Even before Jaypee’s Yamuna Expressway was inaugurated, NHAI awarded R-Infra a project to upgrade the parallel NH-2, showing a lack of coordination between authorities
Dev Chatterjee |
For the Jaypee Group, which built the 165-km expressway between Delhi and Agra, the news Reliance Infrastructure would rebuild the parallel national highway between the two cities came as a dampener.
Inaugurated in 2012, Yamuna Expressway is still struggling to make money. It will be competing with National Highway-2 to attract traffic. Jaypee had built the expressway for Rs 13,000 crore, with a concession period of 36 years. But even before the project was inaugurated, the National Highways Authority of India (NHAI) awarded Reliance a project to upgrade the parallel highway to six lanes, at a cost of Rs 1,900 crore.
Reliance has already started collecting toll on the highway; the project will be ready in the next two years. The 180-km Delhi-Agra highway is part of the ambitious golden quadrilateral project, connecting the four metros.
Analysts say the NHAI project will snatch traffic from the expressway, owing to its lower toll rate. “In the current environment of limited infrastructure funding availability, efficient resource allocation is the need of the hour to improve infrastructure. This is a classic example of lack of coordination between authorities at the state and the Centre,” says an analyst with Ambit Capital.
Analysts say infrastructure and industrial projects are planned independently, without considering the supporting logistical infrastructure needs of the project and without collective assessment of the impact on the environment by several projects in a particular area. The key concern is the lack of sound planning for large projects and the absence of coordination between ministries.
While Jaypee did not comment on queries sent by Business Standard, Reliance Infrastructure officials said while bidding for the project, they factored in the traffic diversion to Yamuna Expressway. However, the actual diversion was much lower than expected, they added.
Reliance officials say the toll rate at Yamuna Expressway is about 85 per cent higher than at National Highway-2, and this will lead to the national highway breaking-even faster. The officials added there was severe traffic congestion on the Delhi-Noida road leading to the Yamuna Expressway.
Compared to the national highway, Yamuna Expressway is an access-controlled road, with all exit points located far from villages, making travel to these areas long and difficult. Also, the quality of service roads connecting these villages was questionable, said a Reliance Infrastructure spokesperson. “Roads such as Yamuna Expressway have a tendency of users driving rashly, increasing the risk of accidents on the expressway, as observed on the Mumbai-Pune expressway. Also, as National Highway-2 connects towns and villages, road users find this safer compared to Yamuna Expressway,” the spokesperson added.
Bankers say both projects are funded by public sector banks and if any of these turns sick, these banks will be asked to restructure the debt or takeover the project. They add to avoid duplication of work, each project should be meticulously planned from an engineering, financial, contractual, environmental and social perspective, along with inter-linkages and land acquisition before construction. “This will help save project developers, banks and the common public a lot of pain later,” says a city-based banker.
Conducts a safety audit; to repair 6 major bridges between Dehu Rd and Satara
After several lives were lost in highway accidents, the National Highway Authority of India (NHAI) has finally woken up to the risk factors for highway commuters. They are in the process of sending a safety audit report to New Delhi before starting repair works on six major bridges — from Dehu Road to Satara — which are unsafe for commuters and require urgent repairs.
The revelation comes in the wake of tragic death of four employees of an advertisement firm based in Pune early last month. The driver of the car missed the gap between the bridges on near Nira river and their car plunged into the river. The spot likes 70 km from Pune on Pune-Satara Road.
The PS Toll Roads, a subsidiary agency of Reliance Infra, had submitted a letter to NHAI on November 25. The letter stated that urgent repairs, including crash barriers and fencing were required at various places on the stretch. Taking note of the letter, NHAI swung into action and asked two other companies to carry out the safety audit report.
NHAI project director Rajesh Kaundal, said, “Following the report submitted by Reliance we asked RH Associates and a third party safety consultant to conduct a safety audit. They will submit a detailed report soon. Once we receive the data, we will send it to our head office in New Delhi.”
“Our safety consultants are also looking into the contract with Reliance and see what repairs works they should carry as per the tender. We have to get in principal approval for the work. Along with that we also need finance for the work. Once we get the final approval from our head office we will start the work,” Kaundal added.
