IRB Infrastructure Developers (IRBIDL)- Remarkable Performance, But...

IRB Infrastructure Developers (IRBIDL) is the largest Build Operate and Transfer (BOT) opera-tor and toll collector in the country with 13 BOT projects.  If we take a look at company’s performance over the last two years it has been quite remark-able. Be it the strong top-line and bottom-line growth, strong order book of Rs 6300 crore for its Engineering, Procurement and Construciton (EPC) arm, its aggressive bidding for the proj-ects or its ability to achieve financial clo-sure despite difficult market conditions, it has been a noteworthy performance. The moot question is whether all these factors warrant a buy on counter?When we take a look on valuations, the scrip is trading at 18x of its FY09E earnings. If we consider FY10 results, the CMP of Rs 112.90 discounts its FY10E earnings by 10x which we feel may not provide much appreciation. The EV/ EBITDA of around 9x seems to be on the higher side and even the market-cap to sales ratio of 3.38x is on the higher side.  But if we take a close look, it is a plain BOT company and hence should be valued on the Net Present Value (NPV) of its current projects. Now, after a thorough analysis of its various projects, we feel most of its recent developments are already priced-in and the scrip may not give much appreciation from current level. 

IRBIDL is a leading private devel-oper in the infrastructure space with a focus on the roads segment. It has a portfolio of 13 BOT road projects with 34 toll plazas. (See the Figure IRB Group Structure). Ten are operational, two are under construction and one is recently awarded. It also has an EPC arm, Modern Road Makers (MRM), which carries out the construction activities for the projects awarded to the company.  

We have divided the BOT projects into two parts, operational and future projects. Here three future projects are Surat-Dahisar, Surat-Bharuch and Kolhapur road development, while the rest are operational ones. Regarding the operational projects, IRBIDL CMD Virendra Mhaiskar says, “The daily toll collection is Rs 1.20 crore and the Mumbai-Pune Expressway contributes 80 per cent.” The Mumbai-Pune Toll Road Project is 206 km in length (95 km of it on the Mumbai-Pune Expressway) having a concession till August 2019.  There has been a decline of around 5 per cent in the traffic growth in the first nine months of FY09. “But the last quarter is expected to be good as far as traffic growth is considered,” says Mhaiskar. 

Hence, we have considered only 2 per cent growth for FY09. But revenues are expected to increased significantly on account of 20 per cent increase in the toll rates in current fiscal. Now, considering the 5 per cent growth in the traffic each year and 20 per cent hike in toll rates every third year, per share NPV of the project comes to Rs 35.  If we consider the other opera-tional projects, per share NPV is Rs 21, resulting in total per share NPV of the operational projects at Rs 56. 

The Surat-Dahisar toll road project aims at extending the existing four-lane 239 km road to six lanes. Concession has been awarded till March 2021 (12 years). The total cost of the project is Rs 2859 crore, funded through Rs 1956 crore of debt, Rs 544 crore of equity and rest from internal accruals. While 80 per cent is held by IRBIDL, rest is held by Deutsche Bank AG. The important fac-tor is IRBIDL has bided aggressively for this project, witnessed from the fact that it has been given a revenue sharing of 38 per cent to NHAI. Also, the NHAI’s share increases at the rate of 1 per cent per year so it will increase to 50 per cent till the end of concession.[PAGE BREAK] 

Mhaiskar says, “Despite aggressive bidding, we are expected to collect Rs 0.96 crore to Rs 1 crore as daily toll, net of NHAI’s share.” He further says, “The new policy allows us to collect toll from the first day after financial closure, same has been achieved and revenue flow has started from February 1, 2009.” Considering the five per cent growth in toll rates as well as traffic every year, per share NPV is estimated at Rs 8 per share. The Surat-Baruch toll road project aims at extending the four-lane 65 km of road into six lanes and the concession period is available for 15 years, till January 2022. The project cost is Rs 1409 crore to be funded through debt of Rs 1211 crore and equity of Rs 198.10 crore. Mhaiskar says, “Work is expected to be completed by middle of June 2009 and we will start earning toll revenues from the end of that month.” Considering 5 per cent traffic growth and 5 per cent increase in traffic every year, we arrive at an NPV per share of Rs 19. 

