IL&FS to merge its road firms

The Indian road sector is set to see the first-ever consolidation with three Infrastructure Leasing & Financial Services-promoted companies being brought under one umbrella, the Gujarat Toll Road Investment Company. The combined entity will have an asset base of over Rs 1,000 crore (Rs 10 billion). 
 
GICL, an investment company, is a joint venture between the Gujarat government and IL&FS. The merger is likely to be completed by June 2005, and will be in two phases. 
 
The merger proposal has been cleared by the corporate debt restructuring cell of banks and financial institutions. 
 
The Gujarat government and IL&FS will infuse Rs 30 crore (Rs 300 million) each into the merged entity and GICL will come out with an initial public offering. 
 
In the first phase of consolidation, the Ahmedabad-Mehsana Toll Road Company (AMTRC) and the Vadodara-Halol Toll Road Company (VHTRC) will be merged into GICL. This will be followed by the merger of the North Karnataka Expressway into GICL. 
 
"This is a unique arrangement where the North Karnataka Expressway project will initially hand-hold the other two road projects till they are able to realise their inherent value," sources in financial institutions said. 
 
After the merger, IL&FS, along with the wholly owned arm, Consolidated Toll Network, will hold a 44.36 per cent stake in GICL, the Gujarat government will hold a 17.34 per cent stake, Punj Lloyd 25.73 per cent, engineering major Larsen & Toubro 9.74 per cent and AIG Indian Sectoral Fund 2.83

per cent. 
 
At present, AMTRC and VHTRC are not generating enough cash flows to service their obligations. The revenues of these companies come from the toll that they levy, which in turn, is dependent on the traffic on the roads. Since the traffic on these roads is at present below projections, the revenues are not enough. 
 
On the other hand, the North Karnataka Expressway is generating positive cash flows as it is an annuity-based project. In such a project, the company receives an annual fee from the government, irrespective of the traffic. 
 
Subsequently, the other two projects are expected to generate adequate cash flows and the assets have to be transferred back to the government only after they achieve a particular rate of return. 
 
The plan is to list GICL on the bourses, after all the three projects become profitable. 
 
The VHTRC operates and manages a 31.7 km road, while the AMTRC operates a 51.6 km road, both in Gujarat. GICL holds around a 72 per cent stake in both companies. The remaining stake is held by Punj Lloyd in Vadodara-Halol and Larsen & Toubro in Ahmedabad-Mehsana.