Infrastructure Deals Jump To Five-Year High
Support columns for a flyover stand under construction on a road in Patna, Bihar. (Photographer: Prashanth Vishwanathan/Bloomberg)

Infrastructure Deals Jump To Five-Year High

Deal activity in India’s infrastructure sector jumped to its highest in at least five years as stressed builders of airports to roads pared debt by selling cash-generating assets to mostly overseas funds.

Total deal value crossed the $5-billion mark in 2019, according to data provided by Grant Thornton. That’s a more than fourfold growth over the previous year. Mergers and acquisitions contributed $1.45 billion while private equity investments stood at $3.65 billion. Airport developers saw the biggest deal activity among sectors.

The spike was primarily led by debt-laden infrastructure companies selling operating assets to deleverage their balance sheets. That comes when India’s growth fell to its lowest in six years in April-June. And it’s expected to slip below 5 percent in the quarter ended September amid a decline in consumption and government having little room to spend on fresh projects.

“The infrastructure sector is highly capital driven and given the historical impasse in the sector, majority of the players in the sector were saddled with high debt levels,” Pankaj Chopda, director at Grant Thornton India, told BloombergQuint. After the Insolvency and Bankruptcy Code, a lot of companies want to pare their debt, he said, adding that pressure “forced the existing players to offer attractive investment terms for on-boarding new equity investors”.

  • In 2019, India’s infrastructure sector saw four domestic mergers & acquisition deals worth $1.39 billion.
  • There were two inbound and one outbound acquisition worth $61 million.
  • Private equity firms, led by overseas funds, invested about $3.7 billion.

Private equity investments were higher than M&As because infrastructure funds have appetite for long-term assets and want to collect operating assets, according to Manish Agarwal, partner and leader, infrastructure at PwC India. “Corporates do not have similar appetite at present, hence no M&As.”

Over the years, a lot of foreign investors have shown interest in India’s infrastructure sector, especially driven by the large amounts of global capital chasing returns in a low-yield world, Taponeel Mukherje, chief executive officer at infrastructure advisory Development Tracks, said. Most of the investors want to invest in brownfield projects generating cashflows to avoid construction risk, he said. “The secondary market deals are not unique to the Indian market but it is a global trend as well for corporates. Over-leveraged balance sheets are using secondary markets to generate capital to pay back debt. This is a good opportunity for the government to monetise assets.”

PwC India’s Agarwal said many of these deals were in the works for many years and increasing stress nudged owners to offload infrastructure assets. “The current market scenario, where promoters are already under pressure from banks, helped to close the gap between the expectations of promoters and investors,” he said. “We also saw uncertainties getting addressed by the government in several of these projects, reducing the valuation expectation gap.”

Airports Most Preferred Sector

Airports contributed the most to the transaction value with both GVK and GMR groups selling stake in their airport arms to cut debt. Private equity firms in all invested $2.2 billion in 2019 in the airports sector.

In October, GVK signed binding agreements with ADIA, PSP Investments and NIIF for an investment of Rs 7,614 crore in its airports holding company. The proceeds will be used to primarily retire debt obligations of holding companies significantly and fund the purchase of additional shares in Mumbai International Airport Ltd. from Bidvest and ACSA, the company said in a media release.

Tata Group and GIC-led consortium invested Rs 8,000 crore in GMR’s airport business in April. Kiran Kumar Gandhi, managing director at GMR Infrastructure Ltd., had told BloombergQuint that the proposed investment will reduce its debt and strengthen the balance sheet, paving the way to hive off airport business.

“The number of passengers using airways as a mode of travel is increasing. So, most of the airports are into expansion mode and getting into new investments cycle. This is the reason why airport segment contributed maximum to the transaction value,” added Chopda

Both GVK and GMR have been trying to bring down debt to focus on airports. GVK exited the Bangalore International Airport Ltd. in 2017 by selling stake to Fairfax Group. GVK bagged the Navi Mumbai greenfield airport while GMR has the Goa airport.

Roads & Highways Follows

The next most active segment was the roads which saw interest from sovereign and Canadian pension funds. “Increasing momentum in Infra InvIT as a mechanism to monetise road assets for reduction of debt at group level and increasing interest by sovereign funds to invest in the sector contributed to major transactions in the segment,” Chopda Said

In 2019, $1.47 billion came into roads and highways through M&As and private equity investments. GIC, CPPIB and OMERS invested close to $912 million in road assets of IRB and IndInfravit Trust this year.

One of the major investors in the road projects in the last five years has been has been Cube Highways—owned by four leading global financial institutions I-Squared Capital, International Finance Corporation, Abu Dhabi Investment Authority and Japan Highway International. It has invested close to $900 million.

Completed projects are less risky as they guarantee stable cash flow from toll, according to Ajay Saraf, executive director and head, investment banking and equities division of ICICI Securities. Many of the companies use the proceeds from the transactions to deleverage as well to create capital for them to grow and bid for other projects, he said. Global pension and sovereign funds actively looking at the infrastructure space have long-term horizon as they their own and not managed money, Saraf said.

Still, higher deal activity doesn’t mean more money is going into building fresh infrastructure. “If most of these deals have happened in secondary markets with an aim of deleveraging then we are not adding significantly to the creation of new infrastructure,” Madan Sabnavis, Chief Economist, Care Ratings.

“The problems of infrastructure sector are coming from both demand and the supply side. The government is active in creation of infrastructure but interest from the private sector is limited,” Sabnavis said. This is because of various funding issues faced by companies and they have also realised that many of the stalled projects are simply unviable, he said. “It is going to be a slow process before the private sector picks up and only certain segments will continue to grow well where the government is spending like roads & highways and airports.”

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