IRB Infrastructure Developers: Buy

Investors with a 3- to 5-year perspective can consider investing in the stock of IRB Infrastructure Developers. With a portfolio of 11 operating toll roads and three under execution through special purpose vehicles, the company’s revenue stream carries a high degree of certainty, making the business less risky compared with other infrastructure players. Investors can accumulate the stock, using market declines to their advantage.

Being an early mover, the company’s asset portfolio is also endowed with superior rates of return (IRR) relative to projects that are currently being awarded. Increase in toll rates and recent concession agreements are likely to provide significant room for growth in toll revenues over 2009-10. With consolidated revenues of over Rs 2,000 crore expected by FY10, the stock currently trades at about 20 times its per-share earnings for 2009-10. This does not factor in revenue from real estate activities planned by the company.

IRB generates revenue from three businesses — building of roads, maintenance of roads built, and toll collection. Of this, toll revenue is likely to be the major earnings driver. The Bharuch-Surat and Surat-Dahisar roads expected to be operational over 2009 and 2010) and the already operational Mumbai-Pune road, are all high traffic areas with over 65,000 passenger car units (measure of traffic density). This suggests high revenue potential.

IRB’s portfolio is distinctive for two reasons. One, none of the projects has any revenue-sharing agreements with the Government. Two, a good number have agreements for toll increases, or non-compete clauses that restrict the Government from operating competing roads that could disrupt IRB’s revenues from traffic. For instance, the company’s key asset — Mumbai- Pune Expressway — has received an 18 per cent hike in toll rate effective April 2008, and this is likely to be reset at the same rate once in three years.

Future projects under the Model Concession Agreement (MCA) would be revenue sharing in nature and could also cap returns from future projects. However, with high quality assets already in its portfolio, IRB is likely to sustain higher margins, compared with peers. Further, the company could retain its edge under MCA, as these contracts would require superior execution capabilities for better profitability. IRB, with its qualification in toll roads, appears well placed to bag orders under the new model.