HDFC Securities Institutional Research reports India’s first Infrastructure Investment Trust launched by IRB
Incorporated in the year 1998, IRB Infrastructure Developers Ltd is India’s leading and one of the largest private roads and highways infrastructure developers in build-operate-transfer (BOT) space. The company carries out engineering, procurement, construction (EPC) as well as operations and maintenance activities in-house.
The core strength of IRB lies in its ability to execute BOT road and highway projects, including sections of the Golden Quadrilateral and the national highways. Mumbai-based, IRB developed India’s first ever BOT project: Thane-Bhivandi bypass and has one of the largest BOT portfolios including both operational projects and projects under construction in the country with a total length of around 12000 lane kilometers. At present, under the BOT division, IRB is operating and maintaining highways with length of more than 8000 lane kms across India.
IRB’s performance for the first quarter of 2017 has been strong and robust. Outperforming the estimates, the company clocked growth for sales, operating margin and profit after tax at 30 per cent, 16.3 per cent and 10.9 per cent, respectively. The decline in interest and depreciation of 13 and 17.7 per cent, respectively led to growth of 58.1 per cent year on year profit before tax (PBT).
For the quarter ended in June, IRB’s consolidated gross debt stands at Rs 13,470 crore and net debt is Rs 11,170 crore. Despite the additional funding net debt-to-equity ratio reduced to 2.1:1 as compared to 2.87:1 in the end of fiscal 2017. The growth of 30.8 per cent on year on year basis in APAT is led by higher tax provision on the expiry of benefits provided under the Section 80-IA of the Income tax and the losses in BOT.
On the short-term, the competition intensity in BOTs segment will remain low and improvement in balance sheet will lead to further re-rating. Additionally, there will be significant growth in traffic across projects from the upcoming third quarter of 2018 on low base.
IRB’s fund-raising tool: InvIT
During May 2017, the road infra-major launched and listed India’s first ever Infrastructure Investment Trust (InvIT). The company raised Rs 5,035 crore through an initial public offering (IPO) of its InvIT. The company shall use about two-thirds, or up to Rs 3,300 crore of the funds raised to repay the underlying debt associated and the balance will go the parent and sponsor IRB infrastructure developer.
An InvIT is mutual fund like institution that owns and manages income-generating infrastructure projects. It pools small sums of money from large number of investors and allows them to directly invest in infrastructure projects such as roads and power, and returns a portion of the income after deducting the expenses to the investors.
InvITs raise funds from a large number of investors and directly invest in infrastructure projects or through a special purpose vehicle. This long-term investment instrument aids the developers of infrastructure assets to monetise their assets by pooling multiple projects under a single entity within a trust structure.
The two forms of InvITs that have been allowed are: one, in which investments are made in completed and revenue generation infrastructure projects through the route of public offer of its units and the other type has the flexibility to invest in completed or under-construction projects and take the route of private placement of units. It is mandatory for both the categories to be listed on the stock exchange.
The advantage of InvIT – given the challenging phase of infrastructure, InvITs provide a suitable structure for financing or refinancing of infrastructure projects in the country. InvITs are designed to attract low-cost, long term capital and the underlying focus is to reduce the funding pressure on the banking system as well as generating fresh equity capital for infrastructure projects.
The InvIT trust for IRB constitutes six operational road assets valued at Rs 5,920 crore. The trust has 100 per cent ownership of these six completed toll-roads assets aggregating to approx. 4000 lane kms across the states of Maharashtra, Gujarat, Rajasthan, Karnataka and Tamil Nadu.
The six project entities that form part of the initial portfolio of the InvIT have been transferred from the BOT assets. The projects comprises of IDAA Infrastructure Pvt Ltd, IRB Surat-Dahisar Tollway Private Ltd, IRB Talegaon Amravati Tollway Pvt Ltd, IRB Jaipur Deoli Tollway Pvt Ltd, IRB Tumkur Chitradurga Tollway Pvt Ltd and M.V.R Infrastructure and Tollways Pvt Ltd.
