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Aggressive bidding continues
GMR has emerged as the highest bidder for the largest NHAI project, Krishangarh-
Ahmedabad (558km; Rs54bn cost). It quoted an annual premium of Rs6.4bn (12%
of project cost), 23% higher than L2 (GVK-Balfour Beatty) and ~50% higher than
L3 (Soma-Isolux); IRB-R-Infra and L&T quoted about half as much. Competitive
intensity for new projects remains high, with 96 companies qualified to participate
in NHAI tenders, several projects attracting 20-40 financial bids, bid premiums
expanding and difference between bids widening. New wins may not be NAV
accretive, in this context, diluting the investment case for the highway developers.
GMR wins the largest NHAI project in India…
q GMR has emerged as the highest bidder for India’s largest national highway
project, Krishangarh-Udaipur-Ahmedabad.
q The project involves six-laning of the 558km stretch of an existing four-lane
highway and construction of Udaipur Bypass in Rajasthan and Gujarat. NHAI’s
approved project cost is Rs54bn, though actual cost could be 20-30% higher.
q The concession period is 26 years, including the three years for construction.
q 13 players had applied for qualification and 11 had placed financial bids.
…offering the highest ever annual premium
q GMR offered an annual premium of Rs6.36bn, escalating by 5% every year. This is
the highest premium ever offered to NHAI for a road highway project.
q GMR’s bid was 23% higher than L2 (GVK-Balfour Beatty, Rs5.2bn), ~50% higher
than L3 (Soma-Isolux, Rs4.3bn). The other bids were about half as much or lower.
q The Finance Ministry and Public Private Partnership Appraisal Committee had
benchmarked Rs3bn annual premium for Krishangarh-Ahmedabad project.
Large premiums leave little margin for error
q GMR’s bid implies 12% of NHAI’s approved project cost. IRB’s Ahmedabad-
Vadodara win was at 15% of capex while L&T’s Baewar-Pindwara win was at 10%.
q The mega projects are complex with many variables (separate stretches, bypasses,
expressways, competing roads, growth, interest costs) impacting economics.
q A high premium leaves little scope for error, in this context. We estimate just 12%
equity IRR for IRB’s project, for example, even with optimistic assumptions.
Competitive intensity in highway sector remains high
q Nonetheless, we expect competitive intensity for new projects to remain high.
q For example, 96 companies are now pre-qualified for projects with 20-40 financial
bids fairly common. Even the mega projects are likely to see +10 financial bids.
q Large negative premiums are becoming more common, therefore, with differences
between bids widening even as the interest rate environment remains challenging.
q New project wins may not be NAV accretive for the BOT segment, in this context,
diluting the core investment case for India’s key highway developers.
q Our O-PF rating on IRB recognizes its reasonable valuations; we would look to
upgrade on evidence of an uptick in BOT traffic and easing of competitive intensity.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Aggressive bidding continues
GMR has emerged as the highest bidder for the largest NHAI project, Krishangarh-
Ahmedabad (558km; Rs54bn cost). It quoted an annual premium of Rs6.4bn (12%
of project cost), 23% higher than L2 (GVK-Balfour Beatty) and ~50% higher than
L3 (Soma-Isolux); IRB-R-Infra and L&T quoted about half as much. Competitive
intensity for new projects remains high, with 96 companies qualified to participate
in NHAI tenders, several projects attracting 20-40 financial bids, bid premiums
expanding and difference between bids widening. New wins may not be NAV
accretive, in this context, diluting the investment case for the highway developers.
GMR wins the largest NHAI project in India…
q GMR has emerged as the highest bidder for India’s largest national highway
project, Krishangarh-Udaipur-Ahmedabad.
q The project involves six-laning of the 558km stretch of an existing four-lane
highway and construction of Udaipur Bypass in Rajasthan and Gujarat. NHAI’s
approved project cost is Rs54bn, though actual cost could be 20-30% higher.
q The concession period is 26 years, including the three years for construction.
q 13 players had applied for qualification and 11 had placed financial bids.
…offering the highest ever annual premium
q GMR offered an annual premium of Rs6.36bn, escalating by 5% every year. This is
the highest premium ever offered to NHAI for a road highway project.
q GMR’s bid was 23% higher than L2 (GVK-Balfour Beatty, Rs5.2bn), ~50% higher
than L3 (Soma-Isolux, Rs4.3bn). The other bids were about half as much or lower.
q The Finance Ministry and Public Private Partnership Appraisal Committee had
benchmarked Rs3bn annual premium for Krishangarh-Ahmedabad project.
Large premiums leave little margin for error
q GMR’s bid implies 12% of NHAI’s approved project cost. IRB’s Ahmedabad-
Vadodara win was at 15% of capex while L&T’s Baewar-Pindwara win was at 10%.
q The mega projects are complex with many variables (separate stretches, bypasses,
expressways, competing roads, growth, interest costs) impacting economics.
q A high premium leaves little scope for error, in this context. We estimate just 12%
equity IRR for IRB’s project, for example, even with optimistic assumptions.
Competitive intensity in highway sector remains high
q Nonetheless, we expect competitive intensity for new projects to remain high.
q For example, 96 companies are now pre-qualified for projects with 20-40 financial
bids fairly common. Even the mega projects are likely to see +10 financial bids.
q Large negative premiums are becoming more common, therefore, with differences
between bids widening even as the interest rate environment remains challenging.
q New project wins may not be NAV accretive for the BOT segment, in this context,
diluting the core investment case for India’s key highway developers.
q Our O-PF rating on IRB recognizes its reasonable valuations; we would look to
upgrade on evidence of an uptick in BOT traffic and easing of competitive intensity.
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