The NHAI sent the report of the financial implication to their head office last week. They will be send a detailed report for the in principal approval by the end of next week. The authorities claimed that the groundwork will only start next year.
R-Infra joins growing number of firms selling assets in a slowing economy, appoints EY to oversee sale
P.R. Sanjai | Malvika Joshi
The R-Infra’s plan comes at a time when nearly 50 roads projects are up for sale in the country. Photo: Priyanka Parashar/Mint
Mumbai: Reliance Infrastructure Ltd (R-Infra), a part of the Anil Ambani-led Reliance Group, plans to sell either all or most of its 11 road projects to pare debt, according to three people familiar with the development, joining companies that are putting assets on sale to reduce their debt burden.
R-Infra has appointed consulting firm EY, formerly known as Ernst and Young, to oversee the sale, said the people, who didn’t want to be identified. The aim is to reduce some of the Rs.21,976.18 crore of debt it had on its books at the end of the last fiscal year.
R-Infra’s spokesperson declined to comment on the matter. An e-mail sent to EY on Friday did not elicit a response.
Two of the three people said EY is taking the projects, with a total length of 968km and on which R-Infra has spent around Rs.11,700 crore, to potential buyers and is yet to finalize their sale.
One of the three people is from R-Infra, another an investment banker and the third is with a private equity fund.
The plan comes at a time when nearly 50 roads projects are up for sale in the country as infrastructure companies building them struggle with problems including delayed government approvals, land acquisition hassles and a funding crunch in the face of high borrowing costs.
Slower economic growth, which slumped to a four-year low of 4.4% in the fiscal first quarter, has caused road traffic to decline, putting the viability of road and highway projects in doubt.
The asset sales are not limited to road projects. Many infrastructure firms are disposing of assets. Since January, at least 10 Indian companies have either sold or announced the sale of assets in a bid to pare Rs.3.58 trillion worth of debt, according to Mint research and an August report by Credit Suisse Securities Research and Analytics.
In an interview with Mint earlier this month, Reserve Bank of India governor Raghuram Rajan welcomed the asset sales.
“We need more of that,” Rajan said. “Because it’s not that the system as a whole doesn’t have liquidity. There are companies sitting on tonnes of cash. Could they buy from these guys? Could foreign investors come in?…”
“If the liquidity-strapped entities get financial space once again, they can then start bidding for projects; they can start fulfilling some of their past commitments,” Rajan said.
Around 40-50 road assets are currently on the block, said Sandeep Upadhyay, senior vice-president (infrastructure solutions group), Centrum Capital Ltd.
Assets that are already operational are commanding a premium, but those still at various stages of development are being valued at a discount, said Upadhyay.
Out of 11 R-Infra road projects, nine are operational.
Operational road projects are cash-generating and have lower risk attached to them. Despite the projects being operational, investors are not rushing to buy these assets as the traffic on the roads is lower than projected before construction.
“Most of the road assets across the country are struggling as the traffic and expected returns were projected aggressively in most cases. This is the reason that while investors have appetite for good assets, there is a wide gap between bid and offer prices,” said Vikas Khemani, head of institutional equities at Edelweiss Securities Ltd.
Mint spoke to executives at least two infrastructure investment companies that had evaluated R-Infra’s road projects. They are yet to take a call on buying them because of a mismatch in valuations.
Investment in the road sector has fallen sharply. According to VCCEdge, which tracks investments, private equity deals (PE) worth $123.5 million have been struck since January in the road sector. In 2012, two deals were struck for $131 million and, in 2011, three big-ticket PE deals worth $556 million were struck.
In May, UK-based PE firm Actis ended its three-year old road joint venture with Tata Realty and Infrastructure Ltd. Actis held a 35% stake in the $2 billion venture.
“In most of the road projects, the internal rate of return is not matching the developer’s expectations,” Khemani of Edelweiss Securities said, adding that while many road assets are up for sale, only a few transactions are materializing.
Upadhyay of Centrum Capital said infrastructure firms’ aggressive bidding for road projects had led to over-leveraged balance sheets, hurting their financial closure prospects.
“The current situation has been primarily self-inflicted due to indulgence in aggressive bidding, based on overestimated traffic growth assumptions and failure to achieve optimistic completion timelines,” he said.
