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EPC revenue surprises positively, traffic recovery underway

* IRB demonstrated a strong operating performance, with a consolidated EBITDA beat of 46%, led by strong execution in the Construction business. The EPC segment reported a revenue/EBITDA/adjusted PAT increase of 65%/49%/9% YoY. COVID-related disruptions impacted toll collection by 20- 25% in 1QFY22. However, it improved from the second week of Jun’21. Likefor-like toll collections fell 24% QoQ.

* Cash flow visibility improved due to the Mumbai-Pune Phase II project. COVID-related lockdowns by various states led to some delays in traffic levels returning back to normal. The outstanding EPC order book stood at INR66b, with an OB/revenue ratio of 1.6x.

* We maintain our EBITDA estimate and Neutral rating, with a SoTP-based TP of INR150 per share. Any favorable outcome from the AhmedabadVadodara Expressway arbitration may pose an upside risk to our TP.

EPC execution surprises positively

* Consolidated earnings ahead of our estimate: Consolidated revenue grew 59% to INR16.3b and was 49% ahead of our estimate on stronger than expected execution in the EPC segment. EBITDA grew 47% YoY to INR7b and was 46% ahead of our expectation. Interest expense jumped to INR4.7b v/s our expectation of INR3.7b. Adjusted PAT stood at INR719m and was way ahead of our expectation of INR188m.

* Earnings surprise is largely attributable to positive surprise in the EPC business. However, this has resulted in a 15% QoQ drop in EPC OB to INR66b, with an OB/revenue ratio of just 1.6x.

Key takeaways from the management commentary

* Bidding activity was muted during 1QFY22 and gained traction during Jul’21. IRB is targeting an order book of INR70-90b from BOT/HAM projects in FY22.

* Toll collection was impacted by 20-25% due to various lockdowns. However, it improved from the second week of Jun’21, and has almost reached preCOVID levels in Jul’21.

* The management has guided at an EPC revenue of INR42-45b in FY22.

* Equity commitment for three new projects in FY22/FY23 stands at INR3b/INR2b.

Valuation and view

* Depleting order book poses a challenge to EPC revenue growth for IRB. It has yet to receive financial closure for two projects, post which the appointed date may take some more time. We expect EPC growth in 2HFY22E to remain a challenge.

* We broadly maintain our EBITDA estimates. We maintain our Neutral rating, with a SoTP-based TP of INR150 per share. Any favorable outcome from the Ahmedabad-Vadodara Expressway arbitration may pose an upside risk to our TP.

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