Bharat Road Network is entering the primary market on Wednesday 6^th September 2017, with a fresh issue of 2.93 crore equity shares of Rs. 10 each, in the price band of Rs. 195 to Rs. 205 per share. Representing 34.90% of the post issue paid-up share capital, issue will raise Rs. 601 crore, at the upper end and close on Friday 8th September. Listing is expected on 18^th September.

Bharat Road Network, an SREI Infra group company, is a 10 year old Kolkata based road BOT player, with a portfolio of 5 operational and 1 under construction toll based projects, across 6 Indian states (Orissa, Maharashtra, Uttar Pradesh, Madhya Pradesh, Haryana and Kerala), aggregating 2,095 lane kms, with an average residual life of 18.5 years. While 400 lane km Maharashtra project is under construction, MP and Kerala projects are operational under final COD, and balance three projects are operational under provisional COD. As per an agreement dated 16-2-2017, all road and highway assets of SREI are to be managed by the company. A 59.38% subsidiary, Orissa Steel Expressway Private Limited, is being foreclosed due to delay in handing over of requisite land. The company is in the process of reclaiming Rs. 830 crore for cost incurred, finance cost, overheads and loss of profit-up to 31-3-17. However, no certainty remains on the claim receivable.

IPO is being undertaken to fund investment of Rs. 51 crore in the under-construction Solapur project on Maharashtra-Karnataka border on NH9 and acquisition of Rs. 372 crore sub-debt from SREI in 3 of the company’s projects. Balance funds will be used for general corporate purposes. Nearly 100% equity in the company is owned by SREI and group, combined holding of which, will decline to 65.10% post IPO.

In all the 5 operational projects, company holds minority stakes i.e. less than 50%. Only the Maharashtra project has 99% stake, but will get operational only next year, by May 2018. Hence, company’s consolidated financials do not reflect the correct picture. Hence, despite a basket of operational road assets (with MP and Kerala projects being operational for over 5 years), company’s current operational matrix is poor, with consistent losses at the net level. It clocked FY17 consolidated topline of just Rs. 10 crore and earned EBITDA of Rs. 6.8 crore. Due to huge interest outgo of Rs. 44 crore, bottomline was in the negative, with net loss of Rs. 74 crore. On an equity of Rs. 54.65 crore, EPS was negative at Rs. 27. Since the company is loss making, 75% of issue size is reserved for QIB and only 10% is available for retail category.

As of 31-3-17, consolidated net worth stood at Rs. 596 crore, translating into BVPS of Rs. 109. Total consolidated debt stood at Rs. 568 crore, while cash and equivalents was at Rs. 28, leading to net DE ratio of 0.9:1. Since company’s assets are all toll-based, risk of income fluctuation remains.

At Rs. 205 per share, company’s market cap will be Rs. 1,721 crore and EV Rs. 3,575 crore (taking into account proportionate share of debt at the SPV level). With a negative bottomline, PE based comparison is not possible while EV/EBITDA yields a multiple of over 20x, on an estimated EBITDA of Rs. 175 crore for FY18, which, on like-to-like basis, after considering proportionate share of SPVs, was at Rs. 125 crore in FY17. This valuation multiple is very aggressive vis-à-vis peers such as Dilip Buildcon, Sadhbav Infra and IRB Infra, all ruling in EV/EBITDA multiple between 6-12x. Since road map for de-leveraging lack visibility, near term prospects appear bleak. 

One can draw parallels of this issue to the IPO Sadbhav Infra, having 10 road BOT projects (9 toll based and 1 annuity) which had undertaken a Rs. 500 crore IPO in Aug 2015 at Rs. 103 per share, at EV/EBITDA multiple of 19x. Two years later, share price is ruling at Rs. 98 a piece, at EV/EBITDA multiple of 12x. Such is the value erosion in 2 years, when broader markets have delivered over 15% returns. Thus, the plight of debt-laden infra companies remain the same, giving no respite to equity investors either.  

To conclude, factors such as high debt, expensive pricing and BOT road infra not being in flavor in the current market times all go against the issue. Given the high risk and long haul nature of the business, it is a clear avoid.

Disclosure: No Interest.