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Agitations take a toll on IRB Infrastructure Developers

LiveMint logoLiveMint 12-06-2014 R. Sree Ram

The Maharashtra government’s reported decision to close 44 toll gates in the state has sparked selling in the shares of IRB Infrastructure Developers Ltd. A string of protests by politicians and citizens against toll roads has led to this decision.

The stock has lost 9% in the last three trading sessions. Two-fifths of the company’s portfolio of road projects constructed in the build-operate-transfer (BOT) mode is in Maharashtra. It is unclear how many of these will be affected by the government’s decision.

A March presentation says IRB has 11 BOT projects operating in Maharashtra. According to IndiaNivesh Securities Pvt. Ltd, four of these may get affected. These four generated `56 crore worth of toll revenue in the previous fiscal year. The contribution of these projects to the total BOT toll revenue is relatively low at 3.3%.

The Maharashtra government is also willing to compensate toll road operators to the extent of `300-360 crore, according to reports. This could limit the burden on the company’s profits.

But the problem is not limited to just profitability because of the complex nature of the business. The four projects have an outstanding debt of `467 crore. Add to this the equity component IRB has invested, and a substantial amount of money is locked in these four projects.

If toll collection is not allowed, the value of these projects can take a hit, leading to an erosion of shareholder value, according to IndiaNivesh Securities.

The recent share decline of `20 exceeds the fair value of `12-15 attributed to these projects.

It remains to be seen whether a new state government after the October state assembly elections provides any relief for tolled road operators.

Prolonged uncertainty, meanwhile, can weigh on stock valuations. In anticipation of the economic recovery and an improvement in orders, the stock had run up sharply in the past three months. It is now trading at 1.6 times 2014-15 estimated book value.

While many analysts are not comfortable with the current valuations, negative developments such as these can further dim their opinion.

“While on the operational front it remains one of the strongest players in its segment, it has witnessed negative news flow since March 2012, such as the CBI (Central Bureau of Investigation) raid on IRB for a social activist’s murder case, allegation over investment in the Purti Group of Bharatiya Janata Party’s (BJP’s) ex-chief Nitin Gadkari in lieu of benefits for contracts won, the promoter group selling a stake due to power venture, agitation over toll collection across Maharashtra, etc., which led to volatility in the stock price over the last two years,” ICICI Securities Ltd said in a report dated 23 May.

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