nvestors with a two-three year perspective can consider buying the stock of IRB Infrastructure Developers. The company’s lucrative portfolio of 11 operational toll roads render superior earnings visibility compared with some of the infrastructure companies struggling to achieve financial closure or are strapped for funds to meet working capital requirements. Over the last quarter, the company has demonstrated its ability to not only achieve financial closure of its Surat-Dahisar project but also roped in private equity to contribute part of the equity capital for its special purpose vehicle. IRB also managed to bargain interest reset clause in loans for the above SPV to benefit from any decline in interest rates.
At the current market price of Rs 103, the stock trades at 9 times its consolidated per share earnings expected for FY10. Given the volatility witnessed in the company’s stock, investor can consider buying the stock on declines linked to broad markets.
As an early entrant in toll road operation, IRB has enjoyed certain privileges that include retaining the full share of revenues from toll roads, unlike recent public private partnership projects which come with a revenue sharing clause. This has resulted in the company enjoying operating profit margins of over 40 per cent, way beyond the infrastructure industry average of 10-12 per cent. However, going forward, as the company bids for more projects under the new concession agreement, it may witness lower profit margins, what with revenue sharing agreements with the government taking effect. The company’s margins may nevertheless remain superior to most other players, given its well-integrated business.
IRB has a well-rounded business model of construction as well as toll assets. Order book of Rs 3,300 crore on the construction side, provide strong earnings visibility for the next couple of years. At the same time, high density traffic in Western highways such as the Mumbai Pune Expressway is likely to provide regular toll revenues. While volumes could be muted in periods of economic slowdown, IRB is likely to be supported by the periodic toll hikes built in to the agreements in some of the projects.
Raw material costs and high interest costs were key reasons for the muted performance in the quarter ended December. With declines witnessed in both these parameters, the company may see improved profitability from FY10.
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