IRB Infrastructure Developers (IRBDL), the holding company, develops and constructs road infrastructure through its various subsidiaries. It is one of the largest players in the build-operate-transfer (BOT) road project space. Recently, the company diversified into real-estate development by setting up a township near Pune. IRBDL was involved in the construction or operation and maintenance of approximately 1,200 km of highways and roads in India end October 20’07. The portfolio includes 12 BOT road projects including the large Mumbai-Pune Expressway and four National Highway (NH) BOT projects bagged in March 20’04 and the BOT project of the Bharuch-Surat section of NH 8 awarded in July 2006. IRB Infrastructure Developers was set up to fund the capital requirements of the IRB Group’s initiatives in the infrastructure and construction sectors.
IRBDL operated through 11 subsidiaries end December 2007. Most of them as special purpose vehicles (SPVs) for BOT projects developed and operated by the company. Its 100% subsidiary Ideal Road Builders (IRBPL) is the BOT projects-cum-EPC (engineering, procurement and construction) arm of the company. It also has stake in other SPVs for BOT projects along with its parent IRBDL. Of the 12 BOT projects, four are directly under IRBPL.
Modern Road Makers, another 100% subsidiary, is the engineering and construction arm of IRBDL. Almost all the construction undertaken by the IRB Group in the road and highways sector for BOT projects or funded construction contracts is currently executed through Modern Road Makers. Other entities in the group including project SPVs typically sub-contract almost all the construction work undertaken by them for both funded construction projects as well as for construction work on BOT projects to MRM, either through IRBPL or directly. Aryan Infrastructure Investment (AIIL) is the realty arm of IRBDL, with land reserves. IRBDL acquired a 66% stake in AIIL on 20 June 2007 and 18 July 2007.
Ideal Road Builders (IRBPL) and Mhaiskar Infrastructure (MIPL) are the two largest subsidiaries of IRBDL in the infrastructure development and construction business, and collectively contributed 88.10% and 92.59% of the consolidated turnover of the IRB Group in the year ended March 2007 (FY 2007) and in the five months ended August 2007, respectively (calculated on the basis of unconsolidated turnover of IRBPL and MIPL for the relevant periods expressed as a percentage of consolidated turnover of the IRB Group in such periods). MIPL is involved in the Mumbai–Pune Expressway and NH 4 BOT project, which is the largest BOT project undertaken by the IRB Group, and contributed 37.17% of the consolidated turnover of the IRB Group in the five months ended August 2007 (calculated on the basis of unconsolidated turnover of MIPL for the relevant period expressed as a percentage of consolidated turnover of the IRB Group in such period). IRBPL is involved in various BOT projects as well as funded construction projects from government entities and contributed 55.41% of the consolidated turnover of the IRB Group in the five months ended August 2007 (calculated on the basis of unconsolidated turnover of IRBPL for the relevant period expressed as a percentage of consolidated turnover of the IRB Group in such period)
Within the real-estate development sector, IRBDL is acquiring land in the Pune district of Maharashtra o develop an integrated township. The proposed township project is in its preliminary stages of planning and development and will be the first real-estate development project undertaken by the group. It intends to develop residential and commercial projects within the proposed township project. Currently, the land reserves consists of approximately 925 acres of land in the Mauje Taje and Mauje Pimploli Taluka in Pune district, and there are plans to acquire an additional approximately 475 acres of land for the proposed township project.
The IPO plans to raise Rs 944.57 crore to Rs 1123.27 crore, with a public issue of 5,10,57,666 equity shares in the price band of Rs 185 to Rs 220 per share. The intended objects of the issue are (a) investment in a subsidiary; (b) prepayment and repayment of existing loans of IRBDL and subsidiaries; (c) general corporate purposes; and (d) Issue related expenses. Investment in subsidiary IDAA would be Rs 90 crore. The prepayment and repayment of existing loans company would be Rs 236 crore, and that of subsidiaries would be: Rs 40 crore (Aryan Toll Road), Rs 75 crore (Modern Road Makers), Rs 207 crore (Thane Ghodbunder Toll Road), Rs 25 crore (NKT Road & Toll), Rs 40 crore (Ideal Road Builders) and Rs 100 crore (Mhaiskar Infrastructure).
