>IRB INFRASTRUCTURE LIMITED: Strong Macro + Pure Play = Perfectly Priced

■ Target price Rs278 — We use a sum-of-the-parts methodology to value IRB: 1) BOT assets are valued at Rs164 on a discounted FCFE basis; 2) The EPC business is valued at Rs84 (11x Dec 2011E P/E), a 25-30% discount to its E&C peers given the captive nature of its order book; 3) Other investments and cash on books are valued at Rs13 (book value); 4) Probability adjusted value of future projects is at Rs17, based on our market-share estimates in the projects awarded.

■ Pure play on roads, making it expensive — IRB is one of very few listed pure plays on roads in India and the scarcity premium it has already attracted would likely limit its upside potential. IRB is trading at an average P/E of ~19x FY11E, in line with mid-cap E&C peers but at a 31% premium to its global peers. We might get constructive on the stock at lower levels or better than expected order wins.

■ Leading player, looks well positioned to benefit from strong macro tailwinds… — NHAI intends to award 12,000km of road contracts in FY11 (~4x the FY10 level). IRB has a portfolio of 16 road assets covering ~1,250km. It has a market share of 7% in GQ projects and ~12% in NHAI FY10 project awards. While we do not expect IRB to maintain its current market share in future projects given larger rollouts, it looks well positioned to win a reasonable share of projects based on its technical qualification and net worth. IRB recently tied up with Reliance Infra to bid for the US$1bn Kishangarh-Udaipur-Ahmedabad highway.

■ PAT CAGR estimated at 15% over the next 2 years — 1) A revenue CAGR of 46% over the next 2 years due to project ramp-ups; 2) An EBITDA margin decline of 745bp due to a higher percentage of lower-margin EPC revenues. In its FY10 investor meeting, management indicated that another Rs60-80bn-worth of projects can be funded without resorting to dilution. Our sense is that if the order flow is strong and faster than expected, there could be dilution.

To read the full report: IRB INFRASTRUCTURE