March 14, 2011 IRB Infrastructure (IRBINF)content.icicidirect.com/mailimages/icicidirect_irb... · 2016. 12. 5. · 11.0 28.6 26.9 24.0 24.3 18.5 15.9 14.1 12.6 12.7 9.5 29.7-20.0

March 14, 2011

ICICIdirect.com | Equity Research

Initiating Coverage

ICICI Securities Limited

On the growth road… IRB Infrastructure (IRB), one of the leading players in the road space, currently has a road BOT project portfolio of 16 projects aggregating 5,735 lane km (3413 lane km are operational while the remaining are expected to get operational till FY14E). Once operational, IRB’s BOT revenues would expand 2.2x to | 1604 crore in FY14E. IRB is also comfortably placed in terms of funding requirement (all projects have achieved financial closure and internal accruals are more than sufficient to fund equity commitment). In the construction business, a strong and financially closed captive order book provides healthy revenue visibility. Given its leadership position in road development, comfortable funding position and strong construction division providing revenue visibility, we are initiating coverage on IRB with a BUY recommendation and a price target of | 216. Leading road BOT player IRB is one of the largest BOT toll operators with 16 projects under its portfolio covering 5,735 lane km. Out of this, 3413 lane km are operational, generating net daily BOT collection of | 2.3 crore per day (highest among leading players). Once all projects get operational, we anticipate IRB’s net daily BOT collection would increase to | 4.5 crore in FY14E translating into two fold jump in BOT revenues to | 1604 crore in FY14 from | 721 crore in FY10.

Comfortable funding situation

IRB has achieved financial closure for all projects. In terms of equity commitment, we believe IRB’s internal accruals from BOT and construction division (| 3652 crore during FY11-14E) are more than sufficient to fund its equity commitment (| 2215 crore) during FY11-14E.

In house construction capabilities IRB, through its subsidiary Modern Road Maker (MRM) undertakes in-house construction work. MRM currently has a strong order book of | 8,986 crore, 3.6x FY11E consolidated revenues providing strong visibility. Furthermore, we derive comfort in execution as all of its BOT projects are now financially closed.

Valuations At the CMP, the stock is quoting at 12.3x FY12 EPS and 2.1x FY12 P/BV. We are initiating coverage on IRB with a BUY recommendation and price target of | 216 based on SOTP valuations. We have valued IRB’s BOT project at | 143/share (operational project – | 95/share and under construction/development project – | 48/share) and construction business at | 70/share (at 9x FY12 EPS).

Exhibit 1: Valuation Metrics FY09 FY10 FY11E FY12E FY13E

Net Sales (| crore) 991.9 1,704.9 2,534.7 3,575.8 4,601.4 EBITDA (| crore) 437.4 799.0 1,133.1 1,372.1 1,560.2 Net Profit (| crore) 175.8 384.9 491.9 501.1 560.8 EPS (|) 5.3 11.6 14.8 15.1 16.9 P/E (x) 35.2 16.1 12.6 12.3 11.0 Price / Book (x) 3.6 3.0 2.5 2.1 1.8 EV/EBITDA (x) 18.6 10.6 8.5 8.3 8.2 RoCE (%) 7.6 12.3 13.4 11.5 10.7 RoNW (%) 10.2 18.9 20.1 17.4 16.7

Source: Company, ICICIdirect.com Research

IRB Infrastructure (IRBINF) | 186

Rating Matrix Rating : Buy

Target : | 216

Target Period : 12-15 months

Potential Upside : 16%

YoY Growth (%) (YoY Growth) FY10 FY11E FY12E FY13ENet Sales 71.9 48.7 41.1 28.7 EBITDA 82.7 41.8 21.1 13.7 Net Profit 118.9 27.8 1.9 11.9 EPS 118.9 27.8 1.9 11.9

Current & target multiple FY10 FY11E FY12E FY13E

P/E 16.1 12.6 12.3 11.0 Target P/E 18.6 14.6 14.3 12.8 EV / EBITDA 10.6 8.5 8.3 8.2 P/BV 3.0 2.5 2.1 1.8 RoNW 18.9 20.1 17.4 16.7 RoCE 12.3 13.4 11.5 10.7

Stock Data Bloomberg/Reuters Code IRB IN / IRBI.NSSensex 18,439.5 Average volumes 1,092,253.8 Market Cap (| crore) 6,069.0

52 week H/L 313 / 148Equity Capital (| crore) 332.4 Promoter's Stake (%) 75.0 FII Holding (%) 13.3 DII Holding (%) 3.4

Comparative return matrix (%)

Return % 1M 3M 6M 12MIRB 6.3 (10.6) (37.4) (29.4) ITNL (8.6) (31.2) (43.8) IVRCL 10.7 (41.2) (54.7) (55.3)

Price movement

100130160190220250280310340370

Mar-11Dec-10Sep-10Jun-10Apr-10

3,500

4,000

4,500

5,000

5,500

6,000

6,500

Price (R.H.S) Nifty (L.H.S)

Analyst’s name

Deepak Purswani [email protected]

Bhupendra Tiwary [email protected]

ICICIdirect.com | Equity Research Page 2


Company background Incorporated in 1998, IRB Infrastructure (IRB) is a leading infrastructure development and construction company involved predominantly in the road and highways sector. The company through its various SPVs currently has a road project portfolio of 16 projects aggregating 5,735 lane km. Out of this, 3,413 lane km are operational generating net BOT collection of | 2.3 crore per day, which includes the marquee project Mumbai Pune Expressway. IRB is also credited with executing India’s first BOT project (Thane Bhiwandi Bypass). The company has 9.31% share in the total Golden Quadrilateral length and ~6.7% in the NHDP programme. IRB, through its wholly owned subsidiary Modern Road Makers (MRM), predominantly carries out in-house engineering, EPC and operation & maintenance work. As on Q3FY11, MRM’s order book stands at | 8986 crore, 3.6x FY11E consolidated revenues providing strong revenue visibility over the next couple of years. IRB also enjoys better EBITDA margins compared to its peers (24.8% in 9MFY11) on account of strong execution, ownership of a large base of construction equipment and supply of construction aggregates from its owned quarries, which are based in Maharashtra and Gujarat where most of IRB’s projects are based. In addition to the above, IRB through its subsidiary Aryan Infrastructure Investment Pvt Ltd (IRB’s stake – 66%) owns ~1250 acres of land bank along the Mumbai-Pune Expressway. However, given the slowdown in the real estate industry, the company is planning development at a later stage. Furthermore, IRB, through its wholly-owned subsidiary IRB Sindhudurg Airport Pvt Ltd is also looking to develop the Sindhudurg Airport project on a design, build, finance and operate (DBFO) basis for a concession period of 95 years in 2009. Exhibit 2: IRB road asset portfolio

