Hold IL&FS Transportation; target Rs 216: Emkay

Emkay Global Financial Services has recommended hold rating on IL&FS Transportation Networks (ITNL) with a target price of Rs 216, in its February 05, 2013 research report.

"ITNL's 3Q consolidated revenues at Rs17.6 bn , +39% yoy were significantly above estimates of Rs14.4bn led by robust 37% growth in construction revenues (Rs12.4bn vs est of Rs10bn) driving EBITDA to Rs 4.5bn+ 40%yoy v/s exp of Rs 4.1bn. However despite EBITDA beat, APAT before minority interest at Rs1.1bncame in line with estimates and grew a tepid +9% yoy as interest charges surged 53% yoy as consolidated debt jumped to Rs130 bn compared to Rs102 bn in March-12. PAT (post minority interest) stood at Rs1.04bn, +19% yoy. ITNL's robust execution surprised positively with standalone revenue growth of 68% (Rs9.5bn), however decline of 37% yoy in high margin fee income (Rs935 mn vs est of Rs1300mn) led to 455 bps yoy contraction in EBITDA margins, translating to an in 3Q EBITDA of Rs1.34bn. However standalone interest cost for the quarter jumped 47% yoy (Standalone debt at Rs35 bn up 30% vs March-12) dragging the PAT growth to just 6% to Rs463mn below estimates of Rs511mn. ITNL is executing projects at a rampant pace resulting in increasing leverage at both the consolidated and parent level. The company has a consolidated gross debt of Rs130.2bn in Dec-12 with a consolidated D:E of 3.8x v/s 3.7x in FY12 while the standalone debt at Dec-12 stands at Rs 35.1bn with D:E pegged at 1.6x. Although ITNL has been able to service this debt with 20% growth (for 9MFY13 )in its high margin fee income and 40% growth in EBIDTA, with NHAI awarding slowing down significantly, sustainability of this high fee income growth & serving of the parent debt could be an issue. With significant slow down in NHAI awarding activity (only 1000 km awarded till date vs Annual target ~9K kms) and possibly impact on NHAI funding plan on account of recent termination of road project we do not foresee meaningful increase in awarding activity by NHAI. With robust order inflow in FY12 ITNL has been able to deliver 20% growth in its high margin fee income till 9MFY13. However as ITNL's earning & cash flows are highly leverage to new order inflows, we believe sustaining such high growth rate in fee income is unlikely. Given this backdrop of decelerating high margin fee income growth, the high parent leverage (standalone debt at Rs 35.1bn with D:E at 1.6x) and could mean increasing interest cost pressures for ITNL. Moreover with 20% uptick in stock performance over last 6 months, we see very limited upside given that stock already trades at 8.3X EV/EBIDTA and 1.1 P/B. We downgrade the stock to Hold (Vs ACCUMULATE earlier) with a revised target price of Rs 216. We have valued ITNL's BoT portfolio at Rs173/share (CoE of 12/13% - operational projects, 14% - under construction project & 15% - under development projects), E&C business at Rs 169/share (4.5X FY14E EBITDA) and other subsidiaries at Rs 37/share," says Emkay Global Financial Services research report. Shares held by Mutual Funds/UTI Disclaimer: The views and investment tips expressed by investment experts/broking houses/rating agencies on moneycontrol.com are their own, and not that of the website or its management. Moneycontrol.com advises users to check with certified experts before taking any investment decisions. To read the full report click on the attachment

Read More