IL&FS Transport: More efforts required to lower debt

Analysts say creation of infra investment trusts alone may not erase woes

Two years after the Securities and Exchange Board of India (Sebi) gave its nod for infrastructure companies to create infrastructure investment trusts or InvITs, companies are now gearing up for it. First, IRB Infrastructure filed its draft red herring prospectus (DRHP) with Sebi for an InvIT (on September 8), leading to IRB Infra’s stock outperforming the BSE Sensex since date (stock up seven per cent, while Sensex has lost a little less than two per cent).

Following IRB Infra, IL&FS Transportation Network (ITLN) is also getting ready to create an investment trust. In a post-results call with analysts, its management revealed it would offload three-four build-operate-transfer (BOT) projects, worth Rs 4,500-5,000 crore, to an InvIT. The Street rewarded ITNL’s stock with 15.3 per cent gains after results. Creation of InvITs follows its recent efforts to offload stake in a few of its BOT projects as part of its debt-reduction plan. But, these may still be too little, given the quantum of leverage (or debt).

Consolidated debt as on June 30, 2016, is estimated at around Rs 28,650 crore; consolidated debt-equity ratio inched up from 4.1x in FY16 to 4.4x in Q1 of FY17. Teena Virmani of Kotak Securities believes it may take around a year or so for ITNL’s debt to peak out. But, with interest costs climbing quarter after quarter, faster reduction of debt is critical to augment earnings and boost profitability in the coming quarters as three critical BOT projects are expected to go on-stream by October 2017.

Not just that, financial closure is pending for projects such as Fagne-Gujarat, Amravati-Chikali, Ranchi ring road, Gujarat road over-bridge and the Srinagar project; these projects are expected to contribute to FY18 earnings. However, financial closure is contingent upon infusion of ITNL’s share of equity into these projects (Rs 1,009 crore in the next three years).

  For this, either ITNL’s debt-equity ratio has to be lower than the current range or it will have to raise fresh equity. Of the equity infusion, Rs 454 crore is likely to be brought in by FY17. Any delay in infusing these funds could hamper ITNL’s FY18 earnings. Nevertheless, as leverage is likely to remain high, analysts say creation of InvITs may not help in a meaningful re-rating of ITNL’s stock.

ITNL is yet to disclose its June quarter consolidated earnings due to adoption of new accounting standards. This too hasn’t gone well with analysts. Yellapu Santosh of Angel Broking recently downgraded his recommendation on ITNL’s stock from ‘buy’ to ‘neutral’ in absence of consolidated results. Standalone results (construction business), too, weren’t convincing as revenues grew by just 3.6 per cent year-on-year in Q1 (Rs 937 crore), while it posted profit of Rs 18 crore (against a loss of Rs 18 crore in Q1of FY16), due to other income of Rs 121 crore.