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HOME   >  CORPORATE INFO >  MANAGEMENT DISCUSSION
Management Discussion      
IRB Infrastructure Developers Ltd.
BSE Code 532947
ISIN Demat INE821I01022
Book Value 16.13
NSE Code IRB
Dividend Yield % 0.54
Market Cap 333473.58
P/E 40.45
EPS 1.37
Face Value 1  
Year End: March 2015
 

MANAGEMENT DISCUSSION AND ANALYSIS

1. INFRASTRUCTURE INDUSTRY OVERVIEW & OUTLOOK

India's infrastructure industry, including the road sector, was in the recovery mode during FY 2014-15. The Government has been undertaking initiatives to revive entrebrneurs' interests in the road sector and as a result FY 2014-15 saw a moderate growth. Around 3,060 kms of National Highways were awarded by the National Highways Authority of India (NHAI) in  FY 2014-15 compared to 1,435  kms in the year before. Most of the bids saw good participation gradually towards the year end. The increase in participation of these bids could also be attributed to the fact that requisite clearances for these projects were already in place. NHAI has been focusing on addressing land acquisition and environmental clearances for the upcoming projects. It is learnt that the Cabinet Committee on Infrastructure has stipulated that financial bids shall be invited only after 80% of land has been acquired and environmental clearance has been obtained. This will help to reduce any future delays in project implementation after award of work.

2. SECTOR OVERVIEW: ROADS AND HIGHWAYS

India has the world's second most extensive road network with 4.24 million kms. National Highways have a total length of 96,260 kms and serve as the country's arterial road network. Over 70% of freight and 85% of passenger traffic in India use roads. While

National Highways/Exbrssways constitute only about 2% of the total road length, they carry about 40% of the road traffic, leading to a strained capacity. It is observed that road traffic volumes, as measured by automotive fuel consumption, have grown by about the same rate as overall GDP. The Government launched major initiatives to upgrade and strengthen National Highways through various phases of the National Highways Development  Project (NHDP). NHDP stands  apart as one of the world's largest road development programmes undertaken by a single authority. It helps widen, upgrade and rehabilitate about 54,000 kms of roads, entailing an estimated investment of over Rs. 300,000 Crores. Though number of road projects awarded on BOT mode remained lower during FY 2014­15, the Government's efforts to evolve new, flexible policies to create investor-friendly highway development initiatives are likely to help recoup the deficit in the next few years.

Approximately 16,297 kms of road development works are yet to be awarded under NHDP. This highlights latent demand which can come from further roll out of NHDP in future. The Company will therefore continue to focus on the development of roads and highways.

3. COMPANY AND BUSINESS OVERVIEW

A. Company Overview

IRB Infrastructure Developers Ltd. (IRB), incorporated in 1998, has strong in-house integrated project execution capabilities in both its business verticals viz. Construction and Operation & Maintenance of Highways. It is the first mover and pioneer in the road BOT business and is one of India's largest road BOT operators with a rich portfolio of 23 Road BOT projects. It also has approximately 13% share of the golden quadrilateral highway network. IRB's construction business complements its BOT vertical by executing the engineering, procurement and construction (EPC) and operation and management (O&M) aspects of BOT concessions. Over the years, IRB has developed rich, in-house expertise in both EPC and O&M verticals.

Out of IRB's 23 road projects, 17* are operational, i.e. are revenue generating projects, while 6** are under various phases of implementation. The Company's major clients are government agencies, such as NHAI and State Road Development Authorities, which engage in the development of the country's highways. In the last few years, IRB has been strategically expanding its footprint in states other than Maharashtra and Gujarat. Currently, its road assets portfolio is across eight states . On a per lane kilometers basis, its geographic sbrad is 39% in Maharashtra, 21% in Gujarat, 15% in Karnataka, 7% in Haryana, 6% in Rajasthan, 5% in Uttar Pradesh, 4% in Punjab and 3% in Tamil Nadu.

* In Ahmedabad - Vadodara BOT Project, toll collection has commenced on NE-1 only. Also  includes Mohol - Mandrup - Kamtee BOT Project & Nagar - Karmala -Tembhurni BOT Project which were handed over to the Government of Maharashtra under their directions in May 2015. ** includes Agra - Etawah BOT Project.

B. Business Overview

(I) Construction and development (EPC)

IRB has successfully constructed more than 1,247 kms of highways on BOT basis, while 964 kms is under construction. This includes improvement of National Highway and sections of the Golden Quadrilateral Highway Network.

