• Date: 7 Aug’12                    Price: Rs 125.8                    Mid Cap with mkt cap 4190 crores
• Advice: Medium Risk, High Gain stock at attractive entry point. Buy systematically
• JainMatrix valuation for IRB is 254. It is available at 50% discount.
• Target: 312 by 04/13, and 409 by 04/14.

This update of the Mar 15 2012 article by JainMatrix Investments includes FY12 results, news updates and FY15 projections.

IRB Infrastructure is a leading roads & highway focused construction firm. It has a very good portfolio of legacy and current projects. Tight internal financial controls and a 5-year CAGR growth in Revenues (59%), EBITDA (52%), Net Profit (75%) and EPS (69%) make this an attractive business to buy into. Debt at 5.2k cr (D/E 1.84) is within limits.

This stock is testing investors, as the price plunged 40% in  May’12 on news that three top execs are being investigated in a case related to a real estate project off Pune Expressway. But the firm is confident of their non-involvement. The event should have no bearing on IRB business performance. Investors can hold on and even look at this fall as an opportunity to invest.  

IRB Infrastructure Developers – Description and Profile

• IRB is focused on the fast growing Indian road and highways sector. FY12 revenues were 3,256 cr & PAT 496 cr
• IRB takes up road projects involving Construction of Highways; and Operation and Maintenance (BOT) of this for a ‘concession’ period (of 15-30 years) while collecting toll, before handing it back to the government.
• The key revenue segments are Construction (71%)and BOT (29%). IRB has a large BOT portfolio, of 6,446 Lane-kms, with a market share of 11.1% on the Golden Quadrilateral. This portfolio includes prestigious projects like the Mumbai-Pune expressway, Surat-Dahisar, etc. IRB earns a high daily gross toll today, which is growing fast.
• Shareholding pattern is: Promoters – Individual/Corporate 67.6%, MFs/ DII 5.4%; FIIs 18.7%, Individuals retail & HNI 4.6% and Bodies Corporate plus others 3.7%. Thus Promoters hold a clear majority stake – a good sign.
• Construction payments are made at project execution milestones, so revenues are lumpy. Now the newer projects involve upfront payment of premium to government, so revenues start only once Toll collection starts, while construction work is internally funded.
• IRB has strong in-house integrated execution capabilities, which give it a better control on execution and costs of projects. So experienced personnel are the main resource of this firm.
• The CMD of IRB is Virendra Mhaiskar, an experienced construction engineer.

Events, News and Strategies executed by IRB

• Competition is intense for Construction projects. To counter this, IRB is Bidding for larger creamier projects.
• A recent achievement was the Feb’12 financial closure of the 4,880 crore Ahmedabad-Vadodara road project. It is the first ever-Ultra Mega project of NHAI on BOT basis & DBFOT pattern.
• In May ’12, IRB won a large four laning project of Goa/Karnataka Border to Kundapur section of NH-17 of 190 Km in Karnataka under NHDP phase IV. The project is of approx Rs. 2400 crores.
• BOT projects give 21-22% returns compared to Construction 17-18%. So IRB is now taking the M&A route to acquire operational BOT projects.
• In May’12, IRB Infra acquired MVR Tollways for Rs 130 cr. It has a 66km BOT road between Salem-Karur in TN
• Structurally, IRB is a holding company, and each new project is floated as a separate company. There are about 20 subsidiaries. This structure gives IRB flexibility in financing and executing projects.
• Strong financial record and relationships with financial institutions helps it get loans on tap. The firm is careful about profitability/ IRR of project bids. In 2010, it slowed bidding for new projects due to high interest rates.
• IRB has diversified into related areas – Airport and Realty.
  • The Realty project is Real estate development alongside the Mumbai – Pune Expressway. Land acquisition of approximately 1200 acres has been completed for township development.
  • It will develop a Greenfield Airport in Sindhudurg District, Maharashtra, adjacent to Goa
• IRB prefers to own the road construction machinery and Units/ plants required on projects.
• From a dominant Maharashtra operation, it has consciously expanded into a pan-India presence helped along by big recent wins in Karnataka, Gujarat and North India.

