IRB Infrastructure Developers' Q3FY20 results (Outperformer) - Deal with GIC likely to close by Feb end

Q3FY20 result highlights

• IRB infrastructure reported consolidated revenue of Rs17.4bn, a decline of 2.6% yoy. The decline in revenues was primarily due to lower BOT revenues as concession agreement in Mumbai Pune Expressway Project expired in Q2FY20 (33% yoy decline in Q3FY20). EPC revenue during the quarter grew by 10% yoy to Rs13.9bn (vs our estimate of Rs14.8bn).
• Overall EBITDA in Q3FY20 declined by 6% yoy to Rs7.1bn led by decline in BOT EBITDA of 30% yoy to Rs3.2bn and partially offset by growth in EPC EBITDA at Rs3.9bn (vs Rs3.1bn in Q3FY19). The consolidated EBITDA margin declined by 730bps yoy due to decline in BOT revenues (which has higher margins).
• IRB Infrastructure Developer (IRB) has entered into an agreement with GIC to transfer its nine operating and under construction projects into a private INVIT where IRB will hold 51% of the stake and GIC will hold the remaining units (EV of Rs225bn). The company has received all the regulatory approvals (NHAI and lender) and is expected to close the deal in February 2020. 
• The order book as on Dec’20 declined to Rs68bn (vs Rs113bn in Q2FY20) due to cancellation of Puducherry – Poondiyankuppam and Poondiankuppam – Sattanathapuram HAM projects of worth Rs35bn
• IRB has emerged as sole bidder for Mumbai Pune Expressway Project at a bid project cost of Rs84bn (the project is likely to be taken up by private INVIT). Given that it is the sole bidder, Maharashtra State cabinet approval of the bid is awaited.

Key positives:  Sole bidder in Mumbai Pune Expressway TOT project; all regulatory approvals for INVIT platform with GIC

Key negatives: Cancellation of two HAM projects of worth Rs35bn.

Impact on financials: Introduce our FY22E earnings estimates

Valuations & view

We believe the GIC deal is hugely positive with the cash inflow from GIC to meet 50% of equity commitment in under construction projects. Given the order book of Rs68bn, IRB should easily meet the balance equity requirement of Rs14bn.  As a result, it addresses the investor concerns about funding equity requirement for under construction projects. Besides, it reduces the leverage of consolidated entity from 2 to 1.5. Moreover, it creates a platform for the future INVIT and TOT requirements. We value its EPC business at Rs45bn and maintain our SOTP based price target for IRB at Rs186. We maintain Outperformer rating on stock.