Reliance Infrastructure has been able to reduce 65 percent of its debt with the Adani Transmission deal, said Lalit Jalan, CEO of the company.
We have been able to reduce our debt from a gross debt level of Rs 22,500 crore to Rs 7,500 crore, Jalan said, adding that this is clearly the single largest debt reduction exercise in the power infrastructure sector.
In what is one of India’s biggest infrastructure deals, Reliance Infra has agreed to
sell its Mumbai distribution business to Adani Transmission. The total deal is valued at Rs 18,800 crore. Most of this money will be used to pare down the company's debt. Watch: Reliance Infra expects Rs 3,000-4,000 crore cash surplus and no debt by end of CY19, says CEO Lalit Jalan Edited Excerpts: Q: This is a significant deal for the company. Help us understand the kind of debt reduction, this is going to be one of the largest debt reductions till date undergone by an infrastructure firm. What will be the debt and can you give us a break up of the debt across segments specifically in the metro and defence business etc?
The strategic transformation that we undertook three years back got culminated yesterday (on Wednesday) with the closing of a transaction of our Mumbai Power business with Adani. This is a path-breaking deal.
We have been able to reduce our debt from a gross debt level of Rs 22,500 crore to Rs 7,500 crore. So in a single deal itself, we have been able to reduce 65 percent of our debt. Of course, this means that your interest cost will also go down appropriately.
This is clearly the single largest debt reduction exercise in the power infrastructure sector. What this does for the company, in this space, we have a balance sheet with a net worth of more than Rs 22,000 crore with a debt equity of 0.3:1, which is by far the strongest in this space.
The median debt-equity ratio in this space is in the region of 5:1 with many companies at 8-9:1. So this is a great thing for the shareholders and the company. The goal that we had for the company was that we want to move to an asset-light, to a debt-free, to a high growth, to a high RoE (return on equity) business. I think with the culmination of this deal, we are well on way to achieve our objective.
This Rs 7,500 crore also is expected to be retired over the next one year. A lot of it is banked on the arbitration awards that are expected. Can you tell us the guaranteed arbitration awards that are going to be coming in the next one year because if it goes the other way, what is plan B then?
We have got arbitration awards which we have already won to the tune of Rs 6,000 crore. These awards like the Delhi Metro award – which is the largest with almost Rs 5,500 crore – the NHAI roads award and the Goa Power award has been challenged in the single bench High Court, we have won there also and now it is pretty much at the final stages in the division bench, which is section 37 appeal where the freedom of argument is very limited because they don’t open the case.
So we are very confident that these cases will culminate because with the arbitration award in our favour and with the single bench, which goes to the whole section 34 appeal so this is Rs 6,000 crore.
There is another Rs 8,000 crore of awards, which are at various levels of approval. Then I have Rs 5,000 crore of regulatory assets in Mumbai, which is at advanced levels of approval. These claims, which belong to a period prior to closing, will flow to Reliance Infrastructure as per the deal.
So if you look at the entire packet, we have Rs 6,000 crore of one arbitration awards, Rs 5,000 crore of regulatory awards and Rs 8,000 crore of arbitration awards in the process. So we have almost Rs 19,000-20,000 crore of a portfolio of liquidation of our cash flows. We have to knock off Rs 7,500 crore. So even with the 30-35 percent success rate, we feel that this entire thing will get cleared in the next year.
However, we are very confident that not only we will be debt free, we will be significantly cash surplus through these transactions itself.
So by the end of FY19 roughly, what is the cash surplus that you can expect?
End of 2019, not FY19, FY19 is just six months away, so I would say the end of 2019 that is CY19, we expect – just from these transactions, without looking at internal cash flows – to be at least Rs 3,000-4,000 crore cash surplus and no debt.
Now that the deal is done, by when do the payments start coming in and what other repayments that are going to be made over the next three months?
Payments have already come in. The Rs 13,800 crore, which was tranche one of the deal is already in and that entire money has been used to pay off the banks and the liabilities. So that is already done. We have Rs 7,500 crore of debt spread over the next several years and we are ably capitalised to take care of those cash flows.
So about Rs 13,500 crore has been repaid to the bank?
Already. It got repaid yesterday (Wednesday) itself.
So this clarifies my second point. CRISIL has downgraded the debt instrument which was a Rs 585 crore NCD (non-convertible debentures) and Rs 125 crore bond on back of non-repayment of the due date of interest and principal obligation. So this portion will be taken care of as a result of this payment?
Absolutely. What happens is that if you see that we have signed the deal in December. We were expecting that the deal will be over by March-April. We were very ambitious because of the size of this deal. With 73 lenders and multiple approvals but what happened was the regulatory did not have the quorum. Two of the regulatory members retired, so they could not even hear our demerger petition. That delayed the whole thing by three-four months.
These NCDs, which eventually had the technical default of a few weeks in both the cases, were to be paid out from the transaction and yesterday all those instruments have been fully paid off. So as of today, we have zero default. Everything is paid off and as I said, the debt and liabilities have gone down by Rs 13,800 crore.
Let us talk about the business mix now. What is going to be your core revenue generator? Now that the Mumbai power business, which was the significant portion of the business has gone, what is going to be the largest revenue generator and can you give us a percentage of the mix, for instance, how much would the metro business, the road business and defence contribute to etc?
If you look at the business, post the sale of Mumbai business, we are starting with the Delhi distribution business. For people when they look at Reliance Infrastructure, they focus on the Mumbai power business, the Delhi power business is 2.5 times the size of the Mumbai one.
Q: What is the margin there?
