IRB Infrastructure reported a healthy performance in Q1FY27, with revenue (ex-other income) coming in at ~Rs21.4bn, beating our estimate by ~11%, primarily driven by higher contribution from BOT and InvIT segments. While reported revenue grew by a modest ~2% YoY owing to 21% decline in construction revenue, this was more than offset by robust growth in higher-margin BOT (up 14% YoY) and InvIT (up 81% YoY) income. Consequently, EBITDA margin (ex-other income) expanded by ~860bps YoY, aided by a richer business-mix, while PAT growth was further supported by lower finance cost following debt refinancing and continued deleveraging. We expect EBITDA margin to expand from ~52.1% in FY26 to ~55% by FY29, supported by sustained toll revenue growth, driven by healthy traffic momentum, portfolio expansion and periodic toll tariff revisions. The company also continues to execute its capital recycling strategy, having signed definitive agreements for monetisation of two BOT assets with an enterprise value of ~Rs46bn. With improving earnings quality, stronger balance sheet, disciplined capital recycling and robust BoT/ToT opportunity pipeline, we upgrade our rating on the stock to BUY with a revised SOTP-based TP of Rs29, valuing construction business at 15x FY28e EPS.

Structural Shift towards BOT & InvIT to Sustain Margin Expansion: Increasing contribution of high-margin BOT and InvIT businesses is driving structural improvement in earnings quality and profitability. Consolidated EBITDA margin (including other income) expanded to ~56.9% in Q1FY27 from ~47.5% in Q1FY26 and should remain supported, as BOT and InvIT income grows while construction revenue remains broadly stable at Rs42-43bn annually.

BoT/ToT Pipeline Provides Multi-Year Growth Runway: The NHAI has lined up 17 assets (~1,693 km) for monetisation through InvIT/ToT in FY27, while ToT Bundles 20-22 (~376km) and ~Rs450bn of live BoT tenders are under bidding. As India’s largest integrated toll road developer, IRB is well-placed to capitalise on this opportunity through its proven B.E.S.T. model.

Refinancing and Deleveraging Strengthen Balance Sheet: The company’s net debt fell to Rs107bn in Q1FY27 (0.51x Net D/E) from Rs118bn (0.58x), reflecting continued deleveraging. In Q1FY27, IRB Group refinanced Rs147bn debt, lowering borrowing cost by 65-160bps and generating annual interest saving of ~Rs2.1bn, supporting its target of becoming net debt free (standalone level) by 2030.

Outlook and Valuation – Strong PPP Opportunity with Improving Earnings Quality: We believe IRB is well-placed to benefit from India’s accelerating PPP road cycle, supported by improving earnings quality, debt rationalisation, disciplined asset recycling and a strong BoT/ToT opportunity pipeline. We upgrade our rating on the stock to BUY with an SOTP-based TP of Rs29 valuing construction segment at 15x of FY28e EPS. Key Risks: (a) Significant delay in inflows; and (b) traffic growth risks.