Toll-operate-transfer success unlikely to shadow M&As in the road sector

Last week, the National Highway Authority of India (NHAI)’s first batch of bidding out Toll-operate-transfer (TOT) projects saw bids 1.5 times higher from the base price. This overwhelming interest in TOT, industry experts say, is unlikely to slow down secondary market deals for road assets. Some, however, expect TOT bids to help set valuations better.

The road sector in the last two to three years time has seen a healthy trend of acquisitions, primarily driven by promoter companies selling road assets to reduce debt and adopt an asset-light strategy. Industry experts believe the acquisition trend is here to stay, with another engineering, procurement and construction (EPC) likely to add more assets to the sale pool.

"We expect mergers and acquisitions (M&A) action in the road space to continue and largely this is on two counts- there are still assets owned by corporates who are in financial distress, we have seen such deals in the past and that should continue. In addition, what we are expecting in the next two to three years, are the HAM projects that some of the fast-growing EPC companies have won, may come up for sale, as these companies may like to free up capital to fund strong growth expected in the construction and infrastructure sector," said Sachin Gupta, Senior Director, CRISIL Ratings.

Certain others peg the value of assets up for sale in the near future in the range of Rs150 billion to Rs180 billion.

In the TOT bidding round last week, a joint venture of Macquarie and Ashoka Buildcon has emerged the highest bidder for the first batch of toll-operate-transfer (TOT) projects with a bid Rs 96.8 billion.

Unlike BOT projects that are put on the block by distressed private companies, TOT projects are offered by NHAI. Devam Modi, Director at Equirus Securities added, “Buying a BOT road is different from a TOT, which is an NHAI obligation. Once, TOT is in the market, there is a definite competition and valuations may moderate but deals should definitely happen. Broadly 8-10 assets are up for sale.” Modi expects 4-5 deals to be finalized in the next three to six months time.