3,000 km of 2-lane roads a lifeline for smaller builders

May 14, 2012

The National Highway Authority of India (NHAI), the government-backed autonomous manager of highways, plans to build one-third (or 2,800 km) of this fiscal’s target of 8,800 km long of road network in the form of two-lane roads on cash contracts.

JN Singh, member-finance of the NHAI, said, “As most of the two-lane roads lack heavy traffic, the projects would be awarded on EPC (engineering procurement and construction) or cash contract basis rather than on BOT (build-operate-transfer) or BOOT (build, own, operate and transfer) basis.”

The two-lane projects, therefore, may not attract big BOT developers that covet only mega highways that yield higher margins.

So, smaller road construction firms ravaged by stiff competition, margin pressure, high interest cost and stretched balance sheets may find the cash contracts manna from heaven.

For, the two-lane projects may entail work orders worth up to Rs15,000 crore.

A report by Merrill Lynch said pure road contractors such as IVRCL and NCC could benefit.

Agreed Pankaj Kumar, senior analyst at KJMC Capital Market
Services. This fiscal, he said,
could prove to be a good year for BOT players-cum-road contractors such as IVRCL, HCC, Nagarjuna Construction. But pure BOT developers may find the going tough.

Last fiscal, the NHAI awarded 35 projects. All were for four-lane or six-lane roads, and 23 projects garnered premium status, fetching Rs24,200 crore in net present value (NPV) for the NHAI. (NPV is the difference between the present value of cash inflows and outflows.)

Singh said projects this fiscal would not fetch such huge NPV. Value of orders will also decline due to shift to two-lane orders.

The NHAI will fund the two-lane projects with capital raised from tax-free infrastructure bonds.

Land acquisition and annuity projects should not pose a problem as it had raised Rs10,000 crore last fiscal through bonds.

It has also received approval for an additional bond issue of Rs10,000 crore this fiscal.
Besides, a recent report by Motilal Oswal Securities said the NHAI rakes in Rs9,200 crore in cess, Rs3,000 crore in toll collections and Rs3,000 crore in premium, which would help it in meeting recurring EPC obligations and annuity projects.

The report also stated that intense competition in the road sector is likely to ease due to challenging macroeconomic environment and with established players committing their capital to large infrastructure projects.

The road sector may see consolidation as aggressive bidding, lower-than-expected tariffs, rising funding cost and execution delays have considerably lowered returns on projects, the Motilal report added

Source: www.dnaindia.com