A bumpy ride for road construction firms
The December quarter is set to be a rough one for road construction firms because of problems related to demonetisation. The fortnight of toll-free days in November forced analysts to cut revenue growth estimates. The government has assured compensation for loss of toll revenue, but that would come with a lag. Worse, it will take care of only costs and the interest to be paid out for that period on the project, but not the profits. Effectively, therefore, firms such as NCC Ltd and IRB Infrastructure Developers Ltd may see revenue contraction because of lower toll collections. Some firms such as PNC Infratech Ltd are stuck with slow-moving orders because of land acquisition delays. Those with a larger mix of engineering, procurement and construction orders may be better off during the quarter than those with exposure to toll revenue. Another big disappointment is the slow pace of tendering by the government. Yes, it was known that the target for 25,000km of roads to be awarded during FY17 was too ambitious. After all, the target was two-and-a-half times that of the year before. With barely three months to go for the fiscal to end, the progress both on tender awards and execution is nothing to write home about. ICRA Ltd’s data shows the ministry of road transport and highways awarded only 5,688km of roads. A little less than half of this was from the National Highways Authority of India (NHAI), which was actually expected to award about 15,000km during the year. But the estimates were revised down to less than half by NHAI. In fact, the awards may not even be close to that achieved in FY12. This implies lower-than-anticipated order inflows. And there’s more to prove the naysayers right. The pace of project execution until date for FY17 signals the failure in achieving estimates. NHAI’s 5.8km/day execution is 17% higher than a year ago, but is just a quarter of the target pencilled in for the year. Subdued progress was noticed even prior to demonetisation. This is partly because the newly-introduced hybrid annuity model was being worked out. Also, not many bidders came forth due to highly leveraged balance sheets. Financial closure of the first few projects took longer than expected. As reality struck the Street, the stocks of these firms fell from their highs. Most of the leading firms have underperformed the benchmark indices and fallen between 5-15% since a year ago. Add to this the credit rating agencies have decided to tighten rating metrics. Crisil Ltd, for instance, is adding “expected loss” through the life of the project. This will help investors take better decisions, given that the ramp-up periods and cash flows are unpredictable in infrastructure projects. Of course, the Union budget is expected to offer more sops and support to road construction. Investors may do better to wait until the euphoria settles down and reality sinks in, as it did in 2016. Dion Jordan Authentic Jersey
Budget 2017: Government may accord infrastructure status to low-cost housing
The government may tweak the definition of the infrastructure sector in the upcoming budget to include low-cost or affordable housing, a move that would reduce costs for developers and attract investors, two people with the knowledge of the matter told ET. The change is being proposed about a month after Prime Minister Narendra Modi announced concessions on interest rates for low-cost housing loans under the Pradhan Mantri Aawas Yojana. “If we want housing for all by 2020, re-categorising affordable housing as infrastructure is essential. The government had sought feedback about this about a week ago,” a person familiar with the development said. “I see this happening in the upcoming budget.” The government has been pushing Modi’s pet project of providing about 20 million houses across India by 2020. IT has reached out to senior finance ministry officials and the Reserve Bank of India for feedback on the proposed change and how to prevent it from being misused. “The important thing here would be to define affordable housing or low-cost housing. And these projects will have to be insulated in a way that no one is able to take money out without completion of the project,” another person aware of the development said. Real estate developers have been under stress as they have borrowed funds at a higher cost. In addition, banks are reluctant to lend money to the sector and the situation worsened after the November 8 announcement scrapping high-denomination currency notes, leading to a fall in real estate sales. “If affordable housing is given infrastructure status, it would lower the borrowing cost for the developers. Also, regulations should be simplified to directly borrow foreign debt, which can cost around 4-5% on dollar return,” said Hemal Mehta, a partner at Deloitte Haskins & Sells. Industry experts said that