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Home >Market >Mark-to-market >IL&FS Transport has to raise fresh funds to avoid pressure on earnings

IL&FS Transportation Networks Ltd (ITNL) commissioned two projects in the past 10 days. One is the Shivpuri-Kota border check-post in Madhya Pradesh. The other is the Pune-Solapur road project in Maharashtra. The latter is toll-based and commissioned 145 days ahead of schedule. Early commissioning will bring in additional toll revenues and brokerage estimates put the accretion to earnings at 25 per share from this project.

Investors, however, cold shouldered these developments. Since the commissioning of the first project, the stock has lost much more than the fall in the broader markets. Rising debt levels and weak order inflows continue to weigh on sentiments.

ITNL is caught in a vicious cycle of poor ordering activity, delays in clearances and subsequent spike in interest costs. The company depends on earnings from the construction business to generate equity for new investments. Due to sluggish ordering activity, the outlook for this segment is clouded.

True, the current order backlog provides revenue visibility for more than two years. But it is getting weaker. Compared with March, the order backlog fell by about 5% in June. Slowing order inflows are weighing on execution as well. Revenues in the last quarter fell by 8% from a year ago.

Capital needs, meanwhile, are forcing the company to borrow more. Compared to the year-ago period, consolidated debt jumped 35% to 15,618 crore at the end of June. While rising debt is increasingly eating into operating profits, the company’s earnings will come under further pressure as there are no signs of a pick-up in order inflows and as interest rates rise.

Over the next three to four years, the company will need around 1,900 crore for its ongoing projects.

The management is planning to fund the equity requirements through accruals from operational projects, toll project securitization and the construction business. While the additional revenues will come in handy, these alone will not be sufficient to meet the funding requirements. In the next 18 months, the company is expected to start around 10 projects.

As a way out, the board of the company has approved a proposal to raise 1,000 crore through issuance of preference shares. While the current environment will inspire little confidence among prospective investors, short of an asset sale, raising equity is the smartest way out for the company.

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