India’s growing road infrastructure offers lucrative options to PE Players

India’s growing road infrastructure offers lucrative options (s) to indigenous as well as international PE players. Roads are one of the major modes of transport in India constituting around 75% of the overall freight transport and 90% of passenger traffic. In a country where logistics constitute ~ 5% of the total GDP and give employment to 220 million individuals, road constitutes a major portion of the market. Other important categories include railways, ports, aviation, etc. alongside emerging modes such as inland waterways and pipelines.

The road transport market in India is growing at a steady pace backed by demand from a wide range of sectors such as defense, agribusiness, PSUs, mining, etc. India’s growing retail and e-commerce are also fueling growth in the road sector. It is estimated that by FY 2025, the size of the road transport market will reach USD 330 billion growing at a CAGR of 8.4%.

India’s road infrastructure can be split into multiple categories such as – national highways, state highways, local urban roads & municipality roads, rural roads, feeder lines, etc.

The National Highways constitute just 2-3% of the total road network in the country but comprise around 30-40% of the total freight. As of Jan 23, India has a total extensive national highway network of 144,000 Km. By the end of 2024, India plans to build 200,000 Km of road network, under the ambitious Bharatmala project. NHAI (National Highway Agency of India) is the nodal agency, that has been entrusted with the task of developing road infrastructure in India. NHAI operates under the Ministry of Urban Transport.

As per the government data revealed, during April- Nov of the last fiscal, Maharashtra witnessed new highway construction of around 600 km. This was followed by Rajasthan, where around 417 km of new highways have been constructed. In total, 5000 km of national highways have been built all over India in India. This is much higher than the compared to 5 years when the total lengths of highways built in a fiscal in India mostly ranged b/w 3500-4400 km.

To further spur investment in the growing segment, GOI has deployed attractive incentives for investors. 100% FDI under the automatic route is allowed. Also, there is zero duty on the import of high-capacity equipment.

Heightened Investment Potential in Indian Road Infrastructure

There is tremendous potential in India’s road infrastructure with an elevated yield of around 15-20%. There are primarily two ways under which investors can enter the segment. Firstly, they can participate in constructing roads through the PPP model. Namely, Hybrid Annuity Model (HAM), the government will invest 40% of the cost, while the remaining has to be borne by the investors. Generally, in a low-traffic area, this is a suitable approach. Moreover, since a sizable portion of the payments are already done by the government, the overall burden on the investor lowers.

The other approach is the TOT (Toll- Operate- Transfer) wherein the investors take care of the construction work and in return, get access to the toll collection rights for a fixed period, generally 30 years. In a high-traffic region, this is a lucrative option to make commendable profits. Besides, PEs and funding agencies can also invest in infrastructure funds to participate in India’s booming road infrastructure saga.

In the times to come, major PE players alongside banks, funding institutions, and lending agencies will continue to invest in India’s road infrastructure either through the HAM or the TOT model. As per the data revealed by the Indian government, during FY 18-21, the annual PE investments in Indian road infrastructure amounted to USD 2.7 billion. It has currently risen by 150-200% presently and is slated to reach USD 14 billion by 2030.