R-Infra To Exit Rs 20000 Crore Infra Projects

Fresh from the Mumbai Metro experience, the Anil Ambani-promoted Reliance Infra has said that it will exit infrastructure projects worth Rs 20000 crore due to delays from governmental agencies. These projects include two mega transmission projects, the Mumbai Metro-2 project as well as the Mumbai sea link extension project. The news has disappointed investors and the stock has fallen on the bourses. Last year, the company had exited the Worli-Haji Ali Sea link project over differences with the Maharashtra State Road Development Corporation (MSRDC).

The recent four projects are yet to receive government clearance. Recently, Reliance Infra took a test run of the Mumbai Metro-1 after 10 years of planning and five years of construction. The company had, however, started working on this project before the necessary approvals and financial closure. It was delayed several times and ended up costing more than the estimates. The project is yet to take off despite a recent test run, which may have discouraged the company. After this expensive learning, Reliance Infrastructure has now said that it will not start any work on projects until it receives all the necessary approvals.

The company has not disclosed details about the two-mega transmission projects, but we believe that these could be the ones in North Karanpura (Jharkhand) and Talcher (Odisha). As per news items from last year, R-Infra has plans to sell 26% stake in these two projects. Both these projects are tariff-based and not regulated return projects. The one in North Karanpura is a Rs 1550 crore project, while the Talcher project is worth Rs 820 crore. The latter has already seen a cost overrun due to a delay in approvals.

It should be noted here that the infrastructure industry as a whole is seeing a rough patch, and this is not the only company that is going through problems. For instance, GMR recently exited the Rs 7700-crore Kishangarh-Udaipur-Ahmedabad project owing to forest clearances that were held up, and GVK too exited the Rs 3000-crore Shivpuri-Dewas project in Madhya Pradesh as the NHAI failed to get the requisite environmental clearance.

The earlier exits sparked a debate on whether this was the beginning of a trend, and now, R-Infra’s’s announcement seems to have confirmed this opinion. Over the last six months, companies in the sector have strongly underperformed the broader markets, viz. Reliance Infra (-15%), IRB Infra (-5%), GKV Power and Infrastructure (-35%), IL&FS Transportation Networks (-10%), Noida Toll Bride (-10%).

In this background, R-Infra's fresh comments may further weaken the investor sentiment in the infrastructure sector. The company’s Q4 results also indicated that it is seeing margin pressures in its infra business, with the PBIT margins declining by nearly 700 basis points.

As a best practice, the strategy of commencing work only when all the necessary approvals are in place must be followed. On the other hand, bottlenecks for infra projects are also a harsh reality, and the government needs to work on getting them cleared on a priority basis.