Detailed Rationale

CRISIL Ratings has assigned its ‘CRISIL AA-/Stable’ rating to the Rs 258 crore (outstanding as on June 30, 2023, against original issue of Rs 350 crore in September 2021) non-convertible debentures (NCDs) of IRB Infrastructure Developers Ltd (IRBIDL) and bank facilities of Rs 1,000 crore while reaffirming its rating on the Rs 1,200 crore bank facilities at ‘CRISIL AA-/Stable/CRISIL A1+’.

 

CRISIL Ratings has also withdrawn its rating on the proposed long-term bank loan facility of Rs 500 crore at company’s request and long-term loans of Rs 859.89 crore on receipt of third party confirmation that these loans have been paid off. This is in line with CRISIL Ratings’ policy on withdrawal of ratings.

 

The ratings continue to reflect IRBIDL’s strong financial risk profile, supported by strong operating performance, adequate order book and stable working capital cycle. IRBIDL’s revenue is expected at over Rs 5,500 crore over the next two fiscals from Rs 4,635 crore in fiscal 2023 backed by executable order book of Rs 11,600 crore as on June 30, 2023 (including operations and maintenance [O&M] orders for next three years) and order book to revenue of ~2.5 times providing revenue visibility. While the operating margins (adjusted for claim income) declined to 20.5% in fiscal 2023 from 24.2% in fiscal 2022, it was due to increase in raw material prices and increase in share of hybrid annuity mode (HAM) projects, which typically have lower margins as compared with build-operate-transfer (BOT) projects. The margins are expected to improve to 23-25% over the near to medium term supported by  higher execution of BOT projects and moderation in raw material prices.

 

The order book position improved with two large BOT orders and two HAM projects awarded in the last two fiscals. The company has won one large toll-operate-transfer (TOT) project this fiscal (with engineering, procurement and construction [EPC] work of Rs 453 crore) and is expected to bid for and win more orders from the upcoming pipeline of awards from authorities. In absence of new order inflow, the revenue visibility beyond the next two fiscals may decline and hence, order book continues to remain a monitorable. Further, the order book includes one large state BOT-toll project, i.e., Meerut Budaun (Rs 3,879 crore as on March 31, 2023 and 33% of executable order book position), exposing the company to execution risk with timely implementation of this order remaining a key rating sensitivity factor. 

 

The debt levels had reduced to Rs 3,511 crore as of March 31, 2022, with prepayment of long-term debt with equity infusion of Rs 5,347 crore by Cintra (subsidiary of Ferrovial, S.A – a Spanish multinational infrastructure company) and GIC (Singapore’s sovereign wealth fund) in the third quarter of fiscal 2022. However, the debt has again increased to Rs 4,187 crore (includes utilisation of overdraft [OD] facility of Rs 725 crore backed by fixed deposits [FD]) as on March 31, 2023, due to higher borrowing to support the funding of under-construction projects and working capital requirements. It is expected to increase further with drawdown of long-term debt of Rs 1,400 crore over the past couple of months for equity infusion in the Hyderabad ring road (ORR) TOT project. Nevertheless, the company’s liquidity profile is strong with cash and equivalents stood at Rs 2,083 crore as on March 31, 2023, of which unencumbered cash stood at around Rs 249 crore (excluding Rs 1,305 crore FDs earmarked for OD facility). The financial risk profile is expected to remain healthy given strong net worth of Rs 10,068 crore as on March 31, 2023 (CRISIL Ratings adjusted) leading to total outside liabilities to tangible net worth (TOL/TNW) ratio at below 1 time from 2.5 times as on March 31, 2021. The debt-to-adjusted EBITDA[1] (earnings before interest, tax, depreciation and amortisation) ratio is also adequate at 2.8 times as on March 31, 2023 (6.4 times as on March 31, 2021).

 

The financial flexibility is also underlined by a strong track record of raising debt in both the domestic as well as overseas markets. Furthermore, the company is a sponsor of two listed InvIT (infrastructure investment trust) platforms – IRB InvIT Fund (publicly listed InvIT launched in May, 2017) and IRB Infrastructure Trust (rated ‘Provisional CRISIL AAA/Stable’; private InvIT launched in fiscal 2020) – which have supported capital unlocking in the past through asset monetisation and the company is expected to benefit from the same in future as well. The rating also factors in demonstrated ability of the company to raise equity in large under construction projects, thereby reducing the capital requirements. IRBIDL has executed definitive agreements with GIC for 49% shareholding in IRB Golconda Expressway Pvt. Ltd (IGEPL; ‘CRISIL AA-/Stable’) and Samakhiyali to Santalpur project (Gujarat) is getting executed through private InvIT where GIC is 49% partner.

