A few bumps aside, road ahead is largely smooth for Infra developers

Though competition is very high, stabilisation of commodity, input and energy prices should support margins

The government has followed a counter-cyclical policy through the last two years as it has attempted to regain growth momentum after the near collapse during the 2020 lockdown. The Budgets have since focussed on building infrastructure capacity. One key measure is the speeding up of the building of highways.

As a result, there are healthy order books across road developers and this means steady revenues for developers through the next three fiscals. In 2021-22, NHAI awarded over 12,000 km of roads in 127 new projects, an increase of 22 per cent year-on-year (YoY). Of these, 62 projects were under HAM (hybrid annuity model) and 63 were under EPC (engineering, procurement and construction).

Road-building has been quite successful with an average of 28.6 km per day being rolled out in 2021-22, but this was slower than 36 km per day in 2020-21. In 2022-23 there’s a commitment to expand the award to 25,000 km under the PM Gati Shakti National Master Plan. If this comes through, the order book will ensure revenues until 2025-26.  

However, there are headwinds and concerns, especially on the financial front. Dilution of bid qualifications during the pandemic could lead to inadequately funded developers receiving orders they cannot execute. Some developers seem to lack the net worth to even cover equity requirements.

Lenders could therefore be over-exposed and there may be equity shortfalls and delays. The leading private banks are now turning cautious but PSU banks seem to still be lending enthusiastically and could be over-exposed.

Developers with stronger balance sheets will gain a competitive edge, if the sector doesn’t run into serious trouble. Investors need to examine the HAM projects in all its details as well as the EPC options.

EPC players are insulated from cost increases due to the pass-through nature of such projects. It’s likely the NHAI will raise the net worth requirements for HAM and reduce the upfront payment to 20 per cent of project cost rather than the current 40 per cent. This again favours developers with good balance sheets.

On the positive side, stabilisation of commodity prices, and a reduction in energy prices, as well as in steel and bitumen prices should help developers to improve margins in HAM projects. Some corporates have also been successful at monetising HAM assets, by transferring to InVITs.  

GR Infraprojects’s private InvIT, Bharat Highway InvIT, has received SEBI registration for transfer of six operational HAM assets (equity of Rs 1,000 crore) in 2022-23. In August, IRB Infra approved 100 per cent stake transfer of Vadodara Kim Expressway to IRB InvIT for Rs 340 crore. Ashoka Buildcon’s sale of five BOT (build-operate-transfer) assets and one annuity asset will be completed in Q2, 2022-23. HG Infra and PNC Infratech are also in talks with potential investors for asset monetisation.

In the HAM model, once commercial operation is achieved, risks are mitigated. Cash flow risk is minimised due to NHAI as counterparty (since it is rated AAA), and the interest risk is mitigated by cash flows. Given the combination of likely higher yield and AAA rating, lenders are willing to take risks to fund these.

The road developer scenario is very competitive – too competitive in fact, which is why balance sheet strength is critical. One analyst picks PNC Infratech (price target Rs 427), NCC (Price target Rs 125), HG Infra (Price target Rs 940) and Ashoka Buildcon (price target Rs 188) as most attractive. Another analyst has GR Infra (Price target Rs 2,266) and Dilip Buildcon (price target Rs 369) as Buys.