Infrastructure sector under environment cloud

Private equity firms concerned about falling returns and project delays

The infrastructure sector remained a favourite of private equity (PE) investors in the year gone by. With deals worth $4 billion being closed, the sector saw four-fold growth in PE investments.

However, things have become quite uncertain. PE investors are concerned about a dip in construction activity, which is getting reflected in slower order book growth. Also, input costs have risen due to an uptick in the commodity cycle. Besides, environmental clearances have become tougher, even for ongoing projects. Funds from PEs, as a result, could dry up for the sector.

“For the last eight months or more, we have seen many projects being deferred. There has been a slowdown in investments,” said Luis Miranda, non-executive director, IDFC Private Equity. Additionally, rising prices of commodities such as steel and cement are adding to project costs, impacting returns.

Environmental clearances have also become a concern. “There are instances where the environment ministry is reconsidering projects which have already received approvals. This increases the risk on investments because once a project is approved, we cross it off from our list of concerns,” said Miranda.

Anil Ahuja, head (South-east Asia), 3i private equity, who runs a $1-billion India-dedicated infrastructure fund, agrees. “It becomes tough to predict which project can be backed and which cannot be. Our position becomes very difficult.”

Three months ago, the Ministry of Environment and Forests came up with a norm mandating clearance for coal mines before allocation. This, in turn, stalled bids for the ultra mega power project being planned at Bedabahal in Orissa, twice.

“There have been some uncertainty on coal mine clearances. This will have a direct impact on investments,” said Vikram Uttam Singh, head (private equity), KPMG. Bureaucratic hassles have also hampered the progress of these projects.

Fund flow from other sources is also a major issue. The Reserve Bank of India (RBI) recently signalled higher interest rates for the sector, which might hurt returns. Industry observers predict the rate of interest on loans could rise by as much as 100 basis points.

“There is an increased risk of debt financing on whether a project will be able to achieve financial closure,” said Singh.

Even bankers admitted making loan disbursements tougher for infra projects. “Earlier, we used to let companies draw funds if we felt environment clearances were on the way. Now, we don’t until we physically check the clearances given by the ministry,” he said, further indicating that debt funding will become tougher for infrastructure projects.

While investors might be a little jittery, experts say proposals from companies looking to raise funds through PEs have not decreased. “The number of proposals continues to be quite high as there is a need for serious capital to build infrastructure,” said Ahuja.

Opportunities are being seen in projects where companies have received clearances, the debt component has been tied up and which are being executed by established business houses. These factors are giving PE investors some security regarding their investments.

However, even these deals are not cheap to come by. PE investors say valuations in the unlisted market and promoter expectations have not come down, even though the capital markets have remained volatile and stocks of many infrastructure companies are trading at very low price-to-earnings multiples.