We recently met NHAI to get an update on road project awards. The highway authority anticipates project award to be robust in FY13, though in our opinion EPC project award is contingent on finalisation of the regulatory framework. NHAI believes there are enough DPRs available to meet the project award target. Further, it expects competition for projects to moderate in future on back of funding issues, which we believe will benefit developers. We reiterate IL&FS Transportation (ITNL) and Sadbhav Engineering (Sadbhav) as our top picks.
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FY13 project award to be robust
The overall FY13 road projects award target is 9,500 km (NHAI and Ministry of Roads). NHAI does not see any impediments in meeting this target, with DPRs for 7,500 km of projects available and for a further 1,600 km in the pipeline. FY13 target includes 2,000-3,000 km of EPC projects (worth ~INR100bn) which we believe is contingent on the new regulatory framework for EPC contracts getting finalised soon. If this does not happen, we believe EPC project award may be deferred to early FY14.
Competition to moderate due to funding issues
NHAI believes that competition for bids will moderate given the difficulties in tying up funding (both debt and equity). We believe this will be positive for established developers as IRRs for projects will inch up. Regarding the difficulties being faced by some players in achieving financial closures for projects, NHAI believes that the problem is limited to a handful of projects (out of the ~150 projects awarded over the past couple of years). Eventually, this will be positive for the sector as it will weed out non-serious players. The penal action to be taken in the event a bidder is unable to achieve financial closure will be decided on case-to-case basis.
Expanding ambit of road project development
The current scope of NHDP is limited to ~50,000 km of national highways (of the overall 75,000 km of NHs in the country). Post completion of NHDP, focus will shift to the balance NHs. Also, conversion of state highways into national highways will expand the pie of project award. Apart from this, expressways like the Delhi-Jaipur (which is in addition to NHDP Phase VI) and upcoming OMT contracts will ensure that the road sector opportunity remains large.
Outlook: Momentum to continue; advantage ITNL, Sadbhav
We expect momentum in project award to continue, given the government’s ambitious target. We like ITNL (BUY/SO) due to its ability to build portfolio without dilution, healthy return ratios (ROE>20%) and attractive valuations (FY13E P/BV of 1.1x). We like Sadbhav (BUY/SO)for its superior execution and working capital efficiency. Also, both stand a good chance of bagging new projects as competition eases.
Regards,
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