IRB Infrastructure Developers Ltd. TP: INR 295 - ACCUMULATE Stability, Growth and Returns 26 March 2018 IRB Infrastructure has a portfolio of 14 BOT assets with a market share of 11.64% in the Infrastructure golden quadrilateral and road portfolio of 7,767 lane kms as of 31st December 2017. Large Initiation part of IRB’s portfolio is along the high traffic-density corridors in Western India making it one of the best plays on anticipated traffic-growth. In March 2018 alone the group has so far received letter of award for 3 HAM projects and emerged as preferred Key Statistics bidder for another project on DBFOT basis aggregating INR 89.1 bn augmenting its CMP (INR)* 215.8 construction orderbook to INR 153 bn as of 22th March 2018 from INR 74 bn as of 31st Upside/downside (%) 36.7 December 2017 providing revenue visibility over the next three years. We believe IRB’s Market Cap (INR/USDmn) 75,755/ 1,168 foray into HAM with more assured cash flows and the upcoming TOT opportunity should provide the next leg of growth and drive re-rating. Shares outstanding (mn) 351 3 months avg volume (mn) 1.48 ✓ Foray into HAM and TOT – Catalyst for re-rating: Given the dearth of BOT projects, Dividend Yield (FY17, %) 2.3 and management’s reluctance to actively bid for EPC given the intense competitive action in EPC space, IRB’s shares have underperformed major road builders (12m 52 Wk high/low 267/198 performance of -9% vs. +53%) and are trading at a 44% discount to its peer group Sensex/Nifty 32,596/9,998 (FY19e EV/EBITDA of 6.0x vs. 10.6x on consensus estimates). In our view, HAM/TOT Bloomberg Code IRB IN is a natural progression for IRB that should drive re-rating for the stock and provide fillip to earnings momentum. IRB made its 1st mark in the growing HAM space and Performance (%)* 1M 3M 12M has received letter of award for 2 HAM projects in Tamil Nadu worth INR 35 bn on Absolute (%) (1.9) (6.5) (9.2) 15th March 2018. On 21st March 2018, IRB received letter of award for another HAM Rel. to Sensex (%) 0.2 (4.6) (21.6) project worth INR 20.43 bn in Gujarat. Our analysis suggests that at current price the *Closing prices as on 23rd March 2018 markets are not completely discounting the revenue visibility from current order book and cash flow from existing BOT projects, let alone the upside from new projects wins. Sh. Pattern, % (as on March-2018) ✓ Strong BOT Portfolio with mix of mature vs. new assets: IRB has a balanced mix of Promoter 57.3 mature and new assets (six operational assets and seven under implementation). The FII 23.6 group was awarded three projects in FY17 (Udaipur-Gujarat, Gulabpura-Chittorgarh DII 12.0 and Kishangarh-Gulabpura) and the financial closure has been achieved for all these nd Other 7.1 projects. On 22 March 2018 IRB also emerged as preferred bidder for a project on DBFOT basis in Uttar Pradesh (Hapur bypass to Moradabad) aggregating INR 34 bn. Total 100.0 We expect mature assets to provide stability to group’s cash flows whilst the recently Stock Price Performance* commissioned / new projects assets will provide the fillip to the growth momentum. Sensex IRB 400 ✓ Deleveraging the balance sheet: InvIT has transformed IRB’s balance sheet from tied- up capital to unlocking it. Net debt position as of 3QFY18 declined to INR 108.6 bn from INR 151.5 bn in FY17 with net debt-to-equity reducing to 1.94x in 3QFY18 from 200 2.78x in FY17. Reduced leverage will increase IRB’s ability to raise additional debt to fund its existing projects and win new orders. 0 ✓ Initiate with ACCUMULATE rating. We initiate coverage with ACCUMULATE Apr-14 Jul-15 Nov-16 Mar-18 rating with a TP of INR 295 (+37% upside) with BOT business valued at INR 103 per * Rebased to 100 | Based on daily closing prices share and EPC at INR 173. Our TP implies FY19e EV/EBITDA of 7.5x and P/E of 9.3x. Bull-bear analysis suggests a favorable risk reward ratio with bull case valuation of INR 402 (+86% upside) and bear case valuation of INR 188 (-13% downside). Year End (31 Mar) FY16 FY17 FY18E FY19E FY20E Revenues (INR mn) 52,551 59,691 62,210 72,865 75,515 Rahul Chopra Analyst Name EBITDA (INR mn) 27,874 31,715 29,499 35,706 35,012 [email protected] [email protected] Margin (%) 53.0% 53.1% 47.4% 49.0% 46.4% +91-22-3347 7476 18.2 20.4 25.0 31.7 28.7 Diluted adj. EPS (INR) ROE (%) 13.8% 14.2% 15.6% 17.4% 13.8% P/E (x) 12.0 10.7 8.7 6.9 7.6 P/BV (x) 1.6 1.5 1.3 1.1 1.0 EV/EBITDA (x) 7.8 7.0 7.5 6.7 7.2 Source: Company, YSL estimates; Note: Valuations as on 23rd March 2018 For important information about YES SECURITIES (INDIA) LTD. and other disclosures, refer to the end of this material. 