R-Infra issues stock options in subsidiaries

R-Infra issues stock options in subsidiaries

Mumbai: Reliance Infrastructure Ltd (R-Infra) is issuing stock options to employees in subsidiaries that serve as holding companies for varied businesses as it seeks to better focus rewards by keeping them independent of how the company as a whole is performing.

The subsidiaries deal with power generation, transmission, distribution and trading; engineering, procurement and construction (EPC) in the power and non-power sectors; development of roads, Metro railway systems, airports, speciality real estate and cement.

The value of incentives given to employees engaged in a business should not be diluted by the potential and relative underperformance of another vertical, said R-Infra chief executive officer Lalit Jalan.

“We have started granting stock options at the parent level as well as at the various verticals. Around 50% of the employees would be covered in the scheme," Jalan said, adding that the valuation was being currently worked out with the help of an external consultant.

R-Infra’s various businesses are at different stages of development and the expected turnover from them varies between Rs1,000 crore for the roads division and Rs300-400 crore each for the metro rail and power transmission businesses in the next fiscal.

Such stock options will also help insulate employees from business risks in other segments. A 5 July report by Edelweiss Securities Ltd highlighted such potential threats.

While “volatility in commodity prices and high interest rates" were recognized as the key risks for the EPC business, depressed industrial growth, potentially denting traffic, was seen as a risk for the roads business.

“Stock options are a very valued long-term retention tool that act both as compensation and reward to retain critical talent in a company," said Anita Belani, country head at Right Management Pvt. Ltd, the local arm of a US-based talent and career management firm. “Stock options can also stem the attrition rate of companies considering that there is a shortage of engineers with critical talent in India."

Employees have the option of cashing out through a possible listing, which will also help potential investors enter specific segments.

“Such a structure might make the company attractive to the likes of private equity firms who, depending on the terms of the deal, can invest in a business where they find the price-to-earning ratio desirable," said S.P. Tulsian, a stock market analyst. “Granting stock options at the vertical level will compel employees to contribute towards ensuring that their sector does well. However, employees might not benefit if the businesses do not perform well due to reasons beyond their control, such as cyclical downturns."

While several private equity firms have sought to invest at the holding subsidiary level, the company was in “no rush" to raise external equity, Jalan said.

“We’ve a very strong balance sheet with a cash surplus of Rs4,000 crore, after accounting for a gross debt of the same amount," Jalan said. “There is lot of headroom to raise more debt," he added.

R-Infra will look to raise debt by way of external commercial borrowings (ECBs) at the parent level, since lenders won’t be comfortable giving money to special purpose vehicles that execute projects, Jalan said.

“We are thinking of raising the money in the parent and allocating it further on an optimal basis," said Jalan, a Wharton graduate, like chairman Anil Ambani.

R-Infra’s road development business alone will need around Rs8,000 crore of debt with 14 projects in the pipeline, said Jalan.

While R-Infra’s average cost of borrowing for domestic debt is 9.5-10%, ECBs are 2-3 percentage points cheaper.

Others are also seeking to create distinct verticals to unlock value.

A.M. Naik, chairman of engineering-to-construction conglomerate Larsen and Toubro Ltd, said at the annual general meeting last week that the firm was creating three verticals—infrastructure, power development and realty—owing to “the increase in the number and maturity of concessions in its fold". The firm is looking to boost its cement business by exploring synergies with the power generation portfolio of Reliance Power Ltd, in which R-Infra holds a 45% stake.

The idea is to have cement factories close to the generation units, which according to Jalan could give the business a cost advantage of up to 25% by using fly ash, generated by the power plants as waste, to make the building material. Such proximity will also help R-Infra source cheap power for the cement units.

Reliance Cementation Pvt. Ltd, an R-Infra subsidiary, recently hired Sumit Banerjee, former managing director of cement maker ACC Ltd, to spearhead the business, and intends to establish 25 million tonnes of capacity over the next five years at an investment of Rs10,000 crore.

Though R-Infra’s shares have underperformed the Sensex over the last year, analysts remain bullish on the prospects of the company with its high “net worth and strong parentage", said a 2 July report by Angel Broking Ltd.

“Given its growth prospects and inexpensive valuation, we expect the stock to be an outperformer," the report added. “We believe the earning momentum will pick post FY12 as investments start yielding returns."