Trends and Outlook

Cautious investor stance despite positive policy measures

The government is doing its bit to improve investor sentiment and ensure faster project implementation. The plan outlay for the infrastructure sector for 2016-17 has been pegged at Rs 2.2 trillion. Financiers continue to remain cautious of investing in the sector on account of stressed assets and growing non-performing assets (NPAs) of banks.

A snapshot of key trends over the past year and the outlook for infrastructure financing in the country…

Trends

  • India’s macroeconomic situation has improved somewhat during the past year. The country’s gross domestic product (GDP) grew at 7.6 per cent in 2015-16, as against 7.2 per cent in the previous fiscal. This increase is attributed to a rebound in farm output and improvement in electricity generation and mining output.
  •  On the interest rate front, the Reserve Bank of India (RBI) continues to maintain an ac-
  • c-ommodative stance. The central bank reduced the repo rate by 25 basis points to 6.5 per cent, the lowest since 2011, in its first bi-monthly monetary policy for 2016-17. However, it kept the rate unchanged in its second bimonthly policy on the back of a sharper-than-expected surge in inflationary pressures. The rate cut together with the marginal cost of lending rate-linked lending is expected to put pressure on banks to cut lending rates, though with a lag.
  • During 2015-16, only three projects (one each in the road, power, and oil and gas sectors) worth around Rs 407 billion succeeded in tying up funding. However, financing was more than that in 2014-15, when 10 projects worth over Rs 135 billion achieved financial closure. So far, in the current fiscal (2016-17), only one project worth Rs 25.23 billion in the road sector has tied up funding.
  • In terms of sources of finance, bank lending to infrastructure amounted to Rs 402 billion in 2015-16, a decline of around 53 per cent over the preceding year’s disbursement of Rs 849 billion. While credit offtake for the overall infrastructure sector continues to show a declining trend, the road sector has emerged as the only sector that has witnessed a gradual pick-up since September 2015 due to uptick in activity in the revival of stalled projects.
  • There were also concerns regarding the asset quality of banks, especially with respect to exposure to infrastructure. Though the number of corporate debt restructuring cases declined during 2015-16, the banking system could become vulnerable if macroeconomic conditions deteriorate sharply. In sectors such as power, construction, telecom, shipbreaking and logistics, aggregate debt for restructuring decreased from Rs 1,804 billion (as of March 2015) to Rs 1,464 billion (as of March 2016). According to RBI’s Financial Stability Report (June 2016), the stressed advances ratio of the infrastructure sector declined to 16.7 per cent from 21.8 per cent between September 2015 and March 2016. However, iron and steel and infrastructure continued to account for the highest share in aggregate debt for restructuring.
  • In a big step towards the resolution of bad loans of banks, RBI and the Ministry of Finance are in talks for setting up two special funds to resurrect troubled investments through equity infusion or more debt funds. The funds proposed are the Stressed Assets Equity Fund (SAEF) and the Stressed Assets Lending Fund (SALF). While the SAEF is expected to invest in equity of stressed borrowers bringing equity to burdened projects, the SALF will provide last-mile funding or working capital to assets in trouble due to funding constraints.
  • Lending by non-banking financial companies (NBFCs) reported a rise over the previous fiscal. Disbursals by the Power Finance Corporation (PFC) amounted to Rs 465.88 billion, an increase of about 4 per cent over the Rs 446.91 billion that was disbursed in 2014-15; SREI Infrastructure disbursed Rs 145.33 billion, a rise of about 16 per cent from Rs 125.46 billion in 2014-15; the Housing and Urban Development Corporation (HUDCO) disbursed Rs 82.5 billion, an increase of about 2 per cent from the Rs 81.01 billion reported in 2014-15; and IIFCL disbursed Rs 497.98 billion as of June 30, 2016 as against Rs 393.83 billion in 2014-15.. Recently, RBI allowed NBFCs to provide takeout financing to infrastructure projects, an option so far available only to banks. The move is expected to provide NBFCs with the opportunity to increase their presence on the back of the ongoing stress being faced by commercial banks.
  • The favourable policy measures augured well for the tapping of funds through the external commercial borrowing (ECB) route. This was reflected in a surge in the quantum of ECBs secured by infrastructure players during 2015-16. During the year, ECBs amounting to $17.17 billion were witnessed, an increase of around 4 per cent compared to ECBs worth $16.44 billion in the preceding fiscal year. Infrastructure finance companies, telecommunications, and oil and gas accounted for around 80 per cent of the total ECB-sourced funds. Other sectors that resorted to ECBs included power, ports and shipping, renewable energy, aviation and roads as well as diversified players.
