India: Construction
A Cloudy Outlook Turns Murky
Near‐term jitters have implanted fears about the very viability of PPP in roads which has affected the valuations of their listed parents. We expect the lenders to be safe; however, the pay‐back would be longer‐thanexpected. This will create an asset‐liability mismatch at some point in time. On the other hand, lower equity IRRs and over‐supply of assets on block will make stake sales more dubious. Further, the construction companies will refrain from investing in ready projects as they would rather deploy funds in new projects.
Financial investors will choose to pick up matured and healthy projects, which are scarce. Thus, basket/standalone stake sale of BOT projects to facilitate future fund
‐raising looks like a 'gigantic task'.Nothing Moves-Neither The Bureaucracy, Nor The Workers
BOT (toll) accounted for about 85% of total projects awarded in the last 12 months. However, slower financial closures and execution (company) related issues, further plagued by political/local unrest, has led to cost/time overruns for projects won during 2007‐09. Moreover, aggressive bidding, disappointing traffic growth and the current stiff interest rates, are affecting the IRR's which has come down to single digits in several cases. With an envisaged investment of close to Rs4trn in the 12th Plan for the Road Sector, 50% is expected to come from the private sector. Thus, the onus of transferring the risk and responsibility of infrastructure development is on the private players which has made the PPP model 'too big to fail'.
Execution ‐ tad slower:
FY08‐2010 experienced a time overrun of almost 12‐15 months in many projects, mainly attributed to land acquisition related issues. This has led to a minimum 10‐15% cost overrun, thereby, adding to woes.IRRs to remain subdued: The companies have always indicated IRRs of about 15% plus for road BOTs. However, aggressive bidding, delays in execution, lower ‐than‐expected traffic growth and disequilibrium in financing cost, could bring down the IRR's by 4‐8% and in some cases higher than that. In other cases, upfronting of EPC margins in double ‐digits squeezes out the inherent value, thus, making the project unattractive for sale.
Equity funding to remain a key issue: Pvt. cos, which we have considered in our sample portfolio, have contributed close to Rs100 bn as equity in the last 7‐10 years for development of close to 13,000kms. We have calculated a balance equity requirement of close to Rs150bn in the next 3‐4 years for the projects under execution & development, plus fresh awards of 5000kms. Safe Harbor Statement:Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints.
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