Exiting operational road projects still a tough task for developers

Mumbai: Promoters desperate to reduce debt are unable to get rid of nearly 60 operational road projects as potential buyers look for cheap deals while lenders refuse to clear them. The result: Despite a recent easing of rules to help developers exit their projects, the situation on the ground has changed little and many promoters remain stuck.

Not every road project on the block will be able to find a buyer, according to investment bankers working on highway sector deals.

India plans to construct 10,000km of new highways a year and give existing roads a much-needed overhaul at an investment of more than Rs.1 trillion a year. But the biggest highway developers are financially squeezed and need to free up capital from existing assets before taking up new ones. However, monetizing these assets has been far from easy.

The presence of multiple investors in some projects, tough conditions laid out by lenders, and differing expectations on valuation are delaying closure of deals, investment bankers said.

“Obtaining lenders’ NOC (no objection certificate) is one of the key hurdles since lenders want to ensure appropriate usage of proceeds before giving such an NOC,” said Ashish Agarwal, director, infrastructure at investment bank Equirus Capital Pvt. Ltd.

Satisfying expectations of multiple stakeholders of the project, where there is more than one sponsor, is among other hurdles companies face when looking to sell their projects, Agarwal said.

Slow approvals from lenders and difficulty in getting the desired valuation from buyers is the biggest hurdle to companies looking to sell their operational assets, said V. Sandeep Kumar Reddy, managing director of infrastructure firm Gayatri Projects Ltd.

Hyderabad-based Gayatri Projects, which develops road projects on build-operate-transfer basis, is looking to sell its stake in seven operational road assets.

Anil Ambani-led Reliance Infrastructure Ltd has been looking to sell all of its 11 operational road projects and has held discussions with potential financial buyers, but there has been no deal yet.

According to an official from an interested buyer, his firm backed out due to the mismatch in valuations and unattractive cash flows in the projects. He did not want to be identified as he is not authorized to speak to the media. Creditors of debt-laden infrastructure developer IVRCL Ltd, which invoked the so-called strategic debt restructuring (SDR) initiative in December, are also looking to sell assets to recover dues.

IVRCL’s efforts since 2013 to sell its three road projects in Tamil Nadu to Tata Realty and Infrastructure Ltd have not materialized despite an agreement by the two companies.

In one of the biggest highway sector divestments last year, Gammon Infrastructure Projects Ltd said it would sell a portfolio of nine projects—six roads and three power plants—to BIF India Holdings Pte. Ltd, controlled by Canada’s Brookfield Asset Management Inc. and infrastructure fund Core Infrastructure India Fund Pte Ltd, for Rs.563 crore in cash. However, the deal faced a hurdle when lenders wanted the proceeds to be used on certain other assets of the company.

A Reliance Infrastructure spokesman and IVRCL joint managing director Balarami Reddy did not respond to emails sent on 25 March seeking comments on asset sale plans. Gammon Infrastructure managing director Kishor Kumar Mohanty did not respond to phone calls and messages.

“There is currently a small segment of buyers who are actively looking at acquiring road assets as compared to many road projects on offer for sale. Consequently, there is a valuation squeeze for the buyers, while the sellers feel that the prospects of their road projects would certainly improve as the economy picks up,” said Navneet Singh, executive director and head, infrastructure group at Avendus Capital.

Multi-asset class fund manager IDFC Alternatives, US-based I Squared Capital and Brookfield Asset Management are among the few financial firms in the infrastructure sector looking to buy controlling stakes in operational road projects. Canadian pension funds namely Canada Pension Plan Investment Board, Caisse de dépôt et placement du Québec, and PSP Investments are also beginning to selectively invest in the sector.

Depressed returns in many of the older operating assets is also acting as a deterrent, said Maybank Kim Eng Securities analyst Anubhav Gupta.

“Several developers bid for projects in previous years expecting 14-15% IRRs but some of them have given negative IRRs, discouraging new investors from those projects. In other cases, approvals from various authorities delay faster completion of deals,” Gupta said.

Madhucon Projects Ltd, GMR Infrastructure Ltd, Welspun Enterprises Ltd, NCC Ltd and Gayatri Projects Ltd are some of the infrastructure companies that have successfully divested their stakes in operational road projects.