IL&FS Transportation Networks: Buy :: Business Line

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At Rs 197, the stock of IL&FS Transportation Networks(ITNL) trades at a reasonable 6.7 times estimated earnings for 2013-14. One of the largest private road developers, ITNL is a good bet at a time when award of orders for developing new stretches of roads is sluggish.

For one, the company has a portfolio of well-established stretches and several more under implementation that will help it cruise past the current dry period. Fifteen stretches (domestic and international) are complete and 16 are under implementation. Ten of these will turn operational by 2014-15.

Two, ITNL’s portfolio is balanced between toll and annuity models. The riskier toll projects have been taken on stretches with good traffic flow such as Pune Sholapur, Vadodra-Halol and Jetpur-Rajkot. The annuity model has been adopted on projects such as the Chenani-Nashri tunnelway in Jammu & Kashmir and stretches in Jharkhand.

DIVERSIFICATION

Three, risk is further balanced out by ITNL’s taking to auctioning off tolls for one year from time to time. Concentration in roads has been reduced by taking on urban development projects such as metro rail (Gurgaon), multi-level car park (Hyderabad) and operating the Nagpur bus service. Fee from construction supervision and pure construction provide further buffer.

Four, ITNL’s acquisition of Spanish road operation and maintenance company Elsamex has aided international forays while also providing an advantage in securing road maintenance contracts in domestic markets, a promising segment. ITNL’s 49 per cent stake in an operational Chinese highway project last year has also boosted revenues.

Five, ITNL has made its mark in high-value road projects, where competition is limited to IRB Infrastructure, Larsen & Toubro and the like. The pricey bidding of smaller stretches where competition is rife, therefore, does not affect it. ITNL also benefits from the strong financial and technical backing by its parent, IL&FS.

STRONG GROWTH

Toll and annuity income surged 77 per cent in the nine months to December 2012 over the year ago period, thanks to good growth in roads in Rajasthan and Gujarat. Meanwhile, steady execution pushed up (consolidated) revenues by a strong 30 per cent for the period. However, given the large size of its order book of over Rs 12,000 crore, the company’s debt – and thus interest outgo - is also high, and is likely to remain so. Debt-equity ratio stands at 3.8 times with interest costs ballooning 64 per cent for the nine months to December 2012. As a result, strong operating margins of 31 per cent gave way to low net profit margins of 7 per cent. But with the interest rate cycle showing signs of turning down, the interest burden might become lighter.