India Ratings downgrades IRB Infra outlook from stable to negative
India Ratings and Research has revised IRB Infrastructure Developers Limited’s (IRB Infra) outlook to Negative from Stable while affirming its Long-Term Issuer Rating at ‘IND A+’.
While arriving at the ratings, India Ratings has continued to take a consolidated view of IRB and its subsidiaries. Furthermore, India Ratings has factored into the ratings any need-based support required by the IRB Infrastructure Trust (IRBIT), IRB’s private InvIT in partnership with GIC Affiliates wherein IRB has 51% stake) which has nine build-operate-transfer (BOT) assets under its analysis.
The outlook revision reflects the rating agency’s expectation of low execution by IRB in 2021-22, owing to delays in the receipt of appointed dates for projects awarded in 2020-21. The agency expects this low execution to lead to low cash flow generation and hence increased borrowings to infuse equity in the awarded BOT and hybrid annuity model projects, which could keep the leverage elevated. The Negative outlook also reflects delays in the recovery of Rs 3,310 crore from IRBIT, and in the resolution on the Ahmedabad Vadodara project, leading to higher-than-expected leverage.
KEY RATING DRIVERS
Construction Order Book’s Revenue Visibility Moderate; Moving Order Book only Rs 2,950 crore: IRB had moderate revenue visibility in the construction segment in 2020-21 with an order book of Rs 7,750 crore (2.1x FY21 construction revenue). However, the execution for Rs 4,800 crore worth of orders, that were awarded in 2020-21, is yet to commence, limiting the moving order book to Rs 2,950 billion. In addition to the construction order book, IRB also has operations & maintenance segment order book (worth Rs 6,810 crore at estimated in 2020-21) which is to be executed over the next eight-to-nine years. The management believes execution will commence across these project sites, after the receipt of appointed dates by October 2021, as two of these projects are in advanced stages of financial closure and one has already received the same.
The agency believes that construction income, on which IRB earns healthy margins of 25%-30%, reducing beyond India Rating’s expectation in 2021-22, could result in low cash flows an increased net leverage (net debt/operating EBITDA) to support the equity requirement of the current under-construction/future projects or support to underperforming projects. Ind-Ra will monitor these developments and significant delays in the timelines are likely to be credit negative.
Significant Pending Receivables from IRBIT: The company has reported significant cumulative cost overruns of 10%-15% in certain projects of its under-construction and completed projects, which have been transferred to the IRBIT. This is mainly on of account of delays in construction, largely due to delays in the receipt of right of way and critical approvals from the project authorities, and the resultant support requirement in the form of interest during the construction and maintenance of the projects. The company has already funded these additional costs through sponsor loans and internal accruals. Resultantly, the gross receivables from the trust and assets under the trust stood at Rs 3,310 crore at FYE21 (FYE20: Rs 3,480 crore).
The management has informed the agency that it has filed claims for the projects that have received completion dates and is in the process of filing claims for others for these overruns with the National Highways Authority of India and expects these funds to be recovered in the next 12-24 months. These funds will be primarily deployed towards reducing the company’s standalone gross debt. However, any delay in the receipt of these funds could lead to the leverage remaining higher than India Ratings projections.
Construction Segment’s Net Leverage Increases Significantly: IRB Infra construction segment’s net leverage increased to 4.2x in FY21 (FY20: 1.4x) following domestic/international debt issuances to fund the equity commitments for the Mumbai-Pune project (Rs 1,690 crore); the Vadodara Kim Expressway (Rs 90 crore) project as well as the under-construction projects at the IRBIT (260 crore). However, the agency believes the debt servicing is unlikely to be a concern in FY22 and FY23 as the segment generates at least Rs 1,200 crore of EBITDA y-o-y while the debt obligations (excluding interest) for FY22 and FY23 are Rs 280 crore and- Rs 390 crore, respectively. The entity aims to deleverage the construction segment debt with the expected proceeds from IRBIT for the cost overruns of Rs 3,313 crore.
The company’s consolidated net leverage for FY21 stood at 5.7x in FY21 (FY20: 1.8x) and its interest coverage (EBITDA/gross interest expenses) at around 1.5x (1.9x). As per India Ratings estimates, average debt service coverage ratio is expected to be around 1.15x over FY22-FY24.
Liquidity Indicator – Adequate: At FYE21, the company had unencumbered cash and cash equivalents of around Rs 700 crore. Furthermore, units (16% unitholding in IRB Invit Fund) in the company’s public InvIT (worth Rs 500 crore) along with mutual fund investments (Rs 310 crore) provide additional liquidity avenues. The unutilised fund-based limits were Rs 510 crore at May 2021. The non-fund-based utilisation at March 2021 was 26% out of the total limits of Rs 1,200 crore.
