Road developers on high-growth path

New hybrid funding model to improve bandwidth of developers; Sadbhav, IRB and L&T to benefit

The government appears to be committed to reviving infrastructure investments in the country. Given that most road developers are facing financial stress, the government is looking at ways to revive the sector by tweaking the funding model to kick-off the development of roads and highways.

Quoting the junior minister for road transport and highways Pon Radhakrishnan, Karvy Research says under the new funding model, the National Highways Auth-ority of India (NHAI) will fund 40 per cent of the engineering, procurement and construction (EPC) cost during the construction period, with the remaining 60 per cent coming in the form of semi-annuity payments. The maintenance and semi-annuity payments will be inflation-adjusted.

So far, the private sector has spent large sums of money to develop roads in the country. Most players have come under severe financial stress since FY14 and have stayed away from bidding for fresh projects. The hybrid funding model would improve the financial bandwidth of these players and make projects more viable. The government is in the process of putting cancelled road projects up for rebidding over the next few days. According to Credit Suisse, NHAI has put up 1,000 km of projects with an indicative project cost of Rs 13,500 crore for award on the EPC mode. Analysts expect the bids to come up from April 1, 2015.

Kotak Institutional Equities estimates near-term opportunity of 9,000 km for developers. A majority of the new tenders are under the EPC model and not the Build, Own and Operate model. Projects under the EPC model are in the region of Rs 500 crore.

According to analysts, given the funding constraints faced by most developers, road projects over the next couple of years would be awarded under the EPC model. However, despite the focus on the sector and improved conditions, competition is limited. There are only a handful of bidders for projects under the EPC model. Credit Suisse believes this bodes well for the sector and companies that are well-placed to leverage this opportunity. The brokerage has reiterated its outperform rating on IRB Infrastructure Developers, Sadbhav Engineering and Larsen & Toubro. Most brokerages believe Sadb-hav is the best play at this point, given its positioning and size.