| crore Stake(%) Length (km) Project Cost Equity Debt GrantsOperational projects 460.8 3272.7 416.3 2856.4 0.0Mumbai - Pune 100 206.0 1292.0 101.0 1191.0 0.0Bharuch - Surat 100 65.0 1404.4 193.4 1211.0 0.0Thane - Ghodbunder 100 15.0 248.5 31.9 216.6 0.0Thane Bhiwandi 100 24.0 104.0 34.0 70.0 0.0Pune - Nashik 100 30.0 74.0 6.0 68.0 0.0Pune - Solapur 100 26.0 63.0 18.0 45.0 0.0NKT project 100 60.0 36.8 15.0 21.8 0.0Mohol Mundurup 100 33.4 18.0 7.0 11.0 0.0Kharpada 100 1.4 32.0 10.0 22.0 0.0

Under cons/development 788.5 8681.7 2804.8 5041.6 835.2Amritsar Pathankot 100 102.4 1441.7 390.8 924.0 126.9Dahisar - Surat 90 240.0 2256.0 902.4 1353.6 0.0Jaipur - Tonk - Deoli 100 146.3 1705.7 499.7 900.0 306.0Kolhapur IRDP 100 50.0 430.0 172.0 258.0 0.0Talegaon Amravati 100 66.7 885.0 194.0 475.0 216.0Tumkur Chitradurga 100 114.0 1142.0 311.0 831.0 0.0Panaji - Goa 100 69.1 821.3 335.0 300.0 186.3

Total 1249.3 11954.4 3221.1 7898.0 835.2


Geographical break-up of road assets (%)

Maharashtra 47%

Gujarat 19%

Rajasthan 10%

Punjab 7%

Goa 5%

Karnataka 12%

Overall market share in GQ

Share holding pattern (Q3FY11)

Shareholders % HoldingPromoters 75.0 FII 13.3 DII 3.4

Others 8.4

Promoters and institutional holding trend (%)

73.9 73.9 75.0 75.0

20.5 20.5 17.0 16.7

0.020.040.060.080.0

Q4FY10 Q1FY11 Q2FY11 Q3FY11

Promoters Institutional investors



Investment Rationale Leading road BOT operator with proven track record IRB has a proven track record in road development and is one of the largest BOT toll operators with ~6.7% market share in the NHDP programme. It is accredited with executing India’s first BOT project (Thane-Bhiwandi Bypass). Currently, it has six projects under its portfolio covering 5,735 lane km. Out of this, 3413 lane km are operational generating net daily BOT collection of | 2.3 crore per day (highest among leading players). Out of this, | 1.5 crore/day is contributed by projects like the Mumbai Pune Expressway and Surat Dahisar project (together accounted for 71% of BOT revenues in FY10). IRB also has six operational debt free projects (| 0.3 crore daily BOT toll collection) enabling it to utilise the cash flow generation for funding other projects.

Exhibit 3: IRB enjoys highest revenue/lane km among its peers ( as on 9MFY11)

Players Total Lane kmOperational lane

kmDaily BOT collection (|

cr)Daily BOT collection per lane

kms (| )ITNL 10,480 4,329 1.5 3435IRB 5,735 3,413 2.3 6815Reliance Infra 4,522 1228 0.5 3709GMR 3,340 1,684 1.1 6345IVRCL 2,407 604 0.3 4470

Source: Company, ICICIdirect.com Research , For ITNL & GMR we have adjusted annuity income for projects on daily basis to look at daily collection

Exhibit 4: Trend in net daily collection (| crore)

0.8 0.9 0.9 1.2 1.2 1.30.2 0.3 0.3

0.4 0.4 0.50.6 0.6 0.60.7 0.7

0.80.3 0.3 0.3

0.3 0.40.40.1 0.10.11.4

2.0 2.3 2.32.8

3.1

4.5

0.0

1.0

2.0

3.0

4.0

5.0

FY10 9MFY11 FY11E FY12E FY13E FY14E

(| c

rore

)

Mumbai Pune Bharuch Surat Dahisar Surat Debt free Projects

Thane Ghodbunder New Projects


Going ahead, with seven more projects aggregating 2,322 lane km getting operational till FY14E, we expect its net daily BOT collection to increase to | 4.5 crore/day (| 1.3 crore/day from new projects) in FY14E from | 2.3 crore/day currently.

Exhibit 5: Net toll revenue to grow at 25% CAGR in FY10-14E

721.1 820.01,015.1 1,110.1

1,604.1

-

420.0

840.0

1,260.0

1,680.0

FY10 FY11E FY12E FY13E FY14E

(| c

rore

)

Source: Company, ICICIdirect.com, Research

Exhibit 6: Project wise toll revenue contribution

42.4 39.8 40.2 39.0 28.6

9.2 15.6 14.0 14.211.0

28.6 26.9 24.0 24.3

18.5

15.9 14.1 12.6 12.7

9.5

29.7

-

20.0

40.0

60.0

80.0

100.0

FY10 FY11E FY12E FY13E FY14E

(%)

Mumbai Pune Bharuch Surat Dahisar Surat

Debt free Projects Thane Ghodbunder New Projects


Marquee project revenues in 9MFY11…

Marquee Projects

9MFY11Revenues (|

cr)

Net* toll collection / day (| cr)

Mumbai Pune Expressway 241.4 0.9Surat Dahisar Project 163.9* 0.6*Total 405.3 1.5

*after NHAI revenues shares

Debt free projects revenues in 9MFY11…

Debt free projects9MFY11 Revenues

(| cr)Net toll collection / day (| cr)

Thane Bhiwandi 39.3 0.1Pune - Nashik 15.6 0.1Pune - Solapur 10.2 0.0NKT project 10.7 0.0Mohol Mundurup 5.6 0.0Kharpada 5.3 0.0Total 86.7 0.3

We expect IRB’s net BOT toll collection to expand 2.2x to | 1604 crore in FY14 from | 721 crore in FY10 once all projects get operational



Geographical de-risking – Expanding beyond Gujarat & Maharashtra

Till FY09, IRB had a presence only in two states i.e. Maharashtra and Gujarat. We highlight that IRB has also successfully diversified its road assets portfolio geographically by spreading beyond Maharashtra and Gujarat through projects awarded in FY10 and FY11 in areas such as Goa, Karnataka, Punjab and Rajasthan, which collectively constitute ~35% of the road portfolio now. As per our working, these new projects, once operational, would mitigate the company’s net daily BOT toll collection concentration in Maharashtra from ~69% in FY09 to ~48% in FY14E.