 

The ratings continue to reflect the company’s established track record in the roads and highways sector, backed by prudent project selection, strong execution capabilities and moderate working capital management. These strengths are partially offset by exposure to under-construction special-purpose vehicles (SPVs) with few large projects at initial stages, receivables from claims in private InvIT SPVs and susceptibility to intense competition and cyclicality in the roads and highways sector.

[1]Surpluses from IRBIDL’s other projects/platforms (Rs 265 crore from IRB MP Expressway Pvt Ltd and IRB InvIT Fund in fiscal 2023) have been included in adjusted EBITDA

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 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. Hence, these projects are moderately consolidated.

 

Cost overrun in five of the nine assets that have been transferred to the private InvIT (IRB Infrastructure Trust) resulted in receivables of Rs 3,578 crore as on March 31, 2023. 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.

 

CRISIL Ratings has also treated unsecured loans received from SPVs as neither debt nor equity as the repayments on these loans are flexible depending on available surplus.

 

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 13,739 lane kilometre (km) of projects in operational (includes projects transferred to InvITs) or under-development stages.  The company also has O&M contracts for 12 projects, which includes ten projects under private InvIT and Meerut Budaun section of Ganga Expressway and IGEPL, and six projects under its public InvIT (where it holds 15.97% stake) as project manager.

 

IRBIDL has ~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 20%.

 

Healthy financial risk profile

IRBIDL’s financial risk profile had substantially improved post equity infusion of Rs 5,347 crore by GIC and Cintra in fiscal 2022. Net worth increased to Rs 10,068 crore as on March 31, 2023 from Rs 3,421 crore as on March 31, 2021. The company’s capital structure continues to remain comfortable with TOL/TNW ratio expected at below 0.7 time in the medium term against 2.5 times as on March 31, 2021. The debt-to-adjusted EBITDA is also adequate at 2.8 times as on March 31, 2023 (6.4 times as on March 31, 2021). Financial flexibility is also supported by company’s strong track record of refinancing loans both in the domestic as well as overseas market.

 

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. The company executes 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. While the gross current assets (GCA, net of cash) increased to 207 days as on March 31, 2023 (PY: 216 days) from 104 days as on March 31, 2021, it was largely due to high inventory and debtor days and the same is expected to revert to erstwhile level gradually.

 

InvIT platforms to support capital unlocking

In addition to demonstration of large equity raise from marquee global investors, and track record of raising debt in both domestic as well as overseas markets, access to two InvIT platforms has materially improved the company’s financial flexibility. IRBIDL is a sponsor of two InvIT platforms – IRB InvIT Fund and IRB Infrastructure Trust – which have supported capital unlocking in the past through asset monetisation and the company is expected to benefit from the same in future as well. The company has demonstrated ability to raise equity in large under construction projects as well, thereby reducing the capital requirements in the near to medium term. Most recent transactions include execution of definitive agreements with GIC for 49% shareholding in IGEPL, and Samakhiyali to Santalpur project is getting executed through private InvIT where GIC is 49% partner. The InvIT structure helps to upstream surplus cash flow to the sponsor from the beginning of operations, providing flexibility in managing the investment requirement.

 

Weaknesses:

Concentrated order book with exposure to initial stage projects

The company had executable order book of around Rs 11,600 crore as of June 30, 2023 (including O&M orders to be executed over next three years only). The order book position improved with two large BOT orders and two HAM projects awarded in last two fiscals. This resulted in improvement in order book-to-revenue (of fiscal 2023) ratio to 2.5 times as of June 30, 2023 from below 2.0 times earlier. The company has won one large TOT project in this fiscal (EPC work of Rs 453 crore) and is expected to bid for and win more orders from the upcoming pipeline of awards from authorities. In absence of new order inflow, the revenue visibility beyond the next two fiscals may decline and hence, order book continues to remain a monitorable. Further, the order book includes one large state BOT-toll project, i.e., Meerut Budaun (Rs 3,879 crore as on March 31, 2023 and 33% of executable order book position), exposing the company to execution risk with timely implementation of this order remaining a key rating sensitivity factor. 

