Covid-19 has jolted the economy. While the nationwide lockdown disrupted economic activity, the recovery seems to be quick for many sectors. Taking a long-term view, the investor and lender community continues to bet on the infrastructure sector. Investors, in particular, unfazed by the short-term dent, are eyeing various opportunities and looking at emerging trends in the post-Covid world. At a recent India Infrastructure conference, experts shared their views on the impact of Covid-19 on infrastructure funding, their investment strategies and future opportunities…
What has been the impact of Covid-19 on investments in infrastructure?
Kunal Agarwal
Private equity (PE) players have a long-term view of the infrastructure sector. Covid-19 has impacted all the sectors of the economy, albeit to varying degrees. The transport sector was severely hit initially due to the nationwide lockdown. However, there were sectors such as telecom and data centres which benefited. Talking about the road sector, both passenger and commercial traffic have substantially recovered since June 2020. Traffic has reached 85-90 per cent of pre-Covid levels, on most stretches. The National Highways Authority of India (NHAI) has been receptive to investor concerns and has allowed extension of concession agreements. The impact will be felt for the short term but the fundamentals have not changed for the long term.
There are healthy acquisition opportunities in roads and renewable energy. Gas midstream opportunities such as city gas distribution and digital infrastructure opportunities such fibre and data centres are emerging as areas of interest for infrastructure investors. The warehousing and logistics space is also gaining traction in the country. The demand for organised warehousing has been increasing. E-commerce is further fuelling the growth of the logistics sector. Privatisation of train operations and station modernisation are also steps in the right direction.
PE investments depend on the risk-return matrix of each sector. In cases where the development risk is contained, investors can consider entering at an early stage. Renewable energy and city gas distribution are examples of this. However, in sectors such as roads and transmission, a platform approach works better to acquire operational assets. The infrastructure investment trust (InvIT) is an evolving product. Investors are considering this instrument actively.
Raj Kumar Bansal
The Covid-19 scenario has impacted recoveries, but the situation is expected to normalise soon. The current crisis presents asset reconstruction companies (ARCs) with an opportunity to acquire stressed assets at reasonable prices. The hotel, steel, cement and real estate sectors have been adversely impacted due to the ongoing pandemic and ARCs can provide last-mile funding to these businesses through acquisitions. ARCs do not have so much resources to buy assets only in cash. Therefore, banks should consider selling assets under security receipt (SR) structure. Meanwhile, lenders to stressed infrastructure companies are looking at litigation financing, or monetisation of pending claims through a third party. This is gradually gaining popularity.
There are a host of merger and acquisition (M&A) opportunities in India. Consolidation in renewable energy has already been seen and this trend will continue. The road sector offers attractive opportunities due to stable operational assets of NHAI. In this sector, there has been a shift to the engineering, procurement and construction model, and it will continue to dominate project awards.
Pushkar Kulkarni
The Covid-19-related disruption has dented investment inflow. There has been disruption in infrastructure assets, particularly revenue-linked assets such as toll roads. The supply chain disruption has brought about a paradigm change in the ports and logistics sector. The government has shown the right intent by introducing measures such as compensation to concessionaires during this crisis. While these are the correct steps, implementation must also happen in an efficient way. Since March 2020, the Canada Pension Plan Investment Board (CPPIB) has not invested in the infrastructure sector per se in India due to the economic disruption caused by the Covid-19 outbreak. The pandemic will have a long-lasting impact on the economy. With a long-term view, CPPIB is waiting for the Indian market to stabilise from the Covid-19 shock to invest in infrastructure assets at the right valuation. It is looking at opportunities in the renewable energy and airport sectors.
Though acquisition of controlling stakes in assets is gaining momentum, InvITs as a platform continue to be an attractive proposition. The regulations for InvITs have become stronger and more consistent, thereby attracting financial investors. Infrastructure assets will change hands going forward. The government will fast-track its monetisationprogramme to mop up funding. The history of partnerships between financial investors and strategic players in India has not been good. Developers need to understand that infrastructure is not a short-term game. Lessons must be drawn from global experience where there are instances of quality partnerships between financial investors and developers.
Meghana Pandit
IndiGrid has announced three acquisitions since March 2020. Covid-19 has not impacted InvITs in a significant way, and distributions were declared in the first quarter of 2020-21. However, there has been a sectoral impact of the virus outbreak, such as elongated working capital cycles and a fall in discom collections for the power sector as a whole. However, the situation is on the mend as discom collections have been recovering at a rapid pace with the gradual opening up of the economy. Current situation is being monitored to ensure negative surprises do not impact the financials adversely to the extent possible.
InvITs have attracted a lot of investor interest in recent times because of their stable risk-return profile. Retail participation has also been improving. IndiGrid, for example, has about 14 per cent retail investment in its units, a 2x increase since the listing of the InvIT. The product has also received a lot of positive regulatory attention. While greenfield/under-construction assets can form a part of InvITs to the tune of 10 per cent, the structure of the investment trusts is such that they make sense for monetising revenue-generating operational assets. The internal rate of return for operational infrastructure assets can range from 12 per cent to 14 per cent. However, some important factors to be considered while investing in InvITs are counterparty risk, long-term nature of the concession agreements and stability of cash flows over the long run.
Shiva Rajaraman
L&T Infra Debt Fund Limited (L&T IDF) is an IDF-NBFC with ~Rs 100 billion assets, which focuses primarily on three sectors – solar power generation, road and power transmission. Since we have financed well-structured projects with adequate debt service coverage and liquidity buffers, there were no delays in payment by our borrowers during the pandemic. Around 70 per cent of our toll-road projects have seen over 100 per cent recovery in traffic. We continue to operate with 0 per cent non-performing assets. For the future, we have identified water and city gas distribution as additional sectors with moderately large potential for business.
With regard to non-banking financial companies (NBFCs), “sound” private sector NBFCs with expertise in their areas of business and strong and reputed sponsors have not faced significant liquidity issues. (Public sector NBFCs such as the Power Finance Corporation have a different dispensation from the government). The challenge in the current market has been more for smaller NBFCs. In general, NBFCs have reduced their disbursements – this has provided some respite from liquidity constraints arising out of lower than expected collections. Going forward, the order of priority for financiers should ideally be (1) liquidity, (2) asset quality, (3) profitability, and (4) asset growth. Assets and liabilities should have well matched tenors for sustainable operations of NBFCs.