After A Stellar 2019, Infra Investors Turn Cautious

Despite frenetic merger and acquisition (M&A) and investment activity in India’s infrastructure sector in the previous year, investors are cautious about 2020, given a slowing economy, challenges in credit availability and the amount of time to close infrastructure deals.

The year 2019 was marked by several major deals such as Brookfield making an investment of ₹25,000 crore in Reliance Jio’s telecom towers infrastructure investment trust (InvIT), L&T IDPL’s InvIT acquiring nine roads from Sadbhav group for around ₹6,610 crore, GIC investing Rs. 4,400 crore in IRB Infrastructure Developers Ltd road assets and a GIC-Tata group consortium’s planned investment of ₹8,000 crore in GMR Airports, which operates the Delhi and Hyderabad airports.

The infrastructure sector witnessed investments worth $14.2 billion in 2019, almost double the previous year’s $7.6 billion, according to data from private equity deal tracker Venture Intelligence.

The biggest investor concern is credit availability for infrastructure assets, given the recent aversion of lenders to funding such projects.

“Major headwinds facing the Indian road sector, in the current economic scenario, are reduction in credit offtake for the road sector, with banks turning more averse to lending to the infrastructure sector despite strong growth fundamentals of several road projects,” said Sandeep Lakhanpal, head M&A and business development at Cube Highways and Transportation Assets Advisors Pvt. Ltd, a roads investment platform set up by global infra investor I Squared Global, the biggest buyer of road assets in India.

The severe stress at large banks and the closure of corporate lending books by some of them could result in a credit crunch for road projects, which would otherwise have been bankable, he said.

If the Indian economy takes a long time to recover, the roads sector could face more pressure as traffic growth is closely linked to economic growth, according to Lakhanpal.

“A delay in the revival of the Indian economy is posing direct risks to traffic growth at the road assets, which are closely related to gross domestic product growth. Additionally, a low WPI trend poses risks to financial returns of investors with rise in toll collections being linked to WPI, according to the National Highways Authority of India’s (NHAI’s) concession framework, while the operational costs are largely influenced by the minimum wage increase,” said Lakhanpal.

Long approval timelines, stretching to almost a year in some instances, is another pain point frustrating infra investors. Arbitration proceedings between the asset seller and government authorities, and unclear approval processes form the bulk of the issues lead to delayed deal closures. Investors expect government authorities to streamline these processes which, in turn, will result in more foreign capital investment in the country.

“A lot of time is being taken for regulatory approvals for various reasons, delaying the much-required capital flow into the country’s infrastructure sector. Further, some of the key challenges being faced in selling and buying assets are the ongoing arbitration/disputes between the relevant authority and the special purpose vehicle (SPV) to be sold,” said Subahoo Chordia, head of Edelweiss Infrastructure Yield Plus Fund.

In the roads sector, many of the asset sales are stuck or delayed because of past claims or disputes between sellers and the NHAI.

“Formulation of a policy through which all the past claims/disputes can be assigned (out of the SPV) to the seller and the respective authority will expedite the process and will make such assets (SPVs) interesting for foreign investors to purchase. This will help many assets in getting sold, specifically in cases with significant disputes, and it will make the authority approval process easier,” said Chordia.

It takes 9-12 months for the money to actually flow in from the date of signing the binding contracts between investors and the seller of such assets, said Chordia.

Despite the concerns, Chordia added that investor interest in the Indian infrastructure space is expected to rise in 2020, with investors such as Global Infrastructure Partners and KKR raising their next funds and looking to deploy capital here. Additionally, monetization of assets through InvITs will attract large capital from global pension and sovereign wealth funds.―Livemint