Bharat Road Netwok Limited IPO - Should you subscribe?

Hello fellow investor...!!

Bharat Road Network Limited is the 18th mainstream IPO of the calendar year 2017. Somewhere I read that IPO is the arrangement where companies garner money when money is available rather than actually needed. Every Tom, Dick and Harry type company is coming with its IPO because a lot of money is available in the market and as it has witnessed in recent time that every IPO gets oversubscribed. Even, GTPL, Tejas Network and S Chand type IPOs are no exception.

 

Before moving ahead, I would like to say that I've gone through 737 pager Red Herring Prospectus of the company. There wasn't a single positive thing in the prospectus which can excite investors to apply the IPO. If you love your hard earned money, I would strongly recommended to AVOID this IPO.

 

I've compiled some information from the RHP.

 

Issue details

 

BRNL will garner money through fresh issue of 2,93,00,000 equity shares of face value Rs. 10

 

The break up of shares allocation is hereunder;

 

Particulars	No. of Shares	Total Shares	%  of total
Qualified Institutional Buyer
Anchor investor	1,31,85,000
Mutual funds	4,39,500
For all QIBs	83,50,500	2,19,75,000	75%
Non - Institutional Investors		43,95,000	15%
Retail Individual Investors		29,30,000	10%
Total		2,93,00,000	100%
Equity share before issue		5,46,50,000
Equity share after issue		8,39,50,000

   

Issue opening, closing, and pricing

 

This is over priced IPO. Loss making company is asking for hefty premium on its penny shares

 

Date of issue opening	06-Sep-17
Date of closing issue	08-Sep-17
Issue Price	INR  195 - 205
Market Lot	73
Tentative date of listing	18-Sep-17

 

BRNL Overview

 

SREI Infrastructure Finance Ltd promoted company BRNL has come up with its IPO to take the advantage of current IPO Bull market. Not sure how far this IPO would be successful. Incorporated in 2006, BRNL is a road BOT (Build, Operate and Transfer) in India, focused on development, implementation, operation and maintenance of road/highway projects. It is involved in the development, operation and maintenance of National and State highways in several states of India with projects in Uttar Pradesh, Kerala, Haryana, Madhya Pradesh and Odisha through partnership with experienced EPC (Engineering, Procurement and Construction) players in the local space where project is located. At present, all its projects are implemented through SPV (Special Purpose Vehicle) either through its subsidiary or in partnership with other infrastructure player. 

 

The company performs a range of project management functions including design, engineering, EPC Management and quality control. It also provides project advisor activities including project management consultancy, project conceptualisation, commissioning, operation and management of the projects during the entire life cycle of their projects. It also undertakes debt syndication, financing and restructuring of its projects.

 

Objective of Issue

 

BRNL proposes to utilise the funds which are being raised through the issue after deducting the issue related expenses ("Net Proceeds")

 

1. Advancing of subordinate debts in form of interest free unsecured loans to its subsidiary, STPL, for part financing of the STPL Projects ("STPL Sponsor Investment")

 

2. Acquisition of the subordinate debt in the form of unsecured loans/OCPID/Warrants/OCDs, advanced/held by SREI to/in STPL, KEPL and MTPL ("Identified SPVs"); and

 

3. General corporate purposes.

 

In this article, I've highlighted five point why shouldn't you subscribe this IPO?

 

Point No. 1

 

BRNL - Consistent loss making company:

 

Profit is the first and foremost requirement for every company to attract its investors to subscribe IPO. Why an investor should put money in lost making company? BRNL has two subsidiaries and five associates company, all of those are loss making.

 

The nature of business of BRNL is such that it finances its subsidiaries and associates to undergo road construction project. The associates and subsidiaries can start making profit only when projects are completed and final or provisional CODs are received. Gestation period is long. Why an investor would put his money where there is no certainty when it will make profit.  And there is no guarantee that company will make profit. This business work under thin margin.

 

Any figure appearing in Balance Sheet and Profit & Loss account is not attractive. This company is running out of cash. Just before filing prospectus with SEBI for IPO, it issued shares to its promoters SREI & Make In India Fund @ Rs. 205 per share. This issued created some capital reserve in the Balance Sheet, otherwise this company is bleeding.

 

Have a look at some of the figures extracted from the financials

 

	Consolidated (Rs In Cr)
	2017	2016	2015	2014	2013
Revenue from operations	10.25	0.75	8.43	9.62	0.68
Profit after tax	-73.89	-92.54	-26.42	-60.76	-16.88
Intangible Assets under development	430.89	303.01	160.45	54.71
Non - current investments	454.69	360.95	381.23	374.05	320.49
Long term loans and advances	74.75	131.43	72.23	25.88	0.51
Long term borrowings	514.97	872.72	280.43	461.01	298.13
Other long term liabilities	17.64	7.31	7.81	2.53	-
Cash generated from operating activities	-16.95	-35.05	-32.31	18.79	0.71
Cash generated from investing activities	-163.01	-214.98	37.78	-45.79	-295.74
Cash generated from financial activities	189.55	263.81	-29.75	51.82	298.68

 