Industry Note:

• Out of the recently identified critical Infrastructure sectors, the Roads sector has done the best in growth, new projects bid out and performance. Governance is better in Roads & highways. Bidding out has happened in a transparent manner. And out performance in project delivery is rewarded with better returns.
• The list of Peers of IRB is over 50 Listed firms, plus diversifieds and unlisted firms. Competition includes Reliance Infra, Jaypee Infra, IL&FS Transp, GMR Infra, Lanco Infra, L&T, IVRCL, Ashoka Buildcon, etc. Industry estimates are that 90 firms are pre-qualified for prestigious National Highways Authority of India projects.
• Consolidation is expected in this industry. A lot of operational BOT projects are available in the market for acquisition, as firms try to pare down debt. These are opportunities for IRB to grow their portfolio directly.
• My quick estimate is that IRB has about 4-6% market share, by revenues. In terms of quality of projects and proven expertise, IRB definitely falls into the top 5.
• Earlier construction projects were awarded to the lowest cost bidder, with Govt. paying to bridge project viability. Today projects are awarded to the bidder that pays the highest premium to Govt. This is due to intense competition, and higher traffic volume projection on Highways. Govt. is now able to earn revenues.
• There is a huge demand for Road construction. For Road projects built under National Highways Development Project (NHDP), the flagship road-building program of the Transport Ministry, the plan is for upgradation of about 50,000 km of roads, at a rate of 7,300 km of roads every year.

Stock valuation, performance and returns

• IRB had its IPO in early Jan 2008. The subscription was fair at 4.3 times. Pricing was at 185, the lower end of the range. Luckily the IPO was before Reliance Power, and listing was before the crash of ‘08.
• From its IPO price of 185, it fell in the 2008 crash to 65, later peaked in Aug 2010 at 312, but fell again in May ’12 to the current 126, see Fig 1. Thus IPO investors have actually seen a 32% loss in 4 years.
• Dividend has increased to 18%, giving a yield of 1.6%. This steady increase indicates good financial health.

Fig 1 – Investments and Returns, JainMatrix Investments

• As compared to share price, Quarterly Income, EBITDA and Net Profit show a wonderful growth path in Fig 2. Note that Q1 & Q4 of every year have higher numbers due to end of year and seasonal factors.
• For a 5-year period the growth figures are Sales (59%), EBITDA (52%), Net Profit (75%) CAGR. These are astonishing numbers, and we are seeing the rapid rise of a very competent Roads Mid Cap stock.

Fig 2 – Quarterly Revenue and Profits, JainMatrix Investments

• We can see from the Consolidated EPS and Cash Flow – Fig 3, there has been a rapid growth in Cash from Operating activities. Steady Cash flow is coming from several BOT stage projects.
• Consolidated EPS has risen by a super 69% CAGR through this period, though from a low base.

Fig 3 – IRB – EPS and Cash Flow, JainMatrix Investments

• While the Cash Flow is good, in fact IRB is in a very cash intensive business. Net Debt has been rising at 37% CAGR since FY08 (Fig 4). However seen along with other business data presented above, this is sustainable.
• D/E is 1.84, below the infra firm warning level of 2.0 (the fall in D/E in Mar08 was from IPO funds deployment).

Fig 4 – IRB – Debt and DE Ratio – JainMatrix Investments

• An important ratio for IRB is the Orders Booked to Billing ratio (BTB). This has fallen, but is still quite comfortable (Fig 5). IRB has preferred to bid for only larger and more profitable projects.
• Order Booked position at IRB is 10185 cr, giving a comforting 3 years near term business visibility.
• Thus we can see that IRB has enjoyed good growth patterns, while at the same time managing its finances and debt well.

Fig 5 – IRB – Order Booked to Billings, JainMatrix Investments

• The Price and PE Chart of IRB, Fig 6, shows that IPO of IRB in ’08 was at aggressive valuations. However IRB has justified this over the last 5 years with excellent business performance.
• Today the PE of IRB is 8.3 times, below the industry average of 17. In fig 6 we can see that the average PE in the last 3 years has been 25. PE has today fallen to very low levels in this valuation range.

Fig 6 – IRB – Price and PE Chart, JainMatrix Investments

• The view of the EPS charts in Fig 7 shows that EPS grew very rapidly in 08-11 periods, then flattened in the high interest rate situation of 2011. The expectation is that the interest rate cycle has peaked today, and with fall in interest rates, the EPS will resume the upward march.
• The EPS of IRB is expected to stay in the Trend line range of Fig 7.

