Detailed Rationale

CRISIL Ratings has revised its rating outlook on the long-term bank facilities of IRB Infrastructure Developers Ltd (IRBIDL) to 'Positive' from 'Stable' while reaffirming the rating at ‘CRISIL A’. The short term rating has been reaffirmed at ‘CRISIL A1'.

 

The revision in outlook follows expectation of substantial improvement in IRBIDL’s financial risk profile post recent announcement of equity infusion up to Rs 5,347 crore by GIC (Singapore’s sovereign wealth fund) and Cintra (subsidiary of Ferrovial, S.A – a Spanish multinational infrastructure company).  Of the Rs 5,347 crore, about Rs 3,250 crore will be utilized to prepay IRBIDL’s long term debt. Debt-to-EBITDA (earnings before interest, tax, depreciation and amortisation) which had peaked to over 6 times as on March 31, 2021 is expected to reduce to below 2.5 times post deal closure. Further, the balance funds will be available as growth capital, supporting future funding requirements of new projects without putting pressure on the company’s balance sheet. IRBIDL’s promoter will continue to have management control and will remain the single largest shareholder. Funds from the deal are expected by December 2021. 

 

The company had orders of around Rs 7,600 crore as of September 2021 (including all existing EPC orders and O&M orders to be executed over the next 1.5 years). While current order book-to-turnover (of fiscal 2021) ratio is 1.9 times,  the same stands lower at 1.4 times of fiscal 2020 revenue, as revenue in fiscal 2021 was impacted due to the pandemic and encumbrances on land. The order book was impacted due to cancellation of two large orders in last two fiscals and lower than expected order inflows. However, the order book position is expected to improve over the near term with substantial orders being announced in the country on the BOT-Toll model which is IRBIDL’s main area of focus. Near term build-up of IRBIDL’s order book is a key monitorable. 

 

The ratings continue to reflect the company’s established track record in the roads and highways sector, backed by prudent project selection and strong execution capabilities, and moderate working capital management. The ratings also factor in its ability to fund ongoing projects by unlocking capital through its infrastructure investment trust (InvIT) platforms. These strengths are partially offset by a moderate order book, modest though improving financial risk profile, exposure to under- construction project special-purpose vehicles (SPVs), and susceptibility to intense competition and cyclicality in the roads and highways sector.

Analytical Approach

CRISIL Ratings has fully consolidated the business and financial risk profiles of IRBIDL with that of Modern Road Makers Pvt Ltd (MRMPL), and moderately consolidated with that of the SPVs. MRMPL is the engineering, procurement and construction (EPC) arm of the group and a wholly owned subsidiary of IRBIDL. Furthermore, IRBIDL has extended an unconditional and irrevocable corporate guarantee for the bank facilities availed by MRMPL. IRBIDL has outstanding corporate guarantees for some of its operational and under-construction projects. CRISIL Ratings expects these corporate guarantees to fall-off once the minimum debt service coverage ratios are met or on refinancing of the debt in these projects as seen with other projects in the past.

 

Cost overrun in five of the nine assets that have been transferred to the private InvIT (IRB Infrastructure Trust) resulted in receivables of Rs 3,300 crore as on March 31, 2021. Recovery of the receivables will be through settlement of claims with National Highways Authority of India (NHAI; ‘CRISIL AAA/Stable’), which management is confident of recovering over the course of time. As part of the analytical treatment, CRISIL Ratings has adjusted net worth to the extent of 50% of the receivables.

 

Unsecured loans from the subsidiaries have been treated as neither debt nor equity as these loans are subordinate to external debt and repayments are minimal. While some of these loans carry interest in order to reduce tax expense at the group level, the management has confirmed that there will be nil net outgo from IRBIDL towards servicing of loans (payment towards interest will be offset against fresh unsecured loans extended to the company by its subsidiaries).

 

Please refer Annexure - List of entities consolidated, which captures the list of entities considered and their analytical treatment of consolidation

Key Rating Drivers & Detailed Description

Strengths:

Established track record in the roads and highways sector

Established in 1998, IRBIDL is one of the largest players in the domestic roads and highways sector. Over two decades of experience has helped the company establish strong relationships with its stakeholders, which include NHAI, Ministry of Road Transport and Highways (MoRTH) and state government departments.

