Monday, July 30, 2012

>IRB Infrastructure Developers

 Recommendation: Buy

Price target: Rs175
Current market price: Rs113
Strong execution drives growth
Result highlights
  • Earnings above estimates, margins expand: For Q1FY2013 IRB Infrastructure Developers (IRB)?s consolidated revenues grew by 22% year on year (YoY) and 15.5% quarter on quarter (QoQ) to Rs980 crore (marginally above estimates) led by a strong execution in the engineering, procurement and construction (EPC) segment and consistent toll collection across projects. Further the operating profit margin (OPM) improved sharply to 43.4% (better than estimates) as against 41.1% in Q1FY2012, but lower than Q4FY2012 margin of 44.9%. The improvement is mainly on account of margin expansion in the EPC segment. Subsequently the EBITDA is up 29% YoY. However, the profit after tax (PAT) growth was restricted to only 5.7% YoY to Rs142 crore (though much above our as well as the street?s estimates) due to ~80% surge in depreciation mainly on account of the Surat ? Dahisar project getting fully operational and increase in interest charges by 31%. The tax rate too came in higher than estimated at 29%, thus eroding profits.
  • Strong performance by the EPC segment: The EPC vertical posted a strong growth of 27% YoY and 21% quarter on quarter (QoQ) in revenues to Rs728 crore led by a robust execution in the Talegaon ? Amravati, Jaipur ? Deoli, Amritsar ? Pathankot and Tumkur ? Chitradurga projects. Further the quarter also witnessed stable / range bound movement in input (raw material) prices as a result of which the margins expanded to 27.9% vis a vis 22.8% in Q1FY2012 and 26.9% in Q4FY2012. Subsequently the EBITDA was up 55% YoY and 26% QoQ. However due to a surge in interest cost, the PAT was up 37% YoY and 20% QoQ.
  • Even BOT division continues its stable performance: Even the build operate transfer (BOT) division continued to put up a stable performance with revenues up 10.4% YoY and 2% QoQ to Rs252 crore. The growth was largely led by (i) toll revision by 6% since April 2012 at the Tumkur ? Chitradurg project and (ii) strong traffic growth witnessed across few projects on a Y-o-Y basis especially in the Surat ? Dahisar, Surat-Bharuch and Mumbai ? Pune projects. At the operating level as well, the segment witnessed a 110 basis point YoY margin expansion to 88.2% resulting in an 11.8% YoY growth in the EBITDA. However due to a sharp jump in depreciation on account of the Surat-Dahisar project, the PAT fell by 35% YoY but was up 13% QoQ (since the depreciation impact was there Q4FY2012 onwards).
  • Thus earnings estimates revised upwards: We have revised our earnings estimates upwards by 15% and 7% for FY2013 and FY2014 respectively to factor in an expansion in the EPC margins as witnessed in Q1FY2013.
  • Maintain Buy with price target of Rs175: We continue to like IRB given its vast portfolio, rich experience, strong financials and healthy cash flows from its operational toll-based projects, all of which provide comfort. With a strong pipeline of projects up for award from the National Highways Authority of India (NHAI) and the bidding process becoming less aggressive, the management is confident of securing projects at an equity IRR of 18%. Further, it is also looking at growing inorganically by acquiring operational projects. With a mature portfolio now, the management plans to reward shareholders with dividend upto 20% of net profit. Its dividend payout last year was 14%. Thus with this strategy, it has declared a 10% interim dividend of Rs1 per share (face value Rs10). We like the strategy of the management for future growth and hence maintain our Buy recommendation on the stock with a price target of Rs175. Further the stock has corrected sharply post its promoter getting tangled in a murder case and the recent Maharashtra Navnirman Sena (MNS) attack on its Mumbai-Pune Expressway. Notwithstanding the legal tangle of its promoter we believe the sharp correction offers a compelling buying opportunity. At the current market price, the stock is trading at 7.6x and 8.4x its FY2013E and FY2014E earnings respectively.