IL&FS Transportation Networks (ITNL) in 1QFY2017 has not reported consol. numbers as it is in process of migrating to Ind-AS. Despite strong execution, sharp decline in yoy Fee and O&M income led ITNL report 3.6% increase in standalone revenues. High contribution of low margin construction business was seen during in 1QFY2017 (construction/ material expenses reported 19.5/11% yoy increase). As a result, yoy EBITDA margins contracted 302bps to 3.2%. Despite 47% yoy EBITDA decline, reported PAT turned-around on yoy basis to `18cr profit in 1QFY2017, owing to strong other income (up 75.9% yoy to `344cr). Other income benefitted from `102cr of profit booked from 15% stake sale in Gujarat Road & Infrastructure Company Ltd. (GRICL).
Outlook and Valuation: In recent time we have seen management offloading stake in 2 operational BOT projects. ITNL management announced that they intend to offload 3-4 BOT projects, worth `5,000cr in to an Infrastructure Investment Trust (InvIT). As per a recent board meeting outcome, ITNL would issue `5,000cr of Non-Convertible Debentures (NCDs), where current 12% debt cost would be re-financed sub-10% levels, thereby saving ~300bps on interest expenses level. All these initiatives would de-leverage Balance sheet and improve the profitability. We earlier upgraded ITNL to BUY with price target of `93, in anticipation of lowering of consol. BS stress and likely improvement in interest coverage ratio. Since our BUY recommendation, ITNL stock has run-up and our price target is attained. In absence of ITNL’s consolidated financials, we downgrade to NEUTRAL view on the stock.