The opportunities in the road infrastructure space are expected to improve visibly as many constraints are seen easing going ahead. Until now, many road projects have been delayed due to issues pertaining to funding as well recent impediments like elections, wherein new projects couldn’t be awarded.
According to industry estimates, about Rs 28,000 crore worth of projects, which are at various stages of bidding, are to be awarded over the next 6-8 months. These include projects of the NHAI and state governments for which, the bidding is expected to start from June 2009.
IRB Infrastructure Developers, which is India’s largest player in the build-operate-transfer (BOT) road segment and currently operating about 800 kilometres (Km) of roads, could emerge as a key beneficiary.
“Out of this opportunity, which is equivalent to about 3,000 km, we are aiming to add 500 km to our kitty,” says Virendra Mhaiskar, CMD, IRB Infrastructure. This seems achievable given that IRB will now be bidding for projects across the country, as against its current presence in Maharashtra and Gujarat.
The company also stands to gain due to its proven capabilities and presence across the value chain—from construction and maintenance to operating the toll or annuity based roads. The presence across the value chain provides the company some cost advantage over others, and has been responsible for winning projects in the past.
Mhaiskar says that the only serious competition for the company is from integrated players like L&T. Nevertheless, the opportunities in the road segment is large enough for IRB to sustain robust growth in the medium-term.
Revenue booster
The gains from some of its existing BOT projects as well as a few others (recently operational as well as those expected to commence soon) will translate into robust growth for the company in 2009-10.
IRB currently has a portfolio of 12 BOT road projects, of which 10 are operational and nine are debt free. These projects, including the Mumbai-Pune expressway (the largest contributor) put together generated annual revenues of Rs 454 crore in 2008-09.
The revenues for 2009-10 are expected to jump by 72 per cent as compared to the previous year. IRB’s 240 km Surat-Dahisar project has started operations (toll-collection) in the month of February 2009 and contributed just Rs 33 crore in 2008-09, translating into annualised revenues of Rs 200 crore.
Additionally, its 65 km Bharuch-Surat road project, which is expected to be operational from July 2009, could fetch another Rs 120 crore. In existing projects, revenues are seen rising 6-10 per cent on account of higher volumes and revised tariffs.
| SPIKE IN PROFITS | |||
| in Rs crore | FY08 | FY09 | FY10E |
| BOT revenues | 370.00 | 460.00 | 780.00 |
| Construction revenues | 363.00 | 567.00 | 1,200.00 |
| Total revenues | 785.00 | 1,027.00 | 1,980.00 |
| OPM (%) | 34.20 | 44.10 | 47.50 |
| Net profit | 114.00 | 176.00 | 356.00 |
| EPS (Rs) | 4.18 | 5.60 | 11.00 |
| PE (x) | 34.00 | 25.00 | 12.50 |
| E: Analyst estimates | |||
Construction opportunities
The growth prospects in the construction segment are equally big, which largely comprises of EPC or road maintenance work for BOT projects. This segment, which contributed a little over 50 per cent of total revenues last year, has an order book of Rs 5,897 crore.
However, only Rs 3,000 crore of this order book is on account of EPC work which is to be executed over 30 months. The rest are for operation and maintenance (O&M) contracts, wherein revenues inflow is spread over the long term (12 years and more).
Considering the current EPC and O&M orders, current year revenues could be in the range of about Rs 1,200 crore. Going ahead, bagging of new projects will only increase the order book of this division, and provide enhance visibility.
Integration benefits
What is also important to note that with the addition of new projects such as Dahisar-Bharuch and Bharuch-Surat, the economies of scale will improve and margins. Besides, the company is also expected to benefit on account of the correction in the commodity prices.
The price of bitumen, which accounts for about 30-40 per cent of the road construction cost, has fallen from Rs 45,000 a tonne in last year to Rs 35,000 per tonne currently.
Similarly, the nearly 50 per cent correction in steel prices (TMT bars, used in construction) should augur well; operating profit margins are seen improving by about 340 basis points in FY10. Besides, the company is also expected to benefit from the decline in interest rates as its debts (about Rs 3,000 crore in 2008-09) are linked to the bank’s PLR.
| ROAD TO GROWTH | |||||
| in Rs crore | Length (KM) | Expected completion | Revenue | ||
| FY09 | FY10E | % chg | |||
| Mumbai Pune | 200 | Operational | 287 | 305 | 6.3 |
| Bharuch-Surat | 65 | By July 2009 | - | 120 | NA |
| Surat-Dahisar * | 240 | By August 2011 | 33 | 200 | 506.1 |
| Others | 126 | Operational | 140 | 155 | 10 |
| Total | 631 | NA | 460 | 780 | 69.6 |
| Build-operate-transfer (BOT) road projects; financial closure already completed, * In phases by August 2011 | |||||
Outlook
To sum up, the improvement in profit margins along with higher revenues in the BOT roads and construction businesses should help IRB double its net profit in 2009-10 resulting in an EPS of Rs 11.
Besides, the company also has a land bank of 1,400 acre, which analysts have valued at Rs 550-580 crore or Rs 16-17 per share (on the NAV basis) of IRB. However, it will take some time (over 1-2 years) before the company could realise any revenues on this count.
At Rs 142, the stock is trading at 13 times, which is reasonable considering its large portfolio of BOT projects, strong order book and healthy prospects and, can deliver 20-25 per cent returns over a year’s time.
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