The Kolhapur project includes con-struction and maintenance of 50 km of roads in that city. The total project cost is Rs 450 crore to be funded in a debt-equity ratio of 70:30. The total conces-sion period is 30 years. But revenues are expected to be generated from 2012. Considering three per cent growth in the traffic and 3 per cent growth in toll rates, the NPV is estimated at Rs 3 per share. Here IRBIDL has also been allotted a 30,000 sq meter of plot. Mhaiskar says, “We have just carried out a feasibility study and intend to develop a hospital-ity project. We are in the final stages of negotiations and as soon as these are over, we will make an official announce-ment.” But as there is no clarity regard-ing the project till date, we have excluded the valuation of the same as of now.

As regards the EPC business, Mhaiskar says, “All EPC work related to the road projects are executed by MRM and today our order book stands at Rs 6300 crore.” He further informs, “Of these, Rs 3800 crore is EPC contract which are to be executed in the next 30 months while Rs 2500 crore are O&M contracts with an execution period of 10-12 years.’’ Here the advantage for the company is MRM has been able to maintain 18-20 per cent EBITDA margins. Management attri-butes the same to lower outsourcing of work and ownership of aggregate mines (which contributes 40 per cent in road construction) also saves the cost.  But going forward, the management expects the margins to decline by at least 200 basis points. Management has also stated that it has a capex plan of Rs 130 crore to be funded through internal accruals. One should note that all its contracts are from group companies and hence it should be considered as inter-segment revenues. Ideally it should be eliminated from the consolidated revenues. But the management has put an argument that, “In BOT contract agreements with government, the operator does not own the road, but gets ‘toll collection rights’ against the cost incurred for construc-tion services. Since the construction cost incurred by the operator is considered as exchanged with the government against toll collection rights, revenues from such contracts are considered as realized and hence are not eliminated from the con-solidated revenues”. We are of the opin-ion that, although many companies fol-low the same, it is not a right accounting practice. As a result providing a separate valuation to the EPC business may not be apt. Also company’s topline is inflated to that extent.[PAGE BREAK]

IRBIDL has 1250 acres of land at Mauje Taje and Mauje Pimploi near Kamshet (Mumbai-Pune Expressway). Here the management has said, “Our idea is to go for a joint development project. But right now there is no appe-tite for taking projects in real estate sec-tor and hence we are going slowly.” Now although the management has stated that its worth is around  Rs 150 crore, our sources reveal that it is in interiors and rate per acre is around Rs 10 lacs, providing a value of Rs 125 crore. This results in per share value of Rs 4. The management has said they are not con-sidering any revenues from real estate till March 2010. 

Regarding other details, the company has a strong cash balance of Rs 350 crore and also has investments amounting to Rs 190 crore. But investments are made through the balance of IPO money which has not yet been expended and is expected to be spent in the next fiscal. This may impact the other income of the company. In addition, the company has consolidated debt of Rs 1900 crore and, with the Surat-Dahisar Project going on stream, it is expected to increase up to Rs 4400 crore by 2011. Hence high debt burden is also an issue. 

Now, another factor is that we have calculated the NPV on the basis of a constant rise in the traffic rate which sometimes may not happen. Any decline in the traffic growth will have a down side impact on NPV. Another concern is that IRBIDL has presence only in Maharashtra and Gujarat. But the man-agement has stated that the company plans to enter other terri-tories like Punjab, Andhra Pradesh, Haryana and Tamil Nadu.

As stated earlier the financial performance of the company has been good and has maintained its momentum in 9MFY09. Here the company has posted a top-line of Rs 670.78 crore and bottom-line of Rs 133.62 crore. As regards FY09, with start of toll collection from Surat-Dahisar project, we expect the compa-ny to post a top-line of Rs 1070 crore and bottom-line of Rs 195 crore. But we feel strong performance is already been discounted in the price. As regards the NPV, it arrives at Rs 86 for BOT projects and with the real estate value of Rs 4 per share, the total comes to Rs 90. Considering the CMP of Rs 112.90, the EPC business is available at Rs 23 per share. Now we have already mentioned that its EPC revenues are just inter-segment revenues and should not be accorded a separate valuation. But even if we provide a multiple of 7x to its FY10E earnings, it only gives a price of Rs 21 per share giving a target price of Rs 111. Hence with little or no upside available at current level, we recommend the investors to avoid the counter at current level.