| Summary of Contents
| THEMATIC REPORT Switch from ITNL to IRB Key points -
Trading premium gap at all-time high; buying opportunity in IRB: The recent sharp correction in IRB Infrastructure Developers (IRB) has created a huge divergence in the valuations of IRB and IL&FS Transportation Ltd (ITNL). ITNL trades at a 40% premium to IRB as against a mean average of an 11% premium and the usual band of a 5% to 20% premium. Notwithstanding the legal tangles of the IRB promoter, we believe that the divergence of more than 2x standard deviation (2SD) offers a compelling buying opportunity. -
IRB-sharp correction and clearance from a legal case to limit the downside: Though the charges levied against the promoter of IRB are serious, the correction of over 30% in the stock factors in a lot of the negatives and has made the stock available at a 40% discount to its mean average valuation multiple. The improving outlook for the road infrastructure developers should limit the downside risk in the stock though. Moreover, any positive development on the legal issue could result in a sharp re-rating of the stock. -
IRB's profitability less vulnerable to interest rates: Considering the economic turbulence that our country is going through (with inflation still at levels beyond the comfort zone of the central bank), we think the interest rate reversal cycle might be delayed by one or two quarters. For the companies with a high debt burden this would mean continued pain in terms of high interest charges for at least the next couple of quarters. Here, we think IRB is better placed in comparison with ITNL since the debt/equity ratio of IRB stands at 2.5 vs 3.7 for ITNL. On a closer analysis of the interest payments we find that while IRB pays almost 40% of its operating profit as interest charge, ITNL pays 50% of the same as interest charge (due to the interest payment on the annuity projects under construction). Further, in the last two years, IRB has been efficient in generating higher returns on invested capital (RoIC) as compared with ITNL with the FY2012 RoIC at 11.5% as compared with ITNL's 9.3%. -
Switch from ITNL to IRB: Fundamentally, we like both the companies and believe both would be likely beneficiaries of the tall target set by the National Highways Authority of India for project awarding this fiscal. In fact, ITNL shall score better than IRB on many financial parameters over the long term. However, the recent event-driven sharp correction in IRB has thrown open a tactical opportunity to shift from ITNL to IRB for superior returns in the near term.
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| | Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a postition in the companies mentioned in the article. | | | | | |
