L&T in talks with SBI, Telangana government to bail out cash-strapped Hyderabad metro rail project

A matter of interest

Subrahmanyan declined to comment on the specific financial assistance he was seeking from the government, but hinted it had to do with compensating for the interest incurred.

“It is nothing but the interest loss; the project has got nearly Rs 14,000 crore of debt, and therefore the loss is about Rs 1,400 crore, which is nothing but the interest cost,” Subrahmanyan said.

“Otherwise, if the traffic is normal and such, the project breaks even at the EBITDA level. We have to find ways and means to reduce the debt level, thereby bringing the project to more viable levels,” Subrahmanyan added.

Hyderabad metro rail is L&T’s single biggest investment in a project. It has invested over Rs 19,000 crore on the project through debt, equity and a grant from the Central government.

Covid impact
L&T fully commissioned the Hyderabad metro rail project in February 2020. In March it saw a daily ridership of 500,000 people. Operations came to a grinding halt towards the end of March due to the nationwide lockdown imposed to contain Covid-19.

After being fully shut for over five months, the metro rail began partial operations on September 7. Operations are being resumed in a graded manner. Ridership has only reached 100,000 on a daily basis, as many commuters are keeping away from the metro, fearing a Covid-19 infection, and this is making the recovery all the more challenging.

While the lockdown had put the brakes on operations and cash flows, L&T continued to incur fixed operational costs, depreciation and interest expenses. All this raised serious questions on the financial viability of the project, which is also burdening L&T’s balance sheet at the consolidated level.

In the first half of FY21, the Hyderabad metro managed to make only Rs 550 crore, way below the costs it incurs. Indeed, L&T Hyderabad Metro Rail suffered a net loss of Rs 382 crore in FY20. Total revenues stood at Rs 1,370 crore.

Tricky time

Moneycontrol had earlier reported about the possibility of L&T threatening to invoke the ‘force majeure’ clause in the concession agreement to walk out of the project in the case of unforeseen events.

But things are more complicated on the ground, as the Telangana government finds itself in a tough fiscal situation due to the loss of tax revenue on account of Covid-19, a high debt burden and the recent floods that devastated capital city Hyderabad and its adjoining districts.

The company is also weighing other options, including monetising land banks that it received as part of the concessionaire agreement, and even a possible divestment.

But the timing hasn't been right for L&T, given how the Covid-19 pandemic has hit real estate demand, especially for commercial and office space, as employers have adopted the work from home option. This has also led to a decline in the number of daily commuters.