IPO watch: Poor financials, valuation dampen Bharat Road’s appeal

Bharat Road Network has been making losses for the past five fiscals to FY17. NSEBSEKNR ConstructionsLoading data…

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      ChartsValuation & Peer ComparisonCommunity BuzzPEER COMPANIES ET Intelligence Group: Consistent losses and capital intensive nature of the business make the initial public offering (IPO) of Kolkata-based roads company Bharat Road Network an unattractive proposition.

      Investors looking to capture the roads theme may instead consider well-established listed players such as IRB Infrastructure, KNR Constructions and Dilip Buildcon.

      Business

      Bharat Road Network, a unit of SREI group, has six road projects spread across Kerala, Madhya Pradesh, Haryana, Uttar Pradesh and Odisha. Key highways under development include: Ghaziabad-Aligarh, UjjainIndore, Thrissur-Angamali and Solapur-Maharashtra border.

      National highways form close to 2 per cent of India’s road network and carry close to 40 per cent of total road traffic. The government has put infrastructure sector on high priority in terms of investments and reforms. This should benefit roads companies in the coming years.

      A large part of Bharat Road Network’s roads portfolio falls on national highway route. This is advantageous for the company given the high traffic on national highway routes.

      Objectives

      Of the total proceeds of close to Rs 600 crore, the company will utilise Rs 372 crore in acquiring sub-debt of its promoter SREI. Usually, an infrastructure project such as road construction is financed through a combination of debt and equity.

      A sub-debt represents the equity portion of the project finance which also attracts proportionate share of cash flow from the project. The company plans to use Rs 150 crore for acquiring new road projects and another Rs 50 crore for its road pro ject at Solapur-Maharashtra border.

      Valuation

      The infrastructure theme has distinct advantages for road companies as improvement in connectivity ensures traffic growth. But developing roads is a capital intensive business and road companies often take a long time to turn profitable.

      Bharat Road Network has been making losses for the past five fiscals to FY17. It therefore makes sense for investors to wait for the listing of the company. On the valuation front, the company’s enterprise value (EV) is 332 times FY17 operating profit before depreciation (EBITDA). Its listed peers trade at EVEBITDA of 7-13.

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