Exhibit 7: Geographical distribution of road assets in FY09

Gujarat, 29%

Maharashtra, 71%


Exhibit 8: Geographical distribution in FY11

Karnataka 12%

Goa 5%

Punjab 7%

Rajasthan 10%

Gujarat 19%

Maharashtra 47%


Exhibit 9: Net daily BOT collection break-up (%)

69% 62% 58%

31% 38% 42%

0%

20%

40%

60%

80%

100%

120%

FY09 FY10 M9FY11

Maharashtra Gujarat


Exhibit 10: Net daily BOT collection break-up (%)

58% 60% 59% 48%

42% 38% 38%

29%

0%9%

0%

25%

50%

75%

100%

FY11E FY12E FY13E FY14E

Maharashtra Gujarat Rajasthan Punjab Goa Karnataka


W expect new projects, once operational, to mitigate the

company’s net daily BOT toll collection concentration in

Maharashtra from ~69% in FY09 to ~48% in FY14E



Robust growth in vehicle sales supports our traffic growth assumption Given the lack of historical traffic and traffic growth rate data, we have looked at automobile volumes and growth rate, which are key variables for traffic and traffic growth on the road in our view.

Overall domestic auto sales have witnessed a healthy growth at a CAGR of 13.5% during FY04-10. While passenger vehicle domestic sales have grown strongly at a CAGR of 13.7% during FY04-FY10, domestic sales of commercial vehicles, which have higher tolling rates, have witnessed a robust growth at a CAGR of 12.6% during FY04-FY10. The unabated growth of auto sales has picked up its pace in FY11 and overall growth YTD is ~28% for domestic auto sales.

Going ahead, Indian macro variables such as demographics and per capita income point out that the Indian automobile sector is set for a structural demand across segments similar to what was witnessed in China from FY03 onwards. Hence, we expect the Indian automobile sector to sustain its healthy growth rate. This, in turn, supports our traffic growth estimates of 5-7% across projects.

Exhibit 11: Strong domestic auto sales trend to translate to higher traffic growth

0.91.1 1.1

1.41.5 1.6

1.9

-0.1

0.2

0.5

0.8

1.1

1.4

1.7

2.0

FY04 FY05 FY06 FY07 FY08 FY09 FY10

mn

units

-5

0

5

10

15

20

25

30

(%)

Passenger Vehicles Commercial Vehicles Overal Growth

Source: SIAM, ICICIdirect.com Research

Exhibit 12: Our traffic growth assumption is much lower than historic growth

7

6

7 7

6 6 6

7 7 7 7 7

5

7 7 7

3

4

5

6

7

8

Mum

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NKT

pro

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Moh

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undu

rup

Khar

pada

Amrit

sar

Path

anko

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Dahi

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Sura

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Jaip

ur -

Tonk

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Kolh

apur

IRDP

Tale

gaon

Amra

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Tum

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Chitr

adur

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Pana

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oa

(%)


The strong growth in automobile sales volume (a key

variable for traffic growth,) supports our 5-7% traffic

growth assumption



Comfortable funding requirement for current road portfolio…

In order to understand the funding requirements of IRB’s equity commitment towards new project awarded in FY10 and FY11, we have analysed the equity requirement at each and every project level based on construction schedule as well as cash profit at every project level. As per our analysis, we anticipate IRB would have enough cash profit from all BOT projects to fund its equity commitment towards new projects. We also understand from the cash flow analysis that IRB would require peak funding requirements during FY12-FY13. We derive comfort in IRB from the fact that it would not face any problem in funding requirement due to i) all BOT projects being financially closed, ii) its ability to generate significant cash flows from its BOT assets and iii) debt-free status of some of the projects whose cash flows can be utilised for other projects. Exhibit 13: Equity requirement… | crore FY11E FY12E FY13E FY14E TotalAmritsar Pathankot 78.2 175.9 136.8 - 390.8Dahisar - Surat 200.0 200.0 - - 400.0Jaipur - Tonk - Deoli 99.9 149.9 249.8 - 499.7Kolhapur IRDP 84.5 - - - 84.5Tumkur Chitradurga - 62.2 124.4 124.4 311.0Talegaon Amravati 62.5 74.7 56.9 - 194.1Panaji - Goa 0.0 100.5 150.7 83.7 335.0Total 525.0 763.2 718.6 208.1 2215.0


Exhibit 14: …will be met comfortably through internal accruals generated

| crore FY11E FY12E FY13E FY14E TotalCash profit from BOT 393.7 528.1 596.8 710.9 2229.5Cash profit from EPC 312.4 319.2 393.3 398.3 1423.1Total 706.0 847.2 990.1 1,109.3 3652.7


Exhibit 15: Summarised cash flow statement

| crore FY11E FY12E FY13E FY14EOpening cash balance 510.1 754.0 562.9 473.1

Cash inflowCash profit 706 847 991 1109Net debt raised 1346.8 1514.2 1116.0 54.0Total cash inflow 2052.8 2361.1 2107.0 1163.2

Cash out flowCapex -1582 -2757 -1917 -763Change in WC -226.9 204.7 -279.6 388.5Total cash out flow -1808.9 -2552.2 -2196.9 -374.8

Net cash flow 244.0 -191.1 -89.9 788.3Cash surplus/shortage at the end of year 754.0 562.9 473.1 1261.4


