Bharat Road Network IPO opens: Should you subscribe?

Even though the current IPO market has been witnessing a bullish sentiment, we suggest investors to avoid the issue as we expect weak financial performance to persist in the near term, it said. NSEBSESREI InfrastructureLoading data…

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          ChartsValuation & Peer ComparisonCommunity BuzzPEER COMPANIESAshoka BuildconEXPAND TO VIEW ALL NEW DELHI: Srei Infrastructure Finance-led Bharat Road Network kicked off its initial public offer on Wednesday. The company will raise Rs 600 crore by selling up to 2.93 crore equity shares in Rs 195-205 per equity share price range. The issue constitutes 34.90 per cent of the post issue paid-up equity share capital of the company.

          The company intends to utilise the net proceeds from the issue towards advancing of subordinate debt in form of interest free unsecured loan to its subsidiary, STPL, for part financing of the STPL Project among others. The IPO will close on September 8. Analysts are neutral to negative on the issue, given that valuations do not offer much on table when compared with listed peers such as Sadbhav Infra, Ashoka Buildcon and IRB Infrastructure Developers.

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          Here’s what analysts said on the issue:

          Angel Broking : Neutral

          The brokerage noted that the company manages over Rs 6,685 crore of road assets including five operating projects and one under construction project aggregating to 2,095 lane km, with average residual life of approximately 18 years and 6 months.

          The broking firm noted that the company is presented only in Build–operate–transfer (BOT) project segment and lack of presence in the engineering, procurement & construction (EPC) segment makes its highly dependent on the traffic growth and price increase for improving its profitability.

          «Though BRNL’s projects are spread across India, the past track record of the numbers doesn’t give enough confidence about sharp improvement in the near term. At the issue price band, the stock is offered at 2.6 times its pre-issue BV and 1.5-1.6 times its diluted BV. Even established players like IRB, with strong portfolios are trading at similar valuations and hence, we believe the issue price leaves limited scope for further appreciation,” the brokerage said.

          Centrum Broking: Avoid

          Centrum Broking has avoid rating on the issue. It noted that the company is loss-making and valuations could not be comparable to peers like IRB Infrastructure Developers, Sadbhav Infrastructure Project, Ashoka Buildcon.

          «Fluctuation in the financial performance (loss-making company with stretched working capital cycle) remains a concern for us. The government’s focus on improving infrastructure investments has resulted in many structural reforms, leading to the road sector coming back into focus. The conversion of the benefits of these opportunities into financial numbers is expected to be prolonged,» the brokerage said.

          Even though the current IPO market has been witnessing a bullish sentiment, we suggest investors to avoid the issue as we expect weak financial performance to persist in the near term, it said.

          ICICI Securities: Avoid

          ICICI Securities said that the company has pledged a portion of shares it holds in certain subsidiaries and associates in favour of lenders as security for loans provided to them.

          «If these subsidiaries & associates default on their obligations, lenders may enforce the share pledges and acquire management control or sell the shares to any person without any restriction. Such a sale will dilute BRNL’s stake and may entail its equity stake in such subsidiaries and associates being sold to any of its competitors,» it noted.

          The brokerage further said that the given quality of most projects commissioned in the past few years , the issue should be at a discount to IRB Infra’s valuations. But that is not the case.

          Choice Broking: Avoid

          This brokerage that the company was valued at P/BV multiple of 2.7 times, compared with 1.7 times p/BV of peers, excluding Sadbhav Infrastructure Project.

          «BRNL will be utilising around Rs 372.50 crore from the net from the issue to acquire subordinated debt advanced/held by SREI in the identified SPVs. By this mechanism, the company will become creditors in the SPVs. Thus interest expenses from the SPV will be an income for the BRNL. This arrangement might increase the cash flow for the company, but is not likely turn the SPVs profitable as there is no reduction in the debt levels,» the brokerage said.

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