Friday, November 22, 2024

IRB Infra’s growth hinges on winning new orders from highways authority

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IRB Infrastructure Developers Ltd stock has underperformed the Nifty 500 index in the past six months. One reason for this could be the stake sale a few months ago by the promoters and Cintra, a subsidiary of Spanish construction company Ferrovial. Secondly, the absence of fresh projects is a dampener.

Still, investors have seen a staggering 94% increase in IRB stock over the past year, with the company having won two toll-operate-transfer (TOT) contracts last year. Toll collection for these started in April. Unsurprisingly, owing to its rich valuation of 2.6 times FY24 book value, Incred Research Services has a ‘reduce’ rating on the stock.

Toll collections so far in FY25 have been driven by new projects. Collectively, IRB and IRB Infrastructure Trust saw 20% year-on-year growth in toll collections in August. With this, YTDFY25 (April-August) toll growth is at 30%, but without the newly commissioned project it’s at just 2%, said an Antique Stock Broking report dated 30 September.

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Yet, Incred expects IRB’s consolidated sales to grow only marginally – by 2.8% – because of lower revenue booking in the construction segment, largely due to higher rainfall. Ebitda growth is projected to be flat, compared to 10% growth in Q1. As such, a robust Ebitda margin of about 45% has helped IRB maintain its consolidated net debt-to-equity multiple at about 0.9x as of the end of June.

Banking on NHAI projects

IRB expects the momentum in toll collections to pick up in the coming festive season. To be sure, further movement in the stock will be contingent upon winning big-ticket projects from the National Highways Authority of India (NHAI). The highways authority has lined up projects worth 45,000 crore and is expected to invite bids in the coming months. IRB is looking to enhance its projects portfolio with an expected pick-up in NHAI orders, but must ensure it does not spread itself too thin in this asset-heavy business.

Few highway construction projects have been awarded so far in FY25 owing to the general elections, but this is expected to pick up in the second half of the year. Build-operate-transfer (BOT) projects worth 2 trillion and TOT projects worth 1 trillion are expected to be awarded over the next 18 to 24 months.

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IRB has focused on TOT projects, where it has a sizeable 38% market share thanks to the limited number of participants. Its BOT market share is 10%.

The company has more than 12,500 lane kilometres (lkm) of operating road assets and another 3,000 lkm under construction. The assets include those owned by IRB infrastructure Trust, which holds 51% of the equity. The rest is held by GIC, Singapore’s sovereign wealth fund, and Cintra. Both entities also hold stakes in IRB.

IRB’s order book for the engineering, procurement and construction (EPC) segment stood at about 4,800 crore at the end of Q1FY25. This translates to a low order-book-to-sales multiple of 0.9 times based on trailing 12 months segment revenue. Investors will keep close tabs on project awards in the coming months to see whether the order inflow ends up being better than expected.

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