• Highway sector headed for consolidation; M&A activity seen picking up, says ICRA

    The highway sector in the country is poised for a wave of consolidation, mergers and acquisitions given the positive vibes the sector has seen lately due to the pace of implementation, changes in regulatory environment and accelerated investment flows.

    While developers are seeking to divest some of the projects to cut debt and free up equity for redeployment into new projects, investors are scouting for projects with right valuation.

    Aided by the regulatory changes, the sentiment has become positive in the sector with new investments triggering consolidation as also mergers and acquisitions, according to Shubham Jain, Sector Head Corporate Ratings, ICRA. Jain told Business Line that sponsors in 17 projects, involving a total cost of ?9,800 crore, have monetised their assets. These include 10 National Highway projects, 4 NH annuity and three State toll road projects.

    Early investors

    The interesting aspect of the acquisitions in the road sector made three years ago is that some of the first batch of investors such as Brookfield, Cube Highways, Aberis Infraestructuras and IDFC among others, are considering exiting having made good returns.

    Among the infrastructure sector, the road projects have been the direct beneficiaries of the policy decision on relaxation of the exit policy for projects awarded before 2009.

    The hybrid annuity model has seen 27 projects worth ?24,300 crore totalling 1,522 km being awarded by December 2016. Developers have received this model favourably as it has similarities with the EPC mode projects. The BOT mode annuity projects had a number of issues which the developers were forced to contend with.

    The pace of road project implementation has also gone up to about 16.5-17 km per day as against 14 km per day last year. While NHAI is aiming at 20 km per day, the Ministry of Transport is looking at 40 km per day, Jain explained.

    About 16 construction companies have a combined business of ?80,000 crore of road construction, with a visibility of projects for 3-3.5 years.

    With the Budget laying special focus on infrastructure and roads and bridges getting an allocation of ?64,900 crore, more projects will be on offer. A number of completed projects will come up for sale. This time around the buyers will be from operations and maintenance business who will base their purchases on increased returns from the sector.

    Returns on projects

    During the 2009-2013, return on roads was below expectation. But better returns would lead to a wave of mergers and acquisitions where specialised investors will come in, he explained.

    Jain said given the large number of infrastructure projects which are operational or nearing completion there could be churn in the sector. The opportunities in the road sector are highest with over 100 operational national highway projects.

    With financing traditionally being bank-centric, there is sustained effort to defocus from the banking system by encouraging other investment modes. Jameis Winston Jersey

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