The country’s third largest road developer, IRB Infrastructure, recently announced the financial closure of its Rs 4,880-crore Ahmedabad-Vadodara road project. The company has mobilised debt of Rs 3,300 crore, including Rs 1,100 crore of foreign currency borrowings, at an average cost of 10.5 per cent.
Analysts say with this, the company has achieved financial closure for all its projects. Towards the end of 2011, road developers were finding it difficult to raise funds for their projects as financiers felt that the projects were unviable, given the aggressive bids. Given this, the company has still managed to raise debt at a competitive cost.
Though analysts maintain the company’s bid for the project is rather aggressive, the financial closure of the project gives some visibility on construction revenue and toll collection. Says Goldman Sachs, “We view the 10.5 per cent weighted average cost of debt positively vs our estimate of 11.5 per cent, but the lower-than-expected leverage increases the equity requirement by Rs 300 crore from our earlier estimate of Rs 1,280 crore.” The positive impact of lower borrowing rates counterbalances the surplus equity requirement.
Despite concerns, analysts believe IRB is better placed than competition as it has only toll roads and is geographically concentrated in west and north India. Most of the company’s works are NHAI projects. Morgan Stanley says toll roads offer upside to developers through higher traffic growth and tariff increases compared with annuity projects, which offer no upside.
Apart from this, IRB has six projects in its portfolio that are debt-free, which enables the company to keep its leverage down. In FY11, IRB managed to lock in a loan for Mumbai-Pune at 10.6 per cent for its full tenure. This allowed substantial interest cost savings in the high interest rate environment. Morgan Stanley says with cash from operational assets, IRB is also in a comfortable position to fund its equity commitment of Rs 2,300 crore, and has an additional Rs 620 crore available to take on more projects without equity dilution.
