The country relaxed the exit policy for road projects under the public private partnership (PPP) model in May 2015. The policy move is showing results with a higher quantum of deals seen in the road sector in the last two year's time, according to rating agency Icra Ltd.
The rise in deals, however, may not have brought cheer to a good number of road-project sponsors, as Icra data suggests 31 per cent of the deals in the last two years were made at a loss to the investor.
"In about 31 per cent of the transactions, the return to the developers is negative, indicating loss on investment. Developers with weak credit profiles are the ones who disposed their assets at a loss as liquidity took precedence over profit-making for them," said K Ravichandran, Senior Vice President and Group Head, Corporate Ratings, at Icra.
In a media statement on Wednesday, the rating agency said, "Sponsors in around 20 road assets involving a total cost of Rs 12,327 crore have monetised their assets as opposed to around Rs 7,000 crore in the preceding 50 months." The report attributed the rise to relaxation seen in the exit policy for road projects. In May, 2015, the Cabinet Committee on Economic Affairs (CCEA) relaxed the exit policy for projects awarded before 2009, allowing 100 per cent equity divestment by the developers, as against 74 per cent earlier.
Of the 20 road assets sold, three were state road projects and the remaining were national highway projects. "Out of 17 NH projects, 16 were awarded before 2009 and are the direct beneficiaries of the policy decision on relaxation of the exit policy for projects awarded before 2009 in May 2015," Icra said in its note.
Icra in its note further added the relaxation in the exit policy not only attracted private equity players who are more comfortable when they own 100 per cent stake in the projects, but also enabled the unlocking of additional 26 per cent of the developers' equity invested in about 5,600 km of NH projects, awarded under the PPP mode. "This could result in freeing up of around Rs 4,500 crore of equity which could support equity contribution towards the construction of 1,500 km of NH roads in PPP mode," according to the Icra note.
The report named Brookfield Asset Management (Canada), Canadian Pension Funds, Macquarie (Australia), I Squared Capital (USA, Cube Highways), Abertis Infraestructuras (Spain) and IDFC Alternatives as the major investors currently looking for assets in the sector. There is a strong case for these funds to look at road assets as Ravichandran in the Icra note added, "The ones with highest returns were secondary sale transactions wherein the sponsors are private equity investors. With the increase in WPI and the continued healthy growth in traffic, the toll collections are expected to grow by 10-11 per cent over the next two years." Icra expects the asset sale transactions to gather further momentum as the valuations have improved following a favourable outlook on toll collections and decline in interest rates.
Shubham Jain, Vice President and Sector Head, Corporate Ratings, points out those who might gain from this improved momentum for asset sale are projects with at least five to seven years of operational track record. "Projects awarded before 2009 are ideal candidates for the asset sale. The M&A opportunities in the road sector are the highest among various infrastructure sub-sectors with around 88 operational National Highways projects totalling 7,192 km with a total project cost of Rs 69,327 crore and median operational track record of four years," Jain said.