while it may appear to be a small change, categorising low-cost housing as infrastructure could have far-reaching results. “Real estate industry has been asking for the infrastructure status for affordable housing for last three years, but this time it is only logical that it could go ahead. This is mainly because the prime minister has announced the new scheme and infrastructure status will help reduce the borrowing cost and help accelerate growth,” said Jeenendra Bhandari, partner at MGB and Co, an audit and tax firm. The government’s focus is on affordable housing in the rural areas and there could be additional tweaks in this aspect in the budget. Emailed queries sent to finance ministry officials, the Central Board of Direct Taxes and the RBI did not elicit any response. Regulations will have to be changed so that low-cost housing projects do not attract adverse taxes but easier project finance even from investors outside India, the people in the know said. Industry experts said a change in status, along with clear guidelines, could mean low-cost housing could attract investment from foreign pension funds and insurance companies. “These projects could have a dollar-denominated debt and offer a return of 4-5%. This would work well for both domestic developers as well as foreign investors,” an expert said. As per the recommendations, the government can look at allowing tax-free returns to foreign investors that invest in low-cost housing. This could solve some of the funding issues the sector is facing. Andreas Athanasiou Womens Jersey
NHAI to seek nod from traffic police before expanding Delhi-Gurgaon Expressway underpass work
National Highway Authority of India (NHAI) will have to keep the district traffic police in loop before expanding the construction work of three underpasses on Delhi-Gurgaon expressway and a flyover on old Delhi-Gurgaon Road. In fact, improvements have been suggested in the NHAI’s construction plan so there is least congestion on roads and commuters do not face any discomfort. A meeting was held between senior police officers, road safety officers (RSO) and NHAI officials earlier this week. Following which a joint inspection was conducted by traffic cops, RSOs and NHAI on Friday. Sources told TOI that the team found over two dozen flaws in the NHAI’s three-phase construction plan for the building underpasses at Rajiv Chowk, Signature Tower and IFFCO Chowk, while, a flyover will be constructed on Old Delhi-Gurgaon Road. These flaws were identified on the basis of the snarls they could cause, or even didn’t offer a carriageway for the vehicles to cross while the construction work was on. For instance, the Rajiv Chowk was often being choked in past couple of weeks due to the NHAI’s construction work. “During inspection it was noticed that the highway authority is also supposed to widen the road in addition to constructing the underpass. They could have first widen the road so vehicles had a carriageway to move on and would have taken internal lanes to construct the underpass. But instead they took over the main road instead and as a result there is now a bottleneck at the stretch and commuters are facing the difficulties,” said Rajive Nandwani, a road safety officer. In fact, a water pipeline burst near Rajiv Chowk earlier this week, led to choking of the junction. Similarly at Maharana Pratap Chowk, the construction work has narrowed down the road space which is leading to snarls. The remaining lanes, including the one coming from bus stand are badly damaged and have potholes which makes it difficult to drive over it. Following this, NHAI has been asked to take a nod from the traffic police before expanding to any other parts of the road near these underpasses. “We have suggested them some improvements in their construction plan so there is always room on the road for vehicles to move. The joint team inspection will be done whenever they would want to expand the area under construction because once the area is dug up, nothing can be done till it is filled,” said Sibash Kabiraj, joint commissioner of police. “For now we have asked them to give road users some space near the statue at Maharana Pratap Chowk and widen the old Mehrauli-Gurgaon Road. There is some construction material lying on the slip road coming from Signature Tower towards this crossroad which will be removed by the end of coming week,” adds JCP Kabiraj. Valeri Nichushkin Authentic Jersey
Roads and renewables infrastructure deals seen rising in 2017
