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New order wins ease pressure on the depleting order book

* IRB’s consolidated financials are not comparable YoY due to the monetization of nine assets through the InvIT route and consolidation of the Mumbai-Pune Phase II project. The Construction business reported a revenue/EBITDA/adjusted PAT decline of 7%/6%/36% YoY. While toll collections have grown MoM from Dec’20 onwards until the end of Mar’21, the ongoing disruption caused by the second COVID wave has led to 20-25% lower collections sequentially in Arp-May’21. Higher losses YoY from associates, increased depreciation from Mumbai-Pune Phase II project, and higher interest cost in the Construction segment led to a 18% miss to our earnings estimate (flat YoY at INR975m) in spite of a beat on our revenue estimate.

* Cash flow visibility has improved meaningfully due to the Mumbai-Pune Phase II project. However, the second COVID wave could lead to some delay in traffic levels returning back to normal. Orders wins worth INR33b in the Construction segment in 4QFY21 have aided the depleting order book (OB), with OB-to-revenue ratio now at 2.1x.

* We cut our FY22E/FY23E EPS by 8%/9% due to higher debt and hence greater interest cost in the Construction segment. Though NHAI has ramped up ordering in 2HFY21, any weakness in order wins in FY22E may pose a downside risk to our earnings estimates. We maintain our Neutral rating, with a SoTP-based TP of INR100 per share. Any favorable outcome from the Ahmedabad-Vadodara Expressway arbitration may pose an upside risk to our TP.

Earnings below expectation owing to higher depreciation and interest cost

* Consolidated earnings miss our expectation: Consolidated revenue stood flat at INR16.1b and was 12% ahead of our estimate on stronger than expected execution in the EPC segment. EBITDA came in higher at INR7.6b and was 7% ahead of our estimate. Higher revenue from lower margin Construction business implies a lower beat on EBITDA. On account of higher depreciation, interest cost, and losses from associates, adjusted PAT stood flat at INR975m and missed our expectation by 18%.

* 4QFY21 segmental highlights – EPC business: Revenue declined 7% YoY to INR11.4b and was 21% ahead of our expectation. EPC order book (excluding O&M) stood strong at INR77.5b (+64% YoY) after the recent order wins in HAM and EPC projects. Order book-to-revenue ratio now stands at 2.1x. Net profit declined 36% YoY to INR1.3b. BOT business: Revenue increased 31% YoY to INR4.6b and was in line with our expectation. On account of higher depreciation, interest cost, and losses from associates, adjusted PAT loss stood at INR316m v/s a INR1,053m loss last year. The headline numbers are not entirely comparable YoY owing to transfer of assets into the second InvIT and accretion of Mumbai-Pune Phase II project.

Key takeaways from the management commentary

* NHAI aims to award projects worth INR1.5t (4,500km) in FY22. Of this, ~20% of the awarding will be towards BOT projects, while the rest will be towards HAM projects. IRB has a 5.5% market share across BOT, HAM, and TOT projects.

* Toll collection tariffs have been increased by 3.8% over and above the inflation rate from 1st Apr’21. This is expected to aid tolling income in FY22 and could cover up for the lost collection in Apr-May’21.

* IRB is more comfortable bidding for BOT projects, where execution visibility is around two years, with lower competitive intensity.

* EBITDA margin should remain in the 45-48% range (EPC: 24-25%).

* IRB is selectively looking at some non-Road BOT projects. However, the focus will remain on Road Projects in the near future.

Valuation and view

* We cut our FY22E/FY23E EPS by 8%/9% due to higher debt and hence greater interest cost in the Construction segment. Though NHAI has ramped up ordering in 2HFY21, any weakness in order wins in FY22E may pose a downside risk to our earnings estimates. We maintain our Neutral rating, with a SoTP-based TP of INR100 per share. Any favorable outcome from the Ahmedabad-Vadodara Expressway arbitration may pose an upside risk to our TP.

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