If there’s one word that is constantly bandied about in the noise surrounding economic growth, it is infrastructure. An increase in the pace of infrastructure activity is paramount to kicking growth into higher gear.
Now, infrastructure encompasses a wide range of areas — roads, railways, airports, power, ports, telecom, mining, water and sanitation projects, bus shelters and multi-level car parks, and other urban infrastructure. And infrastructure development has been stuck for years now.
Each segment has its own specific problems besides suffering the fallout of the economic slowdown. Power projects, for example, are in need of fuel, better pricing and distribution. Ports are congested and turnaround times are long. Road projects have been held up for want of land and clearances, poor traffic volumes due to the slowdown, and recklessly over-priced bids.
Specific problems apart, funding — both long-term and for working capital — is a common worry for infrastructure companies. With the slow execution, high debt, cost overruns, and lack of new projects, the infrastructure sector has been accounting for an increasing share of banks’ stressed assets. According to the latest Reserve Bank’s Financial Stability Report, infrastructure accounted for 29.8 per cent of bank stressed advances as of December 2014.
Addressing issues
The roads sector, however, seems to be crawling out first from this quagmire, and looks better-placed for growth than projects relating to airports, power or ports.
Over the past two years, several steps have been taken to address bottlenecks and shorten execution timelines. For one, forest clearance was delinked from environmental clearances in early 2013. Two, the entire clearance process was itself fast-tracked and online filing was allowed. Sadbhav Engineering, GMR Infra, and GVK Power and Infra are some companies that withdrew from large projects over delays in clearances.
Three, some developers who won projects based on the premium they paid the NHAI were allowed to defer premium payments for a specific number of years, providing them some short-term cash flow relief. Four, developers were allowed to fully exit projects.
The NHAI also began bidding out more projects through the plain-vanilla EPC (engineering-procurement-construction) route. Such a method simply involves the construction of the road. The bidding company does not take on the traffic and tolling risk as it otherwise would under the BOT (build-operate-transfer) route. EPC projects involve lower capital infusion, faster payback and lower risk.
Companies such as Larsen & Toubro, Sadbhav Engineering and Ashoka Buildcon, have won such EPC projects. Over 2014-15, the NHAI awarded projects worth ₹22,608 crore against the ₹7,395 crore the year before. State highway activity also, similarly, gathered pace.
National Fund
The recent Budget also helped deepen the funding pool for road developers. Apart from a 52 per cent increase in budget allocations, part of the excise duty collected on petrol and diesel was redirected towards road cess. A National Investment and Infrastructure Fund was to be set up with an initial capital of ₹20,000 crore. Tax-free bonds were reinstated, with the NHAI allowed to raise up to ₹24,000 crore through this route.
Finally, though infrastructure projects have gestation periods of 10-15 years, banks were unable to lend for longer tenures because of an asset-liability mismatch. This problem has now been addressed. Banks are allowed to raise long-term funds, without having to set aside statutory requirements, specifically to lend to infrastructure projects. Banks can also work out flexible repayment structures for such projects.
Looking up
These measures will play out over the long term. Meanwhile, road developers are already seeing some improvement. With the resumption in awarding activity by both the national and State highway departments, revenue growth has also begun to accelerate.
The nine listed pure road developers saw revenues grow 5 per cent for 2014-15 over the previous year, even as the collective infrastructure space posted flat revenues. They also saw net profits grow a good 20 per cent for the year, against the 62 per cent net profit drop clocked by the listed infrastructure space.
Further, with some improvement in economic activity, traffic volumes picked up, driving toll collections higher. Toll revenues for IRB Infrastructure Developers, for example, grew a good 23 per cent for the 2014-15 fiscal over the previous year (excluding one project on which tolling began only in 2014-15). Key stretches such as Mumbai-Pune and Ahmedabad-Vadodara saw toll collections grow in excess of 25 per cent over the past four quarters, while those such as Tumkur-Chitradurga and Surat-Dahisar clocked steady double-digit growth.
Similarly, for Sadbhav Engineering, growth in toll collections began progressively accelerating for projects such as its Aurangabad-Jalna, Bijapur-Hungund, and Auragabad Ring Road.
Improvement in traffic volumes is also important for BOT projects because developers will have less room for increase in collections through toll rate hikes. Toll rates are usually linked to the wholesale price index, which has long been hurtling south.
Of course, barring Larsen & Toubro and KNR Construction, the debt-equity ratio of all players is above two times and interest cover below 2.5 times. But over the long term, lower interest rates, better-designed funding and cheaper inputs such as bitumen and steel should help improve margins.
Besides IRB Infra and Sadbhav Engineering, the prospects of players such as MBL Infra, KNR Constructions, Larsen & Toubro, Ashoka Buildcon and IL&FS Transportation Engineering will improve on the road sector cementing its revival.