The stock of IVRCL declined 6.3 per cent on Tuesday after the company announced merger of subsidiary IVRCL Assets & Holdings (IVRCL Assets) with itself. Fear of equity expansion in the parent company IVRCL, as a result of the merger, besides lack of clarity on the reason behind such a move may be the reasons for the stock's decline.
IVRCL Assets is an infrastructure developer, with a basket of nine toll roads, three of which are operational. While the company's consolidated revenue in FY11 was Rs 876 crore, it is yet to derive profits at a net level. IVRCL is a contractor for various civil and infrastructure projects, including the group's own projects.
The planned merger, if implemented, would bring the basket of toll roads into the parent company. The real estate assets will be housed in an unlisted subsidiary of IVRCL. With this move, the company will put its ambitious real estate plans of 2007 on the backburner.
Background
IVRCL Assets was listed in the stock market as a real estate company, IVR Prime Urban Developers, in 2007. With the dip in the realty market, IVRCL decided to rename this company as IVRCL Assets and moved all its road assets into the latter company. The real estate assets, primarily land, continued to be held in IVRCL Assets.
Why the move?
The current move will now reverse the earlier decision to strip the road assets from the parent. But why did IVRCL resort to this roundtrip of splitting and merging? Market's dislike for real estate appears to be one reason behind the recent move. Lenders as well as institutional investors have been wary of real estate exposure in recent times.
Lending or investing in a company that houses both infrastructure and real estate may have raised doubts about the end use of funds. IVRCL Assets, as a result, has not received valuations similar to peers in the infrastructure space. The company received funding for many of its projects only with the help of guarantee from its parent. Stripping the real estate arm into a separate subsidiary may, therefore, improve the funding prospects for future infrastructure projects.
No additional strain
Bringing the toll roads under the parent may not cause any additional financial strain to IVRCL, as new projects will be under special purpose vehicles that will borrow in their own capacities. Besides, IVRCL has stated that once assets are developed, it may consider selling them to outsiders instead of holding them. This strategy may also help churn capital, which would otherwise be locked up.
The merger, though, would entail issue of IVRCL shares to the public shareholders of IVRCL Assets. Swap ratios, if based on current market capitalisation, may result in an equity expansion of less than 10 per cent in IVRCL. However, the valuation for share swap is yet to be worked out by the companies.
This leaves 2000 acres of land in the unlisted subsidiary in the waiting list of ‘value to be unlocked'. However, given the current scenario in realty, not much activity can be expected here.