Mixed Results

The year 2018-19 has been a mixed one for companies involved in road development. While those such as NCC Limited and Reliance Infrastructure Limited recorded sizeable profits, other large road construction players such as Ashoka Buildcon Limited, Hindustan Construction Company [HCC] Limited and the Sadbhav Group reported losses. The enormous construction opportunities offered by the Bharatmala Pariyojana and the new implementation models – hybrid annuity model (HAM) and toll-operate-transfer (TOT) – have attracted a number of new players. Mid-sized companies have started marking their presence, either on their own or through joint ventures with foreign companies.

The year also saw a pickup in financial closures of road projects being undertaken by large companies while the struggle continued for mid- and small-sized companies. There was also increased activity in terms of asset sales.

Numbers speak

India Infrastructure Research tracked the financial performance of 18 key companies in the road sector. In 2018-19, around 44 per cent of the companies tracked recorded losses or a dip in net profits as compared to the previous financial year. Some of the companies which incurred losses were Ashoka Buildcon Limited, HCC Limited, IVRCL Limited, Jaypee Infratech Limited, Sadbhav Engineering Limited and Sadbhav Infrastructure Project Limited. The companies that experienced a fall in their profits as compared to the previous year include Dilip Buildcon Limited and IRB Infrastructure Developers Private Limited.

However, companies such as NCC Limited and Reliance Infrastructure Limited registered marked improvement in profits over the previous year. Companies such as Welspun Enterprises Limited and H.G. Infra Engineering Limited posted an over 50 per cent rise in profits during the year while PNC Infratech Limited, J Kumar Infraprojects Limited, Larsen & Toubro, Gayatri Projects Limited and MEP Infrastructure Developers Limited registered a growth of over 20 per cent in profits. KNR Constructions Limited also witnessed an impressive 15.72 per cent growth in profits over the previous financial year.

In terms of total income, Reliance Infrastructure Limited recorded negative growth.

Key trends

Financial closures

With lenders gradually warming up to HAM, there has been a pickup in financial closures. That said, it is the large road sector companies that have benefited from this trend. Given the relatively asset light nature of the model, several first-time promoters or companies with weak balance sheets and financials had bid for, and secured, high-ticket HAM projects. These companies are still finding it difficult to raise funds from the capital market. Most of them have been unable to provide bank guarantees owing to their weak financials, as a result of which banks are unwilling to take the risk of financing their projects. As per India Infrastructure Research, a total of 19 HAM projects achieved financial closure in 2018-19, as against six in 2017-18. Further, financing documents for another five road projects have already been submitted to the National Highways Authority of India (NHAI) and two projects have received sanction letters from banks.

During 2018-19, KNR Constructions Limited and MEP Infrastructure Developers Limited achieved financial closure for four projects each, worth a total of Rs 44.67 billion and Rs 41.05 billion respectively. Further, Dilip Buildcon Limited, IRB Infrastructure Developers Limited and PNC Infratech Limited have been successful in tying up funds for three road projects each, worth Rs 41.19 billion, Rs 55.08 billion and

Rs 45.13 billion respectively. H.G. Infra Engineering Limited and Sadbhav Infrastructure Project Limited also achieved financial closure for one project each, worth Rs 6.06 billion and Rs 11.61 billion respectively. In addition, Ashoka Buildcon Limited has submitted financial closure documents to NHAI for four projects worth Rs 47.45 billion, while Sadbhav Infrastructure Project Limited has submitted financing documents for one project worth Rs 10.92 billion. Also, Dilip Buildcon Limited has received sanction letters from banks for two of its road projects worth Rs 22.79 billion.

In the first three months of 2019-20 (till June 20, 2019), seven projects have achieved financial closure. Of these, six are being implemented by Dilip Buildcon Limited at a total estimated cost of Rs 88.94 billion and the seventh project is being undertaken by Ashoka Buildcon Limited at an estimated cost of Rs 8.56 billion. Recently, in May 2019, Sadbhav Infrastructure Project Limited also submitted financing documents to NHAI for its Rs 10.08 billion road project in Karnataka.

Asset sales

In the past few months, the market has seen both domestic and foreign players increasingly picking up stakes in road assets. In May 2019, all the stakeholders of Ghaziabad Aligarh Expressway Private Limited – PNC Infratech Limited, Galfar Engineering and Contracting SAOG and Bharat Road Network Limited – executed share purchase agreements with Cube Highways and Infrastructure Private Limited for divestment of their entire stake in the special purpose vehicle (SPV). In March 2019, Reliance Infrastructure Limited signed a definitive binding agreement with Cube Highways and Infrastructure III Private Limited for the sale of its entire 100 per cent stake in Delhi-Agra Toll Road Private Limited. The total enterprise value of the deal is over Rs 36 billion.

