>ROADS SECTOR (MACQUARIE RESEARCH)

Roads sector – Walking the talk

Event
■ Activity in the road sector is gathering momentum after a 2-year lull. National Highway Authority of India (NHAI) has stepped up project awards under the new government. NHAI has opened tenders on six projects of 644km worth Rs69bn (US$1.4bn) awarded in the last 30 days.

Impact
■ Project awarding at full speed by the new government: After lacklustre activity over the last two years due to unfavourable policies and an economic slowdown, NHAI has shifted gears with a new minister in charge.

⇒ Six projects worth Rs69bn decided in last 30 days: In contrast to only nine project awards in FY09 vs a target of 56 projects, six projects have already been decided on in last 30 days. The actual award of the projects is now a formality. Four of these were bagged by IRB Infra – one each by the GMR-Punj Lloyd consortium and HCC-Laing-Sadbhav consortium.

⇒ Pipeline of road projects is very healthy: There are another 41 projects worth Rs410bn (US$8.5bn) at various stages of bidding, just waiting to be awarded. On top of this, there are another 9,000km of road projects where ground work has been done and they are awaiting project bidding.

■ Government moving to improve viability of projects: In order to revive developer interest and speed up project awards, several measures have been introduced and some are more likely to be taken up (refer to page 2 for details). ⇒ Plan to set up separate finance vehicle for highways
⇒ Project to be put up for bid on annuity basis directly if not viable on toll basis
⇒ Estimated project costs increased
⇒ Increase in Viability Gap Funding (VGF) and payment norms
⇒ Concession period increased for several projects
⇒ Beneficial land acquisition norms

Outlook
■ Developers to benefit with better returns on the projects: Developers will gain as the competitive intensity for taking BOT projects has eased. Our channel checks suggest that new projects are being taken at an 18–20% equity IRR with conservative assumptions vs 14–16% IRRs last time around.

■ Construction contractors to gain, with a lag: Construction companies will gain, with a lag, as these projects will take around six months for financial closure before construction can start on the projects.

■ Road activity to also have a multiplier effect: Road projects worth US$10bn will directly benefit industries like steel, cement and construction equipment, while also generating large-scale employment opportunities.

To see full report: ROADS SECTOR