1 IRB Infrastructure Developers Ltd. IRB Infrastructure Developers in Pictures Exhibit 1: Revenue Exhibit 2: EBITDA Margin 80,000 (INR mn) 60.0% (%) 58.7% 70,000 58.0% 56.0% 60,000 53.0%53.1% 54.0% 50,000 52.0% 50.2% 49.0% 40,000 50.0% 48.3% 46.2% 30,000 48.0% 45.7% 46.3% 46.0% 47.4% 20,000 46.4% 44.0% 45.9% 10,000 42.0% 10,210 17,540 25,026 32,582 38,174 37,319 39,619 52,551 59,691 62,210 72,865 75,515 - 40.0% FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY20E FY18E FY19E FY20E Source: Company, YSL Exhibit 3: IRB’s BOT Portfolio Spread (%) Exhibit 4: IRB Order Book Uttar 160 (INR bn) 153 Pradesh 140 126 10% 113 120 100 19 97 100 85 84 19 Harayana 7 Maharashtra 18 74 9% 80 33% 7 153 60 41 65 108 94 93 40 79 67 20 43 20 - Rajasthan FY12 FY14 FY16 FY15 FY17 26% FY13 3QFY18 March'18e Gujarat Operation and maintenance (O&M) order book Karnataka 13% Construction and development (EPC) order book 10% Source: Company, YSL Exhibit 5: Return on Equity and ROIC (%) Exhibit 6: Leverage Ratio (x) 18.0% 17.1% 6.0 5.0 5.1 16.0% 14.2% 4.7 13.5% 13.6% 13.8% 5.0 4.6 14.0% 4.0 12.0% 10.8% 4.0 3.6 9.1% 9.0% 10.0% 8.1% 8.7% 3.0 8.0% 2.9 2.8 6.0% 2.0 2.5 2.6 4.0% 2.0 1.9 1.0 2.0% 0.0% - FY13 FY14 FY15 FY16 FY17 FY13 FY14 FY15 FY16 FY17 3QFY18 ROIC ROE Net Debt to EBITDA Net Debt to Equity Source: Company, YSL For important information about YES SECURITIES (INDIA) LTD. and other disclosures, refer to the end of this material. 2 IRB Infrastructure Developers Ltd. KEY INVESTMENT HIGHLIGHTS IRB on a verge of upswing ✓ Play on the entire BOT value chain: Incorporated in 1998, IRB is toll operator with a market share of 11.64% in the golden quadrilateral. IRB’s aggregate road portfolio stood at 7,767 lane kms as of 31st December 2017. Post the listing of IRB InvIT Fund on May 2017, where seven of its operational projects were transferred, IRB now has IRB Infra is a pure play toll operator with strong six operational assets, seven under implementation stage and the group has expertise in BOT projects. preferred bidder for another project on Design, Build, Finance, Operate and Transfer (DBFOT) basis. IRB’s 100% subsidiary, Modern Road Makers Pvt Ltd (MRM), undertakes construction exclusively of in-house road BOT projects. The group’s vertically integrated operations facilitate works related to the entire BOT value chain, from traffic studies, in-house construction and O&M of all operational BOT projects making the group a play on the entire BOT value chain. Exhibit 7: IRB’s BOT portfolio snapshot Sl. Length Concession Project name Type State Date of Start (concession) No. (KM) Period 1 Kaithal-Rajasthan Border Toll Haryana 166.30 January 1, 2013 27 Years 2 Pune Solapur Toll Maharashtra 26.00 March 20, 2003 16 Years 3 Pune Nasik Toll Maharashtra 29.80 September 25, 2003 18 Years 4 Mumbai - Pune Toll Maharashtra 206.00 August 10, 2004 15 Years 5 Thane Ghodbunder Toll Maharashtra 14.90 December 24, 2005 15 Years 6 Solapur - Yedeshi Toll Maharashtra 98.70 Under Construction 29 Years 7 Yedeshi - Aurangabad Toll Maharashtra 189.10 Under Construction 26 Years 8 Ahmedabad-Vadodara Toll Gujarat 195.60 January 1, 2013 25 Years 9 Udaipur – Gujarat Border Toll Rajasthan / Gujarat 113.80 Under Tolling and Construction 21 Years 10 Kishangarh - Gulabpura Toll Rajasthan 90.00 FC completed 20 Years 11 Gulabpura – Chittorgarh Toll Rajasthan 124.87 Under Tolling and Construction 20 Years 12 Goa/Kar Border - Kundapur Toll Karnataka 189.60 Under Construction 28 Years 13 Agra Etawah Toll Uttar Pradesh 124.52 Under Tolling and Construction 24 Years 14 Hapur bypass to Moradabad Toll Uttar Pradesh 99.86 Preferred bidder 22 Years Source: Company, YSL IRB has started to bid for ✓ Foray into HAM and TOT opportunity to be a catalyst for potential for re-rating.