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Monday, April 23, 2012


Scrip Code: 533177 IL&FSTRANS
CMP:  Rs. 190.85; Buy at Rs.185-190.
Short term Target: Rs. 200, 6 month Target – Rs. 232; 
STOP LOSS – Rs. 175.58; Market Cap: Rs. 3,707.59 cr; 52 Week High/Low: Rs. 233.95 / Rs. 142.55
Total Shares: 19,42,67,732 shares; Promoters : 14,58,67,769 shares –75.09 %; Total Public holding : 4,83,99,963 shares – 10.00 %; Book Value: Rs. 91.87; Face Value: Rs. 10.00; EPS: Rs. 12.34; Div: 35 % ; P/E: 15.46 times; Ind. P/E: 14.14; EV/EBITDA: 8.99.
Total Debt: 1,894.09; Enterprise Value: Rs. 5,588.11 cr.

IL&FS TRANSPORTATION NETWORKS LIMITED: ITNL was incorporated in 2000 and is based in Mumbai, India. It was formerly known as Consolidated Transportation Networks Limited and changed its name to IL&FS Transportation Networks Limited in September 2005. IL&FS Transportation Networks Limited operates in the Highway and street construction sector. IL&FS Transportation Networks (ITNL) is a surface transportation infrastructure company. ITNL is the builder, operator and transfer (BOT) road operators engaged in developing, designing, operating, maintaining and facilitating surface transportation infrastructure projects. ITNL’s services include advisory and management services, supervisory services, operation and maintenance services, toll collection services for toll road projects. ITNL provides maintenance services primarily for highways and roads in Spain, Portugal and Latin America, and advisory and project management for BOT road projects, trades in materials used in the maintenance of roads & undertakes construction contracts. On May 31,2010, it acquired Area De Servicio Coiros S.L.U. On September 1, 2010, it acquired Conservacion De Infraestructuras De Mexico S.A. De C.V. On December 17, 2010, it acquired Alcantarilla Fotovoltaica, S.L.U. and Area De Servicio Punta Umbria, S.L.U. IL&FS Transportation Networks Limited is a subsidiary of Infrastructure Leasing & Financial Services Limited. The company is compared to NRW Holdings Limited globally & locally with Cummins India Limited and Walchandnagar Industries Limited.

Investment Rationale:
IL&FS Transportation Network limited is India’s largest road developer (7,621 lane kms) and is poised for 18 % CAGR (FY08-14E) in operational portfolio with fair mix of toll & annuity projects and BOT stake adjusted with average daily toll collection of Rs. 70 lakhs per day in FY11 and is expected to clock around 49 % CAGR (FY11-16E). Company has order backlog at Rs. 8,900 Cr at 3.3X FY11 revenue excluding Rs. 2,500 Cr order inflow in Q4FY12 and the recent wins of Rs. 2,500 Cr could restrict ITNL’s participation in next round of bidding at NHAI. ITNL is already sitting on 2 projects which are yet to achieve its financial closure and its SOTP value comes at Rs. 222 it implies a 13 % upside, but ITNL is highly sensitive to interest rates so a cut of 100 bps (1 %) in interest rate (0.50% is cut already and 0.50% more is expected) will lead to 26 % increase in SOTP value. ITNL is the largest private sector Built Operate Transfer road operator from IL&FS Group , with a portfolio of 22 domestic road projects and 1 international projects aggregating to 7,621 stake adjusted lane in km (SALK) in its portfolio. ITNL has 11 operational projects with 3,281 SALK and remaining 12 projects or 4341 SALK under development.  After a long dry patch ITNL has won two projects over the last couple of months. Recently ITNL acquired 49 % stake in Yu He Expressway in China through its 100 % subsidiary International Pte Ltd (IIPL) based in Singapore. The balance 51 % stake is retained by Chinese state owned enterprise CEG. The total cost of acquiring 49 % stake is USD 160 million which is funded through mix of borrowing of USD 140 mn at cost of debt of 5 % and Equity of US$ 20 mn. The acquisition is priced at 1x the Book Value. The length of the expressway is 58.72 km of 4 lanes with 30 years of concession period. The residual period of concession agreement is 20.5 years. The company expects 16 % equity Internal Rate of Return in the project. The benefits for ITNL from the acquisition include sustained revenue from toll/annuity, improvement in EBITDA margin, enhancement in ITNL’s experience and qualification, etc.

Outlook and Valuation:
Recent wins could restrict ITNL’s participation in new projects, Although ITNL can win further projects but it is believed that with ITNL already sitting on two projects which are yet to achieve financial closure they would be extremely selective in bidding for the third project. Structurally ITNL would digest the two wins the Kiratpur Ner chowk & Kharagpur Baleshwar worth Rs. 2,500 Cr. Unlike past where ITNL use to recognize significant chunk of margins upfront as consulting fee, a larger proportion of 75 % is now recognized more rationally over the entire construction phase which also means lower internal surplus to fund new projects. Highly sensitive to interest rate, 100 basis points correction in the risk free interest rate (0.50% is cut already and 0.50% more is expected) will leads to 26 % increase in fair value of ITNL which remains a key beneficiary of reduction in risk free rate of project financing. ITNL has the highest leverage in the road sectors making it highly interest rate sensitive. High financial leverage as suggested by consolidated debt: equity of 3.5 x makes ITNL the prime beneficiary in the correcting interest rate scenario. The valuation of ITNL’s road BOT portfolio comes at Rs. 185/share with Cost of Equity of 12 % ; operational projects at 13 %, 14 % for under construction project & 15 % for under development projects, the valuation of E&C business comes at Rs. 140/share with 6 x FY13E EBITDA and valuation of other subsidiaries comes at Rs. 30/share. Net debt works out to Rs-123/share at parent level. At the current market price of Rs. 190.85, the stock is trading at a PE of 9.26 x FY12E and 9.68 x FY13E respectively. The company can post Earnings per share (EPS) of Rs. 20.60 in FY12E and Rs. 19.70 in FY13E. One can buy ITNL with a target price of Rs. 232.00 for Medium to Long term investment and for the SHORT TERM PLAYERS it should be Rs. 200.00

SALES (Rs. Crs) 2,407.90 4,048.20 5,308.40 6,930.50
NET PROFIT (Rs. Crs) 353.60 457.90 400.20 382.10
EPS (Rs.) 18.20 23.60 20.60 19.70
PE (x) 11.70 9.00 10.30 10.80
P/BV (x) 2.50 1.80 1.80 1.50
EV/EBITDA (x) 8.60 7.80 9.80 9.80
ROE (%) 27.70 23.40 16.80 14.40

I would buy IL&FS TRANSPORTATION NETWORKS INDIA LTD with a price target of Rs. 232 for Medium to Long term and Rs. 200 for the Short term players. As I always say, I am a long term believer in markets & I do respect the markets and will keep a strict stop loss of 8 % or Rs. 175.58 on every purchase.


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