Mega road project deal a dead albatross for GMR?

Bagging the Rs5,700 crore Ahmedabad-Kishangarh-Udaipur national highway project could cost GMR more than the `636 crore premium it has committed to pay the National Highways Authority of India.

If experts are to be believed, the highly competitive bid could lead to negative cash flow in the project.

“We are hoping a revenue of Rs490-500 crore in the first year. Of this, you set aside operation and management cost of Rs50 crore. From where will one pay Rs636 crore. Once construction is over, there will be an interest burden worth Rs600 crore,” said a source, requesting anonymity

A GMR spokesperson refused comment saying the government was yet to issue the letter of award to it.

Analysts, however, see a major blow on the way for such developers.

“In our view, the pickup in road awards, which had seen a slowdown since April 2011, is positive for road contractors. But we remain concerned on the high level of competitive intensity which could depress equity returns on these projects for the developers,” Nomura Financial Advisory and Securities analysts Saion Mukherjee and Harish Venkateswaran wrote in a report.

“We believe the high level of competitive intensity and high premium on many projects is favourable for NHAI, as it eases the financial burden on it. But for the developers winning these projects, it could turn out to be a winner’s curse in our view.”

NHAI awarded four road projects worth Rs9,500 crore in the last week of July, including the 555 km Kishangarh-Ahmedabad-Udaipur six-laning project —- the biggest one in the highways sector in the country, the bids for which were opened on July 29 —- for which GMR emerged the preferred bidder. The second runner-up, GVK Power and Infrastructure, had quoted a premium of Rs516 crore, followed by Soma Enterprises with Rs401 crore and Nagarjuna Constructions with Rs360 crore.