We anticipate that IRB would have enough cash profit from

all BOT projects to fund its equity commitment towards the

current project portfolio

Based on the current road project portfolio, IRB requires |

2228 crore as equity requirement for new projects. In our

view, IRB’s cash profit from BOT and EPC would more than

suffice to fund these equity requirements



Comfortably placed to fund projects worth ~ | 4000 crore in future

In order to understand IRB’s equity commitment towards new project wins in FY12E, we have built up a scenario where we anticipate 6750 km of projects would be awarded by NHAI in FY12E. Then we have assumed IRB’s market share at 6% (in line with share in NHDP programme so far). Based on these assumptions, we anticipate that IRB could win new projects to the tune of ~| 4000 crore in FY12E. Then, assuming debt to equity of 70:30, we anticipate cumulative equity requirement of ~| 1,200 crore during FY12E-FY14E for new project wins. Henceforth, analysing the company’s cash flow we find that the company should not face any problem in funding its equity requirement internally for these projects. We anticipate that IRB should have a cash surplus of | 46 crore in FY14E despite having funding equity requirement of ~| 1200 crore for projects, which could get awarded in FY12E. However, we highlight that so far we have not incorporated this scenario either in our valuation or in our financials.

Exhibit 16: Assumption for new project win

FY12ENHAI target for road awarding (km) 9000Assumed shortfall (km) 25%Projects to be awarded (km) 6750Assumed IRB's market share 6.0%Length of kms to be awarded (km) 405Average cost per km (| crore) 10Total cost (| crore) 4050Debt @70% (| crore) 2835Equity @30% (| crore) 1215Average construction period (in years) 3


Exhibit 17: Equity requirement schedule for assumed new project wins in FY12E

| crore FY12E FY13E FY14E TotalProject completion assumption(%) 20% 40% 40% 100%Project cost @| 10 cr per km 810.0 1620.0 1620.0 4050.0Debt @70% 567.0 1134.0 1134.0 2835.0Equity @30% 243.0 486.0 486.0 1215.0


Exhibit 18: Summarised cash flow with project win in FY12E | crore FY11E FY12E FY13E FY14EOpening cash balance 510.1 754.0 319.9 -255.9

Cash inflowCash profit 706 847 991 1109Net debt raised 1346.8 2081.2 2250.0 1188.0Total cash inflow 2052.8 2928.1 3241.0 2297.2

Cash out flow

Capex -1582 -3567 -3537 -2383

Change in WC -227 205 -280 389

Total cash out flow -1808.9 -3362.2 -3816.9 -1994.8

Net cash flow 244.0 -434.1 -575.9 302.3Cash surplus/shortage at the end of year 754.0 319.9 -255.9 46.4


As per our working, IRB should have a cash surplus of | 46

crore despite funding projects worth | 4000 crore to be

won in FY12E

We anticipate order award of ~400 km for IRB in FY12E

assuming IRB’s historical market share in the NHDP

programme



Awarding expected to pick up in next few months – a key catalyst in near term

Media articles suggest that projects worth | 36,000 crore are expected to be awarded in the next few months, post their approval from the Public-Private Partnership Appraisal Committee (PPAC), opening up huge opportunities for road developers. Projects worth | 13,000 crore have already been sent for approval to the PPAC. Considering that IRB has bid for almost all these project, it could win at least one or two of them.

Exhibit 19: Projects worth | 13,000 crore already sent for approval to PPAC Project Cost (| crore)

Shivpuri-Dewas 2815

Eastern Peripheral Expressway 2699

Jabalpur-Bhopal-Jabalpur 2445

Ahd-Vadodara 2381

Beawar-Pali-Pindwara 2343

Jabalpur-Katni-Rewa 1906

Ichchapuram-Anandpuram 1783

Shahganj-Betul 1164

Gwalior-Shivpuri 1155

Walajapet-Poonamali 1045

Jabalpur-Lakhanadone 851

Nagpur-Waiganga Bridge 565

Kota-darah Teendhar 530

Source: DNA Money, ICICIdirect.com Research

Forging partnership for mega projects

NHAI has identified nine mega projects that will be awarded for building long highway stretches (300-700 km) and would involve a cost of ~ | 5,000 crore each on an average. Out of these projects, NHAI has already invited bids for the Kishangarh to Ahmedabad (via Udaipur) project, where media reports indicate that as many as 13 firms have submitted bids (including one each from Britain, France and Australia). Request for quotation (RFQ) has also been invited for the Ichapuram-Rajahmundry project (436 km) of NH-5 in Andhra Pradesh, costing | 3,550 crore. These projects, mainly in high traffic areas, are lucrative from the point of view of toll revenue and a handful of international players have joined the fray.

IRB has joined hands with Reliance Infrastructure in a 50-50 JV for these projects. The partnership with Reliance Infra would provide dual benefits to IRB in terms of execution efficiency of a domestic partner as compared to an international player who would have only provided financial support and met the networth criteria as laid by NHAI for project bidding.

Exhibit 20: NHAI net worth criteria Project size Networth requirementUpto | 2000 crore 25% of project cost| 2000- | 3000 crore Rs 500 crore plus 50% of cost above | 2000 croreGreater than | 3000 crore Rs 1000 crore plus 100% of cost above | 3000 crore


Projects worth | 13,000 crore have already been sent for

approval to PPAC. Considering that IRB has bid for almost

all these project, it could win at least one or two of them

The partnership with Reliance Infra would provide dual

benefits to IRB. This would be in terms of execution

efficiency of a domestic partner as compared to an

international player who would have only provided financial

support and met the networth criteria as laid down by

NHAI for project bidding



Favourable macro opportunities in road segment in long run

The government’s flagship road development platform is the National Highway Development Programme (NHDP), which aims to upgrade or build ~54,500 km of highway by FY15 in seven phases with contracts for ~31,300 km yet to be awarded. NHDP work includes six-laning and four-laning of the Golden Quadrilateral, North-South and East-West Corridors, widening of two-lane highways and construction of expressways and national highways. IRB, being the early entrant and leading player in this segment, coupled with strong entry barriers is well poised to be the key beneficiary from this trend.

