The government has continued its focus on modernization, expansion and development of infrastructure (roads, ports, airports, railways and power) to maintain a steady pace of economic growth at 8-9%. The enhanced budget allocations led to an increase in the infrastructure projects/orders allotted to private and public infrastructure companies generating a growing need for funding the undertaken projects.
1.1. Widening gap between Infrastructure allocations & investments:
With the positive news flowing in to the Infrastructure sector in the form of budget allocations and supportive measures announced by the government, Infrastructure companies have received boost. Financial Budget (2010-11) brought cheer to the Infrastructure sector companies as the plan allocated 47% (Rs.1,786,820 million – incl Power/US$400bn) of the total budget to Infrastructure development. Road transport accounted for a major portion (11%) of the total Infrastructure development budget followed by Railways (9%).
Infrastructure spend break up:
||% of Total
|Other Infra (Telecom)
Source: Budget FY2010-2011
Budget coupled with the recent announcement of the 12th infrastructure investment plan confirmed the upside in the sector as the investments are expected to double from the existing 11th plan infrastructure investments* (Rs.22,500 billion/ US$500bn) to Rs.44,500 billion (US$1,000 bn) reinforcing the infrastructure growth story. Of the total investment figure around 40-50% of the 12th Infrastructure investment plan (US$1,000 billion) will be financed by the government and the remainder by the private sector.
Despite the increased 12th investment plan there exists a wide gap between the expenditure to be incurred and the financial investment to be made in the sector with this gap increasing continuously.
1.2. Order Book: On the rise
The Infrastructure companies are expected to witness a substantial increase in their order books by around ~30-40% in FY11. Companies are competitively bidding for tenders and their order books indicate that the number of projects undertaken is increasing steadily. L&T, HCC, Gayatri Projects, Nagarjuna Construction, GMR Infra, IRB Infra, NMDC, NTPC, etc expect their order books to rise substantially to Rs.2,500 billion (US$55 bn) given the continued buoyancy in the Power, Oil & Gas and Infrastructure sector.
The table below indicates the current (FY2010) and expected (FY2011) order book figures indicating an upward surge in the infrastructure projects.
||OB FY10 (Rs.mn))
||OB FY11 (Rs.mn)
|IL&FS Trans & Networks
*GMR Infra – EPC (Engineering, Procurement & Construction) order book, Reliance Infra -EPC order book. This is an indicative list of the companies in the Infrastructure space.
The Infrastructure sector is capital intensive in nature and is often faced with shortage of funds- for project completion. Though the government provided stimulus (working capital needs) to the companies; this was inadequate without private sector participation. This gave rise to a widening gap between the budgeted infrastructure allocations (resulting to increased orders) and funds for the capital expenditure (working capital needs of these companies). To reduce the funding deficit, infrastructure companies adopted a number of fund raising routes (Debt financing- primarily debt raised via Bank Credit, External Commercial Borrowings ECBs, Non-Banking Finance Companies, etc. and Equity financing via PE – private equity, Qualified Institutional placements, IPOs – Initial Public Offering/FPOs – Follow on Public Offers, FDI – Foreign Direct Investment, etc.) to ensure smooth completion of their projects.
1.3. Finance raising initiatives:
In order to fund projects, companies primarily approached banks and NBFCs. However, owing to the global financial crisis, the supply of credit to the sector was marred with most of the projects put on hold or delayed substantially.
However, during 2009 funds started trickling in the sector with companies’ increasingly borrowing debt from domestic banks. Borrowing slowly spread to loans availed from foreign markets as overseas debt could be raised at cheaper rates (loans at 9%-10%) compared to Indian banks. However, the recent European crisis triggered a second round of credit crunch causing an increased dependency on Indian bank and NBFC debts.
Debt-laden Infrastructure companies:
Infrastructure Companies financials are highly debt laden with mounting borrowing costs. A Major part of the debt (- short term in nature) used to fund working capital requirements (in contrast to other industries where debt is used to finance capital expenditure) is also used to finance BOT (– build, operate and transfer) projects that typically have a debt/equity ratio of 2:1. This increases their level of the working capital requirements on a regular basis.
Additionally, government contracts form a major portion of company order books resulting to delayed realisation of projects. Intensive working capital needs coupled with high gestation periods tend to lengthen the overall capital cycle. This leads to an increased need for working capital resulting to extension of existing loans with no incremental returns.
1.3.1 Debt route:
With reference to the 12th Infrastructure investment plan Infrastructure companies are expected to raise approximately 50% of the total US$1,000 billion via the debt route. Traditionally, Infrastructure companies raise approximately more than 60%-70% of their funding needs via debt. This has been steadily increasing over the past years with an increased project pipeline.
A few examples of debt raised during the recent period are listed below,
- Hindustan Construction Company (HCC) raised Rs.1,000 million (US$22m) from J&K Bank (The Jammu & Kashmir Bank) for its hill city project – Lavasa.
- IRB Infra has raised debt worth Rs.25,990 million (US$578m) with a consortium of financial institutions (IDFC, Canara Bank, Bank of Baroda and Union Bank of India) to fund four projects (Pathankot-Amritsar BOT project, Jaipur-Deoli project, Talegaon-Amravati BOT project and Panaji-Goa BOT Project).
