Deal Closure in the Indian Infrastructure Markets During the Pandemic

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Although India is one of the largest and most populated countries in the world, organisations have been able to bounce back from the crisis much faster than expected. The infrastructure sector has proven to be more resilient than others, such as telecom and hospitality, which have been greatly affected by the disruption. This, in great part, has been a result of the timely intervention of the government entities that have supported various infrastructure sectors.  

Main Lessons Learned from the Pandemic and the Way Forward

Deal closure during the pandemic has been challenging. India-focused Funds are analyzing strategies to mitigate the impact of the pandemic. Various factors have proven to be essential to reach new deal closures. A well thought out plan is important to close deals in times when in-person meetings cannot be held. Another important parameter is having trusted partners and relationships which have been built over a period of time. Nevertheless, in such a difficult environment, timely capital is perhaps the most important factor in a deal.  

An important challenge has been coordinating with various institutions such as banks, due to the limited working hours, hence prolonging deal closure periods. However, for companies having pan-India presence it has been easier to coordinate and ensure the work gets done. Deal flow in the market remains healthy, however, uncertainty regarding the business is causing difficulties.

Stakeholders who have been investing in India for a while are happier due to the large capital that has been injected into the various markets. But new investors on the other hand are cautious and have decreased their pace of investment. However, investors who are aware of what they want are still interested in putting down their investments even during current times. One thing is clear - liquidity is not an issue when it comes to the right assets.  

Value Correction and Performance Linked Structures

Other than transmission assets, there are numerous assumptions which come into play when a valuation of an asset is considered. For example in renewables, factors such as PLF, degradation, tariff, O&M, among others come into play. This makes it difficult to predict a possible correction in valuation as these assumptions have been dynamic during the pandemic. The drop in interest rates has also affected financing. Overall, the number of buyers looking to buy assets has dropped by a certain margin and asset supply in the market has increased significantly. Conclusively, demand-supply affects the valuation, making this a buyer’s market right now.
 
The preference is to carry out a cleaner deal (purchase 100% upfront) than a performance linked structure. Nevertheless, it also depends heavily on the thought process of partners involved in the deal. A lot depends on trusting the performance projections. Some investors might work out deferred payment structures in such circumstances.  

Have Certain Sectors Been Less Impacted By the Pandemic?

After March, deal activity has decreased as global investors have taken a more cautious stance. Capital has grown precious in the past few months, driving up the cost of capital. Asset revenues in FY21 have taken a hit. Although most assets have bounced back as compared to pre-COVID levels, growth remains uncertain. In such a situation it is difficult to say if any particular sector is impacted more than others, but since most of the road assets are seeing more than 80% of the traffic returning, this might lead to a lot of deals closing in the next quarter in the road sector.

Deal Closure Challenges from the Legal Perspective

Issues such as stamping and documentation were difficult to handle during the first month and a half of the most stringent lockdown period. Large financial institutions have worked their way around this and made the processes digital which also benefits the future. Digital platforms have played a large part in concluding transactions. The only difficulty which has been faced is land diligence as it requires site visits. Negotiation styles have changed due to the absence of physical meetings. The positive part is ‘to the point’ online conversations; these help in speeding the deal process when trusted parties have been involved.

The struggle period created during lockdown has been slowly coming to an end and activities regarding transactions are growing smoother. Lenders are positive about lending to good quality assets. Other than some projects which are stuck due to uncontrollable parameters, most assets are able to find financing even during the crisis.