IRB's integrated approach towards project execution involves in-house constructing as well as operating and maintaining activities with least outsourcing. Its large pool of equipment and skilled and experienced manpower help IRB complete projects within budget and in time. This experienced manpower also helps the Company to manage the entire tolling and maintenance functions in-house during operations phase. An evolving IT infrastructure set up provides finesse to these integrated methods of conducting business.

The Company's construction order book as on March 31, 2015 stands at approx. Rs. 10,770 Crores to be executed over the next three to four years.

Among the existing projects, Amritsar - Pathankot Project has commenced commercial operations. The Company is in the process of obtaining a Provisional Certificate for the Ahmedabad - Vadodara Project for commencement of tolling on the NH-8. Works on Goa/Karnataka border to  Kundapur Highway Project is progressing as per schedule.

In January 2015, IRB received the Appointed Date for the Solapur -Yedeshi Highway Project and construction work has commenced which is to be completed in 30 months.

IRB has won following new projects in last few months.

(II) Operations and maintenance (O&M)

IRB has 17 projects under operations and maintenance. IRB has in-house expertise in handling the operation and maintenance of BOT road Projects. The Company routinely carries out maintenance of toll roads, including periodic and major maintenance. Its O&M work has won many accolades in the past. IRB has been awarded CNBC TV18 Essar Steel

Infrastructure Excellence Award in the Highways and Flyovers category for its Mumbai - Pune section of National Highways (NH-4) in FY 2009-10 and Bharuch Surat Section of NH-8 in FY 2010-11.

(III) Related diversification

IRB had executed Project Development Agreement for Sindhudurg Greenfield Airport BOT Project with Maharashtra Industrial Development Corporation (MIDC). The Company has also received Environmental Clearance for the Project from the Ministry of Environment and Forest, Government of India. Requisite land has already been acquired by MIDC for the Airport. Construction work on the airport has commenced in February 2013. Construction on the Gateway Hotel Project in Kolhapur has also commenced.

4. FINANCIAL ANALYSIS BOT Assets

Net block in BOT Assets, both operational as well as under construction, have grown significantly from Rs. 2,674 Crores in FY 2007-08 to Rs. 14,388 Crores in FY 2014-15, registering a compound annual growth rate (CAGR) of 27%.

As is the norm for financing Highway BOT projects, debt funds from project lenders have been the major source of funding these investments. The project lenders have reposed trust in the Company's financial strength, demonstrated by healthy growth in internal accruals and net worth. Besides, they have also shown faith in our project execution capabilities. This trust of the project lenders has played a primary role in helping IRB achieve required financial closures.

Since the initial public offering (IPO) in 2008, net worth grew at 15% CAGR from Rs. 1,621 Crores in FY 2007-08 to Rs. 4,361 Crores in FY 2014-15. This growth was largely driven by healthy earnings during this period.

Consequently, net Debt Equity Ratio (DER) touched 2.52 in March 2015. This was driven by the investments undertaken over the last three years. IRB invested in projects that were under construction and are now on the verge of becoming operational. With this, it is augmenting capacity to invest in new projects that may be secured on a diligent evaluation of their risks and commercial viability.

During the year, IRB has made project investments of Rs. 2,977 Crores in BOT Assets under Construction. This was funded by project debt of Rs. 1,863 Crores, grant of Rs. 29 Crores and internal accruals of Rs. 1,085 Crores.

These projects require a further investment of approx Rs. 13,200 Crores across the next three to four years, before they can commence Commercial Operations. The investments will be funded largely through Project Debt of Rs. 8,630 Crores, Grant of Rs. 1,520 Crores and the balance out of Internal Accruals.

Commercial Operations are beginning on under-construction projects like Pathankot-Amritsar project. This is helping in the rise of cash flows from Toll Operations. This increase, alongwith steady cash flow from construction activities, enhances the Company's confidence of generating internal accruals, sufficient enough to infuse its balance equity commitment in the projects in hand. Internal accruals are generated even after providing for debt repayments as well as dividend payouts, in line with its dividend policy.

Total consolidated income  increased by 3% from Rs. 3,853 Crores in FY 2013-14 to Rs. 3,960 Crores in FY 2014-15.

