IRB Infrastructure (IRBINF) 254

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1 [ Result Update Rating matrix Rating : Hold Target : 260 Target Period : 12 months Potential Upside : 2% What s changed? Target Unchanged EPS FY16E Changed from 15.9 to 17.7 EPS FY17E Changed from 15.9 to 17 Rating Unchanged Quarterly performance Q2FY16 Q2FY15 YoY (%) Q4FY15 QoQ (%) Revenue 1, EBITDA EBITDA (%) bps bps PAT Key financials Crore FY14 FY15 FY16E FY17E Net Sales 3, , , ,099.3 EBITDA 1, , , ,154.9 Net Profit EPS ( ) Valuation summary FY14 FY15E FY16E FY17E P/E Target P/E EV / EBITDA P/BV RoNW (%) RoCE (%) Stock data Particular Amount Market Capitalization ( Crore) 8,927 Total Debt ( Crore) 13,632 Cash and Investments ( Crore) 1,400 EV ( Crore) 21, week H/L ( ) 289 / 181 Equity capital ( Crore) Face value ( ) 10.0 Price performance Return % 1M 3M 6M 12M Ashoka Buildcon (2.6) (14.8) (14.5) 43.0 IRB Infra Research Analyst Deepak Purswani, CFA deepak,purswani@icicisecurities.com October 23, 2015 IRB Infrastructure (IRBINF) 254 Strong execution, moderate toll revenue growth IRB Infrastructure (IRB) reported robust growth of 30.1% YoY to crore ahead of our estimate of crore. Construction revenues showed strong growth of 49.6% YoY to 677 crore ahead of our estimate of 554 crore whereas toll revenues grew 9.5% YoY to crore The EBITDA margin contracted significantly by 658 bps YoY to 52.6% below our estimate of 57.4% due to a change in its revenue mix with higher proportion of revenues flowing in from the comparatively low margin construction division Net profit grew 22.4% YoY to crore in line with our estimate of crore Net debt increased to 12,223.7 crore (net debt to equity: 2.66x) in H1FY16 vs. 10,969.5 crore (net debt to equity: 2.52x) in FY15 Construction revenues grow 49.8% in Q2FY16 With the recent addition of the Agra Etawah project ( 2650 crore), IRB s order book is strong at crore, 5.1x TTM construction revenues, providing strong visibility to construction revenues in the next couple of years. In Q2FY16, IRB s revenues from the construction division grew 49.8% YoY to 677 crore with EBITDA margin of 29.9%. Going ahead, we expect construction division revenues to grow at 28.2% CAGR to crore during FY15-17E on the back of a strong order book providing visibility over the next few years. Gross toll collection grows 9.5% YoY to crore Gross toll collection grew 9.5% YoY to crore in Q2FY16. After witnessing double digit traffic growth, Mumbai Pune toll collection grew 7.6% YoY to crore whereas other key projects such as Surat Dahisar (traffic growth: (7-8%) and Bharuch Surat (3-4%) witnessed moderate traffic growth. Going ahead, we expect gross toll collection to grow at a CAGR of 19.2% in FY15-17E at 8.1 crore per day. Equity commitment of 2600 crore over next four years IRB s equity requirement over the next four years is at ~ 2600 crore with 300 crore in H2FY16E, 1200 crore in FY17E, 500 crore in FY18E and 500 crore in FY19E for the current BOT portfolio. In terms of projects, the major chunk of equity is required in three projects: Agra Etawah ( 750 crore), Mumbai Pune extension ( 600 crore) and Aurangabad Yedeshi ( 426 crore). Beside this, IRB is looking to add km in the BOT portfolio every year (125 km already included in FY16), which would require additional equity requirement. However, we do not see an issue in funding equity commitment as IRB is well on track to generate cash profit of crore per annum to fund its equity commitment. Investment REIT listing, near term trigger; maintain HOLD IRB is in the process of transferring operational assets towards a trust for listing investment REITs by end-fy16. This is likely to free up equity capital of ~ crore for IRB and would act as a key catalyst for the stock in the near term. However, we believe most positives have already been priced in the CMP. Hence, we maintain HOLD recommendation with an SOTP based target price of 260/share. ICICI Securities Ltd Retail Equity Research

