Uncertainty looms over Indian infra companies
With the announcement of 12th Plan, the government has induced to bring breath of fresh air, but the highly leveraged infrastructure companies are finding it difficult to manage their interest burden. ACE Update documents how.
It is estimated that lack of good quality infrastructure impedes India’s GDP growth rate by 1-2 per cent per annum. Although, in the last two decades, India has witnessed a significant capacity enhancement in infrastructure, the industry didn’t experience the desired result. It’s better if we don’t even talk about the worrisome 2012.
But the good thing is that the government has recognised the constraint and understood that infrastructure development, undoubtedly, is the cornerstone for sustaining economic growth.
Finance Minister P. Chidambaram, has recently acknowledged the need for large volumes of investment for infrastructure. He pointed several much-needed policy measures to mobilise it, including raising funds through ‘infrastructure debt funds’, credit enhancement by India Infrastructure Finance Corporation, and additional issue of tax-free bonds.
However, the biggest feel-good factor is the government’s 12th Five-Year Plan and the industry-friendly policies. The 12th Plan has injected hope into the small, mid or big players for the brighter, better, and bigger future.
According to the 12th Plan, India seeks to build about 9,500 km annually with an investment of about $ 90 billion in the next 3-4 years. Even the maritime sector (ports, shipping, and logistics) will envisages enhancement of cargo handling capacity of ports to 3,200 to 2,020. In this plan, the government is expecting $453 billion out of a total investment requirement of $970 billion to come from the private sector.
If the above plan is conceptualised fully during 2012-17, India can expect to grow at an average of 8.2 per cent.
Isn’t a fact to be excited for? Isn’t a step by the government to appreciate? Alas, it seems planning and conceptualising are yet to join hands. Recently, Gammon India, a 100-year-old company, which is in the midst of a severe cash crunch, has initiated talks with investors to sell up to 24 per cent stake in its listed subsidiary. Even GMR Group decided to sell its 70 per cent stake in the Island Power Project in Singapore to FPM Power Holdings for S$660 million.
Maybe the new policy has implemented a new set of beliefs, the same old problems are too stubborn to leave. The project slowdown in the domestic market is still hurting the industry. The companies are making losses even as costs continue to rise.
In order to reduce its financial stress and prepare the company for the next round of growth, Gammon needs to raise at least Rs.1,000 crore. It is looking at divesting stake in several businesses like real estate and power equipment. The company may also sell its stake in its special purpose vehicles.
Gammon India had accumulated losses of Rs.321 crore in the September to December, a sharp reversal from a profit of Rs.35 crore in the previous year.
GMR Group, the cash-strapped Indian group, has been looking to divest stakes in non-core assets since last year. Its infrastructure unit held net debt of nearly $7 billion at end-December. The group also reportedly sold a majority stake in a road project in India.The government, of course, has succeeded to bring breath of fresh air, but the highly leveraged infrastructure companies are finding it difficult to manage their interest burden.
The revenue is still under pressure because of the slowdown in the sector. Several companies — including GVK and Lanco Infratech — are looking for investors to free their equity investment, but investors continue to be wary. The concerns over the sector and mismatch in valuation expectation aren’t going to be solved so soon.
To add with, in a recent development, a port to be developed in West Bengal found no bidders. Lack of confidence due to strong political agitation during ‘ABG episode’ cannot be ruled out. However, unenthusiasm within the infrastructure companies is largely evident.
If this continues, the road ahead, it seems, is going to be the same as like the road behind.