Another investment banker, on condition of anonymity, said several road projects are generating single-digit returns.
For companies primarily focusing on the EPC (engineering, procurement and construction) model and not wanting to wait for 15-20 years to generate returns, strategic sales are an obvious choice, Upadhyay said. This helps them reduce debt and invest the money in other projects.
“For those relying on BOT (build, operate and transfer) model, the picture may not be as gloomy as is currently perceived,” he said. “This is a buyer’s market and there is ample opportunity to cherry-pick quality assets, ensuring decent—16-17%—returns,” Upadhyay said.
There is good news for highway developers such as L&T, Reliance and GMR with the National Highways Authority of India (NHAI) formulating a plan to speed up the exit of contractors, who take up projects under the build-operate-transfer (BOT) route.
The move follows a virtual standstill in the award of new contracts as developers are strained for equity and are unable to raise fresh resources to take up new road stretches. Apart from a weak equity markets preventing public offers, such as those by IL&FS Transportation Networks a few years ago, even private equity funding has dried up in recent months because of the global economic environment and the resultant slowdown in India.
Since 2009, the rules allow developers to exit two years after a project is completed. Developers of around a 100 projects, which run into thousands of crores, do not have this option for projects bagged before 2009.
The new plan is to permit exit immediately after construction is completed in all BOT projects, helping developers unlock value from these projects where cash flow has begun. Last month, the NHAI board decided to amend the rules but a final decision will be taken by an inter-ministerial group.
NHAI feels once they are also allowed to 100% divestment of their stake in the already completed projects, these companies will have more equity available with them. As they exit from the project, firms of similar net worth specializing in operation and maintenance would take over the project for rest of the concession period.
Officials said several international majors such as Macquarie and Morgan Stanley have evinced interest in running projects after taking them over from the developer. In addition, NHAI has sounded out Indian banks to scout for other potential investors, although the sale needs to be approved by the highway authority. The developers are, of course, cheering the move. “Why should companies be made to stick to a project for 15-20 years when they can take up new projects? Allowing them to exit from completed projects will improve investment scenario,” O B Raju, managing director (highways) of GMR said.
Raising the concern of private equity drying up, Singh in his letter has said shares of many highway developer companies those case out with IPOs four-five years back are going to the market at “steep discounts.”
Reliance Infrastructure (RInfra) today said its Rs 800 crore road project in Haryana for widening of Gurgaon-Faridabad-Ballabhgarh-Sohna road has become operational.
The project was executed by the company through its special purpose vehicle GF Toll Road Private Ltd, the company said in a statement.
The project is RInfra SPV’s first state road project, executed on BOT and has a concession period of 17 years, during which time the road will be operated and maintained by RInfra’s SPV, it added.
The project involved four laning of Gurgaon-Faridabad stretch and two laning of Ballabhgarh-Sohna road, it said.
Commenting on the development, the Reliance Infrastructure CEO, Mr Lalit Jalan, said: “This will increase commuting convenience and connect centers of tourism, International airport, industrial zones and places of economic importance.”
The project includes 14 lanes toll plaza at Gurgaon Faridabad road and six lanes toll plaza at crusher zone. Also, two toll plazas of six lanes each are located on Ballabhgarh Sohna stretch, the company said.
“With current order book of eleven road projects, we will generate from next financial year revenues of Rs 1,200 crore a year with 15 per cent y-o-y growth rate,” Mr Jalan said.
As highways worth Rs 60,000 cr flounder, L&T, Reliance Infra look at parallel opportunities
Aggressive bids for NHAI road projects may have forced major developers such as Reliance Infra and Larsen & Toubro (L&T) to the sidelines, but the latter are now having the last laugh. The tables have turned full circle after a drought of two to three years as the big developers are being approached by several project winners to sell their stakes as smaller firms find raising adequate equity in a volatile market and bank loans in a worsening NPA scenario, tough to come by, said company officials, analysts and bankers that Financial Chronicle spoke to.Lalit Jalan, chief executive officer at Reliance Infrastructure said, the competitive intensity in the road sector picked up in the past few years hence they decided to stay away from fresh bids. “We are looking at around 20 secondary assets since we decided not to bid for fresh projects at negative margins. The secondary assets we are looking at are those where developers are finding it difficult to complete the project as they have not been able to complete financial closure due to weak market conditions or where toll collections are not in line with their bullish estimates,” said Jalan. “The situation is so bad that there could even be distress sales by these firms,” he added. However, he declined to divulge the names of the projects they were buying out before posting them on the stock exchanges.
