IRB Infra. Developers Ltd.: Letting the numbers do the talking.

I had written a report on IRB Infra. Developers Ltd about 2 years ago. Here is the link to it. I would like everyone to see the progress made by IRB Infra over the last 8-10 quarters to get an idea of it's business performance and the corresponding changes in it's valuations.

First have a look at the following chart which shows the Trailing-Twelve-Months progress of IRB's Total Income and EBITDA:

The last time I had written about IRB Infra, it's T-T-M Total Income stood at Rs.4061 crores. In the last 2 years, it has increased by about 56% to reach Rs.6291 crores. IRB's EBITDA has increased by about 35% during the same period. This reflects a slight tapering of EBITDA margins, mainly because of many new large Highway projects were commissioned in the recent quarters and any new project delivers lower EBITDA margin in the initial couple of years. Still the business growth is strong and expected to maintain a healthy double-digit growth momentum going forward as well.

Now let's look at IRB's Earnings Per Share (EPS). I have considered EPS numbers instead of Net Profit numbers, mainly because there was some Equity Dilution done by the company in the year 2015, which affects the EPS. Hence it's better to check the EPS growth.

Between June'15 and June'17, IRB's T-T-M EPS has improved from Rs.15.9 to Rs.21.9, which is a 38% jump in the last 2 years. About 40% of IRB's EBITDA goes towards Interest Costs. With improving Cash Flows from commissioned projects and fresh borrowings at lower rate of interest, we can expect the Interest Cost as a Percentage of EBITDA to gradually go down. This will help improve IRB's Net Profit margin in future quarters.

IRB has been a consistent Dividend payer. It usually pays about 25% of it's EPS as Dividend every year. With increasing EPS, we can expect the company to maintain or enhance the 25% Dividend distribution policy.

Now let's look at IRB's share price movement over the last 2 years:

As you can see, IRB's share price has clearly not reflected the company's strong business growth. It has spent almost all it's time trading in a range of Rs.200 to Rs.270. At the current price of about Rs.210, IRB's share price is available at less than 10 times it's T-T-M EPS. This is extremely low valuations for a company which is managing to grow at healthy double-digit growth rates and is also a consistent Dividend payer. And it's business has good long term visibility as India will continue to need more & more Highways for a long time to come. Most of the B-O-T contracts that IRB has in it's bag are for a 15 to 20 years duration, where the initial 2 years are allocated for construction of the Highway and then Toll Collection and Maintenance of the Highway for the remaining period.

I think that IRB Infra Developers Ltd is a potential multibagger over the long term. Anybody with a long term horizon can invest in it and enjoy the Dividends until the share price starts moving in the direction of business performance.

Inox Wind: How the Wind Power Auction Wins might translate into Revenues.

Inox Wind Ltd had won a 250 MW bid, which was the maximum permissible limit for a single entity, out of the 1000 MW Auction carried out by Central Govt. agency in Q1 of 2017. The price of electricity to be supplied is close to Rs.3.50 per unit (KWh). Inox Wind had also won an order for another 50 MW for supply of WTGs for an IPP (Independent Power Producer), who had also won a bid in that auction. Today Inox Wind has announced that it has again won a 250 MW bid in the second auction carried out by Central Govt agency in this week. The price of electricity to be supplied has been set at Rs.2.65 per unit.

These are surprisingly low bids for Wind Power, considering the fact that until about a year or so ago, the Wind Power tariffs were well above Rs.5 per unit and it was over Rs.8 per unit about 2 or 3 years ago. So the question that arises is that whether it will be profitable for these companies to supply electricity at such low prices and how long will it take to recover their Capital Investments.

Let's consider it from an IPP's point of view, which has won a bid for 250 MW at a price of Rs.2.65 per unit. The Capital Investment required for setting up a WTG is approximately Rs.6 crores per MW. Hence the Capital required for setting up 250 MW capacity will be about Rs.1500 crores. The Capital required for setting up Power evacuation infrastructure will be relatively much smaller and hence I am ignoring it. If all these 250 MW capacity WTGs remain operational 24 x 7 for all 365 days of the year, they will generate about 219 crore units of electricity every year. But the Wind flow is not that consistent everywhere throughout the day or year and hence we can expect about 35 to 40% efficiency overall. Hence the number of units generated will be approximately 80 to 85 crores per year. At the rate of Rs.2.65 per unit, it will translate into revenues of about Rs.220 crores per year. This is close to 15% of the CAPEX involved in this business. Since the electricity is being sold to Power Trading Corporation and not directly to any State Electricity Boards, the payments for the same are expected to be timely. Hence these IPPs should be able to afford Cost of Capital of about 8 to 9% per annum with 20 or 25 years repayment terms.

Inox Wind has already announced that it will be looking to sell majority stakes in the SPVs that will be used to commission the two projects, as it does not intend to remain a Wind Power generator, and focus on it's primary business of being manufacturer and supplier of WTGs. Considering the fact that this business is expected to be profitable even at such low prices, Inox Wind should be able to find buyers for the stakes in these SPVs. Going forward, we may see stabilisation in prices of electricity generated from Wind Turbines around these levels. Any further drop in prices for electricity will need higher efficiency from the WTGs or lower manufacturing costs for them.