Building new roads and expanding lanes on existing highways have been a key focus area for the central government amid its infra push. Prime Minister Narendra Modi and Minister Nitin Gadkari have championed this fact numerous times in the past.
According to a BNP Paribas calculation, the Indian roads sector witnessed strong growth over FY15-21, with aggregate road capex registering a 20 percent compound annual growth rate (CAGR). Growth was higher for highways, with the National Highways Authority of India (NHAI) registering 35 percent CAGR. In terms of kilometers, road construction recorded a 20 percent CAGR. Capex growth includes rising construction costs as well as ballooning land acquisition costs.
Now, as the government readies the Union Budget for next year, the stellar growth in the road sector is likely to slow down now as NHAI is in need of recapitalisation. This also warrants adjusting allocation to the infra sector, analysts believe.
Increased borrowing
NHAI is the nodal agency awarding road building and repairing contracts. There is no doubt that the agency has done creditable work to increase road construction activity across the country. But this has come at a certain cost: higher debt.
Most highways in India are constructed under the hybrid annuity model (HAM). In this, the traffic risk is not borne by the developer, while the funding risk is limited to 60 percent, with the NHAI bearing the remaining 40 percent.
In recent years, the NHAI has borrowed heavily from the market to fund road construction as the private sector was reluctant to finance the needs of the sector. This saw the nodal agency’s borrowings rise from Rs 0.2 lakh crore in FY15 to Rs 3.5 lakh crore in FY22, with net leverage increasing to 1x as of FY22.
“FY24 is likely to be the year of balance sheet consolidation and we expect growth to resume from FY25 onward,” said Nilesh Bhaiya, Equity Research Analyst at BNP Paribas. “The government of India has opted to recapitalise NHAI’s balance sheet in FY23, with higher budgetary support and zero market borrowings. This should lead to a lowering of net leverage to 0.7x in FY23, thus providing room to fuel future growth.”
Nitin Gadkari, Minister for Road Transport and Highways, has time and again defended NHAI’s increasing debt, claiming it was a “gold mine” and that the agency can never fall in a debt trap.
Highway construction activity fell to 19.44 km a day in the April-September period this year, according to Ministry of Road Transport and Highways data. The pace of highway construction stood at 28.64 km a day in 2021-22, despite pandemic-related disruptions and a longer-than-usual monsoon in some areas of the country.
Rising costs
Along with higher debt, net interest expense and land acquisition costs are also increasing for NHAI. On account of the amended Land Acquisition Act, these costs have increased by over five times over the FY13-20 period, i.e., from Rs 80 lakh/ha in FY13 to Rs 400 lakh/ha in FY20.
“We see rising land acquisition and project expenditure. While project expenditure pertains to the physical execution of road projects and is welcomed, higher land acquisition costs are a cause for concern,” said Bhaiya.
New opportunities
Investors have already started factoring in the slower growth in road capex, and thus, stocks such as Dilip Buildcon and HG Infra have seen selling in this year so far. Though names such as IRB Infra and HCC have bucked the trend, the outlook for them is dim.
However, if one segment of the infrastructure and capital goods segment has a bleak outlook, other segments are emerging as new avenues for growth. BNP Paribas believes Railways and Defence are two such sectors where investors can deploy more money. It is bullish on L&T and Bharat Electronics in these sectors.
Defence sector stocks such as Hindustan Aeronautics and Bharat Electronics have turned multibaggers over the last one year. A rally has also been seen in railway names such as IRFC and Titagarh Wagons.
Anand Shah, Head of PMS at ICICI Prudential AMC, also noted that in terms of roads the country has achieved much, but in the fields of railways and defence, “we have not achieved much”.
“We consider railroads as a huge opportunity. Apart from the dedicated freight corridor, there are numerous capex projects underway. Then there is urban infrastructure; metros are being built in every city. Another possibility is renewable energy, including solar and wind energy. Going indigenous has opened a wide range of opportunities for the defence industry,” he said.
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