IRB reported 2QFY17 results below expectation largely due to lower than expected construction income impacted by extended monsoons. Blended YoY traffic growth was also weaker at 6.5% in 2QFY17 v/s 7.0%+ in previous quarters. We factor in 2QFY17 results along with impact of demonetisation drive which will result in economic activity slowdown. Hence we reduce our traffic & execution growth estimates. Maintain Hold with revised TP of Rs 210 (vs Rs 250) earlier.
Traffic growth weak except Mumbai-Pune
Extended monsoons have impacted toll collection across projects in a seasonally weak quarter, although benefiting the Mumbai-Pune project as this route is used by tourists to Lonavala (a popular destination during monsoons). Blended YoY traffic growth was 6.5% in 2QFY17 compared to 7% in 1QFY17 and 8%+ in 4QFY16. Due to the demonetisation drive, tolls are suspended across all projects. Management highlighted that both NHAI and Maharashtra government have assured them of cash compensation based on average traffic in October. Premium across projects that is payable by IRB to NHAI can be offset to the extent of this compensation. Hence we do not expect any long term impact on cash flows from this. However traffic growth in future will be hit due to economic slowdown.
Construction revenue growth expectation of 10%/15% for FY17/18E
Construction was impacted due to extended monsoons, factoring which we have cut our FY17 estimates. However management indicated that this should normalise in Q3. BOT order pipeline remains robust at Rs 166 bn, although the timelines for tendering are uncertain as Ministry’s focus remains on HAM and EPC. IRB won projects worth Rs 450 billion in H1FY17.
InvIT not expected before January 2017
IRB is awaiting SEBI comments to go ahead with the IPO of InvIT. Tumkur-Chitradurga and Jaipur-Deoli have witnessed y-o-y flat/decline in traffic in 2QFY17 and it is likely to impact the InvIT valuations. But falling yields should keep the product attractive for investors at right valuation.
We reduce our toll collection estimates by 2%/4%/4% and revise our construction growth from 15%/15%/0% to 10%/15%/5% for FY17E/18E/19E. Maintain Hold with a revised SOTP-based PT of R210 valuing EPC business at 3x FY18 EV/EBITDA and BOT assets using a DCF based model. Downside risk: Further decline in traffic.
IRB is the largest BOT player in India. It currently has a portfolio of 19 BOT assets, spanning 10,000+ lane kms, having a project cost of R306 bn and equity investment of Rs 55 billion.