IL&FS Transportation Networks: Time to relook

As earnings and cash flows improve, worries on debt could ease leading to re-rating of the stock

As execution speeds up, IL&FS Transportation Networks could shrug off some of the Street’s concerns over the high debt in its books. Over the next one year, the company will commission about 7-10 projects, kicking in cash flows. Importantly, the collections, which currently stand at about Rs 4 crore per day, will improve drastically. This will add to the ability of the company to service debt and manage interest cost as respective revenues from the projects where the debt funds are deployed will start flowing.

"With the launch of these seven projects, we expect ILFT’s average daily cash collection to increase threefold to around Rs 6 crore by FY15. This will likely ease investors’ main concerns about the company and the sector namely, potential delays in cash flow generation limiting developers’ ability to cut leverage," said Ashutosh Narkar, who tracks the company at HSBC Securities and Capital Markets in note.

Also IL&FS Transport, which is one of the most interest sensitive company in the construction space, could see a significant impact on earnings if interest rates drop over the next one year. For instance, even a 100 basis point drop in interest rates could save the company Rs 180-190 crore, which is about 30% of its estimated profits in FY14.

The Street was also worried about the execution despite the company's strong order book. IL&FS is sitting on an order book of about Rs 13,100 crore, which is about 3 times its revenues. However, since analysts now believe that the cash flow will improve and with worries on the clearance front easing beacuse of proactive measures taken by the government and the ministry, there is hope that revenues from the construction business will also be good enough and that will add to the overall growth.

No wonder then that the analysts are expecting its revenues to grow by 10% and earnings to grow by 26% in FY15. More importantly, if the company is successfully able to manage its cash flows and debt as expected by the Street, there could be huge gains in terms of the valuations rerating. Currently, the stock is trading at about 4 times its FY15 estimated earnings.