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Higher Budgetary Support To Drive Road Builders In 2017
The infrastructure sector, considered the growth engine of the economy, started 2016 on a promising note. While the sector has not recovered from the sluggishness prevailing since 2015, certain segments like roads have witnessed a considerable pickup of late, a report by IIFL Private Wealth Management said.
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Higher budgetary allocation and aggressive targets by Union Road Transport, Highways and Shipping Minister Nitin Gadkari held out hope. Regulatory approval for infrastructure investment trusts and the government’s new arbitration norms were expected to ease stress. But like for other sectors, withdrawal of old Rs 500 and Rs 1,000 currency notes has brought uncertainty to the infrastructure space.
Analysts still see a silver lining and anticipate a higher allocation for infrastructure and roads in the next budget.
A Recap Of ‘2016’
In the Union Budget of 2016-17, capital outlays for the road transport and highways ministry were increased by 49 percent to Rs 1,03,286 crore from Rs 69,422 crore allocated in the previous year.
Gadkari set an ambitious target of awarding 25,000 kilometres of road projects in 2016-17 as against 10,000 kilometres in the previous year. The minister has, however, lowered his target of building new roads, conceding that his ministry will fall short of 40 kilometres a day.
Analysts feel the targets weren’t realistic but the sector could outdo previous year’s achievements.
NHAI is most likely to miss its ambitious targets of initially announced 25,000 km set for the year by a huge margin on the back of delay in awarding orders and appointment of its new chairman, Yudhvir Singh Mali. However, the existing gap between deliverables and targets may narrow down since 40-50 percent of orders are awarded in the last three months of the financial year.
Vibhor Singhal, Lead Analyst, Phillip Securities Pte
Alok Deora, assistant vice president at IIFL, agreed that the initial target of awarding 25,000 kilometres road projects in the the current financial year was ambitious. Considering the pace of awarding projects so far, it may end flat year-on-year at 10,000 kilometres, Deora said.
In the (financial) year so far, road awarding has witnessed a 7-8 percent growth in April- November 2016 over the previous year. Though the initial target of 25,000 km set by the government might be a tall ask, the sector might just be able to outdo its previous year’s performance of 10,000 km.
Divyata Dalal, AVP – Institutional Equities, Systematix Shares & Stocks India
Besides, the higher spends and wishful targets, implementation of announced reforms and policy initiatives kept the space abuzz.
Infrastructure Investment Trusts: More than two years after SEBI issued guidelines for infrastructure investment trusts (InvITs), the capital markets regulator in 2016 allowed three companies — IRB Infrastructure Ltd., GMR Infrastructure Ltd. and MEP Infrastructure Developers Ltd. — to launch the trusts.
InvIT — a good initiative, would help developers de-leverage and allow them to execute more projects. This definitely seems to be a trigger from where the investments would kick in.
Alok Deora, AVP – Research, IIFL
Arbitration Guidelines: In order to expedite resolution of claims stuck in arbitration for years, the government has approved new guidelines, which allow releasing 75 percent of the amount against a margin free guarantee in a situation where awards have been given by the authorities concerned.
Government has done its bit to restore investors’ confidence, with release of 75% of the money in the arbitration award being the big positive for this space. This new norm is expected to provide much-needed liquidity for the infrastructure sector. Also, the government spending more and taking more policy initiatives to lift this space, given its tangible characteristics.
Divyata Dalal, AVP- Institutional Equities, Systematix Shares & Stocks India
Hybrid Annuity Model: To revive public-private partnerships in highway construction, the government introduced the Hybrid Annuity Model at the start of 2016. HAM has seen significant traction since the government provides 40 percent of the project cost to the developer to start work while the remaining investment has to be made by the developer.
A lot of HAM projects have been awarded so far in this year and the pipeline of HAM projects remains huge. The government is betting big on it as it’s the key driver in road awarding in coming period.
Alok Deora, AVP – Research, IIFL
Room For Correction?
The Nifty Infrastructure Index has fallen 2 percent in 2016 compared to 3 percent gains posted by the NSE Nifty50 Index. Share prices of prominent road building companies like IRB Infrastructure (down 19.5 percent), GMR Infrastructure (down 27.7 percent) and Reliance Infrastructure Ltd. (down 14 percent) have declined substantially.
Analysts expect the index’s price-to-earnings ratio to correct to 15.8 times in 2017 from 20.2 times as it currently stands, indicating further downside for stocks in the index. However, the index’s price-to-book ratio is expected to rise to 1.68 times as compared to its current 1.54 times.
Demonetisation Demon
Prime Minister Narendra Modi surprised the nation on November 8 by demonetising old Rs 500 and 1,000 notes. While most sectors reacted negatively, the full impact of demonetisation is yet to be ascertained.
Demonetisation is expected to curtail private and state capital expenditure in the infra space but spending by the central government is likely to remain strong, said Deora.
Cash crunch post demonetisation led to a temporary halt in toll collection on state and national highways across the country.
Major players have hinted at 75-100 percent compensation from the government for the loss incurred, IIFL’s Deora said in his report, adding that there has been no clear indication from the government in terms of timing, mode of payment and the quantum of compensation.
Demonetisation may also impact traffic growth as the economic activity is likely to slow down in the near term. Tolling companies, which had seen a pick-up in traffic after two to three years of sluggish growth, now fear weak toll revenue growth.
But there is also an upside. Phillip Securities’ Singhal said that though the impact of demonetisation needs to be evaluated, increased liquidity in the system could see higher allocations for the infrastructure sector in the budget for 2017-18.
Driving Force
The road segment would continue to be the driving force for 2017 in terms of capex, said Deora, adding that the ministry expects a significant increase in budget support during the next financial year, which would lead to more projects being awarded and speedier construction.
The recently approved toll-operate-and transfer (TOT) model is estimated to garner approximately Rs 600 billion (Rs 60,000 crore) for the road ministry which would be used towards road construction projects.
Alok Deora, AVP – Research, IIFL
The recent reforms in the road sector, a pick-up in hybrid business model, higher funding through budgets, infrastructure investment trusts and TOT model would provide a “solid base for improved road awarding and construction in the coming years”, Deora said. Weston Richburg Womens Jersey
