Mumbai: In spite of an overall performance beat during the September quarter, road construction firm IRB Infrastructure Developers Ltd is facing a host of challenges. This could weigh on the stock, besides the overall sombre mood in road construction what with concerns of liquidity and lower project awards.
IRB’s 22.3% jump in net revenue from the year-ago period came mainly from the engineering, procurement, construction (EPC) segment that soared 42%. Although this speaks well of the company’s execution abilities, the question is whether revenue ramp up of this magnitude is sustainable.
The firm is yet to get the appointed date to kickstart two road projects under the Hybrid Annuity Model (HAM) that may delay revenue accretion. According to HDFC Securities Ltd, “the EPC value of these two projects is about ₹2,800 crore or 25% of order backlog. These two projects are facing challenges on land acquisitions. Any cancellation would reduce revenue growth visibility for IRB.”
At present, IRB’s order book of about ₹11,000 crore is equivalent to 1.9 times the annual EPC revenue. Meanwhile, IRB’s revenue from tolling has been disappointing. Toll revenue fell by 15% yoy on account of weak traffic in some areas, completion of the concession (toll) period and also heightened construction activity that led to traffic diversion.
Lower toll revenue is often an drag on profitability of road developers as it enjoys considerably higher margins compared to the EPC business. Therefore, IRB’s consolidated Ebitda margin for the quarter fell by about 413 basis points from the year-ago period to 42.7%. Perhaps, this is why shares of IRB have been underperforming the benchmark indices.
To be sure, robust revenue trickled down to expand Ebitda by 11% yoy. But then the high leverage and resultant interest cost weighed on profit before tax that contracted by 4%. No wonder, the company and investors are eagerly awaiting the GIC Singapore-deal, where IRB hopes to monetise nine road assets. “The proceeds of about ₹4,400 crore would deleverage the project portfolio to the tune of ₹3,000 crore ( ₹300 crore interest saving per annum), with balance funds utilised for equity requirement in projects over the for next two-three years,” explains the HDFC report.
Obviously, this would be the near term trigger for IRB shares that trade at ₹81 apiece. Given the challenges of high leverage, business risks in tolling and uncertainty on order book ramp up, the stock’s underperformance is hardly surprising.
