Growth-hungry infra firms aren’t best bets

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As the Budget Day comes near, infrastructure beco-mes the buzzword for analysts, industry capitals and economists.
Though India has a long way to go in terms of building infrastructure, the government can’t afford to spend on its own as these projects take a long time to make money by themsel-ves. Often, the benefits that the project generates do not accrue to the project itself.

Commercially, it is impossible to view any infrastructure project on a standalone basis. In order to recover money, the output from the infrastructure project has to be priced very high, since it is not feasible to recover money from those who derive indirect benefits.
We have a strange situation, where the setting up of infrastructure projects, has taken on a capitalist model, despite a price control on its sales. And in a country which is scarce on capital, it is difficult to find businessmen to enter this sector.
However, what makes the businessman enter this segment is the corruption in the system. Whether it is providing power or building a road, the capital costs are inflated and provide an easy avenue for the promoter to make money. Often, most infrastructure companies have to invest in assets that live beyond the project. For instance, a road building company will have to procure equipment that survives the project construction. So he has to keep getting more projects.
More projects mean further investment in assets. Collecting money from government departments was never easy. So everywhere, there are hidden costs that the entity has to siphon out. The companies are always hungry for capital.
Most of them are leveraged to the hilt. In addition, their receivable cycles are skewed, thanks to the system. Hence, they keep approaching the markets continuously. There is constant dilution in capital that keeps taking place.
Thanks to the courage shown by some FIIs, these companies are able to raise additional money by raising capital through “private placements”.
Of course, 2011 was a bad year as share prices languished and promoters were not willing to issue shares at low prices and the investors were not willing to buy at prices the promoters wanted.
Debt is not easy to come. Of course, we have the PSU banks which lend to all these sectors, whether it be a power project or a construction firm, and most of them are staring at problems, which will perhaps be addressed by reclassification.
As an investment opportunity, infrastructure companies should be off one’s list. If the prices get beaten down, there could be trading opportunities.
Power projects are a nice example. We need power. For power, we need coal. Coal linkages are tough to get and environment clearances tough to get. Now we have before us a couple of power projects that have signed agreements to supply power at fixed prices but cannot do so because coal prices have gone up.
I wonder if the private companies were so foolish as to assume that coal pri-ces would forever remain constant. Unless, of course, they lowballed the first quotation and then trust their ability to grease the system through a combination of sympathy and corruption and get the prices reversed.
In all this drama, the shareholder rarely gets to see money. You see huge reported EPS numbers, low dividend and high leverage. Cash flows tend to be negative as they are hungry to grow. The share capital number keeps increasing frequently. So there is very little reason for me to park my money in to shares of infrastructure companies.
Infrastructure companies rarely have an unfettered run.
Apart from financial issues, they also have issues of political patronage, which makes their future uncertain and the promoter constantly greasing the system.
So if I have to put money in to this sector, it would certainly not be through equity shares in companies of the sector. Maybe if I have sufficient money and the ability to deal with the “environment”, I will set up a company. There are many contracting firms, which now call themselves “infrastructure” firms.
Infrastructure firms that provide power or water could become attractive only when they stop growing. Then I would be happy to have a look at them for their dividend yield alone. I will pass the “growth” opportunities in this sector.

(The writer is an independent analyst)