IRB Infrastructure Developers

Investors can consider accumulating the stock of IRB Infrastructure Developers (IRB). At the current price of Rs 227, the stock trades at 14 times its expected per share earnings for FY-12.



The slowdown in road order inflows and sluggish earnings growth of players in the infrastructure sector resulted in a broad correction for stocks in this space. The stock of IRB, too, declined by 19 per cent in the last three months. The company witnessed robust revenue and net profit growth of 30 per cent and 42 per cent, respectively, for the half-year ending September 2010, defying the slowdown trend in the sector.

Armed with a portfolio of 10 operational road projects, IRB is well-placed to shield itself from any slowdown in orders, given the steady stream of revenues from its toll projects. With lanes such as the Mumbai-Pune Expressway and Surat-Dahisar, which have dense traffic, toll revenues in fact rose 21 per cent in the September quarter over a year ago. Toll hikes linked to the Wholesale Price Index also ensure that IRB does not suffer on account of inflation.

An order book of Rs 9,500 crore, consisting of Engineering Procurement and Construction (EPC), and operation and maintenance contracts, also provide sufficient scope for earnings growth. Orders stand at 5.5 times FY-10 revenue. IRB, though, is not an exception to the recent trend of sluggish orders, as order book is marginally lower than last year. However, order inflows should pick-up in the March quarter, if the Government wishes to meet its target of 20 km/day.

With regulatory norms in place for bidding, there are not at present too many hindrances for award of orders. IRB appears well placed to comply with the norms. The company, for instance, has been very swift in financial closure of projects that it won in recent times, as the norms do not allow developers to bid for new projects if three or more of their projects are pending financial closure.

However, it would have to either ramp up its net worth or bid jointly if it has to independently qualify for large-sized projects of about Rs 5000 crore. Unlike its earlier portfolios, where it owned the entire stake, this may result in compromise in revenue flows.

IRB's operating profit margins declined less than 1 percentage point to 47.4 per cent as a result of higher contract expenses, even as material costs declined in the latest September quarter. Any escalation in input costs could put further pressure on margins.