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1QFY12: Positive surprise
ƒ Results beat our estimates, led by construction
ƒ Revenue, EBITDA, net income up 50%, 22%, 14% y-y
ƒ Construction EBITDA margin of 25.9%: 590bps above estimate
ƒ TP INR250: BOT INR186; construction INR43; others INR21
1QFY12 results
IRB reported 1QFY12 revenue of
INR8.0b, an increase of 50% y-y and
6.4% above our estimate. EBITDA of
INR3.3b increased 22% y-y and was 4%
higher than our estimate. Net income after
minority interest of INR1.3b was 14%
higher y-y and 8% higher than our
estimate.
The strong performance was led by the
construction division; construction
revenue increased 81% y-y to INR6b,
(17.3% higher than our estimate). The
construction EBITDA margin was also a
positive surprise – the reported margin of 25.9% was 590bps higher than
our estimate. We believe this was due to higher margin at the SuratDahisar project.
Toll revenue increased 14% y-y to INR2.3b (our estimate was INR2.4b)
primarily due to an 18% toll rate hike in Mumbai Pune (35% of gross toll
revenue). Surat Dahisar reported a 6.8% y-y increase in toll revenue
(INR942m, 34% of gross toll revenue) and Bharuch Surat reported 12.8%
y-y growth (INR336m, 12% of gross toll revenue). Tumkur-Chitradurga
also contributed this quarter, with INR114m (operational since 4 June),
which is essentially in line with our daily run-rate. Interest expense was
33% higher than our estimate, resulting in a 29% miss in tolling PAT.
Catalysts ahead: major road bids on the anvil
Major projects such as the Kishangarh-Ahmedabad (INR54b) and
Jabalpur-Rewa (INR19b) are coming up for bid in the next 30-45 days.
IRB has bid for four projects (including the above two) worth INR93b that
are up for bidding in the near term. We expect any project win to be a
material catalyst for the stock.
Valuation
We continue to rate IRB as our top pick in this space. We believe
execution capabilities and access to financing are key differentiators. We
maintain our BUY rating and TP of INR250. Our TP is based on a SoTP
valuation of the construction business and the highway BOT portfolio. We
value the BOT portfolio using DCF (FCFE, 13.5% average cost of equity
over the life of the project) at INR186. The construction business
contributes INR43 based on 3.2x FY13E EV/EBITDA (implied P/E of
6.0x). Real estate and future projects contribute INR8 and INR13,
respectively. Risks to our TP include lower-than-expected traffic growth,
execution delays, and lower-than expected project wins
Investment arguments
Banking on MDF and laminates
GIL has forayed into the lucrative, high-growth MDF market, with the largest MDF
plant in India (1,80,000m3/year capacity), while benefiting from its strong
expansion in laminates (88% capacity expansion). GIL is witnessing strong demand
for its laminate products, with both its new production lines running at full capacity.
The MDF opportunity is especially huge – MDF constitutes 20% of wood panel
consumption in India, while plywood constitutes 80% – the reverse holds
true globally. China alone consumes about 10mn–11mn m3/year of MDF vs.
0.6mn m3/year in India. Going forward, with a strict control on the issue of new
plywood licenses and a 5–7% CAGR in panel demand, MDF is likely to meet this
demand, translating into a 25–30% CAGR for MDF. Moreover, even out of the
present consumption, 80% is being met through imports, which GIL can substitute,
given the high freight costs and 25% anti-dumping duty on imports.
Strong brand, high ad spend and massive distribution
GIL has leading plywood and laminates brands, supported by ad spend as high as
4.3% of sales. The company also has the largest distribution network of over
15,000 dealers. These advantages underpin the strong RoE profile of the
company's brand-driven business model (20% over FY2010–12E).
Outlook and valuation
We believe the concerns related to the MDF segment have receded considerably.
Hence, higher utilisation levels in the MDF segment will aid in improving GIL’s
overall margins on a qoq basis going ahead. The MDF segment is expected to
achieve 45% utilisation in FY2012. Further, the company is well placed to benefit
from 1) its laminate capacity expansion, which increased nearly two-folds in
FY2010 and is expected to achieve 100%+ utilisation in FY2012 and 2) expansion
of its plywood capacity by 3.75mn sq. ft., which is expected to contribute around
`45cr to FY2012 top line. At `230, the stock trades at 5.6x FY2013E earnings.
We maintain our Buy rating with an upgraded target price of `326, valuing the
stock at 8x FY2013E earnings.