K Venkatesh, senior vice-president of L&T BOT projects said, lots of projects have come to L&T for sale, but the company looks at only those assets that can increase their current overall internal rate of return of high double digits. “We have bid for most of these projects and lost, so we know all the technicalities. Hence, it is not difficult to find the right valuation or the rate of return. We take the projects which interests us,” said Venkatesh.
Abhinav Bhandari, infrastructure analyst with Elara Capital said, “Around 80-100 projects would be up for sale or part stake sale in the current financial year. The value of these projects, at an average project cost of Rs 700-800 crore, would be around Rs 60,000 crore. This is almost same as what NHAI allocates in a year. It’s like a parallel system that has come up in the road sector.”
Hyderabad-based infrastructure company GMR that won a mega highway project from NHAI, said they might also look at selective secondary projects. But the rate of return on operational projects is not very high. “People are playing a waiting game as to how long they can sustain the won project.
The developers who have bid aggressively don’t really lose much. At most they will lose the retention money, which is around one per cent of the project cost, and one year of black listing,” the GMR official said.
Investment bankers that Financial Chronicle spoke to cited various reasons forcing developers to exit these projects. Many bids were driven by the desire to build their order books and puff up top lines rather than with an eye on profit margins.
“In many cases the margins built in were hardly 5-10 per cent. Any sensible bidder would look at a margin of 15-20 per cent,” said an investment banker with SBI Caps.
Unfortunately for several of the winners, banks have also become very rigorous in stress testing projects and critically analysing estimates given by companies on toll collection as well as the capital expenditure. “The banks are appointing their own consultants and evaluating on their own, before sanctioning loans for BOT projects,” said an SBI Caps official. In BOT projects, as opposed to straight RPC contracts, the project risk too is borne by the developer.
Some of the companies that won road projects in the past three to four years were IVRCL, Madhucon, Gayatri Projects, Nagarjuna Constructions, Soma Developers, Patel Engineering, Navayuga, Lanco and Essel Infra.
While IVRCL faced a potential takeover bid from the Essel group, several others are facing varying degrees of financial stress and need to improve cash flows to service outstanding debt. Sale of projects may be a step in this direction, said industry experts.
Reliance Infrastructure Ltd (R-Infra), an arm of the Anil Ambani-led Reliance Group, is scouting to buy some road projects from developers who have not been able to complete the works due to a lack of money, said chief executive Lalit Jalan.
R-Infra is eyeing around 20 such assets and hopes to conclude some deals this fiscal year, said Jalan while announcing the firm’s March-quarter earnings on Friday.
“There are assets that are two-thirds complete but the developers now have no money,” Jalan said. “Many of them have put their assets on the block.”
On 9 May, for instance, infrastructure company IRB Infrastructure Developers Ltd announced it had acquired MVR Infrastructure and Tollways, a firm that operated a 66-km road between Salem and Karur in Tamil Nadu on the so-called build, operate and transfer (BOT) model.
Jalan said any acquisition will be in-line with the internal rate of return, or IRR, of 20% that R-Infra’s enjoys on its existing road projects portfolio.
R-Infra’s net profit growth was muted due to higher expenses and finance costs. Net profit inched up to Rs.411.46 crore in the quarter ended 31 March from Rs.410.88 crore a year ago and from Rs.408.32 crore in the preceding October-December quarter.
Revenue almost doubled from a year ago to Rs.7,135.31 crore. But finance costs also doubled year-on-year to Rs.419.30 crore. The company’s total expenditure rose 84% from the year-earlier period to Rs.6,740 crore.
Share prices of R-Infra rose 1.86% on BSE on Friday to close at Rs.463.05 apiece. The benchmark Sensex ended the day nearly unchanged at 16,217.82 points.
“R-Infra’s March-quarter results got substantial support from the EPC (engineering, procurement and construction) division, but higher interest costs and other expenses ate into profits,” said Manish Kumar, infrastructure sector analyst at SBICap Securities Ltd.
