Buy IRB Infra on high risk-reward outlook, target price R182

We maintain our 'buy' rating on IRB Infrastructure on a high risk-reward outlook. We also maintain our sum-of-the-parts-based target price of R182 (R149 for build-operate-transfer and R33 for construction). Downside risks to our target price include lower-than-expected traffic or toll increases, slower execution, or higher-than-expected capital expenditure.

IRB Infrastructure's CMD, Virendra Mhaiskar, reiterated that the investigation by the CBI into the murder of an activist was behind the company. There may be no formal communication from the CBI, since neither IRB nor its employees were formally charged. The lie-detector test is complete, and the CBI should have filed an official chargesheet by now if it had found any evidence of IRB's involvement. That said, there is no limit on the duration of the investigation.

Future order wins and/or project acquisitions would be positive catalysts for the stock. IRB is pre-qualified for R410 billion of NHAI projects and is in the request-for-proposal stage for an additional R24 billion worth of projects. The company said earlier that it had set aside 20% of surplus cash for inorganic acquisitions of projects.

According to IRB's calculations, the recent road project (R24 billion) from the Goa/ Karnataka border to Kundapur will need approximately R1.2 billion of subordinate debt in the initial years due to low traffic. Essentially, this means that the estimated toll collection as of today will not be sufficient to service the debt in the initial years. This is in line with our expectation. However, we estimate 16% internal rate of return (IRR) for this project because of the long tenure of the concession (28 years), essentially implying back-ended returns. The company has asked for a grant of R5.4 billion, 22% of the total project cost (or 32% of NHAI's estimate of the total project cost) and 13% lower than the next best bid of R6.2 billion.

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