IRB Infra: Rising traffic, toll collections boost sentiment

Though normalisation of indicators bodes well, EPC order book expansion is crucial for growth

As toll collections and vehicular traffic continue to improve after unlocking of the economy, investor sentiment towards IRB Infrastructure Developers, too, has improved. The stock has more than doubled from lows seen in May, and recently made a 52-week high.

The June quarter (Q1) performance, recently reported by the road developer and operator, did bear the impact of the lockdown, but was still reasonable and ahead of expectations, according to analysts. Toll revenues declined by more than a half, but it was also due to nine projects going out of IRB'S books (monetisation through the INVIT route). So, it is strictly not a fair comparison. Second, lower construction activities meant that EPC (engineering, procurement and construction) revenue was down 34 per cent year-on-year (YOY). Looking at lower labour availability and the lockdown, IRB however, the EPC segment performance was still decent.

The positive aspect moving forward is that toll revenues have continued to rebound since the restart of economic activities, starting May, and have reached close to pre-covid levels. Improving construction activities also bode well for EPC projects. The second quarter, though seasonally soft because of the monsoon impact, is expected to be better than Q1. What’s more, while IRB has monetised some projects and the same had been factored in forward earnings estimates, the Mumbai-pune Phase-ii win should be earnings accretive. Motilal Oswal Securities (MOSL), incorporating this project's earnings into estimates, have upgraded FY21 and FY22 consolidated earnings estimates by 29 per cent and 26 per cent, respectively.

But, despite this upward revision, MOSL'S FY21 and FY22 earnings per share estimate of ~8.9 and ~9.7 are still lower than ~18.9 achieved in FY20. This is because IRB, which had been seeing good EPC revenue growth (21 per cent annually during FY15-20), led by the ramp-up in execution, has not seen new order wins match the execution pace in the recent past. The company’s order book at ~12,900 crore also includes operations and maintenance projects worth ~7,140 crore. Thus, the (new) EPC order book of ~5,760 crore translates into the order book-to-revenue ratio of just 1.2x, say analysts. This, however, could change. On the back of strong bid pipeline from NHAI, IRB is targeting order inflows of ~7,000-10,000 crore in FY21. Hence, fresh order wins will be crucial for improved revenue and earnings visibility. While analysts at MOSL have a "neutral" rating on IRB, those at Phillipcapital maintain "buy" but say there is limited upside potential after the sharp rise in stock price. Target price of Phillipcapital and Prabhudas Lilladher range between ~152 and ~159 for the stock trading at ~129.