The infrastructure sector was accorded top priority in the Budget. While the measures pertaining to infrastructure financing may take a few quarters to take shape, and road development targets seem ambitious, they signal the intent to clear bottlenecks and speed up execution.

Among the major beneficiaries of a stronger thrust on road development is IRB Infrastructure Developers. Investors with a two- to three-year horizon and a stomach for some risk can buy the IRB stock.

At ₹243, the IRB stock is ruling at 17.6 times trailing 12-month earnings and 12 times estimated earnings for 2015-16. That is well above its three-year average of eight times, but then the stock price was volatile in the period. Other road developers IL&FS Transportation and Sadbhav Engineering are also more expensive at 19 times the trailing earnings, even as they have a heavier debt burden.

Order book strength Second, 16 of IRB’s projects will go operational this fiscal. In large projects of ₹1,000 crore or more, IRB has few competitors. Its toll revenues grew 12 per cent in 2013-14 over the previous fiscal, with good growth in some stretches such as Pune-Solapur and inflow from new projects making up for sluggish collections in Tumkur-Chitradurga, Baruch-Surat, and Surat-Dahisar. With tariff hikes implemented in some sections, collections could rise in the coming quarters. An improvement in economic growth and subsequent commercial traffic can also help. This apart, the lifting of ban on mining can bring in traffic for the Tumkur-Chitradurga stretch in Karnataka.

Third, three big-ticket projects won recently will keep IRB busy and offer good revenue visibility. Even if the NHAI takes time to tender new projects, IRB’s order book of ₹11,973 crore will help it tide over the delay. Clearances for these projects are already in place, while funding is still in the works. Execution may commence over the second half of this fiscal. Construction revenues, which dropped 3 per cent in 2013-14, should move up again with new projects. IRB has kept its operating margins steady at around 30 per cent in its construction segment. Together with better tolls, consolidated revenue growth for IRB, which was a mere 1 per cent for 2013-14 over the year ago, should see an improvement in the coming years.

Better cash flows Fourth, the new projects have been won on a grant basis and not premium, suggesting better project returns.

On two completed stretches too, IRB has received approval to defer premium payments to the government. This saves the company about ₹450 crore in annual payments, which can be diverted into project execution.

Five, while IRB’s debt to equity is high at 2.9 times and will likely remain so, interest costs are beginning to cool slightly.

That should improve net profits, which dipped 17 per cent in 2013-14. Interest cover of 2.4 times is also among the better levels compared to peers.

The Budget proposal to allow banks to raise long-term infrastructure finance without setting aside statutory requirements can provide access to cheaper funds.

Still, interest costs will remain a drag on margins; for 2013-14, net profit margin dropped to 11.9 per cent from 14.6 per cent the year before on the back of a 22 per cent jump in interest outgo.

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