18 October 2019

Infratrack

Fast forward

 

With the government increasingly focusing on the infra push, and with execution picking up, the roads segment is expected to witness a structural uptrend.

 

 

The roads and highways sector has witnessed an improved performance in Q2FY16 with execution picking up and margins on an upswing. Softness in commodity prices aided EBITDA margins. This coupled with improvement in balance sheet health and falling interest rate led to a 21 per cent surge in EBIDTA and 7 per cent in revenue on YoY. The government new initiatives for development of the National Highways including the Bharat Mala Programme covering about 5500 km of new National Highways, special schemes for development of backward areas and places of religious and tourist importance covering a length of over 6000 km, 150 bridges in the next 2 years coupled with smart cities and infra push has generated renewed interest from this sector. With the target of highway construction of 30 kilometres per day within two years the roads segment is expected to see a major change. Favorable policy measures (fund infusion in stalled projects, exit clause), modification in Model Concession Agreement (MCA) for BOT and EPC projects and heightened focus on ensuring that all clearances are available upfront will be the drivers in bringing the sector back on the highway.

 

 

 

DRIVERS

 

Though economic slowdown coupled with other factors such as delay in land acquisition, policy delays, shifting of utilities, environmental clearances and shortage of skill and unskilled workforce are key hurdles in road construction, increase in vehicular traffic and government thrust in infrastructure development will keep the sector afloat in the coming times. Need for high upfront capital investment, long gestation period and uncertain returns have made highway development segment in the sector unattractive to many small private players and cost and time overrun, high debt level also derail the balance sheet of some big players. In such a scenario the government in the recent past has awarded majority of road projects through EPC route. However, since without private participation it is not possible to keep work rolling, it has introduced new Hybrid Annuity Model (HAM), with 40 per cent equity from government to attract private investment and to have a sustainable, efficient, safe and internationally comparable quality of road infrastructure to achieve enhanced and quick connectivity.

 

 

Being a key infrastructure segment, government spending and push on infrastructure is a very important demand driver for the sector.

 

 a) Rise in vehicular Traffic: Industrial reform measures and increased integration with global economy has led to growth in indus-trial activity that in turn has led to an increase in the number of commercial vehicles, increase in disposable income and easy financing terms helped in growth of passenger vehicles in India. During last 5 years, the number of registered vehicles have grown by a CAGR of ~10 per cent while road network in-creased by a CAGR of ~3.3 per cent.

 

b) During the next five years (FY15-FY19), investments through PPP are expected to be over $31 billion for National Highways and around $84 billion for state highways and rural highways.

 

c) Under Union Budget 2015-16 the government plans to connect 1,78,000 unconnected habitations by all weather roads. This would require completion of existing 1,00,000 km of roads under construction plus sanctioning of additional 1,00,000 km of roads. e) Ambitious road construction target by March-end would be 30 kilometres per day from 18 kilometres per day now, while the length of national highways would be increased from 96,000 kilometres to 1.5 lakh kilometers

 

Encouraging new financial schemes to reduce stress on bank funding, use of new initiatives such as infrastructure debt funds (IDF) and partial credit guarantee scheme PCG will reduce the stress on the banking system and provide alternative sources of funds to developers. Further, well-functioning corporate debt market could play a critical role by supplementing the banking system to meet the requirements of the corporate sector for long-term capital investment and asset creation.

 

 

 

TRACK RECORD

 

NHAI awarded projects worth 2443 km, recorded a y-o-y growth of 141 per cent during April-September 2015 as against 1013 Km in April-September 2014. Total highway projects awarded by NHAI and MoRTH combined stood at around 4500 km during April-September 2015 with a target for award of highway projects is 10000 km in FY16 as against 7980 km awarded in FY15.

 

Target for completion of construction of highway projects set at 6,325 km in FY16 as against 4,410km in FY15. NHAI and MORTH combined completed ~3,000km of highways during April-September 2015. Rate of completion improved to 16km per day from 12 km per day in FY15 and the same is required at 17 km per day in FY16.

 

 

 

RECENT DEVELOPMENTS

 

A. Faster Approval for Road Projects 

 

The government has approved segregation of civil construction cost from cost for land acquisition, and pre-construction activities for the purpose of appraisal and approval of National Highways (NH) projects.

 

i) All NH projects with a civil construction cost of up to `1000 crore shall now be appraised by SFC/EFC/PIB headed by secretary, Road Transport and Highways and approved by Minister, Road Transport and Highways. ii) The NH projects with a civil construction cost above `1000 crore shall be appraised by PPPAC/EFC/PIB headed by Secretary, Department of Economic Affairs/Expenditure and approved by CCEA. By adopting the policy, the avoidable delays in the process of appraisal and approval of NH projects can be suitably addressed. Further, speedy appraisal and approval will help in meeting the award target of 10,000 km set for this year.

 

B. Measures announced to tackle project delays

 

i) The government has approved a policy to extend the concession period for BOT-toll projects if the project has been delayed due to issues in receiving statutory approvals like slow land acquisition, shifting of utilities, environment clearances, or issues related to railway over bridges and under bridges. In case the project gets delayed, the concession period for the project will be increased, thereby ensuring that the developer is able to collect toll for the period originally envisaged. ii) In case BOT-annuity projects get delayed due to factors beyond the control of developers, the con-cession period will not be extended. Instead, NHAI has been authorised to pay compensatory annui-ties to the developer corresponding to the actual period of delay upon successful completion of the project. By adopting the policy, all major stakeholders in the PPP arrangement – the Authority, lender and the developer, concessionaire – would have an increased comfort level resulting in revival of the sector and this will bring relief thereby to citizens and travellers in that area.

