Strapped for funds as traffic slows and cash flows get crimped, developers are preferring to let go of road assets, taking whatever they get. There’s no fire sale yet, but sellers are turning more reasonable on valuations as they monetise assets in a bid to deleverage their balance sheets. In the last 8-10 months, construction firms have managed to pick up close to R1,000 crore. IDFC managing director Vikram Limaye estimates the equity value of projects sold, with some premium thrown in, could swell to R3,500-4,000 crore in the next two years.
“Developers are stretched for equity and are willing to sell operational assets, so there will be deals. However, given the slower-than-expected traffic as also the fact that future estimates are being pared, valuations are falling with investors building in a cushion for elevated interest rates and chances of the currency depreciating,” says Limaye, whose $644 million infrastructure fund is among the few mandated to take asset-level positions. Limaye adds the starting point for some deals is the book value; in other words, buyers are looking for buying at not much above the book unless the cash flows and growth are robust.
That’s believable because with the economy in slowdown mode — GDP grew at an anaemic 4.4% in the three months to June — developers are in deep trouble. K Venkatesh, CEO and MD at L&T IDPL, which builds roads, ports and metros, confirms traffic is coming in at least 10-15% lower than estimates. Consequently, valuations of road assets too, he reckons, are down by a similar level compared with the numbers in the previous year. “All future bids will be made after pencilling in lower growth and a higher discount rate,” he asserts, “since interest rates don’t seem to be coming down in a hurry”.
The L&T IDPL chief explains that while the discount rate — the rate at which future cash flows are discounted to arrive at the net prevent value — has risen partly because interest rates have risen, causing investors to seek higher returns, there’s also the fact that the risk perception of projects has gone up. “Foreign investors also have to take note of a depreciating currency and the country risk,” Venkatesh points out. According to Sanjay G Ubale, MD and CEO, Tata Realty and Infrastructure (TRIL), the discount rate has risen from around 13-15% in 2010 to 15-17%.
Given challenges on the currency front—the rupee has depreciated by 40% in three years eroding gains of foreign investors — valuations could be headed south. Suneet Maheshwari, CEO and MD of L&T Infra Finance, believes valuations for road assets may have dropped by anywhere between 25% and 40%. “Toll estimates have fallen and moreover the rate of growth in traffic and toll too is expected to be much slower,” Maheswari explains, adding, the shortfall in toll receivables could be as much as 20%, depending on the sector where it is located.
Not surprising then that GMR has sold a 74% stake in its Farukhnagar-Jadcherla expressway to SBI Macquarie for R206 crore — around 1.3-1.4 times of the book value — and 74% in its Ulundurpet Expressways to IDFC Alternatives for R222 crore — 1.12 times of the book value. The IVRCL portfolio, may change hands at below the book value, say sources.
Tata Realty is looking to snap up a portfolio of three assets – Salem Tollways, Kumarapalayam Tollways and IVRCL Chengapally Tollways (ICTL) – from the Hyderabad-based IVRCL. “There are more sellers than buyers in the market as the dynamics has changed. With more projects on the block, investors now have the upper hand,” says Ubale.
Sellers admit they are on the back foot though few are willing to sell an asset below book value. Not all are disappointed at the prices that their assets are fetching. “It’s better to recycle the capital and put it into new ventures,” says one developer. A recent CLSA report lists several assets that could be sold, including the operational and toll-based Himalayan Expressway, which may be sold by the JP Group. Others potentially saleable road projects include GMR’s Ambala-Chandigarh highway and the Hungud-Hospet highway, of which 95% has been completed.
Deal flow is likely to pick up given how bankers are becoming reluctant to restructure debt though foreign funds and will also bargain for better valuations. Much of the weaker valuations are reflected in the market capitalisation of road builders. Data show that the market value of a dozen firms in the space has more than halved to 1.05 lakh crore from Rs 2.2 lakh crore, three years back. According to market estimates, between 2009 and 2012 about 15 road assets, worth $1 billion, were traded. In early 2012, PE firm 3i invested Rs 300 crore ($61 million) for a 49% stake in Supreme Infrastructure India's portfolio of road projects, SBI Macquarie invested $150 million in a portfolio of seven roads of Ashoka Buildcon. IVRCL, which wants to exit many projects, is still awaiting clearance from the National Highway Authority of India and a no objection certificate from the lenders.