IRB Infra well-placed to ride NHAI’s monetization plan
Summary
Investors are excited about the December toll collections where the road and highway developer saw nearly 26% year-on-year growth to ₹488 crore.
IRB Infrastructure Developers Ltd’s new year has begun well with its shares gaining 11% already in 2024 so far. This is after a 43% appreciation in 2023.
Investors are excited about the December toll collections where the road and highway developer saw nearly 26% year-on-year growth to ₹488 crore. Since toll collection is typically better in the second half of the financial year, IRB’s management expects the uptrend to continue in the March quarter (Q4FY24).
That said, the order pipeline also looks robust. Kotak Institutional Equities notes that with National Highways Authority of India (NHAI’s) focus on managing its debt levels, road awarding has shifted to toll, operate and transfer (TOT) and BOT (build, operate and transfer) projects. Thus, the expectation is that more projects would be awarded in FY24. Against this backdrop, “With a ₹44,400 crore BOT pipeline for FY24 and two more TOT projects expected to be awarded, we see players such as IRB, with its strong balance sheet, best placed to benefit," said Kotak.
For the half year ending September (H1FY24), IRB’s revenue stood at ₹3,379 crore, out of which 34% came from BOT and TOT projects, while the construction segment contributed the rest.
In the near-to-medium term, IRB is expected to maintain a double-digit revenue growth and stable margin. The company’s order book stood at ₹32,700 crore as on 30 September. Here, the EPC order book stood at about ₹7,500 crore providing revenue visibility for the next 2-2.5 years for the construction segment.
Besides, the three years executable O&M (operation & maintenance) order book is close to ₹2,500-3,000 crore.
As such, the sharp rally in the stock may cap large near-term upsides. According to Bloomberg data, the stock trades at 29 times estimated FY25 earnings, which appears pricey. Hereon, it is crucial to monitor the timely execution of projects and IRB's ability to consistently replenish the construction order book with new orders. Moreover, how monthly toll collections pan out is worth watching.
“IRB entirely focuses on roads and highways, exposing it to inherent sectoral concentration risk and intense competition in the tender-based contract award system, resulting in volatility in new order inflows," said India Ratings and Research on 5 January. However, it believes that IRB’s stronghold in the BOT-toll space, where competition is limited, could help margin remain stable over the medium term.
However, any unexpected rise in debt levels would be detrimental. As on 30 September, IRB’s consolidated gross debt stood at ₹13,500 crore.
