IRB Infrastructure Developers: On the fast lane - Buy

The Centre’s increasing thrust on road projects should translate into healthy investor interest in this sector. This should help companies such as IRB Infrastructure Developers (IRB), a leader in the BOT (build, operate and transfer) mode of executing road projects. The company is also coming up with an Investment-Trust (Inv-IT) model — the first of its kind in India.

IRB has an impressive execution and maintenance track record. Its healthy profit margins and strong order book should translate into good revenue and profit over the next couple of years.

The stock’s current price discounts its trailing 12-month earnings by 12.6 times, lower than its historical three-year average of around 14 times. Long-term investors can buy the stock.

The fiscals 2016 and 2017 saw a strong revival in the road projects constructed by both National Highway Authority of India (NHAI) and the Ministry of Road Transport and Highway (MORTH). With the Centre’s intention to boost road construction from the current rate of 18 km per day at the end of 2016 to 40 km per day by the end of 2017, road projects are expected to get a booster dose in the upcoming budget.

But high debt, weak global economic conditions, high premium payments and problems due to stalled projects have made many BOT players exit over the last few years. Besides, the number of BOT projects bid out by NHAI has decreased considerably between 2012 and 2016 (nearly 100 per cent of projects in 2012 to 20 per cent in 2016). That said, with an increase in overall road projects, there is enough scope for the limited number of BOT players in the fray now to grow and with healthy margins.

IRB plans to bid for only about 300 to 500 km of BOT projects each year. With its strong track record, the comany is well-placed among peers. The order book at the end of December 2016 at around ₹12,000 crore is more than twice the FY16 revenue of ₹5,254 crore. This provides good revenue visibility.

IRB will transfer six of its mature projects to an Investment Trust (Inv-IT). The Inv-IT, managed by an investment manager and project manager assigned by IRB Infrastructure and Modern Road Makers Private limited (EPC arm of the company), will maintain the projects, collect and distribute the toll revenues.

The unit holders from the Inv-IT will receive dividends from the trust after the payment of principal and interest for the projects.

The Inv-IT intends to raise close to ₹4,300 crore, of which more than 75 per cent will be used to pay down secured debt, sub-ordinate debt and other loans. Besides, IRB intends to raise about ₹1,000 crore through offer for sale by selling part of its own stake in the Inv-IT. The sold units are the excess beyond the mandated 25 per cent that IRB should hold. This should help the company in the ₹1,700-crore equity investment planned over the next three years in ongoing and future projects.

The cumulative toll revenue for the six projects to be transferred to the Inv-IT has grown at an annualised rate of 17 per cent between FY-12 and FY-16. India Ratings has assigned a long-term senior debt rating (AAA) with a stable outlook for this Inv-IT fund. IRB’s leverage is expected to fall considerably after the issue.

Despite the effect of demonetisation and stoppage of toll collection for more than three weeks in November and December 2016, IRB’s consolidated revenue grew by 17 per cent Y-o-Y in the nine months ended December 2016 to ₹4,313 crore. Of this revenue, toll and construction revenue accounted for about 40 per cent and 60 per cent respectively.

As part of compensation for demonetisation, the operation, maintenance and interest cost were paid by the authorities to the developers. Besides, the contractual time span of projects were extended to compensate for the forgone profit.

At ₹5,254 crore, IRB’s revenue for 2015-16 was 32 per cent higher than in 2014-15. Operating and net profit grew about 20 per cent and 17 per cent respectively to ₹2,784 crore and ₹636 crore with margins healthy at around 53 per cent and 12 per cent. The interest coverage ratio for fiscal year 2015-16 stood at 2.62 times compared to 2.5 times a year earlier.

The company currently operates 14 projects. Besides this, five are under implementation while three others were recently awarded. For nine months ending December 2016, the total toll revenue stood at ₹1,837 crore. This is 6.5 per cent higher compared with the same period a year earlier. Of the projects under operation, Mumbai-Pune, Surat-Dahisar and Ahmedabad-Vadodara contributed more than 60 per cent of the toll revenues.

The net debt to equity ratio (about 2.8 times at the end of December 2016) should reduce further after the successful roll out of Inv-IT.

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