Taking the rough with the smooth

Bad press is fatal for any company and it has certainly wounded the stock price of IRB Infrastructure Developers. It all started when media reports alleged that IRB was given the marquee Mumbai-Pune Expressway contract, and other hefty deals, when BJP president Nitin Gadkari was Maharashtra’s PWD minister in the Shiv Sena-BJP government from 1995-1999. The IRB Group, it was further alleged, had bought shares worth Rs.1.85 crore in Gadkari’s Purti Sakhar Karkhana in 2001, and gave a loan of Rs.165 crore to his Purti Power and Sugar in 2010. 

This bit of negative news is the latest in a long series of controversies that has plagued the company. It wasn’t so obvious back then but trouble began teething nearly a year-and-a-half ago, in July 2011, when the IT department raided around 40 of IRB’s properties in Pune and Mumbai. A scant six months later, in January 2012, Goldman Sachs accused IRB of not adequately disclosing its November 2010 acquisition of a Rs.107 crore aircraft. Then, Virendra Mhaiskar, IRB Infra’s chairman and managing director, was investigated by the Central Bureau of Investigation (CBI) in May 2012 for his possible involvement in the murder of RTI activist Satish Shetty in Maharashtra. As recent as November 2, CBI searched the Pune premises of sister firm Aryan Infra over the same murder.

Analysts who have always liked this road-builder for its first mover advantage and ample cash-flows continue to keenly watch the ongoing developments. Their grudging regard is evident as they commend the management for taking the blows upfront and explaining the situation instead of hiding or postponing. Earlier and post the current eruption of negative news flow, the company sent successive clarifications to the stock exchanges. It has completely distanced itself from the Rs.165 crore loan given by Global Safety Vision, a company started by Virendra Mhaiskar’s father Dattatray Mhaiskar, to Gadkari’s Purti Power and Sugar.

Mhaiskar says the investment was made by his father in his personal capacity and he was not privy to it. What about the Purti Sakhar Karkhana shares worth Rs.1.85 crore and bought back in 2001? “We were a family business and, at that time, we thought investing in a sugar factory in Vidarbha was promising,” Mhaiskar told Outlook Business. “No public money was involved and Gadkari was not the PWD minister at the time of this investment, he says.” 

After the promoters, it is the FIIs holding the stock who have bled the most. After the 62.49% held by promoters, FIIs hold 21.15%. Haven’t they come up with all kinds of questions? An unperturbed Mhaiskar says, “Our investors are not worried. We have explained the situation to them and they understand.” Do they entirely? Nitin Arora, analyst with Nirmal Bang, articulates what’s on everybody’s mind: “Even though the company has clarified, investors and fund managers will take some time to adjust to the news.” The question that every investor needs an answer to: can IRB ride-out this image maligning volatility? 

By the book

Let’s forget all the noise for the moment and focus on the fundamentals. First, the order book; IRB’s order book of Rs.9,500 crore, executable over 3-4 years, gives it revenue visibility. The latest addition to the order book is the 189 km Goa-Kundapur project won in July 2012, having a concession period of 28 years. The project is estimated to cost Rs.2400 crore and has to be executed in three years. This win was a shot in the arm for IRB as it has a stated target of adding an incremental 300 to 400 km of road construction to its order book every year. Mhaiskar says any sluggishness on the part of National Highways Authority of India’s (NHAI) is unlikely to affect IRB in FY13 as it has bagged the Goa-Kundapur project. “We have asked for Rs.536.22 crore as viability gap funding from NHAI, and are expecting an IRR of 18%,” he adds.

Going forward too, bidding and bagging contracts seem to be the least of Mhaiskar’s worries despite competition, say analysts. The government awarded 6,000 km of projects last year, and may do another 3,000-4,000 km this year. Abhinav Bhandari, analyst, Elara Capital says, “IRB need not go out and bid aggressively even if they don’t get any projects for the next six months or even a year because they are in a fairly comfortable position right now,” he says. “Their order book should last them for two to two-and-a-half years. I don’t see any problems occurring at least till FY14.” 

