Reliance Infrastructure to freeze funds for 2 road projects in 10 days

Reliance Infrastructure, one of the biggest infra players in the country, is executing in-house orders worth Rs 40,000 crore and contracts worth Rs 20,000 for other companies. Its CEO Lalit Jalan takes questions from DNA on the company’s future plans among other things. Excerpts from the interview:

You plan to more than double your exposure to highways sector to Rs 25,000 crore by 2013? What do these figures mean in terms of revenue and growth potential?
Among the total portfolio of 11 projects, 9 projects worth Rs 9,800 crore would start generating revenue in FY11. Of the 11, we have to achieve closure for two, which we will do in the next 7-10 days. Given our project selection strategy and focus on profitable project corridors, we conservatively expect annual revenue growth of over 13% CAGR for entire concession periods of our projects.

What do you think of the recent NHAI clause which says a developer can’t bid for projects if it has three or more projects pending closure?
It’s fair. They want to make sure projects are coming through.

The Central Board of Direct Taxes has issued a clarification on the ‘new infra’ projects and exempted development of additional lanes. To what extent will it help companies?
This will provide impetus to the companies participating in road development/ widening works. In the case of six-laning projects, the government allows concessionaires to collect toll during construction which is taxable as per IT rules. Since this toll is entirely being used for funding the project construction, a tax on the same burdens the project and impacts its financial viability. In our view, government should seriously consider the treating ‘toll during construction’ as tax-free.

What is the latest on the power distribution issue with Tata Power in Mumbai? Will you tap long-term or short-term power tie-ups?
Recently as you know, Tata Power has approached the Mumbai High Court against the government of Maharashtra’s report whereby the government has advised Tata Power to supply 360 mw to R Infra till June end and 200 mw till March 2011. At the same time, we have received good response in long-term bids which are under technical evaluation and we will soon conclude the contracts with long-term bidders. We have signed medium-term power contracts with KSK Energy and Abhijeet Industries with power flowing in from April 2011.

What is the status of metro projects?
Two projects (Mumbai Metro Line 1 and Delhi Airport Express Link) will be operational in FY11. Mumbai Metro Line 1 is expected to be commissioned 15 months ahead of schedule and Delhi Airport Express Link will be operational before Commonwealth Games. We are pre-qualified for Hyderabad Metro & Bangalore High Speed Rail link - total project outlay of Rs 18,000 crore.

Five years from now, do you see the predominance of any infra vertical in your company?
No, roads do look bigger right now but something like metro is very lumpy so one project itself will be about Rs 10,000 crore.

Is your foray into cement a step in backward integration?
No, it’s not so much for our business. We did it because it was jiving well with our strengths. We have fly ash with us in-house, power and limestone and we have the balance-sheet and the execution capabilities. This brings us in the lowest-cost position through the integration of all of this. We think it’s a double-digit growth business.

What’s the status of the project?
Our project in MP has achieved financial closure and we are in the process of placing orders for the plant. Most of the land and mining leases are with us.

What is a biggest challenge for an Indian infra company?
It’s execution. In execution there are both internal and external challenges. Right of way, people coming and stopping projects, dealing with stakeholders, are all external challenges. Internal is getting contractors, achieving closure. You will get into newer problems but how you make sure you reach your quality and cost position in time irrespective of the multiple problems you face is what matters.

What about regulation?
Regulation is by and large fairly clear, the documents are all well-drafted.

Are there any infra segments you want to venture into?
There are certain opportunities like the Delhi Mumbai Industrial Corridor. We are exploring that.

What sort of work would be involved there?
Everything from SEZ development to the laying of tracks. We are also looking at some port opportunities. We are not very interested in water because of the huge amount of political involvement. We are also looking at airports other than the five brownfield airports we have in Maharashtra.

Do you think real estate development and infra development can go hand in hand, as in the case of your metro project?
Yes, what happens is the government has limited VGF to give so it says you take this as an option. That is defined in the concession agreement. It is quite a workable model. Look at airports.