BRNL's IPO not yet the road to travel

With young assets, the firm could take some time before its starts reporting profit at the net level

Bharat Road Network Ltd (BRNL), a 30.4 per cent subsidiary of SREI Infrastructure Finance, is a build-operate-transfer (BOT) player in the roads segment. The portfolio of assets is large, with five operating and one under-construction project, totalling 1,622 km across Uttar Pradesh, Kerala, Haryana, Madhya Pradesh, Maharashtra and Odisha.

However, the initial public offering (IPO) is unattractive, due to weak financial performance in the past and the valuations.

The company, gearing up to grow its business, plans to utilise Rs 372 crore of the IPO proceeds of about Rs 600 crore for acquisition of subordinated debt held by SREI (related to its Solapur, Kurukshetra and Mahakaleswar projects). Since it is acquisition and not retiring of loans, the overall debt in BRNL’s books will not decline. Of the remaining proceeds, Rs 50 crore is for funding its under-construction Solapur tollway project and another Rs 150 crore as growth capital for acquiring new projects.

On the business front, the roads portfolio is young (projects largely commissioned in recent years), with assets having an average residual concession period of 18.5 years. So, they are still not profitable, this being the nature of road BOT businesses. These are capital-intensive and take time for turning profitable. As projects are rolled out, costs rise but in a majority of cases, it takes some time till traffic rises to a level for the project to become profitable at the operating level.

It is only after operating profits reach such a level that the project is able to service the interest cost and, consequently, repay debt.

BRNL had an average debt maturity profile of about 10 years as on end-March and, thus, continues to post a loss at the net level. 

The year 2015-16 saw losses rise, as the company started its largest project, GAEPL (Ghaziabad-Aligarh).

The project will be a major growth driver in the longer run, being in the Dadri-Noida-Ghaziabad region, one of the development nodes of the Delhi-Mumbai Industrial Corridor. However, this will not take place anytime soon.

Bajrang Kumar Choudhary, managing director, says most of the projects are turning cash-positive and that remains the initial objective. With many projects now in a stage where they have become capable of servicing their own interest cost, with some even capable of servicing the debt, he says he's confident of improving performance. The company also continues working on repricing and refinancing its debt, the majority of which happened in the past 10 months; the benefits should accrue gradually.

Overall, low profitability has impacted BRNL’s performance and return ratios. Analysts at Centrum Stock Broking say they expect weak financial performance to persist in the near-term. So, investors should avoid the IPO.

While the financials are weak, the valuations also do not provide comfort. At the higher end of the IPO price band, the stock is valued at 1.4 times the FY17 price to book value.

Analysts at ICICI Securities say the stock valuation is at par with other established players such as IRB Infrastructure.

Looking at the quality of projects, they believe it should instead be at a discount to the larger and profitable peer. Hence, investors could wait for stock prices to discover the right valuations after listing, before they invest.