  • India remains underpenetrated with regard to the bond market which forms only 13-14 per cent of the GDP, much lower than many Asian economies. However, RBI’s recent guidelines for the issuance of rupee-denominated bonds (masala bonds) by banks to provide partial credit enhancement to bonds issued by infrastructure companies, and new norms for the issuance and listing of green bonds in the stock market are quite enabling. The response to tax-free bonds has been very encouraging, with oversubscription becoming a trend across major public sector entities including NTPC Limited, PFC, HUDCO and the National Highways Authority of India. Recently, the Housing Development Finance Corporation (HDFC) raised Rs 30 billion through the issuance of unsecured masala bonds, becoming the first Indian company to issue such bonds, followed by NTPC’s Rs 20 billion green masala bond issue.
  • About 30 per cent of the total cost of a typical infrastructure project is funded through equity, which mainly comes from promoters or through private equity (PE) investments. In 2015-16, 21 deals together amounting to over Rs 220 billion took place in the infrastructure sector. This was more than 170 per cent (by value) of that witnessed in entire year 2014-15. The renewable energy sector saw the maximum activity during the past year, with 10 deals worth Rs 160 billion. Other sectors that witnessed PE activity include roads (three deals worth Rs 14.85 billion), power (two deals worth Rs 12.36 billion) and oil and gas (one deal worth Rs 31.78 billion). In the first quarter of 2016-17, three deals worth over Rs 15 billion have taken place, a decline of around 87 per cent by value over the corresponding period of the previous year. Though the current fiscal began with a tepid PE activity, deals in the infrastructure sector are expected to increase further this year on the back of recent policy changes to push stranded projects. Driven by an improved exit environment and changes in valuation expectations, a number of PE players exited long-term investments. During 2015-16, there were nine PE exits in the infrastructure space.
  • The government has been consistent in announcing new sources of funding. The proposed infrastructure investment trusts (InvITs) are witnessing some progress. So far, players such as IRB Infrastructure Developers Limited, Sterlite Power Grid Ventures, IL&FS Transportation Networks Limited, GMR Infrastructure Limited and MEP Infrastructure Developers Limited plan to raise funds through InvITs. Recently, the Securities and Exchange Board of India approved two of the four applications received by it for setting up such entities. Progress on 3P India (proposed to streamline the public-private partnership model of project execution) and the Rs 200 billion National Investment and Infrastructure Fund is fairly satisfactory.
  • On the capital market front, there was some fresh fund-raising by infrastructure players. During 2015-16, six initial public offerings (IPOs) were launched by infrastructure companies. Collectively, they were able to raise about Rs 50 billion (as per the total value of the public offerings), with the highest amount raised by InterGlobe Aviation Limited. These IPOs have been from companies in the logistics, power, aviation and diversified sectors. So far, the current fiscal year has witnessed two more IPOs worth over Rs 14 billion by Mahanagar Gas Limited and Dilip Buildcon Limited.

Outlook

  • A number of factors could impinge upon the growth outlook for 2016-17 such as slow investment recovery amid balance sheet adjustments of companies, weak revival of private investment demand and tepid external demand.
  • Infrastructure debt funds (IDFs) were so far restricted to sectors where there was some form of government participation or oversight. However, the recent change in regulatory guidelines is a very welcome step allowing a wider gamut of projects to tap into IDFs. IDFs will also drive the evolution of a secondary market for bonds which is presently lacking depth. Further, RBI is also considering making it compulsory for companies to raise funds for infrastructure projects via corporate bonds. Going forward, RBI’s Sustainable Structuring of Stressed Assets scheme and the revision of the strategic debt restructuring scheme are expected to provide a resolution to large stressed accounts of banks.
  • There is a need to speed up the project execution process to revive investor interest. Land acquisition continues to plague infrastructure projects though environmental clearances have been significantly eased. Post-award execution delays need to be avoided, especially in sectors like ports.

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