In India's highways sector, institutional money overtakes promoters

Topics Highways | Private equity

Private equity (PE)-funded Cube Highways closed two road deals in the past month, both bought from promoter-driven and listed entities. Interest from PE, sovereign and pension funds has institutionalised India’s road sector more than ever before.

Historically, domestic companies have been keener on returns from construction of infrastructure, including roads, than from operating those assets. In this scenario, institutional investors with interest in long-term, stable returns and access to cheaper capital make for the right fit.

Cube Highways has acquired one asset each from Hindustan Construction Company (HCC) and KNR Constructions, both listed entities, so far in 2020. “The reality is developers don’t earn enough returns on equity on operational assets and are better off selling,” said a top executive, who did not wish to be identified.

India’s pecking order in terms of tolling is already headed towards being fund-focussed. Rating agency ICRA’s top five tolling companies are L&T Infrastructure Development Projects, PNC Infratech, IRB Infrastructure and Developers, Ashoka Buildcon, and Sadbhav Engineering. Three of these companies either have investments from PE and pension/sovereign funds or hold assets in infrastructure investment trusts (InvITs), where these funds are invested.

Cube Highways, incorporated in 2015, has around half-a-dozen acquisition agreements with KNR and Dilip Buildcon, another listed entity. After the completion of its toll-operate-transfer (TOT) bundle 3 and these acquisitions, Cube will have at least 2,775.8 km under tolling operations. 

Cube adds that it will have a portfolio of 27 highways with nearly 8,400 lane-km across India, including assets in various stages of completion. The number, if achieved, will help it get close to IRB’s 8,809 km portfolio, inciiluding its InvIT. An email query sent to the company remained unanswered.

There are definite perks to this growing interest. “PE and similar interest are making the road sector more institutional and disciplined. Quality of maintenance is also improving. Developers are more interested in building these assets and not operating them,” said Shubham Jain, senior vice president and group head for ICRA. Others add that interest from funds, not just from PE, which looks for a five-year exit, has made patient capital available. "Private equity is usually 5 to 7 year money looking for high returns, deployed by LPs who raise funds from GPs. However, asset platforms of L&T IDPL and our peers including InvITs are funded by long term patient capital such as global pension funds, insurance funds or sovereign wealth funds. Such investors look for ‘Real Assets’ which give stable cash flows or annuity-like yields,” said Shailesh Pathak, chief executive officer for L&T IDPL.

However, this may have its own challenges, especially during a pandemic. For instance, Cube Highways, according to people in the know, sought time to make TOT-related payments to National Highways Authority of India (NHAI). 

In another case, SBI and Macquarie have to wait longer to exit their joint investment in Ashoka Buildcon’s BOT portfolio. “SBI-Macquarie exit or monetisation of assets process was going on definitely. The potential bidder that was there in March is still on hold, so they have probably kept on hold all investments at least up to August end,” the company told analysts in August.

The coming year may see the road sector get further institutionalised, through InvITs, where pension, sovereign and PE funds have been the main investors. IL&FS, for instance, plans to set up an InvIT for its road assets to raise Rs 13,000 crore in the December quarter. According to sources, lenders will invest in it and look for an exit later. IL&FS is also in the process of selling three road assets, where the shortlisted bidders, according to sources, are funds. NHAI will invite bids for its fifth bundle of TOT, a space once again dominated by funds. 

Macquarie group and Cube Highways won the two previous rounds. Further, NHAI also plans to offer some of its road assets under the InvIT model.

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