Bharat Road Network IPO Review: Road (to be) less travelled

The public offer of Kolkata based Bharat Road Network Limited (BRNL) opens on 6 September and will close on 8 September. Priced in the range of INR195 – 205 per share, the sale of 29,300,000 shares is expected to raise INR600.65 crore at the upper end of the price band. Backed by SREI Infrastructure Finance, BRNL is a road BOT (Build Operate Transfer) company in India. Investors can place their bid for minimum 73 shares and in multiples thereafter. As we dive deeper in Bharat Road Network IPO review, we will see if it has better prospects. Here are some essential details about the IPO.

Several infrastructure players have tapped the IPO market in the last couple of years and Bharat Road Network Limited is the latest one in this series. As most of these infra IPOs managed to sail through, it will be interesting if BRNL IPO also gets good response from investors, as another IPO of Dixon Technologies is lined up during the same dates. An important factor to note is that retail quota is limited to just 10% in the upcoming IPO.

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Bharat Road Network IPO Review: All fresh shares

BRNL IPO will have no Offer For Sale (OFS) component and it will be third such IPO this year after Avenue Supermarts and Salasar Techno Engineering. As mentioned above, the company plans to issue 29,300,000 shares and raise anywhere between INR571.35 crore and INR600.65 crore. These funds will be used in two main activities:

• Advancing of subordinate debt in form of interest free unsecured loan to subsidiary, STPL, for part financing of the STPL (Solapur Tollways Private Limited) Project – 5 crore
• Acquisition of the subordinated debt in the form of unsecured loans/OCPIDs/warrants/OCDs, advanced/held by SREI to/in STPL, KEPL (Kurukshetra Expressway Private Limited) and MTPL (Mahakaleshwar Tollways Private Limited) – 2 crore

Bharat Road Network IPO Review: Build, operate, transfer

Bharat Road Network is involved into development, implementation, operation and maintenance of roads/highways projects. The company has a project portfolio consisting of six BOT projects as of now. Out of these, two are operational under final COD while three are operational under provisional COD. These projects are in projects in states of Uttar Pradesh, Kerala, Haryana, Madhya Pradesh and Odisha through partnerships with experienced EPC players. One of the projects in Maharashtra is under construction.

Bharat Road Network typically owns less than 50% stake in the Special Purpose Vehicles (SPVs) for executing the projects. It is only in the under-construction Solapur project that BRNL owns the majority stake (99%). Another subsidiary is Orissa Steel Expressway Private Limited (OSEPL) which is 59.38% owned by BRNL. Nevertheless, this project is being foreclosed due to delay in handing over of the requisite land and the company is in the process of reclaiming INR830.48 crore for cost incurred, finance costs, overheads and loss of profit-up to 31 March 2017. There is no clarity when and how much of the claim will be awarded to the company.

Bharat Road Network IPO Review: Financial performance

There is little that BRNL has to offer in terms of financials. The company had revenue of just INR14.93 crore in the latest financial year. On this revenue, the company posted a loss of INR73.88 crore. In fact, it has posted losses in each of the last five years (this is one of the reasons retail allocation in the IPO is limited to 10%). As most of its projects fall into the category of associate companies, it is not surprising that consolidated revenues are small and losses wide.

While its core expenses are still less compared to revenues, finance costs are simply very high at INR43.5 crore in FY2017. No wonder losses are so high for BRNL.

Bharat Road Network IPO Review: Should you invest?

As we have seen so far, there is little inspiring about the company, its market position or financial performance. To be fair, road BOT is a capital intensive business and BRNL’s projects are yet to mature so financial performance should improve from here. Considering the fact that almost all IPO proceeds will go towards acquisition of debt of associates, this is especially true. Nevertheless, its total debt of INR568.4 crore and the resulting debt equity ratio of 1.2 will not be completely eradicated by IPO funds. Besides, the funds will be used to acquire and not retire debt, it will simply be a case of moving borrowings from the books of associates to BRNL. Bharat Road Network will become a creditor to the project SPVs and will enjoy interest payments as revenue but it is a zero sum game on a consolidated basis.

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The corporate parentage of SREI Infrastructure is positive but it is worth noting that the company has not added any new project in recent years. It was awarded STPL project in 2012 and has solely focused on execution ever since. Despite this, the slow growth in revenues and underwhelming financial performance isn’t confidence inspiring.

Bharat Road Network has listed IRB Infrastructure Developers Limited, Sadbhav Infrastructure Project Limited, and Ashoka Buildcon Limited as peers, there is no benchmarking possible as BRNL is negative on almost all financial parameters. Among other factors, investors will need to see its financial performance in line with prevailing interest rates. With interest rates having declined significantly, there is not much scope of respite on this front.

All in all, Bharat Road Network IPO review reveals the company has strong and experienced promoter and has ability to arrange finances for its projects. However, the weakness in its financial performance is too obvious and the outlook doesn’t look particularly positive.