Roadbuilders Stall on Bottlenecks: Corporate India

Roadbuilders Stall on Bottlenecks, Debt Costs
Commuters cross a road near the Central Station in Chennai, India. Photographer: Kuni Takahashi/Bloomberg

Indian builders of roads are struggling to revive flagging sales as regulatory bottlenecks and the highest borrowing costs in Asia prevent them from bidding for new projects.

Ramky Infrastructure Ltd., a company based in the southern city of Hyderabad, expects no growth in revenue in the year ending March 31, Chairman Ayodhya Rami Reddy said in an interview. Madhucon Projects Ltd.’s finance director S. Vaikuntanathan said it is a “bad time” for the industry as delays in land acquisitions and environmental clearances have stalled development.

“Our priority right now is to protect our bottom line from rising interest costs even if it is at the expense of growth,” Reddy said. “Unless there is an improvement in the business environment in the country, we would like to go easy on bidding for some time.”

A slump in road and highway construction may hinder Prime Minister Manmohan Singh’s efforts to upgrade the nation’s public utilities, crucial to turning around Asia’s third-biggest economy from the slowest pace of expansion in three years. McKinsey & Co. estimates poor amenities may shave off 1.1 percentage points from gross domestic product growth, or $200 billion in 2017. India’s infrastructure is ranked below Kazakhstan and Guatemala by the World Economic Forum.

Maoist Rebellions

Ramky Infrastructure’s shares have tumbled 79 percent since the company’s initial public offering at 450 rupees apiece in September, 2010. Sales rose 22 percent to 38.5 billion rupees ($698 million) in the year ended March 31, slowing from a 54 percent gain in the previous 12 months, according to data compiled by Bloomberg. Total debt surged sixfold in four years to 19.4 billion rupees as of March 31.

Singh’s government, dealing with graft probes and coalition allies unwilling to back proposals to open up the economy, is attempting to rewrite a century-old land acquisition law that may help speed up road projects.

Abuse of the colonial-era law that allows the state to seize land at cheap rates has led to clashes between farmers and local authorities, and fueled Maoist rebellions in some mineral-rich provinces. Singh is struggling to win approval for the bill, first presented to parliament about a year ago.

Behind Schedule

A daily average of 4.5 kilometers (2.8 miles) of roads was added in 2011, according to estimates by PricewaterhouseCoopers LLP, falling short of the government’s 2009 target of 20 kilometers a day. A quarter of 226 highways commissioned by the National Highways Authority of India are behind schedule because of challenges in acquiring land, according to Road Transport Minister C.P. Joshi.

“This is a bad time for the infrastructure sector,” Madhucon’s Vaikuntanathan says. “For road builders, the biggest challenge is land acquisition. With the government not turning words into action, funds are stuck in projects that are not going anywhere as land is not available.”

Sales growth at Madhucon slowed to 5 percent last financial year, from an average 32 percent in the previous three years, data compiled by Bloomberg show. Total debt has quadrupled from four years ago to 8.2 billion rupees as of June 30.

Builders are also reeling from borrowing costs that are the highest among investment-grade economies. An inflation rate that has remained above the central bank’s comfort level has prompted the monetary authority to raise its benchmark interest rate 13 times in 2010 and 2011, cooling growth.

Shrinking Output

GDP rose 5.5 percent last quarter, following a 5.3 percent gain in the previous three months, which was the smallest rate of expansion since 2009, according to the Central Statistical Office. Factory output shrank three months this year, and grew 0.1 percent in July, the government said yesterday.

Reserve Bank of India Governor Duvvuri Subbarao cut the repurchase rate for the first time in three years in April, signaling no further reductions until inflation slows. The benchmark rate of 8 percent is the highest among the 10 biggest economies in Asia.

Five-year bond yields for AAA rated Indian companies have risen 2.16 percentage points to 9.43 percent from a three-year low touched on April 22, 2009.

“Road builders are in for some tough times,” said Mangesh Bhadang, an analyst at Quant Broking Pvt. in Mumbai. “They are essentially facing longer working capital cycles and execution delays. A way out for these companies would be to monetize their assets and free up some capital.”

‘Hard Bargain’

Some companies are already doing that to fund projects after exhausting bank credit limits. Larsen & Toubro Ltd., Asia’s largest engineering company by market value, is reducing its holding in a unit to raise cash, while Reliance Infrastructure Ltd. said in its annual report that it plans to offer as much as 25 percent of its shares. Punj Lloyd Ltd. will sell assets, including property, early next year, Director of Corporate Affairs Luv Chhabra said Aug. 8.

The value of assets owned by construction companies has been going down even as debt on their books has been rising, which may lead to debt servicing issues for some, GVK Power & Infrastructure Ltd.’s Chief Financial Officer Isaac George said in an interview.

“Though selling a stake in projects may seem the obvious way out, the problem is the valuations aren’t encouraging,” Sudhir Reddy, chairman of Hyderabad-based IVRCL Ltd. said in an interview. “Buyers are driving a hard bargain as there are lots of choices available in the market, with many companies trying to hive off stakes in their projects.”

On a Break

Reddy told reporters on Sept. 10 that IVRCL is on a “temporary holiday” from bidding for highway projects. The builder has total debt of 50 billion rupees and expects to reduce it by 10 billion rupees by March.

Ramky Infrastructure’s Reddy said his company is looking at expanding its operations outside India and offering other services to help tide over the challenges in road construction.

Ramky will be bidding for more contracts in West Africa after winning an order for a special economic zone in Gabon, he said. It will also consider bolstering its waste management business as growing awareness of environmental issues spurs demand for such services, Reddy said.

“We can’t put all our eggs in one basket, especially in the present scenario,” he said. “What is happening in the infrastructure sector is just the tip of the iceberg. The worst is yet to come.”

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