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Tuesday, April 27, 2010

Infra cos exit fringe biz to focus on core strengths

India's infrastructure companies are selling non-core businesses and focusing on the main activity in a bid to exploit the almost limitless opportunities thrown up by the country’s rapid growth and economic expansion.

Companies, such as IVRCL, Punj Lloyd and GMR, have in the recent past sold peripheral businesses, such as real estate and sugar, and used the cash to invest in infrastructure.

“There is a huge opportunity in the infrastructure sector, which require huge capital investment. Companies believe this can be captured by diluting stake in the holding company or divesting non-performing asstes,” said Kuljit Singh, partner and transactions advisory, Ernst & Young India.

On Sunday, Bangalore-based GMR Group sold its sugar business to EID Parry for about Rs 110 crore. The sugar business was loss-making and GMR wanted to focus on its main business of power and infrastructure development. “The transaction is in line with GMR Group’s overall strategy to divest its non-core assets and focus on its infrastructure and energy business going forward,” said the company.

Hyderabad-based infrastructure firm IVRCL is looking to sell its real estate business comprising about 2,100 acre of land across several states. “We are more interested in focussing on our core business infrastructure rather than uncertain business such as real estate,” said E Sudhir Reddy CMD IVRCL. “We plan to sell 100-150 acre of land every year from now to raise cash for core activities,” he added.

Infrastructure, which involves building roads, airports, bridges, highways, power plants represents a huge and growing opportunity for many of these companies. The government is keen on stepping up spending in the sector and plans to award contracts worth several thousands of crores to private companies for setting up airports, laying roads and highways etc.

A recent report by KPMG and FICCI said that the government plans to increase its infrastructure spending as a percentage of the GDP to 9% in 2014 from 6.5%. The prime minister also announced recently that the total investment in the infrastructure sector is expected to be $1 trillion in the 12th Five Year Plan compared with $514.04 billion in the 11th Five Year Plan.

Typically, such acts of restructuring gather pace when companies are faced with financial challenges. “During the downturn, most of the companies critically assessed their portfolio. Now, they are looking at portfolio maximisation and we will see more and more infrastructure companies offloading non-core assets,” KPMG’s ED Jai Mavani said.

Conventional thinking indictates that if a company is not highly leveraged and the fundamentals of their core businesses are strong, they can raise debt from the market to meet the near-to-medium-term challenges. They can also dilute the equity to extend lifeline to their challenging business models. But many infrastructure companies have large amounts of debt so the only way they can raise money is to either dilute more equity, always difficult in tight market conditions, or sell non-core businesses.

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