It looks like the much-hyped hybrid annuity model (HAM) adopted for road projects is running into rough weather. The delay in announcing the “appointed date" for nearly one-third of the HAM road projects has been a cause for concern. Appointed date is the date fixed after the tender is awarded from when the scheme comes into force.

To be sure, the HAM model is an improvisation on the erstwhile BOT (build-operate-transfer) format. The National Highways Authority of India (NHAI) had hoped to circumvent project delays due to the hurdles in land acquisition and environment clearances. These hurdles had sounded death knell for some of the best infrastructure firms during the early 1990s, leaving gaping holes in investors’ pockets.

However, it seems like the government is facing challenges in land acquisition yet again. Almost 34 of the 100-plus road projects awarded under HAM are stuck, unable to increase pace of execution as the mobilization advance is not given by the government until the appointed date is fixed. The date is announced only after the government secures 80% right of way for a project.

(Naveen Kumar Saini/Mint)

Does this mean history will repeat itself? Will infrastructure firms once again be caught in delays, high working capital outlays, cost overruns and low rates of return?

Dilip Buildcon Ltd, Sadbhav Infrastructure Project Ltd and MEP Infrastructure Developers Ltd, are the top three bidders in HAM road projects. Along with Ashoka Buildcon Ltd and PNC Infratech Ltd, they account for about 60% of total contracts awarded under this format. These firms have large order books, amounting to about two-three times their annual revenue.

According to Icra Ltd, the pace of financial closure for infrastructure projects had improved by 50% between FY16 and FY18 from 430 days to 194 days, which gave investors the comfort to back these firms.

Sadly, in the last few months, delays in announcing the appointed date even after financial closure by banks, has become a concern, and stocks have mirrored the sentiment. This, despite the high order books and revenue growth in the nine months of FY19. Shares of Dilip Buildcon tumbled 55%, while that of NCC Ltd, Sadbhav Engineering Ltd (the engineering, procurement and construction or EPC) arm of Sadbhav Infrastructure) and IRB Infrastructure Developers Ltd were down 35%, 52% and 41%, respectively, in the past year.

The delay in mobilization advance paid by the government (which happens after the appointed date is fixed) has increased the working capital outlay for some firms. This is not a good sign. It implies higher interest cost, which in the final analysis, affects the rate of return on the project.

That apart, "although private sector banks have taken the lead in funding HAM road projects, delays in financial closure are resurfacing given the recent stress in banking system. This could be a problem for new developers (many tier-II developers) who are taking high exposure to HAM projects," says Rajeshwar Burla, associate head (corporate ratings) at Icra Ltd.

Even for EPC contracts, about 80% of the debt on the developers’ books is to meet working capital requirements. As a result, balance sheets are expected to deleverage at a slower pace, compared to the last two years.

Besides, the tightness in liquidity has also been a challenge. Prospects of these firms hinge on the return of liquidity to the system and faster land acquisition for projects. On the contrary, if the challenges persist, it may not be long before the firms’ revenues and profitability run aground in spite of an attractive pile of orders.

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