Sunday, July 4, 2010

IRB Infra Add on dips

IRB Infrastructure Developers: Buy

The stage is set for road projects to take off after the new norms for bidding have been put in place. Well-entrenched players such as IRB Infrastructure Developers would emerge as the natural beneficiaries of road orders, after this move.

A strong balance sheet, lucrative portfolio of 15 road projects, increase in toll revenues and reasonable leverage all augur well for the company. Investors with a 2-3 year perspective can consider buying the stock.

As IRB is a relatively mature developer compared with its peers, the stock is a fit candidate for the core portfolio. At the current price of Rs 262, the stock trades at 14 times its consolidated per share earnings expected for FY-12 (the company operates mainly through special purpose vehicles).

IRB's order book as of March 31, 2010 was close to Rs 9,000 crore, 5.3 times its sales this year. Most of the ongoing projects are slotted for completion by FY-13. IRB's revenue growth in its currently operational 10 projects has been encouraging.

At a time when quite a few developers have been witnessing lower than anticipated toll volume, IRB has seen increase in toll revenues in most of its key projects.

As there has not been any significant increase in toll rates, traffic volume growth is likely to have contributed to this trend. Revenue by way of tolls alone more than doubled over the last two years to Rs 842 crore in FY-10. This translates into a judicious mix of 50 per cent toll revenues and the rest from construction and maintenance.

In recent times, some of the new projects in operation by other developers have witnessed lower than anticipated traffic. IRB's portfolio of roads is unlikely to suffer from such a limitation as the routes are well-established.

While new projects may witness this trend, continuous bidding for fresh projects and revenue from construction is likely to shield the company from any slowdown in growth.

To ensure that it remains in the race for new projects, IRB has kept itself well-qualified (financially) to bid, by achieving financial closure on all four major projects bagged over the last one year. It is now financially eligible for projects up to Rs 4,000 crore.

Besides, given that IRB holds a large portfolio, it may have the luxury to bid only for lucrative projects. While this might require higher financial qualification, it recently tied-up with Reliance Infrastructure for a project with estimated cost of over Rs 5,000 crore.

IRB ended FY-10 with a 72 per cent revenue growth at Rs 1,705 crore while net profits at Rs 385 crore jumped 119 per cent, partly aided by tax credits. Despite taking on large projects, debt-equity ratio remains less than 1.5.

Vidya Bala

BL Research Bureau

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