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Public sector banks, big lenders to infrastructure projects, have a tough decision to make. Construction and infrastructure (C&I) companies, which account for nearly a quarter (22.6 per cent) of India Inc’s borrowings after 2008, have very little to show on incremental growth in revenue and profit since then, raising doubts about repayment capacity.
Their share in incremental revenue and cash profits is less than eight per cent, a big mismatch between liability and underlying cash flows. In the past five years, revenue and cash profits of the country’s top 17 C&I companies that are part of the BSE-500 index are up 2.5 times from the level in FY08. During the same period, borrowings of these companies jumped a little over five times, to Rs 2.7 lakh crore, now exceeding their revenues (see table).
Experts say this might make it tough for banks to recover their dues. “Most infra projects have missed their revenue and cash flow estimates and many are suffering losses. This will increasingly make it tough for their promoters to service debt,” says Dhananjay Sinha, co-head of institutional equity at Emkay Global Financial Services.
Another worry for banks is the growing mismatch in the sector between borrowings and capital expenditure (or gross block) — investment in revenue-generating assets such as plant & equipment. Between FY08 and FY13, the top 17 C&I companies — Larsen & Toubro, Jaypee Associates, GMR Infra, GVK Power, Hindustan Construction, IVRCL and NCC, among others — added Rs 2.2 lakh crore to their debt pile but only two-thirds of this, Rs 1.45 crore, was accounted for by a rise in gross block.
GMR Infra’s borrowing is up Rs 34,000 crore since FY08 at a consolidated level. In comparison, its gross block increased by Rs 25,800 crore during the period. For Jaypee Associates, the corresponding numbers are Rs 51,500 crore and Rs 40,000 crore. In the case of L&T, incremental borrowings since FY08 exceed the incremental addition to gross block by 77 per cent. While a part of this gap is explained by a growth in its non-banking finance subsidiary, a large chunk of its borrowing is accounted for by its C&I divisions. In Hindustan Construction, the increase in borrowing is more than twice the incremental rise in gross block during the period.
This is in complete contrast to the trend in other capital-intensive sectors such as metals & mining, telecom, cement and automobiles, among others. In metals, for instance, the incremental gross block exceeded the rise in borrowing by a third. In telecom, the addition to gross block was nearly twice the incremental rise in operator borrowings. Even in a financially stretched sector like power, the amount of incremental gross block exceeds borrowing by a small margin.
Analysts say this suggests a part of the borrowings were utilised to fund working capital and cash losses. “Unlike an asset, working capital or cash losses doesn’t guarantee future cash flows and banks might never be able to recoup this amount,” says Sinha.
Others caution against a sweeping judgement on the sector and say every project needs to be analysed individually to gauge its bankability. “Some projects do present cash flow challenges for banks but many remain bankable if completed on time and various regulatory and operational issues are sorted,” says Anjan Ghose, head of corporate ratings at Icra.
The option for banks is to take possession of the projects from the original promoters and dispose these to recover dues. “Most infra projects offer this option to banks but it will work only if the underlying cash flow from the project is sufficient. A financially unviable project can’t turn around by just changing the management,” says Ghose.
Their share in incremental revenue and cash profits is less than eight per cent, a big mismatch between liability and underlying cash flows. In the past five years, revenue and cash profits of the country’s top 17 C&I companies that are part of the BSE-500 index are up 2.5 times from the level in FY08. During the same period, borrowings of these companies jumped a little over five times, to Rs 2.7 lakh crore, now exceeding their revenues (see table).
Experts say this might make it tough for banks to recover their dues. “Most infra projects have missed their revenue and cash flow estimates and many are suffering losses. This will increasingly make it tough for their promoters to service debt,” says Dhananjay Sinha, co-head of institutional equity at Emkay Global Financial Services.
Another worry for banks is the growing mismatch in the sector between borrowings and capital expenditure (or gross block) — investment in revenue-generating assets such as plant & equipment. Between FY08 and FY13, the top 17 C&I companies — Larsen & Toubro, Jaypee Associates, GMR Infra, GVK Power, Hindustan Construction, IVRCL and NCC, among others — added Rs 2.2 lakh crore to their debt pile but only two-thirds of this, Rs 1.45 crore, was accounted for by a rise in gross block.
GMR Infra’s borrowing is up Rs 34,000 crore since FY08 at a consolidated level. In comparison, its gross block increased by Rs 25,800 crore during the period. For Jaypee Associates, the corresponding numbers are Rs 51,500 crore and Rs 40,000 crore. In the case of L&T, incremental borrowings since FY08 exceed the incremental addition to gross block by 77 per cent. While a part of this gap is explained by a growth in its non-banking finance subsidiary, a large chunk of its borrowing is accounted for by its C&I divisions. In Hindustan Construction, the increase in borrowing is more than twice the incremental rise in gross block during the period.
This is in complete contrast to the trend in other capital-intensive sectors such as metals & mining, telecom, cement and automobiles, among others. In metals, for instance, the incremental gross block exceeded the rise in borrowing by a third. In telecom, the addition to gross block was nearly twice the incremental rise in operator borrowings. Even in a financially stretched sector like power, the amount of incremental gross block exceeds borrowing by a small margin.
Analysts say this suggests a part of the borrowings were utilised to fund working capital and cash losses. “Unlike an asset, working capital or cash losses doesn’t guarantee future cash flows and banks might never be able to recoup this amount,” says Sinha.
Others caution against a sweeping judgement on the sector and say every project needs to be analysed individually to gauge its bankability. “Some projects do present cash flow challenges for banks but many remain bankable if completed on time and various regulatory and operational issues are sorted,” says Anjan Ghose, head of corporate ratings at Icra.
The option for banks is to take possession of the projects from the original promoters and dispose these to recover dues. “Most infra projects offer this option to banks but it will work only if the underlying cash flow from the project is sufficient. A financially unviable project can’t turn around by just changing the management,” says Ghose.
