Buy IL&FS Transportation Networks - Sharekhan

IL&FS Transportation Networks
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs330
Current market price: Rs158

Acquisition is EPS accretive

Acquisition at P/BV of 1.1x

IL&FS Transportation Network Ltd (ITNL) through its subsidiary ITNL International Pvt Ltd (Singapore based) has acquired a 49% equity stake in the Chongqing Yuhe Expressway Co (Chongqing Yuhe), China for $160 million, valuing the asset at 1.1x price to book value (P/BV). The project had been transparently bid out with assistance from the World Bank and the Singapore Government which is what motivated ITNL to enter the bid race along with six other competitors (shortlisted). The deal has been funded via an equity contribution of $30 million through the parent company (ITNL) and a debt of $140 million. It is credible to note that ITNL managed to raise $140 million within 15 days which speaks about the company's strong parentage and management.

Project offers stable revenue with all risks mitigated

The stretch spans across 58kms, of which 27.1kms is tolled at five locations (towards various exits), accounting for nearly 60% of revenues for CY2011. For the remaining 31.6kms, the company would receive an assured subsidy of around $22 million (approximately 40% of the revenues for CY2011) from the Chongqing Municipality with a minimum 5% increment in annuity every year. ITNL has capped its risk by undertaking protection under concession agreement against any reduction in toll rates from the current applicable rates and from capacity augmentation obligations. Also the company would get indemnified for any reduction in assured subsidies and any increase in tax rate from 15% in the next ten years.

Benefits accruing from the project

Being an operational project, the gestation period is reduced significantly. Further the project offers stable revenue visibility with the base capped. It will also result in an improvement of the consolidated EBITDA margins as it is an operational project and enjoys a higher margin of approximately 85%; it will also help in maturing the portfolio faster. Further, the acquisition will increase ITNL's technical qualification for the National Highway Authority of India (NHAI) projects and may also open up avenues for participation in bids in joint ventures with the Chongqing Expressway Group (CEG) in China and elsewhere. In addition the project offers management fee linked to operations and maintenance (O&M), financing, technology sharing, new markets etc and could also provide O&M opportunities for Elsamex, its subsidiary.

Acquisition is EPS accretive, we maintain Buy

As per our estimates the deal works out to be earnings per share (EPS) accretive. It offers a 9% upside in FY2013, the first year of consolidation. However, in FY2012 the EPS will decline by 3% due to a higher interest burden on the $140 million raised to fund the acquisition. The value per share for the project works out to Rs4. However we do not revise our estimates and price target currently and will do so post Q3FY2012 results.

We like ITNL's strategy of inorganic growth and believe that given its strong parentage and scale of operations, the company stands to gain from the expected consolidation in the sector. ITNL had not won any project over the last one year on account of aggressive bidding taking place on the NHAI projects. It did not bid aggressively to increase its portfolio size which we believe will pay off in the long run. Thus it adopted the strategy of inorganic growth as many operational and distressed assets are on sale. Further this acquisition will help ITNL to expand its footage in China and also in other emerging geographies. At the current market price the stock is trading at 6.5x and 5.9x its FY2012E and FY2013E earnings respectively. Hence we maintain our Buy rating on the stock.

Source : Equity Bulls

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