Poor execution, weak results weigh on listed entities

IL&FS group companies with stressed financial position require support from parent to meet payment obligations

Listed entities of the IL&FS Group continue to see their share prices under pressure after its parent defaulted and their ratings were downgraded. The group’s borrowing is over ~900 billion, with reported losses during 2017-18 more than ~20 billion.

IL&FS runs its business through numerous subsidiaries. Analysts at Nomura say analysis of the larger subsidiaries indicate its financial position remains stressed, leading to the rating downgrades. It is a complicated structure, with the holding company at the top, owning stakes in its financial services arm and in multiple subsidiary companies that operate its infrastructure assets.

Among the listed companies are IL&FS Transportation Networks (ITNL) and IL&FS Engineering and Construction Company (IECCL), whose debt instruments were downgraded recently. Given the high debt on the books of these companies and low interest coverage ratio, they require support from the parent to meet their payment obligations.

ITNL remains the most leveraged company in the group, with ~350 billion in debt. The consolidated debt to equity ratio here was more than seven in FY18. High interest expenses and relatively low profitability are also weighing on the financials.

Which is why Brickwork Ratings has downgraded its ranking for the non- convertible debenture amounting to ~35.5 billion, given significant deterioration in the credit profile of the parent company. The agency says the downgrade factors in the impaired financial flexibility of ITNL and the IL&FS group in servicing the debt, given the sizable near-term repayment obligations. The liquidity position has worsened after the inconclusive shareholder meeting on September 15, where funding support was envisaged at the IL&FS level, says Brickwork.

Problems for road transportation companies had started mounting between FY12 and FY14. While infra companies earlier went aggressive on bidding for projects and expanding their balance sheets, subsequent delays in execution, lower traffic growth and cost overruns hampered their profitability. Though government efforts thereafter have helped to some extent, many players are still not out of the woods, ITNL being one.

Thus, despite a strong portfolio of road and infra projects, ITNL has been struggling. ICRA, which downgraded the debt (~75.5 billion) rating, cited the company’s failure to achieve equity infusion, asset monetisation and realisation of claims pending with the authorities as reasons.

ITNL now has a portfolio of 28 road projects. Of these, 21 are operational and the rest are under construction, with a total road lane network of 13,493 km. These are a mix of toll and annuity-based projects. Further, the company has an order book of ~164 billion; the international order book is $232 million (~16.9 billion).

The situation is similar for the other infra subsidiary, IECCL. It implements EPC (engineering, procurement, construction) projects in diversified segments — roads, rail and irrigation, among others. These have a relatively longer project life cycle and makes its operations working-capital intensive.

While the order book position of ~96 billion (4.52 times of total sales) as on end-June remained strong, delays and slow project implementation, beside the deteriorating financial profile, are looked at with concern. CARE Ratings has revised its outlook to negative, saying IECCL’s constrained liquidity might affect its ability to execute its order book in the medium term, leading to more deterioration in operating performance.

The only listed subsidiary that seems slightly better off is IL&FS Investment Managers (IIML), a private equity (PE) fund manager.

The funds it manages encompass general purpose PE, real estate and infrastructure. Though debtfree as of end-March, continuous shrinking in IIML’s fee- earning assets under management has impacted its performance over the past three to four years.

Consolidated revenue fell from ~2 billion in FY14 to ~1.1 billion in FY18, and profit before tax declined sharply from ~1 billion in FY14 to ~213.9 million in FY18. Net profit in FY18 was ~65.6 million. Amid the parent company’s issues, the stock of IIML plunged 38 per cent over the past month.