Within infrastructure, a focus area of Union Budget 2012-13, the road sector has been given a lot more impetus. For instance, the project awards target was increased by 20 per cent to 8,800 km for 2012-13. Even for the current financial year, the ministry of road transport and highways is set to achieve its target of awarding projects covering 7,300 km under the National Highways Development Programme.
The targets for FY12 and FY13 are large and commendable, given that only 5,083 km worth of projects were awarded in 2010-11. This comes as a big relief to companies in the sector, which have (in FY10 and FY11) suffered as project award was lower compared to what was targeted and indicates better growth visibility. Additionally, the timing is good, with the sector turning around as a result of easing competitive intensity, leading to better returns. Funding issues have also been addressed: the finance minister has proposed to double the limit for infrastructure tax-free bonds to Rs 60,000 crore for FY13.
After these events, the outlook has improved for the leading companies in the sector, wherein IRB Infra and IL&FS Transportation (two pure road infra plays) stand to gain, as they are expected to bag a good chunk of the upcoming projects. On the flip side, while the slowing economic growth and uncertainty regarding the timing of a cut in interest rates may act as an overhang for the stocks, the longer-term prospects remain good.
IRB Developers
IRB Infra remains a top pick in the sector. It is a leading player, with operational road projects of 3,169 lane-km. Its integrated business model, focus on the road segment and strategic location of projects (like Dahisar-Surat and Mumbai-Pune, among others) places it in a favourable light. The growth will not only come from the existing projects (Build-Operate-Transfer or BOT revenue of Rs 832 crore in FY11, as against total revenue of Rs 2,503 crore), but there is a large pipeline of under-construction BOT road projects of a little over 3,000 lane-km that will drive revenue growth. Analysts estimate the growth in BOT revenues of about 15-20 per cent annually over the next two to three years.
| HEALTHY PIPELINE | ||
| IL&FS Tran. Netw. | IRB Infra | |
| Operational roads (lane Km) | 3,281 | 3,169 |
| Under development (lane Km) | 4,341 | 3,132 |
| Order book (Rs crore) | 8,900 | 9,600 |
| Order book/Sales (x) | 2.2 | 3.9 |
| Source: Emkay Global Financial Services, Company | ||
| INTEREST COST WOES | ||||
| In Rs crore | IRB Infra | IL&FS Transportation | ||
| FY11 | FY12E | FY11 | FY12E | |
| Net sales | 2,438.1 | 3,092.6 | 4,048.2 | 5,308.4 |
| % change y-o-y | 43.0 | 26.8 | 68.1 | 31.1 |
| Net profit | 452.4 | 506.3 | 458.0 | 400.2 |
| % change y-o-y | 35.8 | 11.9 | 29.5 | -12.6 |
| EPS (Rs) | 13.6 | 15.2 | 23.6 | 20.6 |
| Ebitda (%) | 44.9 | 44.1 | 29.0 | 24.8 |
| P/E (x) | 14.5 | 13.0 | 8.1 | 9.3 |
| E: Estimates Source: Emkay Global Financial Services | ||||
Additionally, as the projects get commissioned, revenues will also be booked in the construction segment (engineering, procurement and construction or the EPC segment’s FY11 revenues were Rs 1,600 crore). The construction segment is currently having an order book of Rs 9,600 crore, almost six times its FY11 revenue, with good visibility. Though the consolidated debt to equity ratio at 2.3 times looks high, its Ebitda (earnings before interest, taxes, depreciation and amortisation) is almost three times the interest outgo (during nine months to December 2011), which provides comfort.
At Rs 191, the stock is trading at 13 times its FY12 estimated earnings. This is reasonable, though at a premium to its larger peer. Given the opportunities in the sector and IRB’s earnings outlook, analysts see an upside of 25-40 per cent over the next 12 months, based on their target price of Rs 240-270.
IL&FS Transportation
IL&FS Transportation or ITNL is also entrenched in the road segment, with a strong parentage in the form of IL&FS. The company has a pan-India presence, with operational road projects of 3,281 lane-km generating about Rs 1.9 crore in the form of toll and annuity per day. This will go up, as the company has large projects totalling about 4,340 lane-km under various stages.
Analysts expect ITNL to clock revenue growth of 30 per cent annually in FY12 and FY13. This also reflects the contribution from its construction or EPC business (70 per cent of current revenue), which has an order book of almost Rs 9,000 crore. Though revenue visibility is strong, earnings growth may get restricted on account of higher interest cost (especially if the interest rates remain elevated) and may act as some constraint in seeking new projects, say analysts. As of December 2011, the consolidated debt-to-equity ratio was 3.5 times.
“The company has the highest leverage in the road sector, making it highly interest rate sensitive,” adds Ajit Motwani, who tracks it at Emkay Global. Thus, if interest rates soften, it will be the biggest beneficiary, leading to better stock returns versus its larger peer. Hence, investors with some appetite for risk and patience may consider the stock.
