Investors Eye Acquisitions in the Highway Sector Worth INR245bn

Investors are keenly looking to pick up stake in projects worth INR245bn of completed highways, with an average of six years of operational history, estimates India Ratings and Research (Ind-Ra). The agency notes that there has been a paradigm shift in the acquisitions - from developers to financial investors. Ind-Ra believes that this is a positive shift and it will give impetus and provide opportunities for the opening up of businesses in the operation and maintenance vertical. Ind-Ra estimates that deals which are yet to be sealed have a debt size of over INR164bn. The activity pipeline has been abuzz in the last three years and Ind-Ra estimates that the highway sector has witnessed transactions of around INR111bn in debt, during February 2013-June 2016.

Ind-Ra, based on publicly available information as well as further limited information received from the issuer, notes that the list of sellers or potential sellers include companies, namely, HCC Concessions, NCC Infrastructure, Soma Enterprises, Reliance Infrastructure Limited ('IND A+'/RWN) and GMR Infrastructure.

The Indian highway sector is witnessing an enhanced level of activity in the acquisition space, largely led by global marque funds and investors namely, I Squared Capital, Brookfield Asset Management, PSP Investments and Macquarie's India Infrastructure Fund among others. These international funds have picked up stake or are in advanced stages of acquisition of around 2,900km length of national and state highway projects. Similarly, domestic financial investors namely, IDFC India Infrastructure Fund and other infrastructure companies such as, Tata Realty and Infrastructure Ltd. have made a mark by showing interest in deals of around 780km length of highways. With Infrastructure Investment Trusts gaining traction, Ind-Ra believes highways, as an asset class will further evolve and will set benchmarks.

Road projects worth over INR400bn, spanning around 3,600km, have either been sold off in the last three years or are currently in the process of being divested. This recent increase in investor appetite could well be sustained, with reports doing the rounds that the government is working towards clearing the roads to provide access for global sovereign wealth funds to invest into private highway projects.

Ind-Ra believes that the National Highway Authority of India's (NHAI, 'IND AAA'/Stable) 100% exit policy, which was cleared in mid-2015 and road developers bid to deleverage their balance sheet have both aided the momentum in the last year. Ind-Ra had highlighted this in June 2016 in the report 'Opportunities Manifest Despite Overt Limitations'.

A study of the deals shows that out of a total of 40 deals, including the ones in the pipeline, only five projects have been or are likely to be acquired by another corporate house, while institutional investors mostly account for the balance. Barring one project, all the projects have operational history of over six years, which could well be one of the reasons for investors evincing interest, since such projects reveal actual traffic potential. National highways and toll road projects are the most in-demand projects, around 94% of highway projects in the fray are national highway projects and around 87% of the projects are toll-based projects, which normally have a higher potential of giving returns to the acquirer.

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