India Ratings & Research (Ind-Ra) has affirmed IRB Infrastructure Developers (IRB Infra) long-term issuer rating at 'A-'. The outlook is stable.
The affirmation reflects IRB Infra's ability to maintain its net financial leverage within Ind-Ra's expectations in FY13 (year end March). Consolidated net leverage (net debt/EBITDA) was high at 4.6x at FYE13 (FYE12: 4.0x) with adequate net interest coverage of 3.4x (3.1x).
Ind-Ra expects the leverage to increase over the near term as IRB Infra draws down additional debt to execute build-operate-transfer (BOT) projects at the SPV level. However, interest coverage is likely to reduce as interest expenses on some major BOT projects, which became operational in FY14, would start flowing into the profit and loss statement. In 9MFY14, IRB Infra reported net leverage of 5.3x and gross interest coverage of 2.4x.
The ratings factor in the reduction in the refinancing risk for IRB Infra after the National Highway Authority of India (NHAI; 'AAA'/stable) announced premium reschdueling on stressed projects. The company through this scheme can defer premiums on its two projects - Ahmedabad Vadodara (RS 3.4 billion premium payable in FY15, escalated 5% every year) and Tumkur Chitradurg (Rs 1.6 billion premium payable in FY14, escalated 5% every year).
The company can defer the premium to the extent of a shortfall in the cash flow of the projects post debt servicing. The deferred amount would be payable only when the project has surplus cash flows. So, effectively the deferred amount becomes the subordinate obligation to the project and has to be repaid completely one year before the concession end. The deferred premium would carry an interest cost at the Reserve Bank of India's lending rate plus 2%. IRB Infra is likely to benefit from around Rs 16.7 billion equivalent of premium deferment over FY15-FY18 from NHAI, which otherwise would have been arranged by the former.
The affirmation also factors in IRB Infra's improving BOT portfolio with more projects becoming operational. Pathakot Amritsar will be operational in May 2014. This will increase the ratio of operational projects value to non-operational project value to 56:44 from 38:62 in 2013. The company’s presence across many states also helps in mitigating risks related to industry or economy of one particular area.
Top-line grew 18% yoy to Rs 36.9 billion in FY13, led by the 21% yoy growth in the construction segment. This also resulted in EBITDA increasing 19% yoy to Rs 16.4 billion with EBITDA margin increasing to 44.5% from 43.9%. The construction segment's EBITDA margins increased to 28.1% from 24.8% during the same period.
The ratings reflect IRB Infra's adequate liquidity with INR4.6bn of undrawn fund-based limits and Rs 10.2 billion of cash and cash equivalent (including Rs 7.9 billion as fixed deposits against overdraft facilities) as of December 2013. The company has a debt maturity (excluding bank overdrafts) of Rs 3.5 billion in 4QFY14, Rs 3.6 billion in FY15 and Rs 2.3 billion in FY16. The debt maturity profile has improved after availing a long-term debt of Rs 5 billion in FY14. Also, short-term debt including overdrafts, which used to account for over 80% of debt funding on a standalone basis, reduced to around 60% as of December 2013.
Owing to a slowdown in BOT-based road projects allotment, the construction order book of the company reduced to Rs 58.3 billion as of December 2013 (2.2x of FYE13 construction revenue) from Rs 74.6 billion as of September 2012. Only one project (Sholapur-Yedeshi) worth Rs 12.8 billion is added to the order book in 2013.
The ratings are constrained by unexpectedly lower toll collections especially in the company's newly started projects. Toll is collected at 58% of full tariff for Talegaon Amravati and 75% of full tariff for Jaipur Deoli. However, management has highlighted that partial commercial operation date (COD) status of these projects is the reason for the underperformance. The underperformance of the Ahmedabad-Vadodara project was due to traffic diversion to NH-8 from NE-1 which is being tolled by the company. As the company starts tolling on the NH-8 section (likely by 1Q16), it expects the diversion risk to be mitigated. IRB Infra also expects the toll performance of Tumkur Chitradurg to improve as mining activities pick up pace in Karnataka.
The company incurred a capex overrun of around INR2bn mainly in form of interest during construction in some of its newly started and upcoming projects.
As against Ind-Ra's expectation of 5% yoy traffic growth apart from stipulated tariff increases, some old projects reported weak growth on account of the economic slowdown.