Deals in the infrastructure space are set to increase as companies put dozens of assets across roads and renewable energy sectors on sale, according to analysts and investment bankers. A number of such deals have either been announced or are in the due-diligence stage and will likely be completed in 2017. A number of infrastructure-focused funds and overseas pension funds have announced plans to invest in India’s roads and renewable energy projects. “Within infrastructure, roads is a sector where one will see deal activity improving, primarily because there are multiple operating assets available for a transaction that do not have construction risks involved and thus have better appeal to a financial investor. Also, there are multiple buying platforms emerging apart from the existing road platforms, as financial investors will also become acquirers of road assets via structures such as InvITs (infrastructure investment trusts). It is now a question of buyers’ and sellers’ expectations meeting at a certain valuation benchmark,” said Navneet Singh, executive director and head, infrastructure group, Avendus Capital. Also, while deals in the thermal energy sector are expected to remain subdued due to the presence of only a handful of buyers, predominantly looking for operating assets, “the renewable sector, primarily solar, will see activity in fund-raising as companies will continue to need additional capital to build their projects,” Singh added. Several Indian infrastructure developers, weighed down by debt, have announced exits from individual highway projects to monetize assets and repay creditors while renewable energy firms evaluate fund-raises and going public. The infrastructure sector raised about $3.78 billion in 2016 across 36 transactions, including mergers and acquisitions (M&A), private equity (PE) investment and two initial public offerings (IPOs), analysis of monthly data from investment bank Equirus Capital Pvt. Ltd showed. This compares with $2.9 billion raised in 2014 and about $3.7 billion raised in 2015. According to data from Grant Thornton India, about $2.91 billion was raised from 39 M&A and PE transactions in 2016 across engineering, infrastructure, and clean-tech sectors. Funds such as US-based I Squared Capital, Indian asset manager IDFC Alternatives’ infrastructure fund, Canada’s Brookfield Asset Management, Australia’s Macquarie Group, and the Canadian pension funds Canada Pension Plan Investment Board (CPPIB) and Caisse de Depot et Placement du Quebec (CDPQ) have committed large investments in the sector and are looking to buy assets across roads, thermal power and renewable energy to build their own portfolio in India. CDPQ, for example, had last year committed investments of $150 million for renewable energy in India and also joined hands with Tata Power Co. Ltd and ICICI Venture to launch a platform to facilitate investments in power projects with an initial capital of up to $850 million. Infrastructure Fund II of multi-asset manager IDFC Alternatives, for example, plans to buy certain operational road assets by March. “A number of deals in the sector have been signed or announced over the last 12 months but many are yet to close. One noticeable trend seen is that closing and funding control acquisitions require significantly higher involvement and patience than buying simple passive minority stakes,” said Aditya Aggarwal, partner (infrastructure) at IDFC Alternatives. “Going forward, I would expect a lot more mid-sized M&A activity in renewables given that significant solar capacity would get commissioned from the equity lock-in restrictions in 2017. Likewise, I expect the TOT (toll-operate-transfer) model to be a game changer in road sector investments this year,” Aggarwal said. The government is looking to monetize 75 national highways operated by the National Highways Authority of India (NHAI) through international competitive bidding under the so-called TOT model, where investors including foreign funds will participate. Similarly, road developers including Sadbhav Infrastructure Projects Ltd and Gayatri Projects Ltd are looking for buyers for some of their operational assets. Hyderabad-based Gayatri Projects is carrying out the process of demerging its roads assets into a separate entity to bring in a financial partner or look at selling the portfolio either entirely or as individual assets to foreign funds, managing director T.V. Sandeep Kumar Reddy said. He expects the demerger process to be over by end of March. Among upcoming deals this year is Larsen and Toubro Ltd’s (L&T) plan to transfer its build, operate, transfer (BOT) assets to Canadian pension fund CPPIB by March. A number of companies including IRB Infrastructure Developers Ltd, Sterlite Power Grid Ventures Ltd, IL&FS Transportation Networks Ltd, GMR Infrastructure Ltd and MEP Infrastructure Developers Ltd are gearing up to raise money and cut debt via the InvIT route. InvITs are trusts which manage income-generating infrastructure assets, typically offering investors regular yield and a liquid method of investing in infrastructure projects. Josh Rosen Authentic Jersey
Hit by losses, DND Flyway operator seeks rejig of contract
