Nation builders in a sad state

Infrastructure companies are a harried lot. The sector, the hottest new-age growth story till the cycle turned for the worse in 2008, is showing no signs of getting better.

Worse, the onerous debt burdens they had taken on some years ago in an aggressive bid to grow have only grown bigger over the years even as their projects are either stuck in bureaucratic hurdles or are facing cost escalations.

For example, at the end of the September quarter, GMR Infrastructure’s gross debt stood at Rs40,264 crore, up from Rs34,560 crore at the end of March. The company paid Rs485.2 crore in interest and finance charges alone last quarter.

Similarly, the GVK group had a gross debt of around Rs23,000 crore. 

The September quarter results of these companies are telling enough, said an analyst with a domestic brokerage. Among others, Lanco, recorded a 67% year-on-year rise in revenue, but reported a net loss of Rs136 crore for the quarter. Similarly, GVK Power and Infrastructure reported a net loss of Rs43.66 crore vis-a-vis a Rs37.92 crore profit a year ago. IVRCL, too, posted a loss of Rs39.59 crore against a profit of Rs8.13 crore.

“Over-leveraged balance sheet, which led to high interest outgo, is the major reason for all these companies to post losses,” said the analyst, requesting anonymity.

Little wonder many infrastructure companies are now looking to put their assets on the block in a bid  to escape the interest burden, while some have started divesting stake partially in favour of private equity firms.

The players have only themselves to blame for the sorry state of affairs, which has taken a toll on their stock prices, said Amit K Srivastava of Nirmal Bang Institutional Equities. “With a debt of over Rs20,000 crore, even a 1% increase in interest rate can wipe out half of the profit of these highly leveraged infra companies.”

The case of the dozen or so Andhra Pradesh-based infrastructure companies is worth highlighting here.

If sources are to be believed, the top 6-7 of these players together have a debt pile of Rs1.2 lakh crore – giving sleepless nights to their bankers, who see non-performing assets in these accounts in the next quarter or two.

“They were all biting more than what they could chew. Now, they are spitting it out. It was a greed of sorts to have a heavy order book with an expectation of monetising everything that comes their way had triggered the trouble for all these infrastructure majors. They have ended up over leveraging their balance sheets without knowing what’s in store for them,” said C Kutumba Rao, a Hyderabad-based market analyst, who has been tracking these companies for over two decades.

It all began in the mid-1990s, when a crop of infrastructure companies in Andhra Pradesh emerged as big time contractors. Ranging from canal projects to railway projects to civil works in neighbouring countries, the contractors found out the tricks of the trade. While many of them continued to remain sub-contractors for other industry leaders, others found their own way of making forays into asset building.

It was also the time these contractors understood the nuances of the trade by handling contracts for the Golden Quadrilateral project of the NDA regime and also the power projects.

The unseating of the then TDP government and the Congress coming to power was a significant turning point. The politics of ushering in the agrarian state by the then Congress regime as a contrast to the IT-focused Chandrababu Naidu government turned out to be a boon for these companies.

The YS Rajasekhara Reddy-led government had drafted a `1 lakh-crore irrigation programme. The projects taken up under this programme – titled Jalayagnam – went mostly into the hands of the Andhra Pradesh-based companies such as IVRCL, NCC and Gayatri Projects.

The next big phase involved projects from the National Highways Authority of India (NHAI). Thanks to the irrgation projects, these companies had hefty balance sheets, which allowed them to bid  aggressively for the road projects.

It is at this stage that the contractors turned into asset owners. From an engineering, procurement and construction (EPC) model, these companies moved into build, own, operate and transfer (BOOT) model, eventually becoming the owners of the road projects for a minimum tenure of about 25 years.
That has proved to be their undoing.

“As long as we were contractors, we were healthy. The aggression in going in for the BOTs has slowly sucked most of us into a debt trap. There is asset on our balance sheet, but all of us had a debt-equity of 75:25. So, about 75% of the asset is a debt. Now, that has started eating into the returns. Still, we managed to get better rates of return till 2008, when the interest rates had badly hit all of us,” said the managing director an infrastructure company, requesting anonymity.

The downturn in fortunes began in 2008-09. The spike in interest rates and dependence on short-term borrowings, borrowing of additional funds through instruments like foreign currency convertible bonds and roping in private equity to meet the financial closure deadlines have all hit these companies below the belt.

“Most of the companies had bid so aggressively that in some road projects the bids were more than the NHAI expectations. They were all depending on the traffic projections and were confident of pocketing significant toll. But once the projects were completed and the toll estimates continued to remain low, they realised that the revenue expectations were wrong. Additionally, the spike in interest rates has shown on the health of the companies,” Kutumba Rao explained.

Today, these companies have about half of all road projects, one-third of all power projects and manage four major domestic airports. While the airport projects are relatively healthy, the power projects have all landed in trouble due to non-availability of gas and coal. The road projects are suffering due to the toll related miscalculations.

As if this wasn’t enough, the new road projects face delays. Various permissions from the bureaucracy are hard to come by and clearances, including the forest clearances for large NHAI projects, are hanging fire, delaying the financial closure. This has led to cost escalation, or forced these companies to put their projects on the block.

A senior official of a Hyderabad-based company said a Rs1,800 crore road project of another infrastructure company was 95% done except at four junctions where the road passed through villages. The project has been delayed because the government has not been able to acquire the required land at these junctions.

“Infrastructure development is a capital intensive business. There is 75% debt in most of the projects and carries significant interest burden. However, there was some aggressive bidding by several players. The macroeconomic conditions, too, turned hostile,” YD Murthy, executive vice-president (finance) of NCC, said, adding that there was no option left but to wait for the situation to improve.

In fact, NCC is in a relatively better position compared with peers. “We have always been conservative in bidding. We never rushed in for projects and that is helping us today,” said Murthy.

Kutuma Rao said the infrastructure game has changed. “Book size does not matter in today’s condition but the execution model. The AP companies have no option but to realign themselves with the changing requirements and deleverage their balance sheets. Any effort to raise capital either from the market or private equity at the current low valuations will only worsen the situation,” he said.