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Soma Enterprises Ltd suffered a double whammy last year as revenues from engineering, procurement and construction (EPC) contracts had suddenly gone down at a time when financial problems from the stalled road projects had been staring at its face.
The company’s EPC revenues shrank to Rs 2,500 crore in 2012-13, compared with Rs 3,900 crore in the previous year. It had targeted Rs 4,500 crore revenuew for the last financial year. The promoters’ efforts to sell off some of the completed projects or bring more equity into the company to bail itself out of woods did not succeed.
As the company was unable to pay interest on loans, its lenders had no other way but to refer the case to the corporate debt restructuring (CDR) cell of the Reserve Bank of India a month ago to recast its Rs 5,000-crore debt (including bank guarantees).
Infrastructure companies invest equity and debt at their own risk in build-operate-transfer (BOT) projects and recover the cost and the margins by collecting the toll for a fixed period as allowed by the client, in this case the National Highways Authority of India (NHAI).
When the projects get delayed, the developers take a hit on multiple fronts, including cost overruns. They have to service the debt out of their own pockets. BOT projects typically generate revenues only when they are completed, unlike in the EPC business where the contractor gets the money for the work accomplished without bothering about the end result.
Soma is one of the few infrastructure players that chose to execute almost every bit of EPC contracts on their own, without depending on sub-contracts.
Over the last four-five years, it had built a portfolio of 10 national highway projects, eight of them on BOT basis, along with its partners. The simple construction contract opportunities that come from these BOT projects also form the core of its EPC business.
But things did not go its way as the contract works in irrigation and other areas dried up for the company. The EPC business it was hoping to get from its own BOT projects evaporated as the projects got stuck for various reasons.
Lenders knew that several large projects secured by the company had run into rough weather in the last two-three years. “About four-five road projects were stalled for a year and more. They also figure in the stalled projects list prepared by the Union finance ministry,” said a senior official of a public sector bank, who handled the account of Soma.
The loan repayment cycle has begun even though these projects were not in a position to generate revenues. Equity got stuck and the overall project cost has gone up resulting in a big cycle of problems, according to the official, who did not want to be named.
As many as 23 lenders including State Bank of India, UCO Bank, Axis Bank, Andhra Bank and ING Vysya Bank, besides non-banking finance companies such as L&T Infrastructure Finance, have lent to the company.
“We did not foresee that the clients will not meet their commitments,” Ankineedu Maganti, managing director of Soma, told Business Standard, while explaining the reasons for project delays. The company had put in Rs 1,600 crore equity alone in road projects.
Maganti believes the two-year window that will be provided under CDR is sufficient for the company to get its financials back on track. Reviving the stalled projects, raising more equity and selling four more completed road projects are part of Soma’s revival strategy.
The Rs 4,500-crore Panipat-Jalandhar highway project is delayed by two years and the NHAI did little to resolve the issues. A Rs 600-crore dedicated freight corridor project has also got delayed by two years on account of design approvals.
The Chennai express way project that was designed to provide a bypass to port traffic has remained stalled for one-and-a-half years due to a dispute between the NHAI and the Tamil Nadu government over the alignment of the project. The company had already invested Rs 800 crore in the project. Besides, Soma had won a large contract from state-run NHPC Ltd to build a hydro power project in Arunachal Pradesh. But the client developed cold feet afterwards.
In addition to the stalled projects, the company had set up a 225-Mw gas-based power plant in Uttaranchal at a cost of Rs 1,000 crore. The project was yet to get gas linkage. “The debt remained almost at the same levels as it were in the previous year. It was the shrinkage of the EPC business that had got us into problems,” Maganti says.
In January 2009, ratings firm Icra had cautioned the investors of inadequate credit quality in the long run for the company. Just after two months, in March 2009, it had indicated risk-prone credit quality for the company even in the short term. It had put Soma in the lowest grade ‘D’ in February last year.
But the lenders saw no problem in funding the projects as long as the company was able to bring in equity. It may be recalled that starting 2011, JPMorgan Asset Management had invested Rs 830 crore in the holding company of these road projects.
Ratings were constrained by relatively high gearing of the company and significant committed investment requirements in various BOT special purpose vehicles, which will increase its reliance on borrowed funds, Icra said in January 2011.
In fact, Soma charted a five-year plan in 2011-12, targeting higher revenues, high margins and faster execution of projects. Nothing of this seemed unusual for a company which had more than doubled its revenues to Rs 3,916 crore in the year ended March 2012 from Rs 1,744 crore in 2007-08. Net profit rose to Rs 314.4 crore in 2011-12 from Rs 122 .8 crore in the year ended March 2008.
“Everybody in the infrastructure space believed in this growth story. Road projects were taken up under BOT expecting 8-10 per cent growth in traffic every year based on the automotive sales numbers. But the reality was different. Power projects were built though you cannot operate them even if you completed the projects,” E Sudhir Reddy, chairman and managing director of IVRCL Ltd, told Business Standard.
Projects then got stalled due to a variety of reasons, including the delay in environmental clearances, land acquisition problems and the design issues resulting in financial problems for the developers, according to him.
Viral Shah, senior research analyst (infrastructure) at Angel Broking said high debt, high interest rates, scarcity of funds, inability to meet working capital or equity requirements in case of BOT projects are the common causes that stressed the financials in the infrastructure sector.
GETTING OUT OF THE DEBT POOL
- Plans to use the two-year debt recast window to revive BOT projects by sorting out issues with the National Highways Authority of India and other clients
- Will sell four completed road projects, bringing equity into the holding company of road portfolio and the parent company to repay debt
