Infrastructure sector: Rising funding costs and delayed financial disbursals: Ambit

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Infrastructure sector: Rising funding costs and delayed financial closure/disbursals; HCC appears to be vulnerable 

Whilst we have for a long time heard stories about developers and other long duration borrowers getting undue favors from the bankers, yesterday’s news of the CBI’s public announcement was an unexpected surprise. Whilst the CBI has not names any infra developers as being beneficiaries of undue favors from bankers, we believe there are two broad implications for the sector from this scandal: 

1.        Possible investigation of company’s having high debt:equity AND exposure to the three banks named in the investigation. 

There are a number of companies in the infrastructure and power segments which have seen their consolidated debts rise significantly over the last couple of years and ended up with consolidated debt:equity of 1.5x or higher. 

Given the long duration of debt required for a multiple number of projects under development, there could be a case that some of these companies may have used middlemen for getting these loans. Adani Group and JP Hydro were a couple of names mentioned in the media yesterday. Incidentally these groups through their companies—Adani Enterprises, Adani Power JP Power Ventures and JP Associates—have witnessed not only one of the highest growth rates in their debt over the last couple of years but also have very high debt: equity (see table below). 

2.        Rising funding costs and delayed financial closure/disbursals for long duration borrowers with existing high debt: equity. 

We believe one the key impacts of yesterday’s incident will be that the bankers could become risk averse in lending to long duration borrowers (infra and power developers) which not only have a high level of debt but also high consolidated debt:equity. 

Another side-effect could be lengthier lending processes and hence delayed financial closure of projects. We do not expect working capital borrowing to face issues but there could be minor increases in funding costs for large borrowers. However, the impact could be higher for smaller companies. Apart from the above stated companies, the infrastructure and power companies in BSE-200 with high debt: equity are the following: 

Stock implications: Whilst higher project funding costs and delayed financial closures will impact most of the infrastructure/power developers, wefind HCC (HCC.IN, mkt cap US$739 mn, unrated) the most vulnerable in the light of these events. Consensus has a significant embedded value expectations from HCC’s Lavasa project, which could be impacted given the high debt:equity of HCC and large debt requirement for the progress of Lavasa.