Madhav Nadkarni, chief financial officer at mid-sized engineering and construction company Unity Infraprojects, says he gets at least one offer a week from bankers wanting to sell him a road project.
So far, he hasn’t struck a deal.
But the phone calls are only likely to increase in coming months as India’s smaller roadbuilders struggle to raise cash and bigger operators such as Unity Infra look to buy existing projects rather than overpaying to win projects of their own.
India had planned to award a record 7,300 km (4,500 miles) of road contracts in 2011-12 to March, up from 5,083 km in 2010-11, according to the National Highways Authority of India (NHAI).
So far, though, contracts for just 4,500-5,000 km of roads have been awarded this fiscal year, said Abhinav Bhandari, construction sector analyst at Elara Capital in Mumbai.
And bidding for those projects has been fierce, given the lack of construction activity in other areas of the slowing economy, such as power plants, ports, airports and coal mines.
“We find the bidding to be extremely aggressive,” said Lalit Jalan, chief executive of Reliance Infrastructure Ltd, which has not won a road project in two years. “Till the time this bidding frenzy remains, we are OK sitting on the fence.”
Instead of bidding, Reliance Infra is among several big industry players looking to buy projects that are already underway or completed.
“We are evaluating projects, wherein we could bring in our engineering and financial expertise and increase their rate of return to at least 20%,” said a spokesman for the company, which is controlled by billionaire Anil Ambani.
Reliance expects to increase the number of projects in its portfolio by at least 30-40% in next couple of years, mitigating risks associated with starting from scratch.
Reliance has a portfolio of 11 projects totaling about 1,000 km. The assets, valued at about Rs12,000 crore ($2.4 billion), generate an average annual return of about 20%.
Reliance’s strategy of buying up finished or near-finished projects comes at a time when many smaller operators are finding it difficult to borrow money or issue equity. On average, lenders charge 11-11.5% interest for roadbuilding loans.
Delays in acquiring land, a particular problem in India because of low compensation for property owners, can hold up projects and increase costs and risks.
“Logically, this should lead to a consolidation in the industry in the next couple of years, say by 2014, with large players shoring up assets,” said Elara Capital’s Bhandari.
“For the (smaller) players, this would mean a full stop to their growth plans (through acquisitions),” he said.
Right now, high valuations are keeping a lid on deals, but that is likely change soon, he said.
The road sector is capital intensive as it takes four to five years for projects just to break-even. Positive cash flows are often much further down the track.
“Everyone wants to raise money, because in the infrastructure sector you require huge amount of money on a continuous basis,” said SREI Infrastructure Finance Ltd Chairman Hemant Kanoria. “...A lot of firms are looking at diluting equity either partially or fully.”
On Tuesday, sources said GMR Infrastructure Ltd was in talks with private equity investors including Australia’s Macquarie Group to raise about $200 million by selling stakes in road projects.
Hindustan Construction Co Ltd unit HCC Concessions, with projects valued at Rs5,500 crore as of 31 December, is another company looking to acquire projects.
“The goal is to add a couple of thousand crores (tens of billions of rupees) of quality assets to our portfolio every year,” director Arjun Dhawan told Reuters.
One confirmed seller is engineering and construction company IVRCL Ltd, which reported an 84% drop in net profit in the October-December quarter.
“We are not desperate to sell. This is churning of the assets,” group chief financial officer R. Balarami Reddy said in an interview in January.
IVRCL has hired Ernst & Young to find a buyer for its road project in Tamil Nadu and is in talks with a clutch of foreign investors, Reddy said.
The company is still an active bidder for projects, he said.
“Equity raising is difficult in the present market, but at the same time we cannot stop bidding for projects. We have to take and execute further projects,” he said.
India is expected to build 35,000 km of roads over the next two years, according to US research and consulting firm Frost & Sullivan.
With the burst of activity, government and private sector investors from major developed countries are expected to invest about $3 billion in Indian road projects over the next five years, the consulting firm says.
Unity’s Nadkarni said his company was not on the prowl for projects but would be interested if the right one came along.
“We have to look at all aspects. At what rate, at what premium, at what subsidy, and what would be the cost, all these have to reviewed,” he said.