Ind-Ra: Easy Exit Option for Highway Projects to Release INR40bn to Developers

Easy exit options for completed highway projects will release INR40bn to their developers which can be used for other infra projects or to retire debt, says India Ratings and Research (Ind-Ra). Ind-Ra 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 (source: National Highways Authority of India) under public private partnership, around INR40bn 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 INR110bn.

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 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.

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.

Some of the recent projects indicate the inability to hike toll rates, especially for concessions 100% 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. The current move by the government is a push to the infrastructure sector which had stalled projects worth INR8.8trn or 7% of GDP as of December 2014.

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