NHAI concession may help Reliance Infra, others disentangle Rs 4,500-cr debt

The National Highways Authority of India (NHAI) last month's move to reschedule the premium that developers of road projects have to pay to the government for securing the right to build and operate them will facilitate faster completion of the beleaguered projects and help companies service the debt associated with them.

Companies like IRB Infrastructure, Sadbhav Engineering and Reliance Infrastructure (R-Infra) that will benefit from this move have a total debt obligation of Rs 4,500 crore associated with the road projects they are developing and which are eligible for rescheduled premium payment.

Premium is the amount developers have to pay NHAI for bagging road projects on a build-operate-transfer basis. Developers have to bid the premium amount that they pay NHAI upfront, based on future traffic estimates. The term for payment of the premium is typically 20-25 years, with a 5% increase annually.

In March, a committee headed by then chairman of the Prime Minister's Economic Advisory Council C Rangarajan had suggested a mechanism whereby the rescheduling of payment of such premium will be allowed for only those projects where the toll collected is insufficient to meet project expenses such as servicing of debt, operations and maintenance, along with the premium payment.

For instance, say a road developer has to pay a premium of Rs 100 to NHAI for a road project, but is able to pay only Rs 60 now, after deducting project expenses from toll collection. In such a situation, the government will allow the developer to capitalise the remaining premium amount over the concession period. The developer will have to, at a later date, pay this shortfall in premium with a 10.75% interest.

The government had approved this scheme before the model code of conduct came into force ahead of the Lok Sabha election. The NHAI allowed nine road projects to reschedule premiums in the last week of May, leading to a total premium deferment of Rs 5,960 crore. For FY15, the amount of deferred premium stands at Rs 652 crore.

The developers whose projects have got the benefit are calling it as a much needed breather in a stressed environment.

“The moment a project becomes operational, I, as a developer, do not have the kind of cash flows needed to service my repayments in the initial years,” said Lalit Jalan, chief executive of Reliance Infrastructure. “This mechanism is to ensure that the banks don’t get stressed.” R-Infra’s Rs 925-crore Hosur-Krishnagiri road project has been approved on premium restructuring.

IRB’s Rs 2,226-crore Ahmedabad-Vadodara project and Rs 839-crore Tumkur-Chitradurga projects are among the beneficiaries of the scheme. According to the final approval given by NHAI for IRB’s projects, Rs 236 crore will be the revised premium that the developer will have to pay NHAI in FY15 for the Ahmedabad-Vadodara project and Rs 81 crore for the Tumkur-Chitradurga project, said Virendra Mhaiskar, the chairman of IRB. “It certainly comes as a relief for us and will be helpful in smooth operations of the projects,” he said.

Jonas Bhutta, Bank of America Merill Lynch (BoAML) research analyst, in a report in May said, “Premium rescheduling would lead to cash profits versus losses earlier on these IRB projects, and 100bp (basis points) arbitrage between interest cost on short-term debt (12%) and discount rate at which premium will be rescheduled (11%)”. The foreign brokerage has raised IRB’s FY15-16 earnings by 1%-6% on lower interest expenses.

Sadbhav Engineering had received an approval to defer premium for its Rs 1,213-crore Rohtak-Panipat and the Rs 480-crore Hyderabad-Yadgiri road projects. The company expects 100% deferment of premium in FY15 for both projects, which will mean it will not have to pay any premium in FY15, said a senior senior executive from Sadbhav Engineering. According to the original agreement, the company had to pay a total premium of Rs 60.1 crore for the two projects in FY15.

According to a Kotak Institutional Equities report in May, premium rescheduling will improve Sadbhav Engineering’s near-term cash flows and the potential valuation of the projects it is executing.

“The company seems well-placed to meet the increment equity requirement of Rs 380-400 crore for its underconstruction and development projects,” said Aditya Mongia, infrastructure sector analyst at Kotak Institutional Equities.