Hailing the Reserve Bank of India's move to relax infrastructure financing rules for long-term infra bonds , KK Mohanty, MD, Gammon Infra says the new government's reform moves for infra sector are credit-worthy.
Finance minister Arun Jaitely in Union Budget on July 10 had underlined his government's focus to revive Indian economy by giving an impetus to the infrastructure sector.
According to Mohanty, the company will be able to reap benefits from the RBI norms over medium to long-term and do not see any short-term gains from the move. The small-cap company has not bid for any new projects since past two years, he adds.
Below is the transcript of KK Mohanty's interview with Ekta Batra and Anuj Singhal on CNBC-TV18.
Ekta: How would the infra financing norms impact an infrastructure company as a whole and Gammon Infra in particular? What would be the impact on cost of funds for you?
A: I must appreciate that after the new government came into power, the government's reform moves in the infrastructure sector are absolutely creditworthy.
Today, RBI has relaxed the infrastructure bond raising by the banks and has allowed it to be kept outside the cash reserve ratio (CRR) and statutory liquidity ratio (SLR) norms.
The move will help banks create additional line for infrastructure funding without taking the burden of CRR and SLR. This will indirectly have two advantages for infrastructure sector – (1) slightly lower interest and new line of funding, which might be for a little longer-term than currently available. This will surely help the infrastructure sector in the long run (2) other few things which the government has taken especially for public private partnership (PPP) structure, a three P institution which will take care of all the dispute areas of PPP business.
Also, policy wise they want to create a fund line which will take care of infrastructure requirement of 22-25 years funding and already there is a talk of insurance and PF funds being allowed to invest into infrastructure bonds and infrastructure projects will be the next step, which will help the sector.
To your specific question – I do not think it is immediately going to affect the infrastructure funding or create relief for infrastructure companies like us in six to nine months timeframe. These measures will surely bring relief to the infrastructure sector between medium-term to long-term.
But if you ask me what things are required in the short-term, if you have seen some of the press reports today, there are 189 projects halted in between construction phase or implementation phase – those projects are like low hanging fruits which will have minimum lead time in activating the whole industry and the economy. Therefore, government needs to work out something that will resolve the dispute areas in these projects, so these projects can not only move ahead but can get completed so that some economic activity and cash flow into the system may help the industry to re-energise.
Anuj: You said it's a medium to long-term positive, if you could quantify this in terms of interest costs and other benefits. What kind of benefit you would be looking at in the medium to long-term?
A: Medium to long-term there will be more projects. Today, one of the major hindrances is that banks are reluctant to fund infrastructure projects especially the PPP projects due to the environment created in three-five years time. So, this perception and constraint of funds flowing into infrastructure sector is a major hurdle today.
This new line of funding will help in the future to funds being available for PPP infrastructure projects. Also, because it will be out of the CRR and SLR net so cost of these funds will be less to the bank which affectively should reduce the infrastructure funding, on a relative basis, 100 bps, if market is 12 percent then infrastructure can get funds at 11 percent or 10.5 percent. Therefore, relatively it will reduce the cost of funding by 100-150 bps.
Ekta: What does your composition of funds currently stand at because Power Finance Corporation Limited ( PFC ) and Rural Electrification Corporation ( REC ) will not benefit from this and it will be mainly banks that will be the beneficiaries of this? Would you look to change the composition and look to acquiring more funds from the banking space if that is not the case for you right now?
A: For our company, most of the funding is by banks. So once this is implemented effectively we should benefit. But in the immediate future nothing looks like it will come in our plate.
Ekta: What are the projects for Gammon Infra that need funding at least in the medium-term?
A: In the last two years no new projects have been taken and so, no new projects have come into the basket. Even for the existing projects that are running, once this type of funding is available and at a lower cost, it can be replaced or refinanced or taken over by a new funding agency on better terms, that will surely help and those are the things a financial engineering specific company has to look at and see what suits them the best.
For example if today I have balance seven years funding available in one project and my balance period for concession period is 15 years, I can always replace the seven years funding by a 14-15 years funding in order to get better interest rates and my cash flow in the system will also improve.
Ekta: From an infrastructure company point of view, do you think banks will now be more conducive to lend to infrastructure companies as opposed to earlier, do you think funding will become easier for infrastructure projects from banks?
A: The credit appetite of the banks towards the infrastructure industry is not single dimensional, it has multidimensional aspects. Besides the fund flow and cost of funds, they will also look at the performance of different companies, the performance of the projects, overall investor motive or the excitement in the infrastructure sector. So these things will decide how funding will flow to this sector, not only by one measure by the RBI to relax the norms for infrastructure funding and might be keeping it out of the domain of CRR and SLR.
Anuj: What is happening with your QIP?
A: With regards to QIP, we have got a nibbling enabling resolution from our board of directors for Rs 500 crore. We are in the process of structuring the whole deal and prepare the documents. At the right time we would like to go to the market and whatever possible we would like to capitalize the company so that we are in better financial health and are prepared to en-cash the opportunity that the new government will offer us.
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