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IRB Infrastructure IPO: Our view - Views on News from Equitymaster
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IRB Infrastructure IPO: Our view
Jan 31, 2008

IRB Infrastructure Developers Limited (IRBID), a Mumbai based construction company, is issuing 51.1 m shares as part of its initial public offering beginning today. The issue will be remain open for subscription till February 5 2008. The company has priced its offering at Rs 185 to Rs 220 per share. At the higher price band, it expects to raise Rs 11.2 bn, which will be utilised towards repaying the loans and investment in subsidiaries.

Company background
IRBID was incorporated as a private company, - DVJ Leasing and Finance Private Limited - in 1998 and was primarily formed to fund the capital requirement of the IRB group’s initiatives in the infrastructure and construction sectors. In 2005, IRB was granted the Bharuch–Surat BOT project. And subsequent to the restructuring of the IRB group in 2007, IRBID became the holding company of the IRB group.

Reasons to apply
Key benefits in certain BOT projects: Under the concession agreements relating to the Pune - Sholapur road BOT project and the Pune - Nashik road BOT project, there is an undertaking that the government will not construct and operate either on a BOT basis or otherwise a competing project facility, either toll free or otherwise, during the concession period, except where the fee charged for vehicles using such facility is in excess of 133% of the fee being charged for the vehicles using the roads under our concession agreements with the government. In addition, under the concession agreement for the BOT project relating to the Bharuch to Surat section of NH 8, the NHAI has undertaken that no expressway or toll road (other than a bypass) will be opened to traffic before the expiry of eight years from the date of the commencement of IRBID’s concession period.

In addition, in the event that an additional tollway is constructed following such eight year period, then NHAI shall ensure that the per kilometre fee to be levied on any vehicle or class of vehicles using such additional tollway shall not be less than an amount which is 133% of the per kilometre fee levied and collected from similar vehicles or class of vehicles using the NH 8 section covered under IRBID BOT project. As such the company enjoys advantageous position in these BOT projects.

Timely execution capabilities: The company has been involved in construction, operation and maintenance of 1,200 kilometers of highways and roads as of October 2007 and many of its infrastructure development and construction projects have been completed ahead of their scheduled completion dates. Its infrastructure development portfolio includes several large BOT projects in the roads sector, including the Mumbai-Pune Expressway and NH 4 BOT project, which was awarded in March 2004, and the BOT project for the Bharuch to Surat section of NH 8, which was awarded in July 2006. Proper execution and timely completion is one of the key advantages in the BOT projects and IRBID has done this in the past. Also the company had a strong order book of Rs 23.2 bn as on October 2007.

Reasons not to apply
Long gestation period: Infrastructure development projects involve agreements that are long-term in nature. Such long-term arrangements have inherent risks associated with them because they can restrict the projects operational and financial flexibility. Secondly, the revenue structure for the project is predetermined for the life of the project and its profitability is dependant on how effectively the company manages costs during the term of those agreements. In the case of the tollway road projects whose revenues are not fixed, the profitability and its ability to meet debt service payments is also a function of traffic volumes and the toll levied on users of the road. If the company fails to effectively manage costs or the estimates of traffic volume are not accurate and fail to generate sufficient revenue, this may affect the final outcome of each BOT project.

Our view
Considering the IRBID is a holding company and that a majority of its projects are still in the initial phase of their construction, we believe risks are on the higher side. While the opportunities are large, considering the government’s XIth five year plan (2007-12) outlay for road development projects – US$ 76 bn or around 15% of the total estimated spending towards infrastructure during the period, we believe risks to execution and profitable growth far outweigh the returns envisaged from the road construction sector. In this context, we would recommend our subscribers to ‘AVOID’ the issue. We believe if one has to take exposure to the infrastructure sector, or specifically road infrastructure sector, there are better companies already listed on the stock exchanges – companies with more visible growth prospects and higher diversification into other infrastructure activities than only roads. We have not calculated the stock’s valuations due to the lack of sufficient data from the company.

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