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UBS Investment Research
IRB Infrastructure Developers
M anagement meeting takeaways
Event: We had met the CMD of IRB
Key takeaways from the meeting are- 1) Internal accruals would be sufficient for
funding needs and no capital raising is required, 2) construction business margins
are likely to be 18-20% at the EBITDA level (we estimate ~18%) and 3) IRB will
continue to focus on the road sector (primarily toll-based projects) and aims to
have a ~10% market share (funding through internal accruals, re-levering of
existing projects and stake sale at project level rather than dilution at parent).
Impact: NHAI should be able to award 6,000km+ over next few years
Management believes that- 1) NHAI should be able to award 6,000-6,500km of
road projects this year as well as next year (please also refer our note Asia On The
Ground: India Infrastructure- Near-term momentum in roads; railways to pick up
next year dated 22 September 2011), 2) over-bidding in the sector is likely to fade
away soon and has been due to lack of momentum in other infra sectors and 3)
traffic growth should be about 0.8-1x of real GDP growth rates at a portfolio level.
Action: Saving in Surat-Dahisar project cost; Kolhapur to commence soon
Savings of about 10% have been achieved in the Surat-Dahisar project cost. Toll
notification for the Kolhapur project is expected soon. The company also
highlighted that the value of its land bank has appreciated significantly (we value it
at book), though there are no development plans in the near-term.
Valuation: Reiterate Buy
IRB has earnings visibility, sectoral momentum and has an inflation hedge (both
Surat-Dahisar/Bharuch-Surat toll-rates increase by ~10% this year).
Meeting with management- key takeaways
Sectoral-
6,000km+ can be awarded: NHAI is likely to finish the bid-award process
for the current lot of identified projects by 2015-16. It will take about 3 years
to build this out. A further 1-2yrs could be factored in for inefficiencies.
Overall, US$70bn worth of projects should be awarded in total. NHAI
should be able to award 6,000-6,500km per year over the next couple of
years (about 5,000km were awarded last year and over 3,500km has already
been awarded this year).
Our interactions with the NHAI and the Planning Commission suggests that
NHAI would be able to award 7,000-8,000km this year as well as next year
(please refer our note Asia On The Ground: India Infrastructure- Near-term
momentum in roads; railways to pick up next year dated 22 September 2011;
about 4,500km have already been awarded, bids opened or bids invited this
year).
Aggressive-bidding will not last: The sector has witnessed aggressive
bidding due to lack of momentum in other infrastructure sectors. However,
management expects this to reverse in the not too distant future and has seen
early signs of the same recently.
Traffic growth- 0.8-1x of GDP: Traffic growth should be 0.8-1x of GDP
growth rates at a portfolio level and hence 6-7% growth is achievable (we
estimate traffic growth rates of 5-7% across various projects of IRB,
reducing by 1% in blocks of five years).
Project sales may happen: There are some players in distress and could be
keen to exit projects. However, price expectations of the sellers would need
to come down (many of these projects suffer due to over-bidding and actual
traffic being lower than original traffic estimates).
Strategic-
Focus on road sector: It has no intention to diversify to other infrastructure
sectors and though the company has a real estate and an airport project, it
will focus on the road sector.
Focus on toll projects: The company will continue to focus on BOT-toll
projects and is not very interested in Annuity projects.
Aims to add US$1bn pa: US$1bn worth of projects are planned to be added
every year. It could add another US$500m worth of projects this year (as
Ahmedabad-Vadodara, worth ~US$1bn, has already been won). The
company plans to have a project portfolio of about US$6-8bn by 2020. IRB
currently has a project portfolio of about US$4bn and will have about 10%
market share by then. It does not expect any dilution at the parent level for
the same- if it requires capital, then it could leverage its existing debt-free
assets or increase leverage in existing assets or dilute stakes at the project
level.
Yield asset: IRB could become an yield asset by the end of the decade after
the project portfolio is fully operationalized.
Financials-
Capital raising: Funding seems adequate from internal accruals and existing
balances- no capital raising is planned.
IRRs: The company targets IRRs of 18%+ in its BOT projects. Though the
Ahmedabad-Vadodara project was at the lower-end of the band of IRR at
which the company bids at (likely IRRs in the project are ~16%), it was more
to do with the prevailing bidding scenario (and the company decided that it
was better to focus on large projects in such a scenario).
Construction margins at 18-20%: Construction business can make
EBITDA margins of 18-20% (we forecast margins of ~18%). Key reasons
for higher margins include- 1) low proportion of sub-contracting (only the
labor portion and few other things are sub-contracted), 2) efficiency gains
from full utilization of the equipment bank (as various portions of the project
portfolio are at different stages of completion there are efficiency gains), 3)
efficiencies in designing, 4) proper provisioning for escalations and 5) timely
completion.
Construction business does not require much capex: Capex planned is
only Rs250-300m. Various projects are in different stages of completion and
hence equipment can be moved around.
