Road construction firms go back to EPC model amid difficult times

Soma Enterprise, Madhucon, Gayatri Projects and NCC have sold their stakes in some operational BOT assets and are looking to exit more assets


Road construction firms are giving up on Build Operate Transfer (BOT) model, are bidding aggressively for EPC (engineering, procurement and construction) and HAM (hybrid annuity model) awards. Photo: Indranil Bhoumik/Mint
Road construction firms are giving up on Build Operate Transfer (BOT) model, are bidding aggressively for EPC (engineering, procurement and construction) and HAM (hybrid annuity model) awards. Photo: Indranil Bhoumik/Mint

Mumbai: Road developers, which until recently focused on the projects that required them to invest heavily and bear major risks over long periods have shifted to focus to an asset-light model, as the sector tries to slough off heavy debt.

Soma Enterprise Ltd, Madhucon Projects Ltd, Ramky Infrastructure Ltd, NCC Ltd and Gayatri Projects Ltd are among companies going back to the EPC (engineering, procurement and construction) model, where investments and risks are lower. These firms, which started off with EPC business and later became asset-heavy, are beginning to demerge or monetize their operational build, operate and transfer (BOT) road assets.

Soma, Madhucon, Gayatri Projects and NCC have sold their stakes in some operational BOT assets in the past year and are looking to exit more assets. Navayuga Road Projects is in talks to sell its operational assets to focus on its EPC business, according to two people familiar with the discussions. The firm did not respond to an email query sent last week.

Hyderabad-based Gayatri Projects, for example, is in the process of demerging its eight BOT projects to sell them in future and to focus on the EPC business. “We are not interested in expanding anymore in the BOT sector,” said managing director T.V. Sandeep Kumar Reddy. “Gayatri Projects’s primary business has gone back to its core business of EPC construction. That has been our focus for the last one- and-half years, our order book has gone up, and we will concentrate on that for the next four-five years.”

In EPC, a developer builds with government money while in BOT, a developer builds with his own money, operates it for a specified duration to recover investment and make a profit and transfers it to the government.

Reddy said competition in EPC awards has gone up, but most infrastructure firms are troubled by financial weakness. Peer NCC has also been selling assets to become a pure play EPC company. It is close to selling its Bangalore Elevated Tollway highway road project to asset manager IDFC Alternatives, executive vice-president of finance Y.D. Murthy said.

Similarly, Soma Enterprise is in the process of demerging its BOT assets, according to two people familiar with discussions. A Soma spokesperson declined comment.

HCC Ltd, GMR Infrastructure Ltd and KNR Constructions Ltd—companies which have BOT assets—are also focusing solely on their EPC businesses.

As these firms and even larger ones such as Larsen and Toubro Ltd (L&T) give up on BOT, bidding aggression in EPC awards and the newly introduced hybrid annuity model (HAM) model is on the rise this year. Under HAM, which is a mix of EPC and BOT, the government commits about 40% of the total project cost.

“A lot of companies have realized that their strength is not in operating and maintaining an asset, but in building an asset. Earlier, bids were spread out between BOT and EPC; now everybody is focused on EPC and that has increased competition,” said Ashish Agarwal, director (infrastructure) at investment bank Equirus Capital. “EPC is a low-entry barrier business. It is a good time for the newer or smaller companies to enter EPC business as the larger ones are saddled with debt.”

While reforms and initiatives have helped, about 28 out of 104 operational projects spanning 2,700 km and with outstanding debt of Rs19,650 crore are at risk, according to research and rating firm Crisil Ltd.

Of these, a dozen operational BOT toll-based projects with debt of Rs9,515 crore and two BOT annuity-based projects with debt of Rs285 crore are in the high-risk category, Crisil said on Monday.

A large number of construction projects stalled during 2010-2013. The banking sector has a large exposure to the construction sector, estimated at over Rs3 trillion, with about 45% of the bank loans in the sector under stress, Equirus Securities Pvt. Ltd said in a recent note to clients.

Introduction of the HAM model is expected to revive private investments in the sector. Bids for the HAM projects in the past six months have seen as many as 12 bidders per award compared to just three-four last year, triggering a bidding war.

ALSO READ | Hybrid annuity model triggers bidding war for road projects

“HAM project bid out earlier are facing financial closure hiccups as bankers turn choosy. Going forward, we expect competitive intensity to reduce in HAM projects owing to capital intensive nature. EPC bids may remain aggressive,” HDFC Securities analysts Parikshit Kandpal and Prabhat Anantharaman wrote in a 7 October report.

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