IRB Infra’s Benchmark-Beating Rally Masks Concerns

IRB Infra’s shares gained 122.9% over the last year, Nifty Infra gained 81.7% and Nifty 50 Index rallied close to 80%. Shares of IRB Infra jumped more than 8% on March 31, 2021, after it added two new public-private partnership projects.

Bullish recommendations for IRB Infra by analysts tracked by Bloomberg have increased from 65% to 83% during the last year. The stock has no ‘Sell’ ratings at present. Also, its average of 12-month consensus price targets is the highest among peers.

The road and highway developer, however, saw a decline in the share of construction projects in its order book, along with a fall in revenue from the core segment. Its net debt surged and domestic mutual fund and foreign investors lowered exposure to the stock.

IRB Infra’s board in March approved the reorganisation of its management team and appointment of group chief financial officer. Tushar Kawedia has been appointed as chief financial officer of the company and the group, according to a statement. He was acting as the CFO of IRB Infrastructure Pvt. He previously served as the deputy CFO of the company. Anil Yadav, who was the group CFO, has been reassigned as the investor relations director, IRB Group.

Here’s a look at the issues facing IRB Infra…

Constrained Order Book

The share of operations and maintenance projects in IRB Infra’s order book has risen to more than 60% in the quarter ended December 2020 from 25% a year ago, while that of its core construction portfolio dropped.

Operations and maintenance business conventionally yields a lower margin, given the regular wear and tear, and standardised maintenance work involved for a duration of up to 10 years or more. This results in a slower execution rate and doesn’t aid much in revenue generation.

According to Rohit Natarajan, assistant vice president-research at Antique Stock Broking, the share of O&M projects is less than 5% for peers such as KNR Constructions Ltd. and PNC Infratech Ltd.

The company had said in a post-earnings call for the quarter ended December that its core order book (excluding operations and maintenance projects) provides earnings visibility for the next four quarters.

Its total order book stood at Rs 14,509 crore as of March 2021, up 20% over the year earlier, according to an exchange filing. That, it said, provides revenue visibility for more than two years. And while the share of its construction order book rose to 52% in the quarter ended March, it’s still less than the December 2019 level.

According to Natarajan, this visibility (total construction order book as of March 2021 by construction revenue in FY20) is just 1.5 times—almost half of the industry standard. KNR Constructions and PNC Infra, among others, have visibility of more than 3-3.5 times, he said in a note.

Lower Construction Revenue

IRB Infra posted a 33% year-on-year decline in its core construction segment for the nine months ended December 2020.

That, according to Natarajan, is because of its strategic focus on the build, operate, and transfer projects, which isn’t an attractive proposition as they come with a cost, limiting the company’s balance sheet from growing aggressively. For this, IRB Infra has to routinely engage in “capital recycling, that’s in the form of InvITs”, he said.

But the company is hopeful as ordering activity picks up the pace and it bids more for hybrid annuity model projects in the year ending March 2022. Launched in 2016, HAM has been the sole channel for private investments in the sector to date.

For the financial year ended March 2021, the company has bagged two hybrid annuity model projects and a build-operate-transfer project. So the company isn’t completely averse to the idea of bidding for HAM projects, according to Anil Yadav, former group CFO and current investor relations director, IRB Group.

The Covid-19 pandemic, however, impacted the National Highway Authority of India’s awarding activity for the initial seven to eight months for 2020-21, which has had an impact, he told BloombergQuint. “But we expect earnings visibility to be in the range of 2-2.5 times, that’s also because HAM’s construction period has been reduced to two years.”

Mounting Debt

IRB Infra’s net debt has more than doubled for the nine months through December, compared to the fiscal ended March 2020, led by higher equity needs for build-operate-transfer and toll-operate-transfer projects.

That’s expected to rise further by March 2021-end, owing to the debt-funded concession fee payment of Rs 850 crore to Maharashtra State Road Development Corp. for its Mumbai-Pune toll-operate-transfer project, said Prem Khurana, research analyst at Anand Rathi. IRB Infra also plans to infuse Rs 300 crore worth of equity in a BOT project, Khurana said in a report.

InvIT Performance

IRB Infra’s infrastructure investment trust’s market has eroded by close to 48% since its launch in May 2017. In comparison, the only other listed InvIT, India Grid Trust—launched in June 2017—has gained in excess of 38.54% to date.

There are a total of seven InvITs, of which only two are listed.

IRB Infra has raised Rs 510 crore from the InvIT, and has declared 22 dividends since August 2017. In the past 12 months, IRB InvIT Fund has declared an equity dividend of Rs 5.30 apiece. At the current share price of Rs 53.40, that works out to a dividend yield of 9.93%.

Declining Institutional Holding

Domestic mutual fund investors have cut their exposure in the stock to less than 6% as of December 2020 from nearly 8% a year. Besides, foreign institutional investor holding has come down to 16.30% as of December 2020 from 19.6% a year earlier.