BlackRock Sees Revival as Roads Attract Tata: Corporate India
Billionaires Anil Ambani and Ajay Piramal are joining the Tata Group in seeking distressed Indian road projects offered by debt-laden builders amid Prime Minister Narendra Modi’s plan to boost infrastructure spending.
Jul 24, 2014: Piramal Enterprises Ltd. (PIEL) is negotiating to buy six road projects valued at 20 billion rupees ($333 million), said Parvez Umrigar, co-head of its structured investment group. The $100 billion Tata conglomerate, which bought three road projects last year, and Ambani-led Reliance Infrastructure Ltd. (RELI) are looking for more.
Modi’s pledge to spend $25 billion on roads, airports, ports and smart cities to unclog Asia’s third-largest economy and spur expansion is encouraging investors to buy stalled road and power projects. The highest interest rates among the region’s biggest markets and growth near a decade-low crippled the original builders, forcing them to sell.
“The infrastructure sector is at an inflection point right now,” Rohit Singhania, fund manager for DSP BlackRock T.I.G.E.R fund with 14.38 billion rupees under management, said in a July 17 telephone interview. “We need a lot more roads, power plants, highways and ports. And the new government understands it has to pump investment in these.”
The T.I.G.E.R fund, abbreviated for The Infrastructure Growth and Economic Reforms fund, has delivered returns of almost 44 percent this year beating 96 percent of its peers. The fund’s gains are almost double those of the benchmark S&P BSE Sensex this year.
Modi’s Task
Part of Modi’s task is to induce private investment in infrastructure to follow through on his campaign promises, curb a consumer inflation rate of more than 7 percent and rein in the fiscal deficit to a seven-year low of 4.1 percent of gross domestic product.
His administration’s maiden budget on July 10 cleared the way for dedicated investment trusts and eased infrastructure lending rules. Roads received an allocation of 523 billion rupees in the plan and urban infrastructure 500 billion rupees, as part of 1.48 trillion rupees for everything from highways, ports to housing.
India’s central bank allowed lenders to sell long-term bonds exempt from reserve requirements to bolster funding for infrastructure and affordable housing.
‘Booster Dose’
The budget announcements and central bank’s efforts, according to Singhania, will be “a big booster dose” for the sector. “Things will begin to improve over the next six to nine months” with road developers seeing a pick up in profits over the next year, he said.
India needs to spend about 17.6 trillion rupees by 2017 building roads, bridges, ports and railways, according to estimates of the Planning Commission of India.
The country will have to invest $2.2 trillion by 2030 on urban transportation, housing and office space, McKinsey & Co. estimated in a 2010 study. India’s infrastructure is ranked below that of Guatemala and Namibia by the World Economic Forum.
Tata Realty and Infrastructure Ltd. plans to spend 227 billion rupees by 2018 on roads, technology parks, malls and residential complexes, Managing Director Sanjay Ubale said. The company is one of three companies being handpicked by group chairman Cyrus Mistry to lead a $8 billion push into the sector.
“There is going to be a lot more action in the roads sector in the days to come,” Mumbai-based Ubale said in an interview on July 10. “We are looking at stressed road assets. We had bought some last year. We are looking at some more projects now.”
Debt Recast
Hyderabad-based IVRCL Ltd. (IVRC), which sold three projects to Tata Realty, this month received an approval for a debt recast as the builder struggled with a record annual loss and debt that more than quadrupled in the last five years, according to data compiled by Bloomberg.
IVRCL wrote off receivables worth 2.3 billion rupees in the March quarter, local brokerage Tata Securities Ltd. wrote in a June 3 note highlighting its “worry over high receivables.” It still has about 7.5 billion rupees of receivables under arbitration or unbilled for over three years, the note said.
Stalled power and road projects amid the economic slowdown impaired builders’ ability to repay loans, making them among the biggest contributors to banks’ soured debt in the past two years, according to the local arm of Fitch Ratings.
“Distressed road projects were an impediment to economic growth,” Chintan Lakhani, an analyst at India Ratings & Research, the local unit of Fitch Ratings, said in a telephone interview on July 16. “These deals would make way for fresh investments and renewed interest in the sector.”
Portfolio Churn
Piramal would only consider assets that are commissioned and face “no execution risk,” according to Umrigar. “We are not going to take the risk of land acquisition, forest clearance, environmental clearance. We will enter when the contractors want to churn their portfolio.”
Reliance Infrastructure, whose shares have risen 78 percent this year, expects more deals to close now as the asset valuation mismatch between the buyers and sellers narrows, Lalit Jalan group director for strategy and corporate affairs told reporters on July 18.
Reliance Infra shares rose 0.9 percent to 759.40 rupees in Mumbai, while the Sensex gained 0.5 percent. Piramal rose 0.9 percent, the most in a week, to 638.20 rupees.
An economic revival may widen the valuation gap between the buyers and sellers, hindering deals, said BlackRock’s Singhania, unless a road builder was “extremely starved of funds and being forced by its bankers.”
Piramal expects the deal stalemate to ease as developers try to either repay their debt or seek to exit from projects they have invested for 5 or 10 years, to free up their funds. Most road projects have a 25-year tenure.
“Nobody has a business thesis to continue holding a project from day one to 25 years,” said Piramal’s Umrigar. “Considering the macroeconomic scenario and financial health of the contractors, we are at a stage where projects will start changing hands.”
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