IRB's J&K project cancellation not bad

Blessing in disguise, but firm must look at other options to sustain growth in construction

In a setback to IRB Infrastructure Developers, the government cancelled the Rs 10,050-crore Zojila (mountain pass in Jammu and Kashmir) project awarded to the company. It was the largest-ever single project bagged by IRB. Despite the major loss, the IRB stock closed a bit higher over the previous close, after dipping initially.

So, why is the Street not upset at this loss? For one, even as the project was revenue-accretive from the construction phase, analysts were not building in for revenue projection from Zojila. Further, some of them say that the cancellation of the project is a blessing in disguise. Santosh Yellapu of Angel Broking says, "If anything had gone wrong in the execution of the project, it would have affected project-level IRRs (internal rates of return) and affect the company's profitability, given the size and nature of the contract".

Having said that, IRB will now have to concentrate on other build-operate-transfer (BOT) projects to improve revenue. Sharekhan says that the order inflow has declined 38 per cent year-on-year. At Rs 10,600 crore of order book, IRB's current revenue visibility is for the next two to three years.

There are some other points to keep an eye on. Zojila project was critical for IRB to compensate for potential revenue losses in FY22 if the Mumbai-Pune Expressway contract (27 per cent of its toll revenues, 12 per cent of profits) is not renewed. Virendra D Mhaiskar, chairman and managing director of IRB, is confident that a few projects underway should catch up on revenue generation and match up for the inflows from Mumbai-Pune Expressway from FY23. The pace of revenue ramp-up of these projects will be watched by the Street. Foreign brokerage Citi says that the fall in toll revenue growth will add to concerns on IRB's debt. Its debt-equity ratio now stands at 2.71 in FY16 as against 2.52 in FY15.

Mhaiskar does not rule out rebidding for the Zojila contract. But, Emkay says the government could re-tender this project on the basis of engineering-procurement-construction (EPC). "If the project is re-tendered as an EPC contract, it may not be favourable for IRB as its focus is on BOT business. Also, being an EPC contract, it would hurt IRB's (blended) margins (now at 52 per cent)," it says. For IRB, the margins in the construction business are 35 per cent; BOT business earns over 80 per cent margins.

Periodic bagging of new orders and timely starting of its infrastructure fund would be critical for IRB.