A bumpy ride for road construction firms
The December quarter is set to be a rough one for road construction firms because of problems related to demonetisation.
The fortnight of toll-free days in November forced analysts to cut revenue growth estimates.
The government has assured compensation for loss of toll revenue, but that would come with a lag. Worse, it will take care of only costs and the interest to be paid out for that period on the project, but not the profits.
Effectively, therefore, firms such as NCC Ltd and IRB Infrastructure Developers Ltd may see revenue contraction because of lower toll collections.
Some firms such as PNC Infratech Ltd are stuck with slow-moving orders because of land acquisition delays.
Those with a larger mix of engineering, procurement and construction orders may be better off during the quarter than those with exposure to toll revenue.
Another big disappointment is the slow pace of tendering by the government.
Yes, it was known that the target for 25,000km of roads to be awarded during FY17 was too ambitious. After all, the target was two-and-a-half times that of the year before.
With barely three months to go for the fiscal to end, the progress both on tender awards and execution is nothing to write home about.
ICRA Ltd’s data shows the ministry of road transport and highways awarded only 5,688km of roads. A little less than half of this was from the National Highways Authority of India (NHAI), which was actually expected to award about 15,000km during the year. But the estimates were revised down to less than half by NHAI. In fact, the awards may not even be close to that achieved in FY12. This implies lower-than-anticipated order inflows.
And there’s more to prove the naysayers right. The pace of project execution until date for FY17 signals the failure in achieving estimates. NHAI’s 5.8km/day execution is 17% higher than a year ago, but is just a quarter of the target pencilled in for the year.
Subdued progress was noticed even prior to demonetisation. This is partly because the newly-introduced hybrid annuity model was being worked out.
Also, not many bidders came forth due to highly leveraged balance sheets. Financial closure of the first few projects took longer than expected.
As reality struck the Street, the stocks of these firms fell from their highs. Most of the leading firms have underperformed the benchmark indices and fallen between 5-15% since a year ago.
Add to this the credit rating agencies have decided to tighten rating metrics. Crisil Ltd, for instance, is adding “expected loss” through the life of the project. This will help investors take better decisions, given that the ramp-up periods and cash flows are unpredictable in infrastructure projects.
Of course, the Union budget is expected to offer more sops and support to road construction. Investors may do better to wait until the euphoria settles down and reality sinks in, as it did in 2016.