With the new Budget focusing on Achhe Din, many engineering and construction companies, optimistic about a brighter future, are looking at measures to ease cash-flow issues.
After a few years of a slow economy and declining revenues, India Inc now appears to be keen to pursue multiple modes of raising capital for debt-ridden infrastructure and construction companies. According to a recent report by Credit Suisse Securities, the infrastructure and construction sector in India accounts for 29 per cent of total debt among companies (the survey included 3,700 listed non-financial companies) whose interest payment obligations are higher than their earnings. Companies are now primarily finding ways to raise capital to retire the debts.
Causative factors
"The primary reason for infrastructure and engineering companies to face such high debt obligation is delay in availability of resources," says independent financial consultant Shyam Mohan Gupta. "The time period between taking the loans and deploying them, in many cases, is long, which eventually creates a problem in getting a timely outcome and revenue generation. With growing interest rates, the sustainability of these companies becomes lower."
Procuring loans to expand projects for higher profitability has been another prime reason for this high debt ratio. "Most companies had undertaken infrastructural expansions in the past five years in anticipation of growth," shares a senior official of a reputed public-sector bank. "However, with a growth of mere 5 per cent in the economy, they are now finding it difficult to meet the debt obligation as revenues did not meet expectations. With lesser revenues and increasing annual operational costs, it has become difficult to repay loans, causing more debts. The loan vendors were supportive up to a certain period; however, today they do not seem to be inclined towards providing aid to these companies."
Measures to retire debt
However, after a growth-focused Budget by the Modi Government, such project-related issues are expected to get sorted out soon. "We expect stability in the next two years," affirms the official. Companies facing such financial constraints can reckon on alternatives such as private equity, IPOs and follow-on-offerings. "Non-listed companies tend to raise capital through IPOs whereas listed ones adhere to follow-on-offering," he adds. "It would be feasible to first focus on profitable growth and then pay off the lenders."
However, companies are playing it safe. "Our business model for FY14 was to include the right debt-equity ratio, proper distribution of long-term funds, investment in BOT projects and net margin for working capital," mentions Anjanee Kumar Lakhotia, Chairman & Managing Director, MBL Infrastructure Ltd.
"Government policies need to be implemented in a timely way," says Gupta. "What are companies going to do with the capital they would raise through IPOs? Unless and until they are provided resources, the capital will remain on hold, thus raising the interest-over-earnings ratio again. An IPO is a preferred solution only when all activities one is associated with are operational. Unless infrastructural activities are ongoing in synergy with the projects, the funds raised either through IPO, pension funds or equity cannot be of any use."
The recent announcements by the Reserve Bank of India (RBI) sanctioning long-term loans for infrastructure for 25 years will certainly ease out capital constraints. "This policy will be advantageous to upcoming projects," agrees Gupta. "Such a progressive step by the Government is welcome."
Examples of some recent capital raises:
| Organisation | Amount (Rs crore) | Route |
|---|---|---|
| GMR Infrastructure | 1,800 | Qualified institutional placement |
| JP Associates | 1,500 | Qualified institutional placement |
| Sadbhav Infrastructure Projects | 130 | Non-convertible debentures |
