The IRB Infrastructure stock was up 6.5 per cent on Monday after it reported strong results in the June 2022 quarter, post market hours last Friday. The company reported revenue of ₹1,995.4 crores, growing 19.4 per cent year-on-year and bettering the consensus estimate (Bloomberg consensus) of ₹1,604.3 crore. The strong rise in revenues can be attributed to increase in BOT revenue (one fourth of total revenues) by 31 per cent while the construction revenue (three fourth of total revenues) grew 15.8 per cent. Construction segment revenue was supported by an arbitration award of around of ₹419 crore in the Amritsar Pathankot project in which it was the EPC contractor. Towards this, the company recognised ₹418 crore in its construction revenue and ₹50 crore as expenses. Besides, the Mumbai Pune expressway reported a rise of 52 per cent in toll YoY, whereas Ahmedabad Vadodara highway reported a growth of 44.7 per cent in toll YoY. 

The robust growth in the topline aided EBITDA and profits as well. According to this company, the arbitration award had an impact of ₹368 crore on EBITDA. The EBITDA margin of the company for June 2022 quarter was 56.7 per cent a jump of around 12 percentage points over June 2021 quarter. If the arbitration award is to be ignored, then the EBITDA margin will be around 38.23 per cent. Net profit of the company grew to ₹396.5 crore from ₹105.91 crore in June 2021. About ₹270 crore was added to the net profit by the arbitration award. Savings in operating expenses along with the savings in interest cost led to the growth in profitability. Operating expenses as a percentage of sales was 55.4 per cent in June 2021 quarter as against 43.3 per cent in June 2022 quarter. The company has reported a reduction in its interest expense to the extent of 17.65 per cent in Q1 FY23 to ₹385 crore. The fund raised from Cintra and GIC which was primarily used to deleverage IRB seem to have helped in reducing the interest cost. 

Outlook and valuation 

As on June 30, 2022, the order book stands at ₹15700 crore which gives a revenue visibility of around 2.5 to 3 years. The order book of the company was ₹13279.8 crore during the same quarter last year.  

The company is mainly focused on BOT (Build operate and Transfer) and TOT (Toll operate and Transfer) and the next priority is HAM (Hybrid Annuity Model). Budgetary allocations for the sector have grown at 32 per cent CAGR from FY16 to FY23. The budgetary allocation for FY23 is around ₹1.87 lakh crore. The National Monetisation Pipeline plans to monetise around ₹1.6 trillion worth assets i.e., 26700 kilometers and IRB, which is a major player in BOT and TOT can benefit from this decision.  

The gross toll revenue across the country in FY22 was ₹40,000 crore and IRB had a gross toll collection of ₹5000 crore which amounts to a 12.5 per cent market share. The company has witnessed cost rise of around 20-25 per cent in cement, reinforced steel, and bitumen in last six months. However, since the cost of these materials is around 20 per cent of total project cost, the overall cost impact would be 4-4.5 per cent on total cost, for which IRB has sufficient escalation clause from NHAI. 

While the overall environment seems positive for the business and the company, the only hurdle which the company may face is its premium valuation. The stock of IRB has corrected nearly 23 per cent from its peak on October 25,2022. Still, the company is trading at a one year forward  P/E of 26.6x against its historical average (5 year average) of 11.8x while its peers like KNR constructions is trading at 15.4x one-year forward earnings and PNC Infratech is trading at 11.9x.