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Are NHAI’s roads jammed?

March 2019
With a 10,000 km target set aside for the construction of National Highways in FY2018-19, this sector spurs maximum construction opportunities for contracting companies. And reports indicate that 6,715 km has been achieved as on December 31, 2018.

“For 100 per cent of our fund-based projects including HAM, our company has secured financial closure (FC) within the respective stipulated timeframes,” confirms Yogesh Kumar Jain, Managing Director, PNC Infratech.

“With regard to our four NHAI road HAM projects,” says Jalandhar Reddy, Executive Director & CFO, KNR Constructions, “FCs have been achieved and approved by NHAI.”

“In HAM, we have a total of 12 projects and have received FC for all of them,” confirms Devendra Jain, CEO & Executive Director, Dilip Buildcon. The company has a total of 24 road assets including HAM, BOT, etc.

Commenting on the company’s recently bagged five HAM projects, Paresh Mehta, CFO, Ashoka Buildcon, says, “These contracts were bagged in March-end last year and we achieved FC well in time for all the projects.” The company has received the appointed date for one project with the appointed date of the remaining four expected shortly.

Has HAM been a challenge?
According to Devendra Jain, there was a challenge from March to September-October 2018 in achieving FC. Several banks had huge NPAs and, in all, the number of banks available for funding was less. “We, too, had 12 projects that required FC,” he reveals. “But as our credibility with banks was good, we were able to secure funds successfully.”

“While there could have been delays at certain stages mainly on account of Employer compliances, we have been generally completing projects in time or early. On the performance side, lenders have been quite comfortable,” says Mehta. “For FC, technical performance and equity ability are important, where we have sufficient ability both in execution track record and equity. Our balance sheet is quite strong , so our ability to commit equity and resources are substantially strong and  our  lenders have total comfort on the same.” For these five projects, the company had an equity of Rs 4.80 billion to be deployed. Of this, 40 per cent has already been deployed and Mehta is certain the balance will gradually happen over the period of execution.

Commenting on the challenges in HAM projects, Mehta says, “The first challenge is on Financial Closure of Projects. Many public-sector banks are not underwriting these projects. Second, a limited number of bankers are keen to participate in the syndication of debt.” When underwriters go to the market for syndication, a few public-sector banks such as Bank of India, Union Bank, PNB and Bank of Baroda have participated and sanctioned loans. But down-selling of underwritten projects is not a fast process and takes its own time.  So, public sector banks are yet to come back on the funding programme for HAM projects. Even  State Bank of India has been very cautious in funding HAM projects. Other institutions like IIFCL are keen on funding projects. 

The EPC game
As PNC Infratech has adequate non-fund-based limits, it does not face any challenge in procuring bank guarantees towards bid security, performance security and mobilisation advance, says Yogesh Kumar Jain. KNR Constructions, too, has not faced any challenges – Reddy confirms that the company’s utilisation level is 70 per cent of its limit sanctioned.

Mehta explains that there are Bankers who are vary of  funding EPC and have become very selective. It is expected that over a couple of quarters  Bankers will be more amenable to fund infra projects. Companies invest in machinery and manpower and due to uncertainty of Pipeline of orders and on exhaustion of  order book, it becomes challenging for the companies leading to aggressive bidding in certain cases and stress on the working capital.” As a company, Ashoka Buildcon has had a robust run rate of nine months execution with a 46 per cent jump compared to last year.

Funding routes
Pursuant to the RBI’s Prompt Corrective Action (PCA) Framework, the majority of public-sector banks are not in a position to fund infrastructure projects. 
According to Yogesh Kumar Jain, “A limited number of PSU banks and some private-sector banks are responsive in lending for infrastructure projects”, which restricts funding avenues to the majority of infrastructure companies. He hopes more PSU banks are emancipated from the RBI’s PCA framework soon for an unconstrained funding mechanism for infrastructure projects. 

For his part, Reddy says, “Of the four NHAI HAM projects, the company has signed share purchase agreements for three HAM projects with Cube Highways, a foreign investor, to invest 49 per cent of equity till Commercial Operation Date (COD) and purchase the balance 51 per cent between COD and two years from COD.” The objective is that the company will exit the three HAM projects on COD plus two years.

Dilip Buildcon is looking at long-term funding, which may include non-convertible debentures (NCDs) and mutual funds.
“On the debt and equity side, private equity players are interested in NHAI projects as these are AAA rated and yield generating assets,” observes Mehta. “They are keen to tie-up for equity for projects during the construction phase itself through a structured transaction which could be  initially in form of debt and on completion of construction it is converted to equity and they can acquire the project ” In his view, where the concessionaire has the opportunity to churn his asset base and get into new projects, it becomes a good alternative to concessionaires struggling for equity as the completed project investors  are looking for assets that generate yields.

The government, too, must play its part to push bankers by offering a different status for funding such projects. Norms for bidding of HAM and EPC projects need to be modified to ensure bidding is more healthy and not aggressive. 

SHRIYAL SETHUMADHAVAN