A chat with K Ramchand, Managing Director, IL&FS Transportation Networks (ITNL) on the roads sector, India's most modern tunnel just built in J&K and other topics!
An interview of K Ramchand, Managing Director, IL&FS Transportation Networks (ITNL). He speaks with TradeBriefs about the roads sector currently since there has been a lot of action of late. Plus their pans to sell India's most modern tunnel that they have just built in J&K, fund raising and company focus in the years ahead. Read more
“We are targeting special projects”
The government is planning to raise about Rs 40,000 crore by bidding out road assets via the newly introduced toll, operate, transfer (TOT) model. Under this, companies can bid for operational highway stretches by making an upfront payment, and collect toll over a 30-year concession period. The first bundle of highways that were bid out attracted almost Rs 9,700 crore as against the government's expectations of just over Rs 6,000 crore. Macquarie put in the winning bid. Will the upcoming projects also be bid out to overseas players? Is there any room for the Indian entrepreneur? How does IL&FS Transportation Networks (ITNL) view this latest development from the Roads and Highways Ministry? K Ramchand, MD, ITNL, talks about the TOT model, the hybrid annuity road projects and ITNL’s own focus in the coming days.
You have been attending the pre-bid meetings for the TOT projects that are going to be bid out. Are you going to bid for the upcoming projects?
The reason we are attending these meetings is because there is an operations and maintenance (O&M) angle to it. Someone needs to confirm the concession agreements that are being drafted as far as the performance of the asset is concerned. You wouldn’t expect a purely financial investor to have those sorts of technical skills that are required for meeting the performance requirements of these projects. Hence, we are pitching for this portion of the agreement since we have been doing exactly this sort of work over the years. Today, we have some 29 tolls commissioned and some 14,000 lane-km under our belt. We can put a small amount of equity also. We can’t put a big amount because the project sizes under this model are about Rs 6000-7000 crore. Even if you’re looking at 30% of this amount, it comes to about Rs 2,000 crore which, I don’t think, is a game any Indian player will play. The return that the government thinks it will get are in a range between 10-12%. This is fundamentally a game for the insurance or pension funds who are looking at an annuity scheme. That being said, everybody feels that the Indian entrepreneur is being left out from this opportunity. I hope the next projects are going to be much smaller in size, probably Rs 2,000-4,000 crore.
You have not bid for hybrid annuity model (HAM) projects. Are you going to continue to stay away?
This industry has been under stress. Banks have taken a hit on the roads sector. All segments within infrastructure have had a problem and the banks have become very limited in their appetite, particularly for investing in roads. Hence, we had this new hybrid annuity scheme which was introduced. It’s almost two years now since it was introduced and it is becoming successful. However, the project sizes there are too small of up to about Rs 1,000 crore. We believe that ITNL is better off doing larger projects since our overheads are also commensurate with large projects. We have built that sort of infrastructure within our company. We have enough projects at the moment and we have enough visibility for the next three years at least with about Rs 15,000-16,000 crore worth of orders still to be executed. We are not pushing the envelope. However, we are targeting special projects. We are not putting in really competitive bids for the HAM projects because we think that the banks are taking a far more conservative view on the model and a long time to reach financial closure. The comfort that they are asking for is also very high, including a lot of parent comfort that they want which was not there earlier. Now, it is almost like they are lending to you rather than lending to the project. Earlier, the project cash-flows were looked at before they funded it. Now, they are looking at lot of comfort in the form of guarantees. It could change over time once the banks become a little stronger. At the moment, the participation is not much from the public-sector banks. Rather, it is the private sector that has taken over that space for HAM projects and HDFC Bank, for example, is one of the stronger players in this field now.
What will your niche area be?
