Jitendra Kumar Gupta Moneycontrol Research
Even as muted traffic growth cast a shadow over IRB Infrastructure Developers (IRB)'s toll revenue, the company managed a strong 21 percent year-on-year growth in revenues in the first quarter of FY18 helped by 45 percent growth in construction business.
Growth in construction helped negate the impact of decline in revenues from BOT (build own transfer) segment. Owing to the transfer of six BOT assets under the recently listed InvIT, the BOT business saw a 16.5 percent decline in revenues. This business normally accounts for 27 percent of the revenue.
Barring the impact of the transfer of BOT assets, the toll revenue also got impacted because of muted traffic growth at 4 percent, which was lower than the 6-7 percent traffic growth witnessed during the months of April and May 2017. The management attributed the slowdown to GST and the company expects this to improve in the second half of the year as clarity emerges over the indirect tax regime and traffic resumes once again.
Lighter Balance Sheet – thanks to InvIT
The market has been keeping a close eye on the transfer of Pathankot Amritsar BOT project to IRB InvIT. The management hinted that this is expected to be completed over the next 3-4 months and will reduce the company’s debt further and release equity.
Post the transfer of six projects to IRB InvIT, the company was able to reduce its debt-to-equity to 1.81:1 as against 3:1 before the launch of InvIT. In Q1FY18, the company's consolidated interest cost fell by 13 percent and interest coverage improved to 3.5 times as against little less than 3 times in Q1FY17.
Falling share of BoT to boost financials
With the transfer of the BoT assets and debt to the InvIT, the share of BoT revenue is falling, but the overall impact on financials is positive. Apparently, with more and more projects getting shifted to InvIT, the BOT revenues may not grow in the coming year, but it will mean higher profits as interest costs and depreciation will fall whereas there will be higher other income from the cash and dividends earned on InvIT units.
The numbers have already started revealing the same. With the divestment of the assets, the company is holding cash and cash equivalent of close to Rs 2300 crore, which is almost 50 percent of FY17 networth of the company.
“Today, most of the players in the construction space are starving for cash. IRB has got the cash, which is good considering that it will be able to bid for projects in the future and take more BOT projects because those projects will require equity contribution, which may not be available with the other players in the industry. Having cash in this space is a big advantage,” said Parikshit Kandpal who is tracking the company at HDFC Securities.
Cash will strengthen the balance sheet and the money can be used for the EPC business in terms of bidding for bigger projects and facilitate execution, which is working capital intensive.
EPC – gaining strength
EPC business, which forms 73 percent of its revenue, is on a strong ground sitting on an order book of close to Rs 8,900 crore or close to 3 times its FY17 EPC revenue, thereby providing strong visibility. EPC will be the key driver of growth with the management now expecting 10-15 percent growth in EPC revenue during FY18.
The government is building roads at the speed of 30 km per day (in May 2017), which though lower than the actual target of constructing at the pace of about 40 km a day, is still better than the speed of 22.3 km per day witnessed in FY17. The government is aiming to spend close to Rs 7-8 lakh crore on the road sector in the next 5-6 years, which is substantially higher compared to the current annual run rate of about Rs 18,000-20,000 crore.
With higher visibility on growth (higher order book) and strength in balance sheet, IRB Infrastructure remains best placed to leverage the opportunity thrown by government’s accelerated spending on roads. In terms of valuation as well there is enough headroom as the stock currently trades at about 9 times FY18 earnings. In addition, at current market price of Rs 217, the stock offers a 2.5 percent dividend yield. IRB, incidentally, has already declared a dividend of Rs 2.5 per share (1.1 percent of current market price) post its Q1FY18 results.
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