The FIRST Construction Council (FCC)—an infrastructure think-tank—hosted a virtual discussion forum on July 11, 2023, to highlight challenges and opportunities in road asset monetisation. Two domain experts enlightened participants – comprising FCC members and key decision makers from the construction and infrastructure industry –about the latest developments in the area of road asset monetisation.

In his opening remarks, Pratap Padode, President and Founder, FCC, said, “FCC provides an ideal platform to all stakeholders associated with the construction sector to come together and discuss thought provoking concepts. Today's topic of discussion is "Road Asset Monetisation". Financing has been one of the Achilles heels in the infrastructure story which has punctured our growth many times. As infrastructure projects have long gestation period, financing is very critical. NHAI has also suffered because of the high debt of Rs 3.43 trillion on its balance sheet. Hence, the government launched the National Asset Monetisation plan to raise Rs 6 trillion by FY25 and 27 per cent of this has to come from roads. There is a huge monetisation benefit that can accrue to NHAI and private developers, who have taken on the risk of developing roads.”

He also announced the plan of FCC to establish academic institute to meet the talent requirement of the infrastructure sector, which is only going to grow faster with India aiming to become a $5 trillion economy.

This was followed by presentations of Vikas Sharma, Partner, Infrastructure Investment Banking Advisory Team, EY, and Vijay Agrawal, Director, Equirus Capital.

HAM projects in demand
In his presentation on “HAM assets monetisation: Opportunity and key considerations”, Vikas Sharma, Partner, Infrastructure Investment Banking Advisory Team, EY, said, “In FY19, EPC was the most preferred mode for awarding NHAI projects. But, over the last few years, HAM (Hybrid Annuity Mode) projects have become more important and in FY23, HAM accounted for 56 per cent share of the total NHAI projects. Going forward, HAM will be the key contributor to India's infrastructure growth story.”

Speaking about the role of private sector investment in infrastructure, he said, “HAM requires equity investment by private sector. Based on projects awarded till December 2022, expected HAM equity investment outlay from the private sector for HAM projects is Rs 49,000-61,000 crore (approximately $6-7 billion). Such massive outlay by private sector and continued growth in HAM project award would require release of existing equity locked in developed projects through stake monetisation; thus there is a scope of significant M&A (merger & acquisition) activity in near future. We expect M&A to be very important part of strategy for developers.”

Stating that M&A activity in HAM space is expected to gain strong traction, he said, "Of the HAM projects awarded since January 2016, a total of 71 projects with cumulative BPC (bid project cost) of Rs 80,818 crore (about $ 10 billion) became operational during FY2019-H1FY2023. Of this, about 29 projects with a cumulative BPC $3.5 billion were sold to investors in the last two years. More assets will be needed to monetise in the next few years. For example, about 105 HAM projects involving BPC of Rs 1.22 lakh crore (about $ 15 billion) are expected to become operational in the next two years.”

InvITs gaining traction
Road sector has witnessed heightened M&As activity over the last two to three years. Vijay Agrawal, Director, Equirus Capital, commented, “People are lapping up road assets as Indian roads have come to maturity level where FASTag has improved the digitalisation of collection process and has avoided the leakages. People are banking NHAI agreement. Road EPC players are looking to de-leverage their balance sheet because they need money to tap the upcoming opportunity in infrastructure like HAM assets. With more investors coming in, sellers are getting better valuation for their assets.”

The government has been focusing on infrastructure development and emphasising on capital recycling through capex outlay and parallel monetisation plans. While the government intends to spend Rs 20 trillion for capex over a period of next five years, it has announced monetisation target of Rs 1.6 trillion over the next four years till FY25. NHAI wants to monetise assets worth Rs 50,000 crore every year.

 

Infrastructure Investment Trust (InvIT), conceptually like mutual funds, raises capital to invest in income-generating assets like highways, power transmission, etc. While developers have set up their own InvITs, but, of late, financial institute driven InvITs are raising lot of capital. Because of the tax efficiency, valuation under InvIT structure can be higher.

During his presentation on "InvIT: A preferred structure for holding road asset", Agrawal said, “InvITs are gaining traction and we have three listed InvITs. Though Sensex has witnessed high volatility over the last 15 months, yield from InvIT has shown continued uptick and resilience during volatility. In the road sector, AUM (assets under management) crossed more than Rs 1 trillion and InvITs have emerged as preferred holding structure.”

About FIRST Construction Council:
FIRST Construction Council provides a platform to promote the adoption of best practices, and be the torchbearer for all policy initiatives that are needed to enhance the importance and welfare of the construction industry. By engaging with key stake-holders of the industry and government agencies, the council provides a networking platform and access to growth opportunities for its members.