IRB Infra banking on Modi for highway boom

Revenue visibility promising, given an order book worth four times the FY14 revenues, say analysts

Highways builder and developer IRB Infrastructure Developers has been one the biggest gainers in the continuing rally on the Sensex. The stock is up nearly 150 per cent in the last three months and has almost quadrupled from its 52-week lows of Rs 51.90 in August last year.

The stock has run up in the expectation of escalation in investment in the highway sector by the new government and improvement in its toll revenues on the back of a likely growth revival. Toll revenues from highways under its control and operation account for nearly 40 per cent of IRB’s consolidated revenues, while the rest comes from the engineering and construction (E&C) division. Toll revenues greatly depend on truck movement that in turn is related to the overall economic activity in the economy.

IRB is one the largest highway developers with 18 highway concessions, of which 12 are currently tolled. The company is fully integrated from bidding to final operation and maintenance. It also builds its own highways through an internal construction arm and shows it as E&C revenues.

In the March quarter, toll revenue were up 14 per cent year-on-year to Rs 314 crore, as revenues from two new projects kicked-in – Jaipur-Deoli and Talegaon–Amravati. Its E&C revenue touched Rs 568 crore, though it went down 15.4 per cent on year-on-year. Lower than expected, toll and E&C revenues were, however, offset by higher margins resulting in four per cent increase in operating profit, despite seven per cent year-on-year decline in overall revenues. Operating margins were nearly 560 basis points up at 54 per cent from 48.4 per cent a year ago.

Analysts are upbeat about the company’s revenue visibility, given its outstanding order book of Rs 11,970 crore, nearly four times its consolidated net sales of Rs 3,732 in FY14. This will boost its E&C and toll revenues as more projects come on stream.

The downside risks are the high leverage ratio, 2.5x at the end of FY13, and fresh equity requirement of around Rs 2,850 crore over next three years to fund equity portion in three newly won projects. IRB plans to meet its equity requirement via internal accruals but any slippage in toll revenues (due to lower traffic) or execution delays could force it to borrow or raise fresh equity leading to dilution.

Currently, the stock is valued at around 14.2x earnings in FY14 and 2.1x consolidated book-value, in line with valuation for companies in other asset-heavy sectors such as power and utilities, thereby ruling out further gains from re-rating.