Many large private equity (PE) firms that have raised millions of dollars to invest in India’s infrastructure have struck at least one deal in the road sector this year—a rarity four years ago when the PE market was at its peak.
In the first five months of this year, PE firms pumped in $407 million (Rs.1,823 crore) in road projects, double the $200 million they invested in the sector in all of 2007, show data from Venture Intelligence, a research service focused on PEs and mergers and acquisitions.
Last year, the sector attracted $274 million in investments.
The largest deals in road projects were done through joint ventures (JVs).
Recently, Infrastructure Development Finance Co. Ltd (IDFC) and Khazanah Nasional Berhad, the investment holding arm of the government of Malaysia, agreed to enter into a JV to set up a dedicated infrastructure development company with a focus on India’s road sector.
Khazanah will hold an 80.1% interest in the JV; the balance will be with IDFC.
In May, Morgan Stanley Infrastructure Partners, a $4 billion global infrastructure fund, announced a $400 million JV with Spain’s Grupo Isolux Corsan SA to invest in India’s roads.
Tata Realty and Infrastructure Ltd and PE firm Actis entered into a $2 billion JV to invest in the sector last year.
“Road is the only active sector in India with a clear programmatic approach and predictability,” said Rajesh Samson, partner (transaction advisory) at consulting firm Ernst and Young India. “Sheer volumes in terms of projects under bidding stage is also attracting the largest funds. Many large PE funds are talking to companies to invest in road projects at asset and company levels.”
Road deals offer PE firms better routes to sell their investments as many of the companies executing the projects are either listed or aspiring to be listed on the bourses.
“Road is the only sector where project executions are happening in decent pace with lesser procedural bottlenecks for at least last six months,” said Abhinav Bhandari, analyst at Elara Securities (India) Pvt. Ltd. “Opportunities are wooing big funds to this sector as it ensures a stable stream of revenues irrespective of (whether) road projects are executed on the basis of toll or annuity system. Revenues are expected to increase by 13-15% with automobiles growth for last five years and 7-8% increase in toll rates.” The National Highways Authority of India (NHAI), which aims to develop 20km of roads a day, awarded projects in excess of 5,000km in fiscal 2010-11.
“Since a majority of NHAI programme is yet to be awarded, a JV allows funds like us to proactively participate at the ground level,” said Gautam Bhandari, managing director, Morgan Stanley Infrastructure Partners. “So we are involved in everything right from the selection of the road to the underwriting to how much debt should be taken on, and eventual ownership.”
The benefit of such deals for partners such as Isolux and Tata Realty, he said, is that when they prepare to bid for a road project, their equity financing is already arranged.
During the financial slowdown of 2008-09, several road projects didn’t have the equity component sewed up. Getting debt became difficult as a result and firms struggled to tie up finances.
“Today, these projects are big in size like $600 million to $1 billion each. With a typical 70:30 ratio of debt-to-equity, the equity cheque amounts to $180-300 million for a single road, which is substantial,” said Bhandari of Morgan Stanley Infrastructure Partners. “Post a JV, developers don’t need to worry about who will fund it or what if they have overbid, then who will come in with equity.”shraddha.n@livemint.com.
Source: Livemint