Revenue from operations has marginally increased by 3% to Rs. 3,847 Crores in FY 2014­15 against Rs. 3,732 Crores in  FY2013-14.

Consolidated construction revenue registered a decline of 21% from Rs. 2,555 Crores in FY 2013-14 to Rs. 2,012 Crores in FY 2014-15 due to largely on account of construction activities shifting to FY15-16 on certain under construction projects.

Despite the marginal improvement in India's economy, the Company has seen healthy growth in toll revenues. The consolidated toll revenues (net of revenue share) increased by 56% from Rs. 1,177 Crores in FY 2013-14 to Rs. 1,836 Crores in FY 2014-15.

Other Income registered a decline of 7% from Rs. 121 Crores in FY 2013-14 to Rs. 113 Crores in FY 2014-15.

Earnings Before Interest, Tax, Debrciation & Amortisation (EBITDA) increased from Rs. 1,875 Crores in FY 2013-14 to Rs. 2,325 Crores in FY 2014-15, up by 24°%.

Interest costs increased by 23% from Rs. 756 Crores in FY 2013-14 to Rs. 931 Crores in FY 2014-15 mainly because of projects like Talegaon - Amravati and Jaipur -

Deoli becoming fully operational during the year and Pathankot - Amritsar too being operational for the part of the year.

Debrciation of Rs. 477 Crores in FY 2013-14 rose by 48% to Rs. 707 Crores in FY 2014-15.

As a result, Profit before Tax (PBT) registered an increase of 7% from Rs. 642 Crores in FY 2013-14 to Rs. 687 Crores in FY 2014-15.

Post minority interest, Profit After Tax (PAT) also rose by 18%, from Rs. 459 Crores in FY 2013-14 to Rs. 543 Crores in FY 2014-15.

Earnings per share on basic and diluted basis, which stood at Rs. 16.32 in FY 2014-15 from Rs. 13.81 in FY 2013-14, registered a growth of 18% YoY.

During the year, the Company declared interim dividends aggregating to Rs. 4 per equity share of Rs. 10 each.

The Company's various special purpose vehicles (SPVs) have raised project-term loans to meet ongoing construction of BOT projects. IRB's consolidated debt on net basis, as on March 31, 2015, is Rs. 10,971 Crores, compared to Rs. 9,583 Crores a year ago. This increase was primarily on account of drawing of loans for various under construction projects, such as Ahmedabad -Vadodara, Goa - Kundapur and Solapur - Yedeshi projects.

5. INORGANIC GROWTH

In line with its strategy to grow inorganically, IRB has been evaluating various BOT projects in the secondary markets. However, since there is a substantial gap between the expectation of the seller and the potential buyer of the projects there were no acquisitions last year. Going forward, the Company would like to focus on new projects to be awarded by NHAI rather than the acquisition of road assets.

6. KEY COMPETITIVE ADVANTAGE

The following key advantages enabled IRB to emerge as one of the market leaders:

• Proven track record of successfully accomplishing all phases of BOT Projects in the highway sector

• Robust order book of over Rs. 12,631** Crores including construction order book of Rs. 10,770 Crores (as on March 31, 2015)

• One of the largest Domestic BOT project portfolios in the Roads and Highway sector

• 23 BOT projects, out of which 17 are operational

• Strong financial track record and healthy banking relationship with leading banks/financial institutions

• Integrated and efficient project execution capabilities, supported by combrhensive equipment bank

• Professionally-managed Company with qualified and skilled employee base

** includes Agra - Etawah BOT Project

7. RISKS AND CHALLENGES

The Company's ability to foresee and manage business risks is crucial in its efforts to achieve favourable results. While management is positive about the Company's long-term outlook, it is subject to a few risks and uncertainties, as discussed below.

Competition Risk

The Company is operating in a highly competitive environment. During the year, it is observed that though the competition has diminished to larger extent, the Company believes that the competitive intensity may increase in FY 2015-16. Hence, it will continue to bid for projects with financial, operational and execution viability.

Availability of capital and interest rate risk

Infrastructure projects are typically capital intensive and require high levels of long-term debt financing. IRB intends to pursue a strategy of continued investment in infrastructure development projects. In the past, the Company was able to infuse equity and arrange for debt financing to develop infrastructure projects on acceptable terms at the SPV-level of relevant projects. However, IRB believes that its ability to continue to arrange for capital requirements is dependent on various factors. These factors include: timing and internal accruals generation; timing and size of the projects awarded; credit availability from banks and financial institutions; the success of its current infrastructure development projects. Besides, there are also several other factors outside its control.

