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Monday, April 18, 2011

Stock Report - IL&FS Transportation Networks

Here is stock report on another mid cap stock to buy that I felt could be a good mid cap stock choice for long term investment portfolio. IL&FS Transportation Networks Ltd. (ITNL) gives you an opportunity to ride on infrastructure growth story in India.

IL&FS Transportation Networks Ltd. (ITNL) is a surface transportation infrastructure company, and is one of the largest private sector BOT road operators in India. ITNL develops, operates, maintains and facilitates road transportation infrastructure projects. ITNL was incorporated in 2000 by IL&FS, an infrastructure development and finance company to consolidate their existing road infrastructure projects and to pursue various new project initiatives in the area of surface transportation infrastructure.

ITNL has order mix of 50% BOT and 50% annuity based project mix. 70% of their orders come from NHAI so they are not much dependent on the state highways or state contracts where one could see a lot of difficulties and lower margin because of the stiff competition by the local players.

With high concentration from Indian government on building road network infrastructure is one of the most important factor in Indian growth story. IL & FS Transportation is definitely going to be a big beneficiary of these road infrastructure projects.

According to the ITNL management, the good thing for ITNL is that it has strong order pipeline for execution till FY'14. And for this reason company is not bidding very aggressively by compromising on margins which some other players in industry are doing right now to have the orders booked in pipeline.

The management has indicated for existing projects that margins will not be compromised since there are sufficient arrangements built in the projects to accommodate for the increase in raw materials and other costs.

By FY 13-14, it is expected that many toll/annuity projects would be operational and after that size of balance sheet, interest costs, etc will not be an issue. And so the company is not in a hurry to participate in irrational competition to bag orders at lower margins. Some state governments like Karnataka, Madhya Pradesh are coming up well and company expects some BOT orders in CY'11 from them.

Stock valuation
IL & FS Transportation has Rs 12000 crore of the projects under implementation. Out of these some of the road projects are operational.

As per their March 2010 annual financial results, they had Rs 845.48 crores sales turnover with net profit of Rs 324.73 crores. Their OPM% (operating profit margin) was at 76 and NPM% (net profit margin) at 38.41 which is very good for business. EPS was Rs 18.93.

Till Dec.2010 for 9 months, sales was Rs 855.68 crores with Net profit of Rs 215.09 crores. Their EPS stands at 11.07 for these 9 months. This is as I have seen on BSEINDIA.COM. Other analysts on TV have talked about numbers that I could not find.

Looks like ITNL would post annual EPS around Rs 15-16. With this expected EPS for FY11, at current stock price of Rs 237, the stock trades at PE ratio of ~16. This is reasonable but not cheap. If you look at the order book in pipeline for next 3-4 years and earnings visibility with good growth prospects due to bright future of infrastructure sector in India, one may buy stocks of ITNL in investment portfolio from 3 – 4 years perspectives. It can fetch you good investment returns Y-O-Y.

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