In your interest.
Online Personal Finance Magazine
No beating about the bush.
In an exclusive interview with Moneylife, Virendra Mhaiskar, CMD of IRB Infrastructure Ltd, speaks about his company’s fund-raising plans, real-estate ventures and the state of the road sector in India
Amritha Pillay (ML): IRB Infrastructure is planning to raise around Rs1,200 crore. Which route would you prefer for fund-raising—a QIP or a follow-on public issue?
Virendra Mhaiskar (VM): We have not yet decided on the route and subsequent procedure (for raising funds) like going for a qualified institutional placement (QIP) or other modes. IRB’s resolution for raising funds is valid for one year, so we have some more time. At present, the company is well-funded and we can achieve financial closure for all the projects we have won recently. However, there are some other projects which we hope to bid for and win as well. So in short, we would be able to proceed on our fund-raising plans only after winning these projects.
ML: How you plan to use these funds? Will you use it to repay debt or would you invest the corpus in new projects?
VM: We will be using these funds as an investment for our road projects. However, we may use some amount for debt repayment. As of September 2009, we had a consolidated debt of Rs2,600 crore. For a road project, the equity deployment happens only after three to four years, so we do not need all the money at once. I think we can repay some of our debts and park the balance amount, so as to use it whenever required.
ML: How much do you plan to invest in road projects for this fiscal?
VM: This fiscal, we have already won four projects spanning Maharashtra, Goa, Punjab and Rajasthan. For three projects, we have already received the letters of acceptance and we are waiting for the same for the fourth project. We have an order book of Rs9,900 crore. These four projects—worth Rs4,300 crore—would take our total order book to Rs14,200 crore.
ML: Which are the projects that IRB is planning to bid for?
VM: We have pre-qualified for National Highways Authority of India (NHAI) projects worth around Rs25,000 crore. For these projects, we wish to bid in a sensible manner so as to receive an equity return of 16% to 20% at the minimum.
ML: What is the progress of your real-estate venture, the integrated township at Pune?
VM: Our integrated township project at Pune is in the land-acquisition phase. We have already acquired about 1,200 acres of land out of our total requirement of 1,400 acres.
ML: Is this project on the similar lines as Hindustan Construction Co’s Lavasa project?
VM: No, our project is completely different from Lavasa. Our project is more of an urban township whereas Lavasa is a hill city. A contact with the Mumbai-Pune Expressway is the main highlight of our project. So the positioning of our project and Lavasa is different.
ML: Recently, you bid and won two Bus Rapid Transit Systems (BRTS) in Ahmedabad. Has IRB lined up any more BRTS projects?
VM: As a policy, we have stopped bidding for funded contracts like the BRTS. We are only looking at development contracts either on an annuity or a toll-based model. We believe projects that have lesser government dependence are a safer bet.
ML: NHAI has set a target of completing 20 km per day from March 2010 so as to build 7,000 km per year. As a road developer, do you think that this target is achievable?
VM: I think a major part of this target is achievable. In some cases, the delay can be from the side of the contractor. As soon as the bids are opened, financial bidding for the same should happen. This would bring more clarity into the process. Sometimes, there is a need for more information on a road project, which the bidder may need. It also can lead to a delay in the process and ultimately the project. So if all concerned people, like the authorities and bidder, work simultaneously, we can achieve this target.
ML: What, according to you, are the important factors & strategies we have to consider for this ambitious target?
VM: The government will have to work on two strategies. First, it will have to identify the projects on which there is a need to call for bids. This part has been taken care of and is already on stream. The second part is the creation and development of new projects. The government will have to focus on creating a pipeline of projects so that all pre-bidding work can be done beforehand and there is no delay in the bidding and awarding process.
ML: NHAI has set up around 150 special units for land acquisition as well as ten regional offices. Do you think this step is in the right direction and will it help contractors as well?
VM: Problems of land acquisition are surely there. But now there is a renewed focus from NHAI to deal with this problem. It has started involving State governments actively in the land-acquisition process, so I think the problem is now fairly under control. It has set up land-acquisition units to actively deal with the problem. We definitely are witnessing a push towards resolving the land-acquisition problem.
ML: The government and the planning commission have decided to make the necessary changes in the law and bid documents. What’s your take on the new changes?
