 "Long-term benefits for IRB Infra from latest contract")
The news of IRB Infrastructure bagging India’s largest road transport contract, totalling Rs 10,050 crore, came as a New Year gift to its stock price, which rose five per cent on Monday.
With a concession period of 22 years (including seven years for construction), IRB Infra would build and operate the Zoji La tunnel in Jammu and Kashmir. Analysts believe the project holds long-term potential for the company. First, the project would fetch revenue of Rs 6,500 crore (Rs 928 crore annually) during its construction phase, after which it would receive semi-annual annuity of Rs 981 crore. Second, key performance yardsticks such as internal rate of return (IRR) and earnings before interest, tax, depreciation, and amortisation (Ebitda) margin are expected to be in line with the current level. Virendra Mhaiskar, the company’s chairman and managing director, expects the IRR to be 15-16 per cent, while the project would operate at a 30 per cent Ebitda margin.
With a concession period of 22 years (including seven years for construction), IRB Infra would build and operate the Zoji La tunnel in Jammu and Kashmir. Analysts believe the project holds long-term potential for the company. First, the project would fetch revenue of Rs 6,500 crore (Rs 928 crore annually) during its construction phase, after which it would receive semi-annual annuity of Rs 981 crore. Second, key performance yardsticks such as internal rate of return (IRR) and earnings before interest, tax, depreciation, and amortisation (Ebitda) margin are expected to be in line with the current level. Virendra Mhaiskar, the company’s chairman and managing director, expects the IRR to be 15-16 per cent, while the project would operate at a 30 per cent Ebitda margin.
More important, if operational by 2023, the project could offset the potential revenue loss from the Mumbai-Pune Expressway (currently accounts for 12 per cent of total revenues). The Concession agreement for the latter is to end in 2023.
That said, given the stretched time-frames and likely challenges in execution (political and geographical), analysts take a cautious stand on the project. Nitin Arora of Emkay Financial Services points out the construction period of seven years is a deviation from IRB Infra’s usual norm of two to three years. Any delay in commencement of construction or its completion could result in cost overruns, impacting revenues from the project.
Bharanidhar Vijayakumar of Spark Capital believes Zoji La project could limit IRB Infra’s ability to undertake large-scale projects going forward. IRB had earlier indicated it would deploy Rs 500-600 crore of equity every year into new projects. An Annual equity commitment of Rs 350 crore towards Zoji La could restrict expansion plans in the next seven years. Taking on additional debt to fund similar projects in the near-term could further burden IRB Infra’s consolidated debt equity ratio, currently at 2.61.
Trading at 12.9 times the FY17 price earnings, IRB Infra is among the preferred stocks in road infrastructure. Twenty-five out of 28 analysts polled on Bloomberg recommend ‘buy’ on the stock, with a target price of Rs 300.
That said, given the stretched time-frames and likely challenges in execution (political and geographical), analysts take a cautious stand on the project. Nitin Arora of Emkay Financial Services points out the construction period of seven years is a deviation from IRB Infra’s usual norm of two to three years. Any delay in commencement of construction or its completion could result in cost overruns, impacting revenues from the project.
Bharanidhar Vijayakumar of Spark Capital believes Zoji La project could limit IRB Infra’s ability to undertake large-scale projects going forward. IRB had earlier indicated it would deploy Rs 500-600 crore of equity every year into new projects. An Annual equity commitment of Rs 350 crore towards Zoji La could restrict expansion plans in the next seven years. Taking on additional debt to fund similar projects in the near-term could further burden IRB Infra’s consolidated debt equity ratio, currently at 2.61.
Trading at 12.9 times the FY17 price earnings, IRB Infra is among the preferred stocks in road infrastructure. Twenty-five out of 28 analysts polled on Bloomberg recommend ‘buy’ on the stock, with a target price of Rs 300.