Road sector – funding constraints ease, smooth road ahead for construction players

Jitendra Kumar GuptaMoneycontrol Research

The road sector has been in the thick of action. But who will fund such ambitious programme is often under question. In this regard, recent action of NHAI (National Highway Authority of India) bolsters our confidence that in all probability the targets will translate into reality.

NHAI has begun monetising assets, recently auctioning 648 km of national highways where Macquarie Group won the rights to manage the bidding worth Rs 9,681.5 crore.

Easing funding issue

If private players have little appetite for BOT (build operate transfer) projects, the onus now shifts to NHAI to bring capital to award projects on EPC (engineering procurement & construction)and Hybrid Annuity Model (HAM).

Now the questions is how would NHAI accomplish this task of additional fund requirements that comes along with multi-fold jump in government’s intention to spend on road sector. For FY19, the NHAI has a budget to spend about Rs 1.2 lakh crore. Of this, close to Rs 62,000 crore is expected to come from internal resources. While NHAI will also rely on bonds, a part of the money would come through the monetisation of existing assets. The government had earlier authorised the NHAI to monetise 75 existing projects totalling a length of 4500 km fetching around Rs 1 lakh crore.

There is great appetite for such projects particularly from the foreign investors who are ready to bid at very low yield but stable flow. To put in perspective, in case of the first bidding (Macquarie Group) NHAI

was expecting Rs 6300 crore whereas the highest bid came at Rs 9681.5 crore reflecting that foreign investor is ready to work at lower yield because lower cost of funds.

Nevertheless, this money can be redeployed to fund new projects and bridge the funding gap, which emerged as a result of private sector’s reluctance to take on BOT projects. This would address the funding issue and thus kick start the construction cycle.

The government had earlier stated that it would spend close to Rs 7 lakh crore over the next five years to develop 83677 km of roads including Rs 5.4 lakh crore to be spent on Bharatmala Pariyojana comprising development of 34800 km of roads.

Projects would therefore not be delayed or postponed for want of funds and that would mean increasingly there would be more work for the construction companies largely in the EPC and HAM model. Currently about 98% of the projects which are awarded have come in the EPC and HAM category.

More the merrier

This brings more cheers for the sector as going ahead the pace of awarding will only increase and companies would have higher revenue visibility. Most of the companies are currently sitting on order book of close to 2.5 times to 3 times their sales. Moreover, as the execution capability improves, companies will not require much more of the capital (because of the nature of the project EPC and HAM) since whatever is generated from the business can be redeployed in meeting working capital requirements. Hence companies can execute more and more projects. With the increasing amount of work and easing funding issues, companies, which have strong balance sheet and good execution capabilities like Dilip Buildcon, KNR Constructions, IRB Infrastructure, Sadbhav Engineering and Ashoka Buildcon would be the key beneficiaries.