2 Variance analysis Year Q2FY16 Q2FY16E Q2FY15 YoY (%) Q4FY15 QoQ(%) Comments Net Sales 1, , A robust growth of 30.1% YoY to crore was led by 49.6% YoY growth in construction revenues to 677 crore whereas toll revenues grew by 9.5% YoY to crore Other Income Contract expenses Cost of material consumed Other Direct Expenses Staff cost EBITDA EBITDA Margin (%) bps bps The EBITDA margin contracted significantly by 658 bps YoY to 52.6% below our estimate of 57.4% due to change in its revenue mix with higher proportion of revenues flowing in from comparatively low margin construction division Depreciation Interest PBT Taxes PAT Key Metrics Order book 11, ,937 11, , Order book to bill ratio (x) The current orderbook stands strong at crore, providing strong visibility over construction revenues for the next 2-3 years Change in estimates FY16E FY17E ( Crore) Old New % Change Old New % Change Comments Revenue 5, , , , EBITDA 3, , , , EBITDA Margin (%) bps bps PAT EPS ( ) We have tweaked our estimates to incorporate Q2FY16 results Assumptions Current Earlier FY13 FY14 FY15 FY16E FY17E FY16E FY17E Comments Order Inflow 2,301 6, , ,000 0 Traffic Growth (%) Mumbai Pune Others (average) We maintain our assumptions ICICI Securities Ltd Retail Equity Research Page 2

3 Company Analysis Toll revenues grow 9.5% YoY, 5.1% on like-to-like basis The growth in gross toll revenues for the quarter has been tepid compared to previous quarters at 9.5% YoY to crore aided by increased traffic on the Surat Dahisar project. On a like-to-like basis, gross toll revenue grew 5.1% YoY to 517 crore Tepid growth was seen on account of a drop in traffic in various projects. For example, a 20.1% QoQ drop in toll revenues from the Jaipur Deoli project was seen due to the seasonal effect as sand mining in the region remained closed resulting in lower traffic while an 8.4% QoQ drop was seen in toll revenues from the Mumbai-Pune project due to landslides, which resulted in traffic diversion and toll exemption at times For the Talegaon-Amravati project, a 15.7% QoQ toll revenue drop was seen on account of a diversion in traffic to a parallel state highway where toll was exempted Exhibit 1: Quarterly toll trend crore Q2FY14 Q3FY14 Q4FY14 Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY16 Q2FY16 YoY(%) QoQ(%) Surat - Dahisar Mumbai - Pune Thane - Bhiwandi Thane - Ghorbunder Pune Nashik Pune Solapur Ahmednagar - Karmala Mohol - Mandrup Kharpada Bridge Bharuch - Surat Tumkur Chitradurga Ommalur Salem Namakkal Ahmedabad Vadodara Talegaon Amravati Jaipur Deoli IRDP Kolhapur Pathankot Amritsar NA -3.6 Total Exhibit 2: Toll revenue/day to inch up to 8.1 crore by FY17E FY12 FY13 FY14 FY15 FY16E FY17E ICICI Securities Ltd Retail Equity Research Page 3

4 Recent project wins to boost construction revenues IRB s current order book stands at crore boosted mainly by the Agra Etawah project (length ~124 km, total project cost ~ 2650 crore). It had also bagged the Yedeshi Aurangabad (length 288 km, total project cost 3200 crore with a VGF of 558 crore) and Kaithal-Rajasthan Border (design length 166 km, total project cost of 2300 crore with a VGF of 234 crore), at a total construction cost of 4754 crore. With these new orders, the revenue visibility of IRB s construction business has increased over the next two or three years. Consequently, we anticipate construction revenues will grow at 28.2% CAGR to crore in FY15-17E on account of strong execution in the Ahmedabad-Vadodara and Goa-Kundapur projects in FY16E and new projects contribution in H2FY16. Exhibit 3: Construction order book trend IRB s current order book was at crore boosted mainly by the Agra Etawah project Q2FY14 Q3FY14 Q4FY14 Q1FY15 Q2FY15 Q3FY15 Q4FY15 Q1FY16 Q2FY16 Exhibit 4: Order book break-up Exhibit 5: Project wise order book break-up 6% 19% 16.0% 18.6% 65.4% 11% 1% 16% 17% 8% 22% Ongoing BOT projects BOT projects - under development BOT projects in O&M phase Kaithal Rajasthan Yedeshi Aurangabad Sindhudurg Airport Solapur Yedeshi O&M Contracts Ahmedabad Vadodara Goa Kundapur Mumbai-Pune Phase II Agra Etawah Exhibit 6: Construction revenue trend , , , , , , FY12 FY13 FY14 FY15 FY16E FY17E ICICI Securities Ltd Retail Equity Research Page 4