 

Large exposure to project SPVs with pending claims settlement

The company has made large investments in its project SPVs. Loans from surpluses of operational SPVs of Rs 2,573 crore as on March 31, 2023 mitigate part of the investment exposure. Although the company undertook HAM projects in 2018 and thereafter (where the equity requirement is lower than for BOT projects), its focus is on building a BOT/TOT portfolio, which will keep equity commitment high. A substantial part of the incremental equity requirements were funded through the inflows from preferential equity allotment. Further, IRB and GIC have agreed to explore future opportunities for BOT and TOT projects together in ratio of 51:49. This reduces IRBIDL’s equity contribution to 51% as witnessed in Palsit Dankuni, Meerut Budaun section of Ganga Expressway project, Samakhiyali Santalpur projects and IGEPL.

 

Receivables of over Rs 3,578 crore as on March 31, 2023, 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 filed claim for compensation against revenue losses arising on account of competing road. The SPV approached the Hon’ble Bombay High Court in March 2019 and received an order in its favour conferring protection from contingency of default in premium payment for initial period of 3 months and then the Hon’ble Delhi High Court later awarded that this relief shall continue until arbitration proceedings under Section 17 of the Act are completed. The arbitral proceedings began in December 2020, the Hon’ble Tribunal further directed that interim relief granted by the Hon’ble Delhi High Court continues. Subsequently, the Hon’ble Tribunal declared an interim award in October 2021 in favour of the SPV. Later, NHAI challenged the interim award in the Hon’ble Delhi High Court which was subsequently dismissed by the Court in July 2022. The arbitration proceedings are in progress, in the meanwhile, the SPV filed its updated claim of Rs 2,123 crore as of September 30, 2022 in December 2022. The claim for revenue loss is recurring as it will continue till end of concession period along with the accrued interest, resulting in an increase in the claim amount.

 

In case of the favourable outcome of the arbitration, the SPV shall be compensated against the competing road by NHAI on recurring basis as per the terms of the Concession Agreement until the breach is cured. Therefore, the toll revenue plus the compensation receivable from NHAI would be sufficient to meet the premium obligations. In case of SPV being unsuccessful in the arbitration, pursuant to the direction of the Hon’ble Bombay High Court, the unpaid premium has to be paid to NHAI on the principle of "premium deferment scheme" of the central government earlier agreed in Supplementary Agreement dated June 6, 2014. Under the said scheme if cash flows are 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, no support is expected from IRBIDL towards this project. However, corporate guarantee extended by IRBIDL towards this SPV is yet to be released by the lender due to the ongoing arbitration in spite of the SPV reaching threshold debt service coverage ratio of 1.15 times.

 

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 and thereafter from a pure-play BOT and TOT 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. Limited diversity in revenue will keep IRBIDL susceptible to intense competition and cyclicality inherent in the construction industry. However, given IRBIDL’s continued focus in the BOT-toll space where competition is limited, operating margin is expected to remain stable over the medium term.

Liquidity: Strong

Liquidity is supported by healthy cash accrual, unutilised bank limits and strong cash and equivalents. Total fund based facility of Rs 1,930 crore (including the OD facility of Rs 1305 crore backed by FD) was utilised to an extent of 60% as on July 31, 2023. Cash and equivalents stood at Rs 2,083 crore as on March 31, 2023, of which unencumbered cash stood at around Rs 249 crore (excluding Rs 1,305 crore FDs earmarked for the OD facility). Furthermore, the company holds 15.97% unencumbered stake in the public InvIT (stake is valued at Rs 626 crore as on March 31, 2023), supporting liquidity.

 

ESG Profile

CRISIL Ratings believes that IRBIDL’s ESG profile supports its already strong credit risk profile.

 

The EPC sector has a significant impact on the environment as a result of high emissions, waste generation and impact on land and biodiversity. The impact on social factors is indicated by labour-intensive operations and safety issues on account of construction-related activities.

 

IRBIDL has a continuous focus on strengthening various aspects of its ESG profile.

 

Key ESG highlights:

• IRB published its first Business Responsibility and Sustainability Report (BRSR) for fiscal 2022; the company has also published BRSR for fiscal 2023 disclosing quantitative data on environmental, social and governance related parameters
• The company has formed ESG, Risk Management and Health, Safety and Wellness (HSW) committees. IRB’s HSW team manages the occupational health and safety of its employees
• IRB is member of United Nation Global Compact (UNGC) since July 2022 and committed  to Science Based Targets Initiative (SBTi) on reducing carbon emissions and contribute towards achieving climate targets
• The company engages regional and local suppliers for sourcing products and services
• The governance structure is characterised by 50% independent directors, effectiveness in board functioning, presence of investor grievance redressal mechanism and extensive disclosures

 

There is growing importance of ESG among investors and lenders. IRBIDL’s commitment to ESG principles will play a key role in enhancing stakeholder confidence, given the sizable share of market borrowings in its overall debt and access to both domestic and foreign markets for raising funds.

