Investors not keen to bond with infrastructure companies despite sops announced by government
A revival in infrastructure investment does not seem to be anywhere on the horizon, despite a slew of policy measures by the govt.
Infrastructure, once a darling of banks and equity investors, has been the worst hit by the slowdown and is no longer favoured. Now, investors are even turning away from bonds of companies building roads and ports as negative returns on these bonds offset tax advantages.
“Private equity has been scarce and the capital market does not favour infrastructure companies as they are not a good story, so all sources of equity have withered. Banks are also being selective in lending,” said Suneet Maheshwari, MD & CEO, L&T Infrastructure Finance.
Bond sales of Ennore Port, Dredging Corporation of India and the Jawaharlal Nehru Port Trust (JNPT) have received tepid response from investors, such that they are nowhere near even half the targeted amount of fund raising. The target of raising Rs53,500 crore through tax-free bonds this fiscal to build infrastructure is almost stalled as just 40% of it has been raised with just two weeks remaining for the end of the fiscal.
“This year, the pricing has been tighter and yields on government bonds rallied making them unattractive for retail investors,” said Ajay Manglunia, head, fixed income, Edelweiss Financial Services. “A lot of these companies who came to the market post January with their issues, got their timing wrong,” he added.
The pricing of the tax-free bonds is linked to the yields on benchmark Indian government bonds, such that the coupon issuers offer will be at least 115 basis points lower than the prevailing yields on government securities, which was 50 basis points last year.
Some of the companies such as Jawaharlal Nehru Port Trust, Ennore Port and Housing and Urban Development have raised less than 5% of the issue size they intended to raise. Most issuers have offered a pre-tax return of only about 9.5-10% on these bonds this year in the second tranche, against 11.5-12% last year.
The country’s growth is pegged at 5% for 2012-13, its lowest since 2002-03. The government acknowledges that boosting investment in infrastructure sector will help revive the slowing economy and has set a target of Rs51 lakh crore of investment the sector in the 12th Five Year Plan (2012-17), against Rs27 lakh crore invested in the previous plan period.
Though India traditionally built its infrastructure with government funds, private sector participation has increased in the last 10 years and now accounts for almost 40% of the total spend.
At a time when infrastructure projects face multiple challenges such as delays in approvals, environment clearances, and land acquisition, funding these projects is becoming increasingly difficult.
The twelfth plan will have a huge funding gap and will need to channelise an additional private sector investment of about Rs6.1 lakh crores over the duration of the plan, assuming budgetary allotments don’t change, according to a recent report by Deloitte Touche Tohmatsu India. Lured by the infrastructure boom five years ago, companies made aggressive growth plans and went into a borrowing spree, borrowing funds at special purpose vehicle, subsidiary and parent levels.
When the tide turned, these companies were reduced to dismal financial states with highly-leveraged balance sheets and muted revenue.