Monetisation strategy paid off for R-Infra, GMR but not Lanco AMRITHA PILLAY
Last week, Anil Ambani spelt out the road ahead for his Reliance Infrastructure (R-Infra), heralding an end to its asset monetisation strategy. The group had adopted an asset-light model to deal with a debt overload, as had GMR Infrastructure, GVK Power & Infrastructure and Lanco Infratech, among others.
The story line has been typical. It began with a capital-heavy expansion plan, followed by huge debt and not necessarily higher profits. Larsen & Toubro and IL&FS Transportation Networks also experimented with this model but the results have been different for each.
GVK and GMR managed to reduce debt and operate a leaner model; others like Lanco stare at insolvency despite adopting an asset-light strategy.
“The experience in the infra sector, more so in the energy sector, has been very difficult for every group that entered it. They were hurt by macro issues, internal problems, inability to collect fees for their projects and so on. There is no solution but for companies to go the assetlight way,” says Harish H V, a consultant.
In November 2016, GMR allotted a 30 per cent stake in GMR Energy to Malaysia-based Tenaga Nasional Berhad, for $300 million in cash. In 2013, GMR Highways divested 74 per cent stake in GMR Ulundurpet Expressways to India Infrastructure Fund for ~2.22 billion. Part of the strategy was to give its lenders a 45 per cent stake in its Rajahmundry plant, under the earlier strategic debt restructuring scheme.
Lanco failed to gain from asset monetisation, with all the group’s operational and under-construction power assets likely to end up in insolvency courts. GVK sold 43 per cent equity in the Bengaluru Airport project to Fairfax Group in 2017 for ~34.9 billion.
In 2016, R-Infra sold its cement division to Birla Corp for ~48 billion. Last week, the firm also sold its Mumbai power distribution business to Adani Transmission, for which it expects ~188 billion. Ambani, in announcing the sale’s completion, said his firm was undergoing a transformation to being an asset-light, high-growth and highdividend one.
Some say this is more a need of the hour than a strategy of choice. “It is more of a compulsion than a choice for a number of companies. There are limited funding avenues for asset-heavy models, especially for firms with stretched balance sheets,” said Rahul Prithiani, director at CRISIL Research.
If everyone was to go asset-light, asks Harish, who will create assets for these firms to operate? A larger question is on the post-sale situation. Is there enough cash flow to service the remaining debt and capital expenditure? “It is possible for companies to use an asset-light strategy for future projects but it is not easy to offload the capital-intensive assets they already have on their books. Current debt servicing capability would still be challenging in many cases,” said Prithiani.
Capitaline data does not paint a good picture regarding the interest coverage ratio (ICR) at some of the infra firms. GVK Power’s in 2017-18 was 0.77; GMR Infra’s at 0.54. ICR is the ratio of a company's earnings before interest and tax, and its interest cost, indicating ability to service debt. A healthy ICR is expected to be at least 1.5 times or more. R-Infra’s was at 1.15 in FY18; this will change with the Mumbai distribution sale. Ambani said the transaction alone would reduce R-Infra’s gross debt from about ~220 billion to ~75 billion.
Some say the sector is coming full-circle. “It started with engineering, procurement and construction companies thinking they were missing out from the gain by completing a project and handing it back. They then participated in capital-heavy BOT (build, operate, transfer) and similar ownership projects. Now, companies are going back, using a fancy term called ‘asset-light’,” said an analyst with a domestic brokerage, which did not wish to be identified.