Photo: Pradeep Gaur/Mint
Photo: Pradeep Gaur/Mint

Infrastructure stocks’ rally on centre’s relief steps is much ado about nothing

  • The govt has flexed the concession period for TOT road projects to 15-30 years from earlier 30 years
  • None of the present listed companies whose stocks surged, have any exposure to TOT projects

Infrastructure stocks rallied on Thursday after the government introduced measures to make road projects more investor-friendly. Shares of IRB Infrastructure Developers Ltd vaulted 12.24%, while NCC Ltd, Ashoka Buildcon Ltd and Dilip Buildcon Ltd rose 1.23%, 1.4% and 1.92%, respectively.

However, the knee-jerk reaction was unwarranted and may fizzle out, as bigger issues could make the road ahead bumpier. The government has flexed the concession period for toll-operate-transfer (TOT) road projects to 15-30 years from the earlier 30 years. However, this was immaterial to listed firms, whose shares rallied as they do not have any TOT projects in their portfolio. In fact, so far, only large global firms, such as Macquarie Group and Cube Highways and Infrastructure Pte. Ltd, have won TOT bids.

Graphic: Naveen Kumar Saini
Graphic: Naveen Kumar Saini

Click here to see enlarged image

Indeed, a lower concession period is a welcome step. According to analysts, it makes the toll traffic and revenue forecast more realistic. But it may be meaningful for listed companies if the same is made applicable to the hybrid annuity model or the build-operate-transfer projects, where listed firms have significant exposure.

To be sure, the government’s move to settle at least 75% of the arbitration claims to contractors was a welcome step.

But, Rajeshwar Burla, vice-president and associate head, corporate ratings, Icra Ltd, said: “More than 50% of these monies are to be paid to contractors who are either rated in the default category or are under severe liquidity stress. It has been more than three years but the scheme has met with very limited success. Lenders were not forthcoming (rightly so) to sanction bank guarantees or they demanded 100% cash margin against disputed awards, which contractors were unable to furnish." In this context, the waiver of bank guarantee for one-year interest on large claims is too small to bring the desired relief for firms.

That said, the steps being taken to ease the pressure on companies’ cash flows are welcome. But, the need of the hour is to hasten the redressal process in arbitration cases. According to the latest data (FY18) from the National Highways Authority of India, the number of companies with arbitration and court cases is 1,014 and 730, respectively.

Contractors/concessionaires have claims of 55,345 crore and $430,138 in arbitration, and 7,439 crore and €262,181 in court cases. Often, continued appeal before the higher courts by the central public sector enterprises against infrastructure companies only prolongs redressal of disputes. Further, for the rally in infra stocks to sustain, road construction firms must display sustained revenue and operating profit growth, along with order flows. Both of these have been subdued since the general elections due to overall economic slowdown.

Further, NHAI was warned by the government for reckless spending, which will perhaps slow the pace of order flows.