Stressed infra doing distress sales

After holding on to their stressed assets for years, infrastructure companies have finally started selling out. It was the Rs. 3,800 cr JP – UltraTech deal last week, and more recently GMR Infrastructure announced that it has sold its majority stake in a highway project for $35 million to the India Infrastructure Fund of IDFC Ltd. Earlier this year GMR had also disposed off 74% in another highway project to SBI Macquarie Infrastructure Trust.

Analysts have been generally positive about these efforts at asset monetization given the leveraged balance sheets many of these players carry. But the fact remains that many of these deals are also being seen as distress sales. “Had the economy been growing at 8 percent, I would not have sold the Gujarat unit’ Manoj Gaur of Jaypee Associates told CNBC.

The JP-UltraTech deal was done at a discount to the earlier pegged valuation of about Rs. 4,300-4500 Cr and brokerage estimates suggest that the valuation works out to $124 per ton while the current replacement cost for a similar cement plant would be around $140 per ton. It is also significantly lower than other recently concluded deals in the sector.

But do cheap valuations offered by desperate promoters mean there is going to be a flood of more such deals in the months to come?

The straight answer is no. Valuations are certainly friendlier for buyers than sellers say experts, but the fact that there are very few quality assets out in the market will ensure M&A activity remains slow. Investment Banking sources say at least 50 assets in the roads sector alone have been put on the block for the last 2 years, but it has been difficult for promoters who often paid aggressive premiums to bag projects, to find buyers. Lanco Infratech, IVRCL, Madhucon Projects, Ashoka Buildcon are some of the companies that have been reported in the media to be scouting for buyers for the past 3 years, but not many of these deals have been concluded yet.

“If you look at the GMR and Jaypee Group deals, both of the assets in question were excellent quality. Assets that are getting sold are ones that are in production and already operational, so the development risk is off the table. But such deals will be few and far in between as capital is scarce” says Sanjay Sethi – Head of Infrastructure Advisory at Kotak Investment Bank. Buyers are bargaining hard and driving down prices given the market scenario.

Within the infrastructure space, selling power sector assets has been the toughest say analysts. With issues around fuel linkages, tariffs etc not resolved, potential investors have remained far away. The turnaround time & valuations of power projects is much higher given the size of the plants and unlike in the roads sector there aren’t as many operational assets available – the kinds that private equity players and international investors are interested in.

In fact revival of PE activity, on which the entire infrastructure space heavily relied for funding, will take a long time say experts. Having invested close to $7-8 bn in Indian infrastructure projects, majority of the private equity funds are waiting to see what happens to their existing investments before committing new funds.

“Unlike a Bharti Airtel in the telecom space where PE did very well, there is no poster boy in infrastructure for the next level of investments to come in” says Seshan Balakrishnan, Director – TAS, Infrastructure at Ernst & Young.

It’s sufficiently clear then that the Jaypee and GMR deals don’t necessarily indicate that others too will eventually see light at the end of the tunnel. Investment bankers who’ve been helping companies find buyers say the biggest problem with Indian promoters is that they are unwilling to take haircuts. And if there is any hope that they wish to sell out, they need to offer significant discounts.

“Deals will gather momentum when banks bear down on these developers. We haven’t seen that so far. Eventually the lender will have to step in and force developers to sell at whatever price, to free up cash. If the present conditions prevail for a longer period, we will have a stressed economy and a stressed banking system” says Sethi.

Given the tough stance the new RBI governor has taken on defaulting promoters, perhaps it won’t take too long before banks begin to do this.

Source – Business Standard

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