Mumbai: India’s infrastructure growth will slow further if funding costs are not brought down, as companies pinched by plunging bottom lines turn their focus away from expansion.
Corporates started paying higher attention to the development of India’s highways, metros and airports about five years ago after the government began offering them as build-operate-transfer projects to bring in private funding.
Now, newer projects are likely to find fewer bidders and face slower completion schedules, as firms struggling with the high cost of borrowing also face a banking sector that has toughened up its lending stance.
“Financing is going to be a big problem. Be it equity or debt or any other form of funding, that is going to be the biggest bottleneck going forward, at least for some time,” said Isaac George, chief financial officer, GVK Power & Infrastructure Ltd.
To meet working capital needs, builders have been selling stakes in projects or pledging shares, divesting non-core assets and taking long-term loans to pay off short-term ones.
“There are people looking at deals but where are the deals closing?” said GVK’s George.
“Companies are focusing on their core strengths now,” said Rohit Gupta, analyst with KR Choksey.
Earlier, it made sense to divert funds to realty as banks were ready to lend at lower interest rates. Now, projects aren’t profitable enough so firms are scrapping them, he said.
In January, the government tried to provide a fillip to the cooling economy with hefty rate cuts, easier foreign borrowing rules and a higher foreign investment ceiling on corporate bonds.
It also enabled the India Infrastructure Finance Company to access an additional Rs30,000 crore via tax-free bonds. But affordable bank lending is still hard to find, officials say.
“The liquidity with the banks exists today, but not to the extent that they have to substantially lower their interest rates to single digits,” Ajit Gulabchand, chairman and managing director of Hindustan Construction Co Ltd, said.
“For these projects to come up in a very big way so that they actually prove to be effective contra-cyclical measures, the interest rates will have to come down to single digits.”
Some projects look much less attractive than first anticipated as tight liquidity hits all industries. India’s highways see less traffic, airport collections are down and the once-lucrative real estate surrounding metro projects looks worthless.
Many mid-cap infrastructure companies reported lower net profit growth in the December quarter, hit by high interest costs and galloping commodity prices. These margin squeezes are forcing payment and project delays, say industry watchers.
Steel and cement prices have since cooled and builders have inserted price-escalation clauses in contracts. Employee costs have also come down as an increasing number of realty projects are put on hold, freeing up manpower.
But the March quarter may be too early for firms to reap these benefits, and with the general elections due by May, growth in company order books is seen taking a hit.
In usual times, this would have been a temporary glitch. Now, without access to cash, revenue growth can slow, says Tapash Majumdar, chief financial officer of C&C Constructions Ltd said. “If you do not have access to capital, you will suffer.”