The equity IRR (internal rate of return) of the first bundle of highways being auctioned under the toll-operate-transfer (TOT) model would range between 12% and 13%, based on the National Highways Authority of India’s (NHAI) initial estimated concession value, an analysis by CRISIL Research shows.
The level of bidding intensity will drive the final returns earned by the concessionaire.
The bundle comprises nine highway stretches in Andhra Pradesh, Odisha and Gujarat.
A cluster of manufacturing industries and ports in Vishakhapatnam, Kakinada, Kandla and Mundra are expected to be the drivers of transportation demand. The economic corridor in the east coast is also expected to improve traffic potential in Andhra Pradesh.
Says Prasad Koparkar, Senior Director, CRISIL Research: “But the highway stretches in Gujarat are more attractive than those in Andhra Pradesh because of the presence of industrial clusters and consumption centres in the periphery. Importantly, there are no major alternate routes either, which could have upended the revenue calculus.”
The key risks to the bundle are the impact of Goods and Services Tax and alternate routes.
Says Binaifer Jehani, Director, CRISIL Research: “For example, the four-laning of Gundugolanu-Kovur Road (over the Godavari Bridge) in Andhra Pradesh would divert considerable freight traffic from Gundugolanu to Diwancheruvu. Also, factors such as latent defects and severe economic slowdown, which are difficult to anticipate, can increase the maintenance cost and substantially reduce traffic. But the dedicated freight corridor in Gujarat does not pose a threat to any of the three stretches in the state.”
Overall, the bundle of 9 highway stretches has good inbuilt hedges in terms of geography, traffic mix and returns. Some stretches are more attractive because of reduced risk from alternate routes, better support originating from industrial corridors, and complementary, planned infrastructure.