At FYE21, IRB had maturities of Rs 540 crore and Rs 950 crore in FY22 and FY23, respectively. Of these repayment obligations, the project debt repayments are Rs 260 crore and Rs 560 crore in FY22 and FY23, respectively. However, the company’s net-working capital cycle, although remained negative, elongated to 27 days in FY21 (FY20: 54 days) following an increase in debtors to 40 days (23 days) leading to negative cash flow from operations of Rs 470 crore (Rs 2,630 crore).
Surplus Cash Flows from Mumbai-Pune Project to Aid in Servicing of Sponsor-Level Debt: In February 2020, IRB was awarded the Mumbai-Pune Expressway and old Mumbai-Pune Highway project on toll-operate-transfer basis for a consideration of Rs 8,880 crore. The project cost is being funded through debt and equity in the ratio of 74%:26%, resulting in an equity commitment of Rs 2,270 crore. IRB Infra has already paid equity of Rs 1,690 crore using its balance sheet cash, internal accruals and additional debt.
As per India Rating’s estimates, the surplus cash flows after the debt servicing at the project are enough to service the interest component of the debt raised at the parent for funding the equity commitment and still generate a cash surplus of nearly Rs 100 crore for the entire debt repayment period till FY29. India Ratings draws comfort from the strong financial flexibility of IRB to refinance the debt obligations to be repaid in FY23-FY24 on the equity commitment for the project.
Ahmedabad-Vadodara Project’s Improving Collections Inadequate for NHAI Premium Obligations: IRB’s Ahmedabad-Vadodara project witnessed only a modest revenue decline of 9% yoy to Rs 430 crore in FY21, despite the COVID-19 pandemic, aided by strong collections in 2HFY21 of Rs 260 crore. However, the project continues to be a drag on the performance of the company, as it generates low EBITDA, given the traffic projections have been lower than the management’s initial estimates. The two-month COVID-19 moratorium availed by IRB helped in generating a cash surplus, post-debt servicing in FY21 as the premium payments continue being deferred. The project carries a debt of Rs 3,100 crore with historically modest cash EBITDA generation of Rs 300-400 crore.
Additionally, the large premium payments promised as a part of the concession agreement further deteriorates the project’s economics. Given the lower-than-expected traffic projections, the company expects to obtain a concession duration extension of a maximum five years. At FYE21, the company had a cumulative liability of deferred premium of Rs 1,920 crore. Additionally, given a competing local road, the company had filed for compensation claims of Rs 1100 crore over FY17-FY21. As per the management, the matter is pending with an arbitration panel and the company has received an interim relief from the Delhi High Court. However, a ruling against the company could impact its credit profile.
Equity Commitments and Project Support: At FYE21, IRB Infra had total equity commitments of around Rs 880 crore across its projects (including IRBIT’s projects and excluding the Mumbai-Pune project) to be funded over FY22-FY24. The equity commitments are likely to increase by Rs 2,500 crore if the financial investor does not invest in the entity’s Palsit Dankuni BOT project. Furthermore, to sustain its construction segment revenue growth, the company plans to take on additional BOT and Hybrid Annuity Model projects, which would require further equity. The management expects to win new orders of Rs 5,000-6,000 crore each year, which would have additional equity commitments. According to the management, going forward, about 50% of the equity commitments in the BOT projects awarded (amounting to 12%-15% of the overall project costs) are to be funded by the prospective financial investors, while the company would fund its contribution through internal cash accruals and additional debt.
Standalone Performance: The company reported revenue of Rs 2,750 crore in FY21 (FY20: Rs 3,990 crore) while EBITDA was Rs 370 crore (Rs 520 crore), interest coverage was 0.8x (1.6x) and net leverage was 11.6x (2.9x). The standalone interest servicing at IRB continues to be aided by significant interest income of Rs 100 crore in FY21 (FY20: Rs 140 crore).
Incorporated in 1998, IRB Infra is an established integrated surface transportation infrastructure company with expertise in development of BOT toll road projects. The company’s business segments are toll roads, construction, airport development and real estate. As on 31 March 2021, the company had a portfolio of seven owned projects, seven projects under operations & maintenance contracts as a project manager for IRB InvIT and nine projects under IRBIT. All the projects are structured into separate SPVs that are wholly-owned subsidiaries of IRB Infra; the construction, and operation and maintenance activity is carried out in-house through Modern Road Makers Pvt. Ltd as well as through sub-contracting.
In September 2016, IRB Infra became the first Indian company to get an approval from the Securities and Exchange Board of India for setting-up an InvIT, whereby six operational assets of the company were transferred to the IRB InvIT Fund. This InvIT has been listed on BSE Ltd and National Stock Exchange Ltd since May 2017.
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