Institutional Equities - Online Share Trading

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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
Initiating Coverage Institutional Equities IRB Infrastructure Reuters: IRBI.BO Bloomberg: IRB IN 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. Biggest beneficiary of traction in road segment: NHAI is expected to tender road projects of around 24,000km in the next three years and has given a clear timeline (with project-wise details) to award projects worth around Rs483bn in the next six months. As India’s largest integrated player in the road space, the company is a natural beneficiary. During the past six months (April 2011 onwards), NHAI has awarded projects worth Rs 164bn (around 1,851km) in which the company has secured one mega project worth Rs49bn and is targeting incremental orders worth Rs25bn to Rs30bn in FY12 which would translate into around 13% of projects awarded by NHAI in FY12. Strong operating cash flow to drive future growth: IRB Infrastructure has a portfolio of 17 projects with a daily gross toll collection of Rs30mn, which is growing at around 14-16% per annum. The company has witnessed a significant growth in its operating cash flow, from Rs2.5bn in FY08 to Rs10bn in FY11, which is expected to be in the same range until FY13. On the other hand, for existing projects, the equity commitment could be in the range of Rs11bn over FY12-13, which could be funded through internal accruals. Thus, existing cash flows are sufficient to meet equity funding requirements of its projects without any dilution. However, on completion of existing projects, the debt/equity ratio would increase to 1.9x in FY13. EPC order book of Rs117bn to drive robust growth: The company has an order book of Rs117bn, (7x FY11 construction revenue), which is expected to be executed over the next three years. Robust order book coupled with four projects under active phase (worth Rs46.8bn and executable by FY13), would drive revenue CAGR of 37% over FY11-13. However, we expect the net profit to show a CAGR of 11% due to higher interest costs and depreciation charges on completion of BOT assets worth Rs82bn. SOTP-based target price of Rs235: We assign a Buy rating with a target price of Rs235 to IRB Infrastructure based on SOTP valuation, comprising Rs151 (64% of SOTP, based on FCFE) for BOT assets and Rs84 (36% of SOTP, PE ratio of 8x) for the EPC business. Accordingly, we have arrived at a valuation of Rs235. Y/E Mar (Rsmn) FY09 FY10 FY11 FY12E FY13E Net Sales 9,919 17,049 24,381 31,941 45,863 YoY (%) 35.4 71.9 43.0 31.0 43.6 EBITDA 4,374.0 7,990.2 10,939.3 13,542.7 17,247.3 EBITDA margin (%) 44.1 46.9 44.9 42.4 37.6 Net Profit 1,759 3,855 4,524 4,642 5,967 YoY (%) 54.4 119.2 17.4 2.6 28.5 EPS (Rs) 5.3 11.6 13.6 14.0 18.0 PER (x) 31.0 14.1 12.0 11.7 9.1 P/BV (x) 3.2 2.7 2.2 1.9 1.6 ROCE (%) 6.2 11.8 9.8 8.4 8.9 ROE (%) 10.2 18.9 18.6 16.0 17.1 Source: Company, Nirmal Bang Institutional Reearch 26 September 2011 BUY Sector: Infrastructure CMP: Rs163 Target Price: Rs235 Upside: 44% Amit Srivastava amit.srivastava@nirmalbang.com +91-22-3926 8116 Nitin Arora nitin.arora@nirmalbang.com +91-22-3926 8169 Key Data Current Shares O/S (mn) 332.4 Mkt Cap (Rsbn/US$bn) 54.1/1.1 52 Wk H / L (Rs) 290/132 Daily Vol. (3M NSE Avg.) 1,772,290 Share holding (%) 3QFY11 4QFY11 1QFY12 Promoter 75.0 74.8 74.8 FII 13.5 14.3 13.7 DII 3.4 3.9 4.0 Corporate 4.0 2.6 2.7 General Public 4.2 4.5 4.9 One Year Indexed Stock Performance Price Performance (%) 1 M 6 M 1 Yr IRB Infra 3.8 (12.8) (42.7) Nifty Index (1.6) (11.2) (18.3) Source: Bloomberg
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