Being among the first to announce its plans to launch an infrastructure investment trust, or InvIT, to help maximise its equity and debt allocation mix, IRB Infrastructure (IRB) is now a step closer to realising this plan.
The InvIT offer, likely to open on May 3, is projected to help IRB reduce its debt by at least Rs 4,300 crore. The issue size of the InvIT, estimated at Rs 4,300-5,032 crore (in the lower and upper price bands of Rs 100 and Rs 102, respectively), will witness six road projects being transferred to the fund including marquee ones such as Dahisar-Surat and Bharuch-Surat, which have a residual concession period of four-five years out of the 25-year period.
While the enterprise value of IRB’s InvIT is a shade below analysts’ expectations of Rs 6,500-7,000 crore, there is no reason to worry. For one, there is a strong expectation that another key project (Amritsar-Pathankot) may be added to the InvIT in the next one year, which analysts believe could increase the InvIT value by 25 per cent. Analysts at Emkay Global say that a lower value should not be construed negatively as there is a potential for upside after the listing. They say the current valuation captures only 5 per cent traffic growth, while there is a high possibility of 7-8 per cent traffic growth. A few also believe that lack of precedents could have also restricted the value. The assets, which are being valued at 1.1 times their price, can fetch an internal rate of return of 12.5 per cent on a post-tax basis, which is just about decent.
While this is for the InvIT, analysts believe that the rub-off impact on IRB Infra will be significant. As an immediate fall out, listing the InvIT will help the road contractor significantly reduce its debt. Of the Rs 4,300 crore debt, Rs 3,000 crore pertains to road projects, which will move out of IRB’s balance sheet. The company would then be left with over Rs 1,300 crore, which it could use to fund recently procured orders from Rajasthan, totalling Rs 2,000 crore. The debt-equity ratio of IRB Infra, at a consolidated level, would also reduce from around 3x to 1.8x after the InvIT issuance.
In this backdrop, analysts at Emkay have a target price of Rs 305 of IRB Infra’s stock (23 per cent upside from the current price of Rs 247) and say that the bigger story from here on is of capital being freed up for investment in new projects. Those at CLSA also feel that with debt being freed up, IRB Infra’s stock is ripe for re-rating. However, in Monday’s trade, the stock traded almost flat largely because the recent up move (13 per cent) partly captures the InvIT issuance. From the June quarter, as profitability improves principally because of reduction in interest outflow and given that these projects are loss-making at the net level, the stock should perform well.