After a decade of pain, analysts see an 80% upside in this toll operator

Shares of IRB Infrastructure Developers have been underperforming benchmark Sensex year after year, but many brokerages think that the stock is ready to change gears.

The road ahead for the roads & highways maker IRB Infrastructure Developers looks smoother as brokerages are of the view that the shares of one of India's largest built-operate-transfer (BOT) toll operators may see up to 80 percent upside in a one-year horizon.

IRB Infrastructure is one of the largest BOT toll operators in the country with a market share of about 22 percent in the total Golden Quadrilateral projects.

During the decade of 2010-2019, the stock has beaten Sensex only once in the calendar year 2014 and has given returns in negatives for 8 times. Inexpensive valuations have made the stock's risk-reward profile attractive.

In the year 2020 so far, the stock is up 28 percent as of February 19, against a flat Sensex.

IRB Infrastructure Developers, on February 14, reported a 27 percent decline in consolidated profit after tax (PAT) at Rs 159.73 crore for the quarter ended December 2019.

Total income for the quarter declined to Rs 1,790.17 crore as against Rs 1,835.02 crore in the year-ago period.

Why are brokerages optimistic?

Even as the December quarter numbers of the company were mixed, brokerages found them meeting their expectations.

During the quarter, construction revenues of the company stood at Rs 1,410 crore (including other income) which was 10 percent higher on a year-on-year (YoY) basis.

The rise in construction revenue was underpinned by the strong execution of its under-construction portfolio, with key contributions coming from Hapur-Moradabad, Agra-Etawah and Vadodara-Kim expressway projects.

On a like-to-like basis, the company reported a BOT toll revenue of Rs 370 crore which grew about 9 percent sequentially, with double-digit revenue growth in projects like Ahmedabad – Vadodara, Agra Etawah and Hapur Moradabad BOT Projects.

IRB has emerged as the single bidder for Mumbai-Pune expressway with a bid cost of about Rs 8,260 crore on toll-operate- transfer (TOT) basis.

This is seen as positive and will enhance the company's cash flow.

"The Mumbai-Pune TOT win, if eventually materialises (uncertain since IRB was the sole bidder), should significantly enhance cashflows for the company," said brokerage firm Phillip Capital.

Phillip Capital has a buy recommendation on the stock with a target price of Rs 140 per share which is a nearly 47 percent upside from the current market price of the stock at Rs 95.50.

lower interest depreciation.

"We introduce FY22 estimates and roll forward our valuation to FY22. We continue to value the 9 BOT projects at a 50 percent discount to the GIC deal valuation, and other projects as before (HAMs at 0.7 times P/BV). We value the EPC business at 6 times FY22 PE (unchanged) on the weak order book. Valuations remain highly attractive," said Phillip Capital.

IRB's management in the conference call after quarterly earnings said that the company has received all required approvals for the GIC deal including NOC from lenders and approval from NHAI and the management expects to conclude the deal with GIC at the earliest which is also a strong positive for its balance sheet.

"We believe, the deal with GIC for monetisation of nine BOT projects (valuing at P/BV of 1 time) strengthens its balance sheet and improves cash flow visibility," said brokerage firm Prabhudas Lilladher.

Prabhudas Lilladher has a buy recommendation on the stock with a target price of Rs 130 which is a 36 percent upside from the current market price of the stock.

HDFC Securities has a 'buy' call on the stock with a target price of Rs 172 which is an 80 percent upside from the stock's current market price.

HDFC Sec said that the proceeds from the IRB-GIC deal should help IRB meet its equity infusion requirement of nearly Rs 2,800 crore in under implementation projects.

It added that IRB will also leverage this partnership to bid for upcoming BOT and TOT projects, though it will have to bring in 51 percent of equity under such agreements.

However, HDFC Sec underscores that the sustainability of toll revenue collection rate in the BOT portfolio and the market acceptability for BOT projects remain as key risks for the stock.