>INFRASTRUCTURE: Road development in India

Implementation of reco. by B.K. Chaturvedi driving the new awards
Adoption of the B.K. Chaturvedi report recommendations has cleared the long pending
issue related to MCA & RFP, RFQ. Consequently, the road sector has seen a significant
pick up in the awarding activity- 4,940 km of new projects being awarded over the last 9
months compared to just 1,877 km in FY08-09. This yields a monthly run rate of close to
550 kms of new project awards. The run rate has further increased to 700 kms With
2871 kms of new project awards, in the first 4 months of FY11 itself.

NHAI expects to award 18,000 kms over FY11-12
NHAI’s FY11 target stands at 11599 kms of new awards. Add to it the 8250 km as spill
over from FY10 targets, the cumulative target stands at 19856 kms of new awards.
Though such a steep target is unlikely to be achieved over FY11, we would like to that
the 8250 kms spil over from FY10 targets already have the requisite clearances and are
ready for awards. NHAI expects to award ~9000 kms each in FY11E & FY12E, taking
the overall tally to 18,000kms on new road awards over FY11-12. However, based on
the monthly run rate of ~550km/per month over the last 9 months and ~700 km for YTD
FY11, we expect NHAI to award 7000-7500 kms in FY11E.

Developers maintain positive stance on the sector despite some lingering issues Developers are optimistic on the outlook and opportunities in road sector, despite the sector being plagued by key issues like:

Difference in project cost estimated by NHAI and developers: leading to lower VGF/
termination payments as these are calculated based on NHAI’s own estimates of TPC.
Land acquisition: Inability of the Govt in timely completion of land acquisition resulting
in significant time and cost overruns.

Removal of utilities: Removal of utilities, inordinate delays in obtaining forest clearances and approval for Railway over bridge (ROBs) impacts execution. Lack of succession planning: The current NHAI chairman was supposed to retire in Aug’10 and the ministry is yet to appoint his successor. This lack of succession planning is affecting the pace of project awards (last 3 months has seen few projects awards).

Developers opine funding cost still high. Lenders differ- Rates to harden Even though liquidity constraints have significantly eased over the last year, developers opine that the rates at 9.5%-12.5% (depending on project feasibility) are still high. However, lenders to road projects are of the view that the road sector was actually getting subsidized with lower rate of interest on account of lenders intentionally reducing their weightage on the power sector. With RBI adopting tighter monetary policy, lenders have started signaling that cheaper interest rate scenario is set to change, with interest rates expected to move up between 100 to 150 bps by the end of the fiscal.

Increasing competitive intensity leading to lower IRRs
Developer friendly initiatives adopted by the Govt over the last 12 months have resulted in significant pick up in investor interest. This has lead to increasing competitive intensity, evident from the fact that a lot of projects in FY11 are bagged by developers by paying premium to NHAI, as opposed to them receiving VGF in FY10. Consequently, developers/lenders have seen comparatively lower project IRR’s. The trend suggests a gradual move towards higher premium being paid by bidders.

Our view
We believe NHAI will award 7000-7500 kms of new road projects in FY11 as significant projects from work plan for 2009-10 already have requisite clearance & approvals,. We believe positive macro economic scenario, and political commitment will lead to significant growth opportunities for PPP investment in road sector. This, coupled with Govt’s willingness to resolve issues hampering private investment will lead to steep growth trajectory in the Indian road sector.

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