Road Sector expects 15% increase in capital outlay, expedition of monetisation process

The ambitious National Infrastructure Pipeline (NIP) involves an outlay of around Rs. 20.3 lakh crore in road sector over next five years. However, the budgetary allocations in the past have not kept pace with these plans. Consequently, the dependence on debt funding remained elevated. The total debt for the NHAI has increased by more than three times to Rs.2.49 lakh crore as on March 31, 2020, from Rs. 75,385 crore as on March 31, 2017. The borrowings are expected to surpass Rs. 3.5 lakh crore by FY2023 to fund the Bharatmala Pariyojana programme (subset of NIP). ICRA has already highlighted the importance of speeding up the TOT awards and other fund-raising initiatives (viz. InvITs) to meet the large funding requirements of the ambitious programme.

Shubham Jain, Senior VP, Corporate Ratings, ICRA says, “FY2022 remains a crucial year for two reasons: a) Importance of government spending to revive the economy and b) Significant catch up to do in the ongoing Bharatmala and allied programmes. As a result, the capital outlay is required to be increased by at least 15% supported by increase in budgetary allocation to the sector at least by 20% to around Rs. 0.98 lakh crore to make up for shortfall in last three years and slow progress on asset monetisation. Investors also expect funding roadmap for the ambitious NIP. Given the limited fiscal headroom, the Government could consider relaxation of fiscal deficit targets to meet the huge funding requirements for productive asset creation; failing which both the Bharatmala and the National Infrastructure Pipeline could get jeopardized.”

On GoI’s liquidity boosting measures for the sector, the Ministry of Road Transport and Highways (MORTH) has initiated a slew of relief measures like the shift from milestone-based billing (typically ranging between 45-75 days) to monthly billing and release of retention money/performance security in proportion to the work already executed among others, which has immensely supported the road contractors. These initiatives have helped in reducing the cash conversion cycle, while also getting the performance guarantees and associated margin monies released for the executed portion of the projects. The execution during 8M FY2021 stood at 6,207 km, 4% higher than 5,958 km in 8M FY2020. Adjusting for the first 20 days of April 2020 wherein no construction activity was allowed, the execution per day saw a growth of 13% to 27.7 km/day in 8M FY2021 from 24.4 km/day in 8M FY2021. The execution for FY2021 could surpass the 10,500 km. Project awards also saw a massive jump of 111% to 6,764 km in 8M FY2021 from 3,211 km in 8M FY2020, given the thrust laid on Bharatmala Pariyojana. ICRA expects the Bharatmala awarding process to get completed by FY2023 and execution by FY2026.

On the recent changes to hybrid annuity model and refinancing opportunities, Rajeshwar Burla, VP added, “HAM garnered a favourable response from developers as reflected in the increase in the mix of HAM awards from 10% in FY2016 to 48% in H1FY2021. Recent changes to Hybrid annuity model viz. reduction in period between payment milestones will aid in improved cash conversion cycle, and shift to marginal cost of funds based lending rate (MCLR) from bank rate earlier for computing interest on annuities mitigates interest rate risk and protects the returns of HAM developers. Around 70 HAM projects involving Rs. 35,800 crore of debt is expected to become operational in next two years and are ideal candidates for refinancing where investors prefer revenue-generating assets.”