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Marginal miss in EBITDA; higher other income drives beat in APAT

* IRB Infrastructure’s (IRB) revenue declined 9% YoY to INR15.9b in 2QFY25 (9% below our estimate). EBITDA margin came in at 48.3% (est. 46.3%), up 280bp YoY and 200bp QoQ. EBITDA declined 4% YoY to INR7.7b (5% miss). APAT rose 4% YoY to INR999m, 16% above our estimate of INR 860m, led by higher other income.

* Construction revenues stood at INR10b (-15% YoY), while BOT revenue came in at INR5.8b (+2.4% YoY). The order book stood at ~INR326b (excl. GST) as of 2Q end. The O&M order book stood at INR286b, while the construction order book stood at INR40b.

* Lower execution in construction business impacted revenue, while better cost management led to better operating margin during the quarter. Given its strong order pipeline of INR2t and track record of winning 25-30% of its targeted bids, we expect IRB’s order inflows to pick up going ahead. With a strong order book and a robust tender pipeline, driven by BOT projects, we expect a revenue CAGR of ~12% over FY24-27. We broadly retain our APAT estimates for FY26/FY27, though we trim our APAT estimate for FY25 by ~5% due to lower execution in construction division in 1HFY25. Reiterate Neutral with a SoTP-based TP of INR60.

Robust order pipeline along with a strong balance sheet

* Awarding by NHAI was subdued in 1HFY25 as only ~227km of projects were awarded. However, IRB's order book was healthy. The tender pipeline remains robust at INR2t, of which IRB aims to win at least INR200-250b worth of orders in FY25. IRB’s priority would be BOT toll projects, followed by TOT projects, and then HAM projects.

* As of Sep’24, IRB's net debt-to-equity ratio was 0.86x, with minimal equity commitments in FY25. This financial strength provides IRB with the flexibility to bid for the strong order pipeline of INR2t.

Key takeaways from the management commentary

* Due to severe monsoons, construction revenue and toll collections were impacted in 2Q. However, Oct’24 has seen a good pickup in execution and 2HFY25 could see a much better performance.

* The construction vertical is likely to clock a ~15% CAGR over the next two to three years, with a stable EBITDA margin.

* The management expects INR200-250b worth of order inflows in FY25, given a healthy pipeline of orders in the BoT and ToT segments.

* Losses in JVs/associates would be in the range of INR1.5-1.6b in FY25.

Valuation and view

* Fueled by a robust order book and a strong tender pipeline, primarily due to BOT projects, we expect IRB’s execution to pick up, leading to a ~12% CAGR in revenue and stable margins. We broadly retain our APAT estimates for FY26/FY27, though we trim our APAT estimate for FY25 by ~5% due to lower execution in construction division in 1HFY25. Reiterate Neutral with a revised SoTP-based TP of INR60.

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