National highways: utilization and monetization - Kotak

National highways: utilization and monetization. Our assessment of the systemic utilization of national highways and the scope for monetization of current traffic levels further strengthens our hypothesis of the need and means for a sustained uptick in road construction activity. We remain positive on road construction names in Sadbhav Engineering (Rs392, ADD) and Ashoka Buildcon (Rs267, BUY).

Driving beyond 80 kmph a risk in peak traffic period at a system level

National highways can be considered as a long round-about with ~280,000 lane kms of space catering to ~3,000,000 moving vehicles on highways. Put differently, if all vehicles are on this round-about at the same time, the average distance would be less than 100 meters. Considering the skewed profile of traffic on national highways towards commercial vehicles (six hours of daily driving) and of timing (entry time into cities restricted), the proportion of such 3.3 mn traffic on NH during peak time would be 50% or more. The average distance between two vehicles would thus be less than 200 meters. At 80 kmph, this provides a safety factor of 1.5X against the safe distance needed to avoid accidents. Such safety factors appear rather low at a system level considering that traffic patterns and concentration change over time.

Safe travel at higher design speeds will be another driver for road construction

The recent announcement of the 12 hour 1,250 km Delhi Mumbai journey through a new expressway would require design speeds of more than 100 kmph. Considering this as a benchmark for national highways in the country (as recently approved by the cabinet in February 2018), NHAI would need to widen the existing national highways at a faster pace. NHAI has already decided to reduce the threshold traffic for four laning by 30-33% to reduce accidents and congestion. More of such reduction in threshold would be required to increase the design speed on national highways.

Roads model is workable on strength of tolling at a system level

The current 3.3 mn of moving vehicles on national highways, if tolled at existing rates for a 300 km daily lead distance, can amount to Rs1 tn of toll revenues and can support upgradation of the entire 120,000 kms of length. NHAI thus can act as an aggregator of such assets and hope to monetize its investments over time. The recent success of the first toll-operate-transfer bundle is encouraging from that perspective.

Ordering CAGR can sustain in double digits over the long term; ecosystem to remain supportive

Our above analysis further strengthens the case for strong growth in ordering by NHAI over the next five years. It helps us appreciate the fair level of utilization of national highways in ideal road and traffic conditions. It also helps us understand another medium-term driver of construction capex in potential increase in design speed for roads. The ordering from NHAI can thus grow at a high-teens CAGR over the next five years (refer to our recent report dated 3 April 2018) and can grow much ahead of traffic growth.

Our understanding of NHAI's ability to fund the upgradation capex for the entire 120,000 kms of national highway length at a systemic level also comforts us on the limited scope of current ecosystem to change; NHAI will continue to order out construction contracts to construction companies and eventually be in a position to pass on traffic risks to financial investors.

Source : Equity Bulls

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