‘This is not for the faint hearted’

“We unintentionally became a real estate developer,” confides Sonny Lulla, chief executive of Infrastructure India, a fund manager focused on the Indian market and listed on London’s Alternative Investment Market (AIM).

He is relating the process of land acquisition required in order to put together a free trade and warehousing zone (FTWZ) and inland container depot (ICD) for portfolio company Vikram Logistic and Maritime Services (VLMS), a logistics firm. This involved the acquisition of 100 acres of land in Chennai and a further 100 acres in Bangalore.

Lulla takes up the story: “Each of our land portfolios required hundreds of individual parcels of land to be acquired in order to get a single large footprint. It has taken more than four years in both cities. You build a lot of real estate value in the end, but you want your container terminals up and running in a normal amount of time – you don’t want land to be your focus because that’s not the core competence of the management team.”


Lulla is relaxed enough now, consuming his healthy fruit breakfast in a London hotel. But though he has an affable demeanour, you can sense a residue of stress and frustration as he continues his recital of events: “You do the first [land] transaction and then you do it again 100 times over and you have to have the finance lined up to do each deal – and there may be obstructions during the process. Someone may hold a small parcel but be very attached to it because it has been in the family for generations. The last thing you want is doughnut-shaped land where everyone has sold except the person in the middle. You need a contiguous plot, and that can be difficult to achieve.”

Lulla also points out that clearances may be required to convert agricultural land to industrial use – another timely process. Plus: “We’re trying to develop in metropolitan areas where the population is growing rapidly. And we want the terminals to be well located with good road and rail infrastructure and, ideally, close to an industrial belt and freight corridor. All this means that there is a big barrier to entry, which is a good thing once you have a presence. But it’s not a task for the faint of heart.”      

The challenge doesn’t end there either. After having agreed towards the end of 2011 to acquire fellow Indian logistics business Freightstar – perceived by Infrastructure India to be a good strategic and geographic fit with VLMS – the acquisition of Freightstar’s assets is still pending.

But the yin and yang of the Indian market is reflected in the potential that lies beyond all the initial time delays and frustrations. The combined business will, in Lulla’s words, be “one of the largest private logistics businesses in the country”. He adds: “We will then have a well capitalised business which can grow market share. There’s so much we can do. There are not many similar facilities in the market with the services we can offer.”

This latter claim appears to be borne out by data from the Indian Ports Association which shows the remarkably embryonic state of Indian logistics infrastructure currently. While per capita twenty-foot equivalent units (TEUs) handled by Indian ports are 7 per 1,000, in North America the figure is 140 per 1,000 and, in Australia, 300 per 1,000. TEU per capita is 0.01 in India, compared with 6.7 in Singapore.


The potential is clear, but not only in the logistics sector. Of the five assets in its portfolio, the firm also has investments in two hydropower plants – the largest of which is the 400-megawatt (MW) Shree Maheshwar Hydel Power Corporation (SMHPCL). Having taken a quick sip of his coffee, Lulla relates that things have not been entirely simple with respect to this project either.

“There has been some environmental opposition to the plant from people who would like to stop it despite courts ruling in our favour and the fact that we have met all the criteria asked of us. The Ministry of Environment had previously not given the project the clearances we needed but, in May 2012, we were finally given those clearances which made the project financeable from a debt and equity perspective.”

However, with the necessary clearances obtained, the project was then exposed to a difficult financing environment. “Nearly all the work was done but the project needed capital for some remaining rehabilitation and turbine purchases,” says Lulla. “The project finance market in India has been strained so we have suffered delays and hurdles.”

But with the last required financing for the project expected to close soon, Lulla is as excited about the plant’s future as he is for the logistics business. “Given the issues it has taken more time than we would have liked but it will be one of the largest private Indian power plants in a state [Madhya Pradesh] where it is much needed.”

Having overcome many obstacles to get to the point where its two largest assets are almost up and running, Infrastructure India – which also has stakes in a smaller hydropower plant, a fully operational toll road in Madhya Pradesh and a couple of operating wind farms – can afford to look to the future with confidence. It sees huge growth potential in its existing assets and, in the third quarter of last year, boosted its coffers by completing a £41 million (€47 million; $64 million) fundraising.

Poised to deliver

For Infrastructure India, the Indian market may be poised to finally deliver on its potential after all the blood, sweat and tears. But what is the general market sentiment among fund managers in the country? Has the optimism of five years ago subsided in the face of red tape and an arid financing environment?

“In the short term, market conditions are likely to remain challenging,” reflects Lulla. “However, India is working out some of the issues with respect to finance, regulation and historical mistakes made by developers. There is some stability in the debt markets and we believe that equity providers have put the worst behind them.”

However, he also believes that India simply has to get infrastructure right ultimately. “There is a new Finance Minister and, over the last six months, the government has been heeding the view of the private sector that something must be done. They appreciate that they are missing a huge opportunity – poor infrastructure is shaving around 2 percent off GDP growth. With elections next year, my view is that the government will be constructive and encourage more private sector participation.”

With that, Lulla prepares to leave – perhaps to check up on the latest developments relating to his portfolio. This is almost certainly one infrastructure investor who will never take anything for granted.