For highway builders, toll’s a pain

It’s not working on the highway — at least not yet.
Highway developers are suddenly finding that vehicle movement on their paved projects are falling well short of expectations, causing stress at the financial level.

Lokesh Garg, Supriya Subramanian and Nitij Mangal, analysts with Kotak Institutional Equities, surveyed toll collections across nine projects that were commissioned in the last 18 months.
Their finding? Toll’s a third less than the developers’ original base estimates.

Of the projects surveyed, GMR Infrastructure’s Ulundurpet Expressway in Tamil Nadu saw an average daily toll collection of Rs 16 lakh in FY 2010, nearly 43% lower than estimates.

The two other expressways of the company’s, in Farukhnagar-Jadcherla in Andhra Pradesh and in Ambala-Chandigarh, also reported toll revenues over 25% less than earlier foreseen, the Kotak trio wrote in a note on Monday.

A senior GMR official attributes the fall to downturn. “There was a serious dip in import and export activity at ports and, hence, in vehicle movement,” he said, requesting anonymity.

He said another reason was that the traffic estimates were made during the boom of 2006-07 when the projects were bid for.
“But things have improved. Toll collections have gone up 6-10%,” he added.

IRB Infrastructure Developers also saw 40% lower daily toll revenues in its Bharuch-Surat and Surat-Dahisar projects last fiscal.

VD Mhaiskar, chairman and managing director, had in an earlier interview to DNA had said there was negative traffic growth in a couple of IRB’s projects during the slowdown.

“But we have seen a reversal since. Traffic growth has been at about 6-8% in the recent past,” he added.

Despite the rebound in vehicle movement, experts have concerns given the threat posed to India’s exports by the Eurozone debt crisis, the US recovery notwithstanding. Commerce secretary Rahul Khullar recently said India can no longer expect a 25-30% growth in exports.

“Even though traffic numbers this year are expected to be better than last, they could still be below the original estimates of companies,” said an analyst with a domestic brokerage, who did not with to be named.

Mhaiskar also said it could be a couple of years before the actual traffic growth meets earlier estimates.

Y D Murthy, senior vice-president, Nagarjuna Construction Company (NCC), said there is no need to worry yet because the concession period of a highway is mostly 15-20 years.

“For instance, our Bangalore tollway is just two months old and the toll collections might look below expectations, but we should wait for at least a year to know the exact numbers. We are hopeful of meeting the expectations,” he said.

Traffic concerns aside, highway developers now have to contend with newer players, Garg, Subramanian and Mangal of Kotak said.

The National Highways Authority of India (NHAI) has since the end of fiscal 2009 awarded 6,500 km compared with 850 km for the whole of 2009 and 1,650 km last fiscal. Though this is a huge leap, but “immense competition among more than 30 developers actively participating in tenders leads to aggressive bids and potentially limited asset returns,” the Kotak analysts said. There are over 30 active bidders, with newer entrants like Russia’s Transstroy and Essar-CR18, they said.

The spurt in the number of players has led to aggressive bidding, with a wide divergence of the lowest bid from the second lowest and fewer projects asking for viability gap funding and actually offering high annual escalating premiums.

While Mhaiskar called increased competition a “worrying sign”, E Sudhir Reddy, chairman & managing director, IVRCL Infrastructure & Projects, is unfazed.

“We have to look at the size of these companies as well. Winning a project is a function of the balance sheet and raising funds. Just by being in the fray, these companies need not be considered a major threat,” he said.