Fig 7 – IRB – Price and EPS Chart, Jainmatrix Investments

• ROCE is 13.3% and RONW is 18.6%, these are good ratios.
• PEG is at 0.12 – indicates undervalued status

Peer Benchmarking and Financial Estimates till FY15

In a Benchmarking exercise, we have compared IRB to other infrastructure companies, in Exhibit 8.

Exhibit 8 – IRB, Financial Ratio Benchmarking, JainMatrix Investments

The conclusion we come to is that on a combination of high growth, low valuations and good financial controls, IRB is a better all round player. IL&FS also is showing improving ratios.

JainMatrix Investments projections of FY12 financials in Mar’12 report were very close to the actuals, only 1-3% difference. Here are the further projections till FY15, Exhibit 9.

Exhibit 9 – Key Financials and Projections – JainMatrix Investments

Risks:

• IRB suffered a setback in its mega township project off Mumbai-Pune Expressway. The land acquisition process went wrong, with many middlemen/ agents getting involved, unrest among farmers, and finally the murder of a RTI activist. The IRB Chairman and 2 senior executives are under investigation. When the case details became public in May’12, the share price of IRB plunged 40%.
  • Even though it is being investigated, the case is a fallout of a local frenzy to sell land to IRB among farmers. It appears that the firm is being dragged into an unfortunate event, and they are cooperating with the agencies. The justice process may take 3-5 years, and the firm should not face any financial or operating effects from this.
  • The steep fall thus needs to be examined as a technical event, an event driven panic. IRB after plunging 50% to 100 levels has recovered to 125.8, is gathering strength here, and given a few weeks of stability should recover completely.
• Industry: Roads sector has seen high competition, and is now poised for a 2-3 year period of consolidation. High competition drove infra firms to bid aggressively for new projects. Many firms in this sector have overstretched their balance sheets and may default on payments/ restructure debt/ sell assets.
• This sector is dependent on the government for a lot of key inputs. Risks here include environmental clearance, handover of land by government for Road construction as well as roadside land for development (wherever applicable), procurement of land by government and political / R&R issues.
• Interest rates increases in the Indian economy are certainly impacting the balance Sheet of IRB
• IRB: The focus in IRB has shifted to execution quality and M&A. IRB needs to develop a second rung of management and leadership to take it to the next level of growth.

Opinion, Outlook and Recommendation

• India’s creaking infrastructure demands road construction, starting with National Highways. IRB is a focused Road construction major with an excellent portfolio of completed projects and visible operational excellence. The 3-year review of financials shows that the company is in good shape.
• IRB will see controlled growth due to the strategy of bidding for larger and more profitable projects.
• The 32% fall in price since the IPO is due to a poor sentiment and appetite in the market for infrastructure firms and higher interest rates. However, this sector will recover over the next 2 years.
• My opinion is that the 40% fall of IRB price in May was an event driven panic fall. It has recovered partle already, and over the next few weeks and months, the price should recover fully.
• FY12 results have been excellent, exceeding expectations. IRB will continue to be a Rising Road Star.
• It is the nature of markets that sentiment makes share prices fall far below or appreciate far above the fundamental value. IRB is underpriced at these levels. In a falling interest rate scenario, IRB will continue to outperform as it lowers its cost of debt and delivers on projects.
• IRB is a Medium Risk, High Gain stock. At these levels and in this trajectory, it is a BUY.
• Price Projections – the projections are a little reduced from earlier:
  • Our valuation prices the share at 254 (down from 271). Thus today it is available at a 50% discount.
  • By Apr ’13, the price projection is 312, a 174% appreciation from CMP
  • By Apr ’14, the price projection is 409, a 258% appreciation from CMP

Disclosure: It is safe to assume that if the JainMatrix website recommends a stock, the researcher has already invested in it.

Do you find this site useful?

Visit the SUBSCRIBE  page to find how you can get more. Click LINK

Add your comments/ queries below

Disclaimer:

These reports and documents have been prepared by JainMatrix Investments Ltd. They are not to be copied, reused or made available to others without prior permission of JainMatrix Investments. Any questions should be directed to the director of JainMatrix Investments at punit.jain@jainmatrix.com

Also see: https://jainmatrix.wordpress.com/disclaimer/