Hit by a revenue loss on account of suspension of toll charges and embroiled in litigation, Noida Toll Bridge Corporation Ltd (NTBCL), which owns the Delhi-Noida-Delhi (DND) Flyway, now wants to renegotiate its contract with the government. It is also looking to raise revenue from other sources. NTBCL Vice-Chairman Pradeep Puri told BusinessLine the company will consider making DND toll-free provided the Centre extends the contract period and allows shareholders to get revenue from other avenues, such as ads or installing solar panels, which can be used to generate 10-15 MW. Legal wrangle The DND Flyway became toll-free following a decision by the Allahabad High Court. The Supreme Court has now asked the Comptroller and Auditor General (CAG) to verify the costs. “I am ready to live without toll, provided you do some other things for me. You have some ad revenues there…I have 15 years of balance of concession (contract) period. Consumer interest and public safety should not be compromised…,” Puri said. The Allahabad High Court has not called for contract cancellation, he said, adding: “We can find a way to have a shareholder return without taking recourse to toll. We can put in a solar power facility along the carriageway and the buildings.” “If the revenues were to go up, instead of receiving (toll), I may even end up giving some value back to the government,” he said, adding that the contract was signed during the days when the cost of capital was 16 per cent and it was one of the earliest projects of its kind. The bid documents had been vetted by ADB, SBI Capital and the World Bank at that time. “We are conscious of the fact that in the public eye, the 20 per cent compounding and 20 per cent return is not palatable…. It was an experiment and the first project of its kind. But, it prevented us from being thrown out,” said Puri. The contract has a clause under which the extent of the company’s revenue shortfall will be added to the project cost in the subsequent year while calculating 20 per cent return to the project cost. Claiming that the increase in users in the past few months, after the booths were made toll-free, is marginal, Puri said: “Earlier, there were 1,30,000 lakh daily users. After the tolls were done away with, there are 1,40,000 lakh users.” “About 73 per cent (of NTBCL) is owned by the public. My concern is the welfare of about 82,000 shareholders,” he said. “We have raised funds abroad based on this contract. The sanctity of the contract will have to be maintained.” NTBCL is owned over 70 per cent by IL&FS. LIC, Abu Dhabi Investment Authority and Orix hold stakes in it. Connor Brown Authentic Jersey
Toll operators saved from worst fears as urban traffic shows signs of recovery
Operators of large toll road projects were expected to suffer a severe decline in toll revenue and traffic volume in the aftermath of India’s demonetisation exercise, but early signs of recovery are already visible in key urban markets, officials at these companies said. MEP Infrastructure Developers Ltd, which operates 30 toll plazas on national highways, has seen traffic volume recover in its Mumbai projects after a decline in December, said managing director Jayant Mhaiskar. “On national highways, however, toll revenue has seen a decline of 15%-18% and traffic volume decline of 8%-10% due to low trucks movement,” Mhaiskar said. He added that growth is likely to be flat for the sector in the current quarter ending March. Toll operators were mandated by the government to exempt all vehicles from paying toll across national highways between 9 November and 2 December to ensure smooth flow of traffic after the withdrawal of Rs500 and Rs1,000 banknotes on the evening of 8 November. Toll collections resumed from 3 December but traffic volume had plunged on account of low economic activity. Road projects had seen traffic growth of about 6% in fiscal 2016 and equivalent in the first half of the current fiscal, but overall traffic growth at the end of the current fiscal is expected to be lower. For Sadbhav Infrastructure Projects Ltd, toll collection across its portfolio of road projects for the 29 days in December had fallen 3.7% year-on-year with some projects showing growth and others a decline, according to brokerage Equirus Securities. “Projects (of Sadbhav) with high commercial traffic like Bijapur Hungund, Dhule Palasner and Maharashtra Border have been impacted the most on a year-on-year basis. On the other end, certain projects like Shrinathji Udaipur and Aurangabad Jalna have witnessed y-o-y growth. Projects like Ahmedabad Ring Road, Hyderabad Yadgiri and Rohtak Panipat have been impacted the least,” Equirus said in a note to clients on Monday. But traffic is returning, according to Shubham Jain, vice-president at rating agency ICRA Ltd. “Toll operators had seen low traffic and toll-collections in the initial two weeks of December but have since recovered, and now