Saturday, June 13, 2009


Beneficiary of pick-up in road investments

Demand environment looks buoyant; we reiterate Hold
Road sector infrastructure is likely to see a major up-tick from the government (a) accelerating clearances and adding sweeteners to make road projects more attractive; and (b) giving developers free capacity to bid for new projects as their existing road projects near completion. The sectoral headwinds are positive for IRB, which is one of the largest toll operators in the country. Our revised target price assumes INR40bn in new awards in FY10-11e. With a 30% out-performance in the last month vs. the BSE Sensex and our earnings cut, we reiterate Hold.

Demand environment becoming more benign
Over the next 12-18 months, we expect a flurry of profitable road projects to be awarded with (a) a higher concession period of 20-30 years (vs. 15-20 years previously); and (b) lesser revenue share with the government (vs. the peak of 35-40% in FY08-09). This could drive E&C EBITDA margins to 16% in FY10e, which could improve marginally by 100bps in FY11e.

Our revised estimates factor in new awards, are below consensus for FY10
We lower our traffic assumptions for Surat-Bharuch (by 20%) as well as for Surat- Dahisar in FY10e due to the slowdown in the commercial vehicle movement. Accordingly, we cut our EPS estimates by 39% in FY10e and 2% in FY10e. Our assumptions factor in traffic volume growth of 4-6%, which is in line with historical averages for the respective road stretches.

Reiterate Hold with a target price of INR140/share
Our SOTP valuation calculates the NPV of the toll road business at a CoE of 12.5% (from 15% due to lower equity risk premiums) and EV/EBITDA of the E&C business at 14x FY10e (4x FY09e, increased due to improved demand visibility). Our target price implies an exit P/E of 15.6x FY10e. Key upside/downside risks: (a) traffic growth variability (1ppt change in traffic growth affects target price by 4%); and (b) variability in E&C margins (a 100bps fall could lower EPS by 3% in FY10e).
Downside risks include developers resorting to significantly higher revenue shares, leading to lower NPV projects.

To see full report: IRB INFRASTRUCTURE