Excellent growth prospects, an experienced management, strong parentage and reasonable valuations makes the ITNL IPO attractive.

IL&FS Transportation Networks (ITNL), which undertakes road projects on a build-operate-transfer (BOT) model, is raising Rs 700 crore from the primary market. Of this, about Rs 103-110 crore is an offer for sale by an existing investor Trinity Capital, while the balance will accrue to ITNL which plans to use the funds to prepay part of its debt. ITNL has so far been involved in 21 projects of which 19 are in the road sector. The company started operations in 2000 when its parent IL&FS spun it off into a separate company with a focus on surface transportation projects.

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These projects are expected to be completed in the next two and a half years. The company is also the preferred bidder for two projects - the 888 lane kilometre Narketpalli-Medarmetla road project in Andhra Pradesh and Almaty-Hargos stretch in CIS (former Soviet Union) with a size of 1,212 lane kilometres. Further, it is pre-qualified in 23 projects of 2,500 lane kilometres with estimated project cost of about Rs 21,000 crore.

The key risk for the company is the level of traffic flow through a route which will decide the viability of a project. The Noida Toll Project for example, where ITNL currently holds 25 per cent, did not meet the requisite targets (commercial operations started in 2001) and is only now able to generate healthy traffic flow. The management, however, says that projects it is implementing are in areas where alternative routes are not likely to come up and should fetch it reasonable traffic. 
 

For future projects, what will act in favour of ITNL are NHAI norms which forbid developers from bidding for projects if three or more of their projects are awaiting financial closure. Having a parent such as IL&FS, which has proven skills at raising capital and financial closure, is expected to be a major positive for ITNL. Further, 35 per cent of the projects being annuity give stability to cash flows.

In addition, to reduce revenue volatility it has auctioned toll collections to third parties for a period of one year in exchange for a fixed fee.
 

Financials
Growth for a road infrastructure player isn’t an issue, and expect the company to post revenue growth of 50 per cent. The reason for this is the size of the opportunity ($67.2 billion for the road sector in the XI Five Year Plan) and the fact that that a third of these projects will fall into the kitty of the private sector. Even if the government’s target of constructing 20 kilometres is reduced by half to 10 km a day, it would require an investment of $25 billion for the next three years.

The worry then for the company is its March 2008 acquisition of Spanish company, Elsamex, which operates in the low margin maintenance business and accounted for 43 per cent of revenues in the first half of 2009-10. The management says that while Elsamex’s contribution will not exceed a fifth of the consolidated net profit going ahead, the Spanish company’s knowhow related to maintenance planning and execution will come handy for ITNL’s Indian projects.

Valuations
On the valuations front, the company trades at a significant discount to its closest peer, IRB Infrastructure, at the upper end of the price band (see table). The latter commands a premium due to its more mature portfolio and its in-house execution capability (engineering and construction division). While the revenue profile of ITNL is relatively different as compared to IRB, what acts in favour of ITNL is the management track record (15 years in the business), impressive project portfolio, project expertise and growth prospects in India and overseas. Subscribe to the issue to reap the gains.

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