IL&FS Transportation has bid for most National Highways Authority of India (NHAI) tenders in the last 2-3 months. The company’s arm has raised 690 million yuan or Rs 692 crore in a bond sale in March.
In an interview to CNBC-TV18, Mukund Sapre, ED of IL&FS Transportation, said the company has been awarded around 3,000 km of road orders by NHAI in FY15 and has been expecting another Rs 5,000 crore worth of add-on orders in FY16. The company has also been eyeing to bid for the 13-km Zojila tunnel project in Kargil, Sapre said.
Below is the transcript of Mukund Sapre’s interview with Latha Venkatesh and Sonia Shenoy on CNBC-TV18.
Latha: Can you start by telling us what are the tenders that have recently opened from the National Highways Authority of India (NHAI) and how is your own order book grown because of that?
A: This year they have closed at around 3000 kilometers of roads which have been awarded. The only new change what has come into place is that I think this government as they have also given a major outlay over allocation for more money they are also bringing in engineering, procurement, construction (EPC) contracts and then build, operate, transfer (BOT) contracts.
As IL&FS Transportation Networks Limited (ITNL) we are only active on the BOT scope as we outsource our construction and we don’t participate in EPC. What we hear that there is going to be split of at least 65 percent coming on EPC and 35 percent on BOT. I think they are targeting fairly a large kilometer to be awarded in this year which is about 9000 kilometers. We do believe that they shall be in a position to award those things.
One good thing is that if you see that if a lot of things are EPC, the rush for the BOT bids is going to be less. So, that pattern you could see in last two or three months when there was only three or four bids. So, we personally believe that there will be six or seven serious players in the BOT space and rest all will be back to the EPC space where they will try to rectify the balance sheets. So, we look for an window of 12-18 months where this is going to be a far more limited competition in BOT space and we believe that there will be a pick and choose chance and move forward on that.
Also, there are two or three important things which this new setup is talking, you must have heard about the hybrid model. In fact the Finance Minister did talk of risk management or risk sharing to be relooked into. In that context there is talk and there have been a lot consultative process and one model they are talking is hybrid model where they are saying that 40 percent of grant will be given during construction and 60 percent will be you put in an annuity for that number. Total project cost will be the bidding parameter.
So, if you historically look that the project has suffered or the sector has suffered because of variance of total project cost. In this process the total project cost is going to be the key number where the project is going to be awarded. So, all of us are going to be on the same wavelength and that would bring the bankers also back into the foray as there has been little bit struggle on financially closing the projects. So, all of us are gearing up for this.
In terms of order we have around Rs 12,400 crore of job to be done. We added one acquisition of Rs 3200 crore; it is a tunnel - Srinagar Sonmarg Tunnel and we did one Railway Over Bridges (ROB) concessions, around Rs 3500. Ideally we would like to grow at around Rs 5000 crore of new add-ons for this year. We are very hopeful that this year definitely we will be targeting though we missed by around Rs 1500 and we did concentrate on implementation of whatever is in hand. Good thing is that whatever 27 projects, we will be completing by December 16, the whole portfolio excluding one which we acquired.
Sonia: You did say Rs 5000 crore of new add-ons in this year is what you are expecting. How many NHAI tenders have you bid for so far and what has the quantum been?
A: As far as the bid which has been put was earlier to March and there were two or three bids we have put in but with zero success rate. What we have done is only a Rs 3200 crore project acquired. This acquisition was a little bit different because we just acquired after the financial results were awarded and one ROB. So, technically we have not added on last year anything.
However, we have one interesting project which is Zojila. There are only two or three bidders for it and that project itself is around 9000 kilometers, it is a 13 kilometers tunnel in Jammu and Kashmir (J&K), almost goes up to Kargil area. So, that bid is going to come in June and we are one of the shortlisted bidders for that. It is an annuity project and we are concentrating on these two or three important projects to see that we build our book in this coming year.
Latha: How are you approaching this earning season? Is it likely to be as bad as the one that just got over?
