Highway developers can get Rs 4,000 cr more via easy exit option: India Ratings

Says companies can deploy these funds for other projects or to retire debt

Easy exit options for completed highway projects will release Rs 4,000 crore to the developers of the projects, and the amount can be used for other infrastructure projects or to retire debt, says India Ratings and Research (Ind-Ra).

It believes the Cabinet Committee on Economic Affairs’ (CCEA) approval for road developers to fully exit their equity investment (compared with the previous cap of 76 per cent) for all projects after two years of construction could bring a breath of fresh air to the highway construction sector and provide opportunities of 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 4,000 crore of additional residual equity can be released under the proposed divestment scheme. 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 11,000 crore.

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.

Players in multiple verticals will benefit since the funds released can be used in other projects not promoted by National Highways Authority of India and power projects. Cash-strapped developers burdened by a high debt servicing cost will also now be able to use funds to retire debt. CCEA highlighted that this will help in completing the languishing infrastructure projects. The move will help ease some stress in the road sector and attract investment into the sector.

Traffic in road projects grew in the range of 5-6 per cent 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.

Some of the recent projects indicate the inability to hike toll rates, especially for concessions 100 per cent linked to wholesale price inflation. Considering the prevailing low inflation scenario, the potential benefits of the growth in traffic numbers could be eroded. Also, in the event of drop in toll revenue impairing the debt service, the sponsors support may be required. This move will help developers to sell projects which have predictable cash flows to investors looking for such assets, but will not ease troubles of stranded projects due to cost escalations or regulatory issues.