Handful of road developers to benefit from increased spending on roads4 min read . Updated: 01 Mar 2016, 05:42 PM IST
The govt in the budget announced plans to award 10,000 km of road projects next fiscal and add 50,000 km of state highways
Mumbai: Road developers IRB Infrastructure Developers Ltd, Sadbhav Infrastructure Projects Ltd, IL&FS Transportation Networks Ltd (ITNL), Larsen and Toubro Ltd (L&T), among others, are best placed to benefit from higher project awards as the government plans to invest ₹ 97,000 crore on construction of roads and highways in the next fiscal.
The government in the Union budget on Monday announced plans to award 10,000 km of road projects next financial year and add 50,000 km of state highways to the national highway network.
“This creates a huge future project pipeline (for companies) to my mind," said Virendra Mhaiskar, chairman and managing director, IRB Infrastructure.
L&T, Hindustan Construction Co. Ltd (HCC), IRB Infrastructure, Ashoka Buildcon Ltd and ITNL will be the key beneficiaries of investments in the roads and highways sector, said Crisil Research in its report on Tuesday.
“A large quantum of projects will ensure a healthy business opportunity for infrastructure companies," said Reliance Securities in its report on Monday.
The report said IRB Infrastructure, ITNL, Sadbhav, Ashoka Buildcon and MBL Infrastructures Ltd will benefit the most from the planned investments in roads and highways.
“All construction companies, especially those involved in the development of roads and highways, will see projects that are stuck due to funding issues take off with higher budgetary support," it said.
Owing to highly leveraged balance sheets in the sector, only a handful of developers such as IRB Infrastructure, Sadbhav Infrastructure and ITNL continue to bid for projects under the build, operate and transfer (BOT) model.
In BOT, the developer builds the project with its own money, operates it for a specified period and transfers it to the government.
Several other large companies such as L&T prefer projects under the government-funded engineering, procurement and construction (EPC) model.
India’s infrastructure firms have struggled with project delays and rising debt. Many are looking to monetize operational projects to raise capital to invest in bagging new projects.
Smaller road developers such as G.R. Infraprojects Ltd, PNC Infratech Ltd and Dilip Buildcon Ltd have started winning contracts as their larger rivals GVK Power and Infrastructure Ltd and GMR Infrastructure Ltd focus on reducing debt and completing existing projects rather than taking up fresh projects.
The Narendra Modi-led government’s thrust on speeding up construction of highways means that these companies stand to win increased business. More than half the projects are likely to be put up for bidding under the EPC route with the remaining under the BOT and the hybrid-annuity model.
Under the hybrid model, the government will share 40% of the project cost and allocate funds to the developer to start work. The remaining investment will come from the developer over the duration of the project’s execution. Revenue collection will be the responsibility of the National Highways Authority of India (NHAI); developers will be paid in annual instalments over a specified period of time.
The government on Monday said it plans to invest ₹ 97,000 crore on the roads and highways sector in 2016-17. Taken along with the investments in railways, the total comes to ₹ 2.18 trillion in the next fiscal.
“A huge commitment of ₹ 2.18 trillion on the rail and road infrastructure will not only kickstart economic growth but will also result in having a multiplier effect on India’s economy," said Sunil Kanoria, president of industry body Associated Chambers of Commerce and Industry of India (Assocham).
The enhanced allocation to the roads and highways sector, by around 22% from the previous year, will be a positive, but private sector investments will be key to meeting the target of 10,000 km of national highways by the end of 2016-17, said Vikas Kumar Sharda, director-capital projects and infrastructure at PwC India.
The ministry of road transport and highways is aiming to construct 100 km of roads per day, up from last year’s target of 30 km. India currently constructs 18 km roads and highways per day.
Given that private sector investment in the sector remains muted due to high leverage on part of the companies, government spending on infrastructure has been leading the way to revive the investment cycle.
“As expected, there is continued government spending on the infrastructure sector to get the investment cycle going, especially in the transportation and rural infrastructure sectors," said Arvind Mahajan, head of infrastructure and government services, KPMG in India.
India has the second largest network of roads after the US, spanning about 4.87 million km. It wants to expedite construction of new highways under the EPC and hybrid annuity models.
So far, the National Democratic Alliance government has taken various steps to increase development of new infrastructure in transportation by trying to revive stalled projects, fast-track clearances of projects, easy norms for exiting operational projects, and providing last-mile funding for projects that are stuck in advanced stages of completion.
India will develop road projects spanning 50,000 km and entailing investments of about $250 billion over the next five to six years, Mint reported on 17 February. NHAI has a target of awarding 10,000 km of projects each year. NHAI, which invites bids from developers and awards them to the lowest bidder, is the sole agency responsible for the development of national highways in India.
The government’s focus on improving last-mile connectivity in rural areas will result in improving long-term demand, said Ashish Agarwal, director-infrastructure at Equirus Capital, an investment bank.