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The company has the early mover advantage in toll BOT projects.

Vidya Bala

We reiterate a buy on the stock of IRB Infrastructure Developers. The stock had taken a sharp hit over the last few months on concerns of high interest rates affecting project internal rate of returns (IRRs). Signals of a softening interest rate scenario, however, ease the concern.

With an otherwise sound portfolio of 11 operating BOT roads, profitable projects in hand and sound technical qualification that would allow it compete under the new Model Concession Agreement for roads, IRB provides a good investment opportunity for investors with a three-five year perspective.

At the current price of Rs 81, the stock trades at 6.3 times its consolidated earnings for FY-10. Given the volatile market conditions, investors can consider buying the stock in small lots on declines linked to the broad markets.

The current stock price also provides an opportunity for shareholders to average their costs.

IRB suffered a sharp de-rating after the financial closure for two of its projects (especially Surat-Dahisar) was postponed due to funding delays. Revenues from these projects were, therefore, expected to be delayed. The company has now stated that it has received funding sanction from its ‘lead bank’ and expects loan sanctions from the rest of the consortium in a month’s time. Since toll collection is expected to start as soon as the financial closure is over, this 240-km six-laning project can be expected to start yielding revenues from the fourth quarter of FY-09.

Two, the company’s interest cost on this project has increased by 2-3.5 percentage points as a result of the fund crunch.

While this may marginally dent internal returns, we do not expect any significant negative effect from the same due to the following: The toll revenues are linked to inflation; while interest rates have gone up, inflation is also significantly higher than at the time of bidding the project.

Hence, the increase in toll revenues arising from higher inflation may, to some extent, offset the higher interest costs.

Further, given the high profitability that IRB enjoys from its currently operated roads, there could be enough room (for the company and its subsidiaries as a whole) to absorb slightly lower margins in new projects.

Decline in commodity prices can also be expected to provide relief on the raw material cost especially for steel and bitumen.

IRB sports a lucrative portfolio of 11 toll roads in operation, one under construction and two awaiting financial closure, thus holding the largest road BOT basket in the country.

Unlike the more recent road Build Operate Transfer (BOT) projects where the Government is an active participant in revenue-sharing, IRB, being an early mover, operates 11 roads for which it enjoys full revenues.

It also enjoys periodic hike in toll roads for some of its projects. For instance, the company gets an 18 per cent increase in tolls every three years for its Mumbai-Pune Expressway.

While engineering, procurement and construction (EPC) account for close to 50 per cent of the total value of projects in hand, toll revenues would take over as the key earnings driver once projects under construction and those in the pipeline are executed.

IRB currently earns toll revenue of Rs 1.2 crore per day. This is expected to increase to Rs 3 crore per day once the projects are ready (from FY-10).

Given its early mover advantage, IRB enjoys operating profit margins in the range of 48-50 per cent now. However, the Government’s active revenue-sharing strategy, post the new Model Concession Agreement (MCA), is likely to result in less lucrative IRRs in future. IRB may nevertheless enjoy superior margins to peers which hold few BOT projects with similar rewards.

While there has been a slowdown in road order flows, what with the controversies surrounding the MCA, the recent judgment by the High Court may trigger clearance of orders (that are in the bidding stage), over the next three-six months.

IRB is pre-qualified in at least six of such projects and would contest in the final bidding stage.

The company’s aggressive bidding to clinch the Surat Dahisar project demonstrates its competitiveness. Despite its strong technical qualification, IRB may nevertheless face competition from large overseas players which form consortium with local companies.

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