 

C. Exit Policy – Government has recently allowed private developers to take out their entire equity and exit all operational BOT projects two years from the Commercial Operation Date

 

D. Revival of languishing projects - Cabinet has recently allowed one time fund infusion by NHAI for revival of BOT projects which are languishing in the construction stage, that have achieved at least 50 per cent physical completion.

 

E. Amendments:  The Ministry of Road Transport & Highways (MORTH) has amended certain clauses in the Model Con-cession Agreements (MCA) for BOT and EPC projects. These amendments assign greater responsibility to both contractors and awarding authorities for timely execution of projects and proper upkeep of projects during operations.

 

 

 

THE PLAYING FIELD

 

Road infrastructure sector is highly fragmented with many large and small players. Large players dominate the construction of highways as road projects need high up-front capital investment, have long gestation period and uncertain returns have made the highway development segment unattractive to smaller players. Moreover other factors like stringent technical ability norms, past experience, operational and financial parameters defined by NHAI for participating in PPP projects, limit the entry of small player in large highway construction projects. Consequently the national highway development is dominated by large players like IVRCL, Hindustan Construction Company Limited, IRB Infrastructure, Ashoka Buildcon etc. whereas small players dominate in construction of urban/rural/district roads as the bidding norms set by state agencies are relatively less stringent.

 

Improving expectation and government focus on reviving the infrastructure sector has revived new investment in road infrastructure sector in FY15. Consequently some players exhibited an increase in revenue. Though the sector could not yield much in the last five years because of delay in clearances and consequent overrun in cost and time, FY15 sector results have been better with EBIDTA and PAT improving significantly.

 

 

 

SOLUTIONS AND OUTLOOK 

 

Road infrastructure being a key sector for overall infrastructure development has got major impetus from the government in the current budget. This include measures such as increase in plan budget outlay to the roads sector, introduction of new HAM contract model for awarding project, speedy clearance of road projects and increase in threshold limited for appraising project. The Road Ministry is likely to award project length totaling 20,000 km in next two years whereas the total target for MoRTH is to award road construction project of 9,000 Km in FY 2016. Of the total 9000 km road contract to be awarded the target for NHAI is fixed at 5,600 km and the balance is be implemented through state PWDs. Further, expected softening of the interest rate and sharing of 40 per cent of the project cost under HAM model is likely to provide some comfort to industry players operating with a high level of debt and interest expense ratio. Consequently, we expect margins of the industry to recover marginally in FY 2016 backed by growth in revenue and reduction in financing expenses.

 

As the priority of the government lies in the development of infrastructure, an in-depth study of the gaps between international and national standards is required immediately. Use of locally available resources and materials to bring down the cost and need to reduce the time for completion of project through use of pre-fabricated and innovative technologies is the need of the hour.

 

Going forward focus will be on aligning national standards for design, construction, maintenance and operation of roads, bridges and flyovers with the global standards to bring down the cost of construction while maintaining high standards of quality through adoption of Innovative Technologies and materials for road construction. Further an appropriate scientific approach towards quality construction, time bound solutions and road safety would certainly lower the number of road accidents.

 

With the government focusing on the roads sector as part of it’s infra push, MoRTH target of highway construction of 30 km per day within two years, the roads segment is on a structural ascendant. Favorable policy measures such as fund infusion in stalled projects and exit clause, modification in Model Concession Agreement (MCA) for BOT and EPC projects and heightened focus on ensuring that all clearances are available upfront will be the drivers in bringing the sector back on the highway.

 

 

Source: ‘SBI-Industry Wrap-Road Sector-On a high-way’ by Dr. Soumya Kanti Ghosh, Chief Economic Adviser, Economic Research Department, State Bank of India

 

INDUSTRY WRAP
Indian Road Network (in lakh kms)
Road Category
1991
CAGR
2001
 
CAGR
 
2011
 
2102
 
2013 (P)
National Highway
 
0.34
 
5.55%
 
0.58
 
2.08%
 
0.71
 
0.77
 
0.79
 
State Highway
 
1.27
 
0.37%
 
1.32
 
2.18%
 
1.64
 
1.64
 
1.68
 
Other PWD Roads
 
5.09
 
3.75%
 
7.36
 
3.10%
 
9.99
 
10.22
 
11.00
 
Rural Roads
 
12.60
 
4.58%
 
19.72
 
3.38%
 
27.50
 
28.38
 
31.60
 
Urban Road
 
1.87
 
3.04%
 
2.52
 
5.03%
 
4.12
 
4.64
 
4.45
 
Project Road
 
2.10
 
0.65%
 
2.24
 
2.33%
 
2.82
 
2.99
 
3.11
 
Total
 
23.27
 
3.78%
 
33.74
 
3.32%
 
46.77
 
48.65
 
52.63
 
Source: MoRTH Annual Report 14-15; SBI Research

 

 

 

Status of NHDP/NHAI Projects as on DEC'14 IN Km
Phases
 
Total Length
 
Length completed
 
Balance to complete
 
Phase I GQ
 
7522
 
7519
 
3
 
Phase II NSEW
 
6647
 
5836
 
811
 
Phase III
 
12109
 
6352
 
5757
 
Phase IV
 
20000
 
1240
 
18760
 
Phase V
 
6500
 
1973
 
4527
 
Phase VI
 
1000
 
-
 
1000
 
Phase VII
 
700
 
22
 
678
 
Misc. Projects
 
12759
 
4934
 
7825
 
Total
 
67237
 
27876
 
39361
 
Source: MoRTH Annual Report 14-15; SBI Research

 

 




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