Morgan Stanley's infra PE fund in talks to buy Lanco's road assets

May have to pay an estimated Rs 1,000-1,200 crore for 401 km of highway projects

Private equity (PE) players, who burnt their fingers following big-ticket deals in India’s power sector, are now showing interest in less risky road projects.

Morgan Stanley Infrastructure Partners, a $4-billion global infrastructure fund, is in early discussions with infrastructure company Lanco Infratech to buy its 401 km of highway projects, in various stages of construction, which are up for sale.

A few other infra-focused PE firms are also engaged in due diligence for Lanco’s road assets. The valuation was in the range of Rs 1,000-1,200 crore, said sources. Ernst & Young was the advisor to Lanco in the sale, the sources added.
 

ON THE BLOCK

163 km: NH-4 at Hoskote and NH-48 at Devihalli in Karnataka on a build-operate-transfer basis at an estimated cost of Rs 1,348 crore

238 km: NH-91, a toll road between Kanpur and Aligarh in Uttar Pradesh on a design, build, finance, operate and transfer basis

Gautam Bhandari, managing director of Morgan Stanley Infra-structure Partners, declined to comment on his company’s interest in Lanco. A Lanco Infratech spokesperson also declined to comment.

Morgan Stanley Infrastructure Partners entered into a joint venture with Spanish company Isolux Corsán to invest in road projects in India last year, with a plan to contribute $200 million each to the joint venture.

Experts widely believe India’s highways sector is ripe for private-equity funding. “There are close to $10-billion worth of completed road assets in the market for sale and most of these assets (on build-operate-transfer mode) are post-2006 vintage, which have been picked up in aggressive bidding with low returns (IRR),” said Deepesh Garg, managing director, O3 Capital, an investment bank.

Since 2009, about 15 deals worth $1 billion have taken place in Indian road projects. The largest size of investment, at $693 million, took place in 2011, said data from VCCedge.

In early 2012, PE firm 3i invested Rs 300 crore ($61 million) for a 49 per cent stake in the portfolio of road BOT projects of Supreme Infrastructure India Ltd.

Valuation, though, remained a concern for buyers, said Garg of O3 Capital. “Companies are expecting 1.5 - 2x book value on the completed assets, whereas buyers today may not be willing to pay that price, given the low return expectations. Even in some cases, traffic has been over estimated also,” he said.

According to Bhavik Damodar, head of infrastructure transaction services at KPMG India, the presence of the National Highways Authority of India, or NHAI, makes road projects a less risky investment as compared to other sectors such as power and ports.

“Also, consolidation among small and mid-sized road projects will provide an exit route for PE investors,” said Damodar.