Higher construction income hurts IRB

However, growth prospects seem unaffected; rival ITNL also sees moderation in profit growth

Two of India’s largest road toll operators, IRB Infrastructure and IL & FS Transportation Networks (ITNL), are out with their March quarter performance. Both paint the same story, of better than expected revenue growth but operating margins missing estimates by a huge extent.

First on IRB Infra, which announced its March quarter result (fourth quarter or Q4 of 2015-16) on Thursday, after market hours. Revenue at Rs 1,537 crore increased by 55 per cent over a year before, well ahead of the Bloomberg estimate of Rs 1,376 crore. However, elevated operating and financing costs put a check on net profit (Rs 152 crore), which grew only 9.4 per cent over a year, though still ahead of expectations. Operating expenses grew 89 per cent in Q4, due to higher execution of construction projects. The share of construction projects (where operating margins are 20-25 per cent vis-a-vis toll projects’ at 80-85 per cent) to total revenues increased from about 50 per cent in Q4 of FY15 to 62 per cent. Revenue from the construction business almost doubled to Rs 953 crore.

Consequently, overall operating margins, 56-58 per cent in the past two years, plunged to 48 per cent. However, these were also suppressed due to low-yielding contracts pertaining to the Solapur project being executed in Q4. Going forward, though the share of construction projects might remain high as Rs 8,000 crore of projects are listed for implementation in the next two years, analysts expect operating margins to return to 55-56 per cent in FY17. However, interest cost at Rs 326 crore (up 30 per cent year-on-year) remains a drag on profitability.

As for toll operations, revenue at Rs 584 crore increased 17 per cent and was largely guided by traffic growth, as the company did not raise rates in Q4. Toll revenues in the key Mumbai-Pune and Surat-Dahisar projects, half the total, grew 11 per cent and 10.4 per cent, respectively, over a year before. Among the other key tollways, except for the Ahmedabad-Vadodara expressway, the rest had growth of four to nine per cent.

For now, with the management saying it expects 10-12 per cent toll revenue growth and order inflow of Rs 3,000–5,000 crore in FY17, growth prospects for IRB Infra seem intact. The management is confident of the BOT (build, operate, transfer) pipeline, as 2,000 km of projects (worth Rs 15,000-18,000 crore) are to be awarded in FY17.

A much bigger opportunity is playing out in the hybrid annuity model (HAM) segment. Almost Rs 25,000 crore of projects (90 per cent of the total order pipeline) are lined up under HAM in FY17. It needs to be seen whether IRB continues with its focus on BOT.

Interestingly, its competitor, ITNL, which bids for HAM projects, also saw higher revenue growth and moderation in profit growth due to high interest cost. Revenue at Rs 2,548 crore increased by 76 per cent over a year before in Q4. Even as income from the construction business grew faster pace than toll revenues, operating margins increased from 27 per cent in Q4 of FY15 to 30.5 per cent, aided by higher fee income. However, debt remains a huge overhang for ITNL. Interest expenses more than doubled to Rs 718 crore in Q4 from a a year before. Long-term debt at Rs 22,488 crore is 20 per cent higher than that of IRB Infra (Rs 18,500 crore as on end-March), which is why Nitin Arora of Emkay Financial Services prefers the latter. “The debt burden is huge for ITNL and there is no visibility of it reducing in the near term,” he states.