Investment, merger and acquisition (M&A) activity in the roads sector has picked up pace this year as foreign investors pump in millions of dollars to acquire operating roads and developers look to sell assets to pare debt.
So far this year, road deals worth around $1.8 billion have been announced. That compares with the entire last year’s deal activity of $2 billion, according to data from consulting firm EY and Mint analysis.
Last year’s deal activity was, however, skewed because of a single large deal, involving Macquarie’s acquisition of nine toll roads from the National Highways Authority of India (NHAI)under its maiden Toll Operate and Transfer (TOT) model. Macquarie spent nearly $1.4 billion to acquire those roads.
Deal activity this year has been driven by large investors such as Singapore’s sovereign wealth fund GIC and Canadian pension fund manager CPPIB backed infrastructure investment trust (InvIT) – IndInfravit Trust.
In July, IndInfravit Trust said it is acquiring nine operational road assets from Sadbhav Infrastructure Project Ltd for ₹6,610 crore.
Earlier this month, road developer IRB Infrastructure Developers Ltd announced that GIC is investing ₹4,400 crore in its road platform.
The increased interest in roads is driven by several factors such as availability of large number of assets allowing large institutional investors such as pension and sovereign wealth funds to write big cheques, said Subahoo Chordia, head of Edelweiss Infrastructure Yield Plus Fund.
“Road sector is more mature compared to some of the other infrastructure sectors. Further, the sector presents opportunities for investors such as pension funds, which look for predictable cash flows. A significant portion of the annuity road assets available for sale are projects with NHAI/ministry of road transport and highways (MoRTH) as counter-party thus leading to significantly lower credit risk,” said Chordia.
Also, larger portfolio of toll assets are available for sale by developers or by NHAI through the TOT route, he added.
Edelweiss itself has acquired two roads this year for around $150 million, Mint reported in June.
According to Shivam Bajaj, director of advisory firm Bajaj Consultants, foreign investors are more comfortable investing in roads given the mature and well- established regulatory structures as against some of the other infrastructure assets.
“The revenues in renewable or power transmission assets are dependent upon government authorities and discoms which could result in delays, whereas a toll is collected upfront from the users. There is also growing concern in the investor fraternity on talks of re-negotiating tariffs fixed for renewable projects by certain states which could potentially increase the risk profile for certain investors. Road projects on the other hand, as per the concession agreements, have a very well defined tariff structure laid out, which is not subject to any re-negotiation,” said Bajaj.
Bajaj added renewables and power transmission assets are typically annuity-based assets which result in diminishing returns over longer tenure, whereas toll road assets have progressive revenue, which enhances the returns over the concession life, thus making them more attractive for investors. Bajaj Consultants advised IRB on its fundraise from GIC.
Going ahead, deals in the sector are only expected to pick up, said experts.
Already, several major deals are being negotiated such as Essel Infraprojects’ sale of around three roads and Global Infrastructure Partners’ sale of its Highway Concessions One road portfolio
“There will be both primary investment in building assets largely led by Indian developers and secondary investment largely by financial investors to buy-out operating assets,” said Chordia of Edelweiss.
About ₹1.4 trillion is estimated to be invested by the private sector between 2018-2022 to build new road assets, he said. “Further private developers will look to monetize HAM (hybrid annuity model) road assets and NHAI will look to auction more TOT, thereby increasing the supply for secondary investment for such acquisitions,” Chordia added.
Source: Mint