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 IRB group was one of the early entrants in the BOT segment of the road sector and is one of the largest BOT players in India. It has about 11,300 lane kilometre (km) of projects in operational (includes projects transferred to InvITs) or under-development stages. Its portfolio comprises 20 projects: 19 BOT and one hybrid annuity model (HAM) project. The BOT segment includes 3 operational projects, 9 projects transferred to IRB Infrastructure Trust (4 operational and 5 under-construction ' tolling has commenced as these are 4 to 6 lane projects), and 7 projects under operations and maintenance contracts as a project manager for IRB InvIT. The HAM project is under construction. IRBIDL owns a 20% share in India's Golden Quadrilateral and around 70% of Bombay'Delhi National Highway (NH-8). The strong in-house EPC division managed by MRMPL undertakes all project implementation for the BOT/HAM road projects. Prudent project selection, coupled with strong execution capabilities, help the group maintain strong operating margin of over 20% annually. * Strong order book providing healthy revenue visibility The group maintained a strong order pipeline of more than Rs 9,000 crore in the past five fiscals. Strong orders in hand led to compound annual growth rate of 24% in revenue between fiscals 2015 and 2019. Revenue for fiscal 2019 was Rs 4,950 crore. Revenue was Rs 4,424 crore for the first nine months of fiscal 2020, up 27% from the first nine months of fiscal 2019, backed by strong contribution from the execution of the Hapur-Moradabad and Vadodara-Kim (Package 1) projects. Two of the company's HAM projects were terminated in October 2019 due to non-availability of requisite ROW from NHAI. This resulted in a decline in orders to around Rs 8,000 crore as of October 2019 (from more than Rs 10,000 crore earlier), leading to a decline in the ratio of order book to revenue (fiscal 2019) to around 1.5 times. Nonetheless, executable orders as on December 31, 2019 remain strong at Rs 6801 crore and provide healthy revenue visibility for next 12-15 months. Furthermore, healthy pipeline of HAM and BOT projects expected to be awarded by NHAI in the next few months is expected to support the order inflow and revenue visibility over the medium term. Receipt of new orders in the near term will be critical to sustain moderate growth and will remain a key monitorable. * Moderate working capital management Despite inherently large working capital requirement in the roads and highways sector, the IRB group's working capital cycle is supported by moderate inventory and receivables management. Gross current assets (GCAs) have been less than 180 days for the past five fiscals. IRBIDL executes only BOT/HAM projects for its SPVs and does not execute any EPC contracts, and all the inventory and receivables are towards or from its SPVs, helping maintain moderate working capital cycle. Working capital management, which was healthy till fiscal 2018, supported by GCAs below 150 days, has been impacted by increasing receivables since fiscal 2019 because of funding cost overrun requirements in ongoing projects. Of the 12 BOT projects (excluding public InvIT projects) in the group's portfolio, 5 projects have suffered cost overruns, which are outstanding as part of the group's receivables at around Rs 900 crore (around 55 days) as on September 30, 2019, thereby impacting the group's working capital cycle. These receivables will be recovered once the claims filed with authorities are recovered, which may take considerable time, and hence moderating the working capital management. * InvIT platforms to support capital unlocking The IRB group launched its public InvIT platform in 2017, and transferred 6 of its operational assets in May 2017, and an additional asset in September 2017, which helped unlock capital. The group has received around 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. Further, private InvIT set up with GIC helped the company reduce its equity requirements in the ongoing under-construction projects. As a part of deal, GIC is committed to bring in Rs 1400 crore for meeting equity requirement for under construction projects, of which Rs 753 crore has been brought in till date. Remaining equity commitment will be brought in as per the construction progress of these projects. Additionally, the deal also enabled the plan to deleverage the underlying SPVs through infusion of Rs 3000 crore from GIC. The lenders have approved the plan and the deleveraging will be completed in the next few months, subsequent to which the cash flow position of these projects is expected to improve. InvIT structure helps in upstreaming of surplus cash flows to the sponsors from the beginning of operations, providing flexibility in managing the investment requirements. Also, IRBIDL and GIC plan to explore future road sector opportunities in India together through this platform, in which the equity contribution for new projects will be in proportion of their respective shareholdings. Weaknesses: * Moderate debt protection metrics and large exposure to project SPVs The group's debt stood at Rs 4,040 crore as on December 31, 2019 (Rs 3,522 crore as on September 30, 2019), including Rs 700 crore of NCDs issued to GIC in December 2019 to temporarily enable GIC to fund equity commitments in the ongoing projects. Though these NCDs have been redeemed in March 2020 with the receipt of InvIT proceeds from GIC, debt levels is expected to remain around Rs 4000 crore by March 31, 2020. Further, high equity funding requirements towards Mumbai-Pune TOT project is expected to keep the debt levels elevated. Large debt and moderate accrual results in moderate debt protection metrics. The group has large investments in its projects SPVs. Furthermore, large part of the investments are towards under-construction projects, involving implementation risk. The group's total exposure (in the form of equity investment/unsecured loans) is larger than its entire networth, with total exposure to tangible networth ratio of around 2 times as on March 31, 2019. This is expected to remain high given the intrinsic holding company structure and large investment requirements. Loans from surpluses of operational SPVs of Rs 2,543 crore as on March 31, 2019 (up from Rs 2,201 crore as on March 31, 2018) mitigate part of the investment exposure. Although the group had entered into 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. Furthermore, one of the BOT projects, IRB Ahmedabad Vadodara, has been facing stabilisation issues on account of traffic diversion onto a competing stretch. The group had filed claims for the project, and resolution, which was expected in fiscal 2019, has been delayed. Given the non-receipt of resolution, IRBIDL has petitioned for relief on deferred premium payment of the project in the Bombay High Court in March 2019 and received an order in its favour conferring protection from contingency of default in premium payment till July 2019. In August 2019, the petition moved to Delhi High Court and in October 2019, the company received an extension for relief till the resolution of arbitration proceedings are concluded. Additionally, of the 9 projects being transferred to a private InvIT, 2 of the projects were to achieve provisional commercial operations date (PCOD) or COD in fiscal 2019, but only 1 of them received till date (received in February 2020), and 3 other projects have a higher than expected equity commitment. Further, equity commitment in Mumbai Pune project is also large at around Rs 870 crore which has to be infused in fiscal 2021. Any significant cost overrun in the ongoing under construction projects resulting in high support requirements from IRBIDL and higher than expected equity commitments in future projects will remain key monitorables. * Susceptibility to intense competition and cyclicality in the roads and highways sector The group's outstanding orders as on December 31, 2019, are entirely from the roads and highways segment. This exposes the group to intense competition and sectoral concentration risk. Although the group has diversified into the HAM segment in 2018 from being a pure-play BOT player, its ability to execute orders, grow revenue, and sustain profitability is susceptible to competition in the sector, and changes in government regulations and economic conditions. For instance, subdued awarding of projects by NHAI in fiscal 2019 and termination of 2 HAM projects in November 2019 led to moderation in the group's order book to less than Rs 6,000 crore as on date from more than Rs 10,000 crore over the past 2 years. Limited diversity in revenue will keep the group susceptible to the intense competition and cyclicality inherent in the roads and highways sector. |