Projects-
Ahmedabad-Vadodara: Debt has been tied-up and financial closure is
likely to be announced in Jan-12. The company has assumed an interest rate
of 10.5% while bidding for the project though it is likely to be 9-9.5% due to
usage of ECBs (1% reduction in interest rate increases the project equity IRR
by 50bps+ in our estimate).
Tumkur-Chitradurga: Mining traffic was not considered while bidding for
this project as the Supreme Court ban was already in place then. Hence, the
project IRRs are not going to be impacted by the recent mining ban in the
area. If and when the ban is lifted, it will provide an additional upside.
Surat-Dahisar: Originally estimated project cost was Rs28.35bn and saving
of about Rs3bn has been achieved- actual project cost is about Rs25bn.
Kolhapur project: Notification for toll-collection is expected in a few days
and tolling is likely to commence by end-October. Commencement
certificate for the hotel project is also likely by next month- it has a total cost
of Rs400-450m and will be completed in about 2.5yrs.
Goa-Karnataka: Not much progress on this project and still await
communication from NHAI on the appointed date. Financial closure has
already been achieved.
Airport project: Environment Assessment report is to be received in a
couple of months. The total planned investment is about Rs2bn.
Real estate: The value of land has appreciated significantly as assessed by
an independent valuer recently (we value the land at book value and it
contributes about Rs3 to our SOTP). No development plans have been
firmed up as of now.
Valuation
Our sum-of-the-parts valuation is based on DCF of individual projects, with
discounting rates of about 13%. Our estimates (and valuation) do not include 1)
the Sindhudurg airport and 2) the Kolhapur hotel project
IRB Infrastructure Developers
IRB Infrastructure Developers (IRB) is one of the large BOT toll road operators
in India, managing 14 road projects through 11 subsidiaries. It is vertically
integrated with its construction subsidiary undertaking most aspects of BOT
road development. Its road assets are in the high economic-activity states of
Maharashtra and Gujarat. Its construction business caters primarily to in-house
projects with few third-party contracts. It has recently ventured into real estate
development through a township project near Pune.
Statement of Risk
Any slowdown in traffic growth will severely dent cash generation in IRB’s
assets. As toll roads are typically financed at a 70:30 debt equity ratio, any
interest rate increase will significantly increase cash outflows. Surat-Dahisar is
the largest project undertaken by IRB till date and may pose its own execution
challenges. IRB’s township project is unlikely to generate returns in near term
and therefore any further investment will depress return ratios. Any slowdown in
ordering activity of NHAI will affect IRB’s growth opportunities as it is
leveraged only to the road sector in India.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
UBS Investment Research
IRB Infrastructure Developers
M anagement meeting takeaways
Event: We had met the CMD of IRB
Key takeaways from the meeting are- 1) Internal accruals would be sufficient for
funding needs and no capital raising is required, 2) construction business margins
are likely to be 18-20% at the EBITDA level (we estimate ~18%) and 3) IRB will
continue to focus on the road sector (primarily toll-based projects) and aims to
have a ~10% market share (funding through internal accruals, re-levering of
existing projects and stake sale at project level rather than dilution at parent).
Impact: NHAI should be able to award 6,000km+ over next few years
Management believes that- 1) NHAI should be able to award 6,000-6,500km of
road projects this year as well as next year (please also refer our note Asia On The
Ground: India Infrastructure- Near-term momentum in roads; railways to pick up
next year dated 22 September 2011), 2) over-bidding in the sector is likely to fade
away soon and has been due to lack of momentum in other infra sectors and 3)
traffic growth should be about 0.8-1x of real GDP growth rates at a portfolio level.
Action: Saving in Surat-Dahisar project cost; Kolhapur to commence soon
Savings of about 10% have been achieved in the Surat-Dahisar project cost. Toll
notification for the Kolhapur project is expected soon. The company also
highlighted that the value of its land bank has appreciated significantly (we value it
at book), though there are no development plans in the near-term.
Valuation: Reiterate Buy
IRB has earnings visibility, sectoral momentum and has an inflation hedge (both
Surat-Dahisar/Bharuch-Surat toll-rates increase by ~10% this year).
Meeting with management- key takeaways
Sectoral-
6,000km+ can be awarded: NHAI is likely to finish the bid-award process
for the current lot of identified projects by 2015-16. It will take about 3 years
to build this out. A further 1-2yrs could be factored in for inefficiencies.
Overall, US$70bn worth of projects should be awarded in total. NHAI
should be able to award 6,000-6,500km per year over the next couple of
years (about 5,000km were awarded last year and over 3,500km has already
been awarded this year).
Our interactions with the NHAI and the Planning Commission suggests that
NHAI would be able to award 7,000-8,000km this year as well as next year
(please refer our note Asia On The Ground: India Infrastructure- Near-term
momentum in roads; railways to pick up next year dated 22 September 2011;
about 4,500km have already been awarded, bids opened or bids invited this
year).
Aggressive-bidding will not last: The sector has witnessed aggressive
bidding due to lack of momentum in other infrastructure sectors. However,
management expects this to reverse in the not too distant future and has seen
early signs of the same recently.
