Even falling bank rates, that is normally a boon, have started to impact the cash flow cushion of HAM projects. In its recent report, Hybrid Annuity Model—Developing Cracks, rating agency CARE Ratings Ltd said, “Bank rate steadily declined from 6.75% per annum (p.a.) in January to 5.65% in September without the corresponding reduction in the cost of borrowing which is expected to moderate the cash flow cushion of operational HAM projects."
Note that the annuity paid by the National Highways Authority of India is linked to the bank rate (plus 3%). In a falling interest rate scenario, the lag in rate transmission on loans creates a mismatch in annuity income earned by the road developer and the interest paid by it to the bank. This can cause cash flow disruptions for operational assets in the short term, till bank rates stabilize.
Also, with numerous skeletons surfacing in the banking industry, mid-sized construction companies are finding it tougher to procure term loans and bank guarantees.
Additionally, a lack of investor appetite for infrastructure companies is making it difficult for them to tap equity markets. Shares of Dilip Buildcon Ltd, Ashoka Buildcon Ltd, Sadbhav Engineering Ltd and KNR Constructions Ltd have plummeted by 20-40% since April.
“Financing for projects is yet a concern, and at this juncture, bankable names would clearly distinguish themselves on their ability to achieve closure faster and place them at the top," said a recent report by Anand Rathi Shares and Stock Brokers Ltd.
That’s not all. Land acquisition or right of way issues are coming to affect HAM projects. This is in spite of the government’s pledge to ensure that 80% of the land is tied up before issuing an appointed date to start a project.
Ironically, there is a provision that allows for de-scoping unavailable land from the overall project and issuing a partial completion date if the developer completes the project on the available land. But, disputes between the developer and the government often hinder a quick resolution.
If such hurdles persist, the order books of infrastructure companies, which are about three times their annual revenues, becomes meaningless. As such, investors’ faith in the sector, which has been waning in recent times, may never return.