Strapped for funds as traffic slows and cash flows get crimped, developers are preferring to let go of road assets, taking whatever they get. There’s no fire sale yet, but sellers are turning more reasonable on valuations as they monetise assets in a bid to deleverage their balance sheets. In the last 8-10 months, construction firms have managed to pick up close to R1,000 crore. IDFC managing director Vikram Limaye estimates the equity value of projects sold, with some premium thrown in, could swell to R3,500-4,000 crore in the next two years.
“Developers are stretched for equity and are willing to sell operational assets, so there will be deals. However, given the slower-than-expected traffic as also the fact that future estimates are being pared, valuations are falling with investors building in a cushion for elevated interest rates and chances of the currency depreciating,” says Limaye, whose $644 million infrastructure fund is among the few mandated to take asset-level positions. Limaye adds the starting point for some deals is the book value; in other words, buyers are looking for buying at not much above the book unless the cash flows and growth are robust.
That’s believable because with the economy in slowdown mode — GDP grew at an anaemic 4.4% in the three months to June — developers are in deep trouble. K Venkatesh, CEO and MD at L&T IDPL, which builds roads, ports and metros, confirms traffic is coming in at least 10-15% lower than estimates. Consequently, valuations of road assets too, he reckons, are down by a similar level compared with the numbers in the previous year. “All future bids will be made after pencilling in lower growth and a higher discount rate,” he asserts, “since interest rates don’t seem to be coming down in a hurry”.
The L&T IDPL chief explains that while the discount rate — the rate at which future cash flows are discounted to arrive at the net prevent value — has risen partly because interest rates have risen, causing investors to seek higher returns, there’s also the fact that the risk perception of projects has gone up. “Foreign investors also have to take note of a depreciating currency and the country risk,” Venkatesh points out. According to Sanjay G Ubale, MD and CEO, Tata Realty and Infrastructure (TRIL), the discount rate has risen from around 13-15% in 2010 to 15-17%.
Given challenges on the currency