Outlook: Stable

IRBIDL will continue to benefit from a strong financial risk profile post equity infusion, healthy business risk profile, supported by an established track record in the roads and highways sector and strong execution capabilities.

Rating Sensitivity factors

Upward factors:

• Significant diversification in order book
• Substantial and sustained growth in revenue while maintaining operating margin
• Maintenance of healthy financial risk profile with TOL to TNW remaining below 0.4-0.5 time on a sustained basis

 

Downward factors:

• Larger-than-expected investment or working capital requirement towards project SPVs thereby weakening the financial risk profile
• Significant delays in completion of sizeable under-construction projects or deterioration in performance of operational projects
• No significant order inflows resulting in order book-to-revenue below 2 times for a prolonged period
• Significant stretch in the working capital cycle due to pending claims

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.

 

At end-August 2023, IRBIDL had a portfolio of three BOT Projects {Samakhiyali-Santalpur, Ahmedabad-Vadodara (100% stake) and Ganga Expressway- Package I (51% stake)}, two toll-operate-transfer (TOT; Mumbai-Pune Expressway and IGEPL ([Hyderabad ORR]) and three HAM projects.

 

IRBIDL has a 51% holding in a private Infrastructure Investment Trust (InvIT) that houses 10 BOT projects of which nine projects are in the operational BOT space and one project is under the tolling and construction phase, aggregating to 6,275 lane kms. IRBIDL also holds a 15.97% stake as a sponsor in a public InvIT (IRB InvIT Fund), which has five BOT and one HAM project in its portfolio, of around 2,447-lane km. The company also has O&M contracts for the 12 projects, which includes ten projects under private InvIT and Meerut Budaun section of Ganga Expressway and Hyderabad ORR project,  and six projects under its public InvIT (IRB InvIT Fund – where it holds 15.97% stake) as project manager. 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. The concession period of two projects has ended and they have been handed over to the authority. The present portfolio comprises of five operational BOT assets and one operational HAM asset in the InvIT. 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 had set up IRB Infrastructure Trust and transferred nine of its BOT assets in fiscal 2020 and another project (Palsit-Dankuni) transferred in April 2022 into the trust, in which it holds 51%, while GIC holds the remaining 49%. Out of these ten projects, nine operational projects are already operational and one project, i.e., Palsit Dankuni is under the tolling and construction phase. Of the new projects won by IRBIDL, IGEPL has already been transferred to the private InvIT and Samakhiyali BOT project is expected to be transferred on receipt of appointed date. IRBIDL is responsible for project management activities of these projects, including maintenance.

Key Financial Indicators

As on/for the period ended March 31*	Unit	2023	2022
Revenue	Rs crore	4,635	4,158
Profit After Tax (PAT)	Rs crore	849	534
PAT margin	%	18.3	12.8
Adjusted debt/adjusted networth	Times	0.35	0.32
Interest coverage	Times	3.42	1.89

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

Any other information: Not applicable

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 Ahmedabad Vadodara Super Express 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
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 Ltd*	Moderate	To the extent of support towards equity commitment and cost overrun during construction and cash flow mismatches during operations
CG Tollway Ltd*	Moderate	To the extent of support towards equity commitment and cost overrun during construction and cash flow mismatches during operations
Udaipur Tollway Ltd*	Moderate	To the extent of support towards equity commitment and cost overrun during construction and cash flow mismatches during operations
Kishangarh Gulabpura Tollway Ltd*	Moderate	To the extent of support towards equity commitment and cost overrun during construction and cash flow mismatches during operations
AE Tollway 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 Ltd*	Moderate	To the extent of support towards equity commitment and cost overrun during construction and cash flow mismatches during operations
Palsit Dankuni Tollway Pvt Ltd*	Moderate	To the extent of support towards equity commitment and cost overrun during construction and cash flow mismatches during operations
Meerut Budaun Expressway Ltd*	Moderate	To the extent of support towards equity commitment and cost overrun during construction and cash flow mismatches during operations
Pathankot Mandi Highway Pvt Ltd	Moderate	To the extent of support towards equity commitment and cost overrun during construction and cash flow mismatches during operations
Chittoor Thachur Highway 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 be transferred to private InvIT, wherein corporate guarantee is provided by IRBIDL