AJAY GARG deconstructs the infrastructure sector and foresees a positive run ahead.

Historically, road projects have been stuck in a gridlock, post commencement of construction operations owing to various reasons – unavailability of requisite land, unpredictability of raw material prices and volatile interest rates hurting not just execution but also profitability. This has forced quite a few players to charter untested waters by undertaking capital-intensive ventures like power, real estate and BOT, leading to a strained balance sheet.

In the current regime, projects are awarded only after necessary requirements and clearances are in place, principally among them being land availability. This is leading to a higher completion rate within the stipulated timeframe for the projects undertaken, and therefore, has enabled growth in the sector.

Government policies for growth
In tune to further promote a steady growth in the infrastructure sector, the current governmenthas ensured a stable interest rate regime and raw material prices, providing a solid platform for players to unlock their capitalintensive projects. They are now concentrating on building a robust business model by playing to their strengths. Debt for majority players is now well under control.

On account of the IL&FS debacle and PCA norms in the banking system, liquidity has become a big concern for the infrastructure industry. Although with banks now meeting the PCA norms, and the IL&FS assets on the block, the liquidity concerns have relatively eased.

Short to long-term growth With the re-election of a stable and pro-investment government, investor focus is expected to shift from near-term earnings and orders to long-term revenue and earnings growth trajectory. A lot of long-term players have shown interest in TOT and individual HAM projects.

On one hand, unlocking of capital through the InVITs structure and selling of under-construction will ensure that the balance sheets are intact, while on the other, inflation-targeting and linking of interest rates to MCLR rate will ensure execution trickles down to profitability.

Opportunity in roads and highways
In the infrastructure sector, we are hopeful about theroads sector and foresee a strong opportunity in this segment, given the government’s Rs.5.3 trillion Bharatmala project.

NHAI and MoRTH, put together, have awarded projects worth Rs 3 trillion in the last five years (FY2015-FY2019E).

Apart from NHAI and MoRTH, states have also been strong enablers in the sector and have invested Rs.1.7 trillion during the same period.

FY2018 and FY2019 have witnessed a combined awarding of Rs.1.1 trillion, including key projects like the Mumbai- Nagpur Super Communication Expressway, Purvanachal Expressway and KSHIP.

Primary hurdles to investment
While the sector is showing anupwards trend, investors have two major concerns – the emergence of the unlisted players and NHAI????s debt. Private players took away the lion’s share in FY2019; given that most listed players have been facing challenges in achieving financial closure (FC) of projects bagged in FY18, they refrained from further bidding. Additionally, unlisted players had an edge as the package sizes were lower and they enjoyed a locational advantage. We believe that the FC will now go through a litmus test and we expect bidding intensity to cool off and see consolidation in the unlisted space.

Secondly, concerns regarding NHAI’s ballooning debt have remained an overhang as cess allocation in the budget was flat (`90 billion-100 billion), forcingthe regulatory authority to borrow more money. Consequently, its leverage shot up from 0.3x in FY2015 to 0.9x in FY2019. As a result, NHAI is trying various other routes such as TOT and InVITs to address these issues.

Future predictions
We believe that NHAI will continue to be a major enabler (apart from respective states) for road segment investments.

Given the liquidity crunch, equity commitments for HAM (Rs 40 billion) and stricter norms for getting appointed dates, private players would now be passive participants and consolidate as they already have a sizeable chunk in the order pie. In the listed space, most players have a sizeable HAM portfolio, which entails equity commitment. We believe that companies with a lower order book base and strong balance sheet, as they possess a less risk of equity dilution, would benefit the most.

About the author: Ajay Garg, Managing Director, Equirus Capital, is an accomplished investment banker and has a strong track record for spotting the right investment trends in India. In a span of more than 20 years, Garg has been responsible for over 100 transactions.