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Execution set to accelerate

* IRB Infrastructure (IRB)’s revenue de-grew 8% YoY to INR13.4b in 2QFY23 (14% below our estimate). Heavy monsoons and delay in appointed dates adversely impacted execution in 2QFY23.

* EBITDA declined 7% YoY to INR6.65b. On a sequential basis, EBITDA declined 37% due to lower execution. On a YoY basis, APAT more than doubled to INR853 in 2QFY23 (in-line with our estimate).

* While Construction revenues were soft, toll revenues saw robust growth of ~55% YoY in 2Q FY23. IRB expects the toll revenue momentum to remain strong. IRB recently received appointed date for the Ganga Expressway Project. During the quarter, IRB received part compensation of INR590m from NHAI against losses on Kaithal Rajasthan BOT project, due to the farmers’ agitation.

* With strong opportunity in BOT/HAM projects, IRB is expecting INR50-70b of new inflows in the remaining part of FY23. With an order book of INR200b as of Sep’22 and a robust tender pipeline, we expect IRB to record 17%/14%/54% revenue/EBITDA/PAT CAGR, respectively, over FY22-24. We largely retain our estimates and reiterate our Neutral rating with a revised target of INR240 (based on SoTP valuation).

Robust order book in hand; tender pipeline robust

* IRB’s order book stood at INR200b as on Sep’22, with EPC at INR112b and O&M in BOT/TOT projects at INR88b, providing revenue visibility over the next few years.

* IRB has received appointed date for the Ganga Expressway project.

* IRB is seeing several opportunities in BOT toll projects and expects to win INR50-70b worth of projects in FY23. These would be driven by BOT-toll from NHAI and state and also from HAM projects.

Key takeaways from the management commentary

* The management expects INR45b (net of GST) of construction revenues in FY23.

* Over the past three years, project awarding by NHAI has been aggressive in the second half of the financial year.

* The management expects 6-8 BOT toll tenders to be floated by NHAI in the near future.

* In case of the HAM project, the NHAI component of equity infusion of 40% could reduce to 20%, thereby, reducing competition.

Valuation and view

* IRB’s order book is strong at INR200b (incl. O&M). The EPC OB/revenue ratio stands at 2.8x, providing revenue visibility. IRB recently achieved appointed date closure for Ganga Expressway project in October 2022. As some of these large projects move into execution, we expect EPC growth to improve going ahead.

* We largely retain our estimates and reiterate our Neutral rating with a revised target of INR240 (based on SoTP valuation).

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