IVRCL wakes up to hostile takeover threat

The company would be on a bidding holiday and has decided not to bid for new BOT projects for at least six months

Hyderabad-based infrastructure company IVRCL has finally taken a tough stand on the possible hostile takeover by Essel Group. The company said yesterday that it has put six of its road projects on sale and three projects on a block and is looking at retiring some of its debt through this attempt.

IVRCL Chairman and Managing Director E Sudhir Reddy had said yesterday that the company would be on a bidding holiday and has decided not to bid for new build, operate and transfer (BOT) projects for at least six months.

The cost of these three projects is about Rs 2,200 crore, according to the company officials. IVRCL expects to receive Rs 1,000-1,100 crore from the sale of the six road projects, the proceeds of which would be used to retire the debt, according to R Balarami Reddy, executive director and group chief financial officer.

As per IVRCL's financial results for the period ended June 30, 2012, the company had a net income of Rs 7557.4 crore. However, their finance costs stood at Rs 731.2 crore, as a result of which the company posted a net loss of Rs 123.8 crore.

In March this year, Subhash Chandra promoted Essel Group acquired 10.19% stake in the company and stated that it was keen to further increase its stake in IVRCL. This had let to speculations on whether this acquisition was a prelude to a possible take over of the company. However, IVRCL’s chief financial officer had later told Business Standard that if ever there is any hostile bid to take over the company, they would not leave it just like that.

Though there is no clarity on whether the takeover will happen or not, talks of hostile takeovers help in unlocking dormant value. By selling these assets, IVRCL may not only be able to reduce its debt, it can also protect itself from the hostile bid as rising share prices will make the hostile bid costlier.

Industry analysts are of the view that this would be a positive sign for the shareholders in the company. "Though IVRCL has being talking of selling their assets for a long time, it is a welcome decision to get clarity on it from the company. If IVRCL is able to get a good value for its assets and get out of debts, it will be a good signal for the shareholders," said an infrastructure analyst with a consulting firm.

He added that this would also disinterest the concerned parties from any hostile takeover. "The Essel Group would want to go for a possible takeover to build and strengthen its road portfolio and increase its valuations in the market. However, if IVRCL is reducing its road portfolio, it may be no longer be attractive to the other party," the analyst further said.

Shailesh Kanani, research analyst at Mumbai-based brokerage Violet Arch Securities taking a conservative view said that it will be difficult to predict the outcome of this decision on the shareholders. "Most companies in this sector are looking at monetisation. But the question is how many of them are actually able to do that. Firstly, it needs to be seen how many of their road projects are actually sold," he said.

Further, he added that apart from the cash flow into the company, the debt also needs to be maintained. "Due to the working capital costs, debts usually tend to increase; which is to be stabilised," said Kanani.

At 2.11 pm, the shares of IVRCL were traded at Rs 38.65 on the Bombay Stock Exchange, down 0.13 per cent from Monday’s close.