IRB Infrastructure Developers' Q1FY19 results (Outperformer) - EPC execution to pick-up from H2; impact of traffic diversions temporary

Q1FY19 result highlights

• IRB Infrastructure Developers’ (IRB) Q1FY19 earnings were ahead of estimate led by higher profits from BOT business due to accounting for claim of Rs96m. PAT grew 16.4%yoy to Rs2.5bn as against estimate of Rs2.4bn. 
• Revenue declined 15.4%yoy to Rs15.4bn mainly due to lower BOT revenue but was marginally ahead of estimate of Rs14.7bn. EPC revenue declined 23.2%yoy to Rs10.1bn due to completion of large on-going projects like Solapur Yedshi and Kaithal Rajasthan, but was ahead of estimate of Rs9.2bn. BOT revenue stood at Rs5.2bn, but was below estimate of Rs5.4bn due to traffic diversion in Mumbai-Pune and Agra-Etawah projects and also due to early onset of monsoon impacting the overall traffic across projects. BOT revenue is not comparable yoy due to transfer of 7 assets to InvIT and also due to partial tolling (@75 of normal rate) in under construction BOT projects.
• EBITDA declined 8.7%yoy to Rs7.5bn, but was above estimate of Rs7.2bn due to profits from claim of Rs96m in BOT business and higher EBITDA from EPC business led by higher revenue. EBITDA margin grew 350bp yoy to 48.5% (est: 49%). BOT margin stood at 89.2%, but was above estimate of 83% and EPC margin declined 220bp yoy to 27.6% (est: 29%) due to adverse revenue mix.
• Order backlog as on June 2018 stood at Rs141bn (4.0x TTM revenue). The management expects pick-up in order awards from NHAI in Q2 and Q3FY19. IRB has guided for EPC revenue in the range of Rs46bn-Rs48bn in FY19.
• Gross toll collection on a like-to-like basis remained subdued and grew 1.9%yoy to Rs3.8bn (adjusting for revenue from claims). Traffic growth in key assets (yoy): Mumbai-Pune at 1.4% and Ahmedabad-Vadodara at 8.8%. IRB has guided for gross toll collection in the range of Rs22bn-Rs23bn in FY19.

Key positives: Strong traffic growth on Ahmedabad-Vadodara project.

Key negatives: Loss of toll revenue on Mumbai-Pune project.

Impact on financials: Downgrade in FY19E/FY20E earnings by 7.2%/9.1% due to lower than expected toll collection and higher than expected effective tax rate in the EPC business.

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. Our March 2020 based value for IRB’s EPC business is Rs62bn based on 15x FY21E earnings and our overall revised SOTP based price target for IRB is Rs332. Maintain Outperformer.