Road assets likely to see higher PE interest in the coming quarters

In August, the Cube Highways-controlled Indian Highways Developers entered into an agreement to buy six road assets from Mumbai-based MEP Infrastructure Developers. This, say experts and investment bankers, is one of many deals the sector was waiting to see.

Road projects offer steady and, to a large extent, predictable cash flows over a long period. This, investment bankers say, makes these assets attractive to private equity (PE) investors.

A road project takes two to three years for construction. In a build, operate and transfer model, a developer gets to operate and collect toll for about 15 years. The average Internal Rate of Return is pegged at 12-14 per cent annually, before transferring the project to the state.

The partnership of PE and India’s road story has not been smooth. “Infrastructure funds earlier partnered with road companies but that did not work out well,” says a senior investment banker. Earlier, equity firms or funds took a stake or partnered with road developers in getting a project going. Quite a few had to then struggle over differences with the management or project details unknown at the time of investment.

The past few years have seen a change. “Our strategy (now) is simple -- to pick operational assets and use our efficiency in maximise returns,” said an official from a major infrastructure investment firm.
The banker quoted earlier agrees. "These funds now look to make independent investments in completed projects, avoiding the risks involved in under-construction road projects," he said.

While there is growing PE interest, a good number of road assets remain unsold due to valuation mismatch between buyer and seller. Some say this could be changing. “Infra funds are flush with money and we will see more deals being concluded in the coming months, as the valuations are slowly matching. Lenders and promoters are finally falling in line and accepting reasonable valuations. 

There is interest not only in TOT (toll, operate, transfer) projects but also in secondary sale," says Manish Agarwal, infrastructure leader for consultants PwC India.

TOT is a model the National Highways Authority of India (NHAI) has floated to monetise its operational assets, selling tolling rights for these, in return for an upfront fee from the bidder.

In a March 2018 report on PE in the corporate landscape, consultants Grant Thornton list infrastructure as a key sector that can provide attractive investment opportunities for PE and venture capital funds in India over the next 12 months. Some peg the potential investment pool for road assets from such funds upward of $2.85 billion (Rs 200 billion). 

This expectation was encouraged by the response to NHAI's first round of TOT bids. A joint venture of Macquarie and Ashoka Buildcon was the highest bidder for the first batch, at Rs 96.8 billion. The other bids seen for this bundle of projects included ones from Brookfield Asset Management, IRB Infrastructure, and Roadis-NIIF.

Outbrain