The right way to build roads

Seetharaman R | Updated on January 16, 2018 Published on December 11, 2016

The build-operate-transfer segment is better placed than the rest of the road projects

As road projects continue to gain traction under the current government, build-operate-transfer (BOT) projects are the ones viable on traffic, says Sudhir Rao Hoshing, Joint Managing Director, IRB Infrastructure Developers Ltd. Excerpts from an interview with BusinessLine.

How do you see projects in the road segment coming up?

Of the total projects, 20 per cent are expected in BOT while the rest 80 per cent in EPC (engineering, procurement and construction) or HAM (hybrid annuity models). BOT is the one viable on traffic. Also, except for the deferred funding in HAM, there is hardly any difference between EPC and HAM.

I see anywhere between 1,500 and 2,000 km of BOT projects coming up over the next year. Besides, in the BOT segment, the competition has gone down drastically and we have enough chances to win projects at a healthy rate of return. We expect this to continue over the next few years as well. With no more than four active players in this segment, we expect to win bids around 300 to 500 km per year. So, we don’t have plans to go for any other mode as of now.

With private sector investment coming down, how do you expect this to affect your commercial revenue in some of the mining-rich areas?

A few years ago, the total road length constructed per year used to be around 4,000 km — all in BOT format. But now, the total road length constructed is between 15,000 and 20,000 km. We expect 20 per cent of the total length to be laid in BOT format (which is 4,000 km). With the number of bidders in this segment decreasing, we expect to win projects at a better rate. That is one part.

Secondly, the traffic on road is not directly proportional to roads that are being constructed. Traffic will grow, thus helping BOT players. In fact, BOT segments are better placed than rest of the road projects.

What is IRB’s order book size? Given the greater number of BOT projects, what is your plan on the equipment asset purchase?

Our order book currently is about ₹9,600 crore. We are growing around 15 per cent per year. We should be able to execute the projects with the current set of equipment itself. We don’t see any new major investment in this segment.

We are seeing very strong growth in Mumbai-Pune road traffic. Is this sustainable?

The major reason is the shift from under-construction Goa road into the Mumbai-Pune road segment. This construction will go on for another three years. Besides, the Goa stretch is not considered safe for now. With the Mumbai-Pune road agreement only until 2019, this growth rate should sustain. So, we don’t need to worry about it beyond that.

What is the competititive landscape like?

We have totally 22 projects. We recently won the Kishangarh-Udaipur road segment. Of the 22, 14 are under operation, five under construction and two under development. We have been very competitive. The good thing is that bids are made at quite comfortable levels.

The Ahmedabad-Vadodara project has grown more than 100 per cent in the last quarter. How long do you expect this to continue and where do you expect this to stabilise in the long run?

In the Ahmedabad-Vadodara segment, only the express way (first leg) was open. But now we have also started tolling the second leg awarded by NHAI. That has resulted in revenue increase. Now, we collect 92 to 95 per cent of the tolling from NHAI segment. Post completion, we should see a further increase in toll collection due to tariff revision. So, once the project gets stabilised, we can expect 6-7 per cent traffic growth per year. So, with an expected inflation of 4 to 5 per cent per annum, we can expect the toll revenue to grow anywhere between 12 and 13 per cent in the long run.

Will you look at hybrid annuity model if it gives you right margins?

HAM works on a fixed system where internal rate of return is 13 to 14 per cent. But in our area of strength — the BOT segment — we are able to manage returns around 18 per cent. Right now, we are very comfortable with BOT. We expect to do around 300 km of BOT projects per year but if things go well we will do around 500 km per year.

The return on equity (ROE) has been falling over the last few fiscal years. Do you expect this to revive after successful listing of the Investment Trust?

The project life cycle used to be 12 to 15 years for older projects. But for new projects, it varies anywhere from 22 to 30 years. During the initial years of operation, the rate of return is low. But once your portfolio gets mature, after 3-4 years of operation, the ROE improves. Even then, there will be some projects under construction while others in the initial stages of the life cycle. Post InvIT launch, the net worth of IRB should increase at least ₹1,000 crore.

Apart from this, the year-on-year profit increase should be ₹500 to ₹600 crore while the company is also expected to get annuity revenue of ₹200 crore from the ₹2,000 crore investment in the trust.

Besides this, we also did not participate in any project bids in the year 2013 and 2014. So, we faced a dip in construction revenue in 2015. That resulted in lower profit in 2015. But, going forward, we expect ROE to stabilise around 16 per cent.

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