Post-effects of InvIT launch
IRB has received Rs 1,700 crore as consideration from the InvIT and IRB continues to hold 15 per cent of the unit capital of the InvIT.
After the transfer of six projects to IRB InvIT, the company has substantially reduced its debt-to-equity to 1.8:1 as against 3:1 before the launch of InvIT. This would lead to up gradation of credit rating for the Mumbai based developer.
Moreover, IRB’s total income and EBITDA is expected to remain at present level while profit after tax (PAT) and net worth would improve by savings on the cost of debt and steady income from the InvIT. Other income includes profit of Rs 23.1 crore on account of transfer of the six BOT assets to InvIT.
On the EPC front
During the first quarter, the EPC business of IRB witnessed 45 per cent revenue growth on year on year basis. This robust growth is led by strong execution in five under construction projects.
EPC business’s revenue share has increased by 12 per cent leading to 73 per cent. This change in revenue mix towards EPC division led to shrinking of operating margins by 600 basis points (bps) to 45 per cent year on year basis. The EPC business stood firm with an order book at Rs 8,910 crore at the end of June quarter or 2.5 times its fiscal 2017 EPC revenue providing strong growth visibility. One of the key drivers of growth is the construction business of IRB with EPC revenue expected to grow at 10 to 15 per cent during fiscal 2018.
The projects that are yet to start construction, 61 per cent of the order book is pending for financial closure and appointment of data; this may slowdown the execution during the next two quarters.
The operating margin for EPC business have been lower at 30 per cent where as for BOT assets operating margin is at 85 per cent.
The construction (EPC) business on standalone basis is valued at Rs 125 per share or 4 times its expected earnings of enterprise value-to-EBITDA. This is 50 per cent discount to peers as IRB largely executes captive BOT orders and in an event of slowdown in BOT project awards, IRB may get negatively impacted.
Decline in revenue for BOT business
BOT business encompasses for 27 per cent of the revenue; owing to the re-assignment to six BOT assets under the recently listed InvIT, the BOT division witnessed 16.5 per cent decline in revenues during the quarter. Growth in the EPC business neutralised the impact of decline in revenues from BOT division.
On the discounted cash flow (DCF) basis and using 12.5 to 14 per cent of weighted average cost of capital (WACC), BOT projects are valued at Rs 128 per share. BOT project pipeline remains strong.
The road-developer’s projects, Ahmedabad-Vadodara and Amritsar-Pathankot witnessed 4.7 per cent and 8.9 per cent year on year growth, inclusive of the tariff hike. Its Mumbai-Pune e-way too posted robust growth of 21.2 per cent year on year, led by tariff hike.
The major pain point for Ahmedabad BOT is Rs 800 crore sub debt from IRB, towards cash shortfall. IRB is facing loss in traffic with competing stretch being upgraded by Gujarat State. The company has raised the issue with National Highways Authority of India (NHAI) and wants the authority to take up the issue under ‘State Support Agreement’. The resolution for same is expected over next few quarters.
On the other hand, IRB’s second-largest tollway, Ahmedabad –Vadodara project is facing traffic diversion to completing state highway and IRB has sought relief from NHAI. Consequently, the company has filed a claim with government agencies for Rs 170 crore as compensation from Dec-15 onwards and has asked NHAI to take up issue with Gujarat state government.
Toll collection and GST
Except the InvIT assets, IRB has reported toll collection for all of its projects. The toll revenue of IRB has been impacted by GST resulting in overall traffic growth of 4 per cent for the portfolio excluding the InvIT assets. The impact of GST on IRB Infrastructure developer has reflected from the second half of the month of June 2018 and may persist till the second quarter of fiscal 2018, resulting in muted toll growth.
On account of 17 per cent tariff hike on the 90-km Mumbai-Pune expressway and 4.5 per cent hike in Ahmedabad-Vadodara and Amritsar-Pathankot project, the toll collection registered growth of 14.4 per cent on year on year basis.