IRB stock looks beaten and attractive

Company has total equity of Rs 3,255 crore as against its market capitalisation of about Rs 2,000 crore

The recent correction in IRB Infrastructure Developers’ share price can be used as an opportunity to buy the stock. IRB’s stock has seen huge selling after the company withdrew its bid from Mumbai Trans Harbour Link, one of India’s large road construction projects. Its shares plunged 25 per cent on Thursday to Rs 54.15. Although it has recovered some ground to Rs 66.50 currently, the stock still trades at half its book value (equity) and less than four times its FY13 earnings.

Even if one does not put much emphasis on the earnings-based valuations, its price-to-book value looks attractive. The company’s net worth stands at Rs 3,255 crore against its market capitalisation of Rs 2,200 crore. And, most of this equity (net worth) is invested in hard assets or build-operate-transfer (BOT) road projects. Although the company had Rs 8,776 crore debt at end-March 2013, its operating profit at Rs 1,767 crore was more than sufficient to meet its interest costs of Rs 620 crore for FY13. The firm currently has 18 road assets totalling 7,479 lane km in length of which 4,743 lane km is already operational. A large part of its revenues come from these operational road projects, many of which are at key locations including Mumbai-Pune road, which itself collects toll worth about Rs 1.15-1.20 crore every day. As more projects go on stream, revenues should get a boost and so should profits, thereby providing support to its return ratios which have inched lower in the last few years due to these capex plans.

The company has already invested about Rs 2,000 crore in the assets in the form of equity, which carry a value. At the peak, investors valued these assets at 3.5 times the book value. In contrast, on Tuesday, at Rs 66 a share, the firm is valued at just 0.7 time its consolidated book value of Rs 97. Analysts say the company deserves better valuations, especially in the light of the 18-20 per cent average return on equity it has reported in the last four years. That apart, the dividend yield itself at current price works out to be 7 per cent, which is good for a business that generates cash every year. Although the company’s cash flow from operating activities has fallen from Rs 853 crore in FY12, it was still healthy at Rs 467 in FY13.

With debtors at just Rs 8 crore and cash and bank balance of about Rs 1,500 crore, the liquidity is good (equivalent to about 75 per cent of its market capitalisation). This is excluding the value of construction business, which has order book of Rs 8,432 crore and reported revenues of Rs 2,729 crore in FY13.        

“Even if one removes the value of construction business and values the company only on the basis of its operational assets, the company’s per share value should come to Rs 90,” says Abhinav Bhandari of Elara Capital. Although there is value in the stock at current levels, analysts also warn that investors should be ready for further correction. “There are rumours that some funds have sold the stock or may be, some pledged shares are being liquidated. I think, at current levels, if one has patience for another four to six quarters, IRB’s stock can give good returns. But in the interim, you should not worry if it goes down further because in the current scenario fundamentals may not work,” says Manish Kumar, who tracks the company at SBICAP Securities.