In February 2019, KNR Constructions Limited also entered into a share purchase agreement with Cube Highways and Infrastructure III Private Limited for the sale of stakes in KNR Tirumala Infra Private Limited and KNR Chidambaram Infra Private Limited, in a phased manner for a consideration of Rs 1.52 billion and around Rs 0.36 billion respectively.

Earlier, in December 2018, Ramky Infrastructure Limited completed the sale of its 100 per cent shareholding in N.A.M. Expressway Limited to Cube Highways and Infrastructure Private Limited. Earlier, in September 2018, HCC Limited had sold its Farakka-Raiganj highway to Cube Highways and Infrastructure II Private Limited.

In August 2018, MEP Infrastructure Developers Limited had also signed a non-binding term sheet with Indian Highways Developers Private Limited with respect to the divestment of its total stake in six SPVs to raise Rs 4.5 billion through this sale.

Other financial moves

In June 2019, a group of global investors comprising Beijing-based Asian Infrastructure Investment Bank, Germany’s DEG, International Finance Corporation and India’s HEG Group invested in an infrastructure investment trust (InvIT) formed by Oriental Structural Engineers Private Limited (OSEPL). Reportedly, OSEPL has raised Rs 23 billion through an offer of units that opened on June 10, 2019 and will hold 60 per cent of the units in the investment trust.

In May 2018, GR Infraprojects Limited filed draft papers with the Securities and Exchange Board of India to float an initial public offering, through which it plans to raise Rs 18 billion. Earlier, in December 2018, HCC Limited raised Rs 4.98 billion through a rights issue of its equity shares. The issue was oversubscribed with HCC receiving applications worth Rs 5.51 billion.

Future plans

In April 2019, the National Investment and Infrastructure Fund of India and Roadis announced the creation of a platform for investing in road projects in the country. The platform will invest up to $2 billion of equity in projects being bid out through the TOT model, thereby acquiring existing road concessions. With strong expertise in investment and operations, the platform intends to operate the road portfolio at the highest global standards, while creating maximum value for shareholders.

After the IL&FS crisis, there has been an increase in the number of road projects being put up for sale. Reportedly, several road construction companies are exploring plans to divest stake in their road assets to raise revenues for bidding in new projects. Dilip Buildcon Limited is planning to sell all its 12 HAM road projects. The shareholders of Ashoka Concession Limited, namely, Australia’s Macquarie Group, the State Bank of India and Ashoka Buildcon Limited, are likely to commence the process for selling their stakes in the company soon.

Reportedly, the Edelweiss Infrastructure Yield Plus Fund is also planning to acquire two road assets from the Navayuga Group for $150 million. Meanwhile, Essel Infraprojects Limited is reported to have agreed to the sale of three of its road projects to Caisse de dépôt et placement du Québec. The assets are expected to fetch a combined enterprise value of Rs 33 billion-Rs 35 billion and the entire sale proceeds are likely to be used for debt repayment.

HCC Concessions Limited plans to sell its Baharampore-Farakka highway project, spanning 100 km, in West Bengal. The enterprise value of the project is Rs 14 billion-Rs 15 billion on a fully operational basis as against the total project cost of around Rs 18 billion. Reportedly, Sadbhav Infrastructure Limited is also planning to sell 12 of its operational road assets to the Canada Pension Plan Investment Board, raising around Rs 30 billion from the deal.

The way forward

The Ministry of Road Transport and Highways (MoRTH) has laid out plans to construct 12,000 km of national highways during 2019-20. It aims to achieve this target by constructing 40 km of national highways per day. Further, it has set an overall target of constructing 60,000 km of national highways over the next five years. These ambitious targets augur well for companies involved in road development.

Most of the HAM players are exploring plans to sell equity stakes in their operational as well as under-construction projects. The continuation of this trend will enhance the capacity of road companies to bid for new road projects. This is likely to provide an impetus to project award activity. Another opportunity area for road construction companies is the auction for the third tranche of TOT projects, under which bidding has already commenced.

The government’s increased thrust on road development and the concomitant policy push have certainly infused vigour into the sector. While the MoRTH has asserted that the issues with inter-ministerial coordination have been resolved, those related to land acquisition, shifting of utilities, obtaining statutory clearances, and limited availability of soil/ aggregates still cause delays. That said, private players should now make the most of the opportunities offered by big-ticket projects such as Bharatmala, Setu Bharatam, Char Dham Connectivity and the development of economic corridors.


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