Netz Capital Advisors LLP                               2011  A Basic Guide to InfrastructureBusiness, Investing and Finan...
About Netz Capital Advisors LLPNetz Capital Advisors LLP advises companies in industries such asinfrastructure, Aviation, ...
Table of Contents  1. Introduction  2. Indian Infrastructure Industry Facts  3. Sectors in Infrastructure  4. Type of Cont...
1. Introduction - Purpose of White Paper      Everyone staying in the India understands that India has always lagged in it...
2. Indian Infrastructure Industry Facts    Just to know the gigantic figures of Indias infrastructure industry and its nee...
•   Urban Infrastructure       o Dam       o Water Supply       o Solid Waste Management       o Sewerage and Storm water ...
b. Public Private Partnerships (PPP) and Built Operate Transfer (BOT)             India has so much infrastructure deficit...
•   Contract Execution Development - Subcontractors   The most common job of a Subcontractor is building works and civil e...
6. Financing in Infrastructure        The purpose of this document is to create awareness about the financial system for  ...
b. Debt :     Most of the infra companies dealing in EPC contracting, equipment operation and  raw material supply have De...
7. Banking Guidelines on infrastructure  a. Domestic Banks Policy for Indian Infrastructure         Reserve Bank of India ...
Contact Information:Mr.Anil YadavPresident-FinanceNetz Capital Advisors LLPEmail: anil at netzcapital dot comPhone : +91 9...
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A Basic guide to Infrastructure Business and Financing in India by Netz Capital Advisors working capital Project Finance Corporate Finance

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A Basic Guide to infrastructure business development investment and financing in India by netz capital advisors. Netz Capital provides services such as corporate finance, project finance, real estate finance, manufacturing finance, hospitality finance, aircraft finance, expansion capital, expansion finance and working capital.

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A Basic guide to Infrastructure Business and Financing in India by Netz Capital Advisors working capital Project Finance Corporate Finance

  1. 1. Netz Capital Advisors LLP 2011 A Basic Guide to InfrastructureBusiness, Investing and Financing in India By Atul Khekade & Ritesh Kakkad
  2. 2. About Netz Capital Advisors LLPNetz Capital Advisors LLP advises companies in industries such asinfrastructure, Aviation, real estate, manufacturing and others in arrangingFinance for business expansion through Banks, NBFCs, Private Equity Fundsand Investment Trusts in India and globally. Netz Capital Advisors haspresence in USA, UK, India and Singapore. Netz Capital has advised transactionin excess of $200 million and currently has mandates for $1 billion + inFinancing. netzcapital.com
  3. 3. Table of Contents 1. Introduction 2. Indian Infrastructure Industry Facts 3. Sectors in Infrastructure 4. Type of Contracts a. EPC Contracting b. Built Operate Transfer (BOT) 5. Focus Areas for Infra Companies 6. Financing in Infrastructure a. Equity b. Debt 7. Banking Guidelines on Infrastructure a. Domestic Banks and Funds b. International Banks and Funds 8. Summary netzcapital.com
  4. 4. 1. Introduction - Purpose of White Paper Everyone staying in the India understands that India has always lagged in its infrastructure as compared to the growth of its population. With the growth in Manufacturing, IT and many other industries, India has become a destination for Foreign Direct Investment. Citing the lag of infrastructure as compared to Indias growth, the Government has given special boost to the infrastructure sector, especially the roads, bridges and power. Several business groups are increasingly foraying in to Infrastructure Industry to catch the boom. Many investors are choosing to invest in infrastructure stocks. Netz Capital has successfully advised various infrastructure businesses to arrange expansion capital in various forms through banks, NBFCs, private equity funds and Investment Trusts. Netz Capital through this white paper intends to make the reader aware about the basics of Infrastructure business, opportunities in it and its various financing models. Netz Capital understands that success from an infrastructure project can only be enjoyed with a good financial management of the project in parallel to delivering the quality. Infrastructure is a tricky business and as most of the infrastructure contracts are allotted by a bidding process, the budgets can get tight. That produces a risk of negative cash flow and even bad infrastructure quality. It is a well understood fact that a Successful Infrastructure company develops quality infrastructure within its assigned budget and manages its finances in the right way and focuses on its core activity. This White paper should give a basic understanding to an investor looking into infrastructure stocks and businesses trying to catch the infrastructure boom and are looking into areas of foray within infrastructure. By reading this document, a reader will be able to understand the actual point from vast announcements and news that happen in the infrastructure industry. netzcapital.com
  5. 5. 2. Indian Infrastructure Industry Facts Just to know the gigantic figures of Indias infrastructure industry and its need, here are some basic facts: • Investment Required in Indias Infrastructure Industry by 2019 - $1 Trillion o Roads Requiring - $427 Billion o Power Requiring - $288 Billion o Railways Requiring - $ 281 Billion • Indias spending on infrastructure in the Year 2011 - $50 Billion • Target Set by Ministry of Transport and Highways - Developing 20 Kms of Road Every Day • India will issue tax-free infrastructure bonds with a minimum tenure of 10 years, which will have the potential to raise about $6.5 billion in fiscal year 2010/11, according to government estimates, and the number could rise in 2011/12.3. Sectors in Infrastructure• Transport o Roads and Highways o Bridges o Railway Lines o Metro Rails o Airports o sea Ports• Power o Electricity Generation o Electricity Transmission and Distribution o Oil and Gas Pipelines netzcapital.com