Exhibit 21: NHDP status as on November 2010

Phases Total Length(km)

Approved Cost(| cr)

Expenditure till Oct-10 | cr)

Length completed(km)

Length underImplementation (km)

To be awarded(km)

Likely date ofCompletion

I - GQ,EW-NS corridors & port connectivity 7,498 30,300 37,272 7371 121 6 Dec-10

II - 4/6-laning EW-NS corridors others 6,647 34,339 42,409 4880 1325 442 Dec-10

III A - Upgradation, 4/6-laning 4,815 33,069 1899 2360 556 Dec-13

III B - Upgradation, 4/6-laning 7,294 47,557 21 2849 4424 Dec-13

Total phase III 12,109 80,626 18,338 1921 5209 4980 Dec-13IV - 2 - laning with paved shoulders 20,000 27,800 - - - 20000 Dec-15

V - 6-laning of GQ and high density corridor 6,500 41,210 5,712 406 1894 4200 Dec-12

VI - Expressways 1000 16,680 - - - 1000 Dec-15

VII - Ring Roads, Bypasses and flyovers 700 16,680 - - 19 681 Dec-14

Total 54,454 247,635 103,731 14,578 8,568 31,309

Source: NHAI, ICICIdirect.com Research

NHAI identified mega road projects State Name of Project Length (km)

Andhra Pradesh Six laning of Ichapuram – Srikakulam –Vishakhapatnam – Ankapalli– Rajahmundry section of NH-5

436

Rajasthan & Gujarat Six laning of Kishangarh – Udaipur – Ahmedabad Section of NH-79A, NH-79, NH-76 & NH-8

557

Maharashtra Four laning of Gujarat-Maharashtra border – Dhule – Jalgaon – Akola - Amravati section of NH-6

485

Madhya Pradesh Four laning of Gwalior – Shivpur - Biaora – Dewas section of NH-3 450

Punjab & Rajasthan 2-lane with paved shoulder of Amristsar–Ganganagar– Bikaner–Nagaur-Jodhpur–Pali section of NH-15, 89 & 65

700

Madhya Pradesh Four laning of Lakhnadon-Jabalpur-Katni-Reva Section of NH-7 313

Maharastra Four laning of Indapur-Goa / Maharastra Border section of NH-17 390

Gujarat Four laning of Ahmedabad – Bamanbore – Samakhiali & Bamanbore - Rajkot – Gondal section of NH-8A & B

425

Gujarat Six / Four / 2 LPS of Bhavnagar – Pipavav – Porbandar - Dwarka section of NH-8E

445

Source: PIB, ICICIdirect.com Research

IRB being the early entrant and leading player in this

segment, is well poised to capitalise on the huge

opportunities in the NHDP programme



Construction – moving along the value chain IRB has also moved along the value chain through its subsidiary Modern Road Makers (MRM). It predominantly carries out in-house EPC and operation & maintenance work.

Healthy order book to drive strong topline growth IRB has a strong in-house EPC division and carries out the EPC and operation and maintenance work for own road projects as well as NHAI funded projects thorough its 100% subsidiary Modern Road Maker (MRM). As on Q3FY11, its EPC order book stood at ~| 8,986 crore, 3.6x FY11E consolidated revenues. Additionally, most of its BOT projects have achieved financial closure and IRB is also well placed in terms of equity requirement. Hence, we also derive comfort from this in terms of execution of the projects.

Exhibit 22: Order book composition

55.1%23.4%

21.3%

0.2%

EPC & Ongoing BOT projects BOT projects in O&M phase

BOT projects under award Funded construction projects


Exhibit 23: Project wise order book break-up

Funded Work0%

O&M Contracts23%

Tumkur Chitradurga

12%

Sindhudurg Airport

2%Talegaon Amravati

8%

Jaipur Tonk Deoli16%

Amritsar Pathankot

13%

Panji Goa8%

IRDP Kolhapur2%

Surat Dahisar16%


Enjoys better margins than its peers; expects it to come down in future MRM is owner of a large base of construction equipment and has strong execution capabilities and supply of construction aggregates from its owned quarries, which are based in Maharashtra and Gujarat where most of IRB projects are based. Hence, it enjoys better EBITDA margins (24.8% in 9MFY11). However, we anticipate that the margin would not sustain at current levels due to: i) IRB expanding its presence in other geographies, which may impact its efficiency in project management and ii) MRM may not pass on the entire hike in commodity price. Hence, we anticipate MRM’s margin will come down to 17% in FY13E from 23.9% in FY11E. Exhibit 24: Superior margins from EPC division to drive earnings

14.2

16.3

23.9

18.6

17.0

10.0

15.0

20.0

25.0

FY 09 FY 10 FY 11 E FY 12 E FY 13 E

(%)


Strong order book of ~| 8,986 crore, 3.6x FY11E

consolidated revenues

IRB has been able to generate much higher EBITDA

margins (24.8% in 9MFY11). However, we expect it to

come down in future due to its expansion into other

geographies and rising commodity prices



Foray into other verticals to unlock value in future

Integrated township in Pune

IRB through its subsidiary Aryan Infrastructure Investment Pvt Ltd (IRB’s stake – 66%) owns 1,250 acres of land bank along the Mumbai-Pune Expressway. it intends to develop an integrated township in the Mauje Taje and Mauje Pimploli Taluka in Pune district. The land acquisition of approximately 1,250 acres is complete and the company would further acquire approximately 150-200 acres of additional land for the same. The total saleable area comprising residential and commercial projects would be ~30 million sq feet and the development is planned over eight to 10 years. However, given the slowdown in the real estate industry, the company is planning to develop it at a later stage. In terms of valuation, we have just considered IRB’s 66% stake at 1x P/BV will contribute | 2.6 per share in our target valuation.

Sindhudurg Airport

IRB, through its wholly owned subsidiary IRB Sindhudurg Airport Pvt Ltd is also looking to develop the Sindhudurg Airport project on a design, build, finance and operate (DBFO) basis for a concession period of 95 years in 2009. IRB bagged the Sindhudurg Airport Project from Maharashtra Industrial Development Corporation (MIDC) at an estimated cost including land premium of | 200 crore. The project involves design, build, finance and operation of the Greenfield airport on a developable area of 670 acres in the Sindhudurg district in Maharashtra. IRB has already approached concerned government authorities for necessary approvals and permissions required to commence construction on the project. In terms of financials and valuations, we have neither considered execution nor development of the same in our estimates.

