Multi Baggers

ILandFS Transportation Networks

Company Overview:

ILandFS Transportation Networks Limited (ITNL) was incorporated in the year 2000 as a wholly owned subsidiary of Infrastructure Leasing and Financial Services Limited (ILandFS), which has experience of 25 years in infrastructure development and financing segment in India and is a pioneer in the road BOT space. Now ITNL is the largest BOT Road Asset owner in India in terms of length of road in its portfolio. It acts as developer, operator and facilitator of surface transportation infrastructure projects, taking projects from conceptualization through commissioning to operations and maintenance. Besides the roads space, it is also active in urban infrastructure, border check post projects and the metro rail space. ITNL entered into international business in March, 2008 through the acquisition of Elsamex S.A., a Spanish group involved in providing maintenance services primarily for highways and roads in many European and Latin American countries.

Financial Analysis:

Robust Growth: In Q3FY14, ITNL's net consolidated revenue was Rs. 19659mn, which registered growth of 11.4 percent YoY and 46.6 percent QoQ on the back of faster execution of the under construction projects, increase in operating and maintenance income and higher toll income.

Lower Margins: EBITDA grew by 8.4 percent YoY and declined sequentially by 2.3 percent to Rs. 4877mn. EBITDA margin was 24.8 percent as compared to 25.5 percent in Q3FY13 and 37.2 percent in Q2FY14. While PAT dropped by 6.6 percent YoY and 9.4 percent QoQ to Rs 1098mn. The contraction in the margins was due to rise in construction expenses and employee cost.

Order book: During the quarter, the order book grew by 22 percent YoY to about Rs. 120bn and book-to-sales ratio was 1.8x

Profitability: Return on Equity (ROE) was 16.1 percent for FY13.

Rights Issue: ITNL has made final formal announcement about the rights issue. The company plans to raise Rs. 525Crs by issuing fresh shares at R100/share. The issue, if fully subscribed, will result in about 27 percent dilution. The company has already raised INR7.5bn through issue of preference shares. Also promoters can increase their share holding to statutory limit of 75 percent by subscribing 84 percent of the rights issue.
The equity to debt ratio at 3.9x as of March 31, 2013 and according to the news reports the funds raised from the right s issue will be used mainly for retiring debt/meeting equity commitment for BOT projects.

Likely Impact: The issue will lead to interest cost savings and deleverage the balance sheet but the equity dilution will result in lower EPS for future periods.

Positives:

Market leader in the BOT space: With more than 13,100 lane km in its portfolio comprised and 25 road projects, ITNL is a market leader in the transportation infrastructure sector.

Diversified project portfolio: Its project portfolio which is a combination of toll and annuity based projects, has project presence in 17 states of India and thus geographically diversified. Moreover the portfolio comprised of commissioning and commissioned projects that are at different stages of life, which offers further diversification benefit resulting in lower business risk.

Less risky revenue stream: ITNL's BOT project portfolio is blend of projects with different revenue streams as some projects' revenues are based on toll collections while others' revenues are annuity based, thus both of the revenue models, together, make the total revenue stream less risky.

Risks

1. Being part of infrastructure sector with high leverage, ITNL face the risk of high interest rates.

2. Execution delays are part of the business due to delays in approvals on various issues like environment clearance etc.

3. Regulatory risks

Valuations

Order book of Rs. 120bn and book to sales ratio of 1.8x give visibility for potential revenue of next few years. Earnings per share are likely to be lower due to equity dilution and lower margins but expected to improve in FY15 after a dip in FY14. We recommend the stock a buy at CMP of Rs 117 with a target price of Rs. 180 valuing the stock at 19.3x FY14E EPS and 8.7x FY15E EPS.