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  • Stock Recommendation | IRB Infrastructure - BUY - Target price : 260

    Publish date: OCTOBER 31, 2018

    Mixed quarter on uneven traffic revenues, weak construction margin.IRB reported a mixed quarter on traffic with new projects getting impacted by parallel stretches as revenues of mature projects start stabilizing. Its construction business disappointed on the margin front. The key positive was timely financial closure of HAM projects at reasonable terms and IRB’s stable balance sheet as it bids for the large tendered pipeline from NHAI over the next few months. We revise down our construction margin estimate and adjust for higher 13.5-14% cost of equity for road projects. This leads to a SOTP of Rs260 from Rs310 earlier. BUY.

    IRB reported a steady quarter for construction with revenues up 12% yoy. However, a weak construction margin dragged down construction EBITDA to 13% lower yoy levels. Given the low base of 2HFY18 and impending start of HAM projects, IRB is well on track to report strong growth in construction revenues in rem-FY2019; we estimate 20% yoy growth for full year. While it has not won fresh orders YTD-FY2019, it remains hopeful of finalization of Rs700 bn of ordering this year before the code of conduct sets in. We build in Rs60 bn of ordering for IRB for FY2019.
    Traffic revenues were volatile across projects. While the weak profile of revenues of Ahmedabad-Vadodara and Rajasthan-Kaithal showed some recovery, there were fresh disappointments in toll revenues for Mumbai-Pune (less important as at the very end of the concession period) and Agra-Etawah (more important as has just started tolling and is prone to diversion). Overall revenues of comparable projects were almost flat yoy and in line with our estimates. The big positive from the earnings call related to the HAM projects. IRB is the first to get all its HAM projects financially closed and at reasonable terms (80:20 equity to debt and upfront equity limited to 50% of overall equity requirement).
    Overall results were broadly in line with our estimates with 19/17/24% yoy growth in revenues/EBITDA/PAT. We still cut our estimates by 4-11% as we normalize the pace of execution (no fresh orders won in FY2019) and reflect weak construction margin in our estimates. We also increase the cost of equity assumption to 13.5-14% and cut toll revenue estimates for Agra-Etawah project. All these lead to a lower Rs260 one-year forward SoTP versus earlier SoTP of Rs310. Key downside to SoTP is its sensitivity to traffic growth estimates and large 10% share of value coning from yet-to-be commissioned BOT projects.

    Definitions of ratings

    BUY - We expect this stock to deliver more than 15% returns over the next 12 months.
    ADD - We expect this stock to deliver 5-15% returns over the next 12 months.
    REDUCE - We expect this stock to deliver -5-+5% returns over the next 12 months.
    SELL - We expect this stock to deliver

    Our target prices are also on a 12-month horizon basis.


    Other definitions

    Coverage view. The coverage view represents each analyst's overall fundamental outlook on the Sector. The coverage view will consist of one of the following designations: Attractive, Neutral, Cautious.


    Other ratings/identifiers

    NR = Not Rated. The investment rating and target price, if any, have been suspended temporarily. Such suspension is in compliance with applicable regulation(s) and/or Kotak Securities policies in circumstances when Kotak Securities or its affiliates is acting in an advisory capacity in a merger or strategic transaction involving this company and in certain other circumstances.
    CS = Coverage Suspended. Kotak Securities has suspended coverage of this company.
    NC = Not Covered. Kotak Securities does not cover this company.
    RS = Rating Suspended. Kotak Securities Research has suspended the investment rating and price target, if any, for this stock, because there is not a sufficient fundamental basis for determining an investment rating or target. The previous investment rating and price target, if any, are no longer in effect for this stock and should not be relied upon.
    NA = Not Available or Not Applicable. The information is not available for display or is not applicable.
    NM = Not Meaningful. The information is not meaningful and is therefore excluded.


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