IRB: Revenue visibility, attractive valuations provide comfort

IRB Infrastructure's share price has jumped 13 per cent in three trading sessions, with analysts turning positive following strong results. The company reported 31 per cent growth in net profit in the quarter ending March 2013 on sales growth of 12 per cent.

As the fundamentals are improving, analysts perceive valuations as attractive. At the current price of Rs 130, it is only factoring the valuations of the company's build-operate-transfer (BOT) business, while the construction (EPC) business, worth Rs 50-80 a share, is being ignored by the markets.

"At the current price, IRB is trading closer to its BOT valuation of Rs 134 a share, implying zero value to EPC business. The upside on account of EPC business (valued at Rs 51 a share) is not reflected in the current market price and may result in a re-rating," said Parikshit Kandpal, who tracks the company at Karvy Stock Broking in a recent note.

IRB's growth in the past several quarters is attributed to its strong execution, which to some extent is a key worry for the rest of the industry. This is also reflected in IRB's results, where the construction segment (70 per cent of revenue) grew over 10 per cent. On the flip side, the construction business has seen its order book shrink due to lack of new projects. NHAI in FY13 awarded about 1,300 km of new road projects as against the target of 9,000 km.

Currently, the construction segment has Rs 8,400 crore of order book, over three times its FY13 revenue. This gives reasonable visibility for the next 18-24 months, but any further slowing could be a risk to revenues and valuations of the construction business.

Meanwhile, due to a strong BOT portfolio of existing and upcoming road projects, the company continues to sustain decent growth. In the March 2013 quarter, the segment grew 12.8 per cent as a result of commissioning of new projects and traffic growth.

"The Surat-Dahisar project reported 12.3 per cent growth in toll revenue with 5.0-5.5 per cent growth in traffic, whereas Bharuch-Surat reported eight to nine per cent traffic growth, leading to 18.5 per cent year-on-year growth in toll revenue," said Mangesh Bhadang of Quant Global Research. Importantly, most of its projects are generating good cash flows, which have enabled the company to meet its equity requirements and bid for more projects and sustain execution.

Over the next three months, the company is expected to commission three new road projects, which will further add to its toll revenues and overall growth. This is also a reason that most analysts are expecting IRB to post a strong 20 per cent growth in revenues in FY14. Net profit though, may come under pressure due to higher interest costs for the projects commissioned recently.