 

The company was one of the early entrants in the build-operate-transfer (BOT) segment of the road sector, and is one of the largest BOT players in India. It has 13,095 lane km of projects in operational (includes projects transferred to InvITs) or under-development stages. Its BOT portfolio comprises 16 projects (12 BOT-toll and 4 hybrid annuity model [HAM] projects) and one toll-operate-transfer (TOT – Mumbai Pune Expressway) project. The BOT segment includes two operational toll projects, nine toll projects transferred to IRB Infrastructure Trust (private InvIT; 7 operational and 2 under-construction projects wherein tolling has commenced as these are four- to six-lane projects), one under-construction BOT-toll (financial closure is underway) and four under-construction HAM projects (financial closure is underway for two projects). The company also has operations and maintenance (O&M) contracts for the nine projects transferred to private InvIT and seven projects under its public InvIT (IRB InvIT Fund -  where it holds 15.97% stake) as  project manager.

 

IRBIDL holds about 20% share in India’s Golden Quadrilateral. A strong in-house EPC division managed by MRMPL undertakes project implementation for all the BOT/HAM road projects. Prudent project selection and strong execution capabilities help the company maintain strong operating margin of over 25% per annum.

 

Moderate working capital management 

Despite inherently large working capital requirement in the roads and highways sector, IRBIDL’s working capital cycle is supported by moderate inventory and receivables. Gross current assets (net of cash) stood at 124 days as on March 31, 2021. The company executes only BOT/HAM projects for its SPVs, and hence, all the inventory and receivables are towards or from its SPVs, helping maintain its working capital cycle.

 

InvIT platforms to support capital unlocking

The company launched its public InvIT platform-IRB InvIT Fund in 2017, and transferred seven of its operational assets which helped unlock capital. IRBIDL received Rs 2,200 crore of capital from proceeds of the InvIT, post repayment of debt, helping the company fund equity requirement for the ongoing and newly awarded projects.

 

Furthermore, private InvIT set up with GIC affiliates (GIC) in fiscal 2020 helped the company reduce its equity requirement in the under-construction projects. As part of the deal, GIC is committed to bring in Rs 1,400 crore for meeting equity requirement for under-construction projects, of which around Rs 1,190 crore has been received till September 2021. The remaining will come in as per the progress of construction. Any cost overrun in these projects will be funded as per arrangement under Private InvIT.  Additionally, the deal enabled deleveraging of the underlying SPVs through infusion of Rs 3,000 crore from GIC. The InvIT structure helps to upstream surplus cash flow to the sponsors from the beginning of operations, providing flexibility in managing the investment requirement. Moreover, the company has the flexibility to transfer projects to public/private InvITs, which helps unlock capital.

 

Also, IRBIDL and GIC plan to explore BOT opportunities in India together through this platform. The BOT-toll project awarded to IRBIDL in West Bengal will be transferred to the private InvIT, reducing investment required from IRBIDL by 49%. This platform provides financial flexibility to the company while bidding for BOT projects.

 

Weaknesses:

Moderate order book position

The company had orders of around Rs 7,600 crore as of September 2021 (including all existing EPC orders and O&M orders to be executed over the next 1.5 years). While current order book-to-turnover (of fiscal 2021) ratio is 1.9 times,  the same stands lower at 1.4 times of fiscal 2020 revenue, as revenue in fiscal 2021 was impacted due to the pandemic and encumbrances on land. The order book was impacted due to cancellation of two large orders in last two fiscals and lower than expected order inflows. The company however has secured three orders from NHAI since March 2021.

 

Two HAM projects with cumulative bid project cost of Rs 3,465 crore were cancelled in November 2019 due to non-availability of land. As a result, the current order book is concentrated around four large projects; slowdown in any of these projects can severely impact the company’s performance. However, IRBIDL is expected to secure new orders over the near term to sustain its revenues for the next 2-3 years. Near term build-up of the order book is a rating sensitivity factor.