The rise in interest outgo, according to Jalan, was a result of more of its infrastructure projects coming onstream. R-Infra has long-term debts to the tune of Rs.11,000 crore and a short-term debt of Rs.6,000 crore, he said.
The company’s net profit was marginally below market expectations.
A consensus of R-Infra’s earnings estimates put out by various analysts and compiled by Bloomberg had pegged its net profit at Rs.457 crore. Its revenue, however, surpassed the consensus estimate of Rs.6,130 crore.
For fiscal 2012, R-Infra’s net profit rose marginally to Rs.1,587 crore fromRs.1,552 crore in the previous year. Revenue jumped 59.50% to Rs.24,272 crore.
R-Infra’s EPC and contracts business was the major contributor to its topline and profitability in the January-March quarter.
Revenue from the segment grew around five-fold to Rs.4,141 crore.
Operating profit from the division jumped almost 12-fold to Rs.231crore.
Most of R-Infra’s EPC contracts pertain to power projects being built by Reliance Power Ltd (R-Power), another group firm in which it holds an equity stake. With more of R-Power’s projects progressing on the ground, R-Infra’s EPC business did well.
R-Infra’s EPC order book stood at Rs.17,280 crore as on 31 March.
Kumar of SBICap said that with a large portion of the regulatory overhang on the company’s electricity distribution business being out of the way, its earnings from that business should improve going forward. Regulatory uncertainty largely pertained to certain key approvals that were awaited from the electricity regulatory commissions of Maharashtra and Delhi, including tariff hikes.
Some of the approvals are in place and others are expected shortly, the company said in a statement.
“At current valuations, R-Infra is a more favourable pick than other infrastructure companies,” Kumar said.
On a sequential basis, however, R-Infra’s electricity and the EPC and contracts businesses saw operating profits decline, and losses from the infrastructure business widened.
Net sales from the electricity business fell 7.4% quarter-on-quarter to Rs.2,902 crore.
Jalan said sequentially lower sales from the electricity business was a function of seasonality, and lower segment profits from the business, along with the EPC division, was due to higher allocation of costs on account of these businesses in the final quarter of the fiscal year.
The ride is getting bumpy for many roads developers. But Reliance Infra is making hay out of the current tough environment. Months after it announced that it was looking at distressed road assets in the market.
The ride is getting bumpy for many roads developers. But Reliance Infra is making hay out of the current tough environment. Months after it announced that it was looking at distressed road assets in the market, NDTV has learnt that it is in talks with several players including IVRCL, Madhucon Projects and SREI Infrastructure all of who are looking to sell stake in some of their existing projects.
While Reliance Infrastructure hasn’t pinned down on any particular asset as yet, a buyout could happen in the next 1-2 months.
This will be in Tamil Nadu and will have synergies with the company’s existing projects in the state.
It may be eyeing 400 KM of road projects, including IVRCL’s Salem to Kumarapalayam highway and Madhucon’s Madurai to Tuticorin highway.
While the existing developers, many of whom bid for these projects very aggressively aren’t able to keep them viable, R-Infra hopes it can cut interest costs and bring in other efficiencies.
Meanwhile the company is also looking to go global.
It plans to bid for a BOT project in Vietnam and has expressed its interest in a project in Turkey as well but going international could be a challenge as its efforts to make inroads in Sri Lanka & Nepal have still not take taken off.
BANGALORE: Reliance Infrastructure is evaluating projects in Vietnam, Turkey, Oman and Nepal as it seeks to build a portfolio of $1.5 billion in two years and expand its footprint beyond India, where analysts say cut-throat competition and land acquisition problems are thwarting projects.
The company, part of the Anil Dhirubhai Ambani Group (ADAG), sees an internal rate of return of 20% from projects, which it aims to execute quickly, a senior company official who did not want to be identified, said.
“There are issues related to land acquisition and environmental clearances which delays projects in India making it unviable. Also the construction period is over five years here against two years overseas,” said a senior official from Reliance Infrastructure’s Road division.
Reliance has stated it is looking at five government road projects in Vietnam under the build, operate and transfer (BOT) model and is preparing to file expressions of interest (EoI) for it. The company is also evaluating, operate-maintain and toll road projects in Turkey, which will help it earn a revenue ofRs 4,000 crore annually.
