We factor in the recent Zojila project win for IRB after the roads ministry clarified on due process being followed for the award. We revise our SoTP to Rs 300 (from Rs 290 earlier). At IRB’s bid, R100 bn Zojila project would earn a fair 15% equity return and makes up for IRB’s order inflow requirement until FY2017. It would consume large part of free cash of remaining projects. IRB would require to raise equity to bid for projects during FY2018/19E. This may get obviated by monetization of its investment trust. The CMP values IRB’s BOT investments at 1.2 X invested book.
Through its recent press release, the Ministry of Road Transport and Highways (MoRTH) has clarified on the rigor of the process followed in awarding the Zojila tunnel project to IRB. The ministry would also likely disapprove of doing a Swiss challenge (inviting third parties to better IRB’s bid) based on its recent paper on PPP projects (refer to Page 14).
The project would likely earn a fair equity return at (1) IRB’s Rs 100 bn project cost (~20% higher EPC cost component versus CCEA approved estimate in FY2013), (2) 90% EBITDA margin and (3) 11.25% cost of equity.
A year’s delay in commissioning and a 10% higher cost can materially alter the equity IRR to 10%.
IRB would have until March 2017E to arrange incremental sources of equity funding for getting bidding for new orders in FY2018E.
Assuming no further order inflows, our cash flow analysis suggests healthy free cash for IRB from FY2020E (R8 bn+ per annum).