CPPIB, OTPP Eyeing Indian Projects?

Reghu Balakrishnan of the Economic Times reports, CPPIB, Allianz-led InvIT in talks to acquire Sadbhav Infra’s 12 road assets:
Mumbai: Canada’s largest pension fund manager Canada Pension Plan Investment Board (CPPIB) is in advanced talks to acquire 12 operating road assets of Sadbhav Infrastructure Project Ltd (SIPL), in a deal worth $400-500 million (Rs 3,000 crore), according to two persons aware of the development.

CPPIB, which has entered into exclusive talks with SIPL, will acquire Sadbhav's road assets through the infrastructure investment trust (InvIT), floated by L&T Infrastructure Development Projects Ltd, said one of the persons cited above. CPPIB and Allianz Capital Partners own about 55 per cent of the InvIT units. InvIT was created after CPPIB bought into L&T toll road portfolio and subsequently hived it off into the independent vehicle, which is also the first private infrastructure investment trust called IndiaIndInfravit Trust.

As on December 2018, listed company Sadbhav Engineering Ltd holds about 69 per cent of SIPL, which is involved in the development, operation and maintenance of national and state highways and roads in Maharashtra, Gujarat, Rajasthan, Karnataka, Haryana and Telangana, besides border check posts in Maharashtra.

Negotiations are currently on over the quantum of units Sadhvav will also own in the InvIT, said sources directly involved in the proceedings. A decision over the semifinished assets is also part of the bilateral negotiations that are to end by this month-end.

SIPL has a portfolio of 23 roads & highways build operate-transfer (BOT) and Hybrid Annuity Mode (HAM) projects of which 12 are fully operational with total lane kms of 3,338, as on March 31, 2018.

Strategic investors such as Italy’s Autostrade, Cube Highways, Canadian pension funds such as CDPQ are in talks to acquire stake in Sadbhav Infra, ET had first reported in August. Morgan Stanley is the advisor in the sale process.

In a conference call with analysts in November, Nitin Patel, ED, SEL, had mentioned the company is open to sell a majority stake in SIPL.

Mails sent to Shashin Patel, chairman, Sadbhav Engineering, did not elicit any response till press-time, while spokesperson with CPPIB declined to comment.

Sadbhav Infra posted a revenue of Rs 2,276 crore in FY18 with a market cap of Rs 3,296 crore as on March 8. The company has a total debt of Rs 8,407 crore and enterprise value of Rs 12,987 crore as on March 31, 2018.

Overall cost of the operational project and under construction projects (2,457 km) stood at Rs 21,900 crore. In November, SIPL had received a debt financing worth Rs 600 crore to complete the underlying road projects from Ajay Piramal-led Piramal Group. As the only listed road and highways BOT company in India, SIPL had raised Rs 492 crore through listing on BSE and NSE in September 2015.

In May 2018, CPPIB and German insurer Allianz Group had acquired a combined 55 per cent in the InvIT, where CPPIB had invested approximately $156 million for 30 per cent of units in IndInfravit Trust (IndInfravit) while Allianz Capital Partners acquired 25 per cent stake. L&T Infrastructure Development Projects Ltd (L&T IDPL), the trust sponsor, holds 15 per cent stake.

OMERS Infrastructure Management, another leading Canadian pension fund, had acquired a 22.4 per cent interest in the same infrastructure investment trust (InvIT) for Rs 870 crore ($122 million) last month.

Canadian investors have been actively pursuing opportunities in Indian road assets. According to media reports, several investors, including CDPQ, are also interested in buying road platform – Highway Concessions One (HC1) – owned by US-based Global Infrastructure Partners (GIP) which recently bought IDFC Alternatives Ltd’s infrastructure investment business. HC1comprises seven road assets in various states in India.

These funds have shown interest in buying out equity stakes in 22 road assets of around 12,000 kms owned by debt-ridden IL&FS Group.
Rouhan Sharma of the Financial Express also reports, Sadbhav to sell 12 road projects:
Sadbhav Engineering (SEL) confirmed it is expecting to sell a chunk of its roads portfolio in its subsidiary Sadbhav Infrastructure Project (SIPL), with sources indicating to FE due diligence with respect to traffic growth is in advanced stages for 12 of its toll road projects. According to sources, the Canadian Pension Plan Investment Board (CPPIB) is among those locked in discussions with SEL.

CPPIB declined to comment, saying they do not remark on market rumour or speculation.

