In a bid to have a healthy balance sheet to comply with the bidding norm, highway developers are looking at selling stakes in various central road projects to raise funds as banks deny them loans citing high risks involved in build-operate-transfer (BOT) projects. The inability to tie up funds for projects is also forcing small and medium companies to explore options other than stake sales, such as partnerships with other firms.
?A lot of builders are doing so and it is a healthy practice considering it helps builders to reassure their guarantees with the lenders,? said Feedback Ventures chairman Vinayak Chatterjee.
Among others, infrastructure financing company Srei Infrastructure has lent its support to several road developers to qualify for large projects. MBL Infrastructure is one company that has bagged two road projects in partnership with Srei. ?Equity dilution helps companies place bids for multi-million-dollar projects,? said Hemant Kanoria, chairman and managing director, Srei Infrastructure Finance, without disclosing details of the talks the company is having with several developers seeking equity support and partnerships.
Industry experts say that though partnerships may limit revenue flows of companies in the near term, they help them qualify for larger projects than they could have done in their individual capacity. In addition, it also limits debt commitment of the developer, which will help it maintain a healthier balance sheet.
?Banks and other lenders have become cautious while lending to infrastructure sector since construction companies have over-leveraged their balance sheets and have heavy debts. Equity investment at this juncture comes across as a silver lining for the lenders,? said Chatterjee.
Companies such as Gayatri Projects, Isolux India and Soma Enterprise have actively pursued various options of funding such as roping in equity investors or partners in projects. The US-based financial services company JPMorgan’s investment management unit JPMorgan Asset Management is understood to have acquired stakes in Indian highway companies. Private equity entities such as 3i have also looked put in money in special purpose vehicles and holding companies of highway developers. However, FE could not verify the specific investments by these firms.
Experts also say that considering increasing competition in the bidding for toll road projects, there are expectations that the returns for the developers and the return on equity may also get hit.
A recent study by Crisil says that it is expected to drop to 14% from the earlier 22%.
The average number of bidders per project has increased to 25-30, almost six times the number of bidders for projects awarded before 2009.
?With aggressive bidding driving up project costs, the newer projects will earn lower returns. In 2011-12 almost 65% of the projects were awarded on a premium basis, compared with 25% in 2008-09. The premium amounts even exceeded the project cost in some NHDP (Nationall Highways Development Project) phase III and V projects, for which bidding was particularly aggressive. Crisil Research expects the higher premium to bring down the average equity returns to about 14%,? said Prasad Koparkar, senior director, Crisil Research.
?In most of these 23 projects, fewer bids per project kept bid amounts modest, while higher than expected growth in traffic boosted toll revenues. The degree of competition was modest for projects awarded before 2009. On an average, five developers bid for each project, given uncertainties in the policies that governed BOT toll road projects,? the Crisil report noted.
Not just this, developers understanding the scenario were they are not sure whether the government would transfer them land in time for construction and the absence of an exit option is not letting them sell their entire equity stake in the projects.
The stretches being awarded by National Highways Authority of India (NHAI) are longer now and the funding needs are higher, said a leading infrastructure financing company CEO, who did not wish to be identified.
Recently, media reports had cited that two projects awarded by the NHAI in May and July last year have been terminated as they could not achieve financial closure. This is the first time that highway projects awarded by the NHAI have failed to achieve financial closure.
Such instances are expected to impact the government’s target to build roads at 20 km a day from the next financial year. Sources also say that the authority had awarded two projects worth about Rs 2,450 crore to DSC and Gannon-Dunkerley last year.
While the maximum length of stretches was 50 km a few years ago, it has gone up to 200-250 km now. The cost of building the stretches has gone up from Rs 4-5 crore a kilometre to over Rs 10 crore a kilometre.