Asset monetisation paving way for debt reduction
Recent financial bids for ToT 3 at Rs 50.1 billion, marginally higher than NHAI’s bid price, have come at 15x FY2018 toll collection, thereby meeting 50 per cent of its full year target. These bids are similar to those for ToT 2. As per the current plan, NHAI plans to monetise around 6,165 km till FY2025 and Kotak believes that related sale of toll rights for a 30-year period at similar valuations would take care of 25-30 per cent proportion of NHAI’s current debt. Stricter implementation of FASTag and improving pace of construction can ensure scale up in toll collection. This coupled with asset monetisation via ToT, InVIT and securitisation will ease cash flows for NHAI, thereby resulting in improvement in awarding activity from NHAI. We expect FY2020 to be a year of consolidation for NHAI with subdued project awards in comparison with past years and expect it to improve from FY2021 onwards.

Amendments in ToT model ensure wider set of projects offered to wider range of investors
Cabinet has approved amendments in ToT model proposed by NHAI. Relaxation in time frame of toll revenue history from two year to one year ensures a wider set of assets for monetisation by NHAI. NHAI has also been allowed to vary the concession period of toll projects between 15-30 years ensuring a wider range of investors for ToT monetisation. NHAI has also been allowed to raise long-term financing from banks against toll receipts via toll securitisation. So far since last one year, NHAI had been constrained in its ability to scale up project awards meaningfully due to incremental debt burden and debt servicing. With a target to raise Rs 110 billion/Rs 121 billion/Rs 133 billion via ToT asset monetisation for FY2020/2021/2022 and Rs 386 billion via securitisation, these proposals are in the right direction to bridge the financing gap. However, the amendment of doing away with the need to furnish bank guarantees for interest amount involved in arbitration claims with government does little in terms of easing funding to the sector due to inability or unwillingness of players to furnish large bank guarantees for arbitral amount.

Players better positioned to benefit from revival in ordering as and when it happens
Select companies in our coverage universe are better positioned in terms of 1) Balance sheet strength with D/E ranging from 0.3x to 0.9x for FY2020E, 2) Asset monetisation easing debt burden at consolidated level, 3) Better control over working capital and 4) Improving asset turnover ratios. Stocks at current valuations are already factoring in the bear case scenario of muted order inflows and slow execution. A pick-up in orders is already visible from other segments and is further expected to ramp up from FY2021 onwards, albeit at a slow pace. Our top picks are Dilip Buildcon and Ashoka Buildcon.

Stocks are factoring in worst case scenario – What can go wrong further?

• Lack of interest in NHAI asset monetisation. In the recent bidding for ToT 3, only three players participated and there was a vast difference in bids submitted by them. This can pose a risk to expected ramp up in ordering. However, with wider set of investors targeted via reduced concession period of ToT, we expect NHAI to meet its asset monetisation target.
• Delays in pick up from other segments. Companies have managed to diversify beyond NHAI and bagged orders across segments such as mining, urban infra including airports and metros, irrigation, state highways, flyovers, smart city, T&D, railways. Going ahead, the pipeline looks good but it may take time to reach awarding stage given large size of projects involved such as Ganga Expressway, RRTS corridors, metro projects.
  
• Aggressive competition may put pressure on margins. Due to delayed ordering from NHAI, competition has increased immensely for new project awards with marginal difference between L1 and L2 bids along with entry of new or unlisted players. This can have an adverse impact on margins.