At the same session, R-Infra pressed the exit button on two more projects that were languishing for years due to regulatory hurdles. The first was the Mumbai Metro II line. It was awarded to R-Infra way back in 2010, but work could not start because of issues related to land acquisition. The other project that was discussed at the meeting was the Rs 5,000-crore Worli-Haji Ali sea link. This sea link, an extension of the Bandra-Worli sea link, could not take off as land for a casting yard was taking years to be allocated. After an informal arbitration process, R-Infra, which had incurred expenses of over Rs 160 crore on pre-project activities, finally decided to call time on the project.
Taking stock
The exits clearly show that R-Infra is rethinking its strategy, though it is not to say the company will not bid for more projects in the segment. At the Mumbai meeting, R-Infra CEO Lalit Jalan said that the company was keen to pursue infrastructure projects, but after reworking its investment strategy first. He ended the marathon meeting on an optimistic note: We have learnt our lessons and have developed the skills to meet the challenges. We shall utilise the lessons learnt in our future endeavour to maximise the benefits for our shareholders." What he meant for straightforward: R-Infra will be more cautious while choosing projects.
For R-Infra, roads and rail projects have been a sore point in its business for two reasons: fewer new projects in the sector and the lack of risk-sharing mechanism in public-private partnerships. Jalan says: Let there be new bids. We will participate, but our participation will be based on analysis, ensuring prudent economics. Simultaneously, we are pursuing investment options in the acquisition of secondary assets or distressed assets (roads wherein the developer wants to exit). We have identified six such roads. As of now, R-Infra has 11 road projects, eight of which are making money. Of the remaining projects, one was commissioned recently and another will become operational soon. The last road is expected to open for traffic before the end of the current financial year. R-Infra's road portfolio is worth Rs 12,000 crore as on date and the company proposes to increase it to Rs 25,000 crore in the next three years. However, Jalan says the slowing economy has dramatically reduced the number of fresh projects.
There have been no fresh bids from the National Highways Authority of India in the last one year. The bidding for road and highway projects can become more attractive, Jalan says, if the government introduces a risk-sharing mechanism. The Planning Commission is working on a risk-sharing mechanism. Such a mechanism has already been incorporated in the Trans-Harbour Link project, which is being developed by the Mumbai Metropolitan Region Development Authority. In the event of a fall or a surge in the traffic against the projections, the risk-sharing mechanism will come into effect, he adds.
Due to poor design, construction and management, there were severe restrictions to achieving speed of 120 km. Fear prevailed over the passengers. And if passengers do not travel, the retail will not happen and advertisements will not flow. The biggest problem for us was the lifecycle cost of the civil structure. We, therefore, terminated the contract, Jalan explains. DMRC has disputed R-Infras claims and has served a notice to the company for alleged violation of the concession agreement. A legal battle is inevitable.
However, despite the setbacks (the Mumbai Metro II is hanging fire because of lack of clearances and the company is on the verge of exiting it), R-Infra is actively pursuing other projects among which are the Jaipur Metro and the Bangalore Airport Express. It is looking to bid for the Pune and Nagpur Metro projects too. It may also bid for the subsequent phases of the Mumbai Metro (phases III, IV and V) whenever the bids are floated. In some measures, this has been prompted by the success of the Mumbai Metro line I project which is expected to start operation by September. R-Infra was to operate the metro line for 35 years, according to the initial concession agreement, but as costs have escalated from Rs 2,500 crore to Rs 3,600 crore due to delays, MMRDA has decided to extend the concession agreement period by another 18 months. Also on its radar screen is the Rs 23,000-crore-plus elevated corridor in Mumbai. The company is also exploring options in the Delhi-Mumbai Industrial Corridor. However, for the roads and metro projects to become viable, says Jalan, the price-variation formula, where the developer is compensated for any escalation of price, needs to be incorporated by the Centre and the states just as it has been done in the power sector. Price variation formula is implemented by the state-run PowerGrid Corporation in transmission projects. This comes handy in engineering, procurement and construction contracts when prices of steel, cement and bitumen are variable, he says.
Risk-sharing
Unlike its metro projects, the companys other businesses are doing reasonably well. It has a sizeable presence in the power transmission segment. Its distribution arm is currently looking to increase its base in the Mumbai distribution circle. Consultancy projects are on the anvil too. In the transmission segment, R-Infra is developing five projects including two ultra-mega transmission projects.
R-Infra also has a foothold in the cement sector. It is putting up two projects in Maharashtra and Madhya Pradesh.
The 5-million-tonnes-per-annum plant in Madhya Pradesh, built at an estimated cost of Rs 2,800 crore, will be ready during the second quarter of the current financial year. Its Maharashtra project is on track too. The company has received all the necessary clearances for mining and land, and it is expected to achieve financial closure soon.
However, analysts say cost overruns could delay the breakeven for several of these build, operate and transfer projects. Any delay in the development of infrastructure projects could impact revenue projections. The companys net profit grew 41.59 per cent to Rs 2,246.83 crore in 2012-13 from Rs 1,586.81 crore in the year-ago period.
Citi Research in a recent report notes that higher interest rates and market risk premium may lead to lower valuations for various infrastructure projects. There are other headwinds for the company too by way of clearance risks and changes in the regulatory mechanism. But the risks, as Jalan puts it, are not like going to the Himalayas.