Hotel in Kolhapur

IRB is also looking to develop a four star hotel in Kolhapur on 30,000 sq metre of plot received as part of the concession agreement of IRDP Kolhapur BOT project for 99 years. It has tied up with the Indian Hotel Co Ltd to operate and maintain the same. The estimated construction cost for the proposed 120-130 room hotel is around | 40 crore. We have neither built in any value from this development into our valuation nor considered capex and revenues from this development.

The total saleable area comprising residential and

commercial projects would be ~30 million sq feet. The

development is planned over eight to 10 years



Financials

Consolidated revenues to grow at 39.2% CAGR in FY1O-FY13E…

We estimate IRB will register strong consolidated revenue growth of 39.2% CAGR in FY10-FY13E led by robust revenue growth from the EPC and BOT segments. With an already swelled up NHAI bid pipeline of | 33,000 crore due for award in recent months, any new project win by IRB will add a further positive surprise to our revenue growth estimates. Exhibit 25: Consolidated revenue trend (|crore)

991.9

1,704.9

2,534.7

3,575.8

4,601.4

0

1000

2000

3000

4000

5000

FY09 FY10 FY11E FY12E FY13E



…primarily driven by EPC revenue growth of 52.2%CAGR in FY10-13E…

Driven by the strong order book of | 8,986 crore implying order book to bill ratio of 3.6x (on FY11E consolidated revenue) and strong execution capabilities, we anticipate IRB’s EPC revenues will grow at 52.2% CAGR during FY10-13E. We highlight that we have built in the new order win in FY12 and FY13, which would drive FY13 revenues growth.

Exhibit 26: Construction revenue growth trend (|crore)

543.9983.5

1,708.6

2,546.1

3,469.8

0500

1000150020002500300035004000




We estimate IRB will register strong consolidated revenue

growth of 39.2% CAGR in FY10-FY13E led by robust

revenue growth from the EPC and BOT segments

We highlight that we have built in the new order win in

FY12 and FY13, which would drive FY13 revenue growth

52.2% CAGR

39.2% CAGR



…and BOT revenue growth of 16.2% CAGR in FY1O-FY13E...

We anticipate IRB’s toll revenues will grow at a CAGR of 16.2% during FY10-FY13E on the back of increment toll contribution from new projects. Furthermore, the hike in toll rate at the Mumbai Pune Expressway (18% in FY2012) coupled with toll rate hike of ~5% per annum in various other projects would aid topline growth.

Revenue mix to lead to lower consolidated EBITDA margin over FY10-13E Higher revenue growth in the construction business during FY10-FY13E (52.2% CAGR vs. 15.6% CAGR for BOT revenues) would mean the share of low margin construction revenues in total revenues would rise from 57.7% in FY10 to 75.7% in FY13E. Consequently, the overall EBITDA margin is expected to decline from 46.9% in FY10 to 33.9% in FY13E.

Exhibit 28: Revenue mix to be skewed towards EPC division ahead..

54.8 57.767.4 71.2 75.4

45.2 42.332.6 28.8 24.6

0.0

20.0

40.0

60.0

80.0

100.0

FY 09 FY 10 FY 11 E FY 12 E FY 13 E

(%)

Construction Revenues BOT Revenues


Exhibit 29: …leading to lower EBITDA margin

437.4

799.0

1,133.11,372.1

1,560.2

0

500

1000

1500

2000


30.0

33.0

36.0

39.0

42.0

45.0

48.0

EBITDA EBITDA Margin


We estimate BOT revenue growth of 16.2% CAGR for IRB

in FY10-FY13E aided by incremental revenue flow from

new projects, which would get operational in the given

period

Exhibit 27: BOT revenue growth trend (|crore)

448.0

721.4826.2

1,029.71,131.6

200

500

800

1100

1400




The overall EBITDA margin is expected to decline from

46.9% in FY10 to 33.9% in FY13E on account of higher

share of EPC revenue, going ahead

16.2% CAGR



Net debt to equity to peak out by FY12E–13E With seven projects in the construction/development stage, we expect the debt to equity ratio to rise with the raising of debt for these projects. However, we expect the debt to equity ratio to peak out by FY12E-FY13E at 2x with projects under construction/development nearing completion. However, once all operational projects get operational in FY14E, the net debt to equity is expected to come down to 1.9x in FY14E. Exhibit 30: Net debt to equity trend

1.21.2

1.5

1.9 2.0

0.6

1.0

1.4

1.8

2.2


(x)

Net Debt / Equity


Return ratios to come down marginally in FY10-FY13E Lower margins would also mean that that the return ratios would taper down marginally over FY10-13E. We estimate IRB’s RoNW and ROCE will decline from 18.9% and 12.3% in FY10 to 17.2% and 11.1% in FY13, respectively. Going ahead, however, the same should stabilise at those levels with incremental BOT revenue growth ensuring healthy return ratios. Exhibit 31: Return ratios trend

7.610.2

10.711.513.412.3

18.920.1

17.416.7

0.0

5.0

10.0

15.0

20.0

25.0


(%)

RoCE RoNW


Net debt to equity is likely to peak out at 1.9x/2x in FY12E-

FY13E, respectively.

We estimate IRB’s RoNW and RoCE will decline from

18.9% and 12.3% in FY10 to 17.2% and 11.1% in FY13 with

the reduction in margin and since it is in a capex mode



Risk & concerns Interest rate risk

Increase in interest rates can have an adverse impact on cash flows since most of the projects have a reset clause. However, there is some respite on this front since the Mumbai Pune Expressway has a fixed rate for the remaining period and most of the recently awarded contracts have a fixed interest rate for the construction period (typically two or three years).

Execution delay

Although IRB has a strong track record of executing projects within time, any delay in execution by the company would lead to cost overrun and loss of toll revenues. With issues such as environment clearances and land acquisition slowing down the process, execution delay remains a key concern.

Slowdown in awarding

NHAI's awarding activity has been sluggish in the second half of CY10 with awarding of only ~4,000 km in 9MFY11 as against the FY11 target of 9,000 km due to administrative delays, lack of clarity about the NHAI chairman's appointment and bottlenecks associated with land acquisition. Continuance of this sluggish awarding, therefore, is a major concern for road developers.

Adverse regulatory changes

Any adverse regulatory changes in term of bidding process, toll rates, etc, which is decided by government, can adversely impact the company.

