R-Infra plans to sell road projects to pare debt

October 17, 2013


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.

Share your comments here: