Holding companies: new route to consolidation in highways sector

Holding companies: new route to consolidation in highways sector
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First Published: Mon, Jun 04 2007. 01 06 AM IST
Updated: Mon, Jun 04 2007. 01 06 AM IST
As a first step to consolidation in the privately owned and operated highways sector in India, players such as Larsen & Toubro Ltd and Infrastructure Leasing and Financial Services Ltd (ILFS) have set up holding companies to manage their infrastructure projects.
These holding companies, which will oversee a larger asset base, will provide easier access to finance and pave the way for possible acquisitions of existing concessionaires.
“While consolidation is happening in India at a project to project level, we have not yet seen it company-wide,” said K.V. Rangaswami, executive director with L&T. Rangaswami is also on the board of L&T Infrastructure Development Projects Ltd, the holding company that supervises the construction major’s highway properties.
The tolled highway sector is currently dominated by large players such as L&T, the GMR Group, Gammon India Ltd, and Soma Enterprise Ltd. Lately, however, contracts have been won by smaller civil engineering and construction companies that typically bid for projects as small as 18 km in length.
Analysts say that many smaller players don’t seem to have the wherewithal to last 20-25 years, the typical duration of a highway concession, and they would be the first ones to be swallowed up by larger players looking to leverage economics of scale.
The National Highways Authority of India (NHAI) has so far awarded 50 contracts totalling 2,505 km on the toll-based build-operate-transfer basis to private operators.
Industry watchers say the next two years could see large players—both homegrown and international—buy out smaller companies.
Mint reported on 25 May that global majors, such as Barcelona-based company Abertis Infraestructuras S.A., which directly manages 3,300km of tolled motorways across the world and has a stake in a further 5,000km, are planning an entry into India through joint ventures.
Consolidation has been a feature of the global toll-road industry, with companies such as Europe’s largest tolled-motorway operator Autostrade SpA, which has 3,596 km of tolled motorways and annual revenues of €3.1 billion (Rs17,050 crore) in revenues growing by acquiring smaller companies.
According to Rangaswami, “Larsen & Toubro will certainly look at it (buying stakes in existing concessions) from a purely investment point of view, not as a construction business,” he said.
The company has three operational highways for which tolls are being collected, while six other are under construction. It recently sold its 40% stake in the Rs614 crore Jaipur-Kisangarh project to joint venture partner GVK Group.
Consolidation will offer firms more operational freedom as well as easier access to capital for their portfolio of road projects, said Pradeep Puri, president and chief executive officer of the Noida Toll Bridge Co. Ltd , a subsidiary of ILFS.
ILFS has hived its road projects into a separate holding company.
“In many instances, you see small civil construction companies yanking the projects from under the big guy’s feet,” said Harsh Shrivastava, vice-president marketing for project management company Feedback Ventures Pvt Ltd.
“Recently, a small family-owned construction company won a bid for a nearly 100-km stretch of state highway for which major companies were bidding. The owner then divided the stretch among his five sons-in-law to manage,” Shrivastava added.
According to Arvind Mahajan, an analyst with consulting firm KPMG, in some cases, these smaller players are looking for quick money even though the typical projects are on 30-year annuities.
K.P. Narayana Kumar contributed to this story.
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First Published: Mon, Jun 04 2007. 01 06 AM IST
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