Thursday, September 24, 2015

Power, roads and railways ministries were expected to spearhead Narendra Modi government’s growth agenda. Market observers have been tracking these ministries closely, especially since the ministers heading them have a strong track record. Power ministry seems to have hit a temporary roadblock with the state electricity boards after doing a commendable job in coal allocation.

But it’s the road and railways ministries that have normally hogged the limelight. Mostly positive news flows have been emanating from these ministries as they made a series of announcements relating to novel strategies that will be followed and its high targets will be achieved.

Thus it came as a surprise when the Prime Minister Officepulled up the railway ministry for slack progress on key railway projects. Also, on the same day it was reported that L&T chairman questioned government’s pledge of building 30 kms of road a day.

A note written by Nripendra Misra, Principal Secretary to the PM, to the ministry has highlighted how railways in the first quarter ended June spent only 20% of the Rs 40,000 crore of Gross Budgetary Support provided by the centre for the current fiscal, apart from flagging the slow progress of station development and the high-speed rail project.

AM Naik, executive chairman of L&T questioned how the government could deliver on a pledge to build up to 30 kilometres of roads a day when less than a dozen highway projects had been put up for tender.

We take a closer look at what the ministries have been doing and if there is any substance in the grouses raised.

A report released by Ambit titled ‘A clogged and an unclogged wheel’ looks at both these ministries. It points out that of the two wheels of transport infrastructure capex (railways and roads), only roads has been unclogged whilst the other possibly requires an overhaul.

Quoting CMIE it says that new project announcements in railways have not increased materially in the last 12 months when adjusted for the large but ambitious Delhi-Chennai high-speed rail project.

In the last 12 months, only three other major projects were announced. Despite ambitious plans of investing US$135bn over the next five years there seems to be no immediate sign of revival in spends by the Indian railways at the centre level. This is further corroborated by no growth in railway controlled capex in the first five months of FY16.

Railway’s operating ratio (a measure of how efficiently it is run) has worsened in the first six month. As per Ambit, the operating ratio in the first five months of FY16 of 92.96% was significantly worse than the targeted figure of 88.50% in FY16. This ratio has continued to worsen through the year (92.30% in 1QFY16).

Ambit says this may be because of lower-than budgeted revenues. Revenue from each of the four segments was lower than budgeted despite a growth of 10% YoY.

However, Ambit feels that the ministry is now re-allocating its resources towards focus areas such as doubling of railway tracks and electrification.

But, when it comes to roads, Ambit along with other analysts is bullish on the sector. Ordering momentum in the first five months of the current fiscal has remained strong registering a growth of 93%. The report points out that the recently awarded contracts are likely to see quick execution, given that land is already acquired.

But what most analysts are upbeat on is the recently announced model concession agreement (MCA). Rating agency Crisil says that the new MCA will be a booster shot for highways. "We expect project awards by the NHAI to increase nearly 50% in fiscal 2016. The share of BOT projects, on the other hand, could rise from 25% in fiscal 2015 to over 50% by 2017," Crisil said.

Ambit feels that the recent amendment of the MCA addresses business uncertainties/challenges such as dispute resolution and execution delays and improves project economics (back-ending premium). Emkay Research says that reworking the MCA at this juncture will help providing the solution to the actual ground risk that the road project faces with respect to the land acquisition, equity infusion/financial closure, event risk which ultimately will help avoiding the mismatch in the project cash flows.

What comes out clearly is that clarity on most of the issues will help the government speed up its offerings going forward, which would perhaps address the issue raised by L&T’s Naik. But for railways, the ministry will clearly have to get its act in place and along with cleaner trains and station will have to create assets.

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