IL&FS Transportation Networks / ITNL: ShareKhan Research Report

ShareKhan are bullish on IL&FS Transportation Networks / ITNL and have recommended a BUY with the following investment rationale:

Largest road BOT player with pan-India presence: IL&FS Transportation Networks / ITNL is India’s largest player in the BOT road segment with 10,269 lane km in various stages of development, construction or operation. It has a pan-India presence and a diverse project portfolio consisting of 23 road projects, bus transportation and a metro rail project. Further, the fair mix of annuity and toll projects in its portfolio and the geographical diversification across 12 states reduces the risk to a large extent and provides comfort. In addition, with the acquisition of Elsamex SA, it has further spread its operations in the overseas markets (Spain and other countries).

Ability to scale up the portfolio faster: IL&FS Transportation Networks / ITNL is present across the value chain except the civil construction services which it outsources to the local contractors.

This helps IL&FS Transportation Networks / ITNL to handle a large number of projects at a time. Given its strong pedigree and the financial expertise of the group, it is relatively easier to not only achieve financial closure but also structure capital in the most fruitful manner.

EPC order backlog provides growth visibility: IL&FS Transportation Networks / ITNL has 11 projects in the construction/development stage. Of these six have commenced construction while the balance five projects are expected to achieve financial closure in the next few months. The strong captive order backlog and the equally healthy order pipeline are expected to result in a 68% compounded annual growth rate (CAGR) in the EPC revenues over the next two years. Overall, we expect the sales and the earnings to grow at a CAGR of 45.5% and 30% respectively over the next two years.

Potential upside of 25%, recommend Buy: IL&FS Transportation Networks / ITNL is well equipped to capitalise on the huge and growing opportunity in the road infrastructure sector due to its established track record in operating BOT road projects, its execution capabilities and the strong support from IL&FS. We have valued its BOT portfolio on a DCF basis and arrived at a value of Rs156 per share; its EPC business has been valued at Rs 274, 8.5x its FY2012 earnings estimate (at a 40% discount to the other large players, a 30% discount to IRB) and its share of investment in airport and metro projects has been valued at Rs4.5 per share. We initiate coverage on the stock with a Buy recommendation. Our SOTP price target for the stock is Rs 452 (provides a 25% upside from the current market level). At the current market price the stock trades at a P/E of 12.2x its FY2012E earnings per share (EPS).

In terms of the financials, IL&FS Transportation Networks / ITNL has displayed a stupendous growth in its revenue and bottom line (CAGR of 133% and 89% respectively) over FY2007-10. Going ahead, we believe with the increase in the toll/annuity income and the new project execution the revenue and bottom line is expected to grow at a CAGR of 46% and 30% respectively over FY2010-12. Thus, we initiate coverage on IL&FS Transportation Networks / ITNL stock with a Buy recommendation. Our SOTP price target of Rs 452 provides a 25% upside from the current market level. At the current market price the IL&FS Transportation Networks / ITNL stock trades at a P/E of 12.2x its FY2012E earnings