High interest outgo hits highway developers

Highway developers are bearing the brunt of an increase in cost of borrowing in recent months.

These developers are borrowing at around 14 per cent, compared to eight per cent at the time of bidding for projects.

With the Reserve Bank of India raising its key policy rates for the 11th time since March 2010 on Wednesday, banks are also expected to increase their lending rates.

This would put more pressure on margins of these developers.

The central bank raised the repo rate to eight per cent from 7.5 per cent and the reverse repo rate to seven per cent from 6.5 per cent.

"In a very short period, the cost of borrowing has increased from eight per cent to 14 per cent.

"This will not only impact the viability of projects but also the bottom line of infrastructure companies," said M Murali, secretary general of the National Highway Builders Federation.

Analysts say future projects might also get impacted, if the higher interest regime continues.

"Some developers are raising money from abroad through various methods but that is also limited.

The revenue collection of these developers is not seeing much change, as any increase in the toll rate is calculated on the basis of the wholesale price index," said Sanjay Sethi, senior executive director and head of infrastructure group at Kotak Investment

Banking.

He said the higher interest regime was set to continue for some more time.

But some see an opportunity in this higher interest regime.

"Now, the costs of projects will be estimated on the basis of higher interest rates. Once the interest rates come down we can always make more money," said an executive of a large infrastructure company.

Murali said highway developers had requested the government to allow infrastructure companies to borrow at floating interest rates during the construction and fix it after the construction was over.

"We made a representation to all on the same, but the RBI was not keen on it," said Murali.

"The other demand on classifying loans for highway projects as secure was also not approved, he said.

Apart from higher interest rates, competition is also hitting the bottom line of these developers.

Lots of infrastructure companies are bidding aggressively for highway projects which will ultimately impact their profit margins.

Earlier, the profit margins used to be in the range of 20 to 25 per cent. This has come down to eight to nine per cent because of aggressive bidding.

Highway projects, which earlier attracted up to 20 bidders at the qualification level, are now getting up to 40 bids.

In 2011-12, the National Highways Authority of India has announced it will award 59 projects, covering 7,994 km with a total cost of around Rs 60,000 crore (Rs 600 billion).