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Further earnings downgrade due to rising interest rates to be limited
Rising interest rates have a two-way impact on infrastructure companies. On the one hand, it increases the
interest outflow which impacts profitability and on the other, the rise in cost of equity lowers the intrinsic value
of a project. During January 2010 & September 2011, FY12 revenue estimates (Bloomberg consensus) have
been downgraded by 11% and FY13 revenue estimates by 5%. PAT estimates have been downgraded by
33% and 31% for FY12 and FY13, respectively. Based on our analysis, a 100bps rise in interest rate impacts
the pure EPC players profit by 6% to 7%. Therefore, we believe the higher earnings downgrade than the
actual impact of the increase in interest rates was due to expectations of a further hike in rates. We also
believe that even in a worst case scenario, when interest rates increase by 50bps, the earnings downgrade
will be limited.
Exhibit 20: Bloomberg consensus
Revenue (Rsmn) EBITDA (Rsmn) EBITDA margin (%) PAT (Rsmn)
FY12E Jan-2010 Sep-2011 YoY(%) Jan-2010 Sep-2011 YoY(%) Jan-2010 Sep-2011 Jan-2010 Sep-2011 YoY(%)
GMR Infrastructure 60,432 64,878 7.4 27,066 22,134 (18.2) 44.8 34.1 4,903 375 (92.4)
HCC 57,607 46,505 (19.3) 7,564 6,035 (20.2) 13.1 13.0 2,088 416 (80.1)
IRB Infrastructure 36,669 32,838 (10.4) 14,079 13,412 (4.7) 38.4 40.8 5,050 4,952 (1.9)
IVRCL 88,954 60,719 (31.7) 8,487 5,402 (36.3) 9.5 8.9 4,003 1,315 (67.2)
Reliance Infrastructure 203,087 189,703 (6.6) 24,818 27,745 11.8 12.2 14.6 18,868 16,275 (13.7)
Total 446,748 394,643 (11.7) 82,014 74,727 (8.9) 18.4 18.9 34,912 23,333 (33.2)
FY13E
GMR Infrastructure 89,218 91,958 3.1 42,310 36,915 (12.8) 47.4 40.1 11,691 3,552 (69.6)
HCC 66,723 52,972 (20.6) 8,740 6,878 (21.3) 13.1 13.0 2,400 703 (70.7)
IRB Infrastructure 34,614 42,961 24.1 16,495 16,097 (2.4) 47.7 37.5 4,557 5,534 21.4
IVRCL 122,396 70,199 (42.6) 11,619 6,481 (44.2) 9.5 9.2 5,108 1,695 (66.8)
Reliance Infrastructure 203,693 231,309 13.6 34,928 34,680 (0.7) 17.1 15.0 23,411 21,095 (9.9)
Total 516,643 489,399 (5.3) 114,091 101,049 (11.4) 22.1 20.6 47,166 32,579 (30.9)
Source: Bloomberg
Impact of high interest rates on construction, infrastructure companies
As per our analysis, a 100bps hike in interest rates impacts pure EPC (engineering, procurement and
construction) profits by 6% to 7% and FCFE by 4% to 5%. Looking at the earnings downgrade and price
correction in the past one year, we believe the market has already discounted higher interest rates than the
actual rise in rates. Therefore, in case the interest rates increase by 50bps, they will not impact the consensus
earnings and the target price. On the other hand, if the interest rates stabilise after rising by 25bps (consensus
estimate), the stock prices of infrastructure companies should react positively.
Key assumptions common across different asset classes:
• Asset portfolio: Debt-equity ratio of 70:30
• Working capital of 30% and asset turnover of 1.5x
• Interest rate of 11% per annum
• We have kept everything constant except the interest rate.
Exhibit 21: Interest impact sensitivity
(Rsmn) Construction B/S
Interest rate (%) 10 11 12 Asset turnover 1.5x
Revenue 100 100 100 Assets 66.7
EBITDA 10 10 10 Debt 33.33
Interest costs 3.3 3.7 4
Depreciation 1.7 1.7 1.7
PBT 5 4.7 4.3
Tax @33% 1.7 1.5 1.4
PAT 3.4 3.1 2.9
Change (%) (6.3) (6.7) (7.1)
Source: Nirmal Bang Institutional Equities Research
10 Infrastructure Sector