IL&FS Transportation: is there a silver lining to the cloud of debt?
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IL&FS Transportation Networks Ltd’s (ITNL) robust performance in the March quarter is the result of a better-than-expected-income from all its business segments.
One, construction income was the sweet spot that drove net revenue higher by about 72% from a year earlier, catapulting it higher than the street’s forecast.
Two, the pace of project completion was faster, and, three, tolling revenue came in higher than expected.
So, a huge revenue beat pushed up the quarter’s operating profit by about 80% from a year earlier. Further, ITNL’s decent order book provides growth assurance over the next 12-18 months.
But then, the high proportion of income from the construction segment turns out to be a double-edged sword.
While it fuels revenue growth, it does not augur well for profit margins.
Operating margin at 30.5%, although wider than the year-ago period, fell short of that pencilled in by brokerages.
ITNL’s margin was also impacted adversely by a Rs.44 crore provisioning made during the quarter towards loans that the firm is doubtful of receiving.
The concerns on profitability are likely to continue as most of the orders are in the low-margin construction segment. This is not all. ITNL’s balance sheet is already highly stressed with a debt-to-equity ratio in excess of 4. This weighs down investor sentiment, which makes the ITNL stock wobbly. Besides, in spite of turning in a better than expected revenue and order book growth, the stock has underperformed the benchmark indices in the last one year.
The silver lining in the cloud of debt is that the recently raised money, through a rights issue, should lower leverage. But according to the post-results review by Emkay Global Financial Services Ltd, “Leverage continues to surge higher and ITNL earnings highly leveraged to new orders, equity funding gap would still put pressure on balance sheet.”
What would work in favour of the company is strong revenue traction as new projects are due to get commissioned, easing cash flows from business operations over the next 12 months.
ITNL’s trump card would be its ability to monetize some of its existing and operational assets.
Also, funds could be raised through the new route of Infrastructure Investment Trust, for which approval is awaited from the regulatory authority.