IRB Infrastructure: On firm foundation

The company remains analysts’ best pick among road BOT players, especially given the recent correction.

IRB Infrastructure has fallen 20 per cent in the last one month due to news of the company’s alleged involvement in the bribe-for-loan scam and the recent price-rigging case. However, the company has denied involvement in both, giving respite to investors. Consequently, after touching the 52-week low of Rs 186 on December 9, the stock has risen 17 per cent to Rs 218.05 following the company’s denial that it is involved in price rigging.

The correction led many analysts to either upgrade to or retain their ‘buy’ recommendation, with expectation of a 40 per cent (average) upside potential. A valuation of 12 times financial year 2011-12 estimated earnings is attractive, backed by strong fundamentals and future opportunities in build-operate-transfer (BOT) projects. Sixty projects worth Rs 40,000 crore are awaiting approval from the Planning Commission.

However, concerns stem from subdued activity by the National Highways Authority of India since June, increased competition, addition of a new 30 per cent toll rate slab, lower prices for new projects, and rising interest rates and commodity prices.

Analysts believe IRB is better positioned in terms of these risks as there is less competition in large projects. Moreover, 10 out of 16 projects are operational and generate a daily toll revenue of Rs 2.5 crore, while seven out of its 10 operational projects are debt-free.

Continuing the robust performance of financial year 2009-10, IRB’s revenue and net profit rose 30 per cent and 42 per cent, respectively, in the first half of 2010-11, led by the construction segment (60 per cent of total revenues). Analysts expect a significant rise in construction revenues in the second half due to robust execution of its Rs 9,500-crore order book on the back of start of construction on four new projects awarded in 2009-10. Further, collection of toll revenues from two projects (Kolhapur and Tumkur-Chitradurga) in the March 2011 quarter will boost 2011-12 toll revenues. The company remains analysts’ best pick among road BOT players.