Bharat Road Network IPO Analysis

IPO Rating – 35 (Avoid Investment)*

About the Issue
Bharat Road Network is opening its IPO of up to Rs 2.93 crore equity shares of Rs 600.65 crore. The face value is Rs 10 per equity share. The minimum lot size is of 73 shares with issue price ranging between Rs 195 to Rs 205 per equity share. The issue will remain open for subscription from September 6-8, 2017. The company will get a listing on both BSE and NSE.
 
Purpose of the Issue
•         Advancing of subordinate debt in form of interest-free unsecured loan to its subsidiary, STPL, for part-financing of the STPL project.
•         Acquisition of the subordinated debt in the form of unsecured loans/OCPIDs/warrants/OCDs, advanced/held by SREI to/in STPL, KEPL and MTPL.
•         General corporate purposes.
 
Company Background
Bharat Road Networks is a road BOT company in India incorporated in 2006, which focuses on development, implementation, operation and maintenance of roads and highways projects. It operates national and state highways in several states in India with projects in states of Uttar Pradesh, Kerala, Haryana, Madhya Pradesh, Maharashtra and Odisha through partnerships with experienced EPC players.
 
The company’s project portfolio consists of six BOT projects of which two are projects operational under final COD, three are projects operational under provisional COD, and one is a project under construction. The projects operational under final COD and those operational under provisional COD are in the states of Kerala, Madhya Pradesh, Haryana, Uttar Pradesh and Odisha, respectively. One project is under construction, which is located in the state of Maharashtra. The projects operational under final COD and projects operational under provisional COD cover approximately 1,622.44 lane km, including major and minor bridges and approximately 12 lane km and 60.72 lane km are under construction at the GAEPL project and SJEPL project, respectively, for which the company is waiting for approval.
 
The project at Maharashtra involves development of 400.24 lane km, including major and minor bridges. SREI Infrastructure Finance Ltd. is the corporate promoter of Bharat Road Networks. Both these parties have entered into a letter agreement dated February 16, 2017, pursuant to which all the road/ highway assets of SREI would be managed by the company.
 
Industry Outlook
Major infrastructure development requires substantial capital investment. Economic growth, increasing government thrust, preference of road in freight traffic, spurt in private participation, and surge in passenger traffic and vehicle density are key growth drivers for infrastructure investments. Growth in road freight traffic will be largely driven by increased non-bulk traffic and development of road infrastructure. The government introduced the Smart Cities Mission in June 2015 for the development of 100 smart cities over five years (2016-17 onwards) to meet the infrastructure and services expectations of citizens.
 
The national highways (NHs) constitute around 2% of the country’s road network but carry about 40% of the total road traffic. State roads constitute around 18% of the country’s total road network, handling about 40% of the total road traffic. Higher budgetary support to fund engineering, processing and construction (EPC) projects will also drive investment in national highways, which have recently seen a significant drop in private interest.

Financial Performance



The company has shown inconsistent growth in revenue and profits. Also, the company has been generating losses from more than five years. It has carried forward losses too. As it is generating losses, it posts negative EPS every year. Its RoNW for FY17 was (17.19).
 
Valuation and Peer Comparison
The EPS being negative, the company’s P/E cannot be calculated. Its listed peers in the industry are IRB Infrastructure Developers Ltd., Sadbhav Infrastructure Project Ltd. and Ashoka Buildcon Ltd. IRB Infra is generating profits with EPS of Rs 20.36 and P/E of 11.6x for FY17. Whereas, Sadbhav Infra and Ashoka Buildcon are generating losses with negative EPS.
 
EV/EBITDA for these companies for FY17 are as follows:

Bharat Road Network’s EV/EBITDA is much higher as compared to its peers.
 
Our View
Bharat Road Network is not a profitable firm. It has been generating losses consistently from the past few years. We expect the company would take time to stabilize and set off its losses. It may generate profits later in the long term. Although the construction industry has good prospects in India, it comes with many headwinds which might not be supportive for the company. We do not see investors gaining any returns from this investment. Hence, we recommend investors to AVOID subscribing for this IPO. 

*40 or lower – Avoid Investment, 41 to 45 – Risky, 46 to 50 – Invest with limited exposure, 51 to 55 – Investment recommended, 56 & above – Excellent Investment