IL&FS Transportaion Networks - Rights issue to lead to significant dilution - Edelweiss

IL&FS Transportation (ITNL) has finalised the terms of its proposed rights issue. The company is looking at raising ~INR5.25bn by issuing fresh shares at INR100/share (~9% discount to CMP of INR108). The issue will result in ~27% dilution, assuming full subscription. Funds raised will primarily be used for retiring debt/meeting equity commitment for BOT projects. The issue will lead to interest cost savings and will deleverage the balance sheet; however, the significant dilution will dent FY15E and FY16E EPS 17% and 16%, respectively, which leads us to revise our target price to INR213/share (INR243 earlier). Maintain 'BUY'.

Fund raising to meet equity commitment

The funds raised will be primarily used for meeting ITNL's ~INR13bn equity commitment for its BOT projects. Till now, the company has been meeting its equity commitment by raising debt at the holding company level, leading to standalone debt of ~INR40bn, which was a significant investor concern. We believe the proposed issue will help alleviate concerns on this front and also provide room for future growth once project award picks up. With likely improvement in operating cash flows as more projects become operational, we believe the fund raising will suffice next three-four years' growth requirements.

Focus on balance sheet improvement

ITNL's debt:equity had reached 3.9x at FY13 end, leading to renewed focus on deleveraging. The company has already raised INR7.5bn through issue of preference shares. The proposed INR5.25bn rights issue will further provide breathing space at a time of high interest costs. Promoters can theoretically increase their share holding to 75% (statutory upper limit) by subscribing to 84% of the rights issue.

Outlook and valuations: Overhang lifted; maintain 'BUY'

The rights issue had been an overhang on the stock in light of the anticipated dilution. We believe investors can now focus on the company's fundamentals, which we believe are on recovery path. A healthier balance sheet and likely commencement of eight more road projects by FY15 end will improve ITNL's growth prospects. Maintain 'BUY' with revised target price of INR213/share with BOT projects (adjusted for debt) valued at INR123/share and EPC business at INR90/share.

Source : Equity Bulls

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