 

Modest financial risk profile, expected to improve post closure of equity deal; large exposure to project SPVs

On account of the pandemic, construction activity at company’s project sites witnessed slowdown largely because of shortage of manpower. Issues around encumbrances on land could not be resolved in a timely manner and also impacted construction revenue. In fiscal 2021, revenue de-grew by 28% while operating margin was stable over 26% on account of higher proportion of O&M revenue (which command higher margin). Accrual (excluding dividend outgo) reduced from Rs 905 crore in fiscal 2020 to Rs 354 crore in fiscal 2021. Execution however improved in the current fiscal with revenues of Rs 2,280 crore generated in the first 6 months against Rs 3,936 crore generated in the full fiscal 2021.

 

Increase in debt weakened the financial risk profile. Debt of Rs 3,457 crore as of March 2020 increased significantly to around Rs 7,000 crore by March 2021 (while cash increased from Rs 1,420 crore to Rs 2,253 crore during the same period) owing to high funding requirement for projects (especially for the Mumbai-Pune Expressway project) and incremental working capital. Debt levels have continued to remain elevated through September 2021. The debt-to-EBITDA ratio increased to over 6.7 times as on March 31, 2021, from 2.3 times as on March 31, 2020. The ratio has increased due to higher debt as well as lower EBITDA as a result of lower operating performance in fiscal 2021 due to the pandemic.

 

Debt is however expected to reduce substantially in the current fiscal, following equity infusion by GIC and Cintra. While up to Rs 5,347 crore is the estimated inflow to IRBIDL, this amount can be lower at around Rs 4,300 crore in case infusion by both the parties cannot be completed simultaneously (inflows in this scenario will be lower so that neither parties will hold more than 24.9% stake in IRBIDL). Nevertheless, even with inflows of Rs 4,300 crore, financial profile of IRBIDL will improve substantially. About Rs 3,250 crore of the inflows will be utilized to prepay IRBIDL’s long term debt. Significant improvement in the capital structure following reduction of debt is a key monitorable and a near term rating sensitivity factor.

 

The company has made large investments in its project SPVs. Its total exposure (in the form of equity investment/unsecured loans) is larger than its net worth, and is likely to remain high given the intrinsic holding company structure and large investment requirement. Loans from surpluses of operational SPVs of Rs 2,906 crore as on September 30, 2021 (Rs 2,863 crore as on March 31, 2021) mitigate part of the investment exposure. Although the company undertook HAM projects in 2018 (where the equity requirement is lower than for BOT projects), its focus is on building a BOT portfolio, which will keep equity commitment high. However, a substantial part of the incremental equity requirements can be funded through the expected inflows from the preferential equity allotment. Further, possible joint participation by GIC in new projects (which will be evaluated on a project to project basis) may bring down the funding requirements.

 

Receivables of over Rs 3,300 crore as on March 31, 2021, from projects transferred to the private InvIT will be recovered through settlement of claims with NHAI. Realisation of these claims will be a key monitorable.

 

Furthermore, one of the BOT project SPVs, IRB Ahmedabad Vadodara Super Express Tollway Pvt Ltd, has been facing stabilisation issues on account of traffic diversion to a competing stretch. The SPV has filed claims, but final resolution is awaited since last two years. Given the non-receipt of resolution, the SPV petitioned for relief on deferred premium payment in the Bombay High Court in March 2019 and received an order in its favour conferring protection from contingency of default in premium payment until July 2019. In August 2019, the petition moved to Delhi High Court and in October 2019, the SPV received an extension for relief until arbitration proceedings are concluded. The arbitral proceedings began in December 2020, and are expected to be completed in the next 6-9 months. A favourable outcome reducing premium payments is critical as the project will not be able to support the original premium payments. However, if cash flow is insufficient to make premium payments, the same will be accrued and paid post completion of debt servicing (as the project has a long tail period post receipt of extension in concession period). Hence, IRBIDL will not extend any support towards this project. Moreover, corporate guarantee extended by IRBIDL towards this SPV has fallen off post the SPV reaching threshold debt service coverage ratio of 1.15 times. Any change in this understanding is a rating sensitivity factor.

