IRB reported better-than-expected PAT at Rs991mn, 40% YoY vs. our estimate of Rs909mn. Sales were in line at Rs4.9bn vs. our estimate of Rs4.86bn. EBIDTA margin in the EPC business continued to be higher at ~23.1% due to lower RM costs.

EPC business continues to see higher margins The EPC business recorded higher operating margin at ~23.1% (adj for other income), due to lower raw material cost as against prices prevailing at the time of bidding. The company benefited from the Surat-Dahisar, Jaipur-Deoli and Amritsar-Pathankot projects and expects higher margins to continue over the next 2-3 quarters.

We raise our earnings estimates We tweak our EPC margin forecasts for FY11 and FY12 to 20% and 18% respectively from 16% each earlier. Consequently, our earnings estimate for the construction business increased by 27.8% and 14.1% to Rs7.4 and Rs8.6; our consolidated earnings forecasts have increased by11.5% and 7.5% to Rs15.6 and Rs15.2 respectively.

Booked revenue from new projects IRB booked revenue from two new projects of Rs500mn in Q2, with Jaipur-Deoli contributing ~Rs300mn and Amritsar Pathankot ~Rs200mn. IRB recently started work on Amritsar-Talegaon project and will book revenue from next quarter onward. It already made equity investments of Rs1.4bn with debt component of Rs4-5bn.

VALUATION AND RECOMMENDATION We increase our SOTP-based target price by 6.6% to Rs296 from Rs282 on account of increase in earnings from the EPC business. We value the construction business at 13x FY12 earnings of Rs8.6 at Rs112, BOT project at Rs164 (adj. for time value) vs earlier Rs159, land at Rs10, and cash on books at Rs15. We have not factored in the Kolhapur Hotel and Sindhudurg Airport projects. We upgrade our recommendation from HOLD to ‘BUY’.