Traffic growth- 0.8-1x of GDP: Traffic growth should be 0.8-1x of GDP
growth rates at a portfolio level and hence 6-7% growth is achievable (we
estimate traffic growth rates of 5-7% across various projects of IRB,
reducing by 1% in blocks of five years).
Project sales may happen: There are some players in distress and could be
keen to exit projects. However, price expectations of the sellers would need
to come down (many of these projects suffer due to over-bidding and actual
traffic being lower than original traffic estimates).
Strategic-
Focus on road sector: It has no intention to diversify to other infrastructure
sectors and though the company has a real estate and an airport project, it
will focus on the road sector.
Focus on toll projects: The company will continue to focus on BOT-toll
projects and is not very interested in Annuity projects.
Aims to add US$1bn pa: US$1bn worth of projects are planned to be added
every year. It could add another US$500m worth of projects this year (as
Ahmedabad-Vadodara, worth ~US$1bn, has already been won). The
company plans to have a project portfolio of about US$6-8bn by 2020. IRB
currently has a project portfolio of about US$4bn and will have about 10%
market share by then. It does not expect any dilution at the parent level for
the same- if it requires capital, then it could leverage its existing debt-free
assets or increase leverage in existing assets or dilute stakes at the project
level.
Yield asset: IRB could become an yield asset by the end of the decade after
the project portfolio is fully operationalized.
Financials-
Capital raising: Funding seems adequate from internal accruals and existing
balances- no capital raising is planned.
IRRs: The company targets IRRs of 18%+ in its BOT projects. Though the
Ahmedabad-Vadodara project was at the lower-end of the band of IRR at
which the company bids at (likely IRRs in the project are ~16%), it was more
to do with the prevailing bidding scenario (and the company decided that it
was better to focus on large projects in such a scenario).
Construction margins at 18-20%: Construction business can make
EBITDA margins of 18-20% (we forecast margins of ~18%). Key reasons
for higher margins include- 1) low proportion of sub-contracting (only the
labor portion and few other things are sub-contracted), 2) efficiency gains
from full utilization of the equipment bank (as various portions of the project
portfolio are at different stages of completion there are efficiency gains), 3)
efficiencies in designing, 4) proper provisioning for escalations and 5) timely
completion.
Construction business does not require much capex: Capex planned is
only Rs250-300m. Various projects are in different stages of completion and
hence equipment can be moved around.
Projects-
Ahmedabad-Vadodara: Debt has been tied-up and financial closure is
likely to be announced in Jan-12. The company has assumed an interest rate
of 10.5% while bidding for the project though it is likely to be 9-9.5% due to
usage of ECBs (1% reduction in interest rate increases the project equity IRR
by 50bps+ in our estimate).
Tumkur-Chitradurga: Mining traffic was not considered while bidding for
this project as the Supreme Court ban was already in place then. Hence, the
project IRRs are not going to be impacted by the recent mining ban in the
area. If and when the ban is lifted, it will provide an additional upside.
Surat-Dahisar: Originally estimated project cost was Rs28.35bn and saving
of about Rs3bn has been achieved- actual project cost is about Rs25bn.
Kolhapur project: Notification for toll-collection is expected in a few days
and tolling is likely to commence by end-October. Commencement
certificate for the hotel project is also likely by next month- it has a total cost
of Rs400-450m and will be completed in about 2.5yrs.
Goa-Karnataka: Not much progress on this project and still await
communication from NHAI on the appointed date. Financial closure has
already been achieved.
Airport project: Environment Assessment report is to be received in a
couple of months. The total planned investment is about Rs2bn.
Real estate: The value of land has appreciated significantly as assessed by
an independent valuer recently (we value the land at book value and it
contributes about Rs3 to our SOTP). No development plans have been
firmed up as of now.
Valuation
Our sum-of-the-parts valuation is based on DCF of individual projects, with
discounting rates of about 13%. Our estimates (and valuation) do not include 1)
the Sindhudurg airport and 2) the Kolhapur hotel project
IRB Infrastructure Developers
IRB Infrastructure Developers (IRB) is one of the large BOT toll road operators
in India, managing 14 road projects through 11 subsidiaries. It is vertically
integrated with its construction subsidiary undertaking most aspects of BOT
road development. Its road assets are in the high economic-activity states of
Maharashtra and Gujarat. Its construction business caters primarily to in-house
projects with few third-party contracts. It has recently ventured into real estate
development through a township project near Pune.
Statement of Risk
Any slowdown in traffic growth will severely dent cash generation in IRB’s
assets. As toll roads are typically financed at a 70:30 debt equity ratio, any
interest rate increase will significantly increase cash outflows. Surat-Dahisar is
the largest project undertaken by IRB till date and may pose its own execution
challenges. IRB’s township project is unlikely to generate returns in near term
and therefore any further investment will depress return ratios. Any slowdown in
ordering activity of NHAI will affect IRB’s growth opportunities as it is
leveraged only to the road sector in India.
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