National Highways Authority of India (NHAI) recently awarded nine projects spread over 1,050 km worth Rs 10,600 crore. Listed companies have won six projects. Their share in terms of length (km) and project cost stands at 68% and 63%, respectively. Our analysis of bids reveals a definite moderation in competitive intensity, which has been a major concern over the past year.
We believe the highway authority is on track to award 7,000 km projects in financial year 2012. NHAI has so far awarded projects spread over 4,500 km amounting to Rs 45,000 crore. Of these, the share of listed companies in terms of length and project cost stands at 59% and 60%, respectively.
However, competition among NHAI projects has definitely moderated compared with bids submitted six to nine months ago. This is evident as the number of bidders has dipped opposed to some of the earlier projects that had received bids from 18-20 companies. Most of the recent projects have received bids from 10-15 companies. In fact, the number of bidders in some projects was in single digits.
This moderation in competition is because the quantum of projects awarded has been high at Rs 45,000 crore. FY12 is likely to see the highest number of projects awarded in the past six years. As expected, once a company wins a certain number of projects, its aggression level dips markedly and its future bids are comparatively moderate. The large number of projects already awarded as well as a good project pipeline means that companies have become more selective in bidding for projects. With the toning down of competition, the internal rate of return on projects has inched up.
With capital markets continuing to remain weak, there are concerns with regards to equity infusion for some companies. Many companies had planned fund raising by diluting their stake in the road build operate transfer holding company. Only a few, including Sadbhav Engineering Ltd and Hindustan Construction Co. Ltd, have been successful.
The large number of projects already awarded and concerns over financial closure have forced developers to be more rational while bidding.
Concerned about high premiums promised by developers, the government is planning to meet banks to get their perspective on financial closure of the projects awarded. We expect banks to become more cautious in the future with road projects funding; this will lead to developers being more circumspect while bidding.
A study undertaken by the roads ministry on 66 projects that have achieved financial closure suggests that in some cases banks have financed more than twice the project cost estimated by NHAI. About one-fourth of the projects were sanctioned loans that were 50-100% higher than NHAI estimates.
We like Sadbhav Engineering Ltd for its superior execution and working capital efficiency. We like IL&FS Transportation Networks Ltd as it is a high quality infrastructure company with a well-diversified project portfolio and remains one of the best plays on peaking interest rates. Additionally, both the companies have been cautious in bidding for new projects in the past few months given the aggressive bidding by peers. Both these companies stand a good chance to bag a few projects over the next four to five months as competition eases.
Edited excerpts from a report by Edelweiss Securities Ltd. Send your comment on firstname.lastname@example.org
Also See | Recently awarded NHAI projects (PDF)
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