The equity sale fervour in the road sector has strengthened in the last three to four years. In addition to a spike in the number of sale transactions, the market has witnessed the emergence of global investors. Between January 2015 and May 2016, the road sector reported the conclusion of nine key equity dilution deals valued at over Rs 18 billion. While most of these asset sales have been a result of the deleveraging of balance sheets and the infusion of much-needed liquidity by debt-laden promoters, others have been an outcome of business strategies aimed at achieving growth at a faster pace as well as at increasing market share.
From a seller’s to a buyer’s market
While equity sale transactions have been common across all stages of project implementation, operational asset sales have been dominant, especially in the last few years. Since 2012-13, equity dilution in operational/ongoing road projects has been a common phenomenon. However, the way assets are valued has undergone a sea change. Valuations have posted a corrective adjustment and appear to be more realistic than what they were two or three years ago, as there are more sellers than buyers today.
Some key companies that have offloaded their assets/equity portions in road projects are Gammon Infrastructure Projects Limited, IVRCL, HCC Limited, NCC Infra Limited, Madhucon Infra Limited, Jaiprakash Associates and I Squared Capital. Some of the other companies that are considering divesting their stakes are Soma Enterprises, Reliance Infrastructure Limited, IL&FS Transportation Networks Limited (ITNL) and Ramky Infrastructure Limited.
In April 2013, IVRCL diluted stake in its special purpose vehicles (SPVs) Salem Tollways Limited, Kumarapalayam Tollways Limited and IVRCL Chengapally Tollways Limited. Another major equity dilution deal was struck between GMR Infrastructure Limited and SBI Macquarie Infrastructure Trust, where the former sold its 74 per cent stake in GMR Jadcherla Expressways Limited for Rs 2.06 billion. HCC Limited, through its subsidiary, HCC Concessions Limited, sold a road project in Andhra Pradesh. As a part of its strategy of exiting operational assets, HCC Limited also sold its stake in a road project to the Sadbhav Group. In 2015, Madhucon Projects Limited signed a term sheet with TRIL Roads (Tata Sons’ construction company) to divest its 74 per cent stake in subsidiary Madhucon Agra-Jaipur Expressways Limited.
These transactions have aided companies in bringing in fresh liquidity. While most of the firms have utilised the sale proceeds to pare their outstanding debt, significant funds have also been diverted towards meeting working capital requirements, which bodes well for the uptake of new projects.
On the buyer’s side, investor appetite seems to have improved. The sentiment for such acquisitions is quite positive amongst private equity (PE) firms, venture capital firms, foreign pension and insurance funds, international infrastructure funds, etc. Funds such as the Macquarie Group, Morgan Stanley, JPMorgan Chase and Company, I Squared Capital, IDFC Alternatives, BIF India Holdings, Brookfield Asset Management, the Canada Pension Plan Investment Board and Temasek Holdings have invested, or are considering investing, in road projects and companies.
Equity investors like SBI Macquarie have invested in a number of assets belonging to a single company. “In 2013, SBI Macquarie bought a minority stake in Ashoka Concessions Limited which had a portfolio of seven toll road assets, six of which were operational. Overall, the company has stakes in assets of five
companies with a capital deployment of $350 million. The experience in managing these assets has been satisfactory,” asserts Deep Gupta, senior vice-president, SBI Macquarie Infrastructure Management.
Meanwhile, IDFC holds stakes in 11 projects with a mix of operational and under-construction assets. Ankur Srivastava, director, IDFC, says, “Investor experience in the case of buyout of road assets has been mixed. While returns in the case of under-construction assets were not at par with expectations, operational assets performed better than expectations.” As a result, investors have turned away from under-construction assets. While operational assets attract higher premium for sellers, they are less risky in contrast to assets which are yet to be developed. Global investors too are more bullish on the Indian market, prompted by a desire to diversify away from heavily invested markets like China where growth is slowing.
Key companies in the road sector plan to offload stakes in their assets in the coming months. In March 2016, ITNL signed a definitive agreement with MAIF Investments India Pte Limited for the sale of 15 per cent of the paid-up equity capital held in Gujarat Road and Infrastructure Company Limited (GRICL) for an aggregate consideration of Rs 1.09 billion. Upon closure of the deal, MAIF will hold 56.8 per cent of GRICL’s equity capital whereby ITNL will cease to have management control of the company, but will continue to hold equity shares representing 26.8 per cent of the paid-up equity share capital.
NCC Limited has unveiled plans to monetise power and road projects to pare debt and to meet its working capital requirement. Larsen & Toubro plans to monetise assets from time to time and selectively bid for value-accretive projects in the road and transmission line sectors. Besides, Ramky Infrastructure Limited is planning to monetise its operational road assets to facilitate debt reduction, as part of its corrective action plan. The company is currently in talks for potential stake sale/securitisation of road projects and other assets. However, the discussions are still at a preliminary stage and have not yet reached the definitive agreement stage.
Going forward, acquisition deals will continue to increase as the focus of infrastructure companies will be on reducing debt to create space for fresh private investments. Experts believe that the road sector in the country offers standardised policies and procedures which are required to attract global investors. The Ministry of Road Transport and Highways’ approval of the exit policy, which allows companies to fully exit their projects two years after construction, will continue to be a major growth driver. There is thus a visible pipeline of assets available in the sector for investors to choose from. As a result, investors continue to be bullish on equity infusion in the sector, especially in operational assets. Acquisitions will also be driven by the fact that Indian players are expected to move out of the wait-and-watch mode and consider the inorganic route to expand their operations as a result of increased political and economic certainty and improved financing conditions.
Another major push for the acquisition market will come from the strategic debt restructuring scheme, wherein opportunities for fresh acquisitions will arise for asset reconstruction companies, global investors and more financially robust infrastructure developers. Besides, the proposed launch of the toll-operate-transfer model will create avenues for investors to buy government-funded operational assets. The next few years are thus certainly expected to see greater participation in India’s road and highway space from foreign pension funds, international PE firms, and sovereign wealth funds.