5 Revenues to grow at 26.1% CAGR during FY15-17E We estimate IRB will register a consolidated revenue growth of 26.1% CAGR in FY15-17E propelled by robust topline growth of 28.2% CAGR in the construction segment and 23.7% CAGR in the BOT segment. Revenue is expected to grow at 26.1% CAGR in FY15-17E mainly due to 28.2% CAGR in the construction segment during FY15-17E Exhibit 7: Revenue to grow at 26.1% CAGR led by strong BOT revenues , , , , , , FY12 FY13 FY14 FY15 FY16E FY17E We expect IRB s toll revenues to grow at 23.7% CAGR in FY15-17E on the back of premium rescheduling along with increment toll contribution from Ahmedabad Vadodara project and other new projects. Furthermore, the hike in toll rate at various projects would also aid topline growth. With new orders in the last couple of quarters (Yedeshi-Aurangabad, Kaithal-Rajasthan, Agra Etawah and Solapur-Yedeshi), the revenue visibility of IRB s construction business has increased over the next two or three years. Consequently, we expect revenues in the construction division to grow to crore in FY16E and crore in FY17E on account of strong execution in the Ahmedabad Vadodara, Goa Kundapur project in FY16E and new projects contribution in H2FY16. Exhibit 8: Construction revenue trend Exhibit 9: BOT revenue trend , , , , , ,018.0 FY12 FY13 FY14 FY15 FY16E FY17E , , , , ,177.0 FY12 FY13 FY14 FY15E FY16E FY17E ICICI Securities Ltd Retail Equity Research Page 5

6 The overall EBITDA margin is expected to remain flattish at 57.0% in FY16E EBITDA margins to remain healthy The overall EBITDA margin is expected to remain flattish at 57.0% in FY16E. However, due to major maintenance cost occurring in FY17E in one of the key projects, the overall EBITDA margin is expected to dip to 51.9% in FY17E. Consequently, the EBITDA is expected to grow at 19.6% CAGR to crore during FY15-17E. Exhibit 10: Margins to remain healthy % 57.0% 60.0% % 47.0% 44.3% 43.7% 1, , , , , ,154.9 FY12 FY13 FY14 FY15E FY16E FY17E 56.0% 52.0% 48.0% 44.0% 40.0% EBITDA EBITDA Margin Earnings to jump significantly on account of change in premium policy From April, 2014, IRB changed the policy for premium booking due to premium rescheduling. Rather than booking net revenues (gross toll collection NHAI Premium) in P&L, it has now created intangible assets for the premium payable (over the life of concession period), which will be amortised as per toll revenues. Consequently, we expect IRB s cash profit to grow at 11.7% CAGR to crore in FY17E. Exhibit 11: PAT to grow 8.4% in FY16E Exhibit 12: Cash profit to grow at 12.1% CAGR during FY15-17E FY12 FY13 FY14E FY15 FY16E FY17E FY12 FY13 FY14E FY15 FY16E FY17E ICICI Securities Ltd Retail Equity Research Page 6

7 Conference call highlights For the Ahmedabad-Vadodara project, 98% work is complete. The company has approached NHAI for CoD while the project is ahead of schedule There has been a ~2.3% drop in tariff for Ommalur-Salem-Namakkal and Bharuch Surat project while there was a tariff hike of 1.87% for the Surat Dahisar project The company has stopped toll collection on Nagar-Karmala- Tembhurni and Mohol-Mandrup-Kamtee project The cost of debt has reduced from 11.25% to 10.75% in the current quarter while the cost of debt is ~10.3% for operational projects The company is looking to bid for km of projects for the current fiscal, of which it has already executed concession agreement for 125 km from the Agra Etawah project A 20.1% QoQ drop was seen in toll revenues from the Jaipur Deoli project due to the seasonal effect as sand mining in the region remained closed resulting in lower traffic. An 8.4% QoQ drop was seen in toll revenues from the Mumbai-Pune project due to landslides, which resulted in traffic diversion and toll exemption at times The consolidated debt is at crore while standalone debt is at ~ 3000 crore and standalone debt to equity is at 2.66x The execution of the Agra-Etawah project will start in FY17E The equity requirement over the next four years will be ~ 2500 crore with 300 crore in FY16E, 1200 crore in FY17E, 500 crore in FY18E and 500 crore in FY19E for the existing BOT portfolio Traffic growth for the current quarter for major projects has been ~6-7% The company had signed a concession agreement with MSRDC for the Mumbai-Pune phase II project. However, if the project gets terminated no compensation is expected ICICI Securities Ltd Retail Equity Research Page 7

