I have been following IRB Infra. Developers Ltd. for quite a long time. I think that the Road construction business has a very good future as India, being a developing nation, needs to build substantial transport infrastructure for many more years. But what I haven't understood is the valuation that stock market gives to different players in the same industry.
While the P/E Ratio of most companies in the Infrastructure sector is healthy at about 20 or more, companies like IRB Infra. are trading at P/E Ratio of just about 5 currently. Hence I thought it fit to present the companies Financial Performance over the recent 3 years and compare it with the company's share price movement over the last 5-6 quarters.
Have a look at the accompanying chart showing the Trailing-Twelve-Months progress of IRB Infra's Total Income and EBITDA. From a level of Rs.4700 crores in December'2015, IRB's Total Income has grown to above Rs.6300 crores in December'2018. Remember that this growth is despite the fact that IRB sold about 7 or 8 Toll Projects to IRB InvIT, which is an Infrastructure Investment Trust, sometime in the middle of year 2017. Those projects are generating about Rs.1200 crores of Revenues annually. Hence, effectively IRB Infra's Total Income currently would have reached a level of about Rs.7500 crores. With commissioning of newer projects, IRB Infra has managed to bring it's T-T-M Total Income back to levels it was at before the sale of few projects to the InvIT. With more projects in the pipeline, expected to be commissioned over the next 2 years, we can expect the company's Total Income to continue it's steady climb at
about 10% Y-o-Y or higher. IRB's EBITDA recovery has slightly lagged behind over the recent 2 quarters, but it's margin is healthy at about 48%. Hopefully it will get back to it's normal level of about 50%.
During the period of last 3 years, IRB's EPS has improved from about Rs.18 in December'2015 to just over Rs.25 in December'2018, again on the T-T-M basis. And this is despite the fact that a few Toll projects were sold to the InvIT.
There is very good reason why IRB sold a few Toll projects to the InvIT. Even though it lost about 20% of it's Revenues and a slightly higher percentage of it's Net Profit due to the sale of those projects, it also helped bring down the Debt burden on the company's books as all the project-related Debt for those projects got transferred to the InvIT. IRB will continue to be the Project manager for all those projects and will receive a small fee for the same. Apart from that, the lowered Debt burden allows the company to again bid for more projects and increase it's pipeline for future years. And I think InvITs get some Tax concessions too.
Now let's look at IRB's share price movement over the recent quarters.
As we can see that, after hitting a high of about Rs.280 in April'2018, IRB's share price gradually slid down to levels of about Rs.120 by October'2018. There could be 2 possible reasons for this: (1) The News that the contract for one of IRB's most prestigious projects, the Mumbai-Pune Expressway, was coming to an end in August'2019 and MSRDC (Maharashtra State Road Development Corporation) decided to call for fresh tenders; (2) around the same time the News of IL&FS Loan default & scam broke out. IL&FS as a group, had considerable presence in Financing of Infrastructure projects. Hence a Default on it's part is bound to create some nervousness for other Financiers while lending to newer Infrastructure Projects.
Later when it was seen that the default was not due to poor repayment record of some infra project, but because of a well orchestrated scam by top management of IL&FS, the nervousness might have reduced by a considerable extent. Companies like IRB which have a strong Balancesheet and a good repayment track record, should not find it too difficult to raise resources while bidding for newer projects. IRB's share price has spent the last 6 months in creating a strong base in the Rs.120 to 160 range. Hopefully it is getting ready to break-out of this range on the higher side in the coming months. In terms of valuations too, at the current price of about Rs.122, IRB's share trades at just under 5 times it's EPS, which is a pitiable valuation from any angle. Even it's consistent Dividend paying record, which currently translates into a Dividend Yield of 4+%, should help it earn much better valuations. I think IRB deserves a P/E Ratio of atleast 15 or more, but even for a P/E Ratio of 10, the share price should double from current levels.
While the P/E Ratio of most companies in the Infrastructure sector is healthy at about 20 or more, companies like IRB Infra. are trading at P/E Ratio of just about 5 currently. Hence I thought it fit to present the companies Financial Performance over the recent 3 years and compare it with the company's share price movement over the last 5-6 quarters.
During the period of last 3 years, IRB's EPS has improved from about Rs.18 in December'2015 to just over Rs.25 in December'2018, again on the T-T-M basis. And this is despite the fact that a few Toll projects were sold to the InvIT.
There is very good reason why IRB sold a few Toll projects to the InvIT. Even though it lost about 20% of it's Revenues and a slightly higher percentage of it's Net Profit due to the sale of those projects, it also helped bring down the Debt burden on the company's books as all the project-related Debt for those projects got transferred to the InvIT. IRB will continue to be the Project manager for all those projects and will receive a small fee for the same. Apart from that, the lowered Debt burden allows the company to again bid for more projects and increase it's pipeline for future years. And I think InvITs get some Tax concessions too.
Now let's look at IRB's share price movement over the recent quarters.
As we can see that, after hitting a high of about Rs.280 in April'2018, IRB's share price gradually slid down to levels of about Rs.120 by October'2018. There could be 2 possible reasons for this: (1) The News that the contract for one of IRB's most prestigious projects, the Mumbai-Pune Expressway, was coming to an end in August'2019 and MSRDC (Maharashtra State Road Development Corporation) decided to call for fresh tenders; (2) around the same time the News of IL&FS Loan default & scam broke out. IL&FS as a group, had considerable presence in Financing of Infrastructure projects. Hence a Default on it's part is bound to create some nervousness for other Financiers while lending to newer Infrastructure Projects.
Later when it was seen that the default was not due to poor repayment record of some infra project, but because of a well orchestrated scam by top management of IL&FS, the nervousness might have reduced by a considerable extent. Companies like IRB which have a strong Balancesheet and a good repayment track record, should not find it too difficult to raise resources while bidding for newer projects. IRB's share price has spent the last 6 months in creating a strong base in the Rs.120 to 160 range. Hopefully it is getting ready to break-out of this range on the higher side in the coming months. In terms of valuations too, at the current price of about Rs.122, IRB's share trades at just under 5 times it's EPS, which is a pitiable valuation from any angle. Even it's consistent Dividend paying record, which currently translates into a Dividend Yield of 4+%, should help it earn much better valuations. I think IRB deserves a P/E Ratio of atleast 15 or more, but even for a P/E Ratio of 10, the share price should double from current levels.
2 comments:
Why last quarter results still not declared jan to March Q4F19?
IRB Infra is yet to declare it's Audited Results for FY'19 and Q4-FY'19. Many companies are still declaring their results. I am expecting IRB Infra to declare it's results before the end of May'19.
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