Stock prices of road developers are down in a range between 10-30% this fiscal despite order books that are at their highest in the past five-six years.
Investors have taken money out of road stocks primarily on account of the uncertainty over the financing challenges, particularly for road projects awarded recently under the hybrid annuity model (HAM).
Stocks of companies who have emerged as major players in the HAM segment, such as Sadbhav Engineering and Dilip Buildcon have fallen 32% and 22% each while MEP Infrastructure and Ashoka Buildcon have fallen 29% and 20% each, respectively.
A clutch of 10 road developers have given a negative return of 16% between April 2 and August 24.
According to Vishwas Udgirkar, partner, Deloitte India, there are two sets of challenges with respect to funding road projects.
He explained: “The first is a banking sector problem. This is not only about road projects but overall credit offtake is yet to pick up since banks are under stress and decision making is slow. Second, with respect to HAM, if the banks find a difference in the costs estimated by the bidder and the National Highways Authority of India (NHAI), there is always going to be a problem, particularly because of the earlier issues in the roads sector.
Banks have become much more stringent and it wouldn’t be wrong to say the problem continues”.
Anil Rao, wholetime director, PNC Infratech, concurs.
He said: “Financial closure for projects are happening only selectively. Only those with good track records are preferred by banks today which has limited the number of companies that can procure financing for their projects”.
Udgirkar also points out that while companies viewed the hybrid model as a risk-free model when it was introduced in 2016, there is now realisation the returns are also lower.
“Moreover,” says Udgirkar, “Investors are playing cautious in the run up to the general elections”.
Macquarie Research points out that for NHAI to continue to award a higher number of projects, the proportion of both HAM and toll projects need to be higher but financing for this is again dependent on the banking sector.
Macquarie further points out that since the amendment to the Right to Fair Compensation and Transparency in Land Acquisition, Rehabilitation and Resettlement Act, 2013, land acquisition costs have tripled from Rs 80 lakh per hectare to Rs 2.38 crore per hectare; and with the new hybrid model in place, NHAI also needs to disburse more cash upfront compared to earlier when payment was made in annuities over 15-20 years for projects awarded under the build-operate-transfer (BOT) model.
Industry observers believe that after the 70% increase in the number of kilometres awarded by NHAI in FY18, this is not likely to increase by much this year, given NHAI’s own funding requirements as well as the higher cost of land acquisition.
In fact, according to Macquarie Research, NHAI may award just 5,000 km this year.