A strong pace of execution in road contracts and steady operating cash flows from a lucrative portfolio of 10 toll roads, make IRB Infrastructure Developers (IRB) a good buy in the beaten down infrastructure space.

It is the combination of Engineering Procurement and Construction (EPC) and toll revenue that has helped the company clock steady revenue and earnings growth at a time when most infrastructure developers are reeling under a slowdown, caused by sluggish order flows and delayed execution.

Revenues over the last three years expanded 49 per cent compounded annually to Rs 2,438 crore in FY-11, while profits jumped 52 per cent to Rs 452 crore.

Investors with a two-year perspective can consider investing in the stock of IRB. At the current price of Rs 163, the stock trades at 10 times its expected consolidated per share earnings for FY-13. Any extended decline in the market can be used to buy the stock on dips.

Pick up in execution in some of its key projects such as Amritsar-Pathankot, together with an 18-per cent toll hike in the Mumbai-Pune Expressway resulted in a robust 57 per cent growth in revenues of IRB in the June quarter over a year ago.

While EPC revenues jumped 81 per cent year-on-year, BOT revenue was up a healthy 14 per cent over a similar period. The toll collection in Tumkur-Chitradurga, which commenced in June, should add to revenues in the next quarter.

The spike in toll revenue in operational roads was in the range of 6-26 per cent in the June quarter over a year ago.

Despite strong sales growth, higher interest costs (as a result of higher debt and mark-to-market losses) and higher effective tax rate resulted in a more sedate 14 per cent expansion in net profits.

While interest costs may continue to remain high, with debt equity at 1.5 times, we believe that the company's plans to tap ECBs could bring down average annual borrowings costs from 12 per cent now to 10 per cent.

It is also noteworthy that seven of the nine operational projects of IRB are debt free. This also means that their cash flows are available for operations.

IRB's current order book at Rs 11,170 crore is 6.7 times construction revenues of FY-11. This basically means that IRB has enough work on its hand. We believe that its strategy of not bidding too aggressively, may be prudent at this stage.

Reports state that recent bids by players in the road space, offering high premium/grants could result in internal rates of return (IRR) as low at 11-12 per cent (typically 16-18 per cent in lucrative stretches), when financing costs are at this level or higher.

Such aggressive bids avoided in the current high interest rate regime thus appear a prudent measure.

comment COMMENT NOW