Road runners are back in business

June 4, 2012

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.


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