CRISIL has removed its ratings on the bank facilities of IRB Infrastructure Developers Limited (IRBIDL; part of the IRB group) from 'Rating Watch with Developing Implications' and has reaffirmed the ratings at 'CRISIL A+/CRISIL A1' while assigning a 'Stable' outlook.
 
CRISIL had placed the ratings on watch on August 19, 2019, following the announcement by IRBIDL regarding the definitive agreement entered on August 6, 2019, with affiliates of GIC (GIC, Singapore's sovereign fund) for investment in the company's road portfolio. As a part of this deal, IRBIDL had to transfer 9 build, operate, and transfer (BOT) assets to a private infrastructure investment trust (InvIT), in which IRBIDL would hold a controlling stake of 51% and GIC will hold 49%. GIC would bring in Rs 4,400 crore, which was proposed to be utilised to deleverage these BOT assets (Rs 3,000 crore) and for equity funding of under-construction projects (Rs 1,400 crore).
 
Some of the projects transferred under InvIT with GIC have suffered cost overruns on account of delay in construction, largely due to delays in receipt of right of way (ROW) and critical approvals from the project authorities, and thereby resulting in support requirement in the form of interest during construction and maintenance of the projects. Thus, pending equity commitment for these projects remains at a similar level, despite the expected inflow of Rs 1,400 crore. However, deleveraging of Rs 3,000 crore of project debt for some of the projects, is expected to improve the cash flow position of these projects, reducing the reliance on IRBIDL for support in debt servicing. Further, given that a large portion of future biding will be done with GIC, this deal has given flexibility to IRBIDL to bid for projects which could entail high equity commitment.
 
The rating watch was extended on November 14, 2019 as IRBIDL was in the process of receiving the required approvals by December 2019 and was likely to set up the InvIT in the fourth quarter of fiscal 2020 before inflow of funds from GIC commences. The approvals included registration of trust with Securities Exchange Board of India, and no-objection certificates (NoCs) from lenders and National Highways Authority of India (NHAI; rated 'CRISIL AAA/Stable'), which were in advanced stage of discussion.
 
The rating watch was further extended on December 27, 2019, when IRBIDL had announced on December 06, 2019, regarding proposed issuance of Secured, Redeemable and Unlisted NCDs amounting to Rs 1400 crore on a private placement basis. The NCDs were allotted on December 16, 2019 with 50% of the issuance subscribed by GIC, while the remaining was subscribed by IRBILD's subsidiary, Modern Road Makers Pvt Ltd (MRMPL). These funds were issued primarily towards funding equity commitments of under construction projects proposed to be transferred to private InvIT.
 
On February 25, 2020, IRBIDL announced receipt of first tranche of investment of Rs 3753 crore from GIC out of Rs 4400 crore of total commitment, subsequent to receipt of all approvals towards setting up the InvIT (IRB Infrastructure Trust). The remaining commitment from GIC will be invested based on the progress of ongoing under-construction projects. Subsequently, the allotment of InvIT units has been concluded on February 26, 2020. Additionally, redemption of Rs 1400 crore of NCDs subscribed by GIC and MRMPL has also been completed. Given completion of set up of InvIT and receipt of funds from GIC, ratings have been removed from watch.
 
On February 25, 2020, IRBIDL also announced receipt of letter of award (LoA) for Mumbai-Pune expressway and old Mumbai-Pune Highway project on toll, operate, maintenance and transfer (TOT) basis. The award included tolling and maintenance rights on the project for a concession bid value of Rs 8262 crore over a concession period of 10 years and 2 months. The concession bid value payment includes upfront payment of Rs 6500 crore by June 2020, and subsequent staggered payments of Rs 850 crore each in March 2021 and March 2022, and Rs 62 crore in March 2023. Total project of Rs 8900 crore is expected to be funded by debt to equity mix of 74%:26%. The equity commitment for the project is expected to be around Rs 2300 crore which includes internal accruals from the project of Rs 900 crore and balance Rs 1400 crore. The project would be executed in partnership with financial investor in the ratio of 51:49 with IRB holding 51%. CRISIL understands that the company is in final stage of discussion with this financial investor and the decision on the same is expected by end of March 2020. Any change in this decision will result in materially larger equity commitments from IRBIDL and is thus expected to impact its credit profile.
    
IRBIDL's 51% equity share for the Mumbai Pune Expressway project is expected to be funded partly through internal accruals. Dividend payments is expected to be limited till the equity investments in the project are completed. Capital structure is expected to remain comfortable with total outside liabilities to adjusted networth (TOL/ANW) expected to be below 1.7 times till fiscal 2022. Further, upstreaming of surplus cashflows from this project over its concession is expected to provide financial flexibility to IRBIDL's future funding requirements.    
 
