Small infrastructure companies looking for funds to compete in the country’s mammoth road-building programme are opting for initial public offerings (IPOs).
Earlier this month, two companies—the Satyam group-backed Maytas Infrastructure Ltd and Brahmaputra Consortium Ltd—filed draft red herring prospectuses with the Securities and Exchange Board of India to tap the stock market. These documents are filed with the regulator to get approvals prior to accessing capital markets. Both plan to use the proceeds of their IPOs to bid aggressively for the National Highways Authority of India (NHAI) projects.
Brahmaputra will issue 42 lakh shares of Rs10 each at a price band to be decided later. The company, which will see a 25% dilution in the promoter family’s stake, has already bid for seven projects in the North-South and East-West corridors (a set of highways linking the four corners of the country). Suresh Kumar Prithani, the company’s chairman and managing director, said it would enter the highways sector through a joint-venture.
Maytas Infrastructure will issue 88 lakh shares, diluting 15.04% of the promoters’ stake. It already owns concessions in an elevated tollway project in Bangalore and a section of the national highway between Karnataka’s capital and Hosur (in Tamil Nadu). The proceeds of the issue will be used to fund the company’s existing and future road projects.
Sunrise sector: Many small firms are also pooling their resources to develop and run highway concessions
NHAI, the regulatory authority that controls the country’s approximately 66,000km of national highways, has under various phases of a development programme already upgraded nearly 7,150km of highways. Another 8,000km are being upgraded. A significant portion of these projects is being implemented under the build-operate-transfer (BOT) model, in which the developer bears the cost of the project and retains toll revenues for the duration of the concession period. Analysts said firms that do not have the resources of the larger players could use equity (raised from IPOs) to bid for projects as well as to raise long-term debts to fund actual construction, once the bids are won. “In order to raise long-term debt financing, it is required to have some equity,” said Arvind Mahajan, executive director at audit firm KPMG.
The cost of winning bids could run into a few hundred crores, depending on traffic projections, according to Harsh Shrivastava, vice-president, marketing, with consulting firm Feedback Ventures. In many cases, bidders even offer the government a sweetener—called a negative grant—over the cost of the project to win the bid. Added to that are costs associated with conducting independent traffic surveys and appointing project consultants.
Despite the high costs associated with developing and running highway concessions, many companies are entering the business, banking on the fact that traffic growth has consistently outpaced projections. While Brahmaputra plans to spend no more than Rs10 crore on bidding for “one, possibly two contracts” worth a total Rs500 crore, according to Prithani, Maytas said it planned to bid aggressively for all projects that come up.
Analysts said a number of small firms are also pooling their resources to get into the roads sector. “With roads becoming a sunrise sector, you are seeing a lot of small companies coming and taking big projects from under the larger, more established players,” said Shrivastava.
Brahmaputra’s Prithani said the BOT model has become attractive for smaller firms because the government provides more protection if traffic is lower than projected. “Nowadays, they’re covering the ups and downs. If traffic is 20% below the projected level, the government will offer an annuity,” he added.