Traffic risk

We have built in a traffic growth range of 6-8% for road projects. Lower traffic growth can adversely impact the revenue growth for the projects since all of IRB’s projects are toll-based and revenue is directly dependent on traffic unlike annuity based projects.

Rise in key raw material prices

Rising raw material prices pose a risk for IRB since all in-house EPC contracts undertaken by MRM are fixed price contracts. Any significant rise in raw material prices would pose a risk in valuation either to MRM or its BOT SPV.

With issues such as environment clearances and land

acquisition slowing down the process, execution delay

remains a key concern

Any significant rise in raw material prices would pose a

risk in valuation either to MRM or its BOT SPV



Valuation At the CMP, the stock is trading at 12.3x FY12E EPS and 2.1x FY12E P/BV. IRB, being one of the leading BOT road players, would be the key beneficiary of the huge opportunities in the road sector. Hence, we are initiating coverage on the stock with a BUY recommendation and a price target of | 216/share based on SOTP valuation.

BOT projects: We have valued road BOT projects using the FCFE methodology. The total BOT projects have been valued at | 143/share. We have considered cost of equity of 12% for operational projects and 13% for construction/development stage. We have considered cost of equity of 15% for Goa Panaji as there are environment clearance issues for one of the land parcels. We have considered a traffic growth assumption of 5-7% depending on the project and have factored in a delay in projects by three to six months. We also highlight that we have not built up any new project wins in our valuation. Based on new project wins worth | 4000 crore (discussed on page 6), these projects can add value of | 240 crore for FY 12 or | 7 per share (based on 1x FY12 P/BV), which is not considered in our valuation.

Construction business: We have valued the standalone construction business at | 70/share (9x FY12 EPS, at a discount to midcap construction companies).

Exhibit 32: SOTP valuation detail

Subsidiary Name of ProjectValuation

BasisCost of Equity (%)

Total EquityValue (| cr) IRB Stake(%)

IRB's stakevalue (| cr)

Value per share(|)

Operational projects 3151.2 3151.2 94.8

Mhaiskar Infrastructure Mumbai - Pune FCFE 12 1503.4 100 1503.4 45.2IDAA Infrastructure Pvt. Ltd Bharuch - Surat FCFE 12 609.2 100 609.2 18.3Thane Ghodbunder Toll Road Thane - Ghodbunder FCFE 12 216.2 100 216.2 6.5

Ideal Road Builders Pvt Ltd Thane Bhiwandi FCFE 12 352.4 100 352.4 10.6ATR Infrastructure Pvt. Ltd Pune - Nashik FCFE 12 202.6 100 202.6 6.1Aryan Toll Road Pvt. Ltd Pune - Solapur FCFE 12 118.1 100 118.1 3.6NKT Road & Toll Pvt. Ltd NKT project FCFE 12 89.1 100 89.1 2.7MMK Toll Road Pvt. Ltd Mohol Mundurup FCFE 12 41.5 100 41.5 1.2IRB Infrastructure Pvt. Ltd Kharpada FCFE 12 18.6 100 18.6 0.6

Under construction/development 1626.3 1602.3 48.2IRB Pathankot Amritsar Toll Amritsar Pathankot FCFE 13 367.5 100 367.5 11.1IRB Surat Dahisar Tollway Pvt.Ltd Dahisar - Surat FCFE 13 239.7 90 215.8 6.5IRB Jaipur Deoli Tollway Jaipur - Tonk - Deoli FCFE 13 315.2 100 315.2 9.5IRB Kolhapur Integrated Road Kolhapur IRDP FCFE 13 290.6 100 290.6 8.7IRB Talegaon Amravati Talegaon Amravati FCFE 13 263.4 100 263.4 7.9IRB Tumkur Chitradurga Tumkur Chitradurga FCFE 14 143.1 100 143.1 4.3IRB Goa Tollway Panaji - Goa FCFE 15 6.7 100 6.7 0.2

4777.5 4753.5 143.0

Modern Road Makers Construction business PE 9x 2326.9 100 2326.9 70.0

Aryan Infrastructure Investment Real Estate P/BV 1x 130.0 66 85.8 2.6

Total value 7234.4 7166.2 215.6


We are initiating coverage on the stock with a BUY

recommendation on IRB and a price target of | 216/share

based on SOTP valuations



Exhibit 33: One year forward P/E band

0

100

200

300

400

500

Feb-08 Jul-08 Dec-08 May-09 Oct-09 Mar-10 Aug-10 Jan-11

CLOSE PER 28 PER 24 PER 20 PER 16 PER 12Price




Financial Snapshot

Exhibit 34: Profit & loss account | crore FY09 FY10 FY11E FY12E FY13ENet Sales 991.9 1,704.9 2,534.7 3,575.8 4,601.4 Construction 543.9 983.5 1,708.6 2,546.1 3,469.8 BOT 448.0 721.4 826.2 1,029.7 1,131.6 Other Income 29.6 49.0 36.8 50.2 56.2 Total Revenue 1,021.5 1,753.8 2,571.5 3,626.1 4,657.6

Direct Expenditure 468.2 785.1 1,214.9 1,895.2 2,622.8 Employee Expenses 42.5 71.0 110.5 163.3 219.3 Administrative Expenses 43.8 49.7 76.2 145.2 199.1 Total Operating Expenditure 554.5 905.9 1,401.7 2,203.7 3,041.2

EBITDA 437.4 799.0 1,133.1 1,372.1 1,560.2 Interest 137.7 249.9 300.0 376.3 388.6 PBDT 329.3 598.1 869.9 1,046.1 1,227.8 Depreciation 114.4 181.9 214.1 345.8 430.3 PBT 214.9 416.2 655.8 700.3 797.5

- - - - - Total Tax 37.8 13.3 151.7 198.0 241.7 PAT before MI 177.1 402.9 504.1 502.3 555.8 Minority Interest 1.3 17.9 12.2 1.3 (5.0) PAT 175.8 384.9 491.9 501.1 560.8