VM: The legal aspect on tax benefits and concession on overhead expenditures has been taken care of by the model concession agreement. Under the new agreement, you will be issued a completion certificate and allowed to collect a toll on the remaining part of the road. The developer will have to pay back to the government the concession amount received on the undeveloped part of the road—the part where he did not incur any overhead expenditure.
ML: The ministry has brought some changes in land-acquisition norms like acquiring 80% of the total land before awarding the road project. Will this help speed up road developments across the country?
VM: Considering the commercial aspect, one has to keep in mind that road development in India is on an augmentation basis. We do not have fresh roads. For road projects where traffic already exists, if you start tolling on the percentage of road development for which land is available, it does not matter if the remaining part of the road is not developed. The 80% land-acquisition model is thus a good mechanism which has already been implemented.
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Philip F Blumberg, chairman and chief executive officer, Blumberg Capital Partners, discusses his company’s investment plans for India in an exclusive interview with Moneylife
Pallabika Ganguly and Ravi Samalad (ML): What are your investment plans for India? What, according to you, are the opportunities available for an institutional real estate investment manager like Blumberg in this country?
Philip F Blumberg (PB): We are looking at opportunities in developed commercial office space in Tier I cities, but at present we are more concerned about the regulations. Once the new real-estate regulations are implemented, then we will surely invest in India. If laws are changed, we will create more India-focused funds.
There are many investors like large pension funds in the Netherlands, insurance companies and banks in Germany, public funds in the United States and innumerable foreign and high net-worth individuals (HNIs) in the US, who want to invest about $500 million, but they are waiting for stricter regulation to be implemented in the real-estate market.
ML: How much money do you plan to raise, and what would be the route that you will take? Which other markets are you planning to invest in, other than India?
PB: We are raising $1 billion for our real-estate fund and plan to raise several billion more over the next three years for a number of new funds including media and entertainment, healthcare, and merger and acquisition funds. I expect about 50% of this to come from HNIs and the rest from institutional investors. Our real-estate fund will have up to $300 million available for non-US investments including India. We are raising the capital across regions including the Middle East, Europe, Latin America, India and the Far East.
ML: When do you expect your funds to start flowing into India?
PB: We are currently in discussions with some big players in the Indian realty sector. We are also waiting for signals from the government in terms of tax and other regulations, so investment will start once there is a favourable situation. It will at least take a minimum of six months before we take some steps.
ML: Are there any hurdles to entering the Indian realty market?
PB: We cannot have full-scale operations in India mainly due to the tight regulations about foreign capital coming into India. Currently, we are only allowed to invest in projects which are three years old. The tax charges in India are fairly high. Till the time these issues are not solved, we won’t be able to invest in India.
ML: What about transfer charges?
PB: There are multiple transaction fees and higher taxes (in India). Lack of transparency in transfer charges is a problem in India. In most of the deals, we notice that the proposal is not the same as the law states. In the West, the fees are fixed.
ML: In which Indian cities do you plan your investments?
PB: Right now, we are looking at large-size deals in commercial spaces in New Delhi and Mumbai. We are in talks with some big players in these cities. We are also looking at investing in Tier II and Tier III cities, but we feel that there are more opportunities in Tier I cities than other cities. Tier II and Tier III cities do provide lower costs and good opportunities for growth, but the only hindrances stifling investments are government regulations.
ML: What kind of deals are you striking in New Delhi and Mumbai?
PB: We are looking at opportunities in investing in commercial properties. We will look at absorbing risk with (a view towards) significant returns. Our capital (investments) will carry some risk, but we do not want to invest in a building where 35% space is vacant and the other 35% is owned by tenants, who (typically) shy away during a slowdown. We follow the same procedure in the US. In the US we allow maximum 25% of the building to be owned by tenants. I will take financial risk but not operating risk.
ML: During the slowdown, people were cautious. So where did investors invest their money?
PB: Some investors look at lending and some look at preferred returns. In lending, we get the first 9% stake in development and we also share some percentage of profit. The other type of investment is when you get the same return as the developer. If the returns go up, you start out at the higher percentage of cash flow. If the developer makes more money, he gets the higher cash flow. This method allows us to weigh our return in the earlier part, making it safe.
We mostly prefer to pick up 10% stake in a well-developed property. But at the moment, we want to wait and watch. We will take a decision after verifying how many new supplies come into the market, how transparency (improves) and how regulations affect the scenario in the real-estate market.