  6. 6. • Urban Infrastructure o Dam o Water Supply o Solid Waste Management o Sewerage and Storm water Drainage• Industrial and Commercial Infrastructure o Special Economic Zones (SEZ) o Industrial Park• Mass Market Housing o Townships o Cluster Development4. Type of Contracts a. EPC Contracting (Engineering, Procurement and Construction) Most of the work in the infrastructure segment is typically handed out to contractors on EPC Contracting basis after a bidding process. Government initiates a project such as Highway, bridge, metro, airport or a sea port and it floats a tender which details about subcontractor deliverables, time frames and Budget. Estimating Governments budget, several eligible contractors then bid for the project. Contractors and their bids are evaluated based on various factors such as past experience, financial strength, management team and the project is handed over to the eligible contractor. In EPC Contracting, Government is assumed to have taken care of the land acquisition part on which the project is to be developed. The project may well be on the Government land itself. EPC Contracting has been a cash cow for various infrastructure firms which were in existence even before Indias recent growth and infrastructure boom. netzcapital.com
  7. 7. b. Public Private Partnerships (PPP) and Built Operate Transfer (BOT) India has so much infrastructure deficit that the Government has recently chosen to give greater boost to infrastructure development by inviting private parties to join hands with the Government. This frees up Government budget and gives private parties the flexibility to fetch return from project over a longer period of time such as 5-60 years in return of the equity infusion required up front. A Public Private partnership is called for when the economic benefits of the infrastructure project go beyond its development value and time frame. Public Private Partnerships may be required from raw stages of the project such as land acquisition. Infrastructure projects under Public Private Partnerships get required Government approvals and development rights. In return, the private party acquires necessary land, develops the project, recovers its investment from the projects economic value and then hands over the project to the Government after certain time frame which can go up to 100 years.5. Focus Areas for Infra Companies Ideally, an infrastructure company that wins a bid develops the project itself, however due to the growth, competition and opportunities in the space, there is a clear cut focus that infra companies have to develop while outsourcing rest of the activities to a specialist. • Sourcing of Contracts and Outsourcing: Companies that focus on Contract sourcing have a strong management team with infra expertise, quality development portfolio and strong financials. Many such companies (prime contractors) are listed in the stock market and many will continue to. These companies leverage their strengths to win contracts from the Government and grow their order book on year on year basis. Job of these companies is to manage their cash flows and outsource the work to quality subcontractors. Personnel working in these companies have their expertise on Management, Financing, Government Liaisoning and Project Planning, Architecture etc. netzcapital.com
  8. 8. • Contract Execution Development - Subcontractors The most common job of a Subcontractor is building works and civil engineering.Subcontractor expertise lies in recruiting mass construction worker manpower.Subcontractors have to manage Raw Material supply required for the project, earthmoving and construction equipment.• Equipment Operator Equipment Operator companies come in with some equity infusion in the business tomake the down payment for the equipments they are required to buy to provide on acontractual basis to the subcontractor or the prime contractor. Equipment Operator orleasing companies get their equipments financed from the bank and carry the risk ofmonthly lease rentals which have to be met in addition to generating profit fromsupplying or leasing their equipments.Various Equipments used by Equipment Operators include : o Soil Compactors o Tyre Rollers o Concrete Mixtures o Concrete Pumps o Piling Rigs o Generators o JCBs ..etc.• Raw Material Supply and Processing Raw Materials suppliers have access to natural resources such as mines which contain basic raw material for infrastructure development. Companies focused on Raw Material Supply and processing excavate raw material from the mines, process it and supply it to contracting companies or companies that use the same material to manufacture a next level raw material. Basic Raw Materials include some of the following: o Coal o Sand o iron o Steel o Glass …etc netzcapital.com
  9. 9. 6. Financing in Infrastructure The purpose of this document is to create awareness about the financial system for infrastructure. India has always grown and will keep growing. The only people that will benefit from this are those with Financial Intelligence, those who can get the right financing for infrastructure business. A successful investor will be the one who invests in a financially sound infrastructure company. The difference between big players and small players in any industry like infrastructure is the size of their balance sheet and their ability to leverage their balance sheet and Banks to arrange timely capital to manage projects and subcontractors. All those who are not able to leverage the boom through right understanding of financing, find themselves with empty pockets. Intention of Netz Capital to write an Infrastructure white paper focusing on its financing is to educate the businesses