IL&FS Transportation Networks Ltd. share price target

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.

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, ITNLs 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). ITNLs 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 ITNLs robust order backlog and strong execution capabilities,...