Opportunity in gloom

December 26, 2011

IL&FS Transportation Networks (ITNL) has seen its stock gradually slide from over Rs 360 last September to its new low (intra-day) of Rs 144 on Wednesday, thanks to weak sentiments in the global and domestic markets.

While it is already India’s largest player in road build-operate-transfer (BOT) projects, IL&FS Transportation Network last week added another feather in its cap when it announced the plan of its China foray. Analysts feel the move is unlikely to benefit it in the medium term, but they remain bullish on its Indian business.

ILandFS Transportation Networks Elara Capital Analyst Abhinav Bhandari says: “We are positive on the company due to its leadership position in the domestic road vertical, strong parentage of IL&FS, partnerships and bilateral contracts with state governments and relatively diversified and de-risked business portfolio.” Notably, stock valuations are now attractive, and, with interest rate cycle at its peak, things should improve in the times to come.

PICKING UP SPEED
In Rs crore	FY11	FY12E	FY13E
Net sales	4,048.00	5,418.30	6,824.70
Y-o-Y change (%)	68.5	33.9	26.0
Operating profit	1,155.00	1,347.70	1,627.70
Y-o-Y change (%)	45.5	16.7	20.8
Net profit	433	447.3	527.7
Y-o-Y change (%)	25.9	3.3	18.0
EPS (Rs )	22.3	23.0	27.2
Y-o-Y change (%)	25.9	3.3	18.0
E: Estimates All figures are consolidated Source: Company, Analysts Reports

At Rs 152, the stock trades at one-year forward (FY13) PE of 6.3 times, below its historic band of 7.5-13.5 times, as well as 11.2 times for its closest peer and India’s second-largest BOT player, IRB Infrastructures. Analysts expect an upside of over 50 per cent, given the average sum-of-the-parts (SOTP) of Rs 270.

Towards the Dragon
ITNL has been selected the preferred bidder for 49 per cent stake in Yu He Expressway Company by Chongqing Expressway Group. The project is a four-lane expressway of 58 km, connecting the Chongqing city with Hechuan County, with toll rights till June 2032. The acquisition worth $160 million (49 per cent stake), or around Rs 850 crore, is expected to be funded by debt.

According to a Sharekhan report, the expressway is significant because it connects to a major industrial belt in the Chongqing region, allowing the Chinese company to enjoy a consistent traffic flow through the year and offering a decent growth prospect. Though the project has been operational for the last 10 years and is profitable, the gains for ITNL may be limited in the medium term.

According to ITNL Managing Director K Ramchand, revenue growth will be marginal in the first few years, while addition to net profit will be less than 5 per cent. But it will substantially improve after the next 10 years (total term of the debt).

PINC Research Analyst Vinod Nair adds: “The relatively small size of the project, non-strategic fit (Chinese market not being a long-term policy of ITNL) and the requirement to fund would limit any near-term benefits.”

Stable core business
In India, ITNL’s 22 projects (about 9,458 lane km) is well divided in terms of region, clients (state and central) and revenues model (toll and annuity).

Amid a weakening economy, the company has been selective in bidding for NHAI projects for the past several quarters. The guidance for it was $1 billion worth of order wins in FY12. But it has not won any major order from NHAI so far in FY12. It has bagged only three state government projects worth Rs 870 crore.

However, this is not seen as a concern either by ITNL or analysts. “The cautious bidding would pay off in the long run,” notes the Sharekhan report. Besides, it has enough work, given the order book of Rs 8,900 crore, about four times its FY11 construction revenues.

The management has expressed its intention of continuing its conservative bidding strategy, as it feels competition will continue to remain high. Moreover, the bidding pipeline remains strong at around Rs 68,500 crore (9,500km).

High on debt
For now, high interest cost, given the consolidated debt-to-equity ratio (2.7 times) in the second quarter of FY12 is a concern. In the September quarter, operating profits rose 37 per cent (Rs 383 crore) on 42 per cent rise in income (Rs 1,282 crore), but a 72 per surge in interest costs (Rs 169 crore) restricted gross profit (profit before depreciation and tax) growth to 17 per cent (Rs 214 crore).

The management expects the debt burden to remain at higher levels on the back of increased execution of 12 under-construction projects that could keep interest costs high in the interim.

Positively, rates are peaking. Edelweiss Securities Analyst Parvez Akhtar Qazi believes that the company is one the best plays on peaking interest rates. “A 100-basis-point decline in interest rates increases our SOTP estimates of ITNL by 13 per cent,” he points out.

PICKING UP SPEED
In Rs crore	FY11	FY12E	FY13E
Net sales	4,048.00	5,418.30	6,824.70
Y-o-Y change (%)	68.5	33.9	26.0
Operating profit	1,155.00	1,347.70	1,627.70
Y-o-Y change (%)	45.5	16.7	20.8
Net profit	433	447.3	527.7
Y-o-Y change (%)	25.9	3.3	18.0
EPS (Rs )	22.3	23.0	27.2
Y-o-Y change (%)	25.9	3.3	18.0
E: Estimates All figures are consolidated Source: Company, Analysts Reports