(Photo: Mint)
(Photo: Mint)

Analysts expect third TOT road bundle will be a success on better toll income

  • Success of TOT-3 is imperative as FY20 interim budget earmarks 10,000 crore fund-raise
  • In round 3, the NHAI has put on the block nine national highway stretches totaling 566 km

Mumbai: Analysts expect the government’s third attempt to auction public highways under the toll-operate-transfer (TOT) model will be as successful as the first, having drawn a blank in round two. On Thursday, the National Highways Authority of India (NHAI) invited bids from private operators for the third bundle of TOT auctions, looking to raise a minimum of 4,995 crore.

Based on future cash flows and discount rates used to arrive at present value, the NHAI has estimated the concession value at roughly 8.8 crore/km compared with 9.15 crore in the first two iterations of road TOT, said SBICap Securities in a report.

According to the report, the success of TOT-3 is imperative as FY20 interim budget has earmarked 10,000 crore (~10% of NHAI’s planned FY20 outlay of 1.1 trillion) fund-raise through TOT monetization to fund the ambitious Bharatmala programme.

For round three, the NHAI has put on block nine national highway stretches totaling 566km spread across Tamil Nadu (4), Uttar Pradesh (3), and Bihar/Jharkhand (1 each).

The first round of TOT auctions saw a mop up of 9,681 crore, against the initial estimated concession value (IECV) of 6,258 crore set by the government. Unlike TOT-2, which had to be cancelled because of poor bids, this time, the NHAI has been careful to make the bundle attractive to bidders both financially and operationally.

The SBICaps report points out that though the nine packages are spread across four states, a large portion (~60%, compared with 15% in TOT-2 and 83% in TOT-1) of it is under contiguous stretches, which should help in better utilisation of resources and also reduce complexity in maintenance.

At 60 lakh/km toll collection in FY18 for the TOT-3 bundle, it is 4% lower than that of TOT-2 and much below than that of TOT-1. Average CAGR growth in toll collection recorded on the individual stretches, since inception, was approximately 20%, slightly higher than in the previous two attempts. This leads to the conclusion that “while absolute collection is somewhat lower, the growth rate/potential seems better in comparison to earlier bundles," the report said.

Credit ratings agency ICRA, in a report, said the fact that the first TOT bundle was awarded for a much higher price than the NHAI’s estimate by 55% had raised expectation for the second bundle. This is evident from the IECV (base price) to the annual toll collection (FY2018) ratio, which was 12.2 times for first bundle and 17.9 times for second bundle.

The IECV multiple for second bundle was possibly aligned with the multiple for the winning bid for first bundle of 18.9. For the third bundle, this ratio has witnessed some moderation to around 14.8 times keeping in mind the subdued response for second bundle. “This makes the bundle relatively more attractive than the second one and has the potential to garner favorable investor response," Shubham Jain, Senior Vice-President and Group Head, Corporate Ratings, ICRA, said.

The overall funding requirement for the new highway development programme, Bharatmala, is estimated at Rs.6,92,324 crore, which is proposed to be funded through budgetary allocations of Rs.3,43,045 crore over FY19-FY22, market borrowings of Rs.2,09,279 crore, Rs. 34,000 crore through proceeds of monetisation through the TOT route and the remaining Rs.1,06,000 crore through private sector participation. Therefore, success of TOT model is significant, ICRA concluded.

The TOT model, introduced by the National Democratic Alliance government in 2016, is part of the Centre’s efforts to monetize operating public infrastructure and build new assets under programmes such as Bharatmala. Under the model, the highest bidder wins the rights to operate and maintain the assets over a 30-year concession period, with rights to toll revenues from these assets until then.