Cost escalation ruins infra firms' hope

The rising finance cost has eaten into the profit margins of major infrastructure firms in the first half of the current fiscal year.

Infrastructure companies have witnessed a sharp increase in their finance cost during April-September 2012. An analysis of the financial statements of 16 infrastructure firms shows financial cost going up because of huge debt, tight monetary policy and high risk perception. Banks and other financial institutions are learnt to be charging high interest rate to infrastructure companies because of heightened risk perception due to uncertainty in policy related activities and inordinate delay owing to lack of statutory clearances.

According to an official estimate, 28 power projects, 36 railway projects and 84 schemes of Ministry of Road Transport and Highways (MoRTH) are delayed as on May 31, 2012 because of various reasons. Delay in project implementation is starkly visible in roads and highways sector. Union Minister of Road Transport and Highways, Dr CP Joshi informed Lok Sabha recently that land acquisition was one of the factors contributing to delay in implementation of some projects under National Highway Development Programme (NHDP). Out of the 226 projects under implementation by the National Highways Authority of India (NHAI), 58 projects are currently delayed owing to various reasons including land acquisition, he added.
Many road developers have seen a sharp rise in interest rate or finance cost during April-September 2012 because of many reasons, one among them being the high risk perception. For example, the finance cost of Gammon Infrastructure Projects (GIPL) rose sharply to Rs 103.8 crore during this period from Rs 63.47 crore in the same period last year. Another major player IRB Infrastructure Developers had to fork out Rs 85.67 crore towards finance cost during April-September 2012, a far cry from Rs 38.55 crore in the year-ago period.

The rising finance cost has increased the woes of road developers who are already repenting for putting irrational bids for unviable road projects. In a recent research report, ratings agency ICRA said lenders increased caution while funding fresh projects, especially in those cases where the bidding (for road projects) is perceived to be very aggressive. In addition, the overall creditworthiness of road developers have deteriorated owing to their leveraged balance sheet and strained profitability. Further, weak capital markets and stressed valuations have made raising equity capital extremely difficult for most developers, the research report said.

In a departure from its earlier practice of awarding item-rate contracts, NHAI has been offering projects on Public-Private Partnership (PPP) mode over the last few years. Coincidently, road contractors also evinced strong response for these PPP contracts as they were finding it difficult to maintain their order-books because of their exclusive focus on item rate or Engineering, Procurement and Construction (EPC) contracts.

However, executing PPP contracts require long term funding and road contractors had to rely on external borrowing to meet their equity commitments in various Special Purpose Vehicles (SPVs) floated to develop the projects because of sluggish capital market in India. The reliance of these contractors on external borrowing led to double leveraging and increase in overall indebtedness at the group level, the ICRA report said.

Following this, many road project developers are trying to sell a part or entire stake in highway projects in order to repay debt and book profit. For example, GMR Infrastructure is in the process of diluting its majority stake in three toll road projects. In another example, Ramky Infrastructure sold 25 percent stake in Gwalior Bypass Road Project to Era Infra Engineering some months ago, thereby reducing its exposure to the project to 26 percent.

Borrowing

According to the research report, road developers are suffering from strained liquidity position because of elongated working capital cycle in core construction businesses and hence are dependent on borrowed funds. Notably, these companies have largely resorted to long term borrowing. For example, the long term borrowing of IL&FS Transportation Networks (ITNL), a leading road developer, rose to Rs 8,657 crore as on September 30, 2012 from Rs 6,973 crore at the end March 2012. The long term borrowing of logistics major SICAL rose by 34 per cent to Rs 193.93 crore as on September 30, 2012 from Rs 144.69 crore at the end September 2011.

Expenditure rises

Many firms witnessed rise in total expenditure because of rising commodity prices and cost overruns on the back of project delays. The total expenditure of IRB Infrastructure rose over three-fold to Rs 952 crore in April-September 2012 from Rs 275 crore in the year-ago period. Rise in expenditure is not only common to road developers but also across all segments of infrastructure sector. GVK Power & Infrastructure posted a loss of Rs 107.96 crore in April-September 2012 compared to a profit of Rs 96.84 crore in the year-ago period because of a considerable rise in expenditure. Its total expense rose to Rs 1,197.89 crore during April-September 2012 from Rs 899 crore in the corresponding six months of last year. The long term borrowing of the company spiked to Rs 12,768 crore at the end of September 2012 from Rs 11,094 crore as on March 30, 2012.

Pledged shares

Many infrastructure companies witnessed a rise in the proportion of shares of their promoters pledged with lenders. For example, the percentage of promotersÂ’ shares pledged with lenders rose to 77.3 per cent for GIPL from nil in the year-ago period. For Essar Ports, a leading port and terminal operator in the country, the percentage of promotersÂ’ shareholding pledged with lenders rose to 17.16 per cent from 12.46 per cent as at end of September 2011.

The promoters of Jaypee Infratech, part of the Jaypee Group, pledged 67.3 per cent of their shares at the end of September 2012 compared to 54.06 per cent at the September 2011.

Bottomline zooms

A notable feature in the earnings results of these infrastructure companies is that net profit has risen more than net sales because of temporary elements in their financial operations.

While the net sales of these 16 infrastructure companies rose 18.29 per cent in April-September 2012 from the year-ago period, net profit swelled 38.58 per cent during this interval. For Essar Ports, share of minority interest in net profit declined to Rs 1.25 crore from Rs 21.25 crore in April-September 2011. This caused the net profit of the firm to rise 85 per cent despite only a 21 per cent growth in net sales. For VA Tech Wabag, which specialises in water treatment for municipal and industrial users, net profit soared 624 per cent despite only 20 per cent growth in net sales because of huge rise in its other operating income. The companyÂ’s other operating income rose by 91 per cent to Rs 7.42 crore from Rs 3.47 crore in April-September 2011.

While these companies have witnessed remarkable profit growth in April-September 2012 period, the same cannot be guaranteed in the coming months. For a sustainable profit growth of these companies in future, the delay in project implementation must be addressed. It is hoped that the recent move by the government to set up the much awaited Cabinet Committee on Investment (CCI) may expedite implementation of the ongoing projects. The CCI, to be headed by the Prime Minister, is intended to provide single window approval for projects worth over Rs 1,000 crore.