IRB Infrastructure Developers' Q2FY19 results (Outperformer) - Toll revenues set to improve in H2FY19

Q2FY19 result highlights

• IRB Infrastructure Developers’ (IRB) Q2FY19 earnings were below our estimates led by lower EPC revenue. PAT grew 32.0%yoy to Rs1.7bn (our estimate: Rs2bn) on pre-exceptional base of PY. On reported base including exceptional income of Rs1bn in PY, PAT declined 26.3% yoy. 
• Revenue grew 19.5%yoy to Rs14.3bn and was below our estimate of Rs14.7bn due to lower than expected EPC revenue. EPC revenue grew 13.6%yoy to Rs9.4bn but was below our estimate of Rs9.8bn due to seasonal factors. BOT revenue grew 32.5%yoy to Rs4.9bn, largely in-line with our estimate of Rs5bn despite being impacted by 8 day transporter’s strike during the quarter.
• EBITDA grew 17.1%yoy to Rs6.7bn, but was below our estimate of Rs7bn and EBITDA margin contracted 100bp yoy to 46.8% (est: 47.3%) led by lower than expected margin from the EPC business. EPC margins declined 540bp yoy to 25.7% (est: 28%) and BOT margins grew 220bp yoy to 87.1% (est: 85%).
• Order backlog as on September 2018 stood at Rs132.2bn (3.6x TTM EPC revenues). The management expects pick up in order awarding from NHAI from Q3FY19 onwards with Rs700bn worth projects up for bidding. IRB has guided for EPC revenue of Rs45bn in FY19.
• Gross toll collection on a like-to-like basis remained subdued & grew 3.6%yoy to Rs3.6bn. Key assets like Kaithal-Rajasthan & Ahmedabad-Vadodara witnessed improved traffic growth. Furthermore, Mumbra bypass has been opened for traffic from Sept end. Hence, a revival in traffic at Mumbai-Pune project is likely from Q3FY19 onwards.
• IRB has achieved financial closure for all its 3 HAM projects at bid project cost with interest rate at roughly 9.75%. For Hapur-Moradabad project, it expects to achieve FC by December 2018. 

Key positives: Improved traffic growth on Ahmd-Vadodara project.

Key negatives: Loss of toll revenue on Agra-Etawah project.

Impact on financials: No material change in estimates

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. However, due to emerging challenges on availability of funding and higher interest rates in the country, we have lowered our EPC business multiple from 15x to 13x, thereby valuing EPC business at Rs59bn and our overall revised SOTP based price target for IRB is Rs293. Maintain Outperformer.