 

Susceptibility to intense competition and cyclicality in the roads and highways sector

IRBIDL’s outstanding orders are almost entirely from the roads and highways segment. This exposes it to intense competition and sectoral concentration risk. Although the company diversified into the HAM segment in 2018 from a pure-play BOT player, its ability to execute orders, grow revenue, and sustain profitability is susceptible to competition in the sector, changes in government regulations and economic conditions. For instance, subdued awarding of projects by NHAI in fiscals 2019 and 2020 and termination of two HAM projects in November 2019 weakened the order book.

 

Competition in the segment may intensify further due to the recent relaxation in bidding norms by NHAI and MoRTH. However, given IRBIDL’s continued focus in the BOT-toll space where completion is limited, the operating margin is expected to remain stable over the medium term.

Liquidity: Adequate

Total fund based facility of Rs 1,930 crore (including the overdraft (OD) facility of Rs 1300 crore backed by fixed deposits) was utilised to an extent of 78% as on October 31, 2021. Cash and equivalent stood at Rs 2,148 crore as on September 30, 2021, of which unencumbered cash stood at around Rs 620 crore (and Rs 1,300 crore cash is earmarked for the overdraft facility). Furthermore, the company holds 15.97% unencumbered stake in the public InvIT (the stake is valued at Rs 550 crore as on September 30, 2021), supporting liquidity.

 

The company has a strong track record of refinancing loans, which will continue to support liquidity. In the last quarter of fiscal 2021, the company raised overseas bonds of Rs 2,184 crore with nil repayments for 7 years and a put option at the end of 3.5 years. Partial proceeds of these bonds were utilised to refinance debt maturing over the next 1-2 years. As a result, maturing debt obligation for fiscal 2022 reduced to around Rs 300 crore from over Rs 880 crore prior to the refinancing. Moreover, the company plans on prepaying its long term debt (other than the overseas bonds) with the proceeds from the upcoming equity infusion which will result in near nil maturing debt obligation till fiscal 2025 thereby enhancing liquidity.

Outlook: Positive

IRBIDL will continue to benefit from its healthy business risk profile, supported by an established track record in the roads and highways sector and strong execution capabilities. Financial risk profile is expected to improve substantially over the near term post completion of the equity infusion plans.

Rating Sensitivity factors

Upward factors:

• Healthy build-up of the order book improving revenue visibility over the medium term
• Improvement in capital structure with debt-to-EBITDA ratio below 2.5 times

 

Downward factors:

• No significant order inflows in the near term
• No significant improvement in capital structure with debt-to-EBITDA ratio remaining over 4 times 
• Larger-than-expected investment or working capital requirement towards project SPVs thereby weakening the financial risk profile

About the Company

Incorporated in 1998 and promoted by Mr Virendra D Mhaiskar, IRBIDL is an infrastructure development and construction company in India with extensive experience in the roads and highways sector. The company is also into other business segments in the infrastructure sector, including maintenance of roads, construction, airport development and real estate.

 

Its portfolio comprises 16 BOT projects (12 BOT and 4 HAM) and 1 TOT project (Mumbai Pune Expressway). Of this, 9 BOT projects have been transferred to IRB Infrastructure Trust. The company also has O&M contracts for seven projects as a project manager for IRB InvIT Fund. The company operates largely as a holding company, while construction activities are carried out through its EPC arm, MRMPL.

 

IRBIDL became a listed company in 2008 by listing its shares on Bombay Stock Exchange (BSE) and National Stock Exchange (NSE). In September 2016, IRBIDL received approval from the Securities and Exchange Board of India to set up an InvIT. The company listed six of its operational assets through InvIT on BSE and NSE on May 18, 2017. It then transferred another asset to the InvIT on September 28, 2017. IRBIDL undertakes maintenance of these projects and holds 15.97% of the unit capital in the InvIT.

