India Ratings and Research (Ind-Ra) has said that the government’s move to ease exit norms for highway projects will release Rs 40 billion to their developers that can be used for other infra projects or to retire debt.
The government decision allowing road developers to fully exit their equity investment for all projects after two years of construction could come as a breath of fresh air to the highway sector and provide opportunities in mergers and acquisitions, it said.
Players in multiple verticals will benefit since the funds released can be used in non-National Highways Authority of India projects and power projects. Cash-strapped developers burdened by a high debt servicing cost will also now be able to use funds to retire debt.
Cabinet Committee on Economic Affairs highlighted that this will help in the physical completion of languishing infrastructure projects. The move will help ease some stress in the road sector and attract investment into the sector.
The rating agency believes the Cabinet Committee on Economic Affairs’ approval for road developers to fully exit their equity investment (compared with the previous cap of 76%) for all projects after two years of construction could bring a breath of fresh air to the highway sector and provide opportunities in mergers and acquisitions.
“Ind-Ra estimates that out of the 86 completed projects equivalent to 5,200 km that have been completed under public private partnership, around Rs 40 billion of additional residual equity can be released under the proposed divestment scheme,” Ind-Ra said in a statement.
This could be used for investment in other projects of the developers. Prior to the current policy direction, the possible equity divestment could have been around Rs 110 billion.
Ind-Ra expects these measures to give a boost to weak sponsors in about 20 projects. This could de-stress and release the equity, helping them to shore up their balance sheets. However, many project bids prior to 2009 had sponsors’ aggressive traffic expectations (than post 2009 projects) partly due to then better prevailing economic growth conditions. Hence, investors may evince interest selectively on projects with strong year-on-year traffic and revenue growth.
Traffic in road projects grew in the range of 5%-6% in FY15 compared with a decline in FY14. Ind-Ra expects the momentum to continue in FY16 also on account of increased economic activity. Toll rate increases linked to inflation, whether wholly or partially, have somewhat offset the decrease in traffic numbers in FY15.