IRB Infrastructure Developers' Q4FY18 results (Outperformer) - EPC business rerating on the cards

Q4FY18 result highlights

• IRB Infrastructure Developers’ (IRB) Q4FY18 earnings were ahead of estimate led by higher profits from EPC segment. PAT grew 15.7%yoy to Rs2.4bn as against estimate of Rs1.7bn.
• Revenue declined 15.1%yoy to Rs13.8bn and was marginally ahead of estimate of Rs13bn. EPC revenue declined 14.1%yoy to Rs8.9bn but ahead of estimate of Rs8bn and BOT revenue declined 16.7%yoy to Rs4.9bn against estimate of Rs5.1bn. BOT revenue is not comparable yoy due to transfer of 7 assets to InvIT.   
• EBITDA declined 19.8%yoy to Rs6.6bn (est: Rs6.4bn) and EBITDA margin declined 285bp yoy to 47.7% due to increase in share of EPC revenue in the revenue mix and higher employee cost.
• On the back of robust EPC order inflow of Rs81.6bn during the quarter, order backlog as on Mar 2018 stood at Rs151bn (3.8x FY18 revenue). IRB has guided for order inflow of Rs70-90bn in FY19.
• Gross toll collection on a like-to-like basis grew 10.3%yoy to Rs3.8bn. Traffic growth in key assets (yoy): Mumbai-Pune at 6% and Ahmedabad-Vadodara at 8.7%. On a portfolio basis, average traffic growth was 6-7% on a like-to-like basis.
• In Q4FY18, Kishangarh-Gulabpura project (@75% of normal rate) and Solapur-Yedshi (93% tolling) started toll collection and average daily toll collection stood at Rs3.9m/day and Rs1.9m/day respectively.

Key positives: Strong traffic growth in key assets & robust order inflow.

Key negatives: Lower toll revenue from Kaithal-Rajasthan project.

Impact on financials: Upgrade in FY19E/FY20E earnings by 13.7%/98.6% due to robust EPC order intake.

Valuations & view

IRB’s foray into the HAM segment and its robust order wins enhance the visibility and sustainability of its EPC business. With increasing contribution from HAM projects (at 15-17% EBITDA margin), IRB’s EPC margins should converge with its peers in 3-4 years. Notwithstanding the implied margin dip from current levels of 28-30%, we believe IRB’s EPC business is likely to be re-rated due to improved sustainability of growth and margins. Our March 2020 based value for IRB’s EPC business is Rs65bn (Rs185/share) based on 15x FY21E earnings (please refer details inside for methodology) and our overall SOTP based price target for IRB is Rs370 (revised from March 2019 TP of Rs274). The CBI has closed the investigation against IRB and its officials in the land bank hoarding case which removes a key overhang on the stock. Maintain Outperformer.