 

IRBIDL made an announcement of the definitive agreement entered into on August 6, 2019, with GIC for investment in IRBIDL’s road portfolio through a private InvIT. On February 26, 2020, the company set up the InvIT, IRB Infrastructure Trust and transferred nine of its BOT assets into the trust, in which it holds controlling stake of 51%, while GIC holds the remaining 49%. Of the nine projects transferred, six have received commercial operations date (COD), one has received provisional COD, while two are under construction (tolling has commenced as these are four-to-six-lane projects). IRBIDL is responsible for the project management activities of these projects, including maintenance.

Key Financial Indicators

As on/for the period ended March 31*	Unit	2021	2020
Revenue	Rs.Crore	3936	5496
Profit After Tax (PAT)	Rs.Crore	323	866
PAT Margin	%	8.2%	15.8%
Adjusted debt/adjusted networth	Times	1.38	0.74
Interest coverage	Times	1.69	3.62

*The financials represent the consolidated financials of IRBIDL and MRMPL, adjusted for CRISIL Ratings internal adjustments

Any other information: Not applicable

Annexure - Details of Instrument(s)

ISIN	Name of instrument	Date of allotment	Coupon rate %	Maturity date	Issue size (Rs.Crore)	Complexity level	Rating assigned with outlook
NA	Long-term loan	NA	NA	Mar-2029	410.0	NA	CRISIL A/Positive
NA	Long-term loan	NA	NA	Jun-2023	200.0	NA	CRISIL A/Positive
NA	Long-term loan	NA	NA	Dec-2028	249.89	NA	CRISIL A/Positive
NA	Proposed long-term bank loan facility	NA	NA	NA	500.0	NA	CRISIL A/Positive
NA	Bank guarantee	NA	NA	NA	1200.00	NA	CRISIL A1

 

Annexure - List of Entities Consolidated

Entity consolidated	Extent of consolidation	Rationale for consolidation
Modern Road Makers Pvt Ltd	Full	Corporate guarantee extended by IRBIDL
IRB MP Expressway Pvt Ltd	Moderate	To the extent of support towards equity commitment and cash flow mismatches during operations
ATR Infrastructure Pvt Ltd	Moderate	To the extent of support towards cash flow mismatches during operations
IRB Ahmedabad Vadodara Super Express Tollway Pvt Ltd	Moderate	To the extent of support towards cash flow mismatches during operations
Yedeshi Aurangabad Tollway Pvt Ltd*	Moderate	To the extent of support towards equity commitment and cost overrun during construction and cash flow mismatches during operations
Solapur Yedeshi Tollway Pvt Ltd*	Moderate	To the extent of support towards equity commitment and cost overrun during construction and cash flow mismatches during operations
Kaithal Tollway Pvt Ltd*	Moderate	To the extent of support towards cash flow mismatches during operations
IRB Sindhudurg Airport Pvt Ltd	Moderate	To the extent of support towards equity commitment and cost overrun during construction and cash flow mismatches during operations
VK1 Expressway Pvt Ltd	Moderate	To the extent of support towards equity commitment and cost overrun during construction and cash flow mismatches during operations
VM7 Expressway Pvt Ltd	Moderate	To the extent of support towards equity commitment and cost overrun during construction and cash flow mismatches during operations
IRB Westcoast Tollway Pvt Ltd*	Moderate	To the extent of support towards equity commitment and cost overrun during construction and cash flow mismatches during operations
CG Tollway Pvt Ltd*	Moderate	To the extent of support towards equity commitment and cost overrun during construction and cash flow mismatches during operations
Udaipur Tollway Pvt Ltd*	Moderate	To the extent of support towards equity commitment and cost overrun during construction and cash flow mismatches during operations
Kishangarh Gulabpura Tollway Pvt Ltd*	Moderate	To the extent of support towards equity commitment and cost overrun during construction and cash flow mismatches during operations
AE Tollway Pvt Ltd*	Moderate	To the extent of support towards equity commitment and cost overrun during construction and cash flow mismatches during operations
IRB Hapur Moradabad Tollway Pvt Ltd*	Moderate	To the extent of support towards equity commitment and cost overrun during construction and cash flow mismatches during operations

*Project transferred to private InvIT as part of GIC deal with IRBIDL holding 51% stake in the InvIT