EPS 5.3 11.6 14.8 15.1 16.9


Exhibit 35: Balance sheet

| crore FY09 FY10 FY11E FY12E FY13EEquity Capital 332.4 332.4 332.4 332.4 332.4

Securities Premium Account - - - - - Reserve and Surplus 1,397.7 1,707.0 2,121.1 2,544.4 3,027.4 Secured Loan 2,474.1 2,903.5 4,328.0 5,920.0 7,113.8 Unsecured Loan 11.7 11.7 11.7 11.7 11.7 Minority Interest 59.9 77.9 90.0 91.3 86.3 Deferred Tax Liability 18.2 26.7 26.7 26.7 26.7

4,294.0 5,059.2 6,910.1 8,926.6 10,598.3

Total Gross Block 389.2 423.0 473.0 523.0 573.0 Less Acc. Depreciation on Tangible Assets 75.4 127.2 140.8 201.4 268.3 Net Block 313.8 295.7 332.2 321.6 304.7 Net Intangible Assets 3,156.5 4,051.6 5,395.2 7,818.1 9,317.0 Total Fixed Assets 3,470.3 4,347.3 5,727.3 8,139.7 9,621.7

Investments 110.8 45.1 45.1 45.1 45.1 - - - - -

Inventory 205.4 169.8 246.9 340.9 415.5 Debtors 13.0 29.7 44.2 62.3 80.2 Loans and Advances 399.5 438.0 829.4 815.5 1,301.1 Cash 415.1 510.1 754.0 562.9 473.1 Total Current Assets 1,032.9 1,147.6 1,874.5 1,781.7 2,269.9 Creditors 130.3 158.7 243.1 342.9 441.2 Provisions 190.8 322.9 494.6 697.8 897.9 Net Current Assets 711.9 665.9 1,136.8 741.0 930.7

Miscellaneous Expenses not written off 1.0 0.9 0.9 0.9 0.9 Assets side total 4,294.0 5,059.2 6,910.1 8,926.6 10,598.4




Exhibit 36: Cash flow statement

| crore FY09 FY10 FY11E FY12E FY13EProfit after Tax 175.8 384.9 491.9 501.1 560.8 Depreciation 114.4 181.9 214.1 345.8 430.3 Cash Flow before working capital changes 290.2 566.8 706.0 846.9 991.1

Net Increase in Current Assets (181.1) (19.6) (482.9) (98.3) (578.1) Net Increase in Current Liabilities 61.1 160.6 256.1 303.0 298.5 Net cash flow from operating activities 170.2 707.8 479.2 1,051.6 711.5

(Purchase)/Sale of Fixed Assets (811.1) (1,058.9) (1,594.1) (2,758.1) (1,912.3) Net Cash flow from Investing Activities (675.5) (966.6) (1,582.0) (2,756.9) (1,917.3)

Inc / (Dec) in Equity Capital - - - - - Inc / (Dec) in Loan Funds 463.1 429.4 1,424.5 1,592.0 1,193.8 Inc / (Dec) in Loan Funds 1.5 - - - - Net Cash flow from Financing Activities 398.2 353.8 1,346.8 1,514.2 1,116.0

- - - - - Net Cash flow (107.1) 95.0 244.0 (191.1) (89.9) Cash and Cash Equivalent at the beginning 522.2 415.1 510.1 754.0 562.9 Closing Cash/ Cash Equivalent 415.1 510.1 754.0 562.9 473.1


Exhibit 37: DuPont analysis

(%) FY09 FY10 FY11E FY12E FY13EPAT/PBT 81.8 92.5 75.0 71.6 70.3 PBT/EBIT 66.5 67.4 71.4 68.2 70.6 EBIT/Sales 32.6 36.2 36.3 28.7 24.6 Sales/Asset 23.1 33.7 36.7 40.1 43.4 Asset/Equity 248.2 248.1 281.6 310.3 315.4 ROE 10.2 18.9 20.1 17.4 16.7


Exhibit 38: Key ratios

FY09 FY10 FY11E FY12E FY13EPer Share DataEPS 5.3 11.6 14.8 15.1 16.9 Cash EPS 8.7 17.1 21.2 25.5 29.8 BV 52.1 61.4 73.8 86.6 101.1 Operating profit per share 13.2 24.0 34.1 41.3 46.9

Operating Ratios (%)EBITDA Margin 44.1 46.9 44.7 38.4 33.9 PAT / Net Sales 17.7 22.6 19.4 14.0 12.2

Return Ratios (%)RoE 10.2 18.9 20.1 17.4 16.7 RoCE 7.6 12.3 13.4 11.5 10.7 RoIC 6.9 13.1 11.5 8.8 7.8




Exhibit 39: Key ratios

FY09 FY10 FY11E FY12E FY13EValuation Ratios (x)EV / EBITDA 18.9 10.8 8.6 8.4 8.2 P/E 36.4 16.6 13.0 12.8 11.4 EV / Net Sales 8.3 5.1 3.9 3.2 2.8 Sales / Equity 0.6 0.8 1.0 1.2 1.4 Market Cap / Sales 6.3 3.6 2.4 1.7 1.3 Price to Book Value 3.7 3.1 2.6 2.2 1.9

Turnover Ratios (x)Asset turnover 0.2 0.4 0.4 0.5 0.5 Debtors Turnover Ratio 76.4 57.4 57.4 57.4 57.4

Creditors Turnover Ratio 7.6 10.7 10.4 10.4 10.4

Solvency Ratios (x)Debt / Equity 1.4 1.4 1.8 2.1 2.1 Current Ratio 3.2 2.4 2.5 1.7 1.7 Quick Ratio 1.9 1.3 1.5 1.2 1.3


ICICIdirect.com | Equity Research

RATING RATIONALE ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns ratings to its stocks according to their notional target price vs. current market price and then categorises them as Strong Buy, Buy, Add, Reduce and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock. Strong Buy: 20% or more; Buy: Between 10% and 20%; Add: Up to 10%; Reduce: Up to -10% Sell: -10% or more;

Pankaj Pandey Head – Research [email protected]

ICICIdirect.com Research Desk, ICICI Securities Limited, 7th Floor, Akruti Centre Point, MIDC Main Road, Marol Naka, Andheri (East) Mumbai – 400 093

[email protected]

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Documents

March 14, 2011 IRB Infrastructure (IRBINF)content.icicidirect.com/mailimages/icicidirect_irb... · 2016. 12. 5. · 11.0 28.6 26.9 24.0 24.3 18.5 15.9 14.1 12.6 12.7 9.5 29.7-20.0