Our niche is in engineering, procurement and construction (EPC). Fortunately for us, we have had an experience of actually being an EPC contractor for the tunnel project which got inaugurated in March 2017 by the Prime Minister – Chenani Nashri Tunnel (CNTL). We actually had to take over from the existing contractor and hand-hold the subcontractor ourselves. We believe that in the last two-three years that we were involved, we have developed sufficient technical expertise to undertake tunnel projects. In between, we also got another tunnel awarded by the National Highways Authority of India (NHAI), below Sonmarg, called Z-Morh. So, we have a tunnel before Srinagar which is CNTL. We have a tunnel from Srinagar to Sonmarg which is Z-Morh and the third tunnel on that road to Leh is the Zojilla tunnel which is just getting awarded. Zojilla was approved by the Cabinet in December and the order should come anytime soon. That is a seven-year project but we believe we will be able to complete it in five-six years. We will probably have some advantages in building this tunnel. We already have a lot of equipment on both those sides and there are people also already stationed there. We know the logistics part now of building a tunnel.
I believe you are looking at a stake sale in CNTL. Your comments.
We are looking at a sale but we are also looking at refinancing. If you are looking at any annuity project which is an NHAI project, the rating on this is AAA. With this, you are able to get very fine rates in the Indian market. The option that we have is either we sell or, we refinance it, continue to hold on to it and probably find a buyer later on in the year. Since we leave value on the table without refinancing, we expect a good value for our equity. We are looking at both options. We will see what works best for us. Also, one needs to keep in mind Kashmir is not a place one can sell a project like hot cakes because buyers will want to put a premium for a project, although for all the wrong reasons. We never had any security-related problems or otherwise during the construction phase. It was very peaceful and we had excellent relationships with everybody but that is not the image that gets portrayed. We once wanted to show a Japanese visitor to show them what we were doing but they don’t even have permission to visit the place from the Japanese government! J&K is one of the states that Japan does not allow their citizens to visit. So, that’s not a very great thing for selling a project.
Give us some idea of how you are doing in your international business, and the stake sale of your Chinese asset.
You know our Chinese asset was funded through two dimsum offerings. One of those came up for refinancing last year in August and we have taken a bridge loan which expires in July. The second bridge loan is coming up for refinancing in April first week and that is why we did the CNH offering. You know it has been a huge success. There has been no offering of high-yield CNH bonds in the last two years and this was the largest CNH Indian offering ever. I think indirectly, it also tells us there is some belief in the Indian infrastructure story, which is what you’re selling. You’re selling a story that this company is capable of giving a corporate guarantee which is backed by an infrastructure story which is vibrant in India. The strength of this corporate guarantee is of the business we do in India. To answer the second part of your question, you know we are looking to sell the Chinese asset. We have some offers on the table. We will probably sell part of it. The asset has done very well and in the last five years, we would have done about $40-50 million as dividends. We paid $160 million when we purchased it. We are very close to getting permissions from the Chinese to sell it.
Tell us about your Spanish acquisition.
Spain is mainly a road maintenance company which we acquired in 2008. We actually got in touch with this company around 2007 and we found there was a great technical opportunity – an IPR opportunity – for us, because they had some products which actually helps in maintenance. They also have some models which can do asset quality modeling. For instance, today, in most of the Indian roads, only once a road has a pothole, one goes and does something by way of repair work. It is always reactive. You are not predicting the problem before it occurs and therefore, ensuring that your life-cycle and maintenance costs are much lesser. This company had those kinds of skills. They had something called porous asphalt which allows water to drain out quickly, for instance. They were probably also the first company to come out with coloured asphalt, like red asphalt, for instance, and blue and green. This helps in differentiation so that in a pedestrian crossing, you can put a red colour asphalt. Then, they also had technology where you could use a very thin layer rather than the normal thick layer we use when we do overlays. So that’s how we bought this company – Elsamex – which has been doing fairly okay. We have been successful in taking them out of Spain and Portugal which were their main markets in those days. Besides maintenance, they also do road rehabilitation. One of the niche areas are the multilateral-funded projects for rehabilitation and maintenance over a long period. Normally, in the international market, you cannot compete with the Chinese. However, they do not usually participate in the operations and maintenance contracts and that is where we have made a niche. They have two projects in Ethiopia and two in Botswana. So, they’re pushing ahead and continue to push that mandate. We do it on our roads in India but unfortunately, the government is not bidding out such O&M contracts in India. They do third-party works and have some contracts from municipal bodies but these are few and far between.
- TradeBriefs Bureau -