However, your Company's track record has enabled it to raise funds at competitive rates. The Company's average cost of debt remains at 11.25% p.a.

Further, IRB has availed External Commercial Borrowing (ECB) facility for its Jaipur - Deoli, Tumkur - Chitradurga, Pathankot - Amritsar and Ahmedabad -Vadodara Projects, which will help it to reduce the interest rate burden.

Traffic growth risk

Toll revenue is a function of the toll rates and traffic growth.

Toll rates: The Government has been implementing a policy of linking toll rates increase to change in Wholesale Price Index (WPI). The toll rates of the Company's Bharuch - Surat and Surat - Dahisar projects are linked to average WPI. However, the toll rates for the projects awarded after 2008 are decided according to a formula, which is 3% plus 40% of average WPI. The Company's all other projects have fixed annual or periodical increase in their toll rates, according to their Concession Agreement. Toll rates on the Company's Bharuch - Surat project have increased by approx. 6% in July 2014 and Surat - Dahisar Project by approx. 7% in September 2014.

Traffic: Vehicular traffic varies with the country's overall economic  activities, specifically in the Golden Quadrilateral corridor. Most of the Company's projects, such as Mumbai - Pune, Thane - Bhiwandi Bypass have a fair mix of passenger and freight traffic. These projects are comparatively less sensitive to the level of economic activities in respective corridors and thus, have been able to contain the impact of muted traffic growth on a few other projects.

On expectation higher traffic growth during the current year, the Company may witness good overall revenue growth from its operational projects.

Input cost risk

Raw materials, such as bitumen, stone aggregates cement and steel, need to be supplied continuously to complete projects. There is also a risk of cost escalation or raw material shortage.

The Company's extensive experience, its industry standing and bulk purchases have helped it plan and procure raw materials at competitive rates. Moreover, the Company procures stone aggregates from its self-operated leased mines which ensures quality and lowers the cost, as compared to bought out aggregates. Besides, it also reduces supply disruption or price escalation.

Labour risk

The timely availability of skilled and technical personnel is one of the key industry challenges. The Company maintains healthy and motivating work environment through various measures. This has helped it recruit and retain skilled workforce and, in turn, complete the projects in time.

8. HUMAN RESOURCE  MANAGEMENT

IRB has a large pool of experienced and skilled technical manpower, with which IRB executes world-class projects and delivered excellent quality, which have become synonymous with IRB. IRB aims to keep its employees continuously updated with the technical knowledge and keep abreast with emerging technologies relating to construction of roads and structures and toll collection systems. Hence, IRB nominates its executives to attend seminars and symposiums conducted by professional bodies of global repute. Employees are also nominated to attend other professional skill-building programmes.

IRB's reputation of providing a congenial work environment that respects individuals and encourages professional growth, innovation and superior performance, acts as a strong pull to attract new industry talent. Human resources continue to be one of the core focus areas of the Company. Respect for individual, open work culture, effective communication, fair and equitable treatment and welfare of employees are significant value propositions, which help IRB to retain a highly engaged talent pool and generate high level of trust among its employees. IRB remains the 'employer of choice' with one of the lowest attrition rates in the infrastructure sector of less than 1% for several years.

9. INTERNAL CONTROL  SYSTEMS

IRB maintains adequate internal control systems including internal financial control systems, which provide, among other things, reasonable assurance of recording the transactions of its operations in all material respects. This system also protects against significant misuse or loss of Company assets. IRB has a strong and independent internal audit function. The Internal Auditor reports directly to the Chairman of the Audit Committee. Periodic audits by the professionally qualified, technical and financial personnel of the internal audit function ensure that the Company's internal control systems are adequate and are complied with.

CAUTIONARY STATEMENT

"IRB", "the Company" are interchangeably used and mean IRB Group or IRB Infrastructure Developers Ltd. as may be applicable. Statements in the Management Discussion and Analysis describing the Company's objectives, projections, estimates, expectations may be "forward looking statements" within the meaning of applicable securities, laws and regulations. Actual results could differ materially from those exbrssed or implied. Important factors that could influence the Company's operations include economic developments within the country, demand and supply conditions in the industry, input prices, interest rates, currency rates, changes in Government regulations, tax laws and other factors such as litigation and industrial relations

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