IRB Infrastructure - Is The Story Over ? - PhillipCapital

IRB Infrastructure reported +14% YoY growth in topline (Rs8.45bn) and +18% YoY growth in Operating Profit (Rs3.8bn), in-line with our and consensus estimates. The numbers however, were better than our and street expectation at the PAT level (Rs1.21bn, +10% YoY), mainly due to lower than expected interest expense (FX losses being capitalized and refinancing of debt for Bharuch-Surat project). While the EPC division reported robust execution (+18% YoY), traffic growth at all major projects remained muted. Overall, there were no major surprises, and the results were along expected lines.

IRB Infrastructure's stock has fallen ~20% in the last one week, on the back of allegations of its subsidiaries investing monies into a private firm, Purti Power and Sugar Ltd, promoted by Mr. Nitin Gadkari, member of the main opposition party at the center (BJP). IRB's management has clarified that the money invested in Purti Power, was invested by Mr. Dattatray Mhaiskar, member of the promoter group, in his personal capacity. The company has also denied allegations of being granted any undue favors, and that all the projects it won, were awarded through transparent bidding process. The Ministry of Corporate Affairs (MCA) and IT department have initiated an investigation into this matter. While it is extremely difficult to deduce what the results of the investigation will be, we note that this is not the first time that the company has come into news for a non-business reason. An analysis of its stock price reveals, that over the last two years, the stock has witnessed a sharp fall seven times – with just one of those falls being for "pure business reason" (for details, see inside).

With the results of the polygraph test conducted on the MD in May-2012, still awaited, this revelation comes as a major blow to the company. We believe that in the current situation, the risk-reward profile for the stock looks extremely unfavorable. While there are very few positive triggers that can boost the stock price over the next six months, the negative events, and the probability of their occurrence is much higher. We see a maximum +20% upside from current levels with a low probability of occurrence and a potential -40% downside, with a relatively high probability of occurrence (details inside).

In wake of the unfavorable risk-reward profile, and the recent non-business developments, we believe the company can no longer be valued, just by aggregating the DCF value of its projects. A discount needs to be applied to the fundamental value, to reflect the concerns and overhang of the non-business developments, and their potential impact on the stock price.

We apply a 50% discount to the fair value of the stock (arrived at valuing individual projects using DCF and EPC division at 3.5x FY14E EV/EBITDA), to arrive at a price target of Rs109, representing 10% downside from current levels. We recommend investors to cut their losses at current levels, in view of the potential downside, if the recent developments take a negative turn for the company. We recommend NEUTRAL.

Source : Equity Bulls

Keywords