Stock Review: IRB Infrastructure Developers

 

 

IRB Infra is likely to benefit from govt's increased thrust on the infrastructure sector. Investors with a two-year horizon can consider buying this stock

 

   INTEGRATED construction firm IRB Infrastructure Developers posted strong financial numbers for the quarter ended June 30, 2010. The company could sustain a double-digit growth in its net profit over the past one year. This reflects an improvement in toll revenues due to higher road traffic and better margin from the construction segment. Given the government's increased focus on infrastructure improvement in the country, the company is unlikely to see any let up in business activity. However, the key to success will be timely execution of projects.

Business:

The IRB Group started operations in 1977 when Ideal Road Builders (IRBPL) was incorporated to undertake the road contracting business. For the first 18 years, IRB completed several projects in the roads and highways sector. It ventured into the BOT (build-own- transfer) space through the Thane–Bhiwandi bypass project in 1995 that marked the entry of the company into the toll road segment. IRB is India's largest BOT road operator and builder. The company has a portfolio of 19 assets, including the successful toll road projects like Mumbai-Pune expressway. The other operational toll assets include the Baruch-Surat and Surat-Dahisar (Mumbai) highways. These three toll projects contribute more than 80% to the toll segment revenue of the company.

   As far as revenue model goes, it derives half of sales from construction and allied activities with the rest from the BOT segment. The BOT segment has more than half of the projects from western India. Although it appears attractive due to the heavy container traffic movement in the region, it does tend to add some risk due to geographic concentration in one region.

   But in the past few quarters, IRB has been able to reduce this risk by bidding for toll projects in other states as well. It has recently bagged projects in north and south regions. IRB has an order book of Rs 9,759 crore as of June 30, 2010, which is 5.2 times its revenue for the trailing 12 months ended June 30, 2010. Half of its order book comprises recently bagged BOT projects. These orders are to be executed over the next 18-24 months.

Financials:

The company's consolidated net sales rose at a compounded annual growth rate of 80% over the past three years. Operating profit before depreciation grew 59% whereas net profit grew 114% annually during the period. A large part of the growth in revenues is on the back of robust increase in toll revenue due to increase in container traffic in western India.

   For the first quarter of FY11, IRB's revenue grew 23% over the year ago period to Rs 512 crore, while net profit grew 41% to Rs 120 crore. This was led by execution of toll projects and improvement in margin of construction business in this quarter. The company was able to boost operating margins by 800 basis points to 50% for the quarter ended June 30, 2010. The increase in margin was due to the Surat-Dahisar project, which constitutes close to 50% of the toll business.

Growth Triggers:

IRB is pre-qualified for projects worth Rs 21,500 crore approx for which bidding is expected in a couple of months. With the government's increased thrust on the road sector, National Highway Authority of India (NHAI), likely to invite bids for 78 projects worth Rs 100,000 crore in the current year as per available estimates.

   With execution capabilities and required expertise, IRB is in the sweet spot. However, IRB is likely to pick and choose lucrative projects, which will add to the profitability of the company rather than going for volumes.

   The company has no plans to increase its capital expenditure in the current year to meet the new demand. As per the company's estimates, current fixed assets are sufficient to meet the increase in turnover in the coming year.

Valuations:

The recently bagged projects are likely to act as a catalyst for better earnings in the coming years. Further, the government's increased focus on the road construction is likely to speed up the opportunities to bag new projects.

   At the current market price of Rs 293, the scrip trades at 20 times its profit for the past 12 months on a consolidated basis. We expect the company to close FY11 with consolidated net profit Rs 460 crore and grow it further to Rs 560 crore in FY12. This means IRB scrip is trading around 16 times the estimated forward earnings for FY12.

   With operating margin (44%) significantly higher than the mid-size construction player (9-10%), this makes IRB an attractive bet for long term. Given its future prospects, investors can consider buying the stock with a horizon of two years.

Concerns:

IRB relies more on toll revenue and a drop in traffic might result in lower income. Further, any delay in BOT project can impact
returns owing to high leverage.