Infra sector looking for necessary push from government

UR Associates has come out with its report on infra sector.

The Reserve Bank of India, at its quarterly monetary policy review on June 18, 2012, kept policy rates unchanged in view of rising inflation and global economic uncertainty, disappointing the players in the infrastructure space which expected further cut in policy rates. Also, the cash reserve ratio (CRR) has been kept unchanged at 4.75%. As per Business Standard, the manufacturing of engineering products has slowed sharply during the first quarter of the current fiscal and the industry sees plant utilisation to drop by 10-20% in capital goods segment as well as in the engineering sector. Several players in this space have decided to curtail their operations by about 10-20% from this month onwards to reduce their working capital requirement. However, later in the week, the sector cheered after the news that the government is likely to impose a 21% import duty on power equipments. The move if imposed will curb the import of cheap Chinese equipment thus boosting the demand for products of domestic equipment makers.

Key highlights:

• Critical infrastructure sector clocked negative growth in 2011- 12: The annual performance of the crucial infrastructure sectors, including telecom, highways, cargo handling, fertiliser production, natural gas, and export and import cargo handled at airports, all registered negative growth in 2011-12, according to report compiled by the Ministry of Statistics and Programme Implementation (MoSPI). In the case of roads, NHAI widened/upgraded 2,248.55 km of highways during 2011-12. It was 10.1% lower than the target of 2,500 km for the period. It was also 29% less than that achieved in the previous year.
• India seeks infrastructure boost from China: Prime Minister Manmohan Singh has called for greater Chinese investment in the Indian infrastructure sector in his meeting with China's Prime Minister Wen Jiiabao, as the government pursues its $1 trillion investment target in this sector. The Prime Minister said "We are clear. Chinese investment in infrastructure is welcome".

Power Grid to diversify into power distribution abroad: Power Grid Corporation of India is planning to get into distribution business and is scouting for power distribution opportunities overseas. Besides, it is trying to branch into EPC (engineering, procurement and construction) business in other countries. The company currently has 19 overseas projects that mainly involve consultancy in power transmission. It has international projects of around Rs 105 bn under execution. Mr. R. N. Nayak, Chairman and Managing Director, Power Grid, told Business Standard that they were not only looking for transmission, but also distribution business. “We have executed around 33% of rural electrification where we are distributing power as franchisee. Though we have experience, we can enter distribution business provided we are able to buy and trade power in the domestic market,” he said. Mr. Nayak said the company wanted to expand its overseas portfolio by going beyond consultancy. Besides consultancy, the company’s international foray is also focusing on asset management, EPC and joint venture/acquisition.

Overseas utilities may buy GVK coal, acquire stake: Power generation utilities from the Philippines, Taiwan and South Korea, including Korea Electric Power Corp. (Kepco), may buy 30 mn tonnes of coal a year from the GVK Group’s mines in Australia that it acquired from Georgina Hope Rinehart’s Hancock Group for $1.26 bn last year. Also, once the project receives environmental clearance, these firms may also acquire a stake in GVK Coal Developers (Singapore) Pte Ltd that holds the assets in Australia. The mandate for divesting part of the company’s stake in the coal mines has been given to Macquarie Capital, according to a person familiar with the development. However, Mr. A. Issac George, Director and Chief Financial Officer of GVK Power and Infrastructure Ltd, declined comment. In September, GVK group acquired a 79% stake in Tad’s Corner and Paul’s Corner, and a complete acquisition of Kevin’s Corner mines located in the Galilee Basin in Queensland. The group, through its subsidiaries, also acquired the rail and port project connecting the coal mines that involves the construction of a 495km railroad and a 60 mn tonnes per annum (mtpa) port at Abbot Point. At full production, the mines are expected to produce 84 mtpa of coal. GVK may need the financial support and technical expertise of partners to develop the mines, and the rail and port projects, with the overall investment required in the first phase pegged at $10 billion. 

L&T to raise $500 mn for infrastructure arm from PE investors: Larsen & Toubro (L&T) has decided to initiate a fund-raising exercise, one of the largest in the space in recent times, for its wholly-owned infrastructure development arm L&T Infrastructure Development Projects (L&T IDPL). L&T had mandated Morgan Stanley to help it raise $400-500 mn (Rs 22.0-27.5 bn at Rs 55 to a dollar) for a minority stake in the company from financial sponsors like large sovereign funds or long-term infrastructuresector- focused private equity investors or even deep-pocket global pension funds, said people familiar with the ongoing discussions. Sources close to the developments said, even though a formal valuation exercise is yet to get completed, the initial back of the envelope calculations suggest that the equity valuation of L&T IDPL alone would be in excess of Rs 110 bn ($2 bn). L&T may dilute anything between 12-20%, depending on investor appetite. Considering the company still has to undergo significant capex and some of its flagship ventures will take at least five-seven years to reach cash flows, only long-term investors would be approached.

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