Stock Pick From The Construction Sector

Standing Tall

• Focus on execution rather than on aggressive bidding has helped it to sustain margins.
• An order book of Rs 7663.40 crore indicates ample growth opportunities.
• With 18 BOT projects, 14 of which are operational, it has steady cash flow.

It is well known that the infrastructure sector has witnessed a major setback due to the current economic slowdown. With trouble in financing projects, inability to meet debt repayment schedules, bottlenecks in terms of execution and fetching new orders, the sector has been besieged by problems. Not surprisingly, stocks in the segment have taken a steep fall, some of them losing over 90 per cent of their market cap.

However, even in such a scenario, IRB Infrastructure Developers stands out as a good bet for the long term unlike many of its infrastructure peers. The prime reason behind the same is that the company has been focusing on project execution instead of bidding heedlessly for expensive projects. In the past, many infrastructure companies have gone bust as they pursued new projects even at the risk of compromising on margins. However, IRB has focused on completion of its earlier projects and has managed to sustain the return on equity at around 17 per cent in the past two years.

While other infrastructure companies are short of funding options, IRB is comfortably placed, with a debt-equity ratio of 2.4x. In addition, with a number of completed projects under its belt, the debt on these can be refinanced at lower rates.

IRB focuses on large projects worth Rs 1000 crore or more, where competition is limited, providing enough breathing space on the margins front too. The company has an order book of Rs 7663.40 crore, clearly indicating ample growth opportunities. Further, with 18 BOT projects, 14 of which are operational, it has a steady cash flow.

One advantage IRB has is that it has focused on execution of projects. In the past two years, the road projects scenario has swung from expensive bidding in 2011 to a virtual drying up of project awards in 2012. During this period, IRB focused on completing projects on hand and refrained from aggressive bidding it completed two projects last fiscal and three are slated for completion this fiscal. Two more projects, which are much bigger than what IRB has executed in the past, will come up by FY16. This restraint meant that fresh orders were limited, but it allowed IRB to maintain comfortable debt and project return levels. Now when the economy comes on track, the relatively lower debt should also help the company bankroll new projects without difficulty.

In the June 2013 quarter, the toll collection for the roadways already under operation rose by five per cent compared to that in the same quarter of 2012. In addition, with the company’s acquisition of an operational road in the past year, the total toll collection in the June quarter jumped by 19 per cent.

Road traffic has been slowing in some key road stretches due to a slowing economy, early monsoon and mining bans. Despite this, with tariffs linked to inflation, toll hikes have compensated for the slower traffic. Its diversified geographical presence also gives IRB an advantage over the other state-centric players.

Going ahead, IRB’s revenues are expected to increase with tolls set to start from three more stretches (IRDP-Kolhapur, Pathankot-Amritsar and Jaipur-Deoli) by the end of this calendar year. With the widening road portfolio, the dependency on a few road stretches has also reduced.

The company’s consolidated operating margins are healthy at around 50 per cent. However, the interest costs and depreciation together have brought down its net margins over the past three years from 18 per cent to 14 per cent. On the valuations front too, at Rs 82 the stock trades at 5x its trailing 12-month earnings, which is well below its three-year average of 12-14x. Nevertheless, looking at its overall performance, investors with a two-year horizon can accumulate the stock in phases, with a target price of Rs 125.