A Study on Financial Problems faced by

Infrastructure Leasing & Finance Services (ILFS)

FINANCIAL MANAGEMENT

CIA 3

By

AARON ETHAN CHARLES DSOUZA - 1928801

JIJOY VARGHESE - 1928809

RASHI MISHRA - 1928857

School of Business and Management

Christ (Deemed to be University), Bangalore-29
2019-20
INTRODUCTION:

IL&FS Ltd (Infrastructure Leasing & Finance Services) is a core investment company and serves
as the holding company of the IL&FS Group, with most business operations domiciled in
separate companies which form an ecosystem of expertise across infrastructure, finance and
social and environmental services. A brain child of the late MJ Pherwani, IL&FS was founded in
1987 with equity from Central Bank of India, Unit Trust of India and Housing Development
Finance Co to fund infrastructure projects when peers IDBI and ICICI were focused more on
corporate projects.

Who owns IL&FS?

IL&FS has institutional shareholders including SBI, LIC, ORIX Corporation of Japan and Abu
Dhabi Investment Authority (ADIA). As on March 31, 2018, LIC and ORIX Corporation are the
largest shareholders in IL&FS with their stake holding at 25.34 per cent and 23.54 per cent,
respectively. Other prominent shareholders include ADIA (12.56 per cent), HDFC (9.02 per
cent), CBI (7.67 per cent) and SBI (6.42 per cent).
Financial crisis (Liquidity Crunch)

IL&FS Financial Services, a group company, defaulted in payment obligations of bank loans
(including interest), term and short-term deposits and failed to meet the commercial paper
redemption obligations due on September 14. On September 15 2018, the company reported
that it had received notices for delays and defaults in servicing some of the inter-corporate
deposits accepted by it. Consequent to defaults, rating agency ICRA downgraded the ratings of
its short-term and long-term borrowing programs. The defaults also risks hundreds of investors,
banks and mutual funds associated with IL&FS. The defaults sparked panic among equity
investors even as several non-banking financial companies faced turmoil amid a default scare.
IL&FS Financial Services fell short of cash and defaulted on several of its obligations. Even as
new infrastructure projects dried up IL&FS' running construction projects faced cost overruns
amid delays in land acquisition and approvals.

Important dates with events

June 2018 : IL&FS group’s transport subsidiary IL&FS Transportation Networks (ITNL)

delayed repayment of Rs 450 crore of inter-corporate deposits from Small Industries
Development Bank of India (SIDBI). Rating companies ICRA and CARE Ratings downgrades
ITNL’s debt papers/credit facilities citing weak financials.

July 21: Group’s Founder and Chairman Ravi Parthasarathy steps down, citing health reasons.
Hemant Bhargava, LIC MD and nominee, takes charge as Non-Executive Chairman of IL&FS
group.
August 28: Group’s financial arm IL&FS Financial Services defaults on repaying a few hundred
crores of rupees to its commercial-paper investors but pays the same two days later.
Early September: The group defaults on a Rs 1,000 crore term loan and its subsidiary defaults
on dues worth Rs 500 crore owed to SIDBI.
August-end and early-September: ICRA, CARE and Brickwork Ratings downgrades the
conglomerate’s various long- and short term borrowing programmes worth over Rs 12,000 crore
to 'default' or 'junk' grades. ICRA downgrades the group twice in a fortnight and also removes all
group entities from its rating watch.
September 12 to 26: Several short term loan defaults take place, totalling Rs 440.46 crore (Bank
loans: Rs 284.5 crore, term deposits: Rs 103.53 crore and short-term deposit of Rs 52.43 crore).
September 12: In a letter to employees, IL&FS says Rs 16,000 crore is stuck in claims and
termination payments with concession authorities and it had been planning on raising Rs 45,000
crore through the issue of shares and Rs 3,500 as long term debt from shareholders.
September 15: Former LIC Chairman SB Mathur takes over as IL&FS group Chairman. IL&FS
says it is planning to monetise assets to pare its debt by up to Rs 30,000 crore over the next 18
months and identifies 25 projects for the same.
September 18: Markets regulator Securities and Exchange Board of India (Sebi) says it is
looking into the IL&FS matter with regards to rating agencies and the impact on mutual funds.
September 21: Fears of a debt market crisis due to an IL&FS default prompts DSP Mutual fund
to sell commercial papers of  Dewan Housing Finance (DHFL) which leads effects in equity
markets, which crash nearly 1,500 points. Ramesh C Bawa, MD and CEO of IL&FS Financial
Services resign.
September 24: IL&FS defaults again and loses access to fund rising through commercial paper
market for up to six months from the date of repayment of this obligation. IL&FS board seeks
relief from NCLT to work out an arrangement with shareholders, creditors and board of
directors. SIDBI threatens to file a case at the NCLT for non-repayment.
September 28: RBI meets top shareholders and raises concern on the crisis
September 29: At its Annual General Meeting (AGM), IL&FS decides to raise Rs 4,500 crore
through a rights issue and raises borrowing limit to Rs 35,000 crore from Rs 25,000 crore. The
company appoints Alvarez and Marsal as specialist agency to execute the debt restructuring plan.
October 1: NCLT judgment allows government to assume control and institute a new board
under the chairmanship of Uday Kotak and five other new board members.

