Recovery in sight for IL&FS Transportation

Currently, the company is sitting on an order book of about Rs 13,100 crore, three times its revenue

As execution quickens, IL&FS Transportation Networks (ITNL), India’s largest road infrastructure company, will be able to shrug off some of the Street’s concerns over the high debt in its books, as some projects for which loans were taken start generating revenues and cash flows. Through the next year, the company will commission seven-10 projects, expanding its existing road portfolio. More importantly, collections will improve significantly, boosting the company’s ability to service debt and manage interest cost, as revenues start flowing from the projects where the debt funds are currently deployed.

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

ITNL is one of the most interest rate-sensitive companies in the construction space. Any drop in interest rates through the next year, which is quite likely, will have a huge impact on the company’s earnings. For instance, even a 100-basis-point drop in interest rates could save the company Rs 180-190 crore, about 30 per cent of its estimated profits in FY14.

Despite the company’s strong order book, the Street was worried about execution. Currently, the company is sitting on an order book of about Rs 13,100 crore, three time its revenue. However, since analysts now expect the cash flow to improve and worries on the clearance front are easing due to proactive measures taken by the government, there is hope revenues from the construction business will rise, adding to the overall growth.

Therefore, it isn’t surprising analysts expect ITNL’s revenue to rise 10 per cent and earnings 26 per cent in FY15. And, if the company is able to manage its cash flows and debt, as expected by the Street, it may see huge gains, in terms of a valuation re-rating. At Rs 124, the stock is currently trading at just four times its FY15 estimated earnings.