Liquidity starts seeping back into India Inc

Kumar Yogesh

Banks are now shedding their aversion to financing new projects and foreign investors are heading back to India. According to government estimates, infrastructure projects worth nearly Rs.46, 000 crore will be awarded in the coming months..

THOUGH PRIVATE and the foreign banks are yet to step up lending in a big way, public sector banks have started financing projects.

The result: Funding of over Rs 58,000 crore (Rs 580 billion) for large projects has been tied up in the last six weeks.

The list includes Indian Oil's Paradip refinery (Rs 14,900 crore or Rs 149 billion), State Bank of India's loan to NTPC (Rs 8,500 crore or Rs 85 billion), Krishnapattnam Port (Rs 3,000 crore or Rs 30 billion), BGR Energy's engineering, procurement and construction work (Rs 4,000 crore or Rs 40 billion), SBI's loans to Vodafone (Rs 10,000 crore or Rs 100 billion) and the Anil Dhirubhai Ambani group's three projects (Rs 14,500 crore or Rs 145 billion) for the Sasan Ultra Mega Power project, Rs 2,000 crore (Rs 20 billion) for Delhi Metro Express and around Rs 1,000 crore (Rs 10 billion) for transmission projects in the west.

"With interest rates falling, lenders are locking in deals at higher yields on the project finance side," said Ravi Kapoor, managing director of Citigroup Global Markets.

Infrastructure developers aren't the only ones finding it easier to raise resources; companies such as Tata Motors are finding takers, too. A banker associated with the Rs 4,200-crore (Rs 42 billion) debenture issue, said the auto major had placed its entire debt in a day.

Construction major JP Associates is also in the process of raising nearly Rs 4,000 crore (Rs 40 billion) from debentures.

Companies that failed to raise equity in the aftermath of the September crisis -- when several global investment banks crumbled under the sub-prime loan crisis in the West -- had to opt for non-convertible debentures to meet their funding requirements. Although this market remained strong, with companies raising funds at up to 12 per cent, participation was limited to state-owned Life Insurance Corporation.

Now, other banks are back in the market, said market participants. In April, companies collectively raised NCD issues worth Rs 25,000 crore (Rs 250 billion).

There are signs that the equity market is looking up too. Overall, bankers estimated that over Rs 40,000 crore (Rs 400 billion) of rights, QIP and debenture issues are in the pipeline.

In the last six weeks, Unitech, DLF and Indiabulls -- all real estate players -- have together raised Rs 8,000 crore (Rs 80 billion) through qualified institutional placements.

"The private placement by the three realty companies is an example of foreign investors willing to invest in a sector that was perceived to be the most risky," said Enam Securities Vice-president Yogesh Kapoor.

He predicted that other sectors considered less risky would attract investment more easily from overseas investors.

"The underlying sentiment has changed dramatically. Indian stocks, which were punished severely in comparison to other emerging markets, provide attractive value propositions for investors," Kapoor added.

Also, the election mandate that returned a less fragmented government at the Centre is expected to facilitate the reform process, so some state-owned companies will enter the capital market, which will increase the supply of good quality papers, Kapoor said.

Some constraints, however, remain. "On the equity side, companies with good assets and a good track record on returns to shareholders are able to raise funds now. But the gate is not so widely open that anyone can get through," said Gagan Banga, director, Indiabulls Real Estate, which raised Rs 2,585 through a QIP issue on Tuesday.

Also, he said the cost of debt remains high. "We have seen sentiments improve for the short-term but we have not found a solution for the medium to long term," Banga said. Indiabulls Power Services is looking to raise about Rs 5,200 crore (Rs 52 billion) of debt to achieve financial closure for its upcoming thermal power plant. It has already raised its equity contribution of Rs 800 crore (Rs 8 billion).

Though Banga did not name any projects, funds for Sasan were tied up at 12.5 per cent, while SBI's five-year loan to Vodafone will cost 13.25 per cent during the first two years.

Going forward, however, things are likely to improve. "Investment in infrastructure projects will pick up substantially shortly. It was expected to start early this year but got caught in the election process. The National Highway Authority of India had stopped the award of new projects owing to the election code of conduct, but it is expected to start soon. This time, the response is going to be overwhelming as most of the projects have been redesigned," said India Infrastructure Finance Company Chairman and Managing Director, S S Kohli.

He added that benign interest rates would also make infrastructure projects more economically viable. "With enough liquidity in the system, there will be no paucity of resources," he predicted.

According to government estimates, infrastructure projects worth nearly Rs 46,000 crore (Rs 460 billion) will be awarded in the coming months.

"The pipeline of projects, from sectors like power and gas, to raise funds is strong. In the current financial year, we expect to arrange around Rs 100,000 crore (Rs 1,000 billion) for infrastructure projects," said A P Verma, managing director & CEO of SBI Caps, which was associated with the Tata Motors and Sasan fund-raising.

Though companies are still under pressure and demand remains subdued, the sentiment, bankers said, has changed because the worst seems to be over, at least in the domestic market.

"The mood was really down in the last quarter of 2008. By mid-January, it had started improving and by March there was clear visibility of the mood changing," ICICI Bank chairman KV Kamath told Business Standard in a recent interview.

Although overseas fund-raising remains tough, given the high credit spreads, domestically banks are flushed with funds, which can be gauged from the fact that for nearly six weeks now, they have been consistently parking around Rs 125,000 crore (Rs 1,250 billion) on a daily basis through the Reserve Bank of India's reverse repo window.