toll-collections are reaching similar levels as pre-demonetisation,” Jain said. Various factors can hurt traffic volume and toll-revenue growth in road projects, including weak economic activity, presence of alternative routes, low rate of inflation and a declining trend in the Wholesale Price Index (WPI). Rise in traffic and toll collections recorded by several highway operators last year had helped improve investment sentiment at a time when many companies have looked at monetizing operational assets. “Overall I think there is some reduction in traffic but it varies across our projects as some have also seen an increase in traffic. December numbers for us would largely be flat year-on-year than a decline. Traffic has already started improving,” said K Ramchand, managing director of IL&FS Transportation Ltd (ITNL), one of the largest developers of build, operate, and transfer (BOT) road assets in India. India has the world’s second largest road network, with about 4.8 million km, but national and state highways constitute a small percentage of that network. Only 24% of the national highways have four lanes or higher, indicating opportunities for expansion. Chris Ivory Womens Jersey
Crisil launches new credit rating system for infrastructure projects
Rating agency Crisil on Thursday announced the launch of a new credit rating framework for infrastructure projects that would facilitate greater participation from long-term investors and lenders. “Crisil, in consultation with the Ministry of Finance and other stakeholders, has developed a new credit rating framework for infrastructure projects that would facilitate greater participation by long-term investors and lenders,” the rating agency said in a statement. The new rating system is based on the ‘expected loss’ (EL) methodology. Which means, the rating will be an expert judgement on EL over the life of the debt instrument by taking into account the two pillars of credit risk — the probability of default (PD), and the prospects of recovery, the statement said. Crisil had recently assessed that India’s infrastructure sector needs Rs 43 lakh crore investments over five years ending March 31, 2020, and the domestic corporate bond market will have to chip in with at least Rs 11 lakh crore because of capital constraints at public sector banks. “Crisil believes that there is a need for new innovative structures such as infrastructure debt funds, and credit enhancement mechanisms such as partial guarantees, that would enable long-term investors such as insurers and pension funds to pitch in and bridge the funding gap,” the statement said. Rodney McLeod Authentic Jersey
NHAI authorities urged to increase height of central median on NH-16
The Anakapalle-Payakaraopeta stretch which has been witnessing a number of road accidents for the past couple of years has become a major concern for the police officials. The issue was discussed in the Road Safety Committee meeting at the Commissionerate here on Wednesday. On the occasion, district collector Pravin Kumar instructed the NHAI authorities to increase the height of central median immediately. A number of accidents occurred at Nakkapalle, S Rayavaram, Kasimkota and Payakaraopeta. Recently, a vehicle jumped to the other side of road, taking heavy toll of life. The seriousness of central medians which are in low height and need of increasing their height was brought before the collector by the rural police. The issues like lack of streetlights and road openings along the national highway-16 and lack of central medians were brought to the notice of the collector. Pravin Kumar instructed the Panchayati Raj officials to identify as to how many road openings are connected to the NH-16 in the rural limits and submit a report. He also asked the officials to set up sign boards to alert the road users. The collector also said that Kaparada, Madhurawada and Anandapuram areas do not have central medians, where accidents occur and asked the officials to build the medians at the earliest. Pravin also said that there are number of busy places in the city limits like Gajuwaka, NAD, Maddilapalem and Satyam junction where central median grills are damaged, while they are missing at some other places. Pravin Kumar said that since it would take some more time to float tenders for the Anakapalle-Anandapuram highway, alternative measures have to be tapped to prevent road accidents and instructed the city traffic police to identify black spots, major junctions, and to make sure that they have streetlights, signal lights, zebra crossings, sign boards and speed-breakers. City police commissioner T Yoganand, SP (Visakhapatnam Rural) Rahul Dev Sharma, officials of RTO, Roads and Buildings, NHAI and GVMC also took part in the meeting. Carlos Henderson Womens Jersey
Chhattisgarh:170 ROADS COSTING RS 25,000 CR BEING DEVELOPED: RAMAN
