It’s a road nobody wants to take – again.
Infrastructure players, who picked up every road project on offer with a gusto last fiscal, seem to have suddenly turned cold to these projects.
Last fiscal, the National Highways Authority of India (NHAI) awarded a whopping 49 projects totalling 7,500 km.
But this fiscal, in the first six months, the authority has managed to award just four projects measuring 560 km.
More interestingly, none of the projects awarded last fiscal was on engineering, procurement and construction (EPC) basis, where NHAI would have had to bear all the costs. All the awards were on build, operate and transfer (BOT) basis, where the bidders shouldered the entire burden. In fact, for as many as 32 of these projects, the bidders had also offered premium totalling `3,000 crore.
IRB Infra, for example, won a concession for 25 years on the Ahmedabad-Vadodara project, with an aggressive bid and premium obligation of `309 crore annually. And that project achieved financial closure, too!
But this fiscal, even a 40% subsidy offered by NHAI for taking up the execution of projects involving conversion of single-lane roads to double-lane, double lanes to four lanes, four lanes to six lanes, etc has failed to attract bidders. As if the word ‘BOT’ has become a pariah.
The Eastern Peripheral Expressway (ring road to the eastern side of Delhi) project, worth Rs3,000 crore, did not find a single taker.
What gives?
JN Singh, member (finance), NHAI, blames it on the apparent economic slowdown. “Toll-paying traffic is less on roads right now. So companies are apprehensive how traffic will grow in future and that is why few players are participating in the bids,” he said.
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Moreover, forest and land acquisitions are taking a long time and that is keeping many players away from bidding, he said.
But industry watchers say the real issue is that banks have turned averse to funding road projects.
To be sure, lending to the road sector has grown 200% over the last three years to around Rs1 lakh crore, which amounted or 2.4% of the total bank loans last fiscal.
But this fiscal, two companies, DSC and Gannon Dunkerley, were disqualified for failure to achieve financial closure of their Barwa-Adda-Panagarh and Jabalpur-Lakhandone projects, respectively.
According to industry experts, earlier, loans were offered based on the strength of the promoter group, or the parent company’s balance sheet. But today, grants are being made based on merit and the proposed return of the projects.
Another industry expert reasoned that many EPC players had entered the BOT segment due to a dearth of EPC contracts last fiscal. “Since BOT needs lock-in of equity commitments for concession of 15-20 years, many EPC players, like HCC, are not bidding for new projects,” he said.
According to this expert, in project evaluation, traffic estimate is the key deciding factor and many developers had estimated CAGR of 8-10% to justify their bids against 5% growth assumed by government. “All such companies are now facing tough time in toll collection, but they are the only ones who should be blamed for such a fiasco,” he added.
Amit Srivastava, analyst at Nirmal Bang Institutional Equities drew attention to another aspect. Going by him, in the boom days, investors supported companies that showed healthy order inflows, whereas now, money is chasing only those scrips where companies have bagged orders that promise healthy returns of over 18% in long run.
The market capitalisation of top infrastructure companies bears out this fact. IRB, GMR Infra and GVK Power have seen their market capitalisation fall from Rs7,034 crore, Rs15,842 crore and Rs4,098 crore as on March 31, 2011 to Rs6,190 crore, Rs12,066 crore and Rs2,747 crore, respectively as on March 31, 2012 and further to Rs4,181 crore, Rs8,291 and Rs2,062 crore as of Wednesday’s close.
Singh, though, is confident NHAI will successfully award 4,000 km of road projects on EPC basis this fiscal.
“Perception of economic slowdown is putting brakes on investment, but it takes just 6-8 months for changing the sentiment and we have seen it in 2008,” he said.
