Infra companies cash in on higher risk appetite in equity markets
infrastructure firms have been queuing up to raise funds through the equity route. Road construction firm Bharat Road Networks Ltd just closed its initial public offer (IPO) with a subscription of 1.8 times.
Another company that undertakes building construction projects—capacit’e Infraprojects Ltd—is raising about Rs400 crore through an IPO. It’s not just the mid-sized firms. After much deliberation, Larsen and Toubro Ltd (L&T) has decided to tap the capital markets through infrastructure investment trusts (Invits). Media reports suggest a huge Rs3,000 crore issue size by monetising a handful of its infrastructure assets such as roads.
Does this mean that the risk appetite for infrastructure projects has improved? Or are companies merely cashing in on the buoyancy in the equity markets to deleverage balance sheets by monetizing operational assets? Perhaps both reasons hold water.
To be sure, investors have turned more optimistic than ever in the past five years. Apart from new orders in infrastructure, efforts by the government to make infrastructure projects financially viable are paying off. For instance, the hybrid annuity model (HAM) ensures greater participation by government in road projects. Land acquisition and environment clearance issues, which scuttled many projects and dragged companies into a debt trap are addressed before financial closure. Besides, returns are fixed for a period of 15 years normally. This lends more comfort to lenders and investors.
No wonder the response to Invits and IPOS has been good so far. Even equity divestments such as the recent block sale of 24 road projects by mid-sized infrastructure firm Dilip Buildcon Ltd has been easier as some of the operational assets under the annuity model assure returns for 15 years. Firms such as GMR Infrastructure Ltd, too, have divested stake in power and road assets. That said, it may take time for the benefits to trickle down and improve the profit and loss accounts of companies. For instance, the interest cover ratio of large and mid-sized firms is only a tad better from a year ago, at around 1.5 to 2 times, showing that the strain on their balance sheets is still prevalent. Operating margins are on the rise but not yet at comfortable levels. Besides, profitability is erratic and hinges on toll traffic and tariffs, too.
However, the risks for the investor are lower than before. Firms, too, are more cautious in bidding for projects and monetizing assets to improve cash flows. Nevertheless, the buoyancy in the equity markets is certainly an enabling factor for infrastructure firms to raise funds.