New Delhi: A recent announcement by Hiranandani Constructions Pvt. Ltd that it would set up a Rs10,000 crore power plant near Pune is just the latest in a trend that has seen real estate developers diversify into infrastructure construction and civil contracts.
“Diversifying into other businesses seems profitable in future. The business will be a source of regular return,” said Niranjan Hiranandani, managing director.
The developer has already created a separate entity, Hindustan Energy Generation Co. Ltd, which will set up the 400MW plant.
“The project will be funded through debt and equity at a 3:1 ratio. The new company may also look at raising funds through private placement of shares, (and/or) initial public offering,” he said.
The promise of regular cash flows is prompting developers, whose returns from real estate projects have been fickle in the past year, to turn to infrastructure.
Hiranandani Constructions’ peers in the real estate sector, however, are opting to play safe by limiting themselves to engineering, procurement and construction (EPC) projects and civil contracts and not getting into operations.
Unitech Ltd, which recently announced that it would spin off its non-core businesses, including investments in telecommunications and hotels, into a separate company called Unitech Infra Ltd, is looking at EPC projects, telecom transmission towers and hydropower projects as key focus areas.
“For the group’s growth, we are now focusing on infrastructure projects, too, apart from real estate. In the past, we have done projects in Punjab, Uttar Pradesh, Madhya Pradesh and Karnataka. But going forward, we needed to create a structure for infrastructure projects. There is a lot of potential in this sector,” said Sanjay Chandra, managing director, Unitech, in a recent interview.
New Delhi-based real estate firm Omaxe Ltd has opted for civil construction contracts to boost its cash flows. The firm has recently won contracts for building an air force and naval officers’ residential complex in Meerut, Uttar Pradesh, at a cost of Rs57.2 crore.
Omaxe had earlier won a Rs64.8 crore construction contract for developing a new All India Institute of Medical Sciences (AIIMS) complex in Rishikesh, Uttarakhand.
Its other projects include Manyavar Kanshiram Allopathic Medical College and its affiliated hospital in Saharanpur, Uttar Pradesh, and modernization of three Employees’ State Insurance Hospitals in Orissa.
“The company, through its wholly owned subsidiary, Omaxe Infrastructure and Construction Ltd (OICL), has been focusing on EPC contracts with (a) present order book of more than Rs850 crore. It is a complementary diversification rather than any risk mitigation strategy,” said Rohtas Goel, chairman and managing director of Omaxe.
Contribution from the infrastructure business in fiscal 2009-10 will be around Rs200 crore, he said.
Another New Delhi-based realty firm Parsvnath Developers Ltd, too, has undertaken construction projects for Delhi Metro Rail Corp. Ltd, building three station complexes. It is also constructing 13 shopping malls at Delhi Metro stations on a build-operate-transfer basis.
“This is an example of backward integration, where a real estate developer gets into such contracts. It is an expansion strategy that generates revenue,” said Amber Maheswari, head of investment advisory at property consultant DTZ International Property Advisers. “And since getting bank loans for infrastructure is easier, it is lot easier for developer firms to get into construction contracts.”
Paresh Chawla, associate director who oversees the real estate practice at consulting firm Ernst and Young, pointed out that in 2006-08, too, developers had gone on a diversification spree. When times turned tough with the onset of the global financial crisis and ensuing credit crunch, they exited infrastructure projects.
Faced with falling buyer demand last year, DLF Ltd sold off its wind power business, a large chunk of its hotel business and various other assets to raise at least Rs10,000 crore.
Chawla, however, added that while infrastructure projects require huge long-term investments, they also offer long-term potential for returns, balancing out the irregular returns that listed realty companies report on a quarter-to-quarter basis. “This would help them in stabilizing,” he said.