Traffic growth key trigger for IRB Infra

The markets were not enthused despite IRB Infrastructure posting healthy revenue growth in the September quarter (Q2) as compared to the year-ago performance. The stock shed about two per cent in trade on Wednesday. The numbers not only missed analyst estimates on profit but did not keep pace with the June quarter's (Q1's) performance, too.

On a quarter on quarter basis, revenue expanded by only four per cent (to Rs 1,149 crore) and did not cushion its operating expenses which went up about 13 per cent from the earlier quarter. As a result, earnings before interest, taxes, depreciation and amortisation (Ebitda) declined four per cent and the Ebitda margin also came under pressure (52.6 per cent versis 56.7 per cent in Q1).

Further, despite interest costs being maintained at the same level as of the June quarter a year before (though the debt to equity ratio at 2.5 times is above the industry standard), profit before taxes declined 12.5 per cent. Gains from some of its subsidiaries aided the overall profits.

 

  Standalone performance also seemed under pressure, mainly on account of a sharp decline in other income (Rs  117 crore in Q1 to Rs 45 crore in Q2). Compared against analyst estimates, profit missed the targets by nearly 12 per cent. This is despite surpassing the revenue estimate at Rs 1,105 crore for Q2. This indicates the company’s operations coming under stress due to cost escalation, particularly because of higher site and raw material costs.

That said, the overall picture for IRB Infra is positive, as it kept pace with the growth momentum seen in the earlier quarter. On a year-on-year basis, revenue expanded 30 per cent and profit after tax by 22.5 per cent (to Rs 149 crore). As for operations, earnings before interest and tax grew 16 per cent, while the pressure on its Ebitda margin remained.

Much of this improvement could be attributed to growth in traffic, particularly in its key markets of Maharashtra and Gujarat which together account for a little over 60 per cent of revenue.

On the whole, though the stock dipped in trade on Wednesday due to the muted quarterly performance to close at Rs 259.45, the road ahead stays intact. A fully integrated road developer, operating on a build, operate, transfer basis, 16 of 23 projects are operational and six under implementation. The order book was estimated at Rs 12,600 crore as of September. It was recently awarded a contract for six-laning of the Agra–Etawah bypass section of NH–2 in Uttar Pradesh under the National Highways Development Project. With likely investment spending of about Rs 45,000 crore by the National Highways Development Authority, and with its own strong execution capabilities, it appears well placed to benefit.

The stock currently trades at a 12-month trailing price to earnings ratio of 16. With further improvement in earnings, analysts expect IRB Infra to trade at 15.2 times in FY17 and 11.7 times in FY18.