Default impact:

A series of defaults by IL&FS group companies in August and September on term deposits, short

term deposits, inter-corporate deposits, commercial paper and non-convertible debentures and

rating downgrades in some and default on some other financial instruments results in a massive

sell-off in  shares of non-banking financial companies (NBFCs). This causes redemption
(repayment) pressure in mutual funds holding such financial instruments and adversely impacts

sentiment in the stock, money and debt markets. This creates a large systemic risk, leading to

good quality debt papers being sold at steep discounts to meet redemption demand. The

government tells NCLT that the collapse of IL&FS may lead to a collapse of many mutual fund

companies.

Situation from micro perspective

 IL&FS has run out of money and, therefore, has been unable to service its repayment
obligations. According to the latest available data, the company has a total consolidated debt
of Rs. 90,000 crores.

 The major reason for the crisis is negative Asset liability mismatch as the outflow of
liabilities became more than the inflow of assets. Investing in long term assets but borrowing
money on short duration debt instruments led to a huge asset liability mismatch.

 Investment in unviable projects has been a major issue for ILFS and nearly 60000 crore debt
of IL&FS is at project level including road power and water projects.

 Several allegations of fraud and corruption have been made against the senior management
of ILFS. Serious Fraud Investigation Office (SFIO) is conducting a probe as there were huge
procedural lapses.

 The former vice-chairman of IL&FS, Hari Sankaran has been arrested by SFIO in Mumbai
for granting loans to entities that were not creditworthy and thereby causing loss to the
company and its creditors

 The initial SFIO probe also revealed that there were major lapses in Deloitte's audit of the
IL&FS. SFIO investigation found it guilty of painting a rosy picture of ILFS despite being
aware of the poor financial health of the company,
Situation from macro perspective

 A major reason behind troubles of L&FS is complications in land acquisition.

 The 2013 land acquisition law made many of its projects unviable. Cost escalation also led
to many incomplete projects. Lack of timely action exacerbated the problems.
 The company's default spells trouble for its investors, which include banks, insurance
companies, and mutual funds.
 Investors and traders have been worried over the cascading effects of IL&FS’s
defaults.IL&FS has revealed a series of delays and defaults on its debt obligations and inter-
corporate deposits. IL&FS said it was unable to service its obligation towards a letter of
credit to IDBI Bank Ltd.
 Life Insurance Corporation (LIC), which has the largest shareholding in IL&FS, said that it
would not allow the debt-ridden IL&FS to collapse and would explore options to revive it.
 Since the defaults have been on commercial papers, it will affect individual investors, too.
This is because mutual funds invest in them and this CPs is supposed to be relatively secure
investments.
 Even the value of unit-linked insurance plans, endowment plans, the National Pension
Scheme, etc. will be hit.
 There are also be some indirect effects. For instance, several projects, including the
Bengaluru Metro construction plans, are likely to be delayed, which will affect individuals,
too, besides the firms involved.
 IL&FS’s defaults can have a significant impact on India’s credit markets. The firm’s
outstanding debentures and commercial papers accounted for 1% and 2%, respectively, of
India’s domestic corporate debt market as of March 31, according to Moody’s Investor
Services. Defaults will spell more trouble for Indian lenders, already battling a huge toxic
loan pile.

