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Institutional Equities
Initiating coverage on five infrastructure companies
IRB Infrastructure: On The Road To Success
IRB Infrastructure, a premier toll road developer and operator with in-house integrated execution capabilities,
will be the biggest beneficiary of traction in the road segment. We believe the company is offering a good
blend of growth and sustainable cash flow (EPC business to drive revenue CAGR of 37% between FY11-13
and toll revenue will provide sustainable operating cash flow of around Rs12bn to meet the equity
commitment of new projects without equity dilution). We assign a Buy rating and a TP of Rs235 to its stock
based on SOTP valuation.
Reliance Infrastructure: Core earnings to improve
Renewal of Mumbai discom licence and the recent tariff hike in Delhi electricity distribution business are
likely to eliminate the overhang on Reliance Infrastructure’s valuation with respect to its power distribution
business. The EPC segment has an order book of Rs280bn, which would drive revenue growth in coming
years. Infrastructure projects are now turning from the development stage to the revenue generation stage
with the commissioning of six road projects, Mumbai metro rail phase I and one transmission project in the
next six months. However, the stock is currently trading at a P/BV of 0.5x, which we believe is unjustified
and below stress case valuation. We assign a Buy rating and a target price of Rs724 to the stock.
GMR Infrastructure: On Recovery Path
GMR Infrastructure, a leading infrastructure company, has underperformed the Nifty in the past three years
by 55% because of multiple issues like Balance Sheet concerns post leveraged buyout of Intergen, funding
constraints for mega expansion plan, overhang of regulatory issues and pressure on profitability. Looking at
the recent developments like adequate raising of capital for near-term expansion, sale of Intergen stake and
expected other positive developments like improvement in profitability and clarity on regulatory issues, we
believe the concerns have been largely priced in the CMP of GMR Infrastructure and provides a good
investment opportunity for long-term investors. We assign a Buy rating and a target price of Rs39 to the
stock based on SOTP valuation.
HCC: Downside Risk Limited
We assign a Hold rating and a target price of Rs33 to HCC as we believe the company’s sales would grow
moderately due to higher working capital requirement and greater leverage. Lavasa, a marquee project, is in
trouble due to dispute with the environment ministry, which has given a big jolt to its valuation. We believe
the downside risk is limited (as the recent transaction relating to divestment of stake in HCC Concessions is
valued equal to the market capitalisation of the parent company), but lack of triggers and the company’s
focus on consolidating its business due to higher leverage would cap any upside.
IVRCL Infrastructure: Project Execution To Gain Momentum
IVRCL Infrastructure, a well established construction company with an order backlog of Rs230bn, which is
3.8x FY11revenue, provides strong revenue visibility. Project execution is poised to pick up from 2HFY12,
driven by commencement of billing in three new projects, increase in shorter execution cycle projects in total
order book and increase in sub-contracting post stability in interest rates, which will drive 17% yoy revenue
growth and 32% yoy earnings growth during FY13. The company is also in advance stage of talks for sale of
stake in the special purpose vehicle of IVRCL Assets & Holding (IVRCLAH) and monetisation of real estate,
which would ease funding needs. We assign a Buy rating and a target price of Rs59 to the stock based on
SOTP valuation.
26 Infrastructure Sector