The ratings continue to reflect the IRB group's established track record in the roads and highways sector, coupled with prudent project selection and strong execution capabilities, strong order pipeline providing healthy revenue visibility, and moderate working capital management. The ratings also factor in the group's ability to fund ongoing projects through capital unlocked from its InvIT platforms. These strengths are partially offset by moderate debt protection metrics, and large exposure to under construction project special-purpose vehicles (SPVs), and susceptibility to intense competition and cyclicality in the roads and highways sector.

For arriving at its ratings, CRISIL has fully consolidated the business and financial risk profiles of IRBIDL, with that of MRMPL, while moderately consolidating the company's SPVs, together defined as IRB group. MRMPL is the engineering, procurement and construction (EPC) arm of the group, and the 100% subsidiary of IRBIDL. Further, IRBIDL has extended an unconditional and irrevocable corporate guarantee (CG) for the bank facilities availed by MRMPL. IRBIDL has outstanding CGs for some of its operational and under-construction projects. CRISIL expects these CGs to fall-off once the debt servicing conditions are met or on refinancing of the debt in these projects as seen with other projects in the past. CRISIL has also treated unsecured loans received from subsidiaries as neither debt nor equity as these loans are interest free, subordinated to external debt and the repayments on these loans are minimal.

Please refer Annexure - List of entities consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

The IRB group had cash and cash equivalent of Rs 2,029 crore as on December 31, 2019 (Rs 1,637 crore as on September 30, 2019). However, large part of it is encumbered towards margin money requirement and locked-in in the form of unit shares in the public InvIT, resulting in moderate liquidity. Unencumbered cash and cash equivalent stood adequate at around Rs 530 crore as on December 31, 2019. Furthermore, locked-in shares (15%) in the public InvIT will become unencumbered by May 2020, supporting the future liquidity.
 
Fund-based bank limit utilisation averaged 88% over the 12 months through September 2019, while average utilisation of non-fund-based facilities was at 74%. Furthermore, the group refinances its term loans every 2-3 years, making the current portion of long-term debt (CPLTD) significantly higher. CPLTD in fiscal 2020 was 44% of long-term debt as on March 31, 2019. However, annual cash accrual of over Rs 600 crore and track record of refinancing term loans will continue to support liquidity.

CRISIL believes IRBIDL will continue to benefit from its healthy business risk profile, supported by its established track record in the roads and highways sector and strong execution capabilities. The financial risk profile is backed by strong profitability and a healthy capital structure.

Incorporated in 1998 and promoted by Mr Virendra D Mhaiskar, IRBIDL is an infrastructure development and construction company in India, with extensive experience in the roads and highways sector. The company is also into other business segments in the infrastructure sector, including maintenance of roads, construction, airport development, and real estate activities. IRBIDL currently has a portfolio of 20 projects (19 BOT and 1 HAM, including 7 that have been transferred to IRB InvIT Fund and 7 that have been transferred to IRB Infrastructure Trust). The company operates largely as a holding company, while the construction activities are carried through its EPC arm, MRMPL.
 
IRBIDL became a listed company in 2008 by listing its shares on Bombay Stock Exchange (BSE) and National Stock Exchange (NSE). In September 2016, IRBIDL received an approval from SEBI to set up an InvIT. The company has listed 6 of the operational assets through InvIT on BSE and NSE on May 18, 2017. The company has also transferred one additional asset to InvIT on September 28, 2017. IRBIDL currently undertakes maintenance of these projects and holds 15.97% of the unit capital in the InvIT.
 
IRBIDL made an announcement of the definitive agreement entered into on August 6, 2019, with GIC for investment in IRBIDL's road portfolio through a private InvIT. Subsequently, on February 26, 2020, the company has set up the InvIT i.e. IRB Infrastructure Trust and transferred 9 of its BOT assets into the trust, in which it currently holds a controlling stake of 51% while GIC holds the remaining 49%. Of the 9 projects transferred, 4 have received COD/PCOD, while 5 are under construction (tolling has commenced as these are 4 to 6 lane projects). IRBIDL will undertake the project management of these activities, including maintenance of these projects.
 
On a consolidated basis (with MRMPL), IRBIDL reported net profit of Rs 702 crore on operating income of Rs 4,424 crore in the first nine months of fiscal 2020, against Rs 510 crore of net profit and Rs 3,481 crore of operating income in the first nine months of fiscal 2019.

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