Strengths
- Strong mature project portfolio of 11 operational BOT projects and one project under implementation. All the 11 operational BOT projects generate stable and steady revenue/cash flow through oll collections. The Bharuch-Surat BOT project is under construction. The project has completed financial closure. Further, the operating project portfolio consists of heavy traffic toll roads such as Mumbai-Pune Expressway and its alternative NH4.
- Impeccable track record of timely project delivery, often leading to early tolling on account of early completion of project.
- Had orders of Rs 2324.90 crore end October 2007. The current land reserve of 925 acres for realty development is close to Pune in Maharashtra.
- Joint venture (JV) with Deutsche Bank’s Singapore branch facilitates stringent financial (pre-qualification) criteria for bidding for higher ticket size BOT projects from the National Highway Authority of India (NHAI). Entered into eight MoU with the Singapore Branch of Deutsche BanK AG in January 2007 to jointly bid for certain road expansion projects proposed by NHAI. Out of the joint bids was the highest (o n percentage revenue sharing) for the Surat-Dahisar project and the Letter of Acceptance (LoA) is awaited. As per the MoU, the Dutsche Bank will pick up a minimum 10% stake and IRBDL a minimum of 51% in the SPV.
- Strong operating margin. Cconsolidated operating margin was 54.1% in FY 2007 and 56.6% in the first five months of FY 2008
Weaknesses
- Certain entities in the promoter group are in similar business activities and that could result in conflict of interest. For instance, Aryan Construction, a proprietary concern of V D Mhaiskar HUF, part of the promoter group is in construction activity. Aryan (AIIL), a 66% subsidiary, has awarded Aryan Constructions the lumpsum turnkey contract for the development of a proposed township for an aggregate Rs 2259.66 crore, with an mobilisation advance of Rs 183.91 crore out of Rs 252 crore of total agreed advance. Quite a few of the promoter group companies such as Rideema Toll, A J Tolls, MEP Toll Road, and VCR Toll Servicers are in toll collection services.
- Current operations are concentrated in Maharashtra and Gujarat. Ability to succeed in bagging contracts outside these two states remains to be seen.
- Has little experience in realty development and marketing.
- The IRB group has undertaken series of substantial restructuring steps in the recent past and, hence, the consolidated FY 2007 results as well as the latest five months ended August 2007 results are not comparable with the past nor will be comparable with the future. Under these circumstances its impossible to make any judgement about its financials.
Valuation
IRBDL is one of the major BOT project companies in India. Other major companies with more BOT projects include Larsen & Toubro and Gammon India. But they are significantly larger in size. Being engineering and construction companies, their revenue from BOT operations is relatively small to their total turnover.
The IRB Group underwent restructuring with various subsidiaries coming under its fold on various dates in FY 2007. Consequently, the consolidated restated profit and loss account for FY 2007 do not reflect a full fiscal year of consolidated operations. Consolidated revenue in FY 2007 stood at Rs 305.72 crore and the restated net profit after minority interest at Rs 22.73. The EPS works out to Rs 0.68. At the price band of Rs 185-Rs 220, the P/E works out to 272.1-323.5 times FY 2007 consolidated earning.
Nearest comparable player is the Noida Toll Bridge, which quotes at a P/E of 111.7 of its FY 20’07 consolidated earnings. The market cap of IRBDL at the upper price band will be Rs 7312.01 crore compared with Noida Toll Bridge’s Rs 1085.49 crore. Noida Toll Bridge has only one operating BOT project, while IRB has 11 projects. But the margin of the former is higher at 71.3% in FY 2007 and 60.7% in FY 2006. The construction business typically has lower margin, which pulls down the overall margin of IRBDL.
Consolidated revenue was Rs 261.88 crore and consolidated net profit after minority interest being Rs 23.97 crore in the first five months of the current fiscal. The annualised EPS works out Rs 1.73 and the P/E at the price band works out 106.9 – 127.1 times five months ended consolidated FY 2008 annualised earning.
Normally, such companies are valued based on sum-of-parts and net present value (NPV) of its BOT projects and EPS and P/E may not reflect the true picture.