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IRB Infra – Quoting At Discount

November 29, 2010

Almost all the broking house say that the Discount on IRB Infra is unwarranted. The stock is down its from its peak of INR 313 in Aug 2010; more importantly, the stock has corrected ~25% in the last month.

The main reason for correction – Slowdown in NHAI project award since May 2010 and Delay in start of execution in the 4 projects won last year – While execution was expected to begin on all projects in Q1FY11, it eventually started on 2 projects in Q2FY11 and on the remaining 2 projects in the current quarter.

The operational projects continue to do well. The three new projects are also on track; It is still early days for policy changes related to e-auctions and changes in bidding criteria. A lot of clarity must emerge before these are put into practice, according to management.

Based on the fundamentals of the business, the BOT Business is valued at Rs 190, EPC Rs 90 and Cash and Real Estate for the rest taking the Sum of the Parts Valuation to Rs 315, 30% upside from current market price.

EPS Expectations for FY 11 and FY 12 are – Rs 14.5 and Rs 16.95 respectively. Investors with risk appetite can BUY the stock as the direction of the market is still unclear.

Update on 09-12-2010:
The government has proposed adding a new toll rate slab for three-axle commercial vehicles, lowering its base toll to Rs2.40 per km vs. Rs3.45 per km earlier. These toll rate revisions might not apply to currently operational PPP projects, in our view. Projects in the pipeline account for only 7% for IRB. Lastly, we remain positive on long-term sector prospects. IRB is our top pick. Despite the near-term growth pangs, we believe long-term potential of the Indian road development sector remains strong.

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