Roads sector: below the surface, problems remain
Despite reforms in the roads sector, most civil and construction firms are still languishing with stranded projects or weak financials
Road projects are in much better shape compared to most other infrastructure segments. The picture looks different when one considers the several potholes that are making it a bumpy ride for the sector. This is despite the government’s nimble-footed reforms to address the problem areas in the sector.
Progress on awarding projects has been good. A solid 10,098km and 16,031km, respectively, were awarded during fiscal year 2016 (FY16) and FY17.
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The new hybrid annuity model (HAM)—which has almost fully replaced orders via the BOT (build-operate-transfer) and EPC (engineering, procurement and construction) routes—awards contracts after land is acquired by the government. This overcomes a major hurdle that dragged many firms into a debt trap earlier.
Still, only a handful of firms have benefited. The new kids on the block are small and medium-sized companies such as PNC Infratech Ltd, Dilip Buildcon Ltd, KNR Constructions Ltd, Sadbhav Engineering Ltd and Ashoka Buildcon Ltd. By virtue of their cleaner and stronger balance sheets, they have managed to raise bank finance to support their orders. Their order books stand at around three-four times their annual FY17 revenue. These companies would therefore be able to generate 10-15% revenue growth for the next couple of years.
Elsewhere, most civil and construction firms are still languishing with stranded projects or weak financials. Data from Capitaline shows that the average net sales for 65 listed firms in the sector have contracted over the last three quarters. Even the average interest cover is below one, indicating that it is difficult for them to service interest costs.
No doubt, banks remain wary of lending aggressively to the sector. Investors too are sceptical and except for a few firms, stocks prices have been rangebound in the past year.
Large construction firms that were yesteryear heroes went into a debt trap following the slowdown after FY09, and they continue to struggle with their losses mounting. A Jefferies India Pvt. Ltd report highlights that as of 2 June 2017, the National Highways Authority of India has only released Rs980 crore (19 cases) under the arbitration scheme versus Rs2,630 crore (65 cases) worth of claims made by the contractors.
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Investors would be hoping that history does not repeat itself, with the few firms that are doing well. They have bagged orders, after bidding aggressively, under the HAM model and are confident that traffic and toll rates will yield revenue and earnings growth in the coming years. Some are also scouting options to raise funds through the infrastructure investment trusts and lower the debt burden in the listed holding company. But others such as MBL Infrastructures Ltd faced problems convincing lenders and had to surrender a road project.
The pace of clearances and land acquisition in particular still leaves much to be desired. A report from India Infoline Ltd echoed this, saying that the acquisition pace has to improve if the construction target of about 44km of roads per day is to be achieved.