As the awarding of projects in the road sector gathers steam and sanity returns among players, share prices of companies like IRB Infrastructure Developers have rebounded in the recent past. IRB’s shares, for instance, rose almost 35 per cent from a low of Rs 125 in January. Considering the expected turnaround in the industry, IRB’s current valuations, and the strong revenue and earnings visibility, its stock could continue to perform well in the coming months. Also, if interest rates come down, as these are expected to, it would benefit the company, considering its estimated net debt (Rs 6,100 crore) to equity ratio of 1.8 in FY12.
At Rs 168, its stock discounts FY13 estimated earnings by about 11-12 times, which is reasonable. And, given analysts’ one-year price target of Rs 200 per share, it indicates potential upside of 19 per cent.
Q3: Along expectations
For the quarter ended December, IRB’s revenues increased 11.5 per cent, led by higher revenue in the build-operate-transfer (BOT) business. Notably, this business also helped boost overall operating profit margins by 190 basis points to 16.4 per cent.
“The improvement in the operating profit margins reflects the revenue from BOT (which commands higher margins) grew higher, compared to the EPC business, which might be taking a backseat as a result of the slow execution,” says Ganesh Ram, who tracks the company at Kim Eng Securities.
However, despite the strong growth in operating profit margins, the net profit declined marginally by about one per cent, owing to higher interest cost. “Interest cost has gone up this quarter, mainly because of the Surat-Dahisar road project (commissioned recently), the entire debt for which was drawn in December quarter. This project has Rs 1,500 crore of debt and has generated Rs 99 crore of gross revenue in the quarter,” says chairman and managing director Virendra D Mhaiskar.
Most of the debt is related to the BOT projects, which operate on an internal-rate-of-return basis. Analysts believe the interest cost to revenue ratio would stabilise in the coming year, as the revenue from BOT operations start kicking in. CLSA estimates the interest cost to revenue ratio would fall from 16 per cent in FY12 to 14 per cent in FY13, with the interest coverage ratio at about three, which is comfortable.
Revenue visibility
In the first nine months of the current financial year, the company has already reported a net profit of Rs 375 crore, and is confident of a net profit of Rs 125-130 crore in the current quarter, taking the full-year figure to Rs 500 crore. For the next financial year, execution of the work at hand, winning new projects and revenue from toll collection would be the key drivers of growth.
Though the company has, over the last year, seen reduction in its order book (in the engineering, procurement and construction division, which undertakes construction of roads), the situation is expected to improve, as activities in the road sector are picking up. For instance, till December, the National Highways Authority of India had awarded about 5,100 km of road projects and aims to achieve the 7,300-km target by the end of the current financial year. The authority has also set a target of over 7,500 km for FY13. These are significantly higher than the 5,000-km target announced in FY11.
Analysts are also confident of competition easing, as a result of scarce capital and funding constraints faced by marginal players in the industry. Nevertheless, the company still has an order book almost four times its annual engineering, procurement and construction revenue, which provides good visibility. “We have enough visibility in terms of the Rs 9,000-crore order book. Additionally, we will be commissioning about 200 km of projects in the next financial year (FY13), which should take care of our revenue and profit growth that year,” says Mhaiskar.
On the whole, though execution could be a risk in the near term, the business environment is expected to improve. Even otherwise, led by the existing order book, analysts expect EPC revenue to grow 35 per cent in FY12, and 23 per cent in FY13.
