Feature

The road not ahead

The macro headwind may be getting worse for the infra sector, but a handful of companies with robust order book could just weather the dust storm

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The present government has been long on promises and short on delivery. That, though, hasn’t stopped it from making new commitments. The Finance Minister recently reiterated that Rs.100 trillion would be invested in infrastructure. How and to what extent that promise will be fulfilled is anyone’s guess, but recent developments have not been encouraging. Take, for instance, what Minister of Road Transport and Highways Nitin Gadkari said at a recent conference in the capital. “One thing is clear that the government is facing financial constraints and it is very difficult for any government to invest in all these sectors (infrastructure),” he said. Gadkari admitted that they are finding it difficult to fund these projects, while urging private companies to boost investment and help revive economic growth. Reflecting this bleak sentiment, road stocks such as Ashoka Buildcon, Dilip Buildcon and KNR Constructions have fallen by 20-30% in the past six months. So, what’s ailing our infra sector? Is it just collateral damage from an economic slowdown, or is there much more at play? 

Debt dilemma

There are a number of intertwined factors. But first, let’s address the elephant in the room — the huge quagmire that National Highways Authority of India (NHAI) is in. The nodal agency, which is responsible for awarding and funding projects besides managing national highways, is neck-deep in debt. Its debt has grown 8x between FY14 and FY19, ballooning to Rs.1.8 trillion, mostly due to high land acquisition cost. “Fiscal concern is still hovering over the sector. The government has told NHAI to fend for itself. How will the NHAI fund projects?” asks Amit Khurana, head of equities and research, Dolat Capital. 

According to Crisil, the average cost for acquiring land has increased to around Rs.34 million/hectare in FY19 from Rs.9 million/hectare in FY14. Land acquisition cost alone contributes to one-third of total spends at NHAI. “The compensation policy under the current land acquisition bill requires the NHAI to pay 4x the market rate for rural land and 2x for urban land,” says Hetal Gandhi, director, Crisil.

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