Chief Minister Raman Singh on Monday said that work on 170 new roads in Chhattisgarh is currently underway at a project outlay of Rs 25,000 crore. “While reviewing the status of road construction projects, I have told the Public Works Department that there should not be any dearth of quality raw material required for construction of roads”, he said. He was addressing a press conference here after chairing a Collectors’ conference in the Mantralaya. Singh said that timelines had been set for completion of all the 170 roads. The Chief Minister said that he had personally reviewed the construction status of 100 roads at the meeting while the Chief Secretary had been reviewing the road construction status of all works constantly. “Our aim is also to provide internet connectivity in 10,000 panchayat-level Lok Seva Kendras as soon as possible. These Lok Seva Kendras will also have a ‘Mini Bank”, Singh said. The Government is emphasizing on better governance practices and cashless transactions, he said. On skill development, the Chief Minister said that the Collectors had been asked to identify more trades where people can be trained in their respective districts for getting them suitable employment. Terrance West Jersey
Govt spending to continue driving infra; budgetary support needed
Public sector spending is expected to remain the prime driver for infrastructure next year too, especially with programmes like Inland Water Transport and Sagarmala requiring initial funding from the Budget, said Manish Agarwal, PwC Capital Projects & Infrastructure leader, on Budget expectations for the infrastructure sector. Responding to questions from the public in Business Standard’s live chat, Agarwal asserted that private sector investment was still to make a comeback in the area of infrastructure spending. He claimed that the road sector would remain the largest recipient of budgetary support in the coming Budget. However, there could be an increase in the share for the Sagarmala and Inland Waterways projects. Excerpts of his views: On impact of Budget merger on Railways It would be interesting to see if the merger of the Railway and General Budgets leads to budgetary allocations for an integrated approach to transport and logistics. The merger of the two Budgets would not by itself change the fortunes of the loss-making Indian Railways or have an impact on its performance. It would, however, help to bring more focus on the key issues relevant to the Budget, that is, sources of funds and what they will be used for. “Over the last few years, using it (Budget) for making populist announcements had reduced. Pricing of railways has also largely moved out of the Budget speech, into a regular commercial decision taken from time to time. Of course, this change alone will not have any impact on performance; but I do see progress against the five year plan set out by the Railways,” he said. On budgetary salve for note ban impact Agarwal said that he was not sure whether the government’s surprise demonetisation measure had had an impact on investments in the infrastructure sector. However, there would be disruption in construction activity due to the note ban — an issue which he expects would be resolved over time. Instead, he pointed to stress in the banking sector as having a greater impact on bringing private investments back into infrastructure. Toll roads would certainly have faced an impact and some compensation for toll road operators could be part of the Budget. On impact of tax sops and subsidies on infra spend While, PM Narendra Modi’s speech on New Year’s eve suggested Budget 2017 might allot major funds to subsidies and tax sops to offset the demonetisation pain, Agarwal did not expect it to cut into the allocations for the infrastructure sector. “I would expect the fiscal space for additional subsidies to be created through higher tax revenues. So, I wouldn’t expect it to hit infra spend. On the contrary, increased infra spend would be in line with the messaging in the New Year’s eve speech,” he said. On govt’s new credit rating system Adopting a wait-and-watch approach on any impact from the government’s proposed new credit rating system for infrastructure, Agrawal said, “I expect there could be a more nuanced evaluation of construction period risks (for example, extent of land acquisition completed could be a differentiator). This could help banks and other institutional financiers. I wouldn’t expect bond financing of greenfield risk, initially.” On tax incentives for infra financing Tax incentive to attract long-term retail capital into infrastructure could help, Agarwal said, particularly with volume of operating assets now being large. However, he explained that the overall approach seems to be of reducing tax concessions. “In line with that, I would be more keen to see steps for creating a market for long-term bonds,” he said. Joe Theismann Jersey