Infra stocks rally 19% as Cabinet approves measures to revive road sector

Shares of infrastructure developers including IRB Infrastructure Developers, Sabhav Engineering, KNR Constructions, and NCC zoomed up to 19 per cent on the BSE on Thursday after the Union Cabinet on Wednesday amended rules regarding the Toll-Operate-Transfer (TOT) model of the highway monetisation programme. Under the new rules, projects which are operational and have toll revenue generation history of one year, as against the earlier criteria of two years, after the Commercial Operations Date (COD) shall be monetised through the TOT model.

"This approval would ensure a wider set of assets for monetisation and providing a more attractive model for the investors. Further, the fund generated from such monetisation shall be utilised for development/ operation and maintenance (O&M) of highways in the country, which would benefit highway users throughout the country," the government said in a statement. READ HERE

Individually, shares of KNR Constructions surged the most, up 19.2 per cent, followed by IRB Infra (17.5 per cent), Sadbhav Engineering (15.3 per cent), NCC (14.5 per cent), and Ashoka Buildcon (10 per cent). Besides, shares of Larsen & Toubro, GMR Infrastructure, Dilip Buildcon, and PNC Infratech advanced in the range of 2.5 to 7.4 per cent.

TOT is an asset monetisation model, where the government transfers the right to operate and maintain a highway to successful bidder for a period of 30 years. For this, the government receives an upfront money from the bidder. Around 75 operational national highway projects have been identified for potential monetisation using the TOT model.

In another development, the Cabinet also approved setting aside of "arbitral award" of highway projects.

"Government entities will take the decision to initiate proceedings for setting aside of the arbitral award, and any appeal(s) thereto, with the opinion of a Law Officer, in consultation with Department of Legal Affairs," a statement by the government said. READ HERE

It further added that 75 per cent of arbitral award money will be paid by the government entity, to the contractor, if such government entity has challenged the arbitral award, subject to the condition that the resultant amount of the arbitral award has not been paid.

"The amount will be paid to the contractor / concessionaire against a bank guarantee only for the said 75 per cent and not for its interest component," the statement added.

The government hopes the measures would help in ensuring that the remedies of challenge/appeal are resorted to in a "prudent and judicious manner", and in furthering the objective of infusion of liquidity into the construction sector.

At 10:03 AM, the S&P BSE India Infrastructure index was trading 1.34 per cent higher at 181.85-mark. In comparison, the benchmark S&P BSE Sensex was trading unchanged. 

"NHAI ordering till Aug’19 has been 555km (Rs 50bn) vis-à-vis 2,263km (Rs 349bn) in FY19 and 7,394km (Rs 1,403bn) in FY18. The weak ordering by NHAI has been led by delayed financial closure and land acquisition. This is also reflected in order inflows (OI) of all road players (average -37% YoY growth). However Dilip Buildcon (DBL) and KNR Constructions (KNR) have both achieved 60% of their annual OI target due to diversification into Metros and Mining (DBL) and Irrigation (KNR). NHAI is expected to ramp up its ordering from Dec’19-Jan’20, with a target of 6,000km for FY20. Even assuming 3,000-4,000kmof ordering we find growth visibility for most EPC road players in FY21-22," said analysts at JM Financial.

They maintain 'buy' rating on Ashoka Buildcon (target price of Rs 172) and KNR Construction (target price of Rs 295), and 'hold' rating on Sadbhav Engineering (target price of Rs 145).