Project execution raised debt, may refinance: Gammon Infra

CARE rating agency downgraded Gammon Infra NCDs from A+ to A.

In an interview to CNBC-TV18, Parag Parikh, ED & CFO, Gammon Infrastructure spoke about the new projects of the company and how their execution has increased the debt levels. He also clarifies that the standalone debt of the company is quite low as compared to the consolidated debt.
“On the standalone, debt levels are quite low for our company. It is more on the consolidated debt that reads at Rs 3,200 crore moving to Rs 3,600 crore. These are project finance debts, so there is hardly any recourse to the holding company,” he adds. Below is an edited transcript of Parag Parikh's interview on CNBC-TV18. Q: What really is the debt position? We know that your total debt increased from Rs 3,200 crore as on FY12 end to Rs 3,600 crore now, the consolidated debt as of September 30. What kind of pressures does it cast on the P&L?
A: The debt position of Rs 3,200 crore going up to Rs 3,600 crore is merely in terms of projects which are under execution or under operations wherein drawdowns are being made from time to time as the project progresses. So, when you look at higher levels of debt especially for projects under execution, we are correlating that there is progress happening on projects at execution.
The NCD rating that we have is at A. It is a rating that we have obtained and kept. We have not gone to the NCD markets for raising any money against these bonds. We have kept these ratings from time to time if we were to ever avail it. On the standalone, debt levels are quite low for our company. It is more on the consolidated debt that reads at Rs 3,200 crore moving to Rs 3,600 crore. These are project finance debts, so there is hardly any recourse to the holding company. Also Read: GMR Infra cracks after Maldives cancels airport project

Q: Wanted an update on Indira Container Terminal Private Limited. There is an expectation that you might sell the stake, considering that contact agreement has lapsed. Just take us through the details and whether you would be looking to pare off some amount of stake there?
A: This is one of the initial bulk terminals awarded to Gammon. It has now been more than seven years that the project is operational. We have two births and both births together are in the range of 6-6.5 million tonnes per annum. So it is an operational project. We are also looking at expanding a little bit of capacity by buying more storage capacity on the backyard that enables the project to grow further.
Yes, we are evaluating options of possible stake sells or divestments into the asset and that is merely to raise some money which can be used and churned again for bidding for newer projects.

Q: How much have your interest costs climbed? We know that in your standalone company your interest costs did climb. YoY it almost doubled from Rs 5.4 crore to Rs 9.36 crore. What kind of full year interest costs are you expecting for Gammon Infra and for the consolidated entity?
A: For Gammon Infrastructure the interest cost that you see more towards the second quarter continues to remain and slightly rise from thereon. One will need to see where these interest costs are coming from. We have also been looking at possible securitization of assets and the surpluses which are lying into these Special Purpose Vehicles (SPVs). These vehicles are being provided to the holding company for investing in other projects. So whilst you see an interest cost higher, a large part of this is merely coming from our group companies, our own SPVs where there is surplus lying and is lent to the holding company. That is where one must look at from an interest cost perspective.
On the consolidated debt, clearly projects will continue to progress this year. We have a few projects which are in advance stages of completion as well as nearly five plus projects which have come up recently and being awarded. Debts will get raised over these projects and therefore absolute numbers will go up. It is considerably healthy it gives us a sense of how projects are progressing over a period of time.
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Q: Considering that you have debt levels of around Rs 3,600 crore on a consolidated basis and you are in talks to pare stake in certain projects- I have two questions. One, how much is your fund requirement in the near-term because I do understand that there is a rights issue which you have approved but haven’t acted upon and how difficult is it to close deals at this point with regards to possible stake sales with maybe private equity players? What is your fund requirement and how much can you possibly garner in the next couple of months?
A: Immediate fund requirement is not very large and therefore we are keeping a pipeline of fund flow ready for ourselves. For example, the non-convertible debentures (NCD) that we just mentioned have not dipped into the NCD market but we are keeping a rating for ourselves.
Similarly, we are looking at potential refinancing as well as securitization of future receivables. Especially, the projects which have been into operations or are coming to an operational stage. This further enables us to raise money for churning into equity. Above that, we are looking at possible asset sales and divestments and will see this on the basis of how attractive valuations are? Whether we would like to exit at this stage or not? If you are not happy with the valuations then we may look at refinancing and securitization which happen more in terms of debt cost. Q: Your last reported number was a loss for Q2; will the rising interest cost then, become more onerous?
A: For our Q2 numbers yes, it has been slightly lower and interest cost will continue to rise. If you look at the standalone numbers they are quite healthy and this is merely because we do a lot of Operations and Maintenance (O&M) for all projects which are under operation. As we move in the near future a couple of projects are coming up for operations, as well as the regular developmental charges and fees that are being charged to these special purpose vehicles. Q: Because of the rating coming in at A rather than A+ will the cost of money go? How much on an average is your bank loan in terms of interest rates and how much can it go up?
A: Across all our projects, bankers are accessing the projects based on the cash flow strength of each of the individual SPVs and to that extent the cost of financing is a blend of the strength of the projects. Most importantly, the current scheme of things is also to do with the overall economy in Indian outlook on credit. Even when you look at this rating it is largely getting associated to the credit outlook of Indian economy as well as the infrastructure industry.
It is a good time to have looked at it as an opportunity and won a handful of projects over the last one year. We do expect that over a period of time and since these are 20-30 year concessions, we look at some sort of an interest rate arbitrage coming up once the interest rates go down. Q: Give us an update with regards to the order book as of now; how much is under execution and what is the inflow that we could expect in the second half of FY13?
A: In terms of existing order book, we won a handful of projects over the last one year. Most of this have been on roads. In recent times, there is a Mormugao Port bid, a terminal on mechanization of facilities that we have bid for. The bids have already been opened and we are expecting a positive response from the client soon. Q: Are there any road projects coming up? What is your order and do you expect it to remain as it is till the end of the year? We haven’t heard from National Highways Authority of India (NHAI) in a very long time.
A: If you look specifically at us, we won handful of projects amounting to more than Rs 5,000 crore. We do not necessarily look at roads, the recent bid is on ports. We are looking at a variety of sectors besides roads where we will see some opportunities. We bid very cautiously and selectively and are not very keen to bid aggressively.