects, 2) the ability to
raise a large amount of long-term debt on a non-recourse basis, and 3) the failure to expand
beyond the Western region. A 1ppt rise in traffic growth can affect our valuation by +5% and
vice versa. A 1ppt lower-than-expected margin in the construction business could affect
FY12E earnings by 3.5%. Additional risk in the stock valuations could be if management
decides to use the cash in the books for any acquisition that is not earnings-accretive. On the
positive side, significant wins by the company versus our estimates as a result of a buoyant
demand environment for road projects is a potential upside risk.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
IRB Infrastructure Dev.
Reuters: IRBI.BO Bloomberg: IRB IN Exchange: BSE Ticker: IRBI
Is the long wait finally over?
Another fallout of pushback in capex cycle; cutting TP to INR 185 (INR 250)
IRB Infrastructure’s view of overall capex slowdown seems to replicate that of
industry leader Larsen. The only difference was IRB’s expectation of benign
competition, as credit is tight, and its continued hope for revival in order inflow
sooner rather than later. However, given the pushback on new order wins coupled
with delays in execution at existing sites, we have cut our estimates especially on
the E&C leg, resulting in a 9% fall in EPS in FY11E and 18% in FY12E. At our
revised target price at INR 185/sh, we reiterate Hold.
NHAI to finally start ordering new projects in the near future?
Management seems positively inclined, but so far the YTD order inflows for IRB
are down c80% yoy. For Q3FY11, IRB’s net sales at INR 6.8bn drove a PAT of INR
1.33bn. Within the two important segments, the EPC division reported topline of
INR 4.7bn (+98% yoy) driving an EBITDA of INR 1.16bn (+130% yoy). The total toll
revenues at INR 2.14bn (+4% yoy) were primarily driven by tolls from the three big
projects Mumbai-Pune, Surat-Bharuch and Surat-Dahisar.
We await greater clarity on new awards and competitive intensity
Our assessment after seeing the corporate results, suggests that EPC players are
struggling in their assessment on whether they would like to focus on volumes or
margins. While the jury on sector trends is still out, we have cut our estimates for
IRB to factor in the slowdown in road sector awards so far. Our revised EPS is
below consensus by 4% and 22% for FY12E and FY13E, respectively.
At our revised target price of INR 185/sh, we reiterate our Hold rating; risks
Our revised 12-month target price assumes a target EV/EBITDA at 6x (in line with
EPC division for peers Lanco and JPA) for EPC business, the toll road operations
valued as per the NPV value (CoE at 12.5%). Key upside risks: a) strong pick-up of
new order inflows which also reduces competitive intensity, and b) continued WPI
inflation over and above our estimates as they have an impact on higher toll rates.
Important downside risks are continued slowdown in road project awards and
further push back in implementation over and above our estimates.
Investment thesis
Outlook
Our Hold on IRB is premised on the following: (1) On the positive side, IRB enjoys a better
competitive landscape than its peers as IRB has tolling operations in the busiest corridors in
India (Delhi-Mumbai-40% of India's CV traffic) and this corridor sees a lot of seasonal uptick
in the second half of the fiscal year. Also in the medium term, with most of the new ports
coming on the western corridors, we think that the probability of the company meeting our
volume growth estimates of 4-6%, in line with historical estimates, looks achievable. (2)
Pickup in execution with most projects achieving financial closure and IRB following the PMC
model for monitoring, which provides improved scalability in execution capabilities, and (3)
revision in tariffs for projects for key projects during Q2FY11 and early FY12E, with full
benefits showing in FY12E. However, what seems to be a drag is that new road awards have
so far seen a lull in FY11 and the government announcement suggests that there could be
big pickup in the awards for new road projects especially from Q4FY11E onwards. IRB is one
of the largest toll road developers, and it is likely to benefit from this pick-up (if it materializes)
as they have the balance sheet to take in new orders. IRB needs ~INR 40bn of road projects
to sustain the construction business growth guidance.
Valuation
We use SOTP to value the three segments of the company-BOT, EPC, and Real Estate. For
the toll road division, we have discounted the cash flows from the toll operations of various
road stretches that are currently under operation as well as under construction. Our model
uses a cost of equity of 12.5% (same as earlier).
For the EPC division, we have used an exit multiple of 6x 1-year forward EV/EBITDA (residual
net value of developers business. Lowered from 8x, in line with other peers like Jaiprakash
Associates). This multiple is justified, in our view, by IRB's competitive position as well as
improved visibility on the earnings of the EPC division due to pick up in execution of road
projects. For the real estate business, we have valued it at the cost of investments.
This methodology gives a consolidated value of INR 185 per share (rounded off). Our target
price would imply an exit P/E multiple of 11.6x FY12E earnings.
Risks
Company-specific downside risks are: 1) the timely execution of projects, 2) the ability to
raise a large amount of long-term debt on a non-recourse basis, and 3) the failure to expand
beyond the Western region. A 1ppt rise in traffic growth can affect our valuation by +5% and
vice versa. A 1ppt lower-than-expected margin in the construction business could affect
FY12E earnings by 3.5%. Additional risk in the stock valuations could be if management
decides to use the cash in the books for any acquisition that is not earnings-accretive. On the
positive side, significant wins by the company versus our estimates as a result of a buoyant
demand environment for road projects is a potential upside risk.
