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Business News/ Market / Mark-to-market/  Rights issue to aid ITNL, but debt concerns may not fade away quickly
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Rights issue to aid ITNL, but debt concerns may not fade away quickly

Stock will get a boost if ITNL proves earnings from new projects can cut debt and cover for new investments

With a debt-to-equity ratio of 3.57, a greater portion of the company’s operating profits now go towards interest payments.Premium
With a debt-to-equity ratio of 3.57, a greater portion of the company’s operating profits now go towards interest payments.

The IL&FS Transportation Networks Ltd’s (ITNL) stock has gained sharply after the company said it fixed the record date for the rights issue on 14 March. The issue is priced at a discount to the market price and offers an arbitrage opportunity for short-term investors. Sure, the government decision to allow road developers defer the premium payments has brought the sector into focus. But a successful completion of the rights issue will resolve one major headwind for the ITNL stock.

Over the next three years, the company is estimated to require 1,300-1,500 crore for the projects it is implementing. The rights issue will inject around 524 crore into the company. Add this to the 750 crore ITNL has already raised through preference shares and the company has raised a substantial chunk of the required funds. “Till now, the company has been meeting its equity commitment by raising debt at the holding company level, leading to stand-alone debt of ~ 40 billion, which was a significant investor concern. “We believe the proposed issue will help alleviate concerns on this front and also provide room for future growth once project award picks up," Edelweiss Securities Ltd said in a note.

That said, not all analysts are enthused. Some are sceptical that the debt concerns will be fully resolved. By December the company’s consolidated debt increased 5% (sequentially) to 17,474 crore. With a debt-to-equity ratio of 3.57, a greater portion of the company’s operating profits now go towards interest payments. Considering that the company is expected to use most of the newly raised funds for equity investments in new projects, it is not yet clear when the actual debt or interest cost reduction will begin.

Also weighing on the outlook are concerns about sustainability of growth in high margin fee income. “ITNL’s earnings and cash flows are highly leveraged to new order inflows; we believe sustaining such high growth rate in fee income is unlikely. Given this backdrop of decelerating high margin fee income growth, the high parent leverage could mean increasing interest cost pressures for ITNL," Emkay Global Financial Services Ltd said in a note released last month.

This is not to say that new funds will be of little help. The rights issue will help the company kick-start the deleveraging exercise. But for the stock to continue to trade with positive momentum and existing investors to see material gains (in terms of profits and earnings per share growth) the company has to prove that earnings from new projects, to be commissioned over the next 1-2 years, are not only sufficient to bring down the debt but also cover for new investments.

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Published: 06 Mar 2014, 08:28 PM IST
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