Company Update on IRB Infrastructure

Geared for execution + Valuation comfort = Buy

We recently met the management of IRB Infrastructure (IRB) to get more clarity on the recent developments at the NHAI’s front – PMO intervention leading to the increase in overall targets for FY2012; the company’s future bidding strategy – in light of the enhanced number of players in the road segment and with one large project already won; and the reasons for the stock’s underperformance.

NHAI to double project awarding in FY2012: NHAI has begun FY2012 on an aggressive note by awarding projects of ~481kms in April 2011 and targets ~1,326km for May and June. This is in line with NHAI’s revised target of ~11,000kms for FY2012, an increase of whopping 117% over FY2011. IRB being one of the market leaders is expected to gain from the same.

With order inflow target met, timely execution is the key: With the bagging of the Ahmedabad Vadodra project at the beginning of the year, IRB has nearly achieved its yearly target of order inflows. Accordingly, it is now focusing on the execution of projects. Hence, management has guided for aggressive ramp-up of its under-construction portfolio and is aiming at the early completion of these projects. We believe IRB is well placed for this, given the in-place integrated business model (in-house construction arm) and quantum of work in hand (order book: `11,741cr).

Recent fall in the stock leads to undemanding valuations: IRB is one of the few Indian companies that offer investors the opportunity to participate in the inevitable rise in India’s investments in the road sector. However, the stock has declined by 12.2/24.3% over the last three/six months due to concerns over 1) aggressive bidding; 2) rising competition; and 3) increasing interest rates. Though these concerns are legitimate, we believe this huge decline in the stock price is unwarranted. We have outlined the value erosion due to these factors and contemporary loss of market cap and deem that this fall has created an opportunity for long-term investors by bringing the stock to undemanding valuations. Hence, we recommend Buy on the stock with a revised target price of `191 (`215).