Roads may be the way out for infra stocks

Roads may be the way out for infra stocks

Infrastructure companies have become pariahs to most investors in the past eight months or so. Their problems have seemed unending—monsoon, rising interest rates, environmental clearance, land acquisition, clients delaying payments, and most of all, slowing order inflows.

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For the roads sector, however, things might be turning around after a slowdown in the past few months. On Monday, the Daily News and Analysis newspaper reported the government was looking to award 100 highway projects for 11,000km worth Rs1 trillion over the next fiscal. The newspaper quoted surface transport minister C.P. Joshi as saying that “at least 7,000km of highway projects annually" would be awarded.

While the National Highways Authority of India’s (NHAI) execution history is nothing to boast about, a platform has been set up for fast-tracking the award of such projects. Earlier this month, the authority increased the validity of qualification certificates submitted by road makers. That will save time and costs for developers and make the bidding process easier.

Secondly, from the start of the next fiscal, NHAI plans to tender some of its projects on an electronic auction platform. This move is aimed at increasing the speed, and more importantly, the transparency of the bidding process. Remember, two NHAI officials were arrested for corruption last year and that was one contributing factor to delays in awarding projects.

Thirdly, land acquisition problems, at least for projects to be awarded in the next fiscal, have been sorted, notes Abhinav Bhandari at brokerage Elara Capital. He believes that 60 projects, of the 100 up for bidding in the near future, have more than 60% land in place. Funding, while it can be a problem for smaller companies, wouldn’t affect the bigger firms. The government’s decision to hike the investment limit by foreign institutional investors in infrastructure bonds could possibly help. Sonal Varma, economist at Nomura Financial Advisory and Securities (India) Pvt. Ltd, notes that external commercial borrowing approvals for roads rose to $350 million (Rs1,568 crore today) in January, 13% of the total for that month.

However, brokerages warn gains from this increase in road projects might not benefit all firms. Shrinking order inflows in other sectors such as power have led to a mad scramble for road projects even by firms with little expertise in the sector. Anecdotal evidence suggests that some of them have even bid for projects at rates of return less than capital costs.

In that scenario, firms that specialize in road construction or those whose order books are replete with existing projects, such as IRB Infrastructure Developers Ltd, IL&FS Transportation Networks Ltd and Sadbhav Engineering Ltd may be the first to emerge out of the woods.

Graphic by Yogesh Kumar/Mint

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