Over-indebted infrastructure companies have been looking to sell assets worth more than Rs 1.25 lakh crore over the past three years but much of this remains unsold. In 2013, close to 55,000 crore of deals and proposals were announced in infrastructure sectors; after a lull, another round of negotiations and transacting, worth some `75,000 crore was seen in the five months to March 2016.
However, with corporates cash-strapped, surplus capacity still at a high 30% and the demand outlook hazy, few transactions have been consummated. Some have been in the pipeline for over a year while others are awaiting regulatory changes. Deals consummated add up to roughly `27,000 crore.
As Sanjeev Prasad, senior executive director, Kotak Institutional Equities observes, if deals have materialised it’s because banks have been pressuring companies to monetise assets. “Valuations have been reasonably good for cement, road, airports and even power assets are fetching a decent price,” Prasad said pointing out that the equity value for some projects has eroded sharply.
While most sales have been aimed at reducing leverage not all transactions have helped bring down debt. For instance, the GMR Group, which led the first round of asset sales by India Inc, offloaded stakes in roads, power and coal assets and had sold `4,500 crore of assets by April 2014. However, its total debt move up from `42,349 crore at the end of FY13 to `47,738 as of March, 2015. Last month GMR said it was disposing of a stake in a road project in Karnataka that would help it bring down its debt by more than `1,000 crore.
Nevertheless, with gas prices having fallen sharply power plants relying on the fuel are now clocking better load factors and moreover, road projects are looking up thanks to a rise in traffic. That should helps improve cash flows at companies such as Lanco and GMR. Madhu Terdal, CFO, GMR Infra, noted recently that cash flows at the firm were improving.
But it’s a long road ahead. An analysis by Credit Suisse showed that despite efforts to cut back on capex and sell assets, debt to ebitda ratios for a host of companies have deteriorated; this is because companies have needed to sell operational cash-generating projects and that has left their cash flows crimped.
For instance, Lanco Infratech’s sale of its Udupi Power in April 2015 will help reduce its debt levels by 15%. However, since the project contributed as much as 69% to operating profit in FY15, the debt to ebitda ratio will worsen. Between March and September 2015, Lanco’s total debt has moved up from Rs 39,191 crore to Rs 41,198 crore, Bloomberg data shows.
In some instances, delays in concluding deals have hurt valuations. For example, when IVRCL sold three highway projects to Tata Roadways in April 2013, the estimated value was pegged at Rs 2,200 crore. However, in November 2015, the Hyderabad- based firm said it was likely to receive just Rs 400 crore since it needed to fulfil certain conditions.
Some transactions are awaiting regulatory changes. For instance, Jaiprakash Associates recently-inked deal with Ultratech Cement for cement units in six states, at an enterprise value of Rs 16,500 crore, will depend on the proposed amendments to the Mines and Minerals Development Regulation Act (MMDRA). Over the last two years, Jaiprakash Associates has managed to garner Rs 5,000 crore by divesting cement assets in Gujurat and Jharkhand.
It’s critical that the company is able to dispose of assets given that it generates meagre cash flows that are inadequate to service its borrowings. In the first nine months of FY16, the consolidated ebitda was just about 1% of its total debt of Rs 75,274 crore.
Although Anil Ambani led Reliance Infra has been trying to monetise some assets for close to two years now, little has happened. In November 2015, Reliance Infra sold a 49% stake in its Mumbai genco and discom operations to PSP investments for Rs 3,500 crore. Media reports suggest that the company is looking to raise close to Rs 14,000 crore by divesting stakes in the cement and roads portfolios. There are plans to sell the tower and fibre businesses and a non-biding agreement with PE players TPG Capital and Tilman Global Holdings has been inked for the wireless tower business for an enterprise value of Rs 21,500 crore but there’s no announcement yet. The delay could weigh on the finances of Reliance Communications (R Comm), which accounts for nearly 40% of the total ADAG group debt of Rs 98,800 crore as of March, 2015.
Moody’s has lowered the credit outlook for R Comm to ‘negative’ citing a delay in sale of non-core assets that it believes is hindering its de-leveraging strategy. The agency says the outlook encapsulates expected changes in the key terms of the transaction, including valuation, which it thinks could be up to 20-25% lower than their earlier estimates of $3.4 billion. Moody’s added that even if the company announces a binding tower sale transaction this quarter, it is unlikely to result into a material improvement in leverage, as well as associated liquidity and refinancing pressures over the next 6-9 months.
Tata Steel’s decision to divest its UK portfolio—it recently sold the long products business to Greybull Capital for a nominal consideration—will help reduce cash burn and financial stress but the firm will remain highly leveraged.
A work in progress
Deals have been few and far between
Banks have been pressuring companies to monetise assets
Most sales have been aimed at reducing leverage
Despite efforts to cut back on capex and sell assets, debt to ebitda ratios have deteriorated
The sale of viable projects has hurt cash flows