R-Infra monetisation strategy paid off but did it help similar companies?

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Last week, Anil Ambani spelt out the road ahead for his Reliance Infrastructure (R-Infra), heralding an end to its asset monetisation strategy. The group had adopted an asset-light model to deal with a debt overload, as had GMR Infrastructure, GVK Power & Infrastructure and Lanco Infratech, among others.

The story line has been typical. It began with a capital-heavy expansion plan, followed by huge debt and not necessarily higher profits. Larsen & Toubro and IL&FS Transportation Networks also experimented with this model but the results have been different for each. GVK and GMR managed to reduce debt and operate a leaner model; others like Lanco stare at insolvency despite adopting an asset-light strategy.

“The experience in the infrastructure sector, more so in the energy sector, has been very difficult for every group that entered it. They were hurt by macro issues, internal problems, inability to collect fees for their projects and so on. There is no solution but for companies to go the asset-light way,” says Harish H V, a consultant.

In November 2016, GMR allotted a 30 per cent stake in GMR Energy to Malaysia-based Tenaga Nasional Berhad, for $300 million in cash. In 2013, GMR Highways divested 74 per cent stake in GMR Ulundurpet Expressways to India Infrastructure Fund for Rs 2.22 billion. Part of the strategy was to give its lenders a 45 per cent stake in its Rajahmundry plant, under the earlier Strategic Debt Restructuring scheme. 

Lanco failed to gain from asset monetization, with all the group’s operational and under-construction assets likely to end up in insolvency courts. GVK sold 43 per cent equity in the Bengaluru Airport project to Fairfax Group in 2017 for Rs 34.9 billion. 

In 2016, R-Infra sold its cement division to Birla Corp for Rs 48 billion. Last week, the company also sold its Mumbai power distribution business to Adani Transmission, for which it expects Rs 188 billion. Ambani, in announcing the sale’s completion, said his company was undergoing a transformation to being an asset-light, high-growth and high-dividend one.

Some say this is more a need of the hour than a strategy of choice. “It is more of a compulsion than a choice for a number of companies. There are limited funding avenues for asset-heavy models, especially for firms with stretched balance sheets,” said Rahul Prithiani, director at CRISIL Research.

If everyone was to go asset-light, asks Harish, who will create assets for these companies to operate? A larger question is on the post-sale situation. Is there enough cash flow to service the remaining debt and capital expenditure? “It is possible for companies to use an asset-light strategy for future projects but it is not easy to offload the capital-intensive assets they already have on their books. Current debt servicing capability would still be challenging in many cases," said Prithiani.

Capitaline data does not paint a good picture regarding the interest coverage ratio (ICR) at some of the infra companies. GVK Power’s in 2017-18 was 0.77; GMR Infra's at 0.54. ICR is the ratio of a company's earnings before interest and tax, and its interest cost, indicating ability to service debt. A healthy ICR is expected to be at least 1.5 times or more. R-Infra’s was at 1.15 in FY18; this will change with the Mumbai distribution sale. Ambani said the transaction alone would reduce R-Infra’s gross debt from about Rs 220 billion to Rs 75 billion.  

Some say the sector is coming full-circle. “It started with engineering, procurement and construction companies thinking they were missing out from the gain by completing a project and handing it back. They then participated in capital-heavy BOT (build, operate, transfer) and similar ownership projects. Now, companies are going back, using a fancy term called ‘asset-light’,” said an analyst with a domestic brokerage, which did not wish to be identified.