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Road builder IRB urges India to offer up new highways for bidding

Source : REUTERS
Last Updated: Tue, Dec 03, 2013 04:30 hrs
Real estate

The chairman of India's largest road construction firm IRB Infrastructure Developers Ltd urged the government to invite companies to bid to build and operate dozens of new highways, a step regarded as crucial to economic growth.

India sees ramping up the construction of new roads, power plants and ports as crucial to making its businesses more internationally competitive and lifting economic growth out of its worst slowdown in a decade.

But the private sector's efforts to build new projects have been derailed by problems ranging from coal and gas supply shortages in the power sector to a throttling bureaucracy and a lack of bank funding in the roads sector.

IRB needs to win new government contracts in order to reverse two consecutive falls in quarterly net profit, Chairman Virendra Mhaiskar told Reuters.

Mhaiskar, who until this year was in the Forbes India list of the country's 100 richest people, said the state-run National Highways Authority of India (NHAI) should offer up for bidding 20-30 highways previously awarded to companies but which failed to take off.

He said in a phone interview he would like to make bids for new projects worth up to 40 billion rupees ($643 million) in the next 3-6 months to prop up an order book that has shrunk to 70 billion rupees from about 84 billion in May.

"Profit growth will entirely depend on new orders," Mhaiskar said. "Because if they're going to exhaust our order book pipeline, then the challenge on the profit remains."

Bank of America-Merrill Lynch and Angel Broking say IRB is in a strong position to pick up new orders and both have a "buy" rating on IRB's stock. However, BoA-ML in November cited a slowdown in new project orders as a concern.

IRB, India's largest road construction firm by market value, posted a 12 per cent drop in net profit to 1.1 billion rupees in the July-Sept quarter, compared with the same period last year. Its net debt to equity ratio is 2.55:1.

"PRIME CONCERN"

India awarded under 2,000 km (1,240 miles) worth of new road construction contracts in the last fiscal year, which ended in March, against a target of 9,500 km (5,900 miles).

"We have seen very little orders getting announced by the NHAI in the last whole of the year. So that remains a prime concern," Mhaiskar said.

"We understand their views as well, that they feel that there is sluggishness and they may not get a good response. But the point is: one needs to keep the good work going," he said.

The NHAI chairman did not respond to a request for comment.

The government has pushed a public-private-partnership (PPP) construction model in which developers bid for projects in exchange for sharing some of the revenue with the state - a way of getting investment without emptying the public purse.

Besides delay in awarding government projects, an economic slowdown and various mining bans in India mean there are fewer cars and trucks than there might have been on the roads to pay tolls - eating into companies' revenues.

Two of India's best known infrastructure companies, GMR and GVK, have moved to exit high-profile road projects. In response, the government is working on a formula to ease the payments that companies have to pay to the state in exchange for operating highways.

Recent projects have been designed mainly on a model known as "build-operate-transfer" (BOT), where companies build and own highways for a fixed period before handing them over to the government.

"These days bankers have become more cautious in lending to road BOT projects. They want 80 percent of the land in possession before the financial closure of the project could be achieved," said Viral Shah, an analyst at Angel Broking.


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