Shares of IRB Infrastructure Developers have given multibagger returns in the last 3 years, rising 102 percent since July 2020. Meanwhile, from its COVID-low of ₹4.5, the stock has surged 437 percent to currently trade around ₹25. However, the current calendar year, 2023 YTD has not been good for the stock, with it declining almost 16 percent. Meanwhile, in the last 1 year, the stock rose a little over 20 percent.
But going ahead, brokerage house Systematix sees a strong upside in the stock. It has initiated coverage on IRB Infra with a buy call and a target price of ₹36.43, indicating a 43 percent upside potential.
IRB Infrastructure Developers Ltd is India’s leading integrated and first multi-national infrastructure developer in the highway sector, with a major presence in the Build-Operate-Transfer (BOT) space.
The brokerage expects IRB to register strong growth in the foreseeable future driven by the following: a) Strong growth momentum going forward, b) Favourable industry tailwinds and Government policies, c) Strategic investors driving governance and bringing in technical expertise, d) deleveraged balance sheet which enables IRB to take maximum advantage of the huge opportunity space in the road sector, and e) IRB being a market leader has the ability to bid and win large sized road projects. The key risk would be lower traffic growth, project delays, lower toll rate hikes, and execution challenges, it added.
Systematix also pointed out that further upside potential from claims worth ₹3,600 from NHAI which are under litigation as well as Hyderabad and Samakhiyali projects which are pending final closure, have not been considered in its valuation. They are cumulatively expected to be valued at ₹5.58 over and above the brokerage's target price, it noted.
Investment Rationale:
Threshold of accelerated growth: IRB is on the threshold of accelerated growth given its robust order book, improved balance sheet and expanding footprint, said the brokerage. As on April 2023, IRB’s order book (including projects pending final closure) stands at ₹36,450 crore, it informed. IRB ended FY23 on a strong note with a 99 percent YoY growth in PAT. The brokerage expects IRB’s revenue from operations to grow from ₹6,402 crore in FY23 to ₹8,118 crore in FY25E at a CAGR of 12.61 percent. Similarly, PAT is expected to expand from ₹720 crore in FY23 to ₹1,133 crore in FY25E at a CAGR of 25.44 percent, estimated the brokerage. It also added that IRB had a consolidated cash balance of ₹2,417 crore in FY23, which it plans to utilize the profits of Mumbai Pune TOT (Toll-Operate-Transfer) and other road assets to fund future projects. This gives IRB the capability to bid for huge future order inflows, noted the brokerage.
Leadership gains to flow through: IRB runs the largest toll road network in the private sector in India. It is a fully integrated player having more than 20 years of experience. It owns and manages about 13,739 lanes kms of roads across 11 states in India. IRB has a 37 percent market share of ToT projects awarded as of 31st March 2023, stated the brokerage. IRB market leadership status gives it a huge advantage over its peers, it added.
Recent large-sized project wins: IRB won a BOT contract for Group 1 of the Ganga Expressway stretch from Meerut to Badaun with a project cost of ₹6,656 crore and a concession life of 30 years. This is the largest BOT asset bagged by IRB thus far. Also, IRB has won a BOT contract from NHAI in the state of Gujarat for the upgradation of six laning of NH27 from Samakhiyali to Santalpur having a project cost of ₹2,132 crore and a concession life of 20 years. IRB has also won a ToT contract for the Hyderabad ORR project which will involve an upfront payment of ₹7,380 crore and have a concession period of 30 years where the total capex is ₹8,400 cr. These large projects apart from strengthening the financials of the company would also enhance the company’s market standing, said Systematix.
Balance Sheet: IRB has deleveraged its balance sheet through the private InvIT where it has partnered with marque investor GIC. It also had a capital raise of ₹5,347 crore in FY22 through preferential allotment to Cintra for a 24.9 percent stake and GIC for a 16.9 percent stake. The firm has managed to reduce its net debt-to-equity ratio from 2.44 in FY21 to 1.07 in FY23. Post the equity infusion IRB’s corporate rating has also improved from A+ to AA-. This would help the company renegotiate its interest rates downwards. The equity infusion also gives the company the much-needed growth capital to capitalise on the national monetisation pipeline to build a compelling portfolio of highway assets, noted the brokerage.
Harnessing industry tailwinds: Indian government is focussing more on Infra. There has been a consistent increase in budgetary allocation from ₹41,200 crore in FY17 to ₹2.70 lakh crore in FY24E at a CAGR of 34 percent. NHAI order is expected to rise in FY24E just ahead of the elections, which is a positive for the firm. Also, the government has framed favourable policies to attract investments in the sector. For NHAI projects that were bid after 2008, the toll rate is revised annually in April at a 3 percent fixed rate plus 40 percent of change in WPI for December. The balance of 60 percent of inflation is paid along with an annuity with interest. High growth in toll rates coupled with a 5-6 percent traffic growth is expected to result in a 10-12 percent YoY growth in toll collections going forward, stated the brokerage.
In a recent announcement, the company informed that it has registered a year-on-year (YoY) toll revenue growth of 16 percent in June and 18 percent for the June quarter.
IRB Infra's toll collection for June stood at ₹383 crore compared with ₹329 crore in the corresponding month last year. With this, the aggregate toll revenue for Q1FY24 rose 18 percent to ₹1,183 crore from ₹1,000 crore in the corresponding quarter last year.
Deputy Chief Executive Officer Amitabh Murarka, said: “First quarter of FY24 looks much more positive as an upward trend seen in aggregate toll revenue as compared to the corresponding quarter of last fiscal. We expect similar momentum for the rest of FY24.”
