Valuation disconnect, delay in approvals stall road deals
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Mumbai: Three years ago when IVRCL Ltd announced the sale of three highways it built at a cost of Rs.2,200 crore in Tamil Nadu, shares of the debt-laden infrastructure company leapt 13%.
Cut to the present and its deal with Tata Realty and Infrastructure Ltd (TRIL) has still not concluded, and IVRCL shares are languishing at a fraction of their 2013 highs. Despite several assertions from both parties that the deal is still on, it is still to close, since some preconditions have not been achieved.
Hyderabad-based IVRCL’s predicament will be familiar to the promoters of more than 60 road builders in India who want to sell projects, raise money, reduce debt and pick up new projects that are coming up. The situation also threatens to undermine the government’s grand plans to more than double the number of road project awards in the current fiscal year.
IVRCL chairman Sudhir Reddy did not respond to phone calls and messages and TRIL did not respond to an email.
Road sector deals are rising but despite a relaxation in norms for such sales last year, many deals are taking longer to conclude as buyers and sellers bicker over valuations, lenders refuse to accept losses, and due to delays in getting approvals from the National Highways Authority of India (NHAI).
“The reason for deals not going through in the roads and highways sector is the valuation disconnect between the buyer and seller due to the difference in estimates of WPI (Wholesale Price Index) and traffic growth. Also, in certain stressed cases, it seems buyers want bankers to take a haircut as well, which is still not happening,” said Rohit Singhania, vice-president and fund manager, DSP BlackRock Investment Managers Pvt. Ltd.
India has set a target to award 25,000km of road projects in 2016-17, compared with 10,000km achieved in 2015-16.
Struggling infrastructure firm Supreme Infrastructure India Ltd has also been looking to sell its operational road assets to raise money for its delayed or under-construction projects amid cost overruns and high interest costs. “It’s a buyers’ market and there are many assets available to choose from,” said Vikram Sharma, managing director, Supreme Infrastructure. “All the developers have got into stress and every quarter, there is a feeling that there is a better situation for a distress sale. So, buyers wait.”
Similarly, IL&FS Transportation Networks Ltd (ITNL), the company with the largest build, operate and transfer (BOT) roads portfolio, has been in discussions with potential buyers, including private equity firm I Squared Capital, for the sale of its certain annuity road assets, Mint reported in April. But a deal is still not in sight. A year ago, the company had said it has a target of monetizing a few road assets in two quarters’ time. ITNL did not respond to an email seeking comment.
Larsen and Toubro Ltd (L&T), India’s largest engineering and construction company, has also said several times in the past few years that it is looking to monetize its operational road assets—either by a sale or through an infrastructure investment trust (InvIT). L&T is now working on a deal with Canadian pension fund CPPIB for these assets, Mint reported on 13 July.
“M&A in roads have picked up only in the last three years, and increasingly, it’s taking longer for deals to complete. The life cycle of a deal, from the time of term sheet signing to closure, has increased to four-to-six months, which is very high,” said Ashish Agarwal, director, infrastructure at investment bank Equirus Capital Pvt. Ltd.
“Delays are due to external reasons, including need for NOCs (no objection certificates) from NHAI, other lenders and also from stakeholders at the project or the holding company level. And within this time frame, if key project variables undergo a change, it can lead to renegotiations,” he said.
Some of the deals announced in 2015 could be concluded this year, Equirus’s Agarwal said.
It took seven months of hard bargaining for Gammon Infrastructure Projects Ltd to sew up a deal to sell a portfolio of nine projects—six roads and three power plants—to Canada’s Brookfield Asset Management last year, and several more months before money changed hands.
On the other side, Piramal Enterprises Ltd, controlled by billionaire Ajay Piramal, which said in 2014 that it was looking to buy a number of road assets, is yet to announce a deal.
Eight mergers and acquisitions and PE deals worth $315 million have been announced so far in 2016, compared with six deals worth $125 million during the same period in 2015, according to data from Grant Thornton Advisory Pvt. Ltd.
The infrastructure fund of multi-asset manager IDFC Alternatives has been one of the most active buyers of operational road assets in India, ahead of peer investors including US-based I Squared Capital and Canada’s Brookfield Asset Management.
“A lot of deal flow is starting to happen but a lot of investors are not aware of the long-drawn process and the patience these acquisitions entail... Our experience is that there are transactions that have gone down very smoothly and in a timely manner; but at the same time, there are a couple of transactions which have taken more time than we had expected,” said Aditya Aggarwal, partner at IDFC Alternatives.
In several instances, due diligence of assets itself throws up negative surprises leading to the collapse of talks, Aggarwal said.
While traffic growth and investor sentiment has revived, several companies continue to be stressed from previous years’ aggressive expansion. Highway developers that are labouring under debt, and dealing with lower-than-expected cash flows on completed projects and issues related to land acquisition on some incomplete ones will need refinancing to the tune of Rs.8,450 crore, India Ratings and Research Pvt. Ltd said in a June report.
About Rs.25,500 crore worth of project-level debt across 37 BOT projects, some under construction and others complete, could be under stress, the ratings agency said.