Why investors fancy this infra stock

Investors have taken a shine to IRB Infrastructure Developers (IRB Infra), evident from the surge in shares of the integrated private toll roads and highways infrastructure developer.

The company, which has an asset base of over Rs 60,000 crore, has lately been in the limelight for its stock split plan, fund-raising activity and stock rally.

On the stock split, IRB Infra’s board met on January 4 to consider the proposal for a sub-division or split of the existing equity shares of the company. It approved the subdivision of one equity share of Rs 10 each into 10 equity shares of Re 1 each.

In a stock split, a company increases the number of its outstanding shares.

Usually, companies split their stock to lower their trading price to a more comfortable range for investors and to increase the liquidity of trading in their shares.

“The stock split is expected to be a good sign as it will create enough liquidity and stability for the company’s stock in the market,” said Vinit Bolinjkar, Head of Research, Ventura Securities.

“Business growth along with sufficient liquidity of shares in the market is expected to improve retail participation in the IRB stock,” he added.

While stock splits are generally touted as a measure to enhance liquidity by drawing in retail investors who get attracted to low-priced stocks (as opposed to cheaply valued, but high-priced stocks), they are also seen as an effort by the management to support stock prices in the face of adverse business circumstances and/or an absence of solid triggers for an increase in the stock price. That begs the question if the stock split itself is an early warning signal for a slowdown coming.

So far, analysts do not seem to think so despite the macro winds blowing in the opposite direction.

Meanwhile, the stupendous upmove in the stock price has largely been because of the company’s strong fundamentals. Plus, enthusiasm for the infrastructure sector ahead of the upcoming Union Budget has also been a major factor in the climb in the stock price.

There is an expectation that the Budget would be a growth-oriented one that would focus more on infrastructure and would benefit key players like IRB Infra.

Read here | Budget-sensitive stocks | How to play these ahead of the D-Day? 

According to a report on the livemint website, the government plans to sharpen its focus on infrastructure growth in the budget by allocating 30 percent more funds for the roads ministry to speed up construction to more than 50 km of highways daily.

Despite the slowdown in capital expenditure (capex) for the road sector, the market believes IRB Infra is well-poised to grow decently.

A slowdown in road capex

As per a report by Nomura, the Ministry of Road Transport and Highways awarded tenders for the construction of 375 km of national highways in November 2022, which is significantly lower than 665 km in November 2021 and 915 km in October 2022.

For FYTD23 (until November 2022), the length of road projects awarded in km was 3.5 percent lower than the corresponding period of FY22 and 20.4 percent lower than that in FY21, the foreign securities firm added.

There are three reasons why Nomura is cautious on road capex.

First, considering that the current inflation level may have increased costs by around 10 percent amid a rise in cement, steel and bitumen costs, the Union Budget’s total road capex allocation for FY23 is up by merely 1 percent year-on-year, which is disappointing.

“This may imply lower project awards over FY23F and FY24F as we see cutting down of land acquisition spending by awarding fewer projects as a way to maintain a flat capex for the government,” Nomura said.

Besides, project awards may not pick up in FY24 as it is an election year, which can slow down awards in the second half of FY24.

Second, the securities firm expects the pace of construction to slow in FY23 as compared to FY22. “Lower budget allocation can imply a lower release of payments and hence a slower pace of execution by EPC contractors.” EPC is short for Engineering, Procurement and Construction.

Lastly, despite the uptick in toll revenues, the growth has not been proportionate to the increase in the National Highways Authority of India’s debt. Without significant monetisation of existing road assets, the debt levels may not be sustainable, Nomura said.

Nomura said NHAI’s debt increased from around Rs 24,200 crore in FY15 to nearly Rs 3,49,000 crore by FY22 or 22 times the FY22 toll collections.

Why is IRB Infra still well-placed?

The infrastructure player’s order book stood at Rs 200 billion as of September 2022, with EPC at Rs 11,200 crore, which made up around 56 percent of the total order book.

The order book of Operations and Maintenance in Build, Operate and Transfer (BOT) and Toll, Operate and Transfer (TOT) projects stood at Rs 8,800 crore. This, according to analysts, provided revenue visibility over the next few years.

“The EPC OB/revenue ratio stands at 2.8 times, providing revenue visibility,” Motilal Oswal Financial Services said.

The management sees Rs 50-70 billion of new order inflows in the remaining part of FY23, driven primarily by BOT-toll and Hybrid Annuity Model (HAM) projects.

Read here | Budget-sensitive stocks | Here are stocks that are widely tracked ahead of the Budget

Ventura Securities expects the company’s net debt to fall to Rs 6,136.0 crore in FY25 from Rs 11,615.4 crore in FY22.

Recently, the company said one of its Special Purpose Vehicles (SPVs) raised Rs 700 crore by issuing nonconvertible debentures on a private placement basis to eligible investors.

“The proceeds received from these nonconvertible debentures would be used to refinance the said project through part repayment of existing project debts, at lower interest cost, which would bring huge interest saving over project life,” IRB Infra said.

Analysts believe that government schemes like Bharatmala provides visibility in the long term for road builders.

“Overall, we expect net earnings to grow at 64.0 percent CAGR (Compound Annual Growth Rate) over FY22-25 from Rs 361.2 crore in FY22 to Rs 1,592.8 crore in FY25 with net margins rising by 1,090 bps from 5.7 percent in FY22 to 16.6 percent in FY25,” Ventura Securities added.

Nonetheless, the industry is likely to consolidate going forward with weaker players gradually moving out and large players gaining market share.

“The immediate slowdown in road capex may not really have a significant impact on companies like IRB Infra negatively,” Sandeep Upadhyay, Managing Director – Infrastructure, Centrum Capital.

That is because the company appears to be well-placed in the road sector despite the slowdown in capital expenditure considering the decent order book which gives revenue visibility over the next few years, he explained.

Potential challenges

On the other side, one concern that Upadhyay highlighted was the company’s asset monetisation plan, which, he said. could be more efficient.

“The market was expecting a brisk rate at which IRB could monetise its assets through its InVIT, however, the rate has been relatively slow hence impacting the free flow of equity capital readily available for fresh investments,” Upadhyay said.

Besides, there is another worry about the high cost of borrowing due to higher interest rates for heavily leveraged companies like IRB Infra, he said. Upadhyay added that the higher interest rate regime is hurting all companies in the sector, especially those that have projects that are highly leveraged like IRB Infra.

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