8 Outlook and valuation At the CMP, the stock is trading at attractive valuations of 15.2x FY17E EPS and 1.6x FY17E P/BV. IRB is in the process of transferring operational assets towards a trust for listing investment REITs by the end of FY16E. This is likely to free up equity capital of ~ crore for IRB and would act as a key catalyst for the stock in the near term. However, we believe most positives have already been priced in the CMP. Hence, we maintain HOLD recommendation. We value the stock at 262/share (BOT valuation /share and construction- 89.3/share). We value the construction business at 8x FY17E PE given high visibility on the order book. Exhibit 13: Valuation summary Valuation Cost of Basis Equity (%) Total Equity Value ( cr) IRB Stake(%) IRB's stake value ( cr) Value per share ( ) Name of Project Operational projects Mumbai - Pune FCFE Bharuch - Surat FCFE Dahisar - Surat FCFE Thane - Ghodbunder FCFE Thane Bhiwandi FCFE Pune - Nashik FCFE Pune - Solapur FCFE NKT project FCFE Mohol Mundurup FCFE Kharpada FCFE MVR Infra FCFE Under construction/partial Tolling Amritsar Pathankot FCFE Jaipur - Tonk - Deoli FCFE Talegaon Amravati FCFE Tumkur Chitradurga FCFE Ahmedabad Vadodara FCFE Goa Kundapur FCFE Sholapur Yadeshi FCFE Yadeshi Aurangabad FCFE Katheli Rajasthan Border FCFE Total BOT projects Construction business PE Real Estate P/BV Total Valuation Less: Standalone Net Debt Target Equity Valuation Exhibit 14: Valuation Sales Growth EPS Growth PE P/B RoNW RoCE ( cr) (%) ( ) (%) (x) (x) (%) (%) FY FY15 3, FY16E FY17E 6, ICICI Securities Ltd Retail Equity Research Page 8

9 [ Company snapshot Target Price Jan-10 Apr-10 Jul-10 Oct-10 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Source: Bloomberg, Company, ICICIdirect.com Research Key events FY12 Mar-12 May-12 Jul-12 Nov-12 Sep-13 H2FY14 Jun-14 Sector saw aggressive bidding by developers and IRB's Ahmedabad Project perceived as aggressive pick Acquired MVR Infrastructure and Tollways Pvt Ltd CBI raided 11 places including counsel for IRB, in connection with Satish Shetty s murder. The promoter and few company official were allegedly accused of Satish Shetty murder Awarded Goa/ Karnataka border to Kundapur Project on NH-17 in Karnataka Media reports indicated the IRB Group allegedly made major investments and had given large loans to Purti Group of BJP ex- chief Nitin Gadkari in lieu of benefits for contract wins during his tenure as PWD minister Protests were seen around Maharashtra by political outfit for alleged higher toll collection Awarded three new projects viz., Solapur - Yedeshi, Yedeshi Aurangabad and Kaithal-Rajasthan aggregating ~ 7000 crore, which will yield construction revenue of 6032 crore NHAI planned to crack down on 26 road projects on the back of under-reporting concerns over toll revenues. These projects include IRB's Surat- Dahisar Jun-14 NHAI approved premium restructuring of 236 crore for the Ahmedabad-Vadodara project and Rs 81 crore for the Tumkur-Chitradurga project in FY15 Sep-14 Received the Letter of Award for the MSRDC s project of O&M of Mumbai Pune project along with execution of additional works on Mumbai Pune section of NH-4, on DBFOT basis with toll rights for additional 8 year, 8 months & 2 days beyond 2019 Mar-15 Yedeshi Aurangabad Tollway Pvt Ltd, a wholly-owned subsidiary of IRB Infrastructure has achieved financial closure (FC) in terms of the concession agreement executed with NHAI by tying up of project finance of 1,756 crore Sep-15 IRB Infra has executed a concession agreement with NHAI for 124 km Agra-Etawah Bypass section on NH-2 under the BOT mode. The estimated project cost for the project is 2650 crore & concession period is 24 years including construction period of 910 days Top 10 Shareholders Shareholding Pattern Rank Name Latest Filing Date % O/S Position (m) Change (m) (in %) Sep-14 Dec-14 Mar-15 Jun-15 Sep-15 1 Mhaiskar (Deepali Virendra & Virendra Dattatraya) 30-Jun Promoter Mhaiskar (Virendra Dattatraya) HUF 30-Jun FII UTI Asset Management Co. Ltd. 31-Aug DII Platinum Investment Management Ltd. 30-Jun Others AllianceBernstein L.P. 31-Aug HSBC Global Asset Management (Hong Kong) Limited 30-Jun GIC Private Limited 30-Jun Birla Sun Life Asset Management Company Ltd. 31-Aug Norges Bank Investment Management (NBIM) 30-Jun Invesco Hong Kong Limited 30-Jun Source: Reuters, ICICIdirect.com Research Recent Activity Buys Sells Investor name Value Shares Investor name Value Shares DNB Asset Management (Asia) Limited 5.80m 1.48m HSBC Global Asset Management (Hong Kong) Limited m -2.88m Manulife Asset Management (Asia) 3.78m 0.99m Van Eck Associates Corporation -8.83m -2.36m Russell Investments Limited 3.39m 0.87m JP Morgan Asset Management -4.84m -1.38m Norges Bank Investment Management (NBIM) 3.03m 0.83m JM Financial Asset Management Pvt. Ltd m -0.97m Driehaus Capital Management, LLC 2.79m 0.79m Birla Sun Life Asset Management Company Ltd m -0.82m Source: Reuters, ICICIdirect.com Research ICICI Securities Ltd Retail Equity Research Page 9

