IL&FS Transportation Networks (ITNL) consolidated revenues for 2QFY2016
were up 24.7% yoy to Rs1,872cr, reflecting a 38.7% increase in Construction
business income to Rs1,223cr. During the quarter, ITNL’s revenues benefitted from
Rs135.6cr of compensation claim. On adjusting for the same, adj. revenues were
up 15.6% yoy to Rs1,736cr. Higher contribution from the low margin Construction
business led to a 578bp yoy decline in EBITDA margin to 35.2%. Despite a 7.1%
yoy EBITDA growth, higher interest and depreciation expenses led to a 30.1%
decline in PAT to Rs69cr. On adjusting for compensation claims, ITNL would have
reported adj. losses of Rs66cr.
ITNL reported an order backlog of Rs15,023cr at 2QFY2016-end, which gives
revenue visibility for the construction segment for over the next 36 months.
The consolidated debt stood at Rs26,213cr, reflecting a D/E ratio of 4.5x (vs. D/E
ratio of 3.7x at 2QFY2015-end, when debt stood at Rs21,177cr).
ITNL’s incremental equity requirement towards BOT projects for the next 2-3
years is at ~Rs495cr. 8 of the ongoing BOT projects are expected to report Date
of Completion (CoD) in the next 12 months, in-turn contributing to FY2016-17E
Toll/ Annuity Income.
Outlook and Valuation: Despite ITNL’s robust order backlog and strong
execution capabilities, we are concerned about its higher consol. D/E ratio, which
is eating into profits. Even though ITNL successfully raised Rs740cr through the
rights issue recently, we sense this would not be enough to address the Balance
sheet concerns, and we believe more needs to be done. The Management
continues to pursue strategic initiatives which should lead to debt reduction;
however, we believe containing debt within comfortable levels would take more
time than is being anticipated by the Management. This could possibly lead to
continued pressure on the stock. To capture high leverage and delays in strategic
initiatives, we revise down our estimates. We now expect ITNL to report 18.3%
top-line and negative 17.6% bottom-line (owing to higher interest expenses)
CAGR during FY2015-17E. Using SoTP based valuation methodology, we arrive
at FY2017E based price target of Rs97. Given the limited upside potential from
the current levels, we maintain our Neutral rating on the stock.

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