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Funding troubles spook ITNL investors

To bring debt under control, ITNL is looking to raise money through stake sales, securitization of the projects and equity issuances

A strong project pipeline is bringing no comfort to IL&FS Transportation Networks Ltd (ITNL) investors. The stock has lost more than one-third of its value since it announced its June quarter results. What spooked the Street is the surge in finance costs and the fear that they may remain high for rest of the fiscal year.

Interest costs at the consolidated level jumped 24% from the year ago, crimping net profit to less than 3 crore. For comparison, in the June 2014 quarter, net profit stood at 138 crore. Some projects are facing funding issues. To overcome the problems, ITNL is taking debt on its books, which is pushing interest costs higher.

“For example, in the Jorbat-Shillong project and Chenani-Nashri road project, the total interest during construction (IDC) limit, as per the approved project cost at the time of securing the funding, has been exhausted and the bankers are unwilling to fund the excess IDC capitalized," Emkay Global Financial Services Ltd said in a note.

The consolidated debt-equity ratio rose from 3.5 in June 2014 to 4.3 times in the last quarter. Debt jumped 25% to 24,832 crore.

To be sure, ITNL’s debt-equity ratio has been rising for some time now. But as one analyst points out, the disclosure that ITNL is facing funding problems at some of its projects has come as a negative surprise.

To bring debt under control, ITNL is looking to raise money through stake sales, securitization of the projects and equity issuances.

On Wednesday, its board approved a proposal to raise up to 750 crore through rights issue. The issue will bring in sorely required funds but they alone may not be sufficient to alleviate financial pressure.

The company has to arrange for incremental equity of 557 crore for the projects in hand. Also as it bags new projects—it has won four projects so far this fiscal—the equity requirement is expected to rise. That means a limited portion of the raised funds will find their way for debt repayment.

ITNL is also looking to monetize its assets. But with an overwhelming number of infrastructure companies looking to monetize their road projects, analysts doubt if ITNL will manage to get a favourable valuation, especially under depressed market conditions. The current situation is expected to drag on for some time or at least till under construction projects are completed and contribute meaningfully to ITNL’s earnings.

“Even though the management is working on strategic initiatives to reduce debt, we sense it would take a few quarters for these developments to materialize. Till then, ITNL’s profitability would be impacted due to higher interest expenses, given its levered balance sheet," Angel Broking Pvt. Ltd said in a note.

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