At a time when most infrastructure players are over-leveraged and facing a liquidity crunch, Essel Infraprojects (EIL) has attracted investments. In August, Goldman Sachs agreed to invest $220 million in its highways arm; earlier in March, its solar asset holding company secured loans of $132 million from Piramal Enterprises Limited and Dutch pension fund manager APG Asset Management. Ashok Agarwal, CEO, EIL tells Shubhra Tandon that though challenges remain, the situation should reverse soon with policies being reformed and private players bidding for new projects more prudently. Excerpts:
How do you assess the last two years in terms of awards and execution?
There are challenges on the execution front, credit growth and cost of capital front. But these are the same for everybody.
Is the situation on the ground improving?
In terms of broad timelines, upon selection as an L1 bidder, it takes around two months to sign the contract, then about 6-7 months to achieve financial closure, etc. So starting construction takes a year if not more. We are hopeful of various reforms being initiated by the government to expedite the process, especially in the road sector.
Is it a challenge that there are more orders under EPC than BOT?
Though the government is very enthusiastic about the EPC space in the road sector, the road ministry is targetting awarding R10,000-15,000 crore of BOT projects and another R25,000 crore of hybrid annuity in FY16-17. So, there are opportunities. In solar too, we have doubled our capacity.
We have seen large infrastructure companies facing trouble..
The private sector may take time to revive since it is difficult without big players. On the PPP side, the need for understanding risk and pre-bid diligence is increasing. Concessionaires are also more aware of availability of land at the pre-bid stage and requisite approvals from the authority awarding the project. This is creating the environment where execution can happen.
Even now, there is competitive intensity while bidding for projects…
The idea of creating value through the order book is a myth. It is the cash-flows that you show after execution that counts. This makes the quality of pre-bid diligence very important. So, while the land has to be made available, the approvals have to come on time and the DPR quality has to improve, we also need better legal and contractual framework to resolve disputes. As a private player we have a responsibility before making a decision and we carefully consider our investments at the pre-bid level. For instance, if only 60% of the land is available, why do you have to bid?
Why is the private sector bidding so imprudently?
There may be multiple reasons: bullishness, chasing the order book for value creation, lack of understanding of the contract and the entire ecosystem—what could go wrong over the 20-25 years’ lifespan of a project. There is a fundamental difference between working on the client’s money and one’s own money. For delays under EPC, the costs were borne by the client; at worst their payments got delayed. However, in the BOT model, cost escalation is borne entirely by the concessionaire. So the mindset is very different. The problem is nobody looked at how the debt will be serviced, and how good the returns will be. But that is the learning curve of PPP.
The risks remain and lenders are cautious; so what makes you confident about the PPP model?
We follow two things. First, being confident about the returns at the bidding stage. Second, when we are L1, we are sure that the land is there, the approvals are in place, there is adequate security and adequate dispute resolution mechanism provided for in the contract. We tend to follow a conservative approach in the bidding process; as a result, we think, lenders feel comfortable funding the project. Also, a lot of infra companies are stressed at the group level, which is not a concern for the Essel group. When there is a downturn in road projects, we look at transmission, else we look at solar power.
Are you looking at only greenfield opportunities?
We believe we are in a buyers’ market, which is another lever. I don’t have to bid afresh. We think there are enough stressed assets available. We will continue to evaluate our options from time to time.
Are you looking at road assets ?
Valuations generally have been a challenge for the last two years. There is a gap in expectations, though it is reducing now as the pressure on the banking system mounts. So, we expect some activity in the M&A space in the road sector in the next 6-9 months.