Near-term headwinds to weigh on IRB Infra stock

Extended monsoon impacted Q2 show, particularly for the construction segment, leading to its performance missing estimates after many quarters

IRB Infrastructure Developers had established a track record of posting better-than-anticipated quarterly results. However, the trend was broken with its September 2016 quarter (Q2) numbers coming below Street estimates. For the IRB stock, it had started outperforming the S&P BSE Sensex in the three months ending October, after lagging the broader index in the past 6-12 months. However, given the near-term headwinds in the business coupled with the miss in Q2, expect these factors to weigh on the stock for some time.

For the quarter, net revenues of Rs 1,290 crore (up 12% year-on-year) came significantly below estimates of Rs 1,408 crore according to Bloomberg poll of analysts. Consequently, IRB witnessed a marginal dip in net profit as well. Net profit at Rs 142 crore in Q2 was lower by five% y-o-y, dragging its stock down by 3.6% in Tuesday’s trade.

 

Extended monsoon in the September quarter led to the weak show by IRB and it particularly weighed on the construction business. The construction business, which accounts for 56% of consolidated revenue, grew by only seven% year-on-year, which according to analysts is disappointing given the robust show posted in at least the past four quarters.

The rub-off effect of monsoon was felt on earnings of the build-operate-transfer (BOT) segment, too. However, analysts at ICICI Securities say that even if the BOT segment revenues came below estimates, it managed to grow at a better pace (Rs 561 crore, up 19% y-o-y) making good for the slow growth in the construction business. In fact, if not for the better operational efficiencies of the BOT division, operating profit margins of IRB would have fallen for the second consecutive period in Q2 as well.

 

BOT is far more profitable than the construction business. Operating margins for the BOT segment increased by 230 basis points y-o-y to 87% in Q2, while that of the construction segment stood at 32.8%. As a result, IRB’s blended margin in Q2 came in at 56%, up 400 basis points y-o-y.
 

While the Q2 results might be attributed as a one-off miss, what requires attention is the interest cost. Interest expenses do not seem to be cooling off for IRB; in Q2, it rose by 42% y-o-y to Rs 339 crore. IRB has identified a few projects to be transferred to the infrastructure investment trust (InvIT), which is likely to be listed on the bourses by the end of FY17. However, more clarity is required on how the InvIT creation could resolve debt-related issues as debt is increasingly becoming a concern for the company. As on September 30, 2016, the debt-equity ratio rose to 3x from 2.78x as on March 31, 2016.

For now, the only factor that offers some comfort is that the ongoing demonetisation scheme is unlikely to hamper IRB’s toll revenues in Q3, even as the government has suspended toll collection for a few weeks to provide relief to travellers (including transporters). “The National Highways Authority of India will make good for the losses due to demonetisation based on October’s toll collection,” says Anil Yadav, IRB's group chief finance officer.

The daily collection from national highway-based toll is about Rs 5 crore for IRB. Based on the number of days toll is suspended, IRB would be compensated. However, the impact of demonetisation on trade is likely to stay for a couple of quarters, and this could weigh on trade traffic on highways, thereby impacting companies such as IRB.

But, unless there is noteworthy relief on the debt-related issues, IRB’s stock might remain range-bound given the steep correction of 23% from November 8.