Largest projects have shown double digit growth: IRB Infra

IRB Infra's build-operate-transfer (BOT) revenues and margins for the June quarter revenues were better than market expectations."Most of the large projects have shown double digit volume growth and that has led to a very strong performance on the BOT toll revenues, which have grown at almost 22 percent year-on-year," VD Mhaiskar, CMD of the company tells CNBC-TV18.Lower steel and diesel prices have helped margins in the Engineering Procurement and Construction (EPC) business. "If the crude prices continue to be low then certainly there is margin expansion scope in the next half of this financial year," says Mhaiskar. Below is the transcript of VD Mhaiskar's interview with Anuj Singhal and Ekta Batra on CNBC-TV18.Ekta: Wanted to start by asking you about the infrastructure investment trust that the company is planning to create and that would mean that you are not looking to raise any fresh capital at the parent level, tell us how this works?A: We have taken a resolution to form an infrastructure investment trust yesterday in the board meeting and the idea would be to transfer the operational assets into the trust. So the point you made that there won't be any need to raise capital at the parent company is correct. We expect the infrastructure trust with these operational projects to have a EV of approximately Rs 15,000 crore and on a less of debt the equity valuation should be in the range of somewhere around Rs 7,000-8,000 crore. So retaining 25 percent stake in the investment trust, we will be able to monetize a good amount of money into the parent company and that will help us to grow further quite strongly.Anuj: Let us talk about results now. Street is surprised positively by your build-operate-transfer (BOT) revenues and even margins, which was a clear beat, what led to this kind of performance and what is the way forward?A: I think the project portfolio has got a lot to play in this. As you know the majority of the projects are in the western half of the country, which has been contributing quite well as far as the gross domestic product (GDP) growth is concerned. That has also reflected in the traffic volume growth in these projects. So primarily most of the large projects have shown double digit volume growth and that has led to a very strong performance on the BOT toll revenues, which have grown at almost 22 percent year-on-year (Y-o-Y).Ekta: There is some margin expansion which is still possible in your engineering, procurement and construction (EPC) segment in the second half and a pickup in revenues?A: Steel prices and prices for diesel have certainly come down and that has to a good extent helped the construction margins to be strong. So if the crude prices continue to be low then certainly there is margin expansion scope in the next half of this financial year.Anuj: Traffic growth for all your major roads was in high double digits and do you think this is going to sustain from these higher basis now?A: This is Q5 running where we have seen strong volume growth and this is the peculiar thing about this particular business model because here you have tariffs which is linked to inflation and you have a volume growth. So typically what we have seen in the past as well, when you had high inflation, the growth falters and when your growth picks up, your inflation falters so each of it tends to hedge the other and if you have observed that the wholesale price index (WPI) has been in a negative trend, so the tariff growth this quarter has not been so much as it would have come beginning of April but because of the higher volume growth, we have been able to achieve good numbers.Ekta: Just wanted to come back to the infrastructure investment trust, you said that you are going to have how much stake and who would be the remaining shareholders in the trust and how much in terms of assets would you look to monetise starting FY16 itself?A: The idea is that now we have taken the board approval. The shareholder approval should happen in some time from now post which we will file for registering the trust. Around 12-15 operational projects we will try to transfer to the trust and our understanding is that the EV for this project should be in the range of around Rs 15,000 crore. So net of debt on these -- the total equity valuation, which we are looking from these 12-15 projects is in the range of around Rs 8,000 crore. As per the real estate investment trust (REIT) and investment trust norms that have been cleared by Securities and Exchange Board of India (SEBI) the parent has to retain 25 percent of the units once the trust is registered and listed. So we will retain 25 percent of that units in IRB.Ekta: Your BOT project equity requirement I understand stands at Rs 2,700 crore up till FY18 so all of that will be met via this trust?A: The equity requirements can be comfortably met from the project surpluses that we have. So as you rightly said the total balance equity would be in the range of around Rs 2,700 crore and that has to be pumped in over next four financial years. So once the trust thing happens, this equity requirement can be comfortably taken care of and even if we look at just the consolidated profitability and the cash flows that we are generating, we are sure that we can comfortably fund this equity requirement over the next four financial years. Anuj: One concern from the analyst community was the Agra-Etawah L1 where your bid was much higher than L2, substantially higher than L2 and considering that it is the northern part where we have seen some slowdown, is that viable for you and do you think they will make money out of that?

A: We are very sure that Agra- Etawah will generate at least 17-18 percent equity internal rate of return (IRR) and there is a bit of a history attached to it. This project is a rebid project and if you look at the earlier bid, which had gone in 2011, the premium that was offered was Rs 128 crore on a traffic base of 2011. We are now going to start the project somewhere in 2016-2017 with a premium that we have committed of Rs 81 crore, which is substantially lower. So we don’t see any reason of any kind of concern on that project at all.

The difference between the other bidders can be because there is not much of interest bidding for BOT projects and conservative bidding to a great extent has played out. So I wouldn’t give much credence to what the L2 was in this case because we have done our homework and in this case as I said the earlier bid was at Rs 128 crore premium on a 2011 traffic base, so Rs 81 crore on 2016-2017 traffic base, I don’t think would by anyway prove to be wrong.

Anuj: Finally would you say that the BOT space has truly seen a turnaround and from hereon do you have significant visibility of revenues?

A: There are two things. Initially when the new government came in, they said we want to do everything on EPC and there was a concern whether private sector will play its role and whether BOT projects will see response but surprisingly all of the BOT projects, which were seeing tendered have seen response.In this year itself government has awarded close to 1,200 kilometres of BOT projects and I think the target of 4,000 kilometres on BOT for a whole year seems quite doable. Other than that they are also looking at doing express way projects around 6-8 of those on BOT and I think that also will be a very promising piece to look at.