A: I think its going to be very similar. I do not see much change, so it’s going to be pretty bad. The one bad part or negative part of what they are talking about as of now is the rural economy. The rural economy is going through a bad phase right now and the untimely rains have exaggerated that a bit more. So you won’t see very good corporate performance particularly from the rural side and the consumption is going down.
Latha: How would you place your bets now? Would you see earnings improve in a quarter or two, after all we are seeing the government disentangle with some vigor, all the knots in the infrastructure space?
A: My guess would be from the second half of this financial year, of course the monsoons are also going to play a very important role, unfortunately we have seen some prediction saying there is 50 percent chance of El Nino again and because we had bad monsoons last year, if you have another bad monsoon year then things are not going to be good particularly in the rural economy. However, the steps the government is taking should start giving you results on the ground from the second half of this financial year. Therefore, I would say another quarter or two may not be all that good and hopefully if the monsoons are good and the whole momentum picks up then you should see things improving in the third and fourth quarter.
Latha: You are raising 690 million yuan through a bond sale?
A: Yes, it is just a refinance. Three or four years back when had acquired a Chinese asset and it was done through a complete debt financing so that bond is again refinanced through this raise. It is not something that we are adding on new borrowing for that project.
Latha: Will the new projects come in at slightly better margins for you’ll, there is slightly lower loan cost and a lot of lower material cost as well or do you think bidding competition will zap it out?
A: The perception on the bidding competition in the BOT sector what we believe is going to down because every bid we are getting only four to five bids only. So, I believe that there is a chance of pick and choose. Also we can look for better returns as interest rates are also softening and bitumen costs have gone down, inflation, diesel. So, there are a lot of positive benchmarks and positive indicators for us in this industry and we should hope for climbing on, on the margins which look little bit stretched in last two years.
Sonia: You did mention that bids for the Zojila project will open in the month of June for which you will bid for. Are they any other projects or rather what are the projects that will open up for bidding in the next say couple of months for which you will be interested?
A: What has happened that few of these earlier projects which had been terminated, those are also going to come for bidding. We will be only concentrating on the BOT part. I don’t have the names with me but all this will be coming next year.
Latha: Have you seen an increase in toll collections? Last year around September-October people were telling us that aggregate toll collections were falling, not slowdown but contraction. How are things at your end, you’ll have nine projects?
A: If you leave apart only one project where there was an network issue, there was an upgradation of some competing road otherwise what we have seen that tolls have gone up by around 8-10 percent on all across the projects and few of them have done quite well.
Sonia: Can you just give us a sense of what the revenue trajectory for the company could be like from hereon? In the nine months of this year you have done an income growth of just about 5.5 percent but your margins have improved to 34 percent. What could Q4 look like and more importantly in FY16 what kind of revenue growth are you looking at?
A: Unfortunately we as a company do not talk about forward looking numbers but we are sure that we shall be able to maintain the rate what we have been maintaining in last two or three years. It is going to be a far more interesting year because we believe that the chances are going to open out, the interest rates are softening so there is every reason to believe that next year onwards we should be able to show far more better improvements and growth leaving apart this year which might be little bit flattish or something.
Latha: What is the sense you are getting on land acquisition – that was the one piece which can still disturb the entire road peace of the infrastructure? Is that getting resolved because even the NHAI Finance Director was saying that in the last two months they haven’t done any land acquisitions because of government intransigent over the status of the Land Act?
A: There are two parts to it. I definitely believe that generally the land acquisition as on a linear growth or linear roads is far more simpler and far more better than what you need to do for this. So, what we understand is that most of the land acquisition should be in place because of this linear development. This issue only boils down so that if you are some bypass component and all and that is the place where there is struggle or you have wildlife sanctuaries or something. If these two elements are not there I don’t see too much of worries on the land acquisition account.
The other important part is that which earlier also there that 80 percent of land should have come. As long as we maintain the discipline, all stakeholders maintain the discipline that 80 percent of land is there on the ground when you are commencing the project I think that is going to be very healthy for all involved. The whole issue has been that condoning each others delay and trying to move forward as everybody is very keen on BOT approach that let us do whatever in hand – that restrain has to come, that discipline has to come. I don’t see too much of problems for the road land acquisition in that fashion.