The IL&FS headquarters in Mumbai. (Source: BloombergQuint)

IL&FS’ Road Assets Are Not Worth What It Says. Here’s Why…

Infrastructure Leasing & Financial Services Ltd.’s road to solvency partly hinges on its ability to sell assets owned by its subsidiaries. And there lies the problem.

What the infrastructure group—now taken over by the government—earns from such a sale will in part depend on its intangible assets. That’s the accounting term for something which doesn’t exist physically but has the potential to add value or generate revenue for a company: like patents, trademarks, copyrights, goodwill and brands.

In case of IL&FS, these intangible assets include the rights to collect toll on highways built by its subsidiaries. And there’s a fear that they are not worth what the group has disclosed. Even the Ministry of Corporate Affairs, in its Oct. 1 note, said that IL&FS may have exaggerated the value of intangible assets worth Rs 20,000 crore, mostly contributed by its largest subsidiary IL&FS Transportation Networks Ltd.

Not without a reason. For two straight years, IL&FS Transportation Networks, or ITNL, didn’t write down the value of these intangible assets despite losses, cost overruns, litigation and arbitration. Companies are required to review the value of such assets every year.

With a debt of nearly Rs 90,000 crore on equity and reserves of just Rs 6,950 crore, IL&FS group has a leverage of 13 times, according to the ministry’s note. Any turnaround plan by the new board picked by the government will include fresh cash infusion and sale of assets—a quarter of which are in the form of rights to collect toll on its highway projects.

Also read: NCLAT Stays NCLT Order Denying Three-Month Moratorium To IL&FS Group

Value Of Assets

IL&FS and its subsidiaries had such intangible assets worth Rs 28,885 crore as of March this year, according to its disclosures. Nearly 85 percent, or Rs 24,654 crore worth of such assets, are linked to highway projects held by ITNL. Of these, completed roads account for more than Rs 15,000 crore and the rest are under-construction.

The IL&FS subsidiary earns most of its revenue through the build-operate-transfer model. Which means it foots the bill for construction and gets the right to charge toll for a certain number of years before transferring the asset to the government.

The rights, or intangible assets, are assigned a value based on cost plus profit margins—the calculations factor in usage, toll rates, cost of the project based on time taken to complete it, and traffic growth forecast by external agencies, according to its annual report. That’s where the valuations could go wrong.

According to Indian Accounting Standards, every asset must undergo an impairment test on a yearly basis to check the value of expected future proceeds. If that’s lower than the book value, a company has to write down the book value—in other words take an impairment.

Why that’s important for ITNL is because:

  • It reported a loss of nearly Rs 700 crore in 2017-18 compared with a profit of Rs 253 crore in 2016-17 on road and metro assets held by the subsidiary.
  • The loss was driven by its completed projects, according to its annual report. The loss would have been higher had the group not reported a profit on under-construction projects—an accounting entry based on estimates.
  • Its projects are under litigation and arbitration because of cost overruns caused by delays. At least three highways with claims worth Rs 1,200 crore in Maharashtra, Uttar Pradesh and Jharkhand were under litigation in 2017-18, according to ITNL’s filings.

Still, IL&FS’ largest subsidiary didn’t write down the intangible assets for two successive financial years: 2016-17 and 2017-18. ITNL auditors SR Batliboi & Co. didn’t make any adverse opinion on the intangible assets of the company in 2017-18.

What further raises doubts about the actual value of ITNL’s intangible assets is that:

  • After March this year, six more projects worth Rs 7,448 crore—about 50 percent of total intangible assets— have run into dispute with ITNL threatening to terminate the contracts, the annual report shows.
  • ITNL in August sold intangible assets linked to NAM Expressway between Andhra Pradesh and Telangana at a loss of Rs 294.5 crore.

Despite these troubles, the value of the intangible assets has not suffered any impairment.

Meanwhile, based on the events of the past months, that is the defaults by the group and the government takeover of its board, the Institute of Chartered Accountants of India has now sent notices to auditors of IL&FS in the last five years. While SR Batliboi & Co., an affiliate of EY, audited its books in 2017-18, Deloitte Haskins and Sells was its statutory auditor for four years prior to that.

“Our audits have been conducted in accordance with the Standards on Auditing issued by the Institute of Chartered Accountants of India,” SR Batliboi told BloombergQuint in an emailed reply.

Confirming that it had received a communication from the ICAI, a Deloitte spokesperson said in an email that it will respond in due course. “At this stage, we have no other observation to make.”

IL&FS and ITNL have yet to respond to BloombergQuint’s emailed queries.

Now, the task of finding the true value of IL&FS’ intangible assets rests on the new board.

Also read: India’s IL&FS Built a Road to Riches for Some