Financial Statements

BALANCE SHEET OF IL & FS

 Mar- Mar- Mar- Mar- Mar-
EQUITIES AND LIABILITIES 19 18 17 16 15
SHAREHOLDER'S FUNDS          
Equity Share Capital 62.81 62.81 62.81 62.81 62.81
TOTAL SHARE CAPITAL 62.81 62.81 62.81 62.81 62.81
Reserves and Surplus 58.56 67.5 85.05 61.08 51.94
TOTAL RESERVES AND SURPLUS 58.56 67.5 85.05 61.08 51.94
TOTAL SHAREHOLDERS FUNDS 121.37 130.31 147.85 123.88 114.75
NON-CURRENT LIABILITIES          
Long Term Borrowings 0 0 0 0 0
Deferred Tax Liabilities [Net] 0 0 0 0 0
Other Long Term Liabilities 10.83 8.98 0 0 0
Long Term Provisions 0 0 2.08 2.06 2.12
TOTAL NON-CURRENT LIABILITIES 10.83 8.98 2.08 2.06 2.12
CURRENT LIABILITIES          
Short Term Borrowings 0 0 0 0 0
Trade Payables 2.01 1.9 2.37 2.81 6.83
Other Current Liabilities 0 0 3.74 3.64 3.59
Short Term Provisions 0 0 4.29 47.3 48.67
TOTAL CURRENT LIABILITIES 2.01 1.9 10.41 53.74 59.08
TOTAL CAPITAL AND LIABILITIES 134.22 141.2 160.34 179.69 175.94
ASSETS          
NON-CURRENT ASSETS          
Tangible Assets 0.26 0.61 0.91 1.33 0.7
Intangible Assets 0 0 0 0.01 0.03
Capital Work-In-Progress 0 0 0 0 0
Other Assets 0 0 0 0 0
FIXED ASSETS 0.26 0.61 0.91 1.34 0.73
Non-Current Investments 0 0 74.42 39.29 41.41
Deferred Tax Assets [Net] 0.55 1.61 1.4 1.47 1.53
Long Term Loans And Advances 0 0 6.7 7 5.32
Other Non-Current Assets 7.95 8.74 0 0 0
TOTAL NON-CURRENT ASSETS 8.76 10.96 83.43 49.11 48.99
CURRENT ASSETS          
Current Investments 106.36 103.17 51.13 99.39 89.73
Inventories 0 0 0 0 0
Trade Receivables 0 15.64 10.01 8.02 21.56
Cash And Cash Equivalents 18.31 5.79 11.63 18.27 6.56
Short Term Loans And Advances 0.12 0.01 2.43 4.83 8.36
OtherCurrentAssets 0.66 5.63 1.69 0.07 0.75
TOTAL CURRENT ASSETS 125.45 130.24 76.9 130.58 126.95
TOTAL ASSETS 134.22 141.2 160.34 179.69 175.94
Mar- Mar- Mar- Mar- Mar-
FINANCIAL RATIOS 19 18 17 16 15
Basic EPS (Rs.) 0.32 0.17 0.76 1.56 1.78
Diluted EPS (Rs.) 0.32 0.17 0.76 1.56 1.78
Cash EPS (Rs.) 0.34 0.19 0.78 1.58 1.8
Book Value 3.86 4.15 4.71 3.94 3.65
Book Value 3.86 4.15 4.71 3.94 3.65
Dividend / Share(Rs.) 0.3 0.6 0.6 1.2 1.3
Revenue from Operations/Share (Rs.) 1.16 1.2 1.96 3.25 3.31
PBDIT/Share (Rs.) 0.48 0.36 0.92 2.08 2.44
PBIT/Share (Rs.) 0.47 0.34 0.9 2.07 2.43
PBT/Share (Rs.) 0.47 0.34 0.9 2.07 2.43
Net Profit/Share (Rs.) 0.32 0.17 0.76 1.56 1.78
PROFITABILITY RATIOS          
PBDIT Margin (%) 41.64 29.64 46.71 64.05 73.87
PBIT Margin (%) 40.49 28.18 45.71 63.56 73.29
PBT Margin (%) 40.49 28.18 45.71 63.56 73.29
Net Profit Margin (%) 28.01 14.09 38.96 48.13 53.78
Return on Networth / Equity (%) 8.38 4.07 16.21 39.66 48.7
Return on Capital Employed (%) 11.12 7.62 15.98 39.01 47.82
Return on Assets (%) 7.58 3.75 14.94 27.34 31.76
Total Debt/Equity (X) 0 0 0 0 0
Asset Turnover Ratio (%) 27.07 26.68 38.37 56.8 59.06
LIQUIDITY RATIOS          
Current Ratio (X) 62.4 68.41 7.39 2.43 2.15
Quick Ratio (X) 62.4 68.41 7.39 2.43 2.15
Inventory Turnover Ratio (X) 0 0 0 0 0
Dividend Payout Ratio (NP) (%) 193.56 367.81 0 76.69 73.04
Dividend Payout Ratio (CP) (%) 185.91 333.13 0 75.91 72.26
Earnings Retention Ratio (%) -93.56 -267.81 0 23.31 26.96
Cash Earnings Retention Ratio (%) -85.91 -233.13 0 24.09 27.74
VALUATION RATIOS          
Enterprise Value (Cr.) 129.29 531.23 422.37 487.34 580.7
EV/Net Operating Revenue (X) 3.56 14.1 6.87 4.77 5.59
EV/EBITDA (X) 8.54 47.56 14.69 7.45 7.56
MarketCap/Net Operating Revenue (X) 4.06 14.25 7.05 4.95 5.65
Retention Ratios (%) -93.56 -267.81 0 23.3 26.95
Price/BV (X) 1.22 4.12 2.94 4.08 5.12
Price/Net Operating Revenue 4.06 14.26 7.05 4.95 5.65
Earnings Yield 0.07 0.01 0.06 0.1 0.1
Action plan for revival

