IRB Infra. Developers Ltd.: Reality Check - Financial Performance vs Share Price performance.

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.

Happy Investing!!!

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.

IRB Infra. Developers Ltd - On road to smooth progress!!

India's largest pure-play Road Developer, IRB Infrastructure Developers Ltd., seems to be now on smooth growth path, though not at a very high pace. Between December'12 to December'14, IRB's T-T-M Total Income hovered between Rs.3700 to 3900 crores mark. But IRB has now managed to post near-10% Y-o-Y Growth in Total Income for three consecutive quarters, after 4 consecutive quarters of slight negative Y-o-Y growth, which has helped the company take it's T-T-M Total Income past the Rs.4000 crores mark at the end of June'15, for the first time in the company's history. Have a look at the charts below:

T-T-M numbers

IRB's EBITDA has done much better than it's Total Income in terms of growth. IRB's EBITDA was growing at a modest pace till March'14 quarter, but the growth pace has clearly picked up from June'14 quarter. Until the September'13 quarter, IRB's EBITDA margin was steady at little over the 46% mark. But since then the company has worked hard on reducing it's overheads and minor operating costs, which has helped bring the company's EBITDA margin to around the 59% mark by June'15 quarter. This is fabulous work!! IRB's management clearly used the lean period of growth to work on lowering costs, which will help the company tremendously in the coming quarters.

On one hand IRB was managing to curtail it's operating costs, but on the other hand it's Interest cost was rising sharply between June'13 quarter to September'14 quarter. IRB's T-T-M Interest Cost stood at Rs.627 crores at the end of June'13 quarter, which was about 35% of it's EBITDA then. In the following 5 quarters, it shot up to touch a figure of Rs.857 crores by Sept'14 quarter, constituting about 41.2% of the company's EBITDA then. Over the last 3 quarters, the company's Interest Cost rise has been slightly lower than growth in EBITDA, which helped bring down the Interest-to-EBITDA % down to 39.7%. During the last 3 quarters, the company's Interest Cost has continued to increase Y-o-Y & Q-o-Q, but the EBITDA has grown at a slightly faster pace. The recent marginal rate cuts by banks and the possibility of further rate cuts from RBI in the coming month(s) will only help IRB to control it's Interest burden and improve it's Profit margins.

IRB has also increased it's Depreciation provisioning starting from June'14 quarter. It's T-T-M Depreciation number has jumped to over 30% of the company's EBITDA now, compared to around 25-26% figure till June'14 quarter. This does not impact the company's Cash Profits, but does impact it's Net Profit numbers. But in a way it's good, because lower Profit-before-Tax also means lower Tax Outgo and it's Assets are De-capitalised sooner due to higher Depreciation provisioning.

Valuations: IRB recently raised some Equity Capital via issue of shares, which led to dilution of Equity to the tune of about 6%. This additional capital will help the company either curtail it's Interest Cost or while Investing in newer projects. Post dilution of Equity, IRB's T-T-M Net EPS stands at almost Rs.16/-, while it's Cash EPS stands at over Rs.36/-. That means at the current price of around Rs.220 per share, it trades at less than 14 times it's Net EPS and just about 6 times it's Cash EPS. I think this valuation is on the cheaper side, considering the company's recent improvement in Financial performance and also the potential growth in the Industry that the company operates in. The Indian Govt. is giving a major thrust to the country's Infrastructure development and construction of Roads & Highways forms the most prominent part of it. There will be no dearth of projects to bid for in the coming months & years. And I am pretty sure that IRB's management will judiciously bid for projects that they can comfortably handle & commission. IRB's growth can continue at a steady pace in the coming many quarters. Hence I think it makes sense to be invested in a company like IRB at the current valuations with potential of more than doubling in the next 1-2 years.