According to the latest Infrastructure report by Motilal Oswal Financial Services, 1H FY23 has been muted with only 810 kms of projects awarded till date. Owing to the weak 1H, NHAI would have to accelerate project awarding in 2H FY23 in order to meet its target of 6,500 kms in FY23. In terms of construction, NHAI is looking to construct 5,000 kms of projects in FY23 and has completed 1,471 kms in 1H FY23.
Asset monetization is the key focus area for NHAI to raise funds outside of budgetary resources. National Highways Infra Investment trust (NHAI InVIT) successfully closed its second fund raise of INR 14.3b for part funding of three road assets, stretching 246 kms. Since its launch in Nov-21, NHAI InVIT has raised INR 94.3b in two tranches with a total portfolio of eight road assets of 636 kms. However, the movement has been slow as far as Toll Operate Transfer (ToT) projects are concerned. (Fig 1.)
Assets monetization gains traction
After hitting a slow track in monetization of road assets through ToT bundle route, NHAI has been able to monetize its road assets via InVIT. NHAI InvIT has raised a sum of INR 14.3b in Oct-22 from domestic and international investors through placement of its units, for part funding its acquisition of three additional road projects stretching 246 kms. In Nov-21, NHAI InvIT had raised INR 80b in its maiden round with initial portfolio of five operating toll roads of aggregate length of 390 kms. Additionally, NHAI InvIT has filed prospectus with SEBI for issuance of NCDs to raise INR 15b. The NCDs would carry a coupon of 7.9% payable semi-annually and would be available for subscription by both retail and institutional investors. (Fig 2.)
NHAI has prepared a pipeline to monetize 1,750 kms of assets in FY23 but a faster execution is required to meet the monetization targets.
However, move to monetize road assets seems to have hit the slow track. NHAI is yet to hand over certain road projects to the private sector for operation even months after the financial bids were opened. NHAI has scrapped the auction for ToT Bundle 10 after the highest bid was below the reserve price of the highway. However, ToT Bundle 9 is still under consideration. (Table 1.)
Daily average Fastag toll collections is on the rise
The onset of the festive season and pickup in economic activity led to ~54% YoY growth in daily average Fastag toll collection in 1H FY23. Fastag volumes grew 58% YoY to 1.63b, taking the total Fastag toll collection to INR 255.4b in 1H FY23. Further, Fastag toll collection stood at INR 42.4b in Sep’22. However, Fastag volumes for Sep’22 stood at 259 mn, registering MoM de-growth of ~5%. Improved toll collections are critical for faster monetization of road assets by the Road Ministry and would also help companies looking to monetize their existing toll assets. (Figure 3.)
Softening in input prices to improve margins of contractors
The prices of Steel and Aluminum have declined ~25%/30%, respectively, from their levels in Apr’22. Steel prices have been under pressure post the Government measures to curb exports and improve domestic supplies. Most contractors would be realizing the positive impact of the reduction in input costs in 2H FY23 as they see improvement in profitability.
Diversified players with strong order book and balance sheet well placed
Players with a decent order book in hand and presence in two or more segments with strong balance sheets are better placed to capitalize on the opportunity of aggressive project awarding by NHAI in 2H FY23. MOFSL’s top pick in this space is KNR Construction.