Road toll management firm MEP Infrastructure Developers Ltd will form an infrastructure investment trust (InvIT) to unlock value from its road assets and reduce debt. The company will also bid for the majority of 101 toll plazas which the Union road ministry plans to put up for long-term contracts.
Infrastructure firms cannot avoid debt, but the company is trying to address the issue by forming an InvIT, said Jayant D. Mhaiskar, vice-chairman and managing director at MEP Infrastructure, said on Friday.
Raising money and cutting debt via new structures such as InvITs, is imperative for MEP Infrastructure, whose debt of Rs.3,220.12 crore is expected to rise once it bids for the toll plazas. Once roads are built, the National Highways Authority of India (NHAI) invites private toll managers, such as MEP Infrastructure, to maintain toll plazas in long-term contracts. Winners must pay upfront fees to the NHAI in most of the cases.
Last year, capital market regulator Securities and Exchange Board of India (Sebi) allowed the launch of real estate investment trusts (REITs) and InvITs to get easier access to funds.
The NHAI, along with the road ministry, plans to award fresh projects of 15,000km worth Rs.3 trillion during FY16 and FY17 through the BOT (build, operate and transfer), hybrid annuity and EPC (engineering, procurement and construction) routes.
“Under this, the government wants private toll management companies to collect tolls for hybrid annuity model and EPC projects,” said Mhaiskar. However, the company needs to make upfront payment to authorities in certain case of long-term toll collection and OMT (operate, maintenance and transfer) projects, he said.
The company had four years ago given upfront payments over Rs.2,100 crore, which affected its finances. “This had impacted our profit after tax for last three to four years. Now, we had partially amortized the upfront payments and turned profitable for the quarter ended 30 June 2015. We expect to maintain the momentum as our cash flows are robust,” Mhaiskar said.
MEP Infrastructure is largely into two areas of business: toll collection and OMT. Capital employed and development or construction risks are minimal under both categories.
The company faces fewer risks than construction companies, said an infrastructure consultant, who requested anonymity. “MEP Infrastructure comes after the construction is done and is restricted to the collection of toll and maintenance. But there are risks of lower traffic and other external risks,” he said.
For instance, the Maharashtra government had exempted state-owned buses and light motor vehicles from toll at three MEP plazas. In the Chennai Bypass Project, NHAI did not comply with certain provisions leading to loss of revenue. Lack of a state support agreement was one of the major reasons, the consultant added.
Similarly, in the case of Madurai-Kanyakumari project, the company lost revenue when the state government buses paid lower user fees.
Mhaiskar admitted that there are risks involving traffic estimates, maintenance responsibility and political risks, but pointed out that these are largely covered by ‘force majeure’ clauses.
Force majeure refers to a clause that allows a company to miss payments due to circumstances beyond its control.
MEP Infrastructure is also looking at acquisition options as road builders have put more than a dozen projects on the block after lower than estimated traffic and public protests against tolling have led to weak revenues.
“The company is open to acquiring distressed assets if it is coming at right discounted price. Otherwise, we have no plans to deviate from our asset-light model approach,” Mhaiskar said.
Rating agencies last week downgraded the bank facilities of the engineering and construction units of GMR Group, Jaypee Infratech Ltd and Larsen and Toubro Ltd (L&T) on account of ongoing delays and defaults in servicing debt obligations and persistent cash losses. It was a first-ever default for L&T, India’s largest engineering and construction firm.
Land acquisition delays by NHAI and a mismatch in traffic estimates had led to delays in repayment of dues at road construction units of L&T and GMR Group.
Both L&T and GMR Group had cited lower traffic estimates as the reason for defaulting on loans.
“Traffic is growing at 5-6% nullifying all these risk factors, especially in the western corridor. Also, the government has also taken series of steps to save road construction and management companies. The user-pay concept is fully matured now except one or two rare instances where people resist to pay, in case the facility provided is not up to the mark, else the paying culture is good,” Mhaiskar added.