We are overweight on road construction stocks since the last one year. Road construction stocks in our ‘strong core’ portfolios have risen by 260%, 120% and 55% since our recommendation. These stocks will continue to outperform the market due to PSU banks recapitalization and Government’s road construction programme (Bharatmala Pariyojan scheme). Register for our Strong Core Advisory Services to gain from our stock picks.
Government, on the 24th of October, announced the biggest road construction programme in Indian history to create 84,000 kms of roads over the period of next 5 years with a total investment of Rs 6920 billion. Among the 84,000 kms of total roads, 34,800 kms of National Highways will be built under ‘Bharatmala Pariyojan scheme- Phase I’ with a total investment of Rs 5350 billion. Government is confident about laying 7,000 kms National Highway per year.
Government has also given details on financing the overall capital requirement of Rs. 6920 billion. Rs. 2090 billion will be market borrowings, Rs. 1060 billion is expected to come from private participation, Rs. 2190 billion will be funded through Central Road Fund, Rs. 590 billion will be budgetary support and Rs. 440 billion is expected to come from monetization of existing road assets.
Last year Government had introduced a Hybrid Model (HAM) to revive PPP (Public Private Partnership) in highway construction. At present, three different models –PPP Annuity, PPP Toll and EPC (Engineering, Procurement and Construction) were followed by the government to encourage private sector participation. Under HAM model, Government will contribute 40% of the project cost in the initial time frame through annual payments. The remaining payment (60%) is chipped in by the road construction company in the form of equity or bank loan. Revenue collection (Toll) would be the responsibility of the National Highways Authority of India (NHAI). Advantage of HAM model is, financial risk is shared by the Government and leaves the road construction company with enough liquidity.
Launch of the new model (Hybrid Annuity Model) is due to the many problems with the existing ones. Large number of stalled projects are blocking infrastructure projects and at the same time adding to NPAs (Non- Performing Assets) of the banking system. In this context, the government of India has introduced Hybrid Annuity Model (HAM) to rejuvenate PPP. Announcement of Rs 2.11 trillion capital infusion plan for PSU banks will boost investments in this sector.
Indian road construction sector is already seeing strong momentum over the last few years with the Highways awarding (46km/day) and construction (23km/day) reaching historical high levels due strong initiatives by the Government.
Due to NPA issues banks are not showing keen interest to lend money to infrastructure companies, Bank recapitalization would help infrastructure companies to borrow money from banks to execute projects. Implementation of ‘Bharatmala Pariyojan scheme’ will increase the order-book size and profitability of the infrastructure companies.