The COVID-19 pandemic has unleashed one of the sharpest and fastest disruptions to business and to normal life. Praveen Sethia, Founder Director, Infrastructure Advisors, feels it will be a tortuous drive to recovery for the government and the companies over the next six months, if not more.
What is the immediate impact of the COVID-19 outbreak?
I have never seen such a sharp and such a quick disruption ever. The impact will be larger and longer-lasting on the Indian economy than anything we have experienced in a long time.
What is the immediate impact on road developers?
Road developers are likely to feel a moderate to long-lasting impact, depending on the period of lockdown and the view being taken by the government and lenders. The important point is road projects are likely to get attention on priority as the government is keen that people are again quickly deployed. Road projects that are away from urban areas can be implemented without much risk of the virus spreading. Lenders, likely, will be providing a financial support package for the infrastructure sector and particularly, the roads sector. As we understand, the Ministry of Road Transport and Highways is looking at restarting projects wherever possible and this is a positive sign. Road developers, if not prudent, are likely to have cashflow issues. With respect to timelines, the force majeure clause can be invoked and will come as a support, but the next three to six months will be very challenging for the infrastructure sector, not just roads.
What will be the likely impact on deals?
If you mean in terms of equity transactions, we will definitely see a correction in the valuation matrix, especially in the toll roads.The impact will be priced, so it is not a matter of big concern for the infrastructure investors like the pension and sovereign funds, which obviously have a longer-term view. There is a disruption for three to nine months and it is a minor blip. I don't see the interest level of investors going down. Of course, the valuations will be affected because the traffic was stopped via a government order for a while and will remain subdued because it takes some time for activity to restart, going by past experience. We are running a mandate for an equity transaction worth about $170 million for non-toll-based projects and discussion is on.
What about the auction of roads under the toll, operate, transfer (TOT) programme?
The fourth TOT auction is taking a while as the last date for bid submission was extended a few times. It is likely to be difficult in the current scenario to churn assets to raise money by National Highways Authority of India (NHAI). With traffic dipping, certainly, the amount that investors will offer will also be lesser because the base number will get corrected. This is obviously going to have an impact on the initial estimated concession value (IECV) the way the NHAI calculates the number. For now, this is a genuine concern both for bidders and for the government.
What is the impact on the National Infrastructure Pipeline?
There is so much funding diversion right now for health initiatives for meeting the Covid-19 requirements that the government will have a real challenge in identifying the means of finance which was otherwise budgeted for launching the projects. A general view can be taken that budgeting will have to be revisited and there could be a bit of a slowdown. I hold the contrary view that investments in infrastructure can kick-start economic growth and you may expect infrastructure spending picking up again.
- NEYOOR B. SHARMA