Hybrid annuity model shifts gears, challenges remain: Ind-Ra

V Rishi Kumar Hyderabad | Updated on October 02, 2019 Published on October 02, 2019

Predicts M&A activity

Most hybrid annuity model-(HAM) based road projects awarded by the National Highways Authority of India (NHAI) have managed to steer away from financial closure issues but land acquisition-related problems continue to hinder the commencement of project construction, according to India Ratings and research (Ind-Ra).

In its report, Ind-Ra states inability of banks to pass on the interest rate benefit could affect the investor returns by around 150bp. The rating agency sees an emerging trend of acquisition of projects that are in the under-construction phase. This trend is likely to gain momentum in second half of FY20.

While 50 per cent of these projects achieved timely financial closure, 30 per cent slipped beyond 90 days from the stipulated 150 days. The delays stemmed from lack of appetite, the lending freeze on many public sector banks, and cherry-picking of projects by private banks.

Of the projects studied by the agency, 15 per cent are yet to be awarded the appointed date due to delays in land acquisition. Developers have already forfeited four projects citing similar issues.

Although 80 per cent land availability offers an edge for swifter completion of project in HAM over earlier revenue models, the delay in providing encumbrance-free land continues to weigh on the road sector. Developers are now cautiously accepting land only after the issuance of section 3G notification against the earlier practice of section 3D notification.

This is evident from the fact that only 30 per cent of the projects have received appointed date on time, and more than 20 per cent of the projects have been delayed by more than six months. In terms of construction progress, 75 per cent of the projects have progressed in line with the schedule. And projects drifted from timelines due to either equity injection delays stemming from weak sponsors or land acquisition and approval-related issues.

For delays resulting from authority, the concession grantor has selectively de-scoped/de-linked or provided an extension to address the problems related to handover of land. If the delays in land handovers have been temporary, de-scoping of work has been put on hold.

Any delays in transmission of fall in bank rates could have a significant impact on equity returns. Ind-Ra believes projects with interest rates linked to bank rates would be able to mitigate interest rate risks. Under-construction HAM projects will continue to gain traction in the acquisition market. With the first round of HAM projects likely to achieve completion in the near term, these are best suited for acquisitions by yield investors.

Published on October 02, 2019
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