In a recent call with analysts, Nitin Patel, ED & CFO, SEL, confirmed the company is open to parting with a majority stake but said it will retain some of its holding, without giving further details. “The enterprise value is more than `10,000 crore, and the projects are largely constructed by Sadbhav. There are no legal or any other issues with them. We are going to remain in the platform,” Patel said.

SEL will also continue to provide the operations and maintenance after disposing the projects. Sources said SEL is creating a separate platform for the purpose which will also help in further asset monetisation.

While SEL’s debt rose to Rs 1,510 crore at the end of the first half this fiscal, up from Rs 1,400 crore a year ago (partly in order to support its vendors and sub-contractors), the company expects to be able to cut its debt to about Rs 1,250-1,300 crore by the end of this year. While analysts said the rise in debt was “discomfiting”, they expect the company to garner a significant amount of money as mobilsation advances from the government, for about five new projects worth `4,693 crore that are set to start construction in the current quarter. “Any success with the asset monetisation plan would only further aid deleveraging and afford access to growth capital,” analysts from Anand Rathi said in a recent note. Further, SEL also has pending receivables of `1,200 crore from the National Highways Authority of India (NHAI).

However, Patel cautioned that NHAI, as well as lenders to projects, have begun insisting on the acquisition of at least 80% unencumbered land before signing off the starting date for construction, potentially delaying the start dates for projects. Consequently, he expects an year-on-year revenue growth of about 12% for the full year. Analysts said this pegs revenue at ` 3,900 crore, slightly lower than the previous guidance of `4,100 crore. However, Patel believes the pace of execution will increase in the remaning half of the year, helping revenue growth. SEL won new orders of `11,700 crore over the last year and is expecting to win another `4,000 crore worth of orders by March 2019.

For the first half, SEL reported a 2.61% increase y-o-y in earnings before interest, tax, depreciation and amortisation (ebitda) to `190 crore while ebitda margins expanded 55 basis points to 11.88%. On Monday, the stock closed down 2.39% at `194 on the BSE.
And Joseph Rai of VCCircle reports, CPPIB front runner for Sadbhav Infra assets:
Canada Pension Plan Investment Board (CPPIB), the North American country’s biggest public pension fund, has entered into exclusive talks with Sadbhav Infrastructure Project Ltd to acquire the company's 12 operating road assets, according to a media report.

The deal is likely to be worth $400-500 million, The Economic Times reported, citing two people it didn't identify.

Last year, the newspaper had said that other investors such as Canadian pension fund CDPQ and I Squared-backed Cube Highways were also separately in talks for the deal.

CPPIB plans to buy the Sadbhav assets through an infrastructure investment trust (InvIT) launched by L&T Infrastructure Investment Development Projects Ltd. CPPIB and Allianz Capital Partners, the in-house alternative investment firm of Munich-headquartered financial services firm Allianz, own a stake in the InvIT.

CPPIB has invested over $5 billion in India since it entered the country a decade ago.

Sadbhav Infrastructure, a subsidiary of Sadbhav Engineering Ltd, was incorporated as an asset holding company for road and other infrastructure build-operate-transfer (BOT) projects in 2007. It has a portfolio of 11 BOT projects and 12 hybrid annuity projects.

The company posted consolidated revenue of Rs 2,322.48 crore for the year ended 31 March 2018 as compared with Rs 1,403.89 crore the previous year. Its net loss narrowed to Rs 329 crore from Rs 353 crore.
If this deal goes through, it will be yet another major investment in India for CPPIB.

As discussed below, other big players including CDPQ (Caisse), Brookfield and Macquarie bid on these assets:

So why invest in India's toll roads? A friend of mine, an expert on toll roads, shared this with me:
"In developed countries, most families already have one or two cars. Your toll roads and other infrastructure projects typically grow with GDP, so your gross return will be GDP growth + CPI inflation. In developing countries like India where demographics are still favorable, industrialization is taking place and lots of people still don't own cars, you can still collect very nice returns on toll roads. You will get GDP growth + CPI inflation + increases from tolls + as more people begin buyinng one or two cars, it will generate more traffic on these highways and profits will increase commensurately. It's a long-term project in a growing economy with great demographics."
I told my friend that's why India's airports are also a hot commodity, as more people enter the middle class, they travel more.

I said that was Peter Letko's thesis at the CFA luncheon a couple of days ago which is why he's bullish on Air Canada and other airlines.

