>ROADS SECTOR: NHAI's improved financial maneuverability, reduced competitive intensity augur well

■ NHAI has awarded ~3,685km in YTD FY12: NHAI targets to award 7,300km of road projects in FY12 and has already awarded ~3,685km till date. The pace is encouraging and we believe that the target is achievable, with ~1,700km of projects under bid evaluation/submission stages. We expect the momentum in project awards to continue, as there exists a ready bank of ~15,000km, where critical milestones are being achieved. Unlike other Infrastructure segments

like Airports, Power, etc, that are facing regulatory, systemic and resource issues, the Roads segment continues to enjoy high visibility of investment activity. A large opportunity canvas coupled with established regulatory framework and peaking out of the interest rate cycle bodes well for several incumbents in the segment.

■ Key initiatives help expedite project awards: NHAI carried out an exercise to pre-qualify bidders on an annual basis, rather than carrying it out on project-to-project. This along with past initiatives like setting up land acquisition cell have started showing results, helping NHAI expedite project awards.

■ Increased premium collections to partially aid funding: The total premium quoted by developers for projects awarded in YTD FY12 stands at INR20b, up from just INR4b each in FY10 and FY11. Given the escalation of ~5% and possibility of continued premium on further bids, we believe premium collection has emerged as an important source of annuity funds for NHAI.

■ NHAI's financial maneuverability has improved: Raising incremental resources through bonds would be a very important strategy for NHAI. During FY12, it intends to raise INR100b through tax-free bonds; the quantum is likely to increase substantially, going forward. This compares with cumulative market borrowings of just INR130b-150b over the past decade. NHAI's revenues in FY11, comprising of cess and tolls, stood at ~INR110b. Market borrowings coupled with increased premiums have improved NHAI's financial maneuverability.

■ Competitive intensity easing in past few awards: In the past few project awards, the number of bidders has been significantly lower. The Road sectos has gone through bouts of excessive aggressiveness in bidding, and at times complete apathy in bidding for the projects. With the kind of capital that has got committed from various players in the sector, we now believe that there is only limited appetite that would be available for future projects to come up and as such we expect the bidding aggressiveness to reduce. Players like IRB have, in fact, raised the internal threshold for return to 18% (v/s 15% earlier).

To read the full report: ROADS SECTOR

RISH TRADER