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Sep 06, 2017 11:34 AM IST | Source: Moneycontrol.com

Bharat Road Network IPO opens; Most analysts recommend 'Avoid'

The very first reason for avoiding the issue is its weak financials and the second prominent reason is its valuations, which are high compared to listed peers, analysts said.

 
 
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Bharat Road Network opened its Rs 600-crore initial public offering for subscription on Wednesday but most stock analysts recommended avoiding the issue.

The very first reason for avoiding the issue is its weak financials and the second prominent reason is its valuations, which are high compared to listed peers, analysts said.

Also Read - 10 things to know before you invest in Bharat Road Network IPO

The company has been posting losses for five consecutive financial years up to March 2017, and there has been no consistency in revenue from operations.

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"The company has been reporting losses and hence valuations are not 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," Centrum Wealth Research said.

The research house further 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."

For the fiscals 2017, 2016 and 2015, its consolidated revenue from operations and loss after tax were Rs 10.25 crore and Rs 73.885 crore; Rs 0.75 crore and Rs 92.54 crore; and Rs 8.43 crore and Rs 26.42 crore, respectively. Low profitability has impacted the return ratios for the company.

Asit C Mehta also recommended avoiding the issue. "Due to operational inefficiency, BRNL is in loss since 5 years with heavy debt. Therefore, the asking price has a negative P/E, which is not measurable," it reasoned.

Choice Broking, too, assigned a avoid rating for the issue, citing aggressive pricing of the issue, likely continuity in losses on consolidated as well as standalone basis and unlikely reduction in debt levels.

BRNL will be utilising around Rs 372.25 crore from the net issue proceeds to acquire subordinated debt advanced/held by SREI in the identified special purpose vehicles (i.e. Solapur Tollways Private Limited, Kurukshetra Expressway Private Limited & Mahakaleshwar Tollways Private Limited).

"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 (i.e. interest income plus non cash expenses in the SPV), but is not likely turn the SPVs profitable as there is no reduction in the debt levels," Choice Broking explained.

The company will also utilise net issue proceeds (worth Rs 51.47 crore of total issue proceeds) for advancing of subordinate debt in form of interest free unsecured loan to its subsidiary (Solapur Tollways Private Limited) for part financing of the project.

According to Centrum, although government focus on infrastructure spending could open up opportunities in the BOT segment, higher competitive intensity could hamper the translation of this opportunity into orders for BRNL.

SMC also agreed with Centrum, saying due to higher competitive intensity the company may not get the opportunity in (government) orders. One may give this IPO a miss, it advises. It has assigned 1.5 rating to the issue.

ICICI Securities also recommended to avoid as the issue is richly valued at 1.4x FY17 P/B multiple.

"At the higher end of the IPO price band of Rs 205, the stock is valued at 1.4x FY17 Price-to-book value (post issue), which appears to be at par with other established player like IRB Infrastructure (1.4x FY17 P/BV). Looking at the quality of projects (most projects commissioned in the past few years), we believe it should be at a discount to IRB," it said.

The road and highways BOT company's public issue, which will close on September 8, consists of up to 2.93 crore equity shares.

SREI Infrastructure Finance is a corporate promoter of the company.

The company is expected to raise Rs 571.35-600.65 crore at a price band of Rs 195-205 per share. The issue will close on September 8.

Bharat Road Network has a project portfolio consisting of six BOT projects, of which two are projects operational under final commercial operation date (COD), three are projects operational under provisional COD and one is a project under construction.
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