IRB Infra: Higher construction revenue takes a toll on profit margin

The steady recovery in the roads sector, be it in terms of new orders or ramp-up in revenue, has put IRB Infrastructure Developers Ltd on a firm wicket. Yet, its huge compromise on profitability may be a concern in the months ahead.

The private sector infrastructure firm rode into the March quarter with a cushy 55% jump in net revenue—about 11% higher than Bloomberg’s 10-analyst consensus estimate. Both its business segments—build-operate-transfer (BOT) and construction—did better than expected. Of course, toll revenue on some critical highways like Ahmedabad-Vadodara did not do as well as some analysts had expected. But thankfully, traffic improved across most routes.

It’s the construction segment that has changed the profitability profile of IRB Infrastructure in the past few quarters. From a 50:50 ratio of construction and BOT projects in total revenue a year back, it is now heavily skewed towards the former, which contributes nearly twice the revenue contributed by the latter.

Here’s where the problem lies.

The construction segment is dotted with several low-margin utilities shifting work, which pulls down IRB Infrastructure’s overall profitability.

For instance, March quarter’s profit margin (before interest and tax) for the construction segment fell by 410 basis points, harder than that of the BOT segment, which fell by 235 basis points from a year back. A basis point is 0.01%.

Consolidated operating margin, therefore, narrowed by 948 basis points from a year ago. This took a toll on the stock price, which has been on the ebb.

True, the firm is on a strong wicket with many orders in the pipeline. A report by Religare Capital Markets Ltd says, “IRB is well poised to compete in the roads sector for new projects. It has a ₹ 9,700 crore order book in the construction segment as well.” But the big concern is whether the revenue mix will push the firm into a lower profit margin zone in times to come.

Investors could watch out for any steps to unlock value through infrastructure investment trusts. It will ease operating cash flows and therefore have a positive impact on investor sentiment too.