Hurdles on the growth highway

When Issac A. George, chief financial officer (CFO), GVK Power and Infrastructure, says: “Cash is king,” he endorses the reverence of the rupee by every finance honcho in the infrastructure sector. After all, this is an industry that builds everything from power plants to highways to airports—all debt-intensive projects that soak up thousands of crores of rupees. At a time when liquidity has dried up globally, and banks are reluctant to lend, mopping up every available rupee—or dollar—is vital. If borrowing is proving a Herculean challenge, the option is to simply tighten the pursestrings and conserve every rupee. In such trying conditions, a number of infrastructure development companies, including IVRCL infrastructures and projects, Nagarjuna Construction Company, Lanco Infratech and Maytas Infra and, of course, GVK Power and Infrastructure, are pulling out all stops to keep a lid on costs, and monitor project progress with a microscope.

A. Ranga Raju A. Ranga Raju,MD, Nagarjuna Construction Company Projects in the works: A port at Machilipatnam in Andhra Pradesh is being implemented along with another Hyderabad company, Maytas Infra Total cost: Rs 1,650 crore Funds still to be raised: Debt of Rs 1,000-1,200 crore Status: Yet to achieve financial closure

“Today, every attempt is being made to conserve cash. Each item of our expenditure is being reviewed to see if we can look for some sort of cuts. There is now an element of austerity and we are trying to ensure that we don’t overspend,’’ says George. What’s more, starting October, most of its employees have opted to stop travelling business class (according to GVK officials, travel is a huge component of overall costs for the company). Such austerity has helped the company build a cash kitty of sorts over time. With a palpable sense of achievement, George tells BT: “Today, we have almost Rs 200 crore in the form of short-term fixed deposits in banks that we can tap any day.”

Down south on the road leading from Salem to Coimbatore in Tamil Nadu, IVRCL is having a direct board-level involvement into monitoring the execution of its two build-operate-transfer (BOT) projects in the road segment in that region. The good news is that both the projects have attained financial closure. Yet, the IVRCL top brass, represented by none other than R. Balrami Reddy, Executive Director (Finance), now makes frequent visits to these project sites.For a few other players, like Lanco Infratech, for example, the best action in such grim times is no action. Lanco, which has been aggressive in the power and infrastructure space, is taking it slow these days. “Today, we are not aggressively looking at pursuing new opportunities in power,’’ says Executive Chairman L. Madhusudhan Rao.

E. Sudhir Reddy E. Sudhir Reddy, Chairman, IVRCL Projects in the works: Three roads, one in Punjab and two in Tamil Nadu; also a 100 millionlitres-per-day desalination plant in TN Total cost: Rs 1,600 crore Funds still to be raised: NIL Status: Financial closure done, construction under way; has had a marginal rise in costs due to rise in prices of commodities like Bitumen and due to delays in getting right of way etc. Considers the project to be on-track

With no dollars available internationally and liquidity tight within the country, these are tough times for India’s infrastructure players, especially for the BOT brigade who are typically into long-gestation projects that require huge funds. “We are seeing that the situation overseas has become tight and most companies are having to resort to domestic financing, where again the liquidity has become very tight as of now. So, many are going to find it difficult to achieve financial closure,’’ says Satyam Agarwal, Senior Analyst (Engineering, Infrastructure and Utilities) at Motilal Oswal Securities. How badly these companies will be hit, he adds, will vary from company to company, and project to project. Overall, however, two factors will decide their fate—the financial muscle of the promoters and the progress of the project so far. Alluri Ranga Raju is one promoter with the financial muscle. But the Managing Director of the over Rs 3,500 crore-Nagarjuna Construction Company has yet to reach financial closure for a port project he is implementing along with Maytas

Infra in Machilipatnam in Andhra Pradesh. The promoters have still to raise Rs 1,000-1,200 crore in debt for the Rs 1,650 crore venture. In the short term, that appears a huge challenge. “The liquidity condition is still tight and we will need to watch for another two or three months,” shrugs Ranga Raju. Maytas infra, however, has also to raise debt for its other major project. Maytas-led consortium has just bagged the Rs 12,000 crore metro rail project in Hyderabad. “Though in the current scenario, the liquidity situation looks tight, we think this is temporary in nature. For the metro rail project, we are confident of achieving the financial closure in six to nine months,” says B. Teja Raju, Vice Chairman, Maytas Infrastructure. “Right now we are working on things that need to be done before that, which is getting the designs and alignment finalised and coming out with EPC will decide their fate—the financial muscle of the promoters and the progress of the project so far.