My friend who's more cynical than me replied: "Letko is right, for the next 15 years, after that the industry will get clobbered once again." I asked him why and he said "because the baby boomers who are traveling will be dead."

Anyway, back to Sadbhav Infrastructure, last October, Nitin Patel, director of Sadbhav Infra, spoke to CNBC-TV18 about the company's business plans and shared this outlook:
“The revenue that we are seeing considering the traffic growth for the six months, we are expecting that this year we should get at least around 7-7.5 percent in an absolute volume growth. In terms of revenue, we are seeing almost around 12-13 percent on an yearly basis as compared to the previous years. So on absolute numbers we can say that the 10 operation toll road will generate almost more than 1,150 crore for the year,” Patel said.

“There is a substantial reduction in the loss main reason is the refinancing and also the tremendous growth in the traffic volumes and traffic growth. This will continue. Last year we have made a repayment of almost around Rs 145 crore, this year we are going to make a repayment of Rs 180 crore. So this will also give further uptick,” he added.
These are the type of long-term infrastructure projects Canadian pension funds love, they're still priced right and the potential growth is incredible compared to what you get in developed countries.

Are there risks? There are always risks with large infrastructure projects especially in a country like India, regulatory, currency and political risks are among a few. But India is a growing democracy and it has plenty of characteristics that attract Canada's pensions to the country.

Last week, I discussed the Caisse's $250 million investment in ECL Finance Ltd, the non-banking financial company affiliated with Indian financial services provider Edelweiss Group.

This week, I read that Ontario Teachers' Pension Plan is part of a consortium looking to buy a stake in Anil Ambani’s Reliance Capital:
Beleaguered business tycoon Anil Ambani, who is struggling to pay off mounting debts, has broadened his search for a buyer of his stake in Reliance Nippon Life Asset Management (RNAM).

Initially, Anil Ambani’s Reliance Capital had approached its Japanese partner Nippon Life Insurance Company to buy its 42.88% stake in RNAM, which manages mutual fund business.

Though the Japanese asset manager is yet to make an offer, Reliance Capital has begun talks with the Abu Dhabi Investment Authority (ADIA), Singapore-based Temasek, Ontario Teachers’ Pension Plan, and private equity funds Blackstone and The Carlyle Group, Business Standard reports.

Nippon Life has the “first right to offer”, but Reliance Capital can choose to ignore it if an offer from a third party is more attractive.

The company has ruled out mergers with domestic mutual fund players as the procedures in accordance with Indian laws could make a merger a long drawn out affair.

RNAM ranks fifth by way of assets under management in the mutual fund industry. As of January, RNAM was managing assets worth 2.43 trillion rupees (US$34.75 billion). In the last fiscal year, it made a net profit of 5.22 billion rupees ($74.64 million).

Reliance Capital wants to get out of the mutual funds business in order to reduce Ambani’s debts. For Reliance Capital the debt exposure is pegged at 180 billion rupees ($2.57 billion).

Anil Ambani’s fortunes began to decline soon after he parted ways with his elder brother Mukesh Ambani, currently India’s richest man, in 2006 and they divided their father’s business empire.

In 2007 Anil’s net worth was $45 billion, according to the Forbes Rich List, while his brother’s was $49 billion. In 2019, Mukesh ranked 13th in the Forbes Billionaire list with a net worth of $50 billion, while Anil’s fortunes had fallen to $1.7 billion, placing him a distant 1,349 in the same list.
Anil's troubled fortunes are creating big opportunities for OTPP and this consortium of sophisticated investors. We shall see if they end up with a stake in Reliance Capital.

The more important message is Canadian pensions are increasingly looking to make large deals in India and I don't blame them. CPPIB is still underexposed to the country and so are many others and over the long run, big projects in infrastructure and private equity deals in the country's financial services are where you want to be.

This is especially true now that private markets in developed countries are fully or overpriced but the risks you take in developing countries (political, regulatory, currency, etc) are not trivial so you need to have the right partners on these massive deals.

Below, road construction and infrastructure firm, Sadbhav Engineering Ltd, recently said it's on track to achieve its topline guidance of over Rs 3,800 crore in FY19.

I also embedded Anil Ambani’s full speech on Reliance Capital from 5 months ago. Reliance was approached by its Japanese partner Nippon Life Insurance Company to buy its 42.88% stake in RNAM but don't count Ontario Teachers' and that consortium out just yet.