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Indian Infra Projects : Superb Fixed Income Returns with Upside

May 10, 2012

Yesterday, Indian Infra player IRB Infra bought out MVR Tollways for INR 1300 million (USD 25 million approx).  MVR Tollways owns a fully built 66 Km road between Salem and Karur in the South Indian state of Tamil Nadu.  The project generates daily toll income of INR 1.6 million.  This translates into an equity IRR of 21% for a period of 14 years (the residual period of the BOT concession agreement).

The 21% IRR does not consider a) WPI linked toll hikes b) Increased traffic during the concession period.  It has zero project execution risk.  Foreign investors in India, who have made fools of themselves by investing in real estate projects with humongous execution risk should sit up and take notice of  this transaction.  Many Indian road and power projects (fully built with no execution risk) are for sale as the project developers overextended themselves by borrowing too much.  Even factoring in the currency risk, this is the kind of deal which foreign pension and wealth funds should be seeking out in India.  Not private equity investments which hopes to profit by flipping assets in India.  It is even more awful in the real estate arena, where a prospective investor is relying on the tender mercies of some of the worst crooks known to humanity.

Talking about private equity, we just remembered a 2008 quote of Warren Buffett on why owners of companies should sell the companies to him and not to PE funds:  You can sell it to Berkshire, and we’ll put it in the Metropolitan Museum; it’ll have a wing all by itself; it’ll be there forever . Or you can sell it to some porn shop operator, and he’ll take the painting and he’ll make the boobs a little bigger and he’ll stick it up in the window, and some other guy will come along in a raincoat, and he’ll buy it. 


From → Credit Analysis

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