The stake sale in projects under construction frees up cash, which can be utilized for future bids
Interest costs in 20 mid-sized listed firms in the infra segment rose sharply from 9.8% in Q4 FY19 to 16.2% in Q1 FY20
Monetizing road assets is in vogue among infrastructure construction firms and has gained traction in the recent past. On the one hand, this shows the ability of well-managed firms to deleverage their balance sheets. On the other, it shows that there is interest from large institutional investors in the country’s road assets.
Last week, Dilip Buildcon Ltd entered into an agreement to sell 100% stake in five under-construction HAM (hybrid annuity model) road projects to Singapore’s Cube Highways and Infrastructure Pte. Ltd. Needless to say, this will ease the financial stress for the Indian firm. Investors gave a thumbs up to the development, taking Dilip Buildcon’s shares up almost 15% in a week.
A few months ago, Dilip Buildcon sold some of its road projects to Mumbai’s Shrem Group. Separately, last month, Cube Highways signed a share purchase agreement with KNR Constructions Ltd for three of its road assets at 1.8 times the committed equity infusion of the project. Sadbhav Engineering Ltd and PNC Infratech Ltd, too, have been in the news for monetizing some of their road assets.
So how does monetizing help infrastructure companies? To be sure, the stake sale in projects under construction releases funds locked into a project. While it saves interest cost, it also frees up cash locked in by way of debt and equity in a project, which can be utilized for future bids. As HDFC Securities Ltd explains, the amount from the sale of five HAM projects can be used as growth capital. With another seven projects planned (with another set of investors), it sets the pace for balance-sheet deleveraging.
Meanwhile, interest costs in 20 mid-sized listed firms in the infra segment rose sharply from 9.8% in Q4 FY19 to 16.2% in Q1 FY20. A slowdown in toll collection growth, specifically in the earlier BOT (build-operate-transfer) project awards, was also perceived as a risk to cash flows of infra firms. This could jeopardize the ability of firms to service interest payments. Since 1 July, such concerns have taken a toll on share prices of infra firms. Shares of PNC Infratech and Dilip Buildcon fell by around 10% and and KNR Construction have fallen by 21% till date.
With most firms having order books of two-three times sales, timely asset monetization is the only road to stable growth. That said, large institutional investors are clear that the monetization deals are subject to achievement of the preset milestones for the infra firms, including right of way and fulfilment of commercial operation date. In other words, this monetization road will not be without its share of bumps.