 Appoint Legal, Transaction & Resolution Advisors to advise the senior management.

 The management should setup an ‘Operating Committee’ of senior executives under MD for
managing daily operations, for co-ordinating with various agencies, for organisational
stability

 The management should work with central and state government authorities to resolve
outstanding claims

 Develop a liquidity management framework using a 12 month cash flow based solvency test

 All contracts assessed for viability. Unviable contracts should be foreclosed

 The company should monetise all non-core assets like luxury cars, immovable properties etc

 The company could offer right issues to generate extra funds to recapitalise.

 IL&FS could manage extra fund from financial institutions like LIC and SBI to pay its
immediate liabilities.

 Asset quality testing also needs to be done before providing loan to anyone. Only good asset
quality backed up loans should be sanctioned

 Capital re-structuring needs to be done. Debt to equity should be calculated. Cost of capital
should also be considered while fund raising.

 Ensure corporate governance is effective.

References

https://www.ilfsindia.com/

https://www.moneycontrol.com/news/tags/infrastructure-leasing-and-financial-services-ltd.html
https://www.business-standard.com/about/what-is-il-fs-crisis

https://economictimes.indiatimes.com/industry/banking/finance/banking/everything-about-the-
ilfs-crisis-that-has-india-in-panic-mode/articleshow/66026024.cms

https://www.theweek.in/news/biz-tech/2018/09/25/Explained-What-is-ILFS-crisis-and-how-bad-
it-is.html