Pay as you go 

The company also has protection against rising input costs as its contracts have an in-built escalation cost. That said, net margin for the company has decreased from the 20% plus that prevailed in 2010 and have been 12-13% for the last 4-5 quarters. Bhandari explains, “The moment the operational project portfolio becomes bigger than the under-construction portfolio, margins are bound to take a hit because a large interest portion comes into the P&L account.”

While completed projects getting into collection mode will ensure revenue growth, Arora feels the EPC revenue component is likely to moderate in FY14. He elaborates, “Most of IRB’s under-construction projects like Jaipur-Deoli, Talegaon-Amravati and Amritsar-Pathankot are expected to be completed in FY13 and FY14.”

There are other worries too. “There could be some problem in BOT (Build-Operate-Transfer) revenue considering the traffic slowdown in some projects,” says Ajit Motwani, analyst, Emkay Global. IRB’s BOT toll revenues for Q2FY13 stood at Rs.256 crore, up 7.7% year-on-year but lower than analyst’s estimates. “Traffic growth across operational projects has been mixed. Bharuch-Surat saw a traffic growth of 6.4% year-on-year, Mumbai-Pune grew by 4.2% year-on-year but declined by the same percentage on Tumkur-Chitradurga and some large projects such as Surat-Dahisar saw no traffic growth at all.” Motwani says the management may be confident about 12% year-on-year BOT revenue growth but he is skeptical because traffic is not growing on some roads.

“Toll rates are linked to inflation,” Mhaiskar counters. “We have seen an increase in toll rates with the rise in inflation.” Toll rates have been hiked by 6% for the Tumkur-Chitradurga road project (effective April 1, 2012), by 7.5% for Bharuch-Surat (effective July 1, 2012), and by 8.9% for Surat-Dahisar (effective September 1, 2012). Mhaiskar says that even though there is a slowdown in traffic, he expects to see the same growth in BOT revenue. Elara’s Bhandari still worries. “Had it been a blip for one or two quarters, we could have dismissed it as insignificant but this [traffic slowdown] has now gone on for 5-6 quarters,” he stresses. “In the current quarter, there has been some de-growth in Mumbai-Pune [road] as well, and it’s IRB’s largest project. And the de-growth of 4% in the Tumkur-Chitradurga road, because
of the mining ban in the region, more or less nullified the toll rate hike of 6%.”

Watch this road 

But like Bhandari and others of his ilk, Hansraj Singh, analyst, IDBI Capital, is not able to shrug off the bad news dogging IRB: “The biggest concern is the controversies. Negative surprises have kept coming. I don’t see political disruption as a risk. It has more to do with corporate governance.”

All said and done, IRB is a company that collects Rs.3.1 crore in toll revenue every day, after sharing with NHAI and JV partners where they exist, and that’s expected to go up to Rs.5 crore by the end of calendar year 2015 because their under-construction projects will be completed in nine months. Revenues will increase again once the Goa-Kundapur project starts contributing to revenues from FY16 or FY17. Even without considering revenue from new projects, toll collection from existing projects would itself increase by 10-11% every year, assuming an average 5% growth in traffic and 6% increase in inflation. So, Bhandari concludes, “IRB Infra is a no-brainer buy if the stock goes down by 10-15%. If the price goes down further to Rs.100, I would be very tempted to look at it.”

Over the past year IRB has demonstrated a tiresome propensity to test the patience of its investors. All this hammering has resulted in the stock correcting 40% from its 2012 high of Rs.209. Given that cash flows continue to be healthy from its existing projects, should one pile into the stock at the current price of Rs.121? While some analysts complain in private about the company not giving enough updates via con-calls, and a detailed breakup of traffic growth, most analysts are batting for IRB’s fundamentals, have a buy rating but continue to be wary of negative developments that could further hit the stock. Emkay has a target price of Rs.230, Nirmal Bang Rs.193, Elara Rs.152. Emkay’s Motwani points out, “It is difficult to prove or disprove allegations, so till the time the company is cleared of controversies, the stock could trade below its fair value.” That is why we too recommend staying away from the stock for now and wait for Bhandari’s no-brainer scenario to play out.