Reliance Infrastructure looks at domestic banks to push projects

Close to clinching second phase of Mumbai Metro project. Reliance Infrastructure (R-Infra) CEO Lalit Jalan is a man in a hurry.

The Anil Dhirubhai Ambani group company hasn't yet got the contract for executing the second phase of the Mumbai Metro, but Jalan's team has already started negotiating with domestic banks to tie up funds for the estimated Rs 11,000-crore (Rs 110-billion) project.

The reason for Jalan's confidence is simple. R-Infra was the lone bidder for the 32-km metro project and the award of the contract will just be a formality. R-Infra quoted a viability gap figure of Rs 2,298 crore, which was much less than the permissible limit of 40 per cent (or Rs 3,064 crore or Rs 30.64 billion) of the total cost of the project, which is Rs 7,660 crore (Rs 76.6 billion).

Mumbai Metro II is just one among the many mega transport projects that R-Infra is implementing at a feverish pace. KP Maheshwari, senior vice-president and director-in-charge of the metro projects, says the 11.7-km first phase of the Metro is expected to be completed before September next year -- nearly 18 months ahead of schedule.

Then there is the other big project that R-Infra is executing -- India's first rapid airport rail service which will traverse the 23 km into Delhi at speeds of up to 130 km/hour. This also is expected to be completed ahead of schedule and much before the Commonwealth Games in 2010.

The total investment in the Metro projects and the rapid airport rail service is Rs 12,560 crore (Rs 125.6 billion).

There is another showpiece project too. R-Infra is set to buy the 11-km Bandra-Worli Sea Link, an eight-lane highway that is slated to open on June 24.

The company has also emerged as the preferred bidder for the 4-km Worli-Haji Ali Sea Link, which is an extension of the original project and, as a part of the deal, the winner of the Worli-Haji Ali Link will buy the entire project by paying Rs 1,634 crore (Rs 16.34 billion) upfront.

It could then collect toll for the entire sea link stretch for not more than 40-50 years.

While these projects are the ones which are talked about the most, R-Infra has also quietly become one of the largest developer of roads and highways projects under the build, own, transfer scheme.

The company has already achieved financial closure for five major 400-km road projects, involving a total Rs 3,150-crore investment, in Tamil Nadu.

In the National Capital Region, it has undertaken projects worth Rs 7,800 crore (Rs 78-billion) with a concession period of 17 years and is executing two to four laning of the 27.5-km Gurgaon-Faridabad project and upgradation of two lanes of the 38.6-km Ballabgarh-Sohna Road.

That's not all: The projects under pipeline include the Eastern Peripheral Expressway covering 135 km and the Krishna Walajpet project covering 150 km.

Despite its decent track record, financing the large projects is a big issue -- a reason why R-Infra recently issued up to 43 million preferential shares to its founders and other investors to raise about Rs 4,300 crore (Rs 43 billion). The equity capital, the company says, will enhance its networth to over Rs 16,000 crore (Rs 160 billion) and augment its borrowing capabilities to Rs 32,000 crore (Rs 320 billion) at a debt-equity ratio of 2:1. 

So far so good, but many analysts say R-Infra may be biting off more it can chew by being too aggressive at a time when raising debt is a huge problem. Take for example, Mumbai Metro Phase II. The project had seven bidders originally, but six of them (including a Mukesh Ambani firm) dropped out as they didn't find the project viable enough and found debt to be a major issue in such turbulent times.

Sanjay G Ubale, MD and CEO of Tata Realty and Infrastructure, cited two reasons why the Tata-led consortium did not bid for the project: "Our consortium wanted assurance from the lenders on the funds required for the project before submitting the bid.

"We had asked MMRDA for more time for getting the assurance. The second reason was the lack of clarity in the alignment of the project as the residents in Juhu and Bandra were demanding underground passages instead of elevated lines," said Ubale.

But Maheshwari says R-Infra has no such concerns and will commission it within five years from the date of the financial closure. Admitting that raising funds is a problem after the Lehman collapse, Maheshwari says the group has enough expertise in this as is evident from the financial closure of many of its projects by taking recourse to domestic banks.

For example, R-Infra turned to local banks for most of the Rs 1,190 crore (Rs 11.9 billion) it borrowed for phase one of the Mumbai Metro, which will cost a total of Rs 2,360 crore (Rs 23.6 billion). The repayment schedule for the loans, which carry an interest rate of 12.5 per cent for the rupee component and 350 basis points above the London Interbank Offered Rate for the foreign currency component, is structured to match the project's cash flow.

What added to the confidence is that another group company has achieved financial closure for two of its mega power projects by taking loans from domestic banks only.

On Mumbai Metro II's financial viability, Maheshwari says the company hopes to start getting a return on its investments within the 25-year operating period. While advertisement revenues and an estimated 1.2 million passengers a day will help, the higher floor space index of four (from two now) within a 500-metre radius of the Metro stations, will be a big boon.

The FSI indicates the total construction allowed on a particular plot of land. That is, if the FSI is two and the plot size is 1,000 sq ft, the maximum construction allowed on that plot is up to 2,000 sq ft.

Government benevolence such as these would make sure that R-Infra remains on a roll.

Its own formidable track record in getting loans from domestic banks would, of course, be a bonus.