The companies are highly debt laden and are expected to continue on the same path. Adding to existing woes, companies face constraints while obtaining domestic debt re-financing through ECBs (As Indian investment laws do not permit ECB debt re-financing) further narrowing down their borrowing options. Continuously mounting debt needs (to finance new projects and re-finance existing debt) and the tight situation of global credit availability urged companies to look at options other than debt.
As a move in this direction, companies extended their finance raising options to equity financing via primary and secondary stock markets, PE and QIP routes.
Buoyant domestic stock markets since early 2010, assisted infrastructure companies to raise a substantial amount via the equity financing route.
1.3.2 Equity route:
Funds raised by corporates during Jan – Jun 2010 in the Indian primary markets via IPO and FPO route increased manifold compared to the same period last year.
Till date, in Jan-Jun 2010 two Infrastructure FPOs raised a total Rs.100 billion (US$2.0 bn).
||Amt. raised (INR billion)
||Amount raised(US$ million)
Source: BSE, NSE, Media Releases
Overall, Infrastructure IPOs helped raise~ Rs.62 billion (US$1,500 million) during the period Jan-Jun 2010 and through the PE and QIP route the companies raised approximately Rs.1 billion (US$23 m).
The tables below show an indicative list of the IPOs, PE and QIP deals during the period.
List of IPOs/FPOs during Jan 2010 – Jun 2010
||Amt raised (INR million)
||Subscription (No. of times)
|REC (Rural Electrification Corp)
|Hathway Cable & Datacom
|IL&FS Transportation Networks
Source: BSE, NSE, Media releases
List of PE (Private Equity) and QIP deals during Jan 2010 – Jun 2010
|Temasek Holdings invested in GMR Energy (GEL)
|GMR Energy (GEL) raised capital from investors led by the IDFC Group for its energy expansion plans
|Allcargo Global Logistics (AGL) raised Rs.1,000 million through QIP
|Helion, Foundation Capital and IFC invested in Azure Power
|International Finance Corporation (IFC) invested in Husk Power Systems
|Saudi BinLaden Group (SBG) acquired 20% stake in Maytas Infra for Rs.3 billion
Source: Media Releases – These are a few selected deals during Jan-Jun 2010
The companies have been able to raise a fair amount of finance via the equity route and are increasingly doing so. The supportive budget announcement provided a boost to the infrastructure sector and has pegged the fund raising momentum in the market.
The companies that raised money through the equity route have received an overwhelming response (from the market with majority of the issues ending with oversubscriptions) laying ground for their peers to follow suit.
Riding the positive wave:
Riding the positive wave in the market, the infrastructure sector is abuzz with forthcoming IPOs, PE funding, QIP deals such as
- HCC plans to raise around Rs.20 billion (US$444m) through an IPO for its unit Lavasa in FY11
- IRB plans to raise around Rs.12 billion (US$267m) through a proposed QIP issue. This is in line with its step to support its balance sheet to win big orders from NHAI & State highway projects.
- GMR Infrastructure stated that PE firm IDFC Private Equity Fund III, and four other investors agreed to invest Rs.4,650 million (US$ 99.63 m) in its unit, GMR Energy.
- GMR Infrastructure, the infrastructure and power subsidiary of diversified GMR Group, plans to raise Rs.50 billion ($1,111 m) via equity route
- ICICI Venture, the PE arm of lender ICICI Bank, plans to launch a Rs.22,500 million (US$500 m) fund by Jul 2010 to invest in infrastructure projects.
- Larsen & Toubro Ltd (L&T) plans to launch a PE fund to invest in Indian power and road projects. The fund size is expected to be in the range of Rs.13,500 million (US$300 m).
- SEW Infrastructure, an engineering, procurement and construction (EPC) company in Hyderabad, plans to raise Rs.1,520 million (US$33.7 m) from Jacob Ballas PE.
Overall, the deals above are expected to raise Rs.124 billion (US$3 bn) in the near term indicating that Infrastructure companies are actively moving out of the traditional realms of debt and venturing towards new financing options.
Though equity has been an expensive source of capital, companies are still exploring the area as they expect to sustain a good level of business growth over the coming years.
Going forward, fund raising activity will gather steam offering PE firms, domestic and global asset management companies and many other financial institutions a tremendous upside to participate in the infrastructure growth story.
The government invested around ~US$350 billion in the infrastructure sector in the 11th plan (2006-2010). And the private sector, invested worth ~US$150 billion (- 30% of the total 11th planned infrastructure investments worth US$500 billion). The infrastructure investment target of the 11th plan was achieved with investments in telecom, airports, oil and gas pipelines sector exceeding the targeted figures. Looking at the buoyancy in the past it is expected that the same level or a higher level of investments will continue to flow in the infrastructure sector in the 12th plan.
- Annual report of Infrastructure companies
- Economic Times
- Business Standard
- Budget speech 2011
- 11th & 12th India Infrastructure Investment plan
- BSE, NSE
- VC Circle website
- Media Releases
Read Full Post »