Not taking the nearest exit

Infra companies wanting to sell road assets find themselves in a buyers market

For many over-leveraged infra companies, selling off BOT road assets is turning out to be an obvious choice. In fact, Reliance Infrastructure is looking to completely exit the segment. But the going has been far from easy as those wanting to sell outnumber those wanting to buy. “Deals are not happening because buyers have become choosy and greedy. Also, some of the assets that are on the block have their own issues and sticky liabilities which many buyers are not willing to pay for,” says Praveen Sood, group CFO, HCC.

Given the overall stress in the sector, interested buyers are largely tough bargaining financial investors. The recent buyout of Gammon Infra assets by Brookfield Asset Management is an example. "It is mostly private equity players who are interested in Indian road assets considering their low cost of funds. We are hearing that NCC and Ramky Infra are about to finalise their sale and that Brookfield is evaluating the road assets of Reliance Infra," says Nitin Arora, who tracks the sector at Emkay Global.

For foreign financial investors, their low cost of capital is a definite edge. "For Indian promoters, their cost of capital is 12%, if you add another 5-6% for the risk that comes with the project, you need a minimum IRR of 17-18%. For a foreign investor, the cost of capital is 3-4% and then add another 5-6% for the risk. So, they are happy even if a project generates 12-14% IRR," says, Satish Parakh, managing director, Ashoka Buildcon.

Foreign investors might be okay with a lower IRR but existing Indian buyers have a higher expectation and there is a reason for that. "Indian companies are generally not very interested at 15-16% IRR. Rather than buying an existing asset they will bid for a new project which will lead to higher IRRs because of the additional EPC margin of about 4-5%," points out Rajkamal Bajaj, director at Bajaj Consultants, which provides project consultancy. Even today Indian promoters expect a 20% return."We are not fund managers. We are running a business and take much more risk and thus expect higher returns on projects," says Parakh.

That said, Indian infra companies are also displaying belated prudence by staying away from long gestation BOT projects and focusing on short cash cycle EPC contracts. As against 1,400 km in FY14, NHAI awarded 3,000 km in FY15 and 2,600 km, up 190% compared to last year, in the first half of FY16. In FY15, out of 3,000 km, 2,269 km of projects was pure EPC while in first half of FY16, 66% of the total orders included EPC work.   

“There are no takers for BOT assets among Indian buyers because at current traffic growth many of them are not viable. Banks are not funding or have turned risk averse to these assets and most infra companies are already stressed because of high leverage,” adds Rohan Suryavanshi, head, strategy and planning, Dilip Buildcon, a leading EPC player. With Indian infra companies focusing on EPC projects and repairing their balance sheets, it is likely that foreign investors will continue to have a free run when bidding for distressed BOT projects.