Friday, August 29, 2014

IVRCL eyes selling assets, raising equity
[Editor: The article below says that half its current order book of Rs.20,000 crore is from the lucrative water segment, such as water treatment and irrigation. IVRCL Ltd (Rs.18.10) expects growth of around 15% a year. “If the next two quarters will see consolidation, the next fiscal would be a turnaround year,” said Reddy, Chief Financial Officer of IVRCL. Meanwhile the government on Wednesday, 27 August 2014, took a decision to allow the Ministry of Road Transport and Highways to decide on mode of delivery and amendments in Model Concession Agreement in respect of national highways projects for expediting of implementation of road infrastructure projects in the country. A strong buy is recommended, with a price target of Rs.37-39, for 6-9 months perspective]
Hyderabad/Chennai. August 28:  Infrastructure company IVRCL, once a stock market favourite, is now struggling to script a comeback.

The company had to go for corporate debt restructuring in January this year after debt piled up in the wake of cost overruns and delays in project execution. IVRCL’s total debt stood at Rs.7,680 crore as on March 31.

As part of a turnaround plan, the company is now considering selling operational assets, raising equity, and taking up projects that require lower capital infusion.

“The liquidity position has begun to improve. The next two quarters will be a phase of consolidation,” says R Balarami Reddy, Chief Financial Officer of IVRCL

Execution held up

Stalled execution of some projects due to delays in receiving Government clearances was one of the factors that derailed the company.

Road projects such as Sion-Panvel and Goa-Karnataka, irrigation projects in Andhra Pradesh, rural electrification in Kerala are among those delayed in 2011. The company’s execution rate, which used to be 40 per cent of the order book a year, fell to 26-28 per cent in 2011-12.

IVRCL also had to contend with delayed payments from clients. The debtors’ cycle stretched from 115 days in 2011-12 to 147 days now. Audit reports drew attention towards the receivables worth Rs.157 crore, considered good (even as collection was pending for a prolonged period) in the 2011-12 report, which ballooned to Rs.937 crore by June 2014.

Cost overruns in projects due to higher costs of raw materials such as cement, bitumen, labour, and steel over the years also cut into profitability. This was exacerbated by the lack of price escalation clauses on many contracts. Operating profit margin collapsed, sinking from 11 per cent in 2010-11 to 1 per cent in 2013-14 on a consolidated basis.

The company’s revenue, which grew 14 per cent on a standalone basis in December 2010 quarter, fell by 17 per cent in the June 2014 quarter, though numbers are not strictly comparable due to demergers and reconsolidation.

Restructuring

The debt-equity ratio leaped from 1.6 times (consolidated) in 2011-12 to 3.8 times by 2013-14. In the period, companies also had to contend with an increase in interest rates from 8 per cent to 12-13 per cent, says CFO Reddy. Interest cost as a percentage of sales reached 15.9 per cent in 2013-14, while interest cover slipped below 1 time. Consolidated net losses mounted from Rs.240 crore (adjusted) in 2012-13 to ₹882 crore last fiscal.

“Having a strong order book and a good portfolio, we were able to manage the situation for about 18 months. However, thereafter, we began to feel the heat. Then we had to knock at the CDR (corporate debt restructure) cell as lenders were not extending necessary funds for projects and were also encashing bank guarantees,” adds Reddy.

The CDR process was finalised in July. The package comes with a 28-month moratorium and an interest rate of 11.25 per cent.

Of the company’s total debt, the holding company debt of Rs.3,850 crore has been restructured, saving about Rs.850 crore in interest payments for two years.

IVRCL paid out Rs.789 crore in interest last fiscal. In addition, IVRCL received Rs.215 crore in cash credit and Rs.175 crore of priority debt.

IVRCL has also signed agreements to divest stake in three road projects – Salem Tollways, Kumarapalyam Tollways and Chengapally Tollways – to Tata Realty. This can ease up equity of around Rs.600 crore and free debt worth Rs1,200 crore.

Another road project (Jalandhar to Amritsar) is on the block as is its Chennai desalination plant. All are loss-making projects and contribute less than 10 per cent of consolidated revenue.

The company also has a land bank of around 1,700 acres, which it can monetise if needed. A rights/ QIP issue of Rs.300 crore is also being planned. These moves can eventually bring the debt-equity ratio down to around 2 times.

Turning around

This apart, once its existing five road projects are done, the company will shift entirely into simple construction contracts in roads, instead of taking them on as a developer (projects taken on as a developer call for heavy capital investments).

Plain construction contracts have short execution periods which will generate quicker cash flows and lower funding requirements. With the plain construction route to road expansion being taken up by the highways authorities, IVRCL could find several such projects coming its way.

Half the current order book of Rs.20,000 crore is also from the lucrative water segment, such as water treatment and irrigation.

The thrust now is also on this segment. Indeed, IVRCL has never had trouble securing fresh projects; from the start of this year, for example, it has won Rs.3,657 crore worth of projects.

The company expects growth of around 15 per cent a year.

“If the next two quarters will see consolidation, the next fiscal would be a turnaround year,” said Reddy.

This is part of a series on how companies are managing debt to gear for better times.

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