Bharat Road Network — Give it a pass

Bharat Road Network (BRNL) a road construction company promoted by Kolkata-based SREI group, is making a public offer of ₹600 crore in a price band of ₹195-205 per share.

At the higher end of the price band, it is seeking an enterprise value to EBITDA multiple of 18 times. This is much higher than of its peers such as IRB Infrastructure (6.3 times), Ashoka Buildcon (8.4 times) and Sadbhav Infrastructure (11.4 times). Moreover, many of the other companies have stable revenue-generating road assets, compared to BRNL which is currently facing regulatory hurdles in three of its six properties.

Investors can avoid this offer. Given that the projects still have an average of 18.5 years to go before they are transferred, the revenue visibility is dodgy. Investors seeking exposure to the road sector are better off buying companies with relatively stable assets.

BRNL constructs roads under the Build, Own and Transfer (BOT) model. It is into development, operation and maintenance of national and State highways in Uttar Pradesh, Kerala, Haryana, Madhya Pradesh, Maharashtra and Odisha. The company largely generates revenue from toll operations. The engineering, procurement and construction (EPC) operations are done through partnership with local EPC players.

It currently has six projects in its portfolio (in the form of SPVs) of which five are operational and one is under construction — Guruvayoor Infrastructure Pvt Ltd (GIPL), Mahakaleshwar Tollways Pvt Ltd (MTPL), Kurukshetra Expressway Pvt Ltd (KEPL), Ghaziabad Aligarh Expressway Pvt Ltd (GAEPL), Shree Jagannath Expressways Pvt Ltd (SJEPL) and Solapur Tollways Pvt Ltd (STPL). Of these, STPL is currently under construction and GIPL and MTPL have received the final nod for commencement of operations while the other three have received provisional go-ahead.

BRNL’s projects cover approximately 1,622 km of laning. On an average, all its five operational projects have been tolling since last five years.

BRNL is facing regulatory issues in three of its projects. A portion of the SJEPL project stopped earning toll revenues with the NHAI and the State government directing cessation of toll collection on that stretch, while exempting certain class of vehicles from toll fee payment.

BRNL claims to have lost about ₹200 crore because of this action. It is unclear about the future revenue streams for this portion of the project. Moreover, the MTPL project faced the challenge of non-collection of toll fees due to an order passed by the State road development authority, resulting in a loss of about ₹13 crore.

The GIPL project too has claims from State authorities — for about ₹170 crore. The company has raised claims from government bodies to compensate its revenue loss but the recovery might not be smooth. Meeting the project cost will be difficult given the uncertainty in cash flows. Moreover, many of its projects have been facing cost overruns due to land acquisitions, though in some cases they have been compensated by the State authorities.

BRNL’s revenue was about ₹10 crore in FY17; it grew 12 times over the previous year. In 2015-16, its revenues were down 91 per cent, compared to a year ago. Suspension of toll collections has resulted in weaker financials for the company in the last three years.

The company reported a loss of ₹74 crore in FY17 and this has only increased over the last two financial years.

The company had about ₹2,400 crore of debt (proportional) on its books. The issue proceeds will go towards repaying ₹420 crore of debt advanced by SREI.