Infrastructure: More funds

The Centre’s initiatives to spur infrastructure investment saw close to 5,700 km being awarded by the National Highways Authority of India (NHAI) and the Ministry of Road Transport and Highways (MORTH) in the nine months ending December 2016. Progressively, over the fiscal year, about 35 per cent of the projects (by length) have been awarded under the new form introduced by the Centre, the hybrid annuity model (HAM) where the project is built using a combination of construction contract and a fixed annuity paid for the project for a pre-defined number of years by the granting authority.

Most of the other projects were constructed under engineering, procurement and construction (EPC) format except a few which were bid under build, operate and transfer-toll format. In the upcoming Budget, we can expect the Centre to increase its allocation for road projects. But over the last one year, EPC projects have been bid at rates that were 10 to 20 per cent lower than the cost estimated by NHAI. Similarly, with banks continuing to be concerned over the road players’ balance sheet strength, only about 25 per cent of the HAM projects have attained financial closure as of December 2016. With the Centre’s vision to reach about 40 km per day by December 2017 from the current rate of 18 km per day in December 2016, it may place more emphasis on EPC projects to increase the speed of road construction.

Although the order book is expected to swell for major EPC players, rising raw material cost and increased competitive bidding should taper down their profit margins.

For instance, the profits for the six months ended September 2016 were lower than the corresponding period last year for Dilip Buildcon (51 per cent), Ashoka Buildcon (1 per cent) and Sadbhav Engineering (1 per cent).

The silver lining for road projects is expected to come from the mature toll projects. The success of the Investment trusts (Inv-IT) model for private projects with strong revenue visibility should restore confidence in the road sector. Besides, the Centre is also expected to indicate its plans to monetise mature road projects using toll-operate-transfer format — a long-term road leasing model — in the upcoming Budget.

Railways in the red

Unlike the road sector which is seeing some green shoots, railway operations continue to be in the red. Finances of railways continue to show worrying signs. As per the November 2016 release by Indian Railways, the gross receipts for the current fiscal are expected to fall by 2.5 per cent from last fiscal, and by 13 per cent from the budgeted estimate. Also, freight revenues, which contribute close to 65 per cent of total receipts, are projected to end 7 per cent lower than last fiscal. But, to modernise railways, the fund requirement of ₹1.2 lakh crore estimated for the current fiscal is expected to progressively increase in the current Budget too. This should help revenues and profits of major rail equipment and allied infrastructure manufacturers such as Texmaco Rail & Engineering, Titagarh Wagons and GPT Infraprojects have soared for the six months ended September 2016 compared to the same period a year earlier. To lower the losses of Indian Railways, the Centre is expected to come up with a tariff regulator to regulate both passenger and freight fare effectively. Besides, we can also expect Railways to monetise its land banks and sell non-core businesses.

In case of Port sector, Centre is expected to indicate its long term fiscal allocation plans for port-led industrial development and coastal waterways.

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