Lenders to hybrid annuity model (HAM)-based highway projects are comfortably placed with debt levels in the safe zone and bidding not unduly aggressive, a CRISIL Ratings analysis shows. That should put to rest rising apprehensions on this score.

With banks extremely cautious and shying off projects not backed by experienced sponsors with strong financials, developers with healthy financials are the ones vying for HAM projects, which is keeping bids prudent. Given this, the average debt service coverage ratio remains comfortable at around 1.15 times for most of these projects which have a low risk in the operations phase.

Says Sachin Gupta – Senior Director, Crisil Ratings, “Banks are limiting their exposure to 35% compared with 70% in the traditional build-operate-transfer or BOT projects. NHAI contributes 40% of the costs, so the gap in funding is expected to be closed by the sponsor. Additionally, banks are seeking corporate guarantees for a large number of projects to safeguard their interests.”

This has kept the bids prudent. The bid project cost (BPC) per km has remained at ~Rs 23-25 crore. Further, L1 (lowest) bids are on average 15% higher than NHAI’s estimated engineering, procurement and construction, or EPC, costs, though the difference between L1 and L2 bidders has doubled to 8% last fiscal from 4% in fiscal 2016. The number of bidders, too, remains limited at 5-10 per project compared with almost 30 seen for BOT projects in fiscals 2011 and 2012.

Another factor responsible for the bidding prudence is that the government’s road development agenda under Bharatmala is quite large, with high visibility of projects – at ~35,000 km valued at Rs 5.35 lakh crore – to be implemented over 5 years. This is likely to obviate desperation to grab projects.

HAM has become the preferred contract for the National Highways Authority of India (NHAI) in just three years of launch, rising from less than 10% (Rs 7,700 crore) of awards in fiscal 2016 to nearly 50% (Rs 76,500 crore) in fiscal 2018. Going forward too, HAM projects are expected to be constitute 60% of the projects awarded by NHAI.

The bidding parameter for HAM projects is the net present value of BPC and O&M bid cost. As per the HAM model, the developer also receives interest on the balance annuities linked to BPC in the operations phase.

Says Sushmita Majumdar – Director, CRISIL Ratings, “We are noticing a trend of reducing operation and maintenance (O&M) bids, which have declined by a sharp 44% on average to ~Rs 10 lakh per km in recent bids, compared with ~Rs 18 lakh per km a two years ago. However, we believe the debt is still viable on a project basis, given that the higher annuities from BPC and interest thereon would support cash flows.”

Lower O&M bids do not impact credit analysis of projects because CRISIL takes into account only the actual O&M expenses – as seen in similar, existing road projects – to compute cash flows and therefore, debt servicing ability.

Overall, from a credit perspective, the bidding so far seems prudent with the right funding mix. HAM has drawn back private developers who had stayed away between fiscals 2013 and 2015 due to land acquisition issues and stressed financials caused by aggressive bidding earlier.