Buy IRB Infrastructure Developers - Asit C. Mehta Investment

We initiate coverage on IRB Infrastructure Developers Ltd with "Buy" recommendation based on SOTP valuation with target price of Rs.305. We have valued BOT projects based on NPV method and arrived at value of Rs.128. EPC business is valued on the basis of relative valuation and we have arrived at value of Rs.172 by assigning P/E multiple of 12x to FY12E EPS of Rs.14. Despite the significant growth expected in the EPC business, considering the presence in only one segment and being a captive unit, we have assigned a P/E multiple of 12x (based on relative valuation) to FY12E EPS of Rs.14 and arrived at value of Rs.172. Other investments are valued at Rs.5.2 on book value per share basis. The company on account of 10 operational projects is expected to continue its revenue growth at 22 -24%. In EPC business, it is expected to grow at CAGR of 63% for 2010-2013 due to commencement of construction of four new projects. There is tremendous growth opportunity in industry due to huge investments, this will also augur well for IRB based on its expertise. Effective cash flow management will help them to reduce burden of funding pressure for new projects. However, operating margin is expected to be contracted, as a result of higher share from EPC business in revenue, which has operating margins around 20% against 82-84% margin of BOT business.

Investment Rationale

Road segment to continue to account for major share in the traffic

Roads are the dominant mode of transportation in India today. The Road Transport Sector has grown significantly during the past six decades from 13.8% share in goods traffic in 1950-51 but at present it is more than 60%, and 15.4% share in passenger traffic in the year 1950-51, which has increased to above 85% at present. We believe that the road segment will continue to account for major share in freight and passenger traffic. The freight and passenger traffic is expected to register significant growth on the back of growth being witnessed in the Auto sector. Further growth of vehicle traffic is an important key value driver for toll based road projects.

Accelerated investment in road sector is expected to boost planned implementation of projects

Government's focus on investments in infrastructure segment, especially in road sector is expected to increase which will result in award of nearly 37,000 km road projects from year 2009-10 to 2013-14 (Source: Report of the B K Chaturvedi committee on NHDP). Of this 37,000km, nearly 90% (33,000 km) of road projects will be awarded in next three years (2009-10 - 2011-12), as per estimation of committee report. However, we believe that award of 37,000 km in a year, is an aggressive target and difficult to achieve. We expect road development projects of around 25,000 - 27,000 Km to awarded during 2009-10 to 2013-14.

One of the largest and experienced toll based BOT player– Six projects are debt free, only one project in pre financial closure state

IRB is one of the largest toll based BOT player with 10 operational projects and 6 under construction projects and one pre-financial closure project under its portfolio. The company has also achieved financial closure for four new projects out of five projects bagged previously. Hence company is now eligible to bid for more projects as per new norm where company is not allowed to bid for new project if three or more projects are in pre-financial closure state. Therefore, we expect that IRB will continue to bag new projects based on its capability and past track record of efficiently executing road projects, which will help company to maintain growth momentum in future.

Project selection approach is key strategy of IRB

The key strategy is to bid for project from high traffic states such as Gujarat, Maharashtra and Rajasthan, large size projects and national highways that carry nearly 40% of total traffic of India. Approximately 22,700 km of new road projects have been planned in Maharashtra, Gujarat, Karnataka and Rajasthan. We believe there are huge investments opportunities in Indian road segment and IRB with its present strategy is likely to benefit from the same.

New business can open new opportunities for growth - its success will unlock additional values and new expertise that is not factored in our valuation.

IRB has one airport project, real estate business and two commercial property development projects under its new business portfolio. Although, all these projects are in pre-construction phase, success in its implementation can unlock more value. Lack of clarity about cash flow from these projects has restricted us to value them.

A Robust order book Rs.97,584 mn gives EPC revenue visibility for next 3 years.

The company has robust order book of Rs.97,584 mn. It comprises of EPC and ongoing BOT projects of worth Rs.20,093 mn, O&M of worth Rs.23,266 mn, funded projects of worth Rs.615 mn and BOT projects which are under award of worth Rs.53,610mn. Major portion of EPC for ongoing BOT projects is likely to be executed in FY11 and rest in FY12. Also EPC from the new award projects will be executed in next three years. IRB's current order book is nearly 5.5X of its FY10, hence gives clear visibility of high EPC revenue for next three years.

Source : Equity Bulls

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