With orders, especially from the central government, diminishing in the infrastructure sector, the company — which is also executing Mumbai’s Worli-Haji Ali sea link project — is looking at state roads and highways projects in the range of Rs 500-1,000 crore across the country.
“The bidding has been very aggressive with as many as 30-40 infrastructure companies bidding for the same projects. We do not want to dilute our return and portfolio value and RInfra will only choose projects which are high-density traffic corridors and offer 18-20% return,” said the official.
Recently, companies such as GMR Infrastructure, L&T Infrastructure Development Projects and IRB Infrastructure had quoted a premium of over Rs 300 crore for national highway projects. Currently, bids from as many as 30-40 infrastructure companies, most of whom have bid for multiple projects, are awaiting progress. As many as 60 road projects by the NHAI, worth around Rs 40,000 crore, are stuck in clearances with the Planning Commission. In FY12, NHAI has awarded 3,300 km of projects and will award 4,200 km by December 2011.
“Land hassles, high interest rates, adverse currency movement, low ordering environment and intense competition for the few projects that are available are several problems that companies in the India construction and infrastructure space are facing. The private sector’s confidence to invest in capacity creation remains low and that both public and private capex are likely to take longer to recover this time,” Morgan Stanley said in a report.
Separately, Reliance is also in talks to acquire national highway road projects in Tamil Nadu, Gujarat and Karnataka worthRs 2,000 crore. “We are looking at building our portfolio through secondary market and are evaluating some assets. The project should be viable and make healthy return for us,” said the Reliance official.
Reliance Infrastructure has emerged as the largest concessionaire of NHAI and currently has 11 road projects totalling 1,000 km valued at aroundRs 12,000 crore under various stages of execution. Six projects would become revenue operational by March, 2012, while four have already started generating revenues.
These projects include sixlaning of the NH 4 between Pune and Satara of length 140 km in Maharashtra, six-laning of NH 7 between Hosur and Krishnagiri of length 60 km in Tamil Nadu, six-laning of NH 2 between Delhi and Agra of length 180 km in Haryana and Uttar Pradesh. The 10 road projects are expected to be fully-commissioned by 2014 and will generate a revenue of Rs 1,200-1,400 crore annually.
“The company is also looking to bid for mega highway projects upward of Rs 2,000 crore and expects a 10-12% increase in traffic growth annually,” he said. RInfra has 25 infrastructure projects totallingRs 40,000 crore, including these 10 projects under different stage of execution. The company had posted a net profit of Rs 362 crore in the quarter ended September 30, 2011. On Friday, the firm’s stock closed up 1.78% at Rs 413 on BSE.
Reliance Infrastructure’s Rs1,928 crore national highway upgrade project between Delhi and Agra has been stuck over clearance from the Ministry of Environment and Forests (MoEF) for more than a year now – a development that is likely to lead to cost escalation in the project.
The 180 km project spanning Haryana and Uttar Pradesh is part of the Phase Five of the National Highways Development Programme, which envisages expansion to six-laning of 6,500 km of highway network.
The phase assumes significance as upgrade of the entire golden quadrilateral (5,846 km) to six-lane standards is a part of it.
Reliance Infrastructure bagged the project from the National Highways Authority of India (NHAI) in May 2010. The company, however, has still not been able to start construction on the road.
The project is being developed on a build, operate and transfer (BoT), toll basis. Analysts, on conditions of anonymity, peg the cost escalation at round 10% as of now.
NHAI, meanwhile, has said that the issue will be resolved in the next one month. Explaining the matter, a NHAI official said, “The clearance involves an area where a toll plaza will be coming up. The clearances happen in two stages. In the first stage, the terms of references are approved by the Union environment ministry. In this project, the MoEF has approved the terms of references four months back.”
In the second stage, public hearing takes place. It is here that the matter is stuck for Reliance Infrastructure. “The public hearing has been completed in Uttar Pradesh. In Haryana, the hearing is scheduled for October 13. Once that is done, the report will be submitted to the MoEF,” said the official.
The company has a portfolio of 11 road projects spanning 970 km, worth Rs12,000 crore. Of these, at least seven will become operational by the end of the current financial year.
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