It is the same. It is a regulatory business. So it is normal, you cover your cost and you make a 16 percent return on equity together with incentives depending on beating the parameter set by the regulator.
So that business where we service 4.2 million customers, we serve 5,000 megawatts demand compared to 1,800 megawatts in Delhi and has a Rs 16,000 crore turnover compared to less than Rs 8,000 crore for Mumbai. That business continues to be a key business of the Reliance portfolio.
Is that going to be the largest now?
A: It will be by far the largest revenue basis business in the portfolio. The business has got very strong operating cash flows. We have cash EBITDA of Rs 4,000 crore. So all the money required for growth, you are supposed to take care of growth as part of the regulatory thing, two-third by debt and one-third by equity. So the equity comes from the operating cash flows itself. So that is fully taken care of.
It is a fully well-funded distribution business, which started off with the debt levels of 57 percent, the debt levels are now sub-10 percent and 9 percent. They are world-class, the reduction is a world record. It is a very healthy business and this becomes a flagship. The second portfolio is our road business.
That will be the second largest then?
No, second largest will be the E&C business but I am talking about the big asset businesses what are left. We have spent Rs 12,000 crore to build this 11 assets. These assets are all marquee assets like the Delhi-Agra main highway, which goes from middle of Delhi to middle to Agra. We have the Pune-Satara, which is extension of the Mumbai-Pune Expressway and other projects, which are on the Golden Quadrilateral corridor. All these projects are completed. All capital expenditure is done and the reverse cash flows have started.
What is the EBITDA then?
A: EBITDA is 88 percent of net revenue. Our revenue is to the tune of Rs 1,300 crore. So, if I look at the net revenue, it will be Rs 1,000 crore because we have paid Rs 300 crore as the premium. So Rs 850 crore will be EBITDA for this business. This business, which is currently growing at 13 percent on a year-on-year basis and we have another 20-25 years of concession period left. So, with no capital expenditure to go, you can imagine how the profitability will look.
What about the EPC business then?
A: The Engineering and construction (E&C) business, we started off in the last three years, we have increased our order book by nine times. Our current order book is in the range of Rs 26,000 crore. Last year itself we have added Rs 23,000 crore worth of orders.
These are all competitively bid assets and these are marquee assets. We are not bidding for small Rs 100-200 crore assets.
Are you adequately funded there?
Adequately funded? I will just come to that. So, Bandra-Versova sea link that is a Rs 7,000 crore marquee project. What we need for an EPC business, it is a negative working capital business. You don’t need funds. What you need is non-fund limits.
We have already got approval from a lead banker for an Rs 8,000 crore limit for our EPC business post the transaction. So, that is already approved and we have started getting approvals from all the lenders. So that will take care of our order book up to Rs 50,000 crore. We are at Rs 26,000 so very adequately funded.
So by when would you reach that Rs 50,000 mark?
We had given a plan to reach in the next year so we are working very hard. It is a very ambitious target, but we are working very hard towards it.
What about the defence business, can you give us a sense about the revenues and how much can you scale it further?
Defence is a nascent business. It is a business we have just got into 2014.
Would acquisitions make sense here to grow it?
Not really, it is a business that we got in. We are looking at all the three verticals that is land space, naval space and the aerospace. We are tying up with the world majors.
Across all the three spaces, we are building a strong portfolio of projects for which we want to bid. These are typically 5-10 years of gestation. I don’t see any large revenue coming in the thing but this is a portfolio which we are building for the future.
So there is a certain amount of revenue erosion that will come as a result of moving out the Mumbai power distribution business. In what period will that be covered? About a years’ time?
Our Bombay distribution business was giving us a turnover of about Rs 7,500 crore out of a total turnover of Rs 28,000 crore. So, this Rs 7,500 goes away.
Our EPC business in that Rs 28,000 was just Rs 1,300 crore. We expect that this Rs 1,300 crore itself will grow up by Rs 6,200 crore in two years itself. So, just E&C growth will take care loss of Mumbai in terms of turnover. So, roads, metros, Delhi distribution they grow on their own that increases the turnover.
Coming on the profitability side, the Mumbai business was giving us EBITDA of Rs 1,550 crore. But we have knocked off Rs 14,000 crore of debt and liabilities. So, there will be no reduction in profitability owing to the sale of our Mumbai business.
Very quickly roads, Infrastructure Investment Trusts (InvITs) has been shelved, there were talks of the possibility of looking at asset monetisation but is that required now? Does it make sense to bring in investor on board to perhaps take part equity?
Now that the portfolio is complete, we are no longer looking at asset monetisation at this stage. The assets are very healthy, growing very well. Capex is done, so we will grow this business through acquisitions and stressed assets space or whatever.
No exit of roads because that is an important clarification?
No, Absolutely, we have no plans to exit the roads business.
I want to understand Reliance Naval and the road forward as well? You have already clarified that you are in conversation with banks. There have been some reports that have come out after the RBI's 180 day deadline has expired IDBI Bank has now decided to take it for insolvency. What is the plan there so far? Have you got any notification from the banks yet?
We have given our proposal to the committee of creditors and we are awaiting a response from them.
Can you share the resolution proposal?
No, I think that is inappropriate.
But is there a mid-ground here before you move to National Compny Law Tribunal (NCLT)?
All the banks are trying to workout solutions outside the Insolvency and Bankruptcy Code (IBC). IBC, as people have seen, are not giving decent values. It is a good asset and we bought the asset itself when it was very stressed. So, we have tried our best. We are very confident that the committee of creditors will look at it appropriately.
So, still some more days before it moves to NCLT, if at all?