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 12,975 lane km of projects in operational (includes projects transferred to InvITs) or under-development stages. Its BOT portfolio comprises 15 projects (12 BOT-toll and 3 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; six operational and three under-construction projects wherein tolling has commenced as these are four- to six-lane projects), one under-construction BOT-toll (awaiting appointed date) and three under-construction HAM projects (two of which are awaiting appointed date). 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 1,000 crore has been received till March 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 8,800 crore as of March 2021 (including all existing EPC orders and O&M orders to be executed over the next 1.5 years). While order book-to- fiscal 2021 turnover ratio stood at 2.2 times as on March 31, 2021, order book to- turnover (of fiscal 2020) is lower at 1.6 times (as revenue in fiscal 2021 was impacted due to the pandemic and encumbrances on land). This is due to low order inflows and cancellation of three large orders in last two fiscals. Order book position has however improved from Rs 6,900 crore as of July 2020 to Rs 8,800 crore as of March 2021 after securing two large orders from NHAI in 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, while the company’s winning bid for a BOT project of ~Rs 2,200 crore was annulled in July 2020 (the same project was however re-awarded to IRBIDL in March 2021). 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.
- Weakening financial risk profile and large exposure to project SPVs
On account of the pandemic, construction activity 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.
Lower operating performance and 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. The company has refinanced part of the debt, which was to be repaid in the next 12-18 months, for a longer tenure. The debt-to-EBITDA (earnings before interest, tax, depreciation and amortisation) ratio increased to over 6.7 times as on March 31, 2021, from 2.3 times as on March 31, 2020 (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 materially in the current fiscal, as the company is in process of implementing various steps for deleveraging. 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 networth, and is likely to remain high given the intrinsic holding company structure and large investment requirement. Loans from surpluses of operational SPVs of Rs 2,863 crore as on March 31, 2021 (Rs 2,713 crore as on March 31, 2020) 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. This might come down to some extent on the basis of joint participation by GIC which will be evaluated on a project to project basis.
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 resolution, which was expected in fiscal 2019, has been delayed. 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 within one year from the start of the proceedings. 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 and one BOT project in July 2020 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.