IRB Infrastructure Developers: Buy

The infrastructure sector is struggling with a multitude of problems — troubles in financing projects, meeting existing debt payments, execution bottlenecks and a dearth of fresh orders. Mirroring the gloom, the stock of IRB Infrastructure, which builds and maintains roads, sank 45 per cent in the year to date.

But we believe that IRB is well-poised to ride out this gloom unlike many infrastructure peers. For one, over the past two years, the company focused on project execution instead of bidding for expensive projects, which compromise returns. Return on equity has been maintained at around 17 per cent in the past two years.

Second, it is comfortably placed on the funding side with a debt-equity ratio of 2.4 times. Third, with a number of completed projects under its belt, debt on these can be refinanced at lower rates. Fourth, IRB focuses on large projects of Rs 1,000 crore or more, where competition is limited. At Rs 71, the stock trades at 4.3 times trailing twelve-month earnings, which is well below its three-year average of 14 times. Investors with a two- or three-year horizon can accumulate the stock in phases. Those already invested in the stock can use the price fall to average out their costs.

Execution on track

In the past two years, the road projects scenario has swung from expensive bidding in 2011 to a virtual drying up of project awards in 2012. During this period, IRB focused on completing projects on hand and refrained from aggressive bidding — it completed two projects last fiscal and three are slated for completion this fiscal. Two more projects, which are much bigger than what IRB has executed in the past, will come up by FY16.

Restraint meant that fresh orders were limited, but it allowed IRB to maintain comfortable debt and project return levels. This places it in a good position to bag orders once NHAI resumes awarding projects. The current order book, at Rs 7,663 crore, executable over the next couple of years, offers good near-term earnings visibility. The relatively lower debt should also help the company bankroll new projects without difficulty. Interest cover is also comfortable at three times. Besides, with multiple projects now complete, debt on these can be refinanced at lower rates.

Toll collection steady

For the same set of roads, the recent June quarter toll collection rose 5 per cent, compared with the same quarter in 2012. With toll collection starting on three new roads, plus acquisition of an operational road in the past year, total toll collection jumped 19 per cent in the June quarter. On an annual basis, toll revenues grew 18 per cent over the past three years.

In some key road stretches, traffic has been slowing due to a slowing economy, early monsoon and mining bans. Still, with tariffs linked to inflation, toll hikes have compensated for the slower traffic. Revenues will receive a boost with tolls set to start from three more stretches by the end of this calendar. With the widening road portfolio, dependency on a few road stretches is also reduced. Consolidated operating margins are healthy at around 50 per cent. But interest costs and depreciation together have brought down net margins over the past three years from 18 per cent to 14 per cent now.

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