In­fra com­pa­nies cash in on higher risk ap­petite in equity mar­kets

Mint Asia ST - - Otherviews - VATSALA KA­MAT


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.

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