IL&FS Transportation Networks (ITNL) – the largest build-operate-transfer (BOT) road projects company in India – seems to be a safer bet compared to its closest peer IRB Infrastructure developers (IRB), given their business portfolio mix, June quarter performance and relative valuations.
IRB, which concentrates more on India’s western region with 17 toll-based projects (relatively risky during an economic slowdown), reported strong revenue growth for the June quarter. While ITNL posted good revenue growth, its diversified project portfolio in terms of region (pan India presence) and toll revenue mix (50:50 ratio of toll and annuity-based projects in a total of 22) limited the margin fall.
Though analysts prefer both players due to their significant business visibility, they say the current valuation gap between the two – ITNL’s nine times FY12 estimated earnings compared to 11 times for IRB, despite the former being a larger player – is unwarranted and should narrow.
| ROBUST REVENUE GROWTH | ||
| in Rs crore | ITNL | IRB |
| Net sales | 1,093.0 | 801.0 |
| % change | 41.0 | 57.0 |
| Share of construction (%) * | 85.0 | 72.0 |
| Share of BOT (%) * | 15.0 | 28.0 |
| % chg in cons. revenues | 75.0 | 81.0 |
| OPM (%) | 30.3 | 41.0 |
| Chg (bps) | -335.0 | -773.0 |
| Net Profit | 116.0 | 134.0 |
| % chg | 11.0 | 14.0 |
| NPM (%) | 11.0 | 17.0 |
| Chg (bps) | -287.0 | -623.0 |
| Interest as % of sales | 13.0 | 15.0 |
| Change in year-on-year; * in overall revenues; bps is basis points Source: Companies, Analysts reports | ||
HIGH GROWTH, HIGHER COSTS
In the June quarter, IRB’s higher sales growth can be attributed to an 81 per cent jump in its low margin construction division’s revenue, which however, also saw operating profit margins falling at a greater pace.
Though IRB’s direct expenses (raw material and contracting) as percentage to sales jumped 942 basis points (bps) – lower compared to around 13 percentage points reported by ITNL – the latter was able to reduce the share of other operational expenditure, including employee costs by a higher margin. ITNL also scored over IRB on the decline in net profit margins as the latter witnessed a jump in interest cost to sales.
Analysts expect the above trend of higher proportion of construction revenues in the overall revenue mix and consequent margin pressure to continue for both companies. The September 2011 quarter is expected to be subdued. Going ahead, analysts say ITNL’s year-on-year performance and its comparison with IRB will need to be monitored.
More From This Section
OUTLOOK
Roads is the only sector providing decent visibility compared to other infrastructure segments and has relatively lesser execution hurdles (like in case of power). Says Shailesh Kanani of Angel Broking: “National Highways Authority of India has started FY12 on an aggressive note by awarding 1,000 kilometer (km) in April-May 2011 and the revised target of 11,000 km for FY12 is up 117 per cent over FY11.”
Awarding activity has picked up in the last few months but competition has also intensified, as ordering activity has dried up in other sectors. ITNL did not receive any orders in the June quarter.
Nevertheless, analysts like both the stocks equally as they are the only focused road BOT developers with strong promoter background, financial strength and substantial experience. They see significant correction in their stock prices in the last one year as a good buying opportunity, with expected return potential of average 35 per cent.
HOW THEY COMPARE
IRB is likely to witness spectacular growth in FY13 as many key projects will be completed in the second half of FY12. Also, it is qualified for projects worth Rs 41,700 crore, including request for qualification (71 per cent) and proposal (29 per cent).
However, analysts say IRB’s risk profile has increased after the company aggressively bid and won the Rs 3,600 crore Ahmedabad-Vadodara project (32 per cent of the total order book). The management though does not see this as a concern.
ITNL’s construction division offers better visibility at 3.9 times the FY11 construction revenues compared to 2.6 times for hat of IRB (net executable order book). Further, ITNL’s BOT toll revenues are less volatile than IRB. The only argument against ITNL is its exposure to developed markets namely Europe, Latin America and Mexico, through its subsidiary, Elsamex.