On solid road

In early 2004, when IRB infrastructure Developers won the bid to operate and maintain the Mumbai-Pune Expressway for 15 years, and paid a huge sum to the Maharashtra State Road Development Corporation, the developer, in lieu of toll collection on the expressway, there were many who wondered if IRB would come good on its investment. Today, with 11 projects running and two under construction, IRB has emerged as India’s biggest operator of toll roads— Noida Toll Bridge and Gammon Infra are the other major players— with 800 km of roads and a daily toll collection of Rs 2 crore.

“There is huge potential for such projects over the next 15-20 years given the poor road infrastructure,” says IRB Infrastructure Chairman and MD Virendra D. Mhaiskar, adding that IRB will remain focussed on this area. Over the next four years, IRB plans to bid and complete projects worth Rs 5,000 crore, including National Highway 4 (Mumbai-Chennai) and National Highway 8 (Mumbai-Delhi), as well as generate Rs 1,500 crore cash from toll collection. The company is also getting into maintenance of city roads, having already bagged one such project in Kolhapur worth Rs 400 crore.

How does the toll road business work? On successfully bidding for a road project, a company pays the bid amount to the highway authority and is given the mandate to build (or widen or rehabilitate), operate and transfer (BOT) the road to the authority. In lieu of the bidding amount, it is allowed to collect toll at a pre-determined rate from users for a specified period (concession period). Though players can and do operate roads built by others, profitability increases if it is built in-house. “In road construction, the profit margin is 8-10 per cent. While bidding for BOT projects, this margin puts us in a slightly better position,” says Mhaiskar.

The IRB advantage India’s biggest operator of toll roads with 800 km of roads Average daily toll collection of Rs 2 crore Construction of roads inhouse reduces cost by 8-10 per cent Risks High interest cost at 12 per cent Lower than expected traffic growth Banks’ reluctance to give loan to BOT operators

Indeed, private operators have become integral to BOT projects because of the emphasis on the public-private partnership model for infrastructure development in the country. The need for offbalance sheet financing of infrastructure projects has also made the involvement of the private sector necessary.

The company reported a net profit of Rs 133.6 crore for the first nine months of 2008-09, compared to Rs 126.6 crore for whole of 2007-08. It has Rs 2,000 crore debt on its books, and another Rs 2,000 crore is going to get added by way of loan for the Mumbai-Surat project. Average interest cost is 12 per cent, which is a major concern for Mhaiskar, who says, “For every one percentage drop in interest, I will save Rs 20 crore for the company.”

Analysts say BOT road projects with toll as the main source of revenue will continue to get funding rather than road projects that are cross-subsidised with real estate like the Bangalore-Mysore corridor and Noida-Agra Expressway. “IRB is wellplaced in this situation as none of its projects relies on real estate revenues,” says Sameer Panke, Research Analyst at Dolat Capital Market.