Increased road target to aid construction sector: IL&FS Trans

The National Highway Authority in India (NHAI), on Wednesday, raised its road construction target for FY17, which seems achievable with the amount of Budget allocated to the sector this year, said K Ramchand, MD of IL&FS Transportation Networks.While the construction target has been set at 15,000 km for the new fiscal year, about 25,000 km has been pegged as a target for awarding national highways projects. Speaking to CNBC-TV18, Ramchand said the target of 6,000 km was a huge improvement last year. The constructions sector, particularly the road players, will be in a position to participate in the big boom going forward, he said.However, he believes lack of bank support remains the key challenge for the sector.The company's order book stands at Rs 12,000-13,000 crore, Ramchand said, adding, about 70-80 percent of the government orders are for construction of roads, while the rest are on the public–private partnership (PPP) basis.IL&FS is now looking at divesting 3 to 4 assets and setting up an investment trust to reduce its debt of Rs 27,000 crore, he added.Below is the transcript of K Ramchand’s interview with Sonia Shenoy and Latha Venkatesh on CNBC-TV18.Sonia: First, if you can tell us what your thoughts are whether such an aggressive target of 15,000 km of construction activity could be achievable in this fiscal?A: I would think yes. Fundamentally, because if you look at the budget allocation which has been made to this sector, they have been hugely increased and they should be in a position to meet the target of at least 15,000 km if not more than that because even 6,000 km which they achieved last year was a huge improvement over whatever has been achieved in the previous year. So, I definitely believe that construction sector which was on a low because of the overhang of banks and build, operate, transfer (BOT) problems that were there in the sector, the construction sector should really see a big boom. And road players in particular, will be in a very advantageous position.Latha: What about yourself? How was your order book looking and how much are you L1? Going by the size of the orders, what are you expecting by way of order book growth in FY17?A: Firstly we have an order book of about Rs 12,000-13,000 crore which is constant, that we maintain throughout the period that we have been listed. Secondly, if you look at the orders that are coming out from the ministry, it is in two pacts. One pact is pure construction which is a bulk of the orders coming out – 70-80 percent – and which is why I think it is quite possibly to achieve these targets that they have set for themselves. About 20-25 percent is coming out in the public-private partnership (PPP) or the BOT framework. In this framework, the only issue which remains to be sort of sorted out is the issue of banks coming back as they were in the previous occasion. Banks have been very strict with appraisals and strict with project costs and a whole host of issues which the ministry and the National Highways Authority of India (NHAI) have started resolving. But that is probably the only, if there is any stumbling block within this whole sector, I would think that the banks coming back and taking a view that the sector is still looking up is the only thing which is stopping this sector from moving full-fledged ahead. But otherwise, the construction part of the sector is definitely moving.As far as we are concerned, we have been bidding only for the hybrid annuity project. We have bid 2-3 of them and none of them, we were L1. We were close to being L1 in one of them, but we should be getting a few of them this year as we go forward.Sonia: But we seem to be in an environment where a lot of debt laden companies are trying their best to sell-off their assets and reduce their debt. You are sitting on a debt of almost Rs 27,000 crore. How do you plan to reduce your debt over the next 12 months?A: Rs 27,000 crore has to be seen in light of a total project estimate which we have got Rs 45,000-50,000 crore. So, if you look at the debt equity of the company as such and you comparing Rs 27,000 crore to about Rs 45,000 crore of total project cost that we are looking at. So, as a number, it may look very big, but if you look at it as a metric, I do not think it is so frightening as it would appear to be.However, we are also looking at divesting some assets. We have done some preliminary work on one or two assets. We are also looking at setting up an investment trust which has recently got a flip in the budget and we should be having some good news going forward as far as scale of debt is concerned.Sonia: What is the quantum of assets that you can divest by the end of the year?A: We are looking at divesting 3-4 assets. We should be able to get maybe about Rs 1,500-2,000 crore of cash flow back into the system. That is number one. Number two is once these assets go away and probably between Rs 3,000 crore and Rs 5,000 crore of assets will likely go out of our books as debt, because it will be a sale of the assets and therefore, we will not need to consolidate it in our books. So, there will be two advantages. One is we will get some cash from the release of the assets from our books and second is of course, the debt goes off because it goes off with the sale.Latha: This investment trust, how much will it help reduce your finance cost?A: We really do not know now, because the bankers seem to feel that you should be able to give a yield of between 9 and 11 percent to actually put some assets in the investment trust. Once we go on the road show, we think we will probably get a much better idea about how this will actually pan out. But if you look at a weighted average cost of capital, then we should see some deduction. But if you look at only pure debt reduction, I doubt whether there will be any debt cost reduction because probably people want to leverage debt to make some equity returns in these projects.