| The restructuring exercise initiated by the IRB group in 2005 has resulted in the formation of a holding company, IRB Infrastructure Developers in the year 2007. While it was formed with the intend to undertake leasing activities, post restructuring, the company is now emerging as a large player in the construction space---including, construction of roads and highways and also operating toll-based infrastructure (highways). |
| Going forward, the company is expected to benefit from its large portfolio of build-operate-transfer (BOT) road projects. Some of these projects are expected to go on stream over the next two years, which in turn should lead to substantial increase in revenues. |
| That apart, a strong order book for the construction business, to the tune of Rs 2,325 crore (almost seven times its FY07 revenue), will act as fuel to the fire. Also, the company's plan to repay a substantial part of its debt will add to the earnings in the short term. While for the long-term, its real estate plans will keep earnings momentum to continue. Road to growth |
| Similar to other infrastructure companies, IRB Infrastructure Developers undertakes government contracts for the construction of roads and highways. The company undertakes BOT road projects in which it does the construction work as well as shares the revenue coming by way of toll collections. The company is currently involved in 12 BOT projects in the roads and highways sector, including the prestigious Mumbai-Pune express highway. |
| Out of these projects, about eleven of them are operational and generate revenue in the form of toll and maintenance. During FY07, the company earned about Rs 300 crore of revenue from collection of toll and another Rs 25 crore from maintenance work undertaken at existing projects. However, the same will go up further over the next two years, on account of commissioning of Surat-Bharuch highway (65 km) and the expected Surat-Dahisar 239 Km project, where the company has emerged as the highest bidder. |
| These two projects, based on estimates viz. traffic and revenue per Km would remain same as in the case Mumbai-Pune highway (Rs 31,500 per Km per day), can provide an annual annuity income of Rs 344 crore. However, it is believed that comparatively, the traffic on these routes would be higher due to the fact that they facilitate transportation of goods from the ports to the Western and North India. In an optimistic case viz. revenues of Rs 45,000 per Km per day, the estimates suggest that revenues over a 12 month period could reach over Rs 500 crore, as compared to the revenue of Rs 300 crore reported in FY07 |
| Huge construction |
| Apart from toll revenue that the two new projects will bring in, they will also contribute to the construction and maintenance business, since IRB itself would be undertaking the construction of these projects. Notably, the company also has an order book of Rs 2,325 crore (including Rs 1,400 crore order for Surat-Bharuch toll project). Of these, construction work equivalent to Rs 1,200 crore has to be completed over the next two years besides, maintenance work worth Rs 1,100 crore will accrue over the next 10-12 years. |
| Add to this, the potential construction order of the Dahisar-Surat project (yet to be awarded to the company), which is estimated at Rs 2,400 crore, the order book for the construction business alone would reach to Rs 3,600 crore, which is to be executed over the next 30 months. At the same time, the order book of maintenance will reach to Rs 2,300 crore, spread over the next 10-12 years or an average of Rs 190 crore per year. |
| Besides these triggers in the near future, the company, as a part of its long term strategy, proposes to enter the real estate business. The company is in the process of acquiring land and, so far, has acquired 925 acre out of the planned 1,400 acre in and around Pune (in the vicinity of its Mumbai-Pune express highway). On this land, the company intends to develop a township, over the next ten years. The first lot of the saleable area is expected to come in FY10-11. On a conservative basis, if the saleable area is priced at Rs 2,000 per square feet, the total value of the project works out to over Rs 6,000 crore or per share value of Rs 30 per share, as shown in the table. |
| Investment rationale |
| The company is operating in high growth areas, where there demand continues to remain high. Besides, company enjoys superior margins, thanks to a higher share of revenues from the toll business. Also, its own the capital equipment and undertakes engineering and construction work in house. Further, out of the total debt of Rs 2,240 crore, the company aims to repay debt to the tune of Rs 723 crore. But, how The repayment of the debt will further result into the post-tax savings of about Rs 48-50 crore and hence, will add to earnings (about Rs 1.5 per share) in the FY09. But thereafter, as the company undertakes other projects, the debt levels could rise again. |
| The current order book of Rs 3,600 crore works out to over 11 times its FY07 revenue. Considering these projects are executed over the next 30 months, the same suggest that revenue and earnings growth can be sustained. All these augurs well for the company. Investors can apply with a long-term perspective. |
| Issue opened: January 31, 2008 Issue closes: February 5, 2008 |