Considering the huge investments planned and focus on faster implementation, the road sector could be an emerging opportunity.
Recent events have rejuvenated interest in the road infrastructure space, which had seen a slowdown in 2008-09. To begin with, while addressing an investor’s summit in Singapore, India’s Minister for Road, Transport and Highways, Kamal Nath stated “the next decade will be infrastructure decade.” Besides, he emphasised the need to speed up investments in the road sector and has set an ambitious target to build almost 20 km of roads a day. Experts believe that investors can reconsider the road sector as the focus is now shifting towards speeding up the implementation pace and the mega investments planned towards scaling up the country’s road network. The additional boost to confidence comes from the fact that the ministry is working towards exploring higher participation of private players, seeking foreign investment, increasing availability of funds and more importantly, faster acquisition of land. Here is why investors can look at some of the infrastructure companies.
State of the road
Large sectoral opportunities are the prerequisite for any company to be able to grow and road is among those few segments. Today, despite having the second largest road network in the world, India’s national highways account for only two per cent of the total road network even as it carries 40 per cent of the total traffic (passenger and freight). As the passenger (growing at 12 per cent) and cargo (over 15 per cent) traffic will continue to grow at healthy rates, it indicates the need for more investments. These would be towards expanding the roads network as well as strengthening existing infrastructure (two- and four-laning) besides, improvement in the road quality.
Mega plans
Meanwhile, the ministry has chosen to fast track projects with an aim to construct 20 km per day (over 7,000 km annually). Estimates suggest that a huge investment of Rs 130,000 crore will be required to build about 54,000 km (including increasing the number of lanes in existing roads) in the next five years. Over the next year, the NHAI is expected to award about 126 projects covering 12,000 km, of which, 65 new projects covering 6,500 km would be awarded by March 2010.
The issues
While these are huge plans and the annual target itself is significantly higher as compared to last years’ figure of 2,203 km, it may not be an impossible target given that nearly 3,300 km of roads were constructed in 2005-06. However, considering the tardy progress in the implementation and award of projects in the past, investors need to be watchful about the progress of the projects. During 2008-09, only nine projects with total length of 1,000 km were awarded. Constraints like availability of funds, high interest rates, risk aversion of the developers and finally, the election period took a toll on the performance last year.For now, even the minister himself recently ruled out the possibility of achieving the 7,000 km target of road construction in the current year. “We are very positive as far as the opportunities are concerned in the road sector. However, today the main issue is that the process should be expedited and the government should award as many projects as possible,” says Amitabh Das Mundhra, director, Simplex Infrastructures.
De-bottlenecking
To deal with the situation, the minister has already listed out a number of initiatives which are being taken to fulfil the target of constructing 20 km road per day. But, don’t expect miracles. “The initiatives taken by the government are definitely encouraging towards the growth of the sector and the attitude seems to be positive, however we cannot expect the things to change overnight,” says Sudhir Reddy chairman & managing director, IVRCL Infrastructure & Projects.
| ROAD WARRIORS | ||||||||
| In Rs crore | Road % of Order book | FY09 | TTM PE (x) | CMP (Rs) | ||||
| Sales | % chg | PAT | % chg | OPM (%) | ||||
| Gammon India* | 51.0 | 3,657.9 | 56.0 | 140.5 | 63.1 | 9.0 | 9.0 | 145.0 |
| HCC | 19.0 | 3,560.3 | 18.9 | 99.5 | 14.9 | 14.0 | 29.9 | 111.0 |
| IRB Infra. | 100.0 | 991.9 | 35.4 | 177.2 | 40.0 | 44.1 | 35.0 | 186.0 |
| IVRCL Infra. | 8.0 | 5,053.0 | 29.8 | 265.0 | -20.3 | 9.6 | 19.8 | 337.0 |
| Nagarjuna Con. | 9.0 | 4,724.1 | 31.6 | 182.5 | 8.8 | 10.6 | 20.2 | 136.0 |
| Patel Engg.** | 16.0 | 1,859.6 | 44.2 | 162.8 | 40.8 | 14.7 | 14.9 | 444.0 |
| Simplex Infra. | 16.0 | 4,723.5 | 66.7 | 124.2 | 37.9 | 9.2 | 15.8 | 387.0 |
| Note: Order book as on Dec 2008, *Gammon India financials are stand alone, CMP is current market price as on 24 July. ** Patel Engi. Financials are for the FY08 Source: Capitaline | ||||||||
Among crucial issues, the land acquisition, which is the biggest stumbling blocks leading to massive cost overruns, the ministry has asked the individual state governments to play a proactive role. Also, NHAI will award the bids only when 80 per cent of the land for the project has been acquired, which will help overcome delays. Besides, there are measures to make the projects viable and attractive to encourage private participation. About 60 per cent of these new projects are expected to be on BOT (build-operate-transfer) basis and the internal rate of return (IRR) is estimated to be as high as 18-20 per cent as against the 14-16 per cent earlier.
Additionally, making available the entire 40 per cent of Viability Gap Finding (to make uneconomical projects viable) during the construction period itself and increase in concession period to 25-30 year from earlier 18-20 years, should turn projects attractive. “Given the measures taken by the government and improving economic environment like growth in traffic and lower interest rates, the IRR going forward should be better compared to last two years,” says Reddy.
The relatively lower interest rates and moves allowing Indian Infrastructure Financing Company to issue tax-free bonds for infrastructure projects are equally good news for the sector.
Conclusion
Overall, the challenges surrounding the sector may not disappear soon, but the direction towards sorting out the issues and developing innovative ways to deal with the problems could help in the long run. “I think more than the targets, what is important is that the government is willing to speed up the implementation process and take its figures further to construct roads of 20 km per day,” says Inderjeet Singh Bhatia, tracking infrastructure at Macquarie Research.
So, if things take shape as planned, the large opportunity in the sector should benefit companies in this space. While there are many companies like L&T and GMR Infra that have a presence in the road infrastructure business, there are some others which have a visible exposure to this sector. These companies (see table) also have reasonable balance sheet strength and execution capabilities, and may be considered.
