The slow pace of ordering in the first six months of FY20 has raised doubts over National Highways Authority of India’s (NHAI’s) ability to achieve its target for the full year.
NHAI’s maiden investor meet held about a fortnight ago reiterated the targeted 6,000km of orders in FY20. To be sure, this looks to be a tall order given that until end-September, only about 600km of orders were awarded. A report by HDFC Securities Ltd estimates ordering of only 4,500km in FY20. Others, such as Antique Stock Broking Ltd and BOB Capital Markets Ltd have also scaled down estimates to 4,500-5,000km.
Developers cite high land cost, slow acquisition of land because of legal hurdles and funding constraints as reasons for the delay. In fact, after a lull in government activity due to the general election, the road sector failed to shift into the fast track as was expected. After FY18, when NHAI’s orders peaked at about 7,400km, the pace has slipped.
What gives? The much-touted hybrid annuity model (HAM), where the government provides the comfort of equity support upfront, is now on shaky ground. Reasons vary from delayed financial closures to liquidity issues that have constrained bank funding, and even last mile land acquisition hurdles.
Meanwhile, a firm directive from the Prime Minister’s Office asking NHAI to stop government funded HAM projects due to fiscal constraints could further delay project awards.
A switch to the BOT (build-operate-transfer) model of awards may not find takers. According to Rajeshwar Burla, vice president and associate head (corporate ratings) at Icra Ltd, “The equity requirements of private road developers are higher in BOT compared to HAM. Given the current financial health of many developers, equity mobilisation is challenging." Further, macroeconomic issues would make it hard for firms to raise project debt.
That apart, equity markets are volatile with lack of investor appetite for the infrastructure sector. Shares of leading road construction firms such as Sadbhav Engineering Ltd and Dilip Buildcon Ltd are down 20-30% since January.
Meanwhile, traffic flow forecast is another risk to BOT projects, wherein cash flows hinge on toll collections, unlike a HAM project that offers steady annuity income for the developer.
Analysts are of the view that a new BOT model concession agreement is being reworked to make it more attractive for developers as well as lenders. But this may take time.
So, FY20 is likely to see hiccups in orders for road projects. Thereafter, analysts reckon that if land acquisition is in place and economic activity picks up, NHAI’s orders too will gain momentum. Analysts are therefore in sync with NHAI order targets set for FY21 and FY22, though the fact remains that it would be lower than the peak level scaled in FY18.