MOSL: IRB INFRASTRUCTURE (Neutral)-Surprises with asset monetization through second InvIT
IRB INFRASTRUCTURE: Surprises with asset monetization through second InvIT
(IRB IN, Mkt Cap USD0.5b, CMP INR95, TP INR106, 11% Upside, Neutral)
- Strong execution inadequate to fully offset weak traffic growth in BOT portfolio: EPC revenue was up 16% YoY, implying strong execution of under-construction projects. EPC margin surprised at 28.7%, as lower-margin HAM projects (two of the total three) are yet to commence construction. Gross toll collection growth on a like-for-like basis was tepid at 2.7% and a major disappointment. On account of higher depreciation and interest expense owing to newly commissioned projects, net profit declined 17% YoY to INR2.1b (17% miss).
- IRB surprised with asset monetization through second InvIT platform: The biggest surprise was the announcement of asset monetization of nine road assets (of which six are under implementation) into a private infrastructure investment trust. IRB will hold 51% in the proposed InvIT and the balance 49% will be with GIC. We note that GIC will pay INR44b for the 49% stake in the trust, of which INR30b will be utilized for repayment of project debt and balance INR14b for equity commitment. We note that total pending equity in the six under-construction projects stands at INR28b. Thus, IRB's equity commitment in the proposed InvIT will be INR14b. Apart from this, IRB has three HAM projects in which it requires to infuse incremental INR1.5b.
- Valuation view: We factor in the proposed deal in our estimates, leading to an earnings upgrade of 7%/4% for FY20/21. Note that the earnings upgrade is a function of a lower base, as we forecast net profit to decline at a 27% CAGR over FY19-21. Valuations are highly sensitive to traffic growth assumptions for the company. We note that traffic growth in IRB's portfolio continues disappointing. Factoring in the same, our target price now stands at INR106. We maintain our Neutral rating on the stock.
IRB Infrastructure Developers is a infrastructure projects development group based in India. Co. undertakes development of various infrastructure projects in the road sector through several Special Purpose Vehicles. Co. executes projects under the Public Private Partnership (PPP) mode. Co.'s focus is developing highway infrastructure involving construction, operation and maintenance of highways, under Build-Operate- Transfer (BOT) mode. Co. places bids for BOT contracts for national and state highways development projects. Along with its subsidiaries, Co. has constructed, operates and maintains approximately 9,295 lane kms of road length in India.
Motilal Oswal Financial Services Ltd. is a reputed name in Financial Services and Online Trading with group companies providing services such as Private Wealth Management, Retail Broking and Distribution, Institutional Broking, Asset Management, Investment Banking, Private Equity, Commodity Broking, Currency Broking, Principal Strategies & Home Finance.
Motilal Oswal Securities is a group company of Motilal Oswal Financial Service Limited which started as a stock trading company and has blossomed into well diversified firm offering a range of financial products and services. Motilal Oswal has built a reputation as the source for best stock trading company and this has taken a wealth of experience, knowledge and expertise, constantly working in tandem, over the years.
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