Road infrastructure companies: On a roll

Robust results and improving economic activity have been key reasons for the rise in stocks of IRB Infra and IL&FS Transportation.

The last two days have seen increased activity in the stocks of India’s major road infrastructure companies. The share prices of IRB Infrastructure Developers (IRB) and IL&FS Transportation Networks (ITNL) touched their 52-week highs of Rs 313 and Rs 336, respectively. While they slipped on Wednesday, the stocks have outperformed the Sensex, with gains of 15-20 per cent (against four per cent for the Sensex), in the past six months. Analysts attribute this to their robust June quarter results and improving prospects.

On Monday, Goldman Sachs came out with a ‘buy’ report on ITNL, giving a target price of Rs 353. The outlook for both the stocks is positive, with traffic growth improving on account of a pick-up in the overall economic activity in India. So far in 2010-11, the National Highways Authority of India (NHAI) has awarded projects for 2,500 km (as against 4,000 km in 2009-10 and just 850 km in 2008-09). This indicates robust flow of orders going ahead. Pratik Vora, analyst, Focus Shares and Securities, estimates projects worth Rs 2.9 lakh crore (cumulative of NHAI, state roads, mega road projects and expressways) in the next five years.

However, interest rate risks (average 14 per cent of the total operating income) and fixed nature of build-operate-transfer (BOT) contracts amid rising input costs are some near-term concerns.

The older player, IRB, has rich experience. Its concentration of projects in the most developed states – Maharashtra and Gujarat (70 per cent of BOT portfolio) – is expected to be compensated by higher activity in other states. Of the 16 projects in hand, 10 are operational and seven are debt-free, which indicate relatively less interest burden and better cash flows. High share of in-house construction (60 per cent) also ensures timely completion of projects and better margins. IRB is also pre-qualified to bid for projects worth Rs 24,600 crore expected to come up for bidding over the next two-three quarters.

ITNL, which provides the dual benefits of strong parentage and ability in arranging finances, has a relatively less risky portfolio with nine toll and 10 annuity projects. The only worry is the recently acquired Spanish company, Elsamex, which contributed significantly to ITNL’s consolidated financial performance in 2009-10 (about 40 per cent to sales, but only 3.5 per cent to net profit). Due to the continuing slowdown in the European region, any dramatic positive change in its fortunes is unlikely.

On Wednesday, IRB’s stock fell around five per cent to Rs 294, while ITNL was down 2.5 per cent at Rs 321.05. The market is trying to correct the valuation gap between the two, say analysts, as IRB, with a turnover of Rs 1,705 crore in 2009-10, is a little stretched at 17.5 times 2011-12 average estimated P/E, while ITNL (turnover of Rs 1,500 crore, excluding Elsamex) looks relatively cheap at nine times.