 BRNL's EPS is negative. Since EPS is negative, PE Multiple can not be calculated. Industry PE Ratio is 11.6

 

	31-Mar-17	31-Mar-16	31-Mar-15	31-Mar-14	31-Mar-13
Standalone EPS	-11.04	-46.67	-6.31	-50.07	-1,041.95
Consolidated EPS	-26.51	-92.54	-26.42	-60.76	-1057.53

 

 BRNL's RoNW (Return on Net Worth) is negative

 

	31-Mar-17	31-Mar-16	31-Mar-15	31-Mar-14	31-Mar-13
Standalone RoNW	-7.29%	NA	NA	NA	NA
Consolidated RoNW	-17.19	NA	-443.99%	-579.89	NA

 

 Why one would invest in a company which has consistent negative EPS and RoNW?

 

The trend of NAV is given. NAV (Net Asset Value) of share means Total Assets substracted by total liabilities divided by total number of shares.

 

NAV = Total Assets - Total Liabilities / Total  Number of Shares

 

NAV as on 31.03.17	31-Mar-17	31-Mar-16	31-Mar-15	31-Mar-14	31-Mar-13
Standalone	77.17	-110.55	-63.86	-57.56	-7.48
Consolidated	78.64	-66.9	5.95	10.48	-1.13

 

In 2 out of 3 peer companies, they also have negative EPS. In fact, in this sector, profits are not immediate. It takes long and long to earn profits

 

As on 31.03.17	FV	EPS	NAV	P/E	RoNW
IRB Infrastructures Developers Ltd	10	20.36	150	11.6	13.57
Sadbhav Infrastructure Project Ltd	10	-10.05	2.78	NA	-360.81
Ashoka Buildcon Ltd	5	-0.55	115.24	NA	-0.45

 

Point No. 2

 

Utilisation of net proceeds is not attractive

 

The net proceeds shall be utilised as follows;

 

Objective of issue	Rs (In Cr)
STPL Sponsor investment	51.47
Acquisition of subordinated debt in the form of unsecured loans/OCPIDs/Warrants/OCDs, advanced/held by SREI to/in the identified SPVs	372.253
General Corporate Purposes

 

STPL (Solapur Tollways Private Ltd) is a subsidiary of BRNL. It was incorporated in 2012. It is involved in the road concession business for four laning of Solapur - Maharashtra/Karnataka border section of NH-9 from 249 kms to 348.8 kms in Maharashtra (Design length - 100.06 kms) on design, build, finance, operate and transfer  - DBFOT (Toll) basis

 

Rs. 51.47 crore shall be utilised to give interest free unsecured loan to its subsidiary which is already loss making. There will be no possible revenue from investors money.

 

Rs, 372.253 will be utilised to acquire debt which again shall be interest free. As I mentioned earlier, promoters company purchased shares of BRNL at Rs. 205. Now, the promoters want their money back. By IPO, they will get their money from BRNL. There is no probable revenue from this arrangement.

 

Point No. 3

 

Road infrastructure companies have too much dependency on Government Authorities

 

Not only BRNL, but every company involved in the business of road infrastructure and BOT (Build, Operate and Transfer) projects have to be too much dependent on the government authorities. Right from submitting the bid - to - get the land - to get approved the project - to get the grant - to get the COD/provisional COD, every step has too much involvement of government authorities especially NHAI (National Highway Authority of India) and other local state authorities. This process takes too much time resulting into too much finance costs to the companies. This factor adversely affect the business.

 

Point No. 4

 

Administrative inefficiencies

 

There are various legal proceedings pending at different levels of adjudication before various courts, tribunals, enquiry officers and appellant authorities against BRNL, its director, its promoters, its subsidiaries and associates.

 

There are total 34 litigations against BRNL, its subsidiaries and associates involving 68.61 Crore approx. and 6 pending litigations by associates involving 262.36 Crore approx. The summary is hereunder;

 

 

Against/By	Nature of matter	No of cases	Rs (In Cr)
Against BRNL	Taxation	2	0.23
Against BRNL Director	Civil	1	Not ascertained
Against subsidiaries	Taxation	2	0.07
Against associates	Action by statutory and regulatory authorities	3	45.69
	Taxation	16	2.83
	Civil	9	19.79
	Criminal	1	Not ascertained
By associates	Civil	3	262.36
	Criminal	3	Not ascertained
Involving promoters	Civil	26	5,285.93
	Taxation	20	84.47

 

 

Point No. 5

 

Delay in completion of projects

 

For road infrastructure companies, meeting deadlines is the biggest challenge. Delay in project becomes very routine. It may be because of Government Authorities or company's side. It may be avoidable or unavoidable. In either case, company has to incur heavy costs especially finance costs. This takes its PAT substantially down. Other than that, it has very complex business structure. Why one should invest in such complex company when other investment options are available in the market.

 

Conclusion

 

AVOID this IPO if you love your hard earned money.

 

Thank you for reading...Jai Hind

 

CA Prashant Seta

Vadodara. Gujarat. India

 

(Note : The above is my personal opinion. You should do your own research before applying)

 

 

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