We are not on a capex holiday...we're actually in a sweet spot: Lalit Jalan

Interview with CEO, Reliance Infrastructure

Most infrastructure projects Reliance Infrastructure had kicked off in 2006-07 have started operations. Chief Executive Officer Lalit Jalan says the infrastructure business is in a hyper-growth phase. In an interview with Katya B Naidu, he talks about his efforts to boost the project pipeline and why the company’s soon-to-be commissioned metro rail line in Mumbai is better than its Delhi Airport Express. Edited excerpts:

Nearly all your infrastructure projects, including 11 road projects and Mumbai Metro line-I, are starting operations this year. From here, however, the pipeline seems empty.
Mumbai Metro line-II is awaiting various clearances. Also, we are not on a capex holiday; we have applied for various projects. We are in a good condition and are actually in a sweet spot. Our debt-to-equity ratio is less than one. All our projects are financially closed and we are in a good shape to look at opportunities, both greenfield as well as secondary. But the valuation expectations of promoters are very high. So, the deals (to buy projects) are not taking place.

As more projects start operations, your infrastructure business would grow for three years. What are the growth opportunities after that?

The infrastructure segment is a growth area. Eleven of my road projects and two metro projects would come into a revenue-generation mode. These record a full year of operations and could contribute about Rs 2,000 crore to the company’s revenues; this should happen by 2014-15. It is a phase of hyper growth. The cement business would also grow. By 2014-15, it would account for 10 per cent of the fixed assets.

The cement business’ performance would be subject to the commodity’s prices. Is there concern this would hit earnings?

It would be our only cyclical business. The management has taken a decision to go ahead with it. We have a good mix of annuity assets such as distribution, which has revenue of Rs 14,000 crore and is growing at 15-20 per cent. That provides us with a lot of safety; it becomes the cash cow. Also, there is the construction business, which would generate revenues of Rs 7,000-8,000 crore a year. The infrastructure business, which is growing, no longer requires cash. At least these would take care of themselves and start paying back equity holders.

Are the road projects you have already commissioned facing challenges? Last year, the traffic growth wasn’t very good.

Initially, interest and depreciation are very high. Revenue would keep on increasing but interest costs would start falling. That is the nature of infrastructure projects; these are back-ended. Also, traffic growth this year has been muted. Certain road projects face challenges such as toll collection, something all road developers face. There’s traffic on the road but it doesn’t pay. This is being seen in the case of some of our road projects, though not all. We are going after it, putting in better technology and better security. We are also negotiating with truckers. It is an ongoing process.

Would earnings from road projects remain muted due to low traffic growth?

Luckily, interest rates are falling; that is a big thing for us. We do not have an interest rate pass-through on infrastructure projects. So, any interest rate cut has a straight impact on the net profit. We have already seen a reduction of about 150 basis points for our projects. It depends a lot on inflation and the Reserve Bank of India. We can see another 100-150 bps reduction this year.

A number of commuters in Mumbai are looking forward to the Metro line-I. What impact would it have on your earnings?
The Mumbai Metro is in an extremely high, dense corridor. We do not see challenges. We are integrated with the suburban line at two points — Andheri and Ghatkopar. According to our estimates, after the line stabilises in a year, we expect traffic of 7,00,000 people a day, while running at a frequency of less than three minutes. So, traffic isn’t a challenge.

Travel time of about 90 minutes can be reduced to ten minutes, in an air-conditioned coach. It would be cheaper than an AC bus, a tad more expensive than a BEST bus, and ten times cheaper than a taxi.

When do think the Delhi Airport Express traffic challenges would end?
Our Delhi Metro line is suffering from lack of passengers, partly because Terminal-I of the airport is not integrated with the Metro. This was a part of the original design. Today, Terminal-I accounts for 30-35 per cent of the traffic. We have taken up the issue with Delhi Metro Rail Corporation. However, we foresee growth, as 15-20 hotels are coming up around the aerocity complex. After the hotels are ready, there would be thousands of people there. We are expecting huge traffic growth.

Last year, Reliance Infrastructure bought back about 23 million shares at a premium to the stock price. What impact did this have?
It has not worked out, in terms of pricing, and that is disappointing. The infrastructure sector is in a very difficult position. People feel nothing is happening in the sector, and are punishing every company. They are not appreciating different infrastructure companies. They are unable to see we do not have unviable projects and the kind of risks others have. Also, we have regular cash flows. After analysts and buyers understand this, we could see some traction.

Many infrastructure companies are considering selling stake in some of their projects, after construction. Would you consider this, too?

That is on our minds. At the end of the day, it is a way to create shareholder value. Asset monetisation would create shareholder value. We will definitely look at that, though there are no specific thoughts on it. The good part is we own 100 per cent of our projects, as opposed to projects in which vendors and other investors have stake. If someone would like to buy, it is between us and them; no third party is involved.

Have you been approached by investors?
There has been a lot of interest, and we have been approached. Right now, they see the devil in every shadow. They see a lot of risk and want a lot of returns. We wonder why should we do a lot of work and give it to you for a small percentage of profit. The same asset could be sold for ten times the amount; we will wait for that. It would come, sooner or later.