Q3FY11–EPC margins surprise
Results above both Street and Deutsche Bank estimates
IRB Q3FY11 results were above both the Street and our estimates, largely on the back of the
c25% EBITDA margin (vs. our estimate of 19%) seen in the EPC business. Net revenues at
INR 6.69bn drove an EBITDA of INR 2.94bn and a net income of INR 1.33bn. BOT revenues
at INR 2.1bn and EBITDA of INR 1.9bn were largely inline with expectations
Revenues below expectations
While revenues from BOT projects saw a marginal 4% YoY growth to INR 2.14bn, on the
back of a tariff increase in Surat Dahisar and Surat Bharuch projects, the revenue pickup from
the new projects bagged in FY10 (Talegaon-Amravati, Panaji-Goa and Tumkur-Chitradurga)
failed to see much traction. Surat-Dahisar continued to form a bulk of the overall construction
revenues at nearly INR 3bn for the quarter while Kolhapur project contributed to cINR 300m.
Amritsar-Pathankot and Jaipur-Deoli, the two new projects for which construction started in
FY11E saw INR c850m of revenues being booked during the quarter.
But EPC margins continued to surprise for the third quarter in a row
Construction segment margins at 24.9% remained above the 24% levels for the third quarter
in a row. Management acknowledged that these margins came largely on the back of the
company tying up raw materials at lower costs but they are unlikely to be sustained in the
longer term. Management expects margins to settle around the FY10 levels of 19-20% in the
longer term.
Management call – Key takeaways
We believe management was more hopeful for a pickup in order inflows especially now that
NHAI has added on its website a set timeline for processing requests for qualification as well
as a bidding date. According to management, this gives some clarity on the pickup of order
inflows that has been plaguing the sector despite so many attempts by the government to
set in motion a process which would allow for transparent and clear bidding practices.
Management was not unduly concerned given that the project slowdown was hurting
revenue pickup as they believe a lot of completion can pick up sooner rather than later as
most of the projects (barring Tumkur Chitradurga) have already achieved financial closure.
The important highlights of the call were:
„ Reiterating their view that orders for the sector should now pick up. There seems to
be clarity regarding approximately 5,000kms of projects that could be awarded over
the next six months.
„ Management expects that competition may not be as aggressive especially as the
cost of finance has gone up significantly and so has the capital cost for building
roads. As far as IRB goes, they are hoping that with their assumptions of not so
aggressive competition they should be able to get orders worth USD 1bn in the road
space. Furthermore these orders would have a targeted equity IRR of 18-20%.
„ According to the project scheduling work being done by IRB, they believe the
revenue booking could see a significant pickup in 1QFY12. Our estimates are 41%
revenue growth in the EPC segment in FY12 as a whole to INR 23bn.
„ Figure 2 gives a snapshot of important milestones/details highlighted by
management for a few of the projects.
Figure 2: Important milestones for select projects
Project Remarks
Thane Bhiwandi 6% tariff hike taken on 1 January 2011
IRDP Kolhapur Expecting completion in FY11E end
Amritsar Pathankot Mobilisation is completed
Tumkur Chitradurga Targeting to start construction on 1 April 2011. Financial closure by February 2011.
Mumbai – Pune 18% tariff hike on 1 April 2011
Goa Panaji Hoping to start construction in 1QFY12
Surat Dahisar Targeting to complete by August 2011
Our new target price of INR 185 (from INR 250) is based on SOTP
We use SOTP as a valuation methodology to value the three segments of the company-BOT,
EPC, and Real Estate. For the toll road division, we have discounted the cash flows from the
toll operations of various road stretches that are currently under operation as well as under
construction. Our model uses a cost of equity of 12.5% (same as earlier).
For the EPC division, we have used an exit multiple of 6x 1-year forward EV/EBITDA (residual
net value of developers’ business. Lowered from 8x, in line with other peers like Jaiprakash
Associates). This multiple is justified, in our view, by IRB's competitive position as well as
improved visibility on the earnings of the EPC division due to pickup in execution of road
projects. For the real estate business, we have valued it at the cost of investments.
This methodology gives a consolidated value of INR 185 per share (rounded off). Our target
price would imply an exit P/E multiple of 11.6x FY12E earnings.
Risks and sensitivity
Company-specific downside risks are: 1) the timely execution of projects, 2) the ability to
raise a large amount of long-term debt on a non-recourse basis, and 3) the failure to expand
beyond the Western region. A 1ppt rise in traffic growth can affect our valuation by +5% and
vice versa. A 1ppt lower-than-expected margin in the construction business could affect
FY12E earnings by 3.5%. Additional risk in the stock valuations could be if management
decides to use the cash in the books for any acquisition that is not earnings-accretive. On the
positive side, significant wins by the company versus our estimates as a result of a buoyant
demand environment for road projects is a potential upside risk.
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