Friday, January 8, 2010


Right time, right place. Market leader IRB offers a focused play on India’s road sector at a time when highway construction is a top government priority. The company, which builds and operates toll roads, has the largest portfolio of build-operate-transfer (BOT) toll assets (1,154km across 16 projects). We estimate that IRB will record a FY09-12 earnings CAGR of c47%, driven by four contracts that the company has won in the last six months, new projects we expect IRB to be awarded over the next year, and revenue from two new toll roads.

Strong sector growth prospects. Given the government’s renewed focus on the building of highways, we estimate India’s road sector will generate cINR3trn (USD65bn) worth of business over the next 7-10 years. In the near term (FY09-13), this should amount to INR1.8trn (USD40bn), and we estimate IRB will capture a c6.5% share (USD2.6bn) of this highly fragmented market during this period. IRB will need to raise fresh capital to fund this growth. Its historical capital utilization record has been positive; we estimate the value of existing projects at 1.9x invested equity. Our current estimates do not factor in any dilution.

Attractive valuation. Our sum-of-the-parts value consists of INR138 for existing projects (DCF based), INR113 for its construction business (18x FY11e EPS), INR10 for other businesses and INR37 for future growth. IRB’s 62% earnings CAGR during FY09-11e and FY11e ROE of 20% are superior to its Chinese peers (earnings CAGR 13%, CY10e ROE 13%). Superior fundamentals justify IRB’s higher PB of 3.3x and PE of 17.8x against its Chinese peers (2.0x PB, PE 14.5x). If we factor in IRB’s impending INR12bn fund-raising, it would trade at an implied FY11e PB of 2.5x. Key risks: A sharp drop in traffic growth and an increase in interest rates.

To read the full report: IRB INFRASTRUCTURE