Investors Eyeing Stakes In Completed Highway Projects Worth Rs 24,500 Crore

Investors are keenly looking to pick up stake in projects worth Rs 24,500 crore of completed highways with an average six years operational history, estimates India Ratings and Research.

The agency notes that there has been a paradigm shift in the acquisitions – from developers to financial investors. India Ratings believes that this is a positive shift and it will give impetus and opportunities for the opening up of businesses in the operation and maintenance vertical.

India Ratings estimates that deals which are yet to be sealed have a debt size of over Rs 16,400 crore. The activity pipeline has been abuzz in the last three years and India Ratings estimates that the highway sector has witnessed transactions of around Rs 11,100 crore in debt, during February 2013 to June 2016.

India Ratings, based on publicly available information, notes that the list of sellers or potential sellers include companies, namely, HCC Concessions Ltd., NCC Infrastructure Ltd., Soma Enterprises Ltd., Reliance Infrastructure Ltd. (‘IND A+'/RWN) and GMR Infrastructure Ltd.

The Indian highway sector is witnessing an enhanced level of activity in the acquisitions space, largely led by global marque funds and investors like I Squared Capital, Brookfield Asset Management, PSP Investments and Macquarie's India Infrastructure Fund. These international funds have bought stake or are in advanced stages of acquisition of around 2,900 kilometer length of national and state highway projects. Similarly, domestic financial investors namely, IDFC India Infrastructure Fund and other infrastructure companies namely, Tata Realty and Infrastructure Ltd. have made a mark by showing interest in deals of around 780 kilometer length of highways. With Infrastructure Investment Trusts gaining traction, highways, as an asset class will further evolve and will set benchmarks.

Road projects worth over Rs 40,000 crore, spanning around 3,600 kilometer, have either been sold off in the last three years or are currently in the process of being divested. This recent increase in appetite could well be sustained, with reports doing the rounds that the government is working towards clearing the roads to provide access for global sovereign wealth funds to invest into private highway projects.

India Ratings believes that the recent National Highways Authority of India (NHAI, ‘IND AAA'/Stable) 100 percent exit policy which was cleared in mid-2015 and the bid to deleverage and both aided the momentum in the last year. India Ratings had highlighted this in June 2016 in the report ‘Opportunities Manifest Despite Overt Limitations'.

Out of a total of 40 deals, including the ones in the pipeline, only five projects have been or are likely to be acquired by another corporate house, while institutional investors mostly account for the balance. Barring one project, all the projects have operational history of over six years, which could well be one of the reasons for investors evincing interest, since such projects reveal actual traffic potential. On expected lines, around 94 percent of highway projects in the fray are national highway projects and around 87 percent of the projects are toll-based projects which normally have a higher potential of giving returns to the acquirer.

(India Ratings and Research a wholly owned subsidiary of Fitch Group is a SEBI and RBI accredited credit rating agency operating in the Indian credit market.)