10 Financial summary Profit and loss statement Crore ( Crore) FY14 FY15 FY16E FY17E Net Sales 3, , , ,099.3 Growth (%) Direct Expenditure 1, , , ,408.2 Employee Expenses Administrative Expenses Total Operating Expenditure 1, , , ,944.5 EBITDA 1, , , ,154.9 Growth (%) Interest , ,484.7 Depreciation ,003.3 Other Income PBT Total Tax PAT before MI Minority Interest PAT Growth (%) EPS Cash flow statement Crore ( Crore) FY14 FY15 FY16E FY17E Profit after Tax Depreciation ,003.3 Cash Flow before wc changes 1, , , ,154.9 Net Increase in Current Assets Net Increase in Current Liabilities Net cash flow from operating act 1, , , ,386.9 (Purchase)/Sale of Fixed Assets -2, , , ,214.4 Interest received on fixed deposi Net Cash flow from Investing Ac -2, , , ,039.8 Issuance of share capital Long term borrowing proceeds 3, , , ,616.2 Repayments of Long term borrow Net Cash flow from Financing Ac , Net Cash flow Opening Cash/ Cash Equivalent , ,418.7 Closing Cash/ Cash Equivalent 1, , , ,743.0 Balance sheet Crore ( Crore) FY14 FY15 FY16E FY17E Liabilities Equity Capital Securities Premium Account Reserve and Surplus 3, , , ,856.1 Secured Loan 11, , , ,943.9 Unsecured Loan Premium Payable , , ,283.0 Minority Interest Deferred Tax Liability Liability side total 14, , , ,489.4 Assets Total Gross Block Less Acc. Depreciation on Tangible A Net Block Net Intangible Assets 8, , , ,873.5 Total Fixed Assets 13, , , ,488.3 Investments Inventory Debtors Loans and Advances , ,450.4 Cash 1, , , ,743.0 Total Current Assets 2, , , ,562.8 Current Liabilities , , ,222.9 Provisions Net Current Assets 1, , ,992.0 Miscellaneous Expenses Assets side total 14, , , ,489.4 Key ratios FY14 FY15 FY16E FY17E Per share data ( ) EPS Cash EPS BV per share Revenue per Share Operating Ratios (%) EBITDA Margin PBT / Net Sales PAT Margin Inventory days Debtor days Creditor days Return Ratios (%) RoE RoCE RoIC Valuation Ratios (x) P/E EV / EBITDA EV / Net Sales Market Cap / Sales Price to Book Value Solvency Ratios (x) Debt / EBITDA Debt / Equity Current Ratio Quick Ratio ICICI Securities Ltd Retail Equity Research Page 10

11 ICICIdirect.com coverage universe (Infrastructure) CMP M Cap EPS ( ) P/E (x) EV/EBITDA (x) P/B (x) RoE (%) Sector / Company ( ) TP( ) Rating ( Cr) FY15E FY16E FY17E FY15E FY16E FY17E FY15E FY16E FY17E FY15E FY16E FY17E FY15E FY16E FY17E IRB Infra (IRBINF) Hold 8, Ashoka Buildcon (ASHBUI) Buy 3, NM NM NM ICICI Securities Ltd Retail Equity Research Page 11

12 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, Hold 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: >15%/20% for large caps/midcaps, respectively, with high conviction; Buy: >10%/15% for large caps/midcaps, respectively; Hold: Up to +/-10%; Sell: -10% or more; Pankaj Pandey Head Research pankaj.pandey@icicisecurities.com ICICIdirect.com Research Desk, ICICI Securities Limited, 1st Floor, Akruti Trade Centre, Road No 7, MIDC, Andheri (East) Mumbai research@icicidirect.com ICICI Securities Ltd Retail Equity Research Page 12

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