G.V.K. Reddy G.V.K. Reddy, Chairman, GVK Power & Infrastructure Projects in the works: Govindwal Saheb coal-based 540 MW power unit; and a 3,180-acre Special Economic Zone in Chennai Total cost: Rs 3,000 crore for the power plant; and Rs 800 crore for the SEZ Funds still to be raised: Debt of Rs 2,400 crore for power; roughly Rs 500 crore in debt for the SEZ Status: Financial closure yet to be done

Alluri Ranga Raju is one promoter with the financial muscle. But the Managing Director of the over Rs 3,500 crore-Nagarjuna Construction Company has yet to reach financial closure for a port project he is implementing along with Maytas Infra in Machilipatnam in Andhra Pradesh. The promoters have still to raise Rs 1,000-1,200 crore in debt for the Rs 1,650 crore venture. In the short term, that appears a huge challenge. “The liquidity condition is still tight and we will need to watch for another two or three months,” shrugs Ranga Raju. Maytas infra, however, has also to raise debt for its other major project. Maytas-led consortium has just bagged the Rs 12,000 crore metro rail project in Hyderabad. “Though in the current scenario, the liquidity situation looks tight, we think this is temporary in nature. For the metro rail project, we are confident of achieving the financial closure in six to nine months,” says B. Teja Raju, Vice Chairman, Maytas Infrastructure. “Right now we are working on things that need to be done before that, which is getting the designs and alignment finalised and coming out with EPC packages to finalise the contract,” he says.

Consider the key problems: There are no dollars available to borrow, private equity seem more bothered about withdrawing money than investing in Indian companies, and the capital markets are in the dumps. Yes, the Reserve Bank of India has been active and is injecting liquidity—with cuts in the repo rate and in the cash reserve ratio, it has already injected Rs 1,45,000 crore. But this money has still to make its presence felt, and that may take another two to three months.

B. Teja Raju B. Teja Raju, Vice Chairman,Maytas Infra Projects in the works: Metro rail in Hyderabad Total cost: Rs 12,000 crore Funds still to be raised: Debt of around Rs 10,000 crore Status: Financial closure yet to be done

More importantly, the problem at the moment is the huge debt redemption pressure faced by banks. Thus, whatever dollars have been supplied by the central bank is being mopped up by banks to tide over the redemption pressure. Also, the Rs 1,45,000 crore that’s been pumped-in by the apex bank may look big in isolation, but not when you stack it up against the quantum of investments expected to find its way into road projects alone. Industry players expect that the National Highway Authority of India (NHAI), in its next round of bidding, is expected to come out with 53 packages (or routes in simple lingo), each of which would call for between Rs 1,000 and Rs 1,500 crore in expenditure. That alone will suck-in investments of over Rs 50,000 crore.

“We need to be cautious for at least the next three to four months because we are still in a period of volatility. I think banks will be cautious in terms of accepting new projects or trying to disburse aggressively for existing projects, till they see some sort of stable condition,’’ says Lanco’s Rao. But still, he feels, since power and roads cannot be imported from other countries—like steel or cement—the government may try to ensure liquidity for major and viable power and road projects—especially those where all approvals are in place, like those relating to land, fuel, selling arrangements and statutory requirements.

But a BOT player’s woes don’t end if cash is available; after all, if it is available, it will be at a high cost, which could play havoc with the economics of a project. “The cost of borrowing has moved up from 10 per cent to 13-14 per cent and there is a chance that it could go up further,” says Rao.

L. Madhusudhan Rao L. Madhusudhan Rao, Executive Chairman, Lanco Infratech Projects in the works: Two coal-based power projects in Chhattisgarh and one in Orissa. Also, a port project in Kerala as part of a consortium Total cost: Around Rs 20,000 crore for the power project; and Rs 8,000 crore for the port (Rs 2,500 crore in Phase I) Funds still to be raised: Debt component of Rs 16,000 crore in all power projects; and Rs 2,000 crore for first phase of the port project Status: Yet to achieve financial closure

Is there a way out? E. Sudhir Reddy, Chairman, IVRCL, says a solution could emerge if the government and agencies such as the NHAI are willing to extend the lifecycle of projects. For example, in a road project, the number of years given to a player to collect tolls could be extended to allow it to be compensated for the additional costs incurred in raising funds for the projects at a higher rate.

However, Reddy has a better alternative in the near term. “We don’t want to bid for BOT projects.” He goes a step further and adds: “Today, it may be good to be just a cash contractor. As a contractor, if I go and work for a BOT player, everything is a pass-through to the asset owner. (It’s best to) Be a pure cash contractor and there are hundreds of works that are available in the non-BOT space.” That’s the way IVRCL has been going, with 98 per cent of its projects today being cash contracts.

The downside of shifting from BOT to pure contract work are the lower margins—20 per cent in contract as against a high of 90 per cent in BOT projects.

One option is to spin-off a subsidiary that acts as an investment vehicle for BOT projects, even as the parent focuses on pure construction activity. That’s the model Nagarjuna Construction has followed, with 100 per cent-owned subsidiary NCC Infra being its vehicle for BOT.

BOT or no BOT, reaching financial closure is the goal that CFOs of infrastructure companies are aiming at. A few will, a few will take longer than anticipated— and more than a few may not get there.

The problem areas... No dollars available. Cost of funds have risen with rising interest rates.short-term rates up almost 50 per cent in the last one year. Cuts in the repo rate and CRR have injected some liquidity into the system but dollar sales by RBI is mopping this up. Limited options to raise funds from the capital markets, PE funds and external commercial borrowings.

...And the way out Conserve cash. Like GVK is doing, for example; it has close to Rs 200-crore cash reserves. Monitor existing projects closely. IVRCL?fs ED (Fin.) tracking BOT projects on a daily basis. Convince government and agencies to consider extending project lifecycles. E.g. increasing the time period over which a player can collect tolls in a road project. Desist from aggressively pursuing new BOT projects. Lanco Infra. will go slow on new project bids and focus on existing ones.