and investors so that they can benefit from it by adding wealth. Having the basic understanding of infrastructure, one can see the difference between a company with Financial Strength and strong business model and focus and a company without financial strength. a. Equity : Built Operate Transfer, Public Private partnerships Infrastructure unlike any other industry is a long term game. It takes time to segregate natural resources such as land, clear litigations and plan a infrastructure project. Public Private Partnerships and Build Operate Transfer projects need significant upfront investment. The purpose of this investment can be land acquisition, setting up critical initial infrastructure till the monetization is realized. This process gives long term returns which is not financeable by a typical Debt Instrument in the banks. Simple reason is that once a corporate draws down debt, it has to start paying the interest immediately. In long term infrastructure projects, revenue generation and profit realization takes significant time like 3 to 5 years. Infrastructure Focused Private Equity Funds like IDFC offer a long term Debt in the form of equity to the infrastructure project where revenue generation takes time. Once the project is stabilized after 3 to 5 years, equity investor can get significant valuation for its equity stake in the project resulting in a reasonable rate of return. netzcapital.com
  10. 10. b. Debt : Most of the infra companies dealing in EPC contracting, equipment operation and raw material supply have Debt as their favorite instrument due to the ability to immediately generate income and profit to repay the Debt interest. • Revolving Credit Line for Subcontractors Focus and benefit of Prime Contracting company lies in bagging Government Contracts and growing their subcontractors. Their focus is managing the cash flow and revenue delays between costs involved in development and payment from the Government. A Typical finance required for an infrastructure company is revolving line of credit from the banks that allow them to meet raw material cost and subcontractor payments while the Government releases its payments in the phase wise manner. Due to this, the prime contracting company can focus on project planning and bagging extra contracts while the subcontractor can focus on quality development and timely completion. • Equipment Finance Banks like HDFC Bank or NBFcs like SREI Equipment Finance use their funds to buy the equipment (asset), calculate its use of term and offer it to contracting companies on a model where contracting companies can make reasonable monthly hire or leases to carry out construction. Private Investors or equipment leasing companies work on the same principle. • Working Capital Working Capital is a basic type of finance required for infrastructure companies to meet their internal financing needs. A Working capital might be used for hiring workers, buying assets, advertising and marketing. • SBLCs A Standby letter of Credit is used by the raw materials importer or purchaser to issue to a raw material exporter to guarantee the payment while the raw material is purchased on Credit. The importer needs to be issue a SBLC from a Bank. The importer needs to convince the bank that he can actually buy the raw materials and might need to issue personal or corporate guarantees and/or collateralize assets. netzcapital.com
  11. 11. 7. Banking Guidelines on infrastructure a. Domestic Banks Policy for Indian Infrastructure Reserve Bank of India has categorized "infrastructure lending" as a separate sector and has allowed banks to lend to the sector with lower interest rate and relaxed credit norms. Even Non-Banking Financial Institutions (NBFCs) which have more than 75% of its exposure to infrastructure segment are now categorized separately as "Infrastructure Finance Institutions". These institutions enjoy benefits such as lower capital adequacy, relaxed credit norms and increased credit limits. This is a very favorable arrangement considering the longer term return nature of infrastructure projects.b. International Banks Policy for Indian Infrastructure Foreign Banks lending or investing into Indian infrastructure is qualified as ECB "External Commercial Borrowing" and even for ECB, Reserve Bank of India has announced friendly policies for "infrastructure lending". The ECB is however under "Approval route" meaning there is a formal application to be made to RBI before bringing down overseas money into Indian infrastructure. There is a $500 million limit on ECB per financial year that can be brought down by a single company.8. Summary Infrastructure is a tricky sector. Companies in infra sector suffer small margins, cost overruns and Debt burdens that result from long term nature of this industry. This makes is particularly difficult and important to manage cash flow behind the infra sector. Businesses in infra and investors need to be very alert about the financial risks yet have to be enthusiastic about the vast opportunities in the industry and global capital that is coming in to India waiting to be invested in the sector. netzcapital.com
  12. 12. Contact Information:Mr.Anil YadavPresident-FinanceNetz Capital Advisors LLPEmail: anil at netzcapital dot comPhone : +91 932484716 /91-22-28631151http://www.netzcapital.comDisclaimerWhilst every effort has been made to ensure the accuracy of the information contained in this publication,neither the netz capital nor any of its members past present or future warrants its accuracy or will, regardless ofits or their negligence, assume liability for any foreseeable or unforeseeable use made thereof, which liability ishereby excluded. Consequently, such use is at the recipient’s own risk on the basis that any use by the recipientconstitutes agreement to the terms of this disclaimer. The recipient is obliged to inform any subsequent recipientof such terms. netzcapital.com

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