IL&FS Transportation to ride high on accelerated road developments

Road infrastructure projects have not been able to keep pace with the growth in auto sales and vehicle traffic. This has prompted the government to allocate higher spends and target faster execution of these projects. IL&FS Transportation Networks Ltd, one of the largest private sector build-operate-transfer (BOT) road operators in India, would benefit from the accelerated road development being targeted.

Business
IL&FS Transportation is into development, operation and maintenance of national and state highways, roads, flyovers and bridges both within and outside the country. In India, it has the largest BOT road asset portfolio covering almost 12,000 lane kilometers with a presence in 13 states. Of the 24 road projects in its hand, nine are operational and the rest are under various stages of development. It has a fair mix of annuity based (52%) and toll (48%) projects in its portfolio, which imparts stability to revenues.

While the revenues from annuity projects are assured, the toll projects fetch revenues based on the quantum of vehicular traffic movement. The company in 2008 acquired Elsamex SA, which engages in maintenance of roads, buildings and petrol stations, primarily in Spain, with additional operations in Portugal in Europe, and Columbia and Mexico in South America.

It is also present in urban infrastructure segments like bus and rail transportation. It operates and maintains Nagpur city bus services on BOO basis wherein it has already deployed 228 buses with a concession period of 10 years. Also, it has formed a special purpose vehicle Rapid Metro Rail Gurgaon Ltd for developing a metro link between Sikanderpur station, Delhi and DLF Cyber City in Gurgaon.

It is looking at other infrastructure opportunities such as airports and automatic multi-level parking as well. It has entered into strategic partnership with the Airports Authority of India to take up airport projects outside India and has also acquired stakes in Gulbarga and Shimoga regional airports.

Investment rationale
The government has huge plans to improve infrastructure in India with investments of close of $1 trillion planned in the next five year plan with a majority of allocations to power and roads. Also, the government wants to build roads at 20 km/day in the coming years from 3.5 km/day today. Accordingly, the National Highway Authority of India (NHAI), which has awarded 3400 km contracts so far this year, is looking to increase the pace of awarding contracts to attain the yearly target of 9,000 km.

This would benefit a large and established player like IL&FS Transport, which has strong financial capability to raise funds and experience in developing road infrastructure. There have been regulatory policy changes to speed up the execution of projects at the start of this year, which is also likely to aid the growth. The company, which got around 9.4% share of the NHAI orders last fiscal, is expected to maintain the share. Also, it has presence in almost all major states and has a good chance of bagging new state road projects.

The company has a current order backlog of over Rs16,000 crore, which provides good revenue visibility. It also follows a unique business model wherein it concentrates on bidding, core engineering and designing and subcontracts the civil construction work, resulting in greater flexibility and resources to get more orders. Its diversified geographical presence and balanced mix of projects also lend stability to revenues.

Concerns
Adverse macro-political events and regulatory changes can affect the company’s revenues. Since it outsources construction activities, it is exposed to higher costs and also execution delays, which may affect its profitability and revenues. Being in a capital intensive business, this highly leveraged player faces higher interest rate risks as well.

Valuations
Driven by robust order backlog and steady project execution, the company’s revenues are expected to grow at a CAGR of 56% over FY10-12E even as the net profits grow at a decent 26%. At the current market price of Rs314.90, the company’s stock trades at a multiple of 14.32 times its expected FY11 earnings per share and 11.22 times its FY12E earnings. Considering its strong track record and diversified nature of revenues, investors with a long-term horizon can look to enter the stock on corrections.
Disclaimer: The writer does not hold any shares in the company