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Even as the road sector remains a safe bet for lenders compared to other infrastructure segments, increased project-financing risks and concerns over leverage are dampening investor appetite, according to experts.
In its report on the Indian road sector, financial services firm Nomura noted that the last two quarters have been strong in terms of execution for the sector, and stocks and order books, too, remained elevated, providing revenue visibility for FY20-21.
However, rising financing concerns and higher risk perception are dampening valuations in the sector.
Equipment sales
Analysts note that despite the strong growth in construction equipment sales, share prices of road developers were below pre-Bharatmala scheme levels, when there was no clarity on future order inflows.
“Concerns on the availability of bank financing and heightened political risk have led to depressed valuations,” said Nomura.
The agency has downgraded Dillip Buildcon to ‘neutral’ rating on financing or leverage concerns. The company has been actively bidding for hybrid annuity (HAM) and EPC projects in the recent past, with the order book at the end of Q1 FY18 at ₹16,300 crore.
Analysts had estimated an equity requirement of more than ₹1,300 crore for the newly-won projects.
According to CRISIL, though the road sector is relatively stable and “not overwhelmed by bad loans” as it was several years back, banks are still wary of lending to PPP projects, especially those that are being developed by mid-sized companies with weaker balance sheets.
“Private players are finding it difficult to raise finances for road projects. This problem is especially acute in HAM projects, where the developer is responsible for the maintenance of the road for 15 years,” CRISIL noted in its Infrastructure Yearbook 2018.
Fundraising proves to be less challenging for large developers, especially those that were successful in deleveraging their balance sheets.
For example, IRB Infrastructure, which launched India’s first infrastructure investment trust (InvIT) last year and was able to reduce its debt equity ratio from 2.85 in FY17 to around 1.87 in FY18, recently raised project finance of more than ₹2,600 crore for three projects from NBFCs and banks within 20 days.
According to Anil Yadav, CFO, IRB Infrastructure Group, players with good track record of executing projects on time and generating cash-flows enough to support equity infusions whenever required, are unlikely to face challenges with funding.
IL&FS crisis
An industry player, who did not want to be named, however, said that over the past two months, even those developers who have not faced challenges before are now finding it difficult to raise new funds due to the IL&FS crisis.
This, however, should be a temporary issue, he added.
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