Listing gains may or may not happen

IL&FS Transportation Networks Limited (ITNL) is tapping the capital markets with an IPO which closes on Monday the 15th of March. The price band is Rs 242-258 and the offer consists of a fresh issue and an offer for sale which together is valued at Rs 700 crs.

Business
ITNL is an established surface transportation infrastructure company and probably one of the largest private sector BOT road operators in India. ITNL is a developer, operator and facilitator of surface transportation infrastructure projects, taking them from conceptualisation through commissioning to operations and maintenance. ITNL has a pan India presence and the company currently has 9397 lane kms under development and management.

The opportunity and the requirement of infrastructure are both well known. The Indian economy has grown at over 6% since 2004 and it is widely accepted that inadequate infrastructure is the key impediment to growth. It is expected that infrastructure spend will grow to 9% of GDP by 2012 against 5% over 2002-2007. Currently National Highways account for 2% of roads, but they carry 40% of the traffic.

ITNL currently has 17 projects under various stages of development. The company has four verticals of operation or business. The first is road sector which has already been discussed. The second is urban transportation and under this there is a rapid metro rail project under execution in a consortium. ITNL is also executing Nagpur City bus service under ‘BOO’ or build own and operate method. The third vertical is leverage the ILFS parentage for development of airports and automatic multilevel parking and existing surface transportation.

The fourth vertical is international operations and the company acquired in 2008, 100% of a Spanish company Elsamex which is into maintenance of roads, buildings and petrol stations. Currently Elsamax maintains 21,000 lane kms in Latin America and Europe and 3100 petrol stations.

ITNL provides end to end solutions for all types of activities that it does. It makes SPV’s for each project, is able to leverage on the strong IL&FS brand and use if required its own balance sheet or that of its parent as well. It has a very strong parentage and investors which include people like LIC of India, Orix Corporation of Japan, HDFC India, and PSU banks like Central Bank of India and SBI and Abu Dhabi Investment Authority.

Objects of Issue

It may also be mentioned here that there is an offer for sale of 42.788 lac shares which would involve an amount of Rs 103 crs to 110 crs which would also form part of the gross issue proceeds. The pre-payment and re-payment of debt would again increase the leverage that the company would enjoy going forward.

Financials
The company had consolidated revenues of Rs 437.45 crs for the year ended March 2008, Rs 1332 crs for March 2009 and Rs 979.56 crs for the half year ended September 2009. The net profit after tax was Rs 93.26 crs for March 2008, Rs 27.88 crs for March 2009 and Rs 118.23 crs for the half year ended September 2009.
The year 2009 March was an aberration and the global slowdown hit almost all sectors and all companies. Things have recovered thereafter and the same has been noticed in the financials of this company as well.

Comparison
The best company that comes to mind for comparing with ITNL is IRB Infrastructure Developers Limited. The company follows a similar model of having SPV’s for each of its projects and consolidating the balance sheet at the holding company level. IRB has an order book of roughly Rs 9200 crs at the end of December 2009. It has earned a daily toll collection of Rs 2.5 crs per day in the third quarter of financial year 2009-2010. Its revenues for March 2009 were Rs 1021 crs and in the current year for nine months ending December 2009 were Rs 1241 crs. Its net profit after tax for the comparable periods was Rs 175 .84 crs last year and current year nine months Rs 251.39 crs. Its earnings per share last year was Rs 5.3 and for nine months ending December 2009 was Rs 7.3 and on annualised basis Rs 9.73.
On most parameters there is similarity between the two companies. Both are clearly dominating the space and are key players in their respective fields. ITNL has strong parentage and in the case of IRB it is the delivery that they have done over the last few years which makes all the difference.

Valuations
ITNL based on half yearly numbers of profit after tax of Rs 118.23 crs and a post issue capital of 19.61 cr shares at the lower price band of Rs 242 would have an EPS of Rs 6.02. The equity at the higher price band of Rs 258 would be 19.43 cr shares and the EPS would be Rs 6.08. On an annualised basis the price earnings multiple or PE multiple would be 20.20 to 21.22. the second half is expected to be better for the company and if we were to presume that the company would earn 1.2 times its first half earnings in the second half of the year the EPs would improve from 12.04 to Rs 13.25 at the lower end of the price band and to Rs 13.38 at the upper end of the price band. In this case the PE would then become between 18.26 times at the lower end and 19.28 times at the upper end of the price band.

Conclusion 
This business is all about size. ITNL has it and also has the balance sheet to deliver and execute its orders in hand and future opportunities that would come its way. There is plenty of competition and IRB is a fair competition in many ways. Business is plenty and all who perform and deliver will prosper. The future is bright for the sector and the company. Expecting immediate gains may or may not materialise. Invest only for the medium term as there may not be substantial gains on listing.

Sebi disclaimer: – I intend to subscribe to the above issue