>IRB INFRASTRUCTURE (BNP PARIBAS)

Don’t wait till the next project win

■ Only pure-play proxy on highway spending
We initiate coverage on IRB Infrastructure (IRB) with a BUY rating and TP of INR293.00. IRB is a pure-play highway developer with over 1,000km, or INR110.6b, worth of projects in its BOT portfolio. IRB has more than INR215b worth of projects under tender and we estimate new
project wins provide potential upside to the current price. The construction arm has an INR103b order book (represents 19x FY09 construction revenue).

■ INR1t opportunity over FY10-12; INR215b bids placed
The National Highway Authority of India (NHAI) is likely to tender INR1t worth of projects in the next three years. IRB is pre-qualified for more than INR215b. Separately, the NHAI has also made several changes to the model concession agreement that would attract private developers.

■ Internal accruals can support additional INR20b projects
We believe the company can win INR20b (approximately 10%) of projects from its existing bid pipeline of INR215b, based on its prequalification. We estimate that the internal accruals will be sufficient to fund equity in these additional projects. This holds true even if the traffic growth declines to 2%. In the worst case, the company can lever its standalone (with net cash of INR838m) or six debt-free projects generating EBITDA of INR1b annually.

■ Valuation
Our TP of INR293.00 is based on SoTP valuation. The BOT projects and construction business contribute INR130 and INR108 to our TP. Potential new projects and the real estate venture contribute INR30 and INR25 respectively. We use DCF to value the BOTs and an EV/EBITDA
multiple of 8.0x on our FY11 construction EBITDA of INR4,860m (implied FY11 P/E multiple of 12.6x is at a 40% discount to market leader L&T).

■ Sensitivity
A 0.5% change in annual traffic growth (from current 7%) results in a 5.0% change in TP. A 0.5% change in cost of equity has a 2.0% impact on TP. Our TP increases by 2.7% for every INR5.0b of projects secured

To see full report: IRB INFRASTRUCTURE