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Toll rate cut to hit road developers

Toll rate cut to hit road developers
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First Published: Wed, Dec 08 2010. 11 15 PM IST
Updated: Wed, Dec 08 2010. 11 15 PM IST
Last week, the ministry of road transport and highways agreed to cut toll rates for three-axle trucks by Rs1 to Rs2.40 per km. An agreement was signed between the ministry and the All India Motor Transport Congress (AIMTC), which had threatened to go on strike if the toll rates were not cut. AIMTC has since withdrawn its planned strike.
What does this mean for companies involved in road development?
Existing projects of developers would not be affected because of this change. Even build, operate and transfer projects currently under construction or operational will not be affected. For that matter, it would also not affect projects that are in the letter of award or request for proposal stages.
But future projects, for which bidding is yet to take place, will be affected by the new toll rates. This means that project viability would be affected.
According to a note by Sharekhan Ltd, “In order to compensate for this reduction in the toll rate, the government will have to either increase the concession period or raise the viability gap funding in order to make the project viable. Thus, for doing this, it will have to revisit the economies of projects, which will delay the bidding process for a short while in the near term.”
Amid all this, one of the main losers would be the National Highways Authority of India (NHAI). This is because the decline in toll rates would be applicable to all existing public-funded toll roads with immediate effect and this toll goes to NHAI.
That apart, the toll rates on all road projects under the public-private partnership model are expected to drop after the concession period, when the project is handed over to the government.
The two main players in the road sector are IRB Infrastructure Developers Ltd and IL&FS Transportation Networks Ltd. Slowdown in new orders from NHAI is one common concern for both. IRB has been surrounded in controversy in the recent past and its stock is currently down by 63% to Rs190 per share from its high of Rs309 per share seen in August. Even IL&FS Transportation’s shares have underperformed during this period.
The cut in toll rates and the possible delay in receiving